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The theme for our on-hold music today was Strange Days.
It's one of the most common ways I've heard people describe life during this pandemic, strange days indeed.
It's common for some to refer to the current state of affairs as unprecedented.
I've concluded that while almost all agree that these are strange days, whether or not people believe these strange days are unprecedented is definitely age related.
Younger people are more likely to view our current situation as unprecedented.
People my age or older are far less likely to see these current strange days as unprecedented.
In 1967, when I was 13 years old and a rock band name The Doors released the song titled Strange days.
Clearly, I have a background from that.
This is the first versus of the song, "Strange days have found us.
Strange days have tracked us down.
They're going to destroy our casual joy.
We shall go on playing or find a new town".
The Doors were way ahead of their time, both musically and culturally.
And indeed, the next few years after 1967 would bring an extended period of strange days and civil unrest that were orders of magnitude stranger than we've seen thus far during the COVID storm.
I'm naturally optimistic, and I promise you this too shall pass.
Since we're all in this together, we will continue to encourage our Camden team to stay true to Camden's why, our purpose for being, that is to improve lives of our team members, residents and shareholders, one experience at a time.
Apartment demand is stronger in the market than we expected given the nearly 40 million Americans that have filed for unemployment benefits with an official employment unemployment rate of 11.1%.
Camden's geographic and product diversification has continued to lower the volatility of our rents and occupancy.
Camden's Sunbelt markets have fewer job losses than coastal markets in the U.S. overall.
Our product mix that offers varying price points in urban and suburban locations continues to work for us.
Camden was prepared for the pandemic.
We have a great culture and a flexible workplace and amazing employees that have adapted very, very well to the current work environment.
Our investments in technology, moving to the cloud-based operating systems and our Chirp Access systems have allowed us to not miss a beat when it comes to leasing or operating our portfolio or making payroll and basic things like that.
We have the best balance sheet in the sector and one of the best in REIT land overall.
We were prepared and continue to be prepared to do as well as we can in this environment, and I think we'll do well long term.
I want to give a shout out to our amazing Camden teammates for all that they do for our residents and taking care of each other every single day.
We want to make sure that we're providing you with the information that you find most useful to your ability to understand the current state of affairs in Camden's markets.
At the outset of the COVID storm, we held an all-Camden conference call during which we told our Camden team that our highest priorities were: number one, taking care of our Camden family; and two, taking care of our residents.
During the second quarter, we made good on that promise.
We undertook various initiatives, including a frontline bonus paid to our 1,400 on-site team members, and we provided grants to almost 400 Camden associates from our long-established Camden employee emergency relief fund.
We also established a Camden resident relief fund from which we were able to provide grants to 8,200 residents at a time of maximum financial uncertainty in their lives.
We were pleased to be able to provide this level of assistance to the people who were financially impacted during the early stages of the COVID crisis.
On our first quarter conference call, we were asked when we thought we could reintroduce guidance.
And we said that when we felt like we had reasonable visibility into the next quarter, we would do so.
At that time, based on the confidence level that we had from our operations and finance teams regarding our projected May and June results, on a scale of one to 10, it was probably a two, not good.
As we sit here today, while our confidence level is less than it would be in normal times, we do feel it is sufficiently high to provide guidance for the third quarter, and we've done so.
It's been incredible to behold.
Keep up the great work, and with a little good fortune, for which we are long overdue, we'll see you soon.
For the second quarter of 2020, effective new leases were down 2.1% and effective renewals were up 2.3% for a blended growth rate of 0.3%.
Our July effective lease results indicate a 2% decline for new leases and a 0.2% growth for renewals for a blended decrease of 0.9%.
Occupancy averaged 95.2% during the second quarter of 2020 compared to 96.1% in the second quarter of 2019.
Today, our occupancy has improved to 95.5%.
We continue to have great success in conducting alternative method property tours for prospective residents and retaining many of our existing residents, with only a slight deceleration in total leasing activity year-over-year.
In the second quarter, we averaged 3,855 signed leases monthly in our same property portfolio as compared to the second quarter of 2019 when we averaged 4,016 signed leases.
July 2020 total signed leasing activity is in line with July of 2019.
For the second quarter of 2020, we collected 97.7% of our scheduled rents, with 1.1% of our rents in a current deferred rent arrangement and 1.2% delinquent.
This compares to the second quarter of 2019 when we collected 98.6% of our scheduled rents, but with a slightly higher 1.4% delinquency.
The third quarter is off to a strong start with 98.7% of our July 2020 scheduled rents collected, ahead of our collections of 98.4% in July of 2019.
Last night, we reported funds from operations for the second quarter of 2020 of $110.4 million or $1.09 per share, representing a $0.26 per share sequential decrease in FFO from the first quarter of 2020.
As outlined in last night's release, included in this $0.26 sequential quarterly decrease is $0.142 of direct COVID-19-related charges included incurred during the quarter.
After excluding the impact of this aggregate $0.142 per share, sequential FFO decreased $0.12 in the second quarter, resulting primarily from: approximately $0.05 per share in lower same-store net operating income, resulting from a $0.02 per share decrease in revenue from our 90 basis point sequential occupancy decline; a $0.025 per share decrease in revenue, resulting from an increase in bad debt reserves from approximately 45 basis points in the first quarter to approximately 180 basis points in the second quarter; and an approximate $0.005 per share sequential increase in expenses; approximately $0.025 in lower non-same-store development and retail NOI, also resulting from a combination of lower occupancy and higher bad debt reserves; and approximately $0.04 per share in higher interest expense resulting from our April 20 $750 million bond issuance.
Turning to bad debt.
In accordance with GAAP, certain uncollected rent is recognized by us as income in the current month.
We then evaluate this uncollected rent and establish what we believe to be an appropriate bad debt reserve, which serves as a corresponding offset to property revenues in the same period.
As previously mentioned, for same-store, our bad debt as a percentage of rental income increased from approximately 45 basis points in the first quarter to approximately 180 basis points in the second quarter.
During the second quarter, we reserved effectively all of the 1.2% of delinquent rents as bad debt.
Also in the second quarter, we reserved effectively half of the 1.1% of deferred rent arrangements as bad debt.
When a resident moves out owing us money, we have already reserved 100% of the amounts owned as bad debt and there will be no future impact to the income statement.
We reevaluate our bad debt reserves monthly for collectibility.
In the second quarter, for retail, which is not part of same-store, we reserved 100% of all amounts uncollected and not deferred, which totaled approximately $800,000.
Last night, based upon our recent trends, we issued FFO and same-store guidance for the third quarter.
However, given the continued uncertainty surrounding the social and economic impacts from COVID-19, at this time, we will not provide an update to our financial outlook for the full year.
For the third quarter of 2020 as compared to the third quarter of 2019, at the midpoint, we expect same-store revenues to decline by 1.6%, driven primarily by lower occupancy, higher bad debt and lower miscellaneous fee income.
We expect expenses to increase by 4.5%, driven primarily by higher property insurance, higher property tax assessments and large property tax refunds received in Atlanta and Houston in the third quarter of 2019.
As a result, we expect NOI at the midpoint to decline by 5%.
We expect FFO per share for the third quarter to be within the range of $1.14 to $1.20.
The midpoint of $1.17 is $0.08 per share better than the $1.09 we reported in the second quarter.
However, after adjusting our second quarter results for the previously discussed $0.14 of COVID-related charges, our $1.17 midpoint for the third quarter is a $0.06 per share sequential decrease, resulting primarily from: a $0.045 per share sequential decline in same-store NOI as a result of a $0.005 per share decrease in revenue, resulting primarily from lower net market rents; and a $0.04 per share increase in sequential expenses, resulting primarily from the typical seasonality of our operating expenses, the timing of certain R&M costs and the timing of certain property tax refunds and assessments; an approximate $0.005 per share decline in non same-store NOI, resulting primarily from the same reasons; and an approximate $0.005 per share increase in sequential interest expense, resulting from our April 20 bond issuance.
As of today, we have approximately $1.4 billion of liquidity comprised of just over $500 million in cash and cash equivalents and no amounts outstanding on our $900 million unsecured credit facility.
At quarter end, we had $185 million left to spend over the next two and half years under our existing development pipeline, and we have no scheduled debt maturities until 2022.
Our current excess cash is invested with various banks, earning approximately 30 basis points.
And finally, a quick update on technology.
As I discussed, our on-site teams are having great success with virtual leasing, and we just completed our second virtual quarterly close, a task that would have been so much harder, if not nearly impossible, without our investment in a cloud-based financial system.
As mentioned yesterday in the Wall Street Journal, we are continuing our pilot of Chirp, our smart access solution, with great success.
And we are finding even more ways to utilize the Chirp technology.
At our pilot communities for self-guided tours, our leasing teams can use the Chirp Access application to grant a prospect limited access to tour both the community and specific available apartment homes in a completely touchless exchange.
There is no need for the prospect to pick up physical keys or FOBs or ever even enter the leasing office.
Our leasing teams create the prospect a Chirp account, grant them access to the best apartments chosen per their unique wants and needs and then determine when the prospects access will expire.
Additionally, we can utilize Chirp to quickly and automatically control the number of residents to have access to an amenity space, such as a fitness center, at any given time.
Amenity spaces deemed as reservation only will require residents to use the chirp access application to reserve a specific time slot.
Only those residents with confirmed reservations will have access to open the door of the amenity space for the allotted time.
When the reservation expires, so does access to the amenity.
Clearly, in this COVID-19 environment, our Chirp initiative takes on even more importance.
| qtrly ffo $1.09 per share.
sees q3 ffo $1.14 - $1.20 per share.
|
Today, I am joined by President and Chief Executive Officer Lal Karsanbhai, Chief Financial Officer Frank Dellaquila and Chief Operating Officer Ram Krishan.
Please join me on slide two.
Please take time to read the safe harbor statement and note on non-GAAP measures.
First, Mike Train, our Chief Sustainability Officer, will be attending this year's United Nations Climate Change Conference, COP26, in Glasgow.
Mike will be a panelist at the adjacent Sustainable Innovation Forum, participating in two notable discussions.
The first discussion will be how to support small to medium enterprises to adopt net zero pathways; and the second, on supporting breakthrough innovation to green, hard-to-abate sectors.
Mike has worked this year to drive many greening of, by and with Emerson initiatives.
One notable greening -- green by example is in the recent announcement between BayoTech and Emerson to accelerate production of and distribution of low-cost, low-carbon hydrogen.
In the agreement, Emerson will deliver advanced automation technology, software and products in support of BayoTech building hundreds of fully autonomous hydrogen units to enable hydrogen fuel cell commercial trucking fleet and abatement projects in steel and cement.
Another exciting initiative is our $100 million commitment to corporate venture capital, Emerson Ventures, designed to accelerate innovation by providing insight into cutting-edge technologies that have the potential to solve real customer challenges.
The investment commitment will advance the development of disruptive, discrete automation solutions, environmentally sustainable technologies and industrial software in key industries.
Finally, our investor conference historically has been in February.
However, due to the recent announcement with AspenTech, we have decided to move our investor conference to May.
It will be located at the New York Stock Exchange on May 17, 2022.
2021 was a phenomenal year for Emerson.
It developed very differently, obviously, than we planned a year ago.
For one, I was named CEO and brought a new value-creation agenda to the table.
But equally important, we operated in an environment which was both rewarding and challenging for the organization.
Through it all, our teams around the world did a fabulous job.
I want to express my sincere gratitude to all the Emerson employees around the world.
2021 was characterized by strong demand in our residential air conditioning business as well as our hybrid and discrete markets in automation.
Furthermore, we have experienced a recovery in process automation markets.
The automation KOB three mix for 2021 was up two points to 59%.
And Emerson's September three-month trailing orders were plus 16%.
We grew 5.3% underlying and leverage at 38% operationally, inclusive of a $140 million swing in our price/cost assumptions from November through to the end of the fiscal year.
The earnings quality of this company continues to be excellent with free cash flow conversion of 129%.
The fourth quarter, however, was challenged significantly by supply chain, logistics and labor challenges.
And that is not dissimilar from anything you've heard before.
This was experienced in the form of material cost inflation, notably steel, electronics and resins, and lead time extensions.
In addition, we experienced logistics challenges in availability of lanes and costs.
And lastly, U.S. manufacturing labor, which was characterized by higher turnover rates, absenteeism and overtime costs.
In the quarter, we missed sales by $175 million.
And alongside a challenging price/cost environment in our climate business, it resulted in a negative $0.14 impact to earnings per share for the quarter and a $0.19 impact to 2021 EPS.
Having said that, the company grew 7% in the fourth quarter and had 19% operating leverage.
Turning to 2022 and some initial thoughts.
The first half of the year will not look dissimilar from the fourth quarter with slight sequential improvement as we go to Q2.
Price/cost and supply chain challenges unwind in the second half of the year against the backdrop of continued strong demand.
The price/cost assumption in the year will be a positive $100 million for 2022.
I'm very optimistic for 2022.
The operating environment has unpredictability, but it is significantly more stable than a year ago and demand is much stronger.
The residential A/C cycle will moderate as we go through 2022.
However, we expect automation markets to continue to strengthen driven by digital transformation and modernizations, replacement in MRO markets and select LNG and sustainability-driven KOB one, most notably methane emissions reduction projects and carbon capture.
I have confidence that we will deliver 30% incrementals on our underlying sales in 2022.
This addresses execution, and as you know, that's one of the three pillars we identified as a management team for accelerated value creation.
We have equally taken significant steps in our journey to modernize our culture and advance ESG initiatives.
The Board named Jim Turley as the company's Independent Chair of the Board, we named Mike Train as the company's first Chief Sustainability Officer, and we hired Elizabeth Adefioye as Emerson's first Chief People Officer.
I'm very proud of the diversity targets we set for the enterprise, the changes to our long-term compensation and annual bonus structure to include ESG measures and the commitments we have made to accelerate greenhouse gas intensity reductions.
Lastly, turning to the portfolio.
We recently concluded a comprehensive portfolio review, which culminated in a two-day session with our Board of Directors in early October.
We left the meeting with a defined portfolio road map and pathways.
The key elements were as follows.
Firstly, in terms of the portfolio today and how we are thinking about it.
We will continue to divest upstream oil and gas hardware assets.
Secondly, we will action low-growth or commoditized businesses.
And lastly, we will action disconnected assets.
All three of these actions will take place over time with intentionality, with patience and a keen awareness of cycles and meeting the value-creation proposition to our shareholders.
Secondly, we identified four large, profitable, high-growth end markets, each with at least $20 billion of size and projected to grow higher than 4% a year into the future supported by macros.
The four end markets will be the hunting ground for our M&A activity.
Lastly, we defined two possible end states for the portfolio and the journey that we'll embark up and have embarked on.
One of the four markets is industrial software, a $60 billion segment that we identified growing at 9%.
The AspenTech transaction is an exciting step for Emerson and a very important transformational step for this corporation.
AspenTech is one of the best-run industrial software companies in the space with highly differentiated technology and a phenomenal leadership team led by Antonio Pietri for who I have the greatest personal admiration.
The AspenTech company will be a highly diversified business with transmission and distribution as its largest served market and is uniquely positioned to enable our energy customers to transition to a lower-carbon future.
I'm optimistic of the synergy opportunities that exist and believe the new AspenTech, which will be 55% owned by Emerson shareholders, will be a differentiated platform for future industrial software M&A.
I'm very excited about this, as I hope you can tell.
We expect to close the transaction in the second quarter of 2022 following the completion and approval of the customary regulatory items.
So we're really pleased with the financial results for fiscal 2021.
As Lal said, we ended the year with a great deal of uncertainty and far exceeded the expectations we had at the beginning of the year.
The underlying demand environment developed much as we thought it would.
There was continued strength in global discrete and hybrid automation markets, and the North America process markets began to gain momentum later in the year.
The global demand in our commercial/residential markets was strong and broad based, particularly in the U.S. residential air conditioning market, and it far exceeded the expectations that we had going into the year.
Our operations team successfully worked through labor and supply chain issues, particularly toward the end of the year, and delivered strong results that we're able to report to you today.
Toward the end of the year, the intensifying combination of rising material costs, supply chain challenges and labor constraints in the U.S. did begin to weigh on sales volume and profitability.
We've worked through that in the fourth quarter.
We will continue to work through that in the first half of fiscal 2022.
Despite these fourth quarter challenges, we're pleased to report that we achieved the key financial targets that we committed to you in August regarding underlying growth, adjusted EBIT margin, adjusted earnings per share and cash flow, and you can see all of that in the table.
This was achieved in the face of an unexpected increase in key raw materials, mainly steel and copper, that resulted in an unfavorable price/cost swing of $140 million during the year versus the expectation and the guidance that we gave you a year ago.
We're very grateful for the extraordinary effort of our operations teams at every level and the manufacturing employees who made this happen under some of the most challenging conditions that we have seen.
This slide highlights our strong 2021 results.
The continued recovery in our end markets drove strong full year underlying growth of more than 5%.
Net sales were up 9% year-over-year, including a one point impact from acquisitions, mainly OSI, which closed at the beginning of the fiscal year.
Adjusted segment EBIT benefited from strong leverage in operations, 38%, as Lal just mentioned, and adjusted EBIT from underlying volume and the benefit of cost reset actions that were begun two years ago.
These cost reductions more than offset price/cost headwinds, which, as I said, were $140 million versus our expectation at the beginning of the year, and the supplies chain challenges that raised costs and reduced availability.
Cash flow was robust, up 18% year-over-year attributable to the strong earnings growth and working capital efficiency.
Free cash flow conversion of net earnings was 129%.
Adjusted earnings per share was $4.10, exceeding our guide by $0.03 at the midpoint and up 19% for the year.
Automation Solutions grew -- underlying growth was flat year-over-year.
Growth turned positive in the second half driven by strong discrete and hybrid markets, while the later-cycle process automation markets delivered sequential improvement as we moved through the year.
Adjusted EBIT increased 230 basis points due to the strong leverage driven by cost reset benefits.
Commercial & Residential saw exceptional growth, up 6% underlying year-over-year due to broad strength across the residential and commercial markets with mid-teens growth in all world areas.
Adjusted EBIT increased 20 basis points versus prior year.
Price/cost headwinds worsened in the second half, particularly in the fourth quarter, as we anticipated on the call in August, but were offset for the full year by strong underlying leverage and spending restraints.
Operational performance was strong throughout the year, adding $0.59 to adjusted EPS, overcoming a $0.19 headwind from supply chain and $90 million of unfavorable price/cost.
Operations leveraged at more than 35% on volume and cost actions.
Nonoperating items contributed $0.02 in that, overcoming a significant headwind from the stock comp mark-to-market accounting.
Share repurchase totaled $500 million, as we guided, and added about $0.03.
In total, adjusted earnings per share was $4.10, as I said, an increase of 19%.
Regarding the fourth quarter, strong end market demand drove underlying growth of 7% with net sales up 9%.
This growth was achieved despite a $175 million impact from supply chain, logistics and labor constraints that affected both platforms in somewhat different ways.
Adjusted segment EBIT dropped 10 basis points, reflecting a 200 basis point impact from supply chain volume constraints across the company and from the increasingly negative price/cost headwind in commercial/residential.
Free cash flow declined 39% mainly due to higher working capital to support the growth versus the prior year.
Adjusted earnings per share was $1.21, exceeding the guidance midpoint by $0.03 and up 10% and versus the prior year.
Automation Solutions underlying sales were up 3% with strong recovery in the Americas, particularly in the power generation and chemical markets, partially offset by declines in other world areas.
Sales were reduced by about $125 million or four points due to supply chain constraints.
Our backlog was up 16% year-to-date and now sits at $5.4 billion, $100 million less than at the end of the third quarter.
Typically, our backlog would reduce more in Q4.
However, due to strong orders and supply chain constraints, backlog remains elevated above the levels we would otherwise have expected.
Strong leverage and cost reductions drove a 170 basis point improvement in adjusted EBIT.
Commercial & Residential underlying sales increased 13% and driven by continued strength in North America residential HVAC and home products as well as heat pump demand in Europe.
Sales were reduced by about $50 million or three points due to supply chain constraints, which, together with sharply increasing material cost headwinds, which were expected, perhaps a little worse than we expected in August but are expected, drove a 340 basis points decline in adjusted EBIT.
Clearly, as you can see, the operating environment is a challenge as commodity inflation, electronic supply, logistics constraints and labor availability continues to impact our global operations.
Net material inflation headwinds accelerated through fiscal 2021, as you can see on the chart, primarily driven by steel prices, with majority of the impact being felt by our Climate Technologies business.
North American cold-rolled steel pricing increased once again in October, extending the streak of monthly price increases to 14 months.
However, the magnitude of the increases have declined in recent months, and more importantly, hot-rolled steel prices dropped around $20 a ton in October, a positive sign for us.
We do anticipate steel prices to start to flatten out over the next few months and net material inflation to peak in the first half of fiscal 2022.
We continue to stay focused and diligent on our pricing plans by executing on our contractual material pass-through agreements, surcharges for freight and more aggressive annual general price increases.
We remain confident that price/cost will turn green and will be a strong positive for the second half of fiscal 2022.
Our current plans indicate that price/cost will be approximately a $100 million tailwind for the fiscal year.
Turning to the next slide.
On the commodity front, while steel prices are at elevated levels today, as I mentioned earlier, they are showing some signs of flattening, providing optimism that we will see North American cold-rolled steel prices start to decline in the coming months.
Plastic resin prices have remained elevated due to high price, inelastic demand and weather-related supply challenges.
Copper prices have also surged as of late, but our hedge positions will dampen the impact to the fiscal year.
Now while COVID-related restrictions are improving in Southeast Asia, capacity at key electronic suppliers remains constrained.
Several key component suppliers have extended lead times and pushed out delivery forecasts, which has increased shortages and decommits to our EMS suppliers.
Furthermore, we are closely watching the impact of industrial power outages in China, which have become a common occurrence at manufacturers and has led to an increase in silicon prices.
For us, electronic shortages are impacting multiple business units in both platforms, and supply is expected to remain a challenge into fiscal 2022.
Extended logistics lead times, particularly on ocean freight, has had an impact on our global operations, port congestion in the U.S., weather and COVID-related disruptions in China being the key drivers.
These dynamics are highlighting how critical regionalization is even on lower-variation parts and components, and the work we have done over the past many years to regionalize are clearly proving the importance of this strategy.
This is exemplified by several of our businesses with strong regional supply bases which have performed very well and avoided expensive airfreight and significant expediting costs.
Finally, hiring and retention challenges continue in many of our U.S. plants, predominantly in the Midwest, as competition for available labor is intense.
High levels of turnover and absenteeism in these locations have impacted productivity and driven increased overtime.
Now on slide 12, despite the unprecedented challenges, our supply chain and operations teams have worked tirelessly to continue to meet the needs of our global customers.
Many creative solutions are being implemented on a real-time basis to ensure continuity of materials supply to our global plants and availability of freight lines to make our shipment commitments.
Our teams have leveraged strong supplier relationships, utilized prequalified alternate sources, leveraged contractual agreements and stepped in to assist our suppliers where needed.
Our regional manufacturing footprint and the enhanced resiliency of our supply network through multi-sourcing that we spent years developing has certainly been an advantage for us in these challenging times.
Accelerated actions around hiring and production shifts to plants with stable workforces has ensured we continue to meet our customers' needs.
Many of our global plants are producing at record levels as our disciplined investments in factory automation have allowed us to unlock additional capacity to combat labor availability challenges.
And looking forward to 2022, demand continues to be strong across both of the platforms.
The trailing three-month orders for Automation Solutions were up 20% versus the prior year driven, as I said prior, by continued automation investments in discrete and hybrid markets, and we believe that will continue into 2022, and, of course, the strengthening of the process automation spend.
While KOB two and KOB three drove most of the orders growth in 2021, the new infrastructure bookings for LNG and decarbonization will improve, I believe, through 2022, providing further upside.
Increased site access will drive increased walkdown and shutdown turnaround activity in the business.
To give you perspective, 2021 walkdowns were up 50% year-over-year with more than 5,000 globally, with each walkdown driving substantial KOB three pull-through.
Shutdown turnaround bookings were up -- for -- in 2021 10% year-over-year driven by strong spring season that extended into the early summer.
2022 shutdown turnaround outage activity spend is expected to be up mid-single digits, led by chemicals and refining, leading to high single-digit bookings growth.
Turning to Commercial & Residential Solutions.
The U.S. and Europe order rates continue to be strong heading into 2022, while Asia has begun to moderate.
Overall, the trailing three-month orders were 9% in September.
And thinking a little bit further into 2022, many of our key climate technologies end markets will continue to have momentum, including aftermarket refrigeration, commercial HVAC, food retail and foodservice driven by new store builds and quick service restaurants and residential heat pumps.
Turning to slide 15.
Looking ahead to 2022, it will be a year characterized by strong underlying demand and an improving operating environment.
The late-cycle process automation business will continue its recovery with mid-single-digit annual growth.
Meanwhile, discrete and hybrid momentum will endure with high single-digit and mid-single-digit growth, respectively.
Growth will moderate in residential markets as demand stabilizes, but improving commercial and industrial environments will benefit Commercial & Residential Solutions.
Decarbonization and sustainability projects, as noted earlier, will provide further growth opportunities as budgets get allocated toward these projects.
Based on this macro landscape, we believe -- we continue to expect demand to be strong in 2022.
Supply chain and price/cost headwinds continue through the first half, pressuring first quarter leverage but turn to significant tailwinds in the second half and end positive in the year.
The team has done a significant amount of work progressing our restructuring programs.
Emerson's 2021 adjusted EBITDA of 23.1% surpassed our previous record.
Over 90% of our restructuring spend communicated in our investor conference is complete, and over 70% of the savings have been realized with remaining longer-term facility projects left to be completed.
Great work as a team.
So given this landscape, we expect underlying sales growth of 6% to 8% in 2022 and net sales growth of 4% to 6%.
Underlying sales growth for Automation Solutions will be 6% to 8%, while Commercial & Residential Solutions will be 6% to 9%.
As Ram discussed, we expect price/cost to turn into tailwind for the year of approximately $100 million.
$150 million of restructuring activities includes the minimal remaining spend on our cost reset program and additional programs, including footprint activities, that have been identified and are planned in the fiscal year.
Historically, our adjusted earnings per share excludes restructuring and other items like first year purchasing accounting in the calculation.
Looking at the 2021 column of the bridge to the right, our prior adjusted earnings per share of $4.10 increases to $4.51 when removing the impact of intangibles amortization expense of $0.41.
For 2022, the amortization expense is expected to be approximately $0.42 driven by -- driving, excuse me, our adjusted earnings per share to between $4.82 and $4.97.
Please note that all guidance does not include the impact of the AspenTech transaction, which is expected to close, as I said earlier, in the second quarter of calendar year 2022.
Turning to slide 17.
We expect a first quarter 2022 underlying sales growth of 7% to 9% with broad underlying strength across Automation Solutions and Commercial & Residential Solutions.
Automation Solutions will experience underlying sales growth in the mid to high single digits, while Commercial & Residential Solutions underlying sales growth will be in the high single digits to low double-digit range.
Adjusted earnings per share is expected to be between $0.98 and $1.02.
Amortization for the quarter is expected to be roughly $0.10.
| sees fy 2022 adjusted earnings per share $4.82 to $4.97 .
emerson - fourth quarter net sales were $4.9 billion up 9 percent from the year prior.
emerson - expect that 2022 will be characterized by strong underlying demand.
emerson sees q1 adjusted earnings per share $0.98 to $1.02.
emerson - sees 2022 net sales growth 5% to 7%.
emerson - sees 2022 adjusted earnings per share $4.82 to $4.97.
emerson - qtrly adjusted eps, which excludes restructuring and first year purchase accounting charges, was $1.21.
|
Presenting today are Bryan DeBoer, president and CEO; Chris Holzshu, executive vice president and COO; Tina Miller, senior vice president and CFO; and Chuck Lietz, vice president of Driveway Finance Corporation.
Today's discussions may include statements about future events, financial projections and expectations about the company's products, markets, and growth.
We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission.
Our results discussed today include references to non-GAAP financial measures.
Earlier today, we reported the highest adjusted fourth-quarter earnings per share in company history at $11.39 per share, 109% increase over last year.
Our full-year adjusted earnings per share was also a record, coming in at $40.03, 120% increase over last year's $18.19 per share.
Record annual revenues of $22.8 billion were driven by contributions from acquired businesses, our growing e-commerce platform and successful navigation of the supply and-demand environment.
SG&A as a percentage of gross profit decreased to 57.2%, 730 basis points better than last year, resulting in SG&A generating over $1.8 billion in adjusted EBITDA for the year.
Given the higher-than-expected EBITDA generated and our M&A cadence since the launch of the plan, we are excited to provide an updated 2025 plan and our vision of the future state for Lithia & Driveway.
18 months ago, we launched our plan to grow from just under $13 billion in revenue and $12 in earnings per share to $50 billion in revenue and $50 in EPS.
The transformation of our company into a diversified omnichannel retailer leveraging our nationwide network and over 7 million annual customers is now well underway.
to grow from just under $13 billion in revenue and $12 in earnings per share to $50 billion in revenue and $50 in EPS.
The transformation of our company into a diversified omnichannel retailer leveraging our nationwide network and over 7 million annual customers is now well underway.
Today, we are eclipsing our initial plan and seeing early returns from leveraging our scale, adjacencies, data, and growing network.
Through these efforts, we are de-linking the historical relationship of each $1 billion of revenue producing only $1 of earnings per share as follows: We just completed a year where, despite inventory constraints, we generated nearly $23 billion in revenue and earned $40 in EPS.
Including a full year of performance from 2021 acquisitions, our annual run rate is well beyond $25 billion in revenue.
Next, we have acquired businesses that will contribute $11.1 billion in annualized steady-state revenues and entered the Canadian market.
Our physical footprint now reaches 95% of consumers within a 250-mile radius.
In January, the 13th month since the inception of Driveway, we achieved over 2,000 transactions.
In addition, 28,000 of our Lithia channel sales in Q4 were e-commerce, representing a combined annual revenue run rate of $6 billion in LAD e-commerce revenues.
Driveway Finance or DFC's portfolio stands at over $700 million as of December 31.
When we reach $50 billion in revenue in 2025, we now believe that every $1 billion in revenue will produce $1.10 to $1.20 in earnings per share or $55 to $60 in EPS.
The increased profit target considers the following factors.
Sales volumes reflect a blended 2.5% new and used vehicle U.S. market share; next, continued investment to scale Driveway and GreenCars is included; total vehicle GPUs returning to pre-pandemic levels; improvements in personnel productivity, increased leverage of our underutilized network and economies of scale in marketing from national brand awareness, driving SG&A as a percentage of gross profit toward 60%; acquiring a further $9 billion to $10 billion in annual revenues to complete the build-out of our North American footprint of 400 to 500 locations.
We do not expect any further equity capital raises, meaning no further dilution of EPS.
Next, an investment-grade rating and utilization of free cash flows for M&A and internal investment, driving decreased borrowing costs; flexibility and headroom and capital allocation for share buybacks in the event of valuation disconnect; continued drag on DFC's profitability due to building of CECL reserves as we scale from our current penetration rate of approximately 4% to a targeted 15%; and finally, early benefits from adjacencies with higher pre-tax margins that also carry structurally lower SG&A costs.
Given that the contributions from new businesses will still be in growth stages in 2025, as such, the above outline doesn't fully extrapolate our earnings per share potential.
As such, we are also providing insights into a longer-term future state that reflects the contributions from these factors at maturity, along with other known adjacencies.
market share, we see opportunity for each $1 billion of revenue to produce up to $2 in EPS.
Our future state contemplates the following additional drivers: up to 20% of units are financed with DFC, and there is no headwind from recording the CECL reserves outpacing the recognition of interest income; our cost structure is optimized to below 50% SG&A as a percentage of gross profit; and finally, our horizontals, such as fleet and lease management, consumer insurance and new verticals, are further developed.
Please take a few minutes and review our new slide deck and IR website.
More specifically, Slide 10 now provides a glimpse into how LAD will look in 2025 and beyond.
We have also refreshed the time line, competitive advantages and new market information slides in the appendices.
It's important to emphasize the synergistic relationship between our expanding physical network, driveway, and adjacencies like DFC and more.
In addition to being cash flow positive and highly accretive to earnings per share at inception, acquired businesses support Driveway's in-home solutions, enabling faster delivery, aftersales experiences, quicker turnaround times for reconditioning, lower logistics costs, and a higher proportion of sales with no shipping fees.
In addition to these competitive advantages, acquired businesses also expand the base from which DFC originates loans, accelerating its growth.
Together, these create services, experiences, and lasting brand impressions throughout the vehicle ownership life cycle.
Since the end of the third quarter, we have completed acquisitions that are expected to generate $1.4 billion in annualized revenues, adding critical density to the North Central Region 3 and the Southeast Region 6.
Looking forward, we have $1.1 billion in annualized revenue under contract or LOI.
In addition, our active deal pipeline has grown to over $13 billion.
We remain confident in our ability to find deals that build out our physical network and that are priced at 15% to 30% of revenues or three to seven times EBITDA.
This discipline ensures that we will meet our after-tax return threshold of 15% in a post-pandemic profit environment.
LAD is known in the industry as the buyer of choice due to smooth manufacturer approvability, timely, confidential and certain completion of transactions and retaining over 95% of its employees.
Last month, we shared that Driveway had significantly outperformed its December volume target by 32% with 1,650 transactions.
This momentum continued into January with over 2,000 transactions, taking us one step closer to our 2022 target of over 40,000 transactions or an estimated $1 billion in revenue.
With a little over a year since Driveway entered the marketplace, we are excited with the positive response it's receiving from consumers, the growing brand awareness and how it is expanding our reach beyond the local markets in which our Lithia channel operates.
Over 97% of our transactions were incremental to Lithia or Driveway and have never transacted with us in the past 15 years.
In addition, our average shipping distance was 932 miles, though we believe once the network is fully built out and inventories return to normal, shipping distances will be meaningfully less.
We continue to learn, improve and add new functionality to driveway.com.
Earlier this year, we launched our fully proprietary new car platform and a more robust finance prequalification module.
Well done, George and team.
On the used vehicle side, our technology is now more advanced or at parity with our e-commerce peers that have been in the market significantly longer.
These new features will enable us to increase our conversion rates by further expanding our consumer optionality.
Driveway continues to provide shop and sale functionality and in-home delivery to every part of our country.
While continuing to expand budgets in key markets, we recently launched our first nationwide advertising campaign on SportsRadio, laying the groundwork for the full rollout of nationwide advertising as the year progresses.
Our team is laser focused on targeting advertising spend, increasing conversion rates and improving performance in our three Driveway care centers.
For 2022, the expected $1 billion in revenues contributed by Driveway represents the amount generated from shop transactions, along with the revenue associated with the subsequent retailing or wholesaling of vehicles procured by Driveway.
This reflects similar revenue recognition to our e-commerce used-only peers.
Driveway Finance, or DFC, is the adjacency that is the most mature and has the potential to massively disconnect revenue and EPS.
Chuck Lietz, our Vice President of DFC, with decades of executive-level experience in the space has overseen the development and expansion of DFC since early 2019.
Under his leadership, we completed the inaugural offering and today have grown the DFC portfolio to nearly $0.75 billion.
Chuck joins us today on the call and will be providing additional insights on DFC's performance in just a moment.
Before closing, I want to briefly touch on electrification and potential future evolution of the current industry sales model.
We are excited and will continue to lead the future move to sustainable transportation and more seamless and convenient ownership experiences.
First, LAD believes that sustainable vehicles are the future and that educating consumers to drive greater adoption is not just good for our business, it's good for our planet.
To that end, in 2019, we launched greencars.com, the leading educational site and marketplace for consumers to research the environmental benefits, performance and affordability of sustainable vehicles.
During 2022, we will be further upgrading and powering up the GreenCars marketplace with Driveway's industry-leading proprietary new and used technology.
This will be supported by a twentyfold increase in our marketing spend to champion education about sustainable vehicle ownership.
In addition, our early learnings have shown that these affinity buyers convert at a higher rate and cost about half the amount of our other e-commerce leads.
Moving on to aftersales.
Sustainable vehicles appear to have lower repair and maintenance needs than comparable ICE vehicles through their first seven to 10 years of ownership.
Now that we are approaching the expected battery replacement windows for Gen 1 DEV and paid PHEVs, ultimate affordability will become much clearer.
Today, there is still limited data on battery replacement and the impact it will have on total ownership cost, residuals or even salvage values.
Combined with income streams from battery replacements and reconditioning, lads in-home service offerings, proprietary diagnostic service equipment and expanded customer retention through longer warranty periods on sustainable vehicles will enable us to both retain and conquest business from third-party after-sales competitors.
Second, franchise laws are determined state-by-state and are an integral part of the U.S. economy.
They established a framework not just for dealers, but for franchisors and franchisees in many industries, not just mobility, though we believe we could benefit from the removal of franchise laws, we view the model's future evolution being driven by removing friction and creating a more seamless experience from build to drive ways for consumers.
The design thesis of our 2025 plan was built on providing consumer optionality and diversifying LAD so that it thrives in any environment.
In closing, our company is just beginning to leverage the benefits of the massive customer data we possess and proprietary technology, growing adjacency and what's possible with a national network and branding.
Unlike other retail sectors, automotive retail is totally unconsolidated, and our 2025 plan is the first to activate the potential of these various components and integrate them into a cohesive, holistic, dynamic and transformative customer experience and business model.
LAD has a track record of exceeding targets through strong execution in any environment, as demonstrated in the 18 months since the launch of its 2025 plan, the 25 years since becoming a high-growth public company and our 75-year history since our inception here in Southern Oregon.
-- delighting our customers and responding to evolving trends while growing revenue and profitability is in our DNA.
In the next few years and those beyond 2025 will be no different.
DFC's value proposition is to provide seamless financing options to consumers governed by an internal credit risk appetite designed to maximize our risk-adjusted cash flows while minimizing volatility during periods of economic stress.
We are a full credit spectrum lender targeting near-prime portfolio which we feel appropriately balance credit risk with the financial spread we earn.
In November of 2021, we completed our inaugural ABS offering, and we're excited with the market's reaction and pricing of the deal.
During 2021, DFC originated over 21,000 loans, penetrating approximately 4% of our retail units and in Q4 became LAD's largest retail lender.
We plan to become a programmatic ABS issuer going forward, allowing us to balance the growth of the portfolio with capital required and credit risk.
Of the loans originated in 2021, the average loan amount was $33,000, the average interest rate was 8%, and the average FICO score was 670.
We have adopted the CECL accounting standards where we record loan loss reserves upon origination and recognize the interest income over the life of the loan.
As a result, individual loans generally are not accretive to earnings until the second year.
Given our plan to ramp originations through 2025 and beyond, we'll be growing loss reserves faster than profits.
In our future state, however, DFC's contribution is clear, assuming a 15% to 20% penetration rate on 1.5 million units sold, DFC could originate between 225,000 and 300,000 loans and contribute up to $650 million of pre-tax earnings annually.
We believe DFC's targeted penetration rate will not impact our relationship with our lending partners.
Looking at the future state and DFC's contributions, DFC alone has the potential to significantly grow earnings per share faster than revenue.
The amount of incremental capital generated by DFC will enable us to further grow and transform LAD in a cost-effective manner.
We appreciate the job you and your team have done to scale and integrate this adjacency within LAD's powerful network.
This will be a huge complement to our core business and a massive profit engine for Lithia & Driveway.
Despite the impacts of the pandemic and inventory shortages, the Lithia channel achieved record levels of profitability and continue to evolve the business to ensure that all customers can buy, sell or service their vehicles wherever, whenever, or however they desire.
This also enabled the company to significantly outperform our 2021 annual operating plans and set us up for another year of high performance in 2022.
I also want to congratulate our LAD Partners Group or LPG winners for their exceptional performance in 2021.
Recognition of an LPG member is a highly coveted award and represents the pinnacle of our mission of growth, powered by people.
Though high-performance resides throughout LAD, these locations demonstrate a relentless and elevated focus on culture, customer experience, and continuous improvement to create the highest level of execution in automotive retail.
Looking forward to 2022 and beyond, our leaders continue to evolve our business practices to address changing consumer preferences or what we call retail readiness.
That means upping our game on how we present vehicles in-store or online, how we price and recondition vehicles, and how we use technology to elevate transparency and convenience in the sales and service experience.
These actions will drive higher volumes in store and nationwide on Driveway, increase customer satisfaction and decrease SG&A as a percentage of gross profit.
New vehicle sales volumes continue to be impacted in the fourth quarter by the current supply demand environment with same-store revenues decreasing 8% and volumes decreasing 21% compared to last year, consistent with the decrease in national SAAR.
Volume declines were offset by higher gross profit per unit, including F&I, which increased 84% over last year.
Our teams excelled in increasing used vehicle volumes to offset the decline in new volumes with same-store sales revenues up 39% and volumes up 11% compared to last year.
Used vehicle gross profit per unit, including F&I, increased 37% over last year.
As of December 31, we had 24-day supply of new vehicles and a 61-day supply of used vehicles.
From an inventory procurement perspective, our store leadership team is taking actions that are within their control.
For new vehicles, this means increasing our sales velocity and exceeding manufacturer expectations, allowing us to take market share and obtain incremental allocations.
For used vehicles, it's increasing the proportion of vehicles we're sourcing directly from the consumer and vehicles we retail versus wholesale and retain in our network.
For the fourth quarter, we saw 74% of used vehicles direct from consumers and 26% were from other channels, such as auctions, other dealers, or wholesalers.
In the fourth quarter, we increased the percentage of vehicles we source from consumers by 8%, earned over $1,400 more in gross profit and turn them 14 days faster.
Turning to service, body, and parts.
Same-store revenues grew 12%, which was driven by an 18% increase in customer pay work and a 27% increase in wholesale parts, offset by a 9% decline in warranty and a 2% decline in body shops.
As consumers return to normal driving habits, hold on to vehicles longer while waiting for new vehicle supply to recover, we anticipate this positive trend to continue.
Same-store SG&A as a percentage of gross profit for the fourth quarter was 58.2%, a 320-basis-point improvement over last year.
This metric benefited from the incremental throughput of elevated gross profit dollars, offset by investment costs to grow Driveway and DFC.
The $45 million incurred during the quarter are a headwind to our SG&A but lay the foundation for significantly increasing profitability in the future that Bryan shared with you.
In summary, our teams remain hyper focused on executing at the highest level possible in this unusual operating environment, focusing on retail readiness, supporting adjacencies and continuing to outperform their local markets in all business lines, which translates to continued opportunities to increase leverage and drive additional profitability as expected in our 2025 plan and beyond.
For the quarter, we generated $538 million of adjusted EBITDA, a 118% increase over 2020; and $304 million of free cash flow, defined as adjusted EBITDA plus stock-based compensation, less the following items paid in cash: interest, income taxes, dividends, and capital expenditures.
We ended the quarter with $1.5 billion in cash and available credit, which is deployed today would support network growth of up to $6 billion in annualized revenues.
We target maintaining leverage between two and three times and remain committed to obtaining an investment-grade credit rating, which would be another sizable competitive cost advantage.
As of quarter end, our ratio to net debt -- of net debt-to-adjusted EBITDA was 1.35 times.
Our targets for the deployment of our free cash flows remain unchanged at 65% toward acquisitions; 25% toward internal investment in Driveway and DFC, along with capital expenditures, modernization, and diversification; and 10% toward shareholder return in the form of dividends and share repurchases.
With recent market volatility, we believed it was prudent to opportunistically repurchase shares.
In the fourth quarter and to date in 2022, we've repurchased approximately 912,000 shares, representing 3% of our outstanding shares at an average price of $284.
In November, we obtained an additional $750 million repurchase authorization from the board, and as of today, have a remaining availability of $679 million.
Deployment of capital for acquisitions and internal investment is always preferred as they reinvest and grow our business.
However, we had excess cash generated from our 2021 performance and saw an opportunity where the returns generated from repurchasing our stock, which has no integration risk, exceeded the return hurdle rate ranges for acquisitions.
Opportunistic share repurchases allow us to efficiently provide immediate shareholder return.
We remain well-positioned for accelerated disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and $55 to $60 of earnings per share by 2025 with even more significant upside into the future.
We would now like to open the call to questions.
| compname says q4 revenue rose 60% to $6.3 bln.
lithia & driveway (lad) increases revenue 60%, earnings per share 36%, and adjusted earnings per share 109%, record fourth quarter performance.
q4 revenue rose 60 percent to $6.3 billion.
q4 adjusted earnings per share $11.39.
quarterly total same store sales increased 12%.
|
Further information about these risks can be found in our filings with the SEC, and we encourage you to review them.
We will attempt to complete our call within one hour.
As we know, another multi-family company is holding their call right after us.
We already have 15 analysts in the queue right now.
If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes.
Our on-hold music today was attributed to team Camden.
We wanted to celebrate the incredible results of our onsite team supported by our regional and corporate staffs that they have achieved throughout the COVID storm.
Despite all the turmoil, team Camden never stopped taking care of business.
That's what you can expect from a team of all-stars.
Instead of 1,000-yard stare, team Camden showed up every day with the eye of the tiger, reminding us of what we know is true, you're simply the best.
So this evening we will join you in spirit, as you all raise your glass to celebrate your remarkable performance.
Our performance for the third quarter was driven by our team, but was also aided by our Camden brand equity and our capital allocation and market selection.
We've always believed that geographic and product diversification would lower the volatility of our earnings.
We're in markets that are pro-business, have an educated workforce, low cost of housing and high quality of life scores.
These attributes drive population and employment growth, which drives housing demand.
The only exception to this market generalization for us is Southern California.
Compared to most other parts of California, however, our properties are in the most business friendly cities and areas in the state.
Our markets have lost fewer high paying jobs than other markets in the U.S. As a matter of fact, it's 5% losses for Camden markets versus 15% for the U.S. Overall, year-over-year employment losses through September have been less in our markets.
Job losses in most of our markets have been in the range of down 2.5% to down 5%, the best being Austin, Dallas, Phoenix, Tampa, Atlanta and Houston.
Toughest markets have been Orlando, Los Angeles and Orange County with job losses between 9.5% and 9.7%.
Another key employment trend our other key employment trends are that are supporting our residents' ability to stay in their apartments and pay rent is that when you think about the job losses that we lost at the beginning of the pandemic, there were 22 million jobs lost, 11 million had been added back.
Of the jobs that have not been added back, 5.8 million are low-income workers making less than $46,000 a year.
And another group 4.1 million folks have not been added back that make between $46,000 and $71,000 a year.
So the lion's share of the 11 million jobs that haven't been that have not been added back are really not our residents.
There are lower income workers that do not live at Camden.
Most of our residents have higher income than that.
And it's unfortunate that we have that many job losses, and we obviously need to add those jobs back as soon as possible, but they aren't negatively impacting Camden's resident base.
Obviously, we're more than pleased with our results for the quarter.
This is certainly the kind of performance that is worthy of celebration by team Camden.
Overall, things seem like they're getting back to something closer to normal, and that's quite a contrast to where we were in April and May of this year.
A few signs that conditions of stabilizing our markets, occupancy for the third quarter was 95.6%, up from 95.2% in the second quarter.
Several of our communities are actually exceeding their original budget for occupancy.
Turnover continues to be a tailwind at 48% for the third quarter and only 42% year-to-date.
There continues to be a lot of anecdotal evidence that home sales are spiking.
In our portfolio, we had 13.8% move-outs to purchase homes in the first quarter of this year that moved up to 14.7% in the second quarter.
And in the third quarter, it moved up again to 15.8%.
But if you take the average, the average year-to-date move-outs to purchase homes, it was 14.8% versus a full year 2019 of 14.6%.
So really very little change year-over-year.
We did see a little uptick in October to 18%, but Q4 is always a little bit elevated.
Clearly, this is a stat that bears some watching to see if the anecdotal evidence starts showing up in the stats.
Before I move on to our financial results and guidance and brief update on our recent real estate activities.
During the third quarter of 2020, we stabilized Camden North End I, a 441 unit $99 million new development in Phoenix, Arizona, generating over a 7% stabilized yield.
We completed construction on Camden Downtown, a 271 unit $131 million new development in Houston.
We recommenced construction on Camden Atlantic, a 269 unit $100 million new development in Plantation, Florida.
And we began construction on both Camden Tempe II, a 397 unit $115 million new development in Tempe, Arizona, and Camden NoDa, a 387 unit $105 million new development in Charlotte.
For the third quarter of 2020 effective new leases were down 2.4% and effective renewals were up 0.6% for a blended decline of 0.9%.
Our October effective lease results indicate a 3.5% decline for new leases and a 2.1% growth for renewals for a blended decrease of 1%.
Occupancy averaged 95.6% during the third quarter of 2020 and this was up from the 95.2% where both experienced in the second quarter of 2020 and that we anticipated for the third quarter of 2020 leading in part to our third quarter operating outperformance, which I will discuss later.
We continue to have great success in conducting alternative method property tours for prospective residents and retaining many of our existing residents, with actually a slight acceleration in total leasing activity year-over-year.
In the third quarter, we averaged 3,227 signed leases monthly in our same property portfolio, slightly ahead of the third quarter of 2019 where we averaged 3,104 signed leases.
To-date, October, 2020 total signed leasing activity is on pace with October, 2019.
Our third quarter collections far exceeded our expectations.
As we collected 99.4% of our scheduled rents with only 0.6% delinquent.
This compares favorably to both the third quarter of 2019, when we collected 98.3% of our scheduled rents with a higher 1.7% delinquency and in the second quarter of 2020, when we collected 97.7% of our scheduled rents with 1.1% of our residents in a deferred rent arrangement and 1.2% delinquent.
The fourth quarter is off to a good start with 98.1% of our October, 2020 scheduled rents collected.
Turning to bad debt, in accordance with GAAP, certain uncollected rent is recognized by us as income in the current month.
We then evaluate this uncollected rent and establish what we believe to be inappropriate bad debt reserve, which serves as a corresponding offset to property revenues in the same period.
When a resident moves out owing us money, we typically have previously reserved 100% of the amount owed as bad debt and there'll be no future impacts to the income statement.
We reevaluate our bad debt reserves monthly for collectability.
Turning to financial results.
Last night, we reported funds from operations for the third quarter of 2020 of $126.6 million or $1.25 per share, exceeding the midpoint of our prior guidance range by $0.08 per share.
This $0.08 per share outperformance for the third quarter resulted primarily from approximately $0.055 in higher same store revenue comprised of $0.025 from lower than anticipated net bad debt due to the previously mentioned higher than anticipated collection levels and higher net reletting income, $0.01 from the higher than anticipated levels of occupancy and $0.02 from higher than anticipated other income driven primarily from our higher than anticipated levels of leasing activity.
Approximately $0.005 in better than anticipated revenue results from our non-same store and development communities.
Approximately $0.005 in lower overhead due to general cost control measures and an approximately $0.015 gain related to the sale of our Chirp technology investment to a third-party, this gain is recorded in other incomes.
We have updated our 2020 full year same store revenue, expense, and net operating income guidance based upon our year-to-date operating performance and our expectations for the fourth quarter.
At the midpoint, we now anticipate full year 2020 same-store revenue to increase 1% and expenses to increase 3.4% resulting in an anticipated 2020 same store net operating income decline of 0.3%.
The difference between our anticipated 3.4% full year total expense growth and our year-to-date total expense growth of 2.4% is primarily driven by the timing of current and prior year tax refunds and accruals.
The increase to our original full year expense growth assumption of 3% is almost entirely driven by higher than anticipated property tax valuations in Houston.
We now anticipate total same-store property taxes will increase by 4.7% in 2020 as compared to our original budget of 3%.
Last night, we also provided earnings guidance for the fourth quarter of 2020.
We expect FFO per share for the fourth quarter to be within the range of a $1.21 to $1.27.
The midpoint of $1.24 is in line with our third quarter results after excluding the previously mentioned third quarter gain on sale of technology.
Our normal third to fourth quarter seasonal declines in utility, repair and maintenance, unit turnover and personnel expenses are anticipated to be entirely offset by the timing of property tax refunds, lower net market rents and our normal seasonal reduction in occupancy and corresponding other income.
As of today, we have just under $1.4 billion of liquidity comprised of approximately $450 million in cash and cash equivalents.
And no amounts outstanding underneath our $900 million unsecured credit facility.
At quarter end, we had $384 million left to spend over the next three years under our existing development pipeline.
And we have no scheduled debt maturities until 2022.
Our current excess cash is invested with various banks earning approximately 30 basis points.
At this time, we'll open the call up to questions.
| qtrly ffo $1.25.
|
Actual results may differ materially from these statements.
For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent 10-K.
Today's remarks also include certain non-GAAP financial measures.
We closed on the transaction in late October, and since then have been working tirelessly to complete the integration and implement KRG's culture and operating philosophy across the combined organization.
The timing of the merger was impeccable and KRG was positioned perfectly to take advantage of the opportunity.
It's now become clear that the merger is even better than we anticipated.
Today, I'm going to speak about three horizons of opportunity for KRG.
Those opportunities that are immediately in front of us, those that will cultivate over the next 18 to 24 months, and those that will materialize over the long term.
The most immediate benefit of the merger, of course, is the significant earnings accretion.
Heath will give additional color as to the underlying assumptions.
While we've only owned the legacy RPA assets since October 22, we quickly jumped headfirst into attacking operational efficiencies with an intense focus, as always, on our leasing efforts.
Against the backdrop of strong demand from a deep and diverse set of retailers, KRG is experiencing significant leasing momentum across all of our open-air product types.
In fact, we're noticing that national retailers are now looking more intently for space across the open-air spectrum, which dovetails nicely with our high-quality and well-located properties.
These positive trends are readily evidenced in our fourth quarter and full year leasing results.
During the fourth quarter, KRG leased over 900,000 square feet at a very strong 12.9% blended cash spread on comparable new and renewal leases.
The blended spread on our fourth quarter comparable non-option renewals was 10.2%.
This is a strong indicator of where market rents are headed for the KRG portfolio.
For the full year, KRG leased over 2.6 million square feet at blended cash spreads on a comparable deals of 10.7%.
As a reminder, those leasing statistics including the leasing activity from the legacy RPAI portfolio are since October 22nd.
If we include the active -- the activity from the legacy RPAI assets for all of 2021, we leased over 5.1 million square feet for the combined portfolio.
Based on this progress, our retail lease percentage stands at 93.4%, up 220 basis points over last year, and yet, we still have significant upside.
The portfolio has signed not-open NOI of approximately $33 million, which will primarily come online during the back half of 2022 and the first half of 2023.
This bodes extremely well for our growth trajectory going into 2023, as the rents from all these leases will be fully annualized.
The good news is that the $33 million of signed not-open NOI represents about half of the near-term leasing-related NOI opportunity.
Our increased scale and improved balance sheet represent a host of immediate opportunities, including the potential for lower debt costs, increased liquidity in our stock, and enhanced relevance with our tenants and vendors.
We are marching toward completing the active development projects detailed in our supplemental.
Based on KRG's underwritten incremental NOI related to the active developments, we are anticipating very solid returns.
We're meticulously reviewing the land bank, also disclosed in our investor deck, in addition to a multitude of other opportunities embedded within the KRG portfolio.
We have learned over the years that each project is unique and requires a customized approach in order to achieve the best risk-adjusted returns.
Sometimes that means bringing in an experienced JV partner or monetizing the land.
For example, during the quarter, we entered into an agreement with Republic Airways to develop a new $200 million corporate campus on an outdated retail location owned by KRG in Carmel, Indiana.
We knew the highest and best use of the land was no longer retail.
Therefore, we sold a portion of the land to Republic for approximately $7 million and will serve as the master developer of their campus.
KRG will not only receive a sizable development fee but also a profit component, all the while putting 0 KRG capital at risk.
The cash from this development will be recycled into an income-producing investment.
A big win for KRG on a site that was not generating any NOI.
I'm very optimistic about the long-term outlook.
It should come as no surprise that in the near term, we will be spending a significant amount of capital on leasing.
Looking beyond the next few years, we begin to generate substantial additional free cash flow, while also naturally deleveraging.
We are setting up to be in a very liquid and favorable position with a net debt to EBITDA in the low to mid-five times.
While I can't predict the macro environment, I'm confident we will be ready to respond aggressively regardless.
We did this deal because we love the real estate and saw significant upside potential period.
Having been in this business for over 30 years, having visited nearly every legacy RPAI asset, I can unequivocally tell you that the quality of our portfolio improved by virtue of the merger.
When I see what's happened in the private market valuations over the past six months, I couldn't be happier with respect to the timing of our transaction.
We doubled down on the amount of GLA that we have in our warmer cheaper markets.
These markets continue to benefit from household and employer migration, which is a trend we don't see changing anytime soon.
We have a sector-leading presence with over 60% of our ABR in these markets, 40% alone being in Texas and Florida.
The merger also provided KRG with a new or enhanced scale in key gateway markets such as Washington, D.C., New York, and Seattle.
These world-class cultural, educational, health, and lifestyle hubs have endured the test of time and are home to many of the opportunities that we discussed.
In summary, there's nothing better than owning high-quality assets in high-quality places.
As the world opens back up, I encourage each one of you to join us on a property tour and see the quality firsthand.
KRG is nothing without our tremendous people.
I can't emphasize enough how excited I am about what we've accomplished as a team, but more importantly, what we'll accomplish together in the future.
I want to echo John's excitement and confidence in the path that lies ahead.
The opportunity in front of us is absolutely energizing.
On the integration front, our substantial efforts to date have enabled the combined organization to operate at a high level, and truly embrace our internal model of one team, one focus.
Before I discuss KRG's fourth quarter results, please keep in mind that they're a bit clunky by virtue of the fact that we closed the merger on October 22.
While the results are from the combined portfolios, we only have two months and nine days of contribution from the legacy RPAI assets.
For the fourth quarter, KRG generated $0.43 of FFO per share.
As compared to NAREIT, our as adjusted FFO results add back in the $76 million of merger-related costs and deduct the $400,000 of net prior period activity.
For the full year, KRG generated $1.50 of FFO per share, as compared to NAREIT, or as adjusted FFO adds back in the $87 million of merger-related costs and deducts the $3.7 million of prior period activities.
Our same-property growth for the fourth quarter and full year is 7.2% and 6.1%, respectively.
These results were primarily driven by a reduction in bad debt as compared to the prior-year periods.
Absent the net contribution from prior-period activities, the fourth quarter and the full year same-property NOI growth is 6.8% and 4.3%, respectively.
These metrics and a host of others are set forth on the news summary page in a revised supplemental.
We hope you like the changes.
Our balance sheet and liquidity profile not only remains solid but continue to improve.
Our net debt to EBITDA was 6x, down from 6.1 times last quarter.
Adding in $33 million of signed, but not-open, NOI from the combined portfolio, our net debt to EBITDA would be 5.6 times.
We are in a great position to not only weather any storm but to also take advantage of any opportunities that present themselves.
As John alluded to earlier, we are providing FFO as adjusted guidance of $1.69 to $1.75 per share.
The variance from NAREIT FFO is approximately $0.02, which represents our estimate of $4 million of nonrecurring merger-related costs.
Furthermore, the accounting adjustments related to the legacy RPAI below-market leases and above-market debt, contribute an incremental $0.06 of FFO per share to our 2022 guidance.
This is a good indicator of our future ability to drive rents and reduce borrowing costs.
Additional assumptions at the midpoint include neutral impact from any transactional activity and bad debt of 1.5% of total revenues.
As you all know, providing same-property NOI growth is a SKU proposition for the sector, given all the noise over the past few years.
It is especially tricky right after a merger of two companies that approach the potential pandemic credit loss from different perspectives.
In order to avoid any confusion, we are assuming same-property NOI growth of 2% at the midpoint, excluding the net impact of prior period adjustments.
This estimated 2% same-property growth is primarily driven by occupancy gains and contractual rent bumps.
Last week, KRG declared a dividend of $0.20 per share for the first quarter.
This represents a 5% sequential increase and an 18% year-over-year increase.
The dividend will be paid on or about April 15th to shareholders of record as of April 8.
One last thought before turning the call over for Q&A.
I think another compelling comparison is to look at our original 2020 FFO guidance of $1.50 per share at the midpoint.
Like our peers, we gave this guidance before the pandemic set in and reflected KRG's run rate after selling over $0.5 billion of assets in connection with Project Focus.
Our 2022 per share guidance represents a 15% increase over our original 2020 per share guidance at the midpoint.
During the course of 2021, many of you asked, when will your earnings return to pre-pandemic levels.
On a per-share basis, not only we return to pre-pandemic levels, but we tacked on another 15%.
Just another testament to the compelling accretion and synergies associated with our well-timed merger.
| kite realty group trust q4 adjusted ffo per share $0.43.
q4 adjusted ffo per share $0.43.
generated ffo, as adjusted, of operating partnership of $82.4 million, or $0.43 per diluted share in q4.
expects to generate ffo, as adjusted, of $1.69 to $1.75 per diluted share in 2022.
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These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Some of today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results.
Tom will provide some comments on our performance as well as an overview of the current operating environment.
Bernadette will then provide details on our second quarter results and updated fiscal 2022 outlook.
We're pleased with the improvement in our manufacturing and supply chain operations as well as the progress in our financial performance in the quarter and I'm proud of how Lamb Weston team has been able to navigate through this difficult macro environment.
We generated strong sales and solid demand across our food away-from-home channels drove volume growth and the initial benefits of our recent pricing actions began to offset inflationary pressures.
In addition, our efforts to stabilize our manufacturing operations are on track, including increasing staffing in our processing plants to improve production run rates and throughput.
Together, our sales and operating momentum drove sequential gross margin improvement in the quarter and have us well positioned to better manage the upcoming cost pressures from this year's exceptionally poor potato crop in the Pacific Northwest.
While our operations and financial results are not yet where we want them to be, we're on track to deliver our financial targets for the year and our investments in capacity and productivity will get us well positioned to deliver higher margins and sustainable growth over the long term.
Before Bernadette gets into some of the specifics of our second quarter results and outlook, let's briefly review the current operating environment, starting with demand.
In the U.S., overall fry demand and restaurant traffic in the quarter remained solid, especially at quick service restaurants where demand has continued to be strong and above pre-pandemic levels.
Traffic at full-service restaurants during the quarter was also solid but remained below pre-pandemic levels.
Restaurant traffic, though, has softened recently as the spread of COVID variants have tempered consumer demand for on-premise dining and as restaurants closed temporarily due to staff shortages.
While we expect that COVID wave will continue to temper demand for on-premise dining in the near term, we do not anticipate that it will have a meaningful effect on traffic or demand at QSRs.
Demand at noncommercial outlets also improved during the quarter but continued to be below pre-pandemic levels.
As with on-premise dining, we expect the spread of COVID variants will affect near-term demand.
The fry attachment rate in the U.S., which is the rate at which consumers order fries when visiting a restaurant or other food service outlets, continue to be above pre-pandemic levels.
This served to support our out-of-home fry demand in the quarter.
The increase in the fry attachment rate has been fairly consistent since the beginning of the pandemic and we do not see that changing in the near term.
Fry demand in U.S. retail channels in the quarter was up mid-teens from pre-pandemic levels and we anticipate it will remain strong in the near term as the pandemic continues to affect demand in out-of-home channels.
Now, outside the U.S., demand in Asia and Oceania has been solid, although the lack of shipping containers and disruptions to ocean freight networks continues to hinder our ability to fully serve our customers in these markets.
Demand in Europe, which is served by our Lamb Weston/Meijer joint venture, has also been solid, although consumer reaction and the effect of recently imposed government lockdowns may reverse some of the recovery in restaurant traffic and fry demand in the near term.
So overall, we're encouraged by the resiliency of demand and the long-term trends for the category but expect that there will be some near-term softness with another COVID wave in the U.S. and our key international markets.
With respect to pricing, we're making good progress in implementing recent pricing actions to manage input cost inflation.
In the second quarter, we began to see the initial benefits of the price increases that took effect in the summer in our foodservice and retail segments as well as in some of our international businesses.
We expect the benefit of these prices will continue to build as the year progresses.
In December, we began implementing another round of pricing actions in our foodservice and retail segments.
While these actions did not affect our second quarter results, we'll see a gradual benefit from them over the next six months.
In our global segment, we saw some benefit of pricing actions in the second quarter but expect to see a greater impact during the back half of the year.
This reflects price increases related to contract renewals as well as the benefit of price escalators for most of the global contracts that are not up for renewal this year.
We expect these price increases across our business segments will in aggregate mitigate much but not all of our cost inflation pressures.
We will continue to assess the pace and scope of further cost inflation and we may take further price actions as the year progresses.
With respect to costs, input cost inflation remains the primary driver to the increase in our cost per pound in the quarter.
Commodity and transportation costs were each up double digits and we expect that trend will continue through fiscal 2022, especially as our raw potato costs significantly increased in the second half of the year.
Outside of cost inflation, we're making good progress to stabilize our supply chain in order to improve cost, production run rates and throughput.
We've taken actions to simplify our manufacturing processes and drive savings through a series of productivity initiatives, eliminating underperforming SKUs and increasing potato utilization rates.
Importantly, after making changes to how we staff production crews, compensation and other incentives, we steadily reduced our staffing shortfall.
We're working to continue this positive trend but realize it's difficult in a very challenging labor environment.
The pending implementation of government-mandated COVID testing and vaccine regulations may also slow our progress and that of our suppliers in attracting and retaining workers in the near term.
Now, turning to the crop.
The yields and quality of the potato crops in our primary growing regions in the Columbia Basin, Idaho and Alberta are well below average due to the extreme heat over the summer.
Similar to prior years, we had contracted with farmers to purchase potatoes to meet our production needs, assuming an average crop year.
But because of the extreme heat, the contracted acres yielded fewer potatoes and the quality is also poor.
As a result, we're purchasing our remaining potato needs in the open market to meet our production forecast.
We were able to reduce the number of potatoes we'd otherwise have been required to purchase in the open market by successfully partnering with our customers to secure changes product specifications.
Given that raw potato supply is tight and that fry demand has largely recovered, we've been purchasing open potatoes at a premium to contracted potato prices.
When possible, we've been securing them from our nearby growing regions, but we have also transported potatoes from the Midwest and Eastern North America which results in increased transportation costs.
We included an estimate of these additional costs in our updated earnings outlook.
We'll begin to see more of the financial impact of this year's poor crop, including the high cost of open market potatoes in our third quarter results.
So in summary, we feel good about our financial and operating progress in the quarter.
The overall demand environment is solid but may soften in the near term due to another COVID wave and we're pulling the right pricing and operating levers to manage through this challenging environment.
As Tom discussed, we're pleased with our progress in the quarter.
We generated strong sales and solid demand across our restaurant and foodservice channels in North America, drove volume growth and we implemented pricing actions.
We believe our pricing and cost-mitigation actions have us positioned to navigate through this difficult operating environment and to support sustainable profitable growth over the long term.
Specifically, in the quarter, sales increased 12% to a little over $1 billion.
This is only the fourth time in Lamb Weston's history that we topped $1 billion of sales in a quarter.
Sales volumes were up 6%.
Volume growth was driven by our foodservice segment, which reflects the continued year-over-year recovery in on-premise dining and by strong shipments to our large chain restaurant customers in North America that is served by our global segment.
Sales volumes of branded products in our retail segment were also up in the quarter, but the segment's overall volume declined due primarily to lower shipments of private label products.
While our overall volume growth in the quarter was strong, it was tempered by industrywide upstream and downstream supply chain constraints, including delays in the availability of spare parts, edible oils and other key materials to our factories as well labor shortages, which impacted production run rates and throughput at our processing plant.
In our global segment, volume growth was also tempered by the limited availability of shipping containers and disruptions at ports and in ocean freight networks.
We expect these production and logistics challenges as well as the near-term impact of COVID variants to limit our volume growth through at least the end of fiscal 2022.
Price mix was up 6% as we realized benefits from our previously announced pricing actions in each of our four segments.
As a reminder, we began implementing product pricing actions in the first quarter as the primary lever to offset inflationary cost pressures and it generally takes a couple of quarters before these actions are fully realized in the marketplace.
We've also taken actions to more frequently change the freight rates that we charge to customers, so they better reflect market rates.
Historically, we only adjusted these rates once or twice a year.
Most of the increase in price mix in the quarter reflects these product and freight pricing actions with favorable mix providing only a modest benefit.
Gross profit in the quarter declined $18 million as the benefit of increased sales was more than offset by higher manufacturing and transportation costs on a per pound basis.
Double-digit inflation for commodities and transportation costs accounted for almost 90% of the increase in cost per pound.
Of the two, commodities played a bigger role and were again led by edible oils, including canola oil, which nearly doubled versus the prior-year quarter, ingredients such as wheat and starches used to make batter, and other coatings and containerboard and plastic film for packaging.
Freight costs rose, especially for ocean freight and trucking, as global logistics networks continued to struggle.
Our costs also increased due to an unfavorable mix of higher cost trucking versus rail in order to meet service obligations for certain customers.
As Tom mentioned, we also incurred higher cost per pound versus the prior year due to incremental costs and inefficiencies driven by lower production run rates and throughput at our factories which resulted in fewer pounds to cover fixed overhead.
Lost production days and unplanned downtimes were primarily due to labor shortages across our manufacturing network, including COVID-related absenteeism.
While the cost drivers in the first two quarters of the year have been largely consistent, in the second quarter, we began to realize the initial benefits of the pricing and cost-mitigation actions that we discussed during our last earnings call.
As a result of these efforts, gross margin increased sequentially versus the first quarter by 500 basis points to more than 20%.
While pricing actions provided the larger lift to the sequential improvement to gross margins, our production run rates and throughput improved sequentially, primarily due to our efforts to stabilize factory labor.
While still lower than average, labor retention rates improved modestly versus the first quarter and the number of new applicants has been steady.
With more stability, we in turn drove more factory throughput.
Finally, our actions to optimize our portfolio are also providing benefit.
We've eliminated underperforming SKUs to simplify our portfolio and increase throughput in our factories.
We've also successfully partnered with our large customers to secure changes to product specifications to mitigate a portion of the operating impact of the poor quality of this year's potato crop.
In short, while our run rate and cost structure are not yet where we want them to be, we look forward to building on the notable sequential progress that we made in quarter and believe that we've positioned ourselves to manage through this challenging near-term increased cost and poor potato crop environment.
Moving on from cost of sales.
Our SG&A increased $7 million in the quarter, largely due to a couple of factors.
First, it reflects higher labor and benefit costs and higher sales commissions associated with increased sales volumes.
Second, it includes a $2.5 million increase in advertising and promotional expenses as we stepped up support for our retail products.
While these expenses are up compared with the prior year, they are still below pre-pandemic levels.
The increase in SG&A was partially offset by a reduction in consulting expenses associated with improving our commercial and supply chain operations as those consulting projects ended as well fewer expenses in the current quarter related to the design of a new enterprise resource planning system.
We had approximately $2 million of ERP-related expenses in the quarter, which consisted primarily of consulting expenses.
That's down from about $5 million of similar-type expenses in the prior-year quarter.
We're resuming our efforts in the second half of fiscal 2022 to design the next phase of our new ERP system.
Diluted earnings per share in the quarter was $0.22, down $0.44.
About $0.28 of the decline was related to costs associated with the redemption and write-off of previously unamortized debt issuance costs related to the senior notes that were originally issued in connection with our spin-off from ConAgra in November 2016.
We identified these costs as items impacting comparability in our non-GAAP results.
Excluding the impact of these items, adjusted diluted earnings per share was $0.50, which is down $0.16 due to lower income from operations and equity method earnings.
Moving to our segments.
Sales for our global segment were up 9% in the quarter.
price mix was up 5%, reflecting a balance of higher prices charged for freight, pricing actions associated with customer contract renewals and inflation-driven price escalators.
Volume was up 4%.
Higher shipments to large chain restaurant customers in North America drove the volume increase, while logistics constraints temper our international shipments.
Overall, the global segment's total shipments continued to trend above pre-pandemic levels.
Global's product contribution margin, which is gross profit less A&P expenses, declined 13% to $81 million.
Higher manufacturing and distribution cost per pound more than offset the benefit of favorable price mix and higher sales volumes.
Moving to our foodservice segment.
Sales increased 30% with volume up 22% and price mix up 8%.
The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants as well as from noncommercial customers drove the increase in sales volumes.
The initial benefits of product and freight pricing actions that we began implementing earlier this fiscal year as well favorable mix drove the increase in price mix.
Foodservice's product contribution margin rose 19% to $104 million as favorable price mix and higher sales volumes more than offset higher manufacturing and distribution cost per pound.
Moving to our retail segment.
price mix increased 5%, reflecting the initial benefits of pricing actions in our branded portfolio, higher prices charged for freight and improved mix.
Sales volume declined 4% as an increase in branded product volume was more than offset by lower shipments of private label products, resulting from incremental losses of certain low-margin business.
Retail shipments in the quarter were also tempered by the industrywide supply chain constraints and production disruptions that I discussed earlier.
Retail's product contribution margin declined 29% to $21 million.
Higher manufacturing and distribution cost per pound, a $2 million increase in A&P expenses and lower sales volumes drove the decline.
Moving to our liquidity position and cash flow.
Our liquidity position remained strong.
We ended the first half of fiscal 2022 with almost $625 million of cash and $1 billion of availability on our undrawn revolver.
In the first half, we generated more than $205 million of cash from operations.
That's down about $110 million versus the first half of the prior year due primarily to lower earnings.
During the first half of the year, we spent nearly $150 million in capital expenditures as we continued construction of our chopped and formed expansion in American Falls, Idaho and our new processing lines in American Falls in China.
We continue to put significant effort into managing certain material equipment and labor availability issues to keep our capital projects on track.
In the first half of the year, we returned $145 million to shareholders, including nearly $70 million in dividends and $76 million of share repurchases.
This includes $50 million of share repurchases in the second quarter alone.
Last month, we announced a 4% increase in our quarterly dividend rate, which equates to approximately $144 million annually and a $250 million increase to our current share repurchase plan, reflecting our confidence in the long-term potential of our business.
As a result, we have about $344 million authorized for share repurchases under the updated plan.
As I referenced earlier, during the quarter, we redeemed and issued nearly $1.7 billion of senior notes.
In doing so, our average debt maturity increased from four years to more than seven years and we reduced our annual interest expense by approximately $8.5 million.
We remain committed to our capital allocation priorities.
First, to reinvest in our business both organically and with M&A.
And then to return free cash flow to shareholders through a combination of dividends and share repurchases over time.
Now, turning to our updated outlook.
We continue to expect our full year sales growth in fiscal 2022 to be above our long-term target of low to mid-single digits.
In the third quarter, we anticipate price mix will be up sequentially versus the 6% increase that we delivered in the second quarter as the benefit of previously announced product pricing actions in each of our core segments continues to build.
We expect volume growth in the third quarter will decelerate sequentially versus the 6% we delivered in second quarter as a result of the near-term impact of COVID variants on restaurant traffic and demand, the macro industry supply chain constraints and labor challenges that will continue to affect production run rates and throughput in our factories and global logistics disruptions and container shortages that affect both domestic and export shipments.
We expect further deceleration in the fourth quarter as we begin to lap some of the higher-volume comparisons from the prior year.
With respect to earnings, we continue to expect net income and adjusted EBITDA including joint ventures will be pressured through fiscal 2022 reflecting significantly higher potato costs in the second half of the year, resulting from the poor crop, double-digit inflation for key production inputs and freight and higher SG&A expenses.
For the full year, we expect our gross margin will be 600 to 700 basis points below our pre-pandemic margin rate of 25% to 26%, implying a target range of 18% to 20%.
That's a change from the 17% to 21% range that we provided in our previous outlook.
We narrowed the range for a number of reasons.
First, we're confident about the pace and execution of the product and freight price increases that we are implementing in the market.
Second, we expect to build upon the incremental progress that we made in the second quarter to stabilize our supply chain operations and drive savings behind our cost-mitigation initiatives.
However, we expect that the improvement in our run rate, throughput and costs will continue to be gradual, reflecting the broader macro challenges facing the labor market that will likely persist through fiscal 2022.
And third, we have greater clarity on the net cost impact from this year's exceptionally poor potato crop.
As a reminder, we'll begin to realize the full financial impact of this year's poor potato crop in the third quarter and will continue to realize its effect through most of the second quarter of fiscal 2023.
Below gross margin, we expect our SG&A expenses to step up $100 million to $110 million in the third and fourth quarters as we begin to design the second phase of our new ERP project.
Equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs, both in Europe and the U.S.
We expect our interest expense to be approximately $110 million, excluding the $53 million of costs associated with the redemption of the senior notes in the second quarter.
We previously estimated interest expense to be approximately $115 million.
Our estimates for total depreciation and amortization expense of approximately $190 million and effective tax rate of approximately 22% and capital expenditures of approximately $450 million remains unchanged.
So in sum, we're seeing the benefit of our pricing actions which drove the sequential improvement in our top line and gross margin in the quarter.
Along with our pricing actions, we're on track with our other cost-mitigation initiatives, positioning us to manage through the impact of the very poor crop.
And finally, for fiscal 2022, we continue to expect net sales growth will be above our long-term target of low to mid-single digits and we have enough clarity in our sales and cost outlook to narrow our previous target gross margin rate.
Now, here's Tom for some closing comments.
Let me just quickly reiterate our thoughts on the quarter by saying we are pleased with our progress in the quarter and we're taking the right steps on pricing actions and in our supply chain operations to navigate through this difficult operating environment.
We are on track to deliver on our targets for the year and we believe we're on a path to get back to pre-pandemic profit levels after we get past the impact of the poor crop in the first half of fiscal 2023 and remain committed to investing support growth and create value for our stakeholders over the long term.
| q2 adjusted earnings per share $0.50.
q2 earnings per share $0.22.
q2 sales rose 12 percent to $1.007 billion.
sees fy 2022 net sales growth above long-term target range of low-to-mid single digits.
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These estimates are subject to some risks and uncertainties.
Additional information regarding these factors is contained in the company's 10-K, 10-Q, and 8-K filings.
Earlier today, we reported fourth-quarter revenue of $10.5 billion, net earnings of $1 billion, and earnings per diluted share of $3.49.
This is, in most respects, a very solid quarter, even though we missed consensus by $0.05.
I have more to say about that shortly.
Despite the adverse impact of the pandemic, we achieved most of our operational and financial goals, added dramatically to our backlog, and had a very good cash quarter.
Because of the adverse impact to the economy caused by COVID-19, I'll devote less time to the quarter-over-quarter comparisons and spend more time on the sequential improvement that tells a compelling story of recovery.
I'll go through that in some detail as I give you my thoughts on the business segments.
As we indicated that it would be, the final quarter is our strongest.
It is quite remarkable that we came within $0.02 of the very strong pre-pandemic fourth-quarter 2019.
On a sequential basis, suffice it to say that revenue is up 11.1%, operating earnings are up 20.6%, net earnings are up 20.1% and earnings per share are up 20.3%.
So all in all, a solid quarter with good performance even compared to the year-ago quarter but really good sequentially.
For the full year, we had revenue of $37.9 billion, down from 3.6% from the prior year, net earnings of $3.17 billion, and earnings per fully diluted shares of $11, once again, modestly below consensus.
Our business was strengthened by significant growth in the backlog to a year-end record high of $89.5 billion.
The same is true of total estimated contract value at $134.7 billion.
The total company book-to-bill was 1.1 to 1 for the year, led by the particularly strong order performance of Electric Boat.
The strong order intake across the board positions the company well for 2021 and beyond.
Our cash performance for the quarter and the year was stronger than expected with a conversion rate of 91% of net income for the year.
Jason will have more fulsome comments on this subject in his remarks.
Let me review the quarter, paying particular attention to sequential comparisons and the full year in the context of each group, and provide some color as appropriate.
Aerospace revenue of $2.4 billion is up 23.3% over the third quarter on the strength of the delivery of 40 aircraft, 34 of which were large cabin.
While this was the strongest delivery quarter of the year, it fell short of our expectations by three aircraft, two of which delivered after the first of the year for reasons related to customer preference.
The third aircraft had a willing customer but was not ready for delivery by year-end.
That one is on us.
For the full year, revenue of $8.08 billion is off 17.6% from the prior year.
Nevertheless, operating earnings are still over $1 billion, far away the industry leader.
Fourth-quarter operating earnings of $401 million is 41.7% better than the third quarter on the strength of higher revenue and a 220-basis-point improvement in operating margin.
However, the shortfall against consensus for the quarter and the year is found in the three anticipated deliveries that slipped into this year.
This should not, in any respect, diminish the outstanding performance of Gulfstream in this environment.
Furthermore, margins increased on a sequential basis throughout the year, ending at 16.5% in the fourth quarter.
At midyear last year, we told you to expect revenue of about $8.4 billion with earnings of $1.13 billion.
We finished the year with revenue of $8.1 billion and earnings of $1.08 billion.
The entire shortfall is attributable to 127 deliveries versus our expectation of 130.
All in all, still within the 125 to 130 deliveries we gave you right after the initial shock to the economy caused by the pandemic became manifest.
On the order front, activity in the quarter was very good, and the pipeline remains quite active.
The book-to-bill at Aerospace in the fourth quarter was 0.96 to 1, dollar-denominated.
For the year, the book-to-bill was 0.88 to 1.
This order activity was, in my view, quite good in the midst of a pandemic-induced depression.
We are of the well-considered view that order activity will improve further as travel restrictions are lifted and the economy begins its recovery.
Let me give you some thoughts on our product portfolio.
First, the G500 and G600 unit manufacturing costs continued to decline, and we are producing superb quality.
We had 92 units of this family of aircraft in service at year-end.
Anecdotally, the G500 led the order book in the fourth quarter.
Next, some in the analyst community have expressed concern about the continuing demand for the G650, which first entered into service eight years ago.
At the end of this year, we had 436 G650 in service, an average of 54 a year.
The 650 continues to be in demand, but not at that level.
I can add anecdotally that in the fourth quarter, it was a close second to the G500 demand.
It remains a strong competitor to anything in the air and will remain a strong contributor to our revenue and earnings for the next several years.
Finally, on the new product development front, all five G700 flight-test aircraft are flying and have over 1,000 hours of test flight.
We appear to be on track for entry into service in the fourth-quarter 2022.
That will stimulate both revenue and earnings next year.
If you've been following our Aerospace R&D spend, you know that there's more to come on this subject.
Revenue in the quarter of $1.96 billion is essentially the same as the year-ago quarter.
Operating earnings of $309 million are $25 million or 8.8% ahead of the final quarter of 2019 on the strength of 140 basis point improvement in operating margin to 15.8%.
For the full year, revenue of $7.2 billion is up $216 million, a 3.1% increase after a 12.3% growth in 2019 despite a revenue decline at ELS, driven by COVID shutdowns in Spain earlier in 2020.
Operating earnings of $1.04 billion are up $45 million, a 4.5% increase.
By the way, this performance is consistent with the initial guidance we provided earlier in the year.
In the U.S., our Army customer is continuing its modernization, which provides steady demand for our combat vehicles and munitions businesses.
The fourth quarter had some nice order activity, including a contract for Abrams Version 3 with a ceiling of $4.3 billion and additional Stryker SHORAD orders with the ceiling of up to $1.2 billion.
Outside the U.S., we are beginning to see increased demand as our NATO allies start to emerge from COVID-constrained activity, including over $200 million of Canadian ammunition orders in the quarter.
In short, this group has had quite positive revenue growth for several years now, continued its history of strong margin performance, had very good order activity, and has a strong pipeline of opportunity as we go forward.
This is once again a good news story.
Marine fourth-quarter revenue of $2.9 billion is up $292 million, a compelling 11.4% increase over the year-ago quarter.
Operating earnings of $247 million are up $48 million against a good fourth quarter in 2019.
Importantly, there is an 80-basis-point improvement in operating margins.
The results are much the same sequentially.
Revenue was up $452 million, and earnings are up $24 million or 10.8%.
For the full year, revenue was almost $10 billion, up $796 million or 8.7%.
Operating earnings for the year of $854 million are up by $69 million or 8.8%.
This is the highest quarterly and full-year earnings ever for the Marine group.
In our midyear guidance to you, we anticipated revenue of about $9.6 billion and operating earnings of $845 million.
We came in above that for both revenue and earnings.
In response to significant increased demand from our Navy customer that you can see in these results, we continue to invest in each of our yards, particularly at Electric Boat to prepare for Block V and the new Columbia ballistic missile submarine.
So suffice it to say that we're poised to support our Navy customer as they increase the size of their fleet and deliver value to our shareholders as we work through this very large backlog and improve our return on invested capital.
Finally, the Technologies group, which consists of GDIT and Mission Systems, is reported together for the first time in a while.
You may recall, we used to report this group as then constituted as Information Systems and Technology.
This new reporting reflects the way we manage these businesses with group executive vice president, Chris Marzilli, reporting to me.
We have also discovered that in this era of end-to-end solutions melding technology, hardware, and software, these business units increasingly go to market together, seeking to provide end-to-end systems and support solutions.
We will, however, continue to provide operating transparency by providing company-specific data where appropriate.
Jason will have more to say about this in his remarks.
This is, of course, the group in the defense segment that has had the most impact from COVID-19 with the most remote participation from employees and the most difficult to access in customer locations.
With all that said, let's turn to the results and commentary on the group and specific businesses.
For the quarter, Technologies had revenue of $3.23 billion, off less than 1% sequentially.
Operating earnings of $352 million are up $38 million or 12.1% on a 120-basis-point improvement in margins.
As you would expect, given the environment, revenue for the first full year is off $711 million or 5.3%, and earnings are off $100 million or 7.6%.
It is well to remember that these revenue and earnings numbers exclude the SATCOM business that we sold in the first half of last year.
All considered, the group performance showed good strength, and earnings guidance from us was close.
Revenue came in at $350 million, below our guidance, $12.65 billion versus $13 billion, but margins, particularly at GDIT, were better, leading our earnings forecast to be on target.
From a margin perspective, GDIT was at 7.9%, up 40 basis points sequentially.
Mission Systems, at 16.2%, was up 290 basis points over the last quarter.
For the full year, the group's free cash flow exceeded 150% of full-year imputed net earnings, the strongest performance within General Dynamics.
GDIT's performance was even stronger.
It was the best quarter cash performance in its history.
The group enjoyed a tremendous order quarter with significant wins by GDIT in four major programs, all of which are IDIQ contracts.
As a result, under our conservative accounting policy, these awards are found in total estimated contract value rather than in unfunded backlog.
Jason will get into this more in his remarks as well.
Each quarter in the past, I've tried to give you some insight about GDIT.
Once again, let me share some thoughts.
The fourth quarter was an extension of the momentum GDIT built throughout the year despite COVID headwinds.
They remained focused on what they could control in an otherwise turbulent year, supporting customers and their employees while controlling costs, converting cash, and winning new business.
On the new business front, GDIT won several large deals in key technical focus areas, including cyber, cloud, and artificial intelligence.
These wins drove GDIT's total estimated contract value up $2 billion or 11% as compared to both the third quarter and year-end 2019.
As you will see in our guidance, GDIT is poised for very nice growth in 2021.
The first thing I'd like to address is our cash performance for the quarter and the year.
That resulted in free cash flow for the year of $2.9 billion, a cash conversion rate of 91%, nicely ahead of our anticipated 80% to 85% of net income.
To put this in context, our cash from operations for the year of $3.9 billion was less than $20 million shy of the highest annual operating cash flow we've ever had, notwithstanding the impact of COVID on our operations in 2020.
In fact, our free cash performance for the year was just short of achieving our original pre-COVID cash forecast, so really a remarkable outcome.
This was the result of outstanding performance across the business to close out the year, most notably in the Aerospace group, which began to draw down its inventory that we've been discussing for some time, and the Technologies group, which continues to generate superb cash flows, as Phebe mentioned, in this case, in excess of 150% of imputed net income for the year.
And as you'll recall, at this time last year, we negotiated a path forward on our large international contract in Combat Systems, including a revised progress payment schedule that liquidates their receivables balance over the next three years.
As part of that agreement, we received two payments of $500 million each last year, and we received the next progress payment earlier this month in accordance with the revised schedule.
So that OWC will continue to unwind, as we've discussed on past calls.
Of course, Marine Systems continues with its significant facilities improvements in support of the unprecedented growth on the horizon.
To that point, we had capital expenditures of $345 million in the fourth quarter for a full-year total of nearly $1 billion or 2.5% of sales.
You may recall, we had expected our capex to peak in 2020 at roughly 3% of sales due to these shipyard investments.
As you might expect, given the impact of the pandemic, we've managed the timing of this capex spend prudently, and the result is three years, '19, '20, and '21, at roughly 2.5% of sales.
This timing fully supports our Columbia and Block V build plan at Electric Boat.
We then expect to trend back down and return to the more typical 2% range by 2023, consistent with our previous expectations.
The net result is that we expect cash performance to continue to improve in 2021 to the 95% to 100% conversion range with year-over-year growth in free cash flow in 2021 and beyond.
We ended the year with a cash balance of just over $2.8 billion and a net debt position of approximately $10.2 billion, reflecting a $1.7 billion reduction in the fourth quarter.
Our net interest expense in the fourth quarter was $120 million, bringing interest expense for the full year to $477 million.
That compares to $110 million and $460 million in the comparable 2019 periods.
Our next scheduled debt maturities are for $2.5 billion in the second quarter and $500 million in the third quarter of this year.
Due to the timing of our cash flows, we may be in the commercial paper market for a transition period.
But overall, we expect interest expense to drop to approximately $420 million in 2021.
We also paid $315 million in dividends in the fourth quarter, bringing the full year to $1.2 billion.
And we repurchased 700,000 shares of stock in the quarter, bringing us to just over 4 million shares for the year for $600 million or $148 per share.
With respect to our pension plans, we contributed $480 million in 2020, and we expect that to decrease to approximately $360 million in 2021, the majority of that in the second half.
Turning to income taxes.
We had a 15.4% effective tax rate in the fourth quarter, resulting in a full-year rate of 15.3%, consistent with our previous guidance.
Looking ahead to 2021, we expect a full-year effective tax rate of around 16%.
Next, I'd like to alert you to two accounting changes that we've made in the fourth quarter, one related to segment reporting and the other related to pensions.
The segment change is the one that Phebe alluded to earlier and relates to our GDIT and Mission Systems businesses.
As the federal IT services and defense electronics markets have evolved in recent years, we've seen a significant increase in the customers' prioritization of these capabilities and a shift to large-scale, end-to-end, highly engineered solutions that require critical mass and a broad array of technology services and hardware offerings to meet these customer demands.
And more recently, the COVID-19 pandemic has only accelerated these trends with an expansion of remote connectivity and an added sense of urgency around required technology investments.
As you've seen, we've responded to these trends over the past several years to further solidify our position as a market leader in this space, including the combination of our C4 and ISR businesses to form Mission Systems and, of course, the acquisition of CSRA to reposition GDIT as a leader in this market.
With these integrations now complete, along with some considerable portfolio shaping and realignment, we are seeing the market dynamics continue to evolve.
The two businesses share the same defense, intelligence, and federal civilian customer base and increasingly go to market together to meet these customers' needs.
In addition, we're seeing considerable commonality and a significant complementary pull-through in their core offerings.
So we will now be reporting them as one technology segment to better reflect the way we're running the business as we position them to best compete in this robust market.
To be clear, we'll continue to provide transparency into the individual revenues and associated programmatic detail for each business, but of course, that becomes somewhat of a mixed bag as they increasingly engage in joint pursuits.
With respect to pensions, we've adopted an accelerated method for amortizing actuarial losses for our government pension plans to better align the timing under GAAP with when the costs are allocated to contracts.
Because these costs are recovered on our contracts, this change had no impact on our net income or cash flow.
However, you'll note some differences between captions on the balance sheet and income statement as this accounting change has flowed through the financial statement.
In particular, this reduces our corporate operating earnings, which we expect to be a negative $85 million in 2021, and increases our other income, which is below the line, which we expect to be approximately $90 million in 2021.
The impact of these two income statement line items is equal and offsetting, so no impact to net income.
And lastly, a little color on backlog.
As of the end of the year, our funded backlog, total backlog, and total estimated contract value are all up compared to a year ago and, as Phebe mentioned, at record highs.
As an indication of the steady improvement since the peak of the disruption from the pandemic, Aerospace book-to-bill returned to 1 times in the quarter, consistent with Phebe's remarks on what we're seeing in terms of Gulfstream demand.
Marine Systems had an outstanding quarter with a book-to-bill of over 4 times due to the exercise of the $9.5 billion option for the Columbia construction contract, providing opportunity for further long-term top- and bottom-line growth for Marine Systems.
And a little bit of color on order activity for the Technologies group for the quarter.
They had a very nice quarter with some notable awards, including the final resolution on the DEOS program with a potential value of $4.4 billion; the EMITS contract in support of the U.S. Army in Europe; the State Department's GSS 2.0 contract with a potential value of $3.3 billion; and a contract with the Air Force to develop a digital engineering environment.
Importantly, given the conservative approach we take to reporting backlog, the preponderance of the value associated with these contracts doesn't show up in orders or backlog at the time of award.
In fact, only a portion of the awards shows up even in our IDIQ potential contract value.
This is quite different from the way most of the peer group approaches this, so worth spending a moment on it.
The way we book these awards is to conservatively estimate initial near-term value in the IDIQ category.
Then as the program progresses and the customer exercises orders, that value moves into the backlog and ultimately gets reported as revenue.
And over time, incremental amounts of IDIQ value are added to that bucket as our visibility into the program evolves.
As a result, over half of the group's annual orders and revenue come out of this potential contract value category.
So the headline numbers you see in the firm backlog belie the outstanding performance in the quarter, as reflected in the total estimated contract value for the group of just over $41 billion.
That concludes my remarks.
With that, I'll turn to our expectations for 2021.
So let me provide our operating forecast initially by business group and then on a companywide roll-up.
In Aerospace, we expect revenue to be about $8 billion, essentially flat with 2020.
Operating margins will be about 12.5%, leading to operating earnings of $1 billion, maybe slightly more.
So what is driving this forecast and, in particular, the lower margins in 2021 when revenue is similar to 2020?
You will recall that I told you last quarter, we will deliver 13 fewer G550s as that airplane is no longer in production.
This leaves us with 13 fewer aircraft, not including the three slips from 2020.
So all up, 10 fewer aircraft.
This reduction in revenue will be made up by a roughly $500 million increase in services across Jet Aviation and Gulfstream at about 10% lower operating margin.
There are a lot of other puts and takes, but this gives you the big picture for the lower anticipated margins.
By the way, our forecasted production delivery considers our backlog, our fourth-quarter orders, and our take on current demand.
I fully expect 2022 will have better revenue and earnings, stimulated by the entry into service of the G700 in the fourth quarter and improving demand across the product lines as the economy recovers.
In Combat Systems, we expect revenue of about $7.3 billion, an increase of approximately $100 million over 2020.
We expect the operating margin to be about 14.5% and operating earnings to exceed last year by $20 million or 2%.
We look for revenue, earnings, and margin rate to grow quarter over quarter during the year with a particularly strong fourth quarter.
After several years of good revenue growth, 2021 and 2022 will have modest growth.
Growth should resume in 2023 and beyond as several developmental programs move into production.
The Marine group is expected to have revenue of approximately $10.3 billion, an increase of over $300 million.
Operating margin in 2021 is anticipated to be around 8.3%, driven in large part by increased work on the first two cost-plus Columbia submarines, which have conservative initial booking rates.
We anticipate growth at each of the yards.
The long-term driver of growth here is the submarine work, which will expand significantly.
Our biggest upside opportunity in this group is to outperform the forecasted revenue line.
We expect revenue in the Technologies group of $13.2 billion, $580 million more than 2020.
This is a growth of 4.5% with GDIT growing at a rate of 7.1%.
Mission Systems will be essentially flat with organic growth of 3%, offset by the SATCOM divestiture.
We expect earnings of $1.25 billion, about $50 million more than 2020.
This implies an overall margin of 9.5% with GDIT returning to 7% or more.
So for 2021, companywide, we expect to see approximately $39 billion of revenue, up over $1 billion from 2020, and operating margin at 10.5%.
This all rolls up to a forecast range of $11 to $11.05 per fully diluted share.
On a quarterly basis, we expect earnings per share to play out much like it has in prior years with Q1 about $2.20 and progressively stronger quarters thereafter.
Let me emphasize that this plan is purely from operations.
It assumes a 16% tax provision and assumes we buy only enough shares to hold the share count steady with year-end figures so as to avoid dilution from option exercises.
So much like last year, beating our earnings per share guidance must come from outperforming the operating plan, achieving a lower effective tax rate, and the effective deployment of capital.
I should leave you with this one final thought.
Our strong cash flow in 2020 and our anticipation of a 95% to 100% conversion rate in 2021 leaves us with the ability to engage in a share repurchase program this year to enhance the earnings per share figures I have just given you.
We will see how that plays out.
I'll be more specific about this after the end of the first quarter.
Back to you, Howard.
As a reminder, we ask each participant one question and one follow-up question so that everyone has a chance to participate.
Operator, could you please remind participants how to enter the queue?
| q4 earnings per share $3.49.
q4 revenue $10.5 billion versus refinitiv ibes estimate of $10.78 billion.
company-wide operating margin for q4 was 12.3%, up 90 basis points from the prior quarter.
|
Last night,we released results for our fourth quarter of fiscal year 2021, copies of which are posted in the Investor Relations section of our website.
In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results.
Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP.
Erica will review the business segment and corporate financial details.
At this time last year.
I talked about being prepared to win as the recovery takes hold and I think 2021 is evidence that we were prepared.
Fiscal 2021 was a remarkable year for Cabot as the business recovered from the 2020 COVID lows to deliver record results.
We accomplished this through a combination of extraordinary execution and our commitment to driving growth through differentiated investments.
I would like to spend a little time now recapping the accomplishments of the year.
The Cabot operating model is built on the foundations of commercial and operational excellence and our strength in these disciplines drove our outstanding results in fiscal year 2021.
We delivered record adjusted earnings per share of $5.02 and total segment EBIT of $550 million.
And our focus on cash, resulted in a record discretionary free cash flow of $353 million.
The macro environment in 2021 required resilience and agility and I'm very proud of the Cabot team in how they work tirelessly to support our customers' evolving needs.
Serving our customers and innovating to grow with them is what motivates our team.
This was made more challenging in 2021 given the myriad global supply chain disruptions that companies face and the fact that necessary COVID safety protocols continue to evolve and adjust our normal ways of working.
Additionally, companies experienced sharply rising input costs, which required dynamic commercial management.
Our teams worked closely with our customers to manage through this environment and we were successful in our pricing efforts to ensure our margins remained robust and we could invest to support our customers long-term supply needs.
Fiscal year 2021 mark the sixth year of our advancing the core strategy and I'm very pleased with our record of execution and the growth prospects for our company.
Adjusted earnings per share has grown at a compound annual growth rate of 11% since the inception of our strategy, ahead of our 7% to 10% target.
A growth focus built around our core segments and disciplined execution have been the hallmarks of our approach.
As pleased as we are with the results since 2015, I'm even more excited about the growth opportunities that lie in front of us and the progress we made in 2021.
Our growth strategy is built on a philosophy of investing from positions of strength and where we have what we call a right to win.
A few highlights from 2021 are particularly noteworthy.
Our unmatched portfolio of conductive carbon additives in our strong customer focus model resulted in a doubling of revenue in our battery materials business year-over-year.
We are progressing with the specialty carbons conversion of our plants in Xuzhou, China and this investment will provide growth across our broad range of specialty carbon applications and will free up additional capacity to support battery materials.
Our inkjet business is well positioned to capitalize on the shift in the commercial and packaging segments from analog to digital printing and we achieved multiple OEM qualifications in 2021 that set us up well for growth as inkjet presses penetrate these markets.
And finally, we continue to the execution of a project to build a specialty compounds production line in Cilegon, Indonesia, which will allow us to meet customer demand for black masterbatch in this high growth region.
While growth and execution are highlights from 2021, these accomplishments have been achieved with sustainability at the core.
We continued our sustainability journey in 2021 with several noteworthy accomplishments.
First and foremost, we committed to align our disclosures with the recommendations of the Task Force for Climate Related Financial Disclosure or TCFD and we engaged a third party to help us evaluate climate risks and opportunities following the TCFD guidelines.
We intend to share the results of this work in the coming months.
While the operating rhythm of 2021 was challenging, I'm very proud of our performance in employee safety.
Our total recordable incident rates of 0.34 keeps us firmly in the upper echelon of chemical and industrial companies.
We also completed a major air emissions control project at our carbon black manufacturing facility located in Louisiana.
This investment in control technology will result in improved air quality through the substantial elimination of nitrogen oxide and sulfur dioxide emissions and will ensure that we can support our customer supply needs in a sustainable fashion over the long term.
In addition, waste heat from the plant is being recovered and used to generate up to 50MW of cogen power without creating any additional emissions.
In August, we announced a new $1 billion revolving credit facility that has pricing that is based on the company's credit ratings, as well as our performance against annual intensity reduction targets for sulfur dioxide and nitrogen oxide emissions.
The transaction reinforces our commitment to sustainability and was one of the first sustainability-linked revolving credit agreements in the U.S. chemical industry.
Lastly, as a chemical industry, we need to attract the next generation of talented and diverse candidates into our field of chemistry.
In support of this aim, Cabot is taking part in an industry effort to support the Future of STEM Scholars Initiative or FOSSI, which focuses on creating pathways for students at historically black colleges and universities to enter and succeed in STEM careers within the chemical industry.
This initiative will have a lasting and transformational impact on the students and our industry and we are proud to be an inaugural sponsor.
Overall, we had a very successful 2021 in terms of financial performance and progress against our strategic objectives.
This well-rounded performance is a testament to the positioning of our portfolio and our exceptional team.
Now a few comments on the fourth quarter.
I am pleased to report solid fourth quarter results with adjusted earnings per share of $1.11.
This performance was 63% above the same quarter last year despite the effects of the semiconductor chip shortage and ongoing global supply chain disruptions, as well as a higher level of maintenance spending due to the timing of turnarounds.
We also continue the momentum of battery materials and ended the year with EBITDA in our previously communicated range of $15 million to $20 million.
Cash flow from operations was strong at $100 million in the quarter despite the impact of higher raw material prices.
I will start with discussing results in the Reinforcement Materials segment.
During the fourth quarter and full year of fiscal 2021, EBIT for Reinforcement Materials increased by $8 million and $167 million respectively, as compared to the same periods in the prior year.
The increases were principally due to higher unit margins and higher volumes.
Higher margins were driven by higher spot pricing, particularly in Asia.
The higher volumes in the fourth quarter and full year of fiscal 2021 were due to a strong recovery in all regions from the COVID related impacts in fiscal 2020.
The fourth quarter results were also impacted by higher costs associated with the plant maintenance.
Globally, volumes were up 6% in the fourth quarter as compared to the same period of the prior year due to 6% growth in the Americas, 5% increase in Europe and up 7% in Asia.
Higher volumes were driven by strong demand in all regions as the replacement tire market remain robust.
Looking at the first quarter of fiscal 2022, we expect a sequential increase in EBIT from a decrease in fixed costs with lower plant maintenance spend and as volumes are expected to increase modestly sequentially as demand for replacement tire remains solid.
Now turning to Performance Chemicals.
EBIT increased by $20 million in the fourth quarter and $93 million for the full year as compared to the same periods in fiscal 2020, primarily due to improved product mix, stronger volumes and higher customer pricing.
The stronger product mix was driven by an increase in sales into automotive and conductive carbon applications in our specialty carbons and compounds product line.
Pricing improved year-over-year in our fumed silica product lines, particularly in China.
Year-over-year volumes in the fourth fiscal quarter increased by 2% in performance additives and decreased by 8% in formulated solutions.
Volumes were impacted during the quarter, largely due to two plant outages as we discussed on last quarter's call.
This segment experienced increased maintenance costs in the fourth fiscal quarter as expected, but these higher costs were offset by $7 million of insurance proceeds related to a claim from earlier in fiscal 2021.
Looking ahead to the first quarter of fiscal 2022, we expect sequential volume growth as one of the impacted plants came back online and a positive benefit from growth in our battery materials product line.
We anticipate higher input costs in the first quarter that will temporarily impact results until our latest round of announced price increases and surcharges can be fully implemented to recoup the rising costs.
Moving to Purification Solutions.
EBIT in the fourth quarter of 2021 increased by $4 million compared to the fourth quarter of fiscal 2020 and full year EBIT increased $7 million.
The increases were driven by lower fixed costs from the sale of the mine in Texas and the related long-term activated carbon supply agreement and the favorable impact from improved pricing in our specialty applications.
Looking ahead to the first quarter of fiscal 2022, we expect EBIT to decline sequentially due to seasonally lower volumes and higher maintenance costs due to planned turnaround activities.
I will now turn to corporate items.
We ended the quarter with a cash balance of $168 million and our liquidity position remains strong at approximately $1.3 billion.
During the fourth quarter of fiscal 2021, cash flows from operating activities were $100 million, which included a working capital decrease of $4 million.
Capital expenditures for the fourth quarter of fiscal 2021 were $80 million and additional uses of cash during the fourth quarter were $20 million for dividends.
During fiscal 2021, we generated $257 million of cash flow from operations, including an increase in net working capital of $222 million.
The working capital increase was largely driven by the impact of higher raw material costs on our inventory balances and accounts receivable balances as we passed higher costs onto our customers in our pricing.
The increase was also partially driven by the growth in our business year-over-year.
Capital expenditures for fiscal year 2021 were $195 million dollars, which included both our targeted growth investments and the spend related to U.S. EPA compliance projects.
We expect capital expenditures in fiscal 2022 to be between $225 million and $250 million.
This estimate includes continued U.S. EPA related capital compliance spend and increased spending on growth projects related to high confidence, high return areas of the portfolio.
The growth related capital includes completing the conversion of upgrading our new China carbon black plant to produce specialty carbons, which is planned to come online in the second half of 2022.
In addition, we are executing on a new specialty compounds unit in Indonesia and have planned growth capital related to capacity expansions in battery materials and inkjet.
Additional uses of cash during the fiscal year included $80 million for dividends.
The operating tax rate for fiscal year 2021 was 27% and we anticipate our operating tax rate for fiscal 2022 to be in the range of 27% to 29%.
As we look ahead to 2022, I'm excited about the growth opportunities in front of us.
Let me take a couple of minutes to share with you our priorities for the upcoming year.
First, we will finalize our 2022 tire customer agreements and we remain positive about the outcome as security of supply remains the top priority for customers.
Demand continues to be strong and is projected to be robust in all regions.
Inventories levels are low across the value chain and global transportation flows remain challenging, all of which are placing a greater premium on local supply.
Second, we'll continue to advance a broad portfolio of strategic growth investments across the company.
In battery materials, we plan to expand capacity at our carbon nanotube facility in Zhuhai, China.
Additionally, the aforementioned specialty carbons conversion of our Suzhou plant will provide 50,000 metric tons of growth capacity across specialty carbons and will free up our network to support growth of battery materials.
We also expect to complete our new specialty compounds production unit in Indonesia later in the calendar year 2022, which will enable us to build on our strong position in the high growth ASEAN region.
And finally, we intend to build on our track record of execution by delivering earnings growth and strong cash flow, while maintaining our investment grade rating and industry-leading dividend.
I hope this gives you some color on our priorities for 2022.
I'll close out my prepared comments today by talking about our outlook for the year.
Clearly, we are pleased with the momentum coming out of fiscal 2021 and we feel very good about how the new year is shaping up.
We expect a step-up in Reinforcement Materials starting in the second quarter based on an expected positive outcome from our 2022 customer agreements.
We anticipate improved results across all product lines in the Performance Chemicals segment with above-market growth in our battery materials and inkjet product lines.
Based on this, we expect adjusted earnings per share for the fiscal year 2020 to be in the range of $5.20 to $5.60.
The first quarter results are expected to be generally in line with the fourth quarter with results accelerating as we move through the year.
On the cash side, we anticipate strong free cash flow from year-over-year earnings growth, partially offset by an increase in working capital to support growth.
Cash flow will be used to fund advantage growth investments, dividends and opportunistic share repurchases.
Overall, I'm very excited about where we are as a company and where we're going.
The growth opportunities we have in front of us are better than they have been at any point during my time as CEO.
The long-term fundamentals of our businesses are strong.
Our end markets remain robust and we continue to execute at a high level.
Looking ahead, we believe we have a winning formula, a talented team, an excellent portfolio of businesses that for growth and a strong balance sheet, all of which position us to deliver on our strategic objectives and continue to grow and lead in our industry.
| compname reports fourth quarter diluted earnings per share of $0.50 and adjusted earnings per share of $1.11.
q4 adjusted earnings per share $1.11.
sees fy 2022 adjusted earnings per share $5.20 to $5.60.
coterra energy qtrly believe robust end-market demand will continue.
coterra energy - in our reinforcement materials segment, expect fy to benefit from higher volumes.
coterra energy - in performance chemicals segment, anticipate particular strength in battery materials and inkjet packaging in fy.
|
On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.
We're off to a strong start in 2021 with solid execution in our first quarter that highlights our ability to strike an effective balance between capturing demand in this robust housing market and measurably increasing our margins.
We are poised for profitable returns-focused growth this year based on a number of factors, most notably, our backlog, both its composition and size, the success of our newly opened communities and a compelling lineup of planned openings for the remainder of the year.
As to the details of the quarter, we generated total revenues of $1.14 billion and diluted earnings per share of $1.02, up 62% year-over-year.
Our housing revenues were at the low end of our guidance range due to the weather disruption in Texas which shifted some deliveries from our first quarter into our second quarter.
Texas is our largest market by units and the severe weather shut down our operations for roughly 10 days in mid-February.
We resumed activity in our communities by the last week of the month and nearly all of the impacted homes have already been delivered.
Our profitability was substantially higher year-over-year with a more than 400 basis point increase in our operating income margin to 10.4%, excluding inventory-related charges.
This result was driven by several key factors.
First, strong demand for our personalized products at affordable price points and our success in balancing pace and price; second, operating leverage from increasing our community absorption rate and the resulting higher revenues; third, the ongoing benefit from the cost containment efforts we put in place last spring; and finally, the continuing tailwind from lower interest amortization.
Our profitability per unit grew meaningfully to over $41,000 in the first quarter, 73% higher than in the prior-year period.
These results are also generating a healthy level of operating cash flow to fuel the expansion of our scale.
In the first quarter, we increased our land investments by 37% year-over-year to roughly $560 million.
We grew our lot position by approximately 3,000 lots since year-end to nearly 70,000 lots owned and controlled and maintained our option lots at 40% of our total.
We own and control all the lots we need to support our growth target for 2022.
And although we remain opportunistic in seeking additional lots that can provide deliveries next year, we are now primarily approving land acquisition for deliveries in 2023 and beyond.
We are achieving our objectives in growing our lot count with a higher-quality portfolio of assets and increasing our returns all at the same time.
A healthy tension exists within our divisions as they work to expand their business while staying on strategy.
We have experienced land teams in our markets who have strong local relationships with land developers and sellers and we continue to see good deal flow that meets our investment criteria.
Although every acquisition is different requiring a tailored set of assumptions regarding the sub market, the number of lots, the type of product we plan to offer and the price point, we are generally underwriting our deals to a monthly absorption of between four and five.
We're being prudent with our investment yet opportunistic with pace and price based on market conditions once each community opens.
Our long-standing approach has been to underwrite in today's dollars and as such our land deals reflect our current ASPs as well as our current costs and assume no future price appreciation or cost inflation.
Geographically, we remain in close proximity to where we've been investing in land over the past couple of years entering neighboring submarkets in order to grow our scale but without moving to the more remote submarkets of each city.
Our Las Vegas business provides a good example of this strategy.
This division has increased its annual deliveries by almost 50% in the last three years and has achieved the number one ranking in the market.
We have a large business in Henderson and in Inspirada and we are well established in Summerlin.
To expand further we are investing more heavily in the Northwest and Southwest areas adjacent to our existing submarkets which still offer good schools, shopping and amenities at more affordable prices.
In terms of deal size, we continue to acquire lots that typically represent a one to two-year supply per community, consistent with our approach over the past several years.
We remain on track with respect to our 2021 and 2022 community count goals that we shared with you in January as we execute on our growth plan.
In the first quarter, we successfully opened 22 new communities out of the approximately 150 openings we anticipate for this year.
As we look to the remainder of 2021, we continue to expect a sequential increase in our ending count each quarter and year-over-year community count growth in the fourth quarter.
We remain well positioned to extend this growth into 2022 and still expect year-over-year community count expansion of at least 10% next year.
Our monthly absorption per community accelerated to 6.4 net orders during the first quarter, a year-over-year gain of 39%.
We achieved this sales rate, even as we raised prices in the vast majority of our communities and managed lot releases in order to balance pace, price and starts as we optimize each asset.
Municipalities have increased our capacity for processing permits, heightening our ability to accelerate our starts, which were up 40% year-over-year in the first quarter.
Going forward, we expect to continue matching starts to our order rates.
While we remain sensitive to affordability levels, throughout the past year we have utilized price as our primary mechanism to manage our sales pace and to cover construction costs, which are under some pressure right now.
That being said, our ASP expectation for this year reflects only mid single-digit percentage growth year-over-year.
This modest increase in our blended ASP reflects our effective approach to our community locations and product positioning to help maintain affordability.
We are targeting the median household income in each submarket and with our built-to-order approach we provide the consumer flexibility in floor plan size and price, enabling them to quickly adjust their purchase decision if interest rates increase further.
We strive to position our communities below the new home median price and at a reasonable premium to an older resale home.
Each of our division is aligned with this strategy and in some cases, we are finding that we are actually below median resale levels as well, given the steeper appreciation in price that the existing home market has experienced.
We offer floor plans below 1,600 square feet in approximately 75% of our communities.
However, the median square footage of our homes in backlog is almost 2,100 square feet which is consistent with the median footage of homes we delivered in 2020.
Buyers are not adjusting the size of the homes they are purchasing nor have they reduced their spend in our design studios, which tells us that even with the uptick in rates affordability remains favorable.
As to overall market conditions, supply remains tight with existing home inventory down nearly 30% year-over-year.
Resale home availability is sitting at record low levels representing two-month supply and further below that level in many of our markets.
This combined with the under production of new homes over the last decade has resulted in supply being virtually non-existent.
In terms of demand, mortgage rates while higher relative to where they were in January, are down year-over-year and remain attractive generally around the low 3% range for a 30-year fixed-rate mortgage.
Most notably, demographic trends are favorable especially with respect to first-time buyers as over 70 million millennials are in their prime homebuying years with an even larger Gen Z cohort right behind them now entering their homebuying age.
As a result of all these factors, but particularly the strong demographics, we believe demand will stay healthy for the foreseeable future.
Net orders in the first quarter grew 23% year-over-year to nearly 4,300, a solid result given the strength in net orders that we experienced in the prior year's first quarter.
Net orders increased as the quarter unfolded reflecting typical seasonal trend and remained at high levels exiting the quarter.
We produced double-digit growth in each of our four regions as demand for our affordable price points remained robust across our footprint.
We continue to observe trends in our underlying order data that are consistent with the patterns that emerged in the second half of last year.
Buyers favored a personalized built-to-order home and millennials represented our largest segment of buyers.
The increasing presence of this cohort in our order activity is naturally translating into a higher percentage of deliveries to first-time buyers at 65% of our deliveries in the first quarter up 11 percentage points year-over-year.
The pent-up demand among first-time buyers and their ease of mobility is an advantage for us given our expertise in serving these buyers along with our location, products and price points.
We offer features in our homes that today's consumers value.
A prime example of these features is our advanced energy efficiency which helps to lower the total cost of homeownership.
We lead the industry in building ENERGY STAR certified new homes having delivered more than 150,000 of these homes to date as well as over 11,000 solar-powered homes.
As a result of our leadership, we were the only national homebuilder to be named to Newsweek's 2021 list of America's Most Responsible Companies in recognition of our leading ESG practices.
We were the first national builder to publish an Annual Sustainability Report and we are excited to share our latest achievements in the 14th edition of our report which is scheduled for release in conjunction with Earth Day next month.
Our backlog value grew substantially in the first quarter to $3.7 billion.
The 9,200 homes we have in backlog together with our first-quarter deliveries represent about 85% of the deliveries that were implied in our full year outlook we provided in January.
With housing market conditions still healthy, our ability to manage starts with sales and reasonable build times, we are confident that we can exceed our original volume expectation for this year.
This is driving our full-year revenue guidance higher, which Jeff will discuss momentarily.
On the mortgage side, our joint venture, KBHS Home Loans, continued its strong execution for our customers.
Our JV handled the financing for 79% of our deliveries in the first quarter, up 8 percentage points year-over-year, producing a significant increase in its income.
Consistent with the past few years, conventional loans represented the majority of KBHS volume and the credit profile of our buyers remained very healthy with an average down payment of about 13% and an average FICO score of 724 which is striking considering our high percentage of first-time buyers.
As we continue to accelerate our revenue growth over the balance of this year, we expect our income stream from the JV will grow as well.
We are positioned for remarkable 2021 and achieving our objectives of expanding our scale and improving our profitability while driving a meaningfully higher return on equity which we now anticipate will be above 18%.
I'd like to take a moment to recognize the outstanding team of individuals that are producing our strong results.
We were gratified to be recognized by Forbes in its 2021 list of America's Best Midsize Employers, again the only national builder receiving this honor.
In closing, we remain mindful that the pandemic is still present.
However, we are encouraged by the progress we are making as a country to emerge from it.
We are energized by how our year is shaping up and look forward to updating you on our progress.
I will now cover the highlights of our 2021 first quarter financial performance, as well as provide our second quarter and full-year outlook.
We are very pleased with our first quarter results with higher housing revenues and considerable expansion in our operating margin driving a 62% increase in our diluted earnings per share.
In addition, strong net orders in the quarter combined with our substantial beginning backlog resulted in a 74% year-over-year increase in our quarter-end backlog value supporting our raised revenue and margin outlook for 2021.
In the first quarter our housing revenues of $1.14 billion rose 6% from a year ago, reflecting increases in both homes delivered and the overall average selling price of those homes.
Looking ahead to the 2021 second quarter, we expect to generate housing revenues in the range of $1.42 billion to $1.5 billion.
For the full year, we are forecasting housing revenues in the range of $5.7 billion to $6.1 billion, up $150 million at the midpoint, as compared to our prior guidance.
We believe we are well positioned to achieve this top line performance supported by our first quarter ending backlog value of approximately $3.7 billion and our expectation of continued strong housing market conditions.
In the first quarter, our overall average selling price of homes delivered increased 2% year-over-year to approximately $397,000 reflecting variances ranging from a 5% decline in our West Coast region to an 11% increase in our Southwest region.
The West Coast decline was mainly attributable to product and geographic mix shifts of homes delivered.
For the 2021 second quarter we are projecting an average selling price of approximately $405,000.
We believe our overall average selling price for the full year will be in the range of $405,000 to $415,000, a relatively modest year-over-year increase and a result of our focus on offering affordable product across our footprint.
Homebuilding operating income for the first quarter increased 90% to $114.1 million from $60.2 million for the year-earlier quarter.
The current quarter included inventory related charges of $4.1 million versus $5.7 million a year ago.
Our homebuilding operating income margin improved to 10% compared to 5.6% for the 2020 first quarter.
Excluding inventory related charges, our operating margin for the current quarter increased 430 basis points year-over-year to 10.4%, reflecting improvements in both our gross margin and SG&A expense ratio which I will cover in more detail in a moment.
For the 2021 second quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges, will be in a range of 10% to 10.5%.
For the full year, we expect this metric to be in a range of 11% to 11.8%, which represents an improvement of 310 basis points at the midpoint, as compared to the prior year.
Our 2021 first quarter housing gross profit margin improved 340 basis points to 20.8%.
Excluding inventory related charges, our gross margin for the quarter increased to 21.1% from 17.9% for the prior-year quarter.
This improvement reflected the favorable impact of selling price increases outpacing construction cost inflation, increased operating leverage on fixed costs and lower amortization of previously capitalized interest.
Assuming no inventory related charges, we are forecasting a housing gross profit margin for the 2021 second quarter in a range of 20.5% to 21.1%.
We expect our full year gross margin, excluding inventory related charges, to be in a range of 21% to 22%, an improvement of 70 basis points at the midpoint compared to our prior guidance and up 190 basis points year-over-year.
Our selling, general and administrative expense ratio of 10.7% for the first quarter reflected an improvement of 110 basis points from a year ago, mainly due to the continued containment of costs following overhead reductions implemented in the early stages of the COVID-19 pandemic, lower advertising costs and increased operating leverage from higher housing revenues.
We are forecasting our 2021 second quarter SG&A ratio to be in a range of 10.4% to 10.8%, a significant improvement compared to the pandemic impacted prior-year period as we expect to realize favorable leverage impacts from an anticipated increase in housing revenues.
We still expect that our full year SG&A expense ratio will be approximately 9.9% to 10.3%, which represents an improvement of 120 basis points at the midpoint compared to the prior year.
Our income tax expense of $26.5 million for the first quarter represented an effective tax rate of approximately 21% and was favorably impacted by excess tax benefits from stock-based compensation and federal tax credits relating to current-year deliveries of energy-efficient homes, the cornerstone of our industry-leading sustainability program.
We currently expect our effective tax rate for both the 2021 second quarter and full year to be approximately 24%, including the impact of energy tax credits relating to current-year deliveries.
Overall, we reported net income of $97.1 million or $1.02 per diluted share for the first quarter compared to $59.7 million or $0.63 per diluted share for the prior-year period.
Turning now to community count.
Our first-quarter average of 223 was down 11% from the corresponding 2020 quarter primarily due to strong net order activity driving accelerated community close-outs over the past 12 months.
Consistent with our forecast, we ended the quarter with 209 communities, down 16% from a year ago.
We believe our quarter-end community count represents the low point for the year as grand openings are expected to outpace close-outs during each of the remaining quarters.
While we expect this dynamic to result in a sequential increase of five to 10 communities by the end of the second quarter, we anticipate our second-quarter average community count will be down by a low to mid double-digit percentage on a year-over-year basis.
We currently expect continued strong market conditions to drive an elevated number of community close-outs during the remainder of the year resulting in a single-digit year-over-year percentage increase in our community count at year-end.
However, we remain very focused on our goal meaningfully growing our community count.
Given our land pipeline and current schedule of community openings, we are confident that we will achieve at least a 10% increase in our 2022 community count to support further market share gains and growth in housing revenues.
During the first quarter to drive future community openings, we invested $556 million in land and land development including a 43% year-over-year increase in land acquisition investments to $275 million.
At quarter-end total liquidity was approximately $1.4 billion, including $788 million of available capacity under our unsecured revolving credit facility.
We had no borrowings under the credit facility in the 2021 first quarter.
Our debt-to-capital ratio was 38.9% at quarter-end and we expect continued improvement through the end of the year.
We still expect strong operating cash flow in the current year to fund levels of land acquisition and development investment needed to support our targeted future growth in community count and housing revenues.
Given our current community portfolio and backlog, along with expected ongoing strength in the housing market, we continue to expect significant year-over-year improvement in our revenues, profitability, credit and return metrics in 2021.
In summary, using the midpoints of our new guidance ranges, we expect a 42% year-over-year increase in housing revenues and significant expansion of our operating margin to 11.4% driven by improvements in both gross margin and our SG&A expense ratio.
In addition, achieving our new revenue and profitability expectations would drive a return on equity of over 18% for the year.
These expected results reflect our view that continued emphasis on our returns-focused growth strategy will enable us to further enhance long-term stockholder value.
Please open the lines.
| q1 earnings per share $1.02.
q1 revenue $1.14 billion versus refinitiv ibes estimate of $1.2 billion.
inventories increased 6% to $4.12 billion as of feb 28, 2021.
quarter-end ending backlog grew 59% to 9,238 homes, driving a 74% increase in ending backlog value to $3.69 billion.
net orders for quarter grew 23% to 4,292 with net order value increasing by $486.4 million, or 35%, to $1.87 billion.
|
Before we get started, I would like to wish everybody a happy Veterans Day.
In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance and our adjusted diluted earnings per share, which excludes certain highlighted items.
Our second quarter results reflected a combination of record market demand across all of our segments, with Q2 '22 orders 36% higher than the same period pre-COVID fiscal year '20, but accompanied by continued inflation and supply chain challenges.
We reported second quarter adjusted earnings of $1.01 per diluted share, which was a slight increase over the second quarter of last year.
Our Motive Power and Specialty businesses delivered better than expected results, while Energy Systems continue to be disproportionately impacted by its Asia-sourced supply chain.
Strong demand led to our quarter end backlog reaching an all-time record exceeding $1 billion, which is more than double normalized levels.
The backlog growth primarily occurred in our Energy Systems and Specialty lines of business and is indicative of extremely robust end market demand over and above the COVID recovery.
Let me take a minute to provide you some added color of the current economic environment.
As has been a common theme among most industrial companies this earnings cycle, we are facing a number of challenges in the wake of the global economic recovery as businesses aggressively compete for labor, materials and transportation, all while still navigating isolated COVID disruptions.
The trend we saw in Q1 has continued with nearly $20 million of sequential cost increases in freight, wages, lead, non-lead commodities and semiconductors.
Our team continues to take aggressive actions to mitigate these pressures, including the implementation of additional price increases, resourcing of materials and engineering redesigns.
As these issues stabilize, our financial results will more fully reflect our record backlog, enhanced profitability and across-the-board demand for our products.
I'd now like to provide a little more color on some of our key markets.
Let's start with our largest segment, Energy Systems, which continues to see robust demand with Q2 '22 order rates increasing over 50% compared to pre-COVID Q2 '20.
We saw exceptionally strong demand in 5G mid spectrum and broadband.
We also received our first orders from the California Public Utilities' Public Safety Grid Shutdown Extended Network Backup Program.
Shipments for these orders are expected to ramp in Q3, Q4 and into fiscal year 2023.
In addition, we believe these programs may be extended to other states presenting another opportunity for future growth.
Countering the strong demand is the fact that Energy Systems has our longest and most complicated supply chain, which was therefore the hardest hit by the macroeconomic environment in the quarter.
The Energy Systems price recapture cycle is longer due to the project nature of this business while working through the contractual obligations of its lengthy backlog.
As a result, in Q2, ongoing pricing actions lagged inflation and were largely offset by mix with more service revenue offsetting higher margin electronics orders that could not be shipped or could not be delivered due to chip shortages.
Tariff mitigation strategies, including our efforts to move contract manufacturing out of China and closer to home, continue to be slowed by semiconductor availability.
Freight costs for Energy Systems alone rose sequentially an additional $6 million in the quarter, doubling the prior year level.
While Energy Systems' operating earnings this quarter were disappointing, market demand and macro trends, combined with additional price increases and the resourcing of electronics, still point to an extremely positive long-term path for the business.
However, due to the current state of the global supply chain, especially availability of semiconductors, our third quarter will remain challenged.
That said, as many of our commodities' inflation trends appear to have peaked, we are confident our price recapture initiatives will catch up in the near future.
Despite the challenges we noted in our Energy Systems business, one of EnerSys' core strengths is our diversification.
Our Motive Power business continued its positive momentum during the quarter outperforming both top-line and profitability expectations as demand returned to pre-COVID levels.
Revenue decreased $15 million from Q1 due to the traditional European summer holidays.
Nevertheless, we believe this business has not yet reached its full potential as our OEM customers' demand has been hampered by their ability to secure chips.
Margins improved as a result of price and mix improvements as well as ongoing opex efficiencies with Motive Power enjoying nearly 20% higher operating earnings than the same pre-COVID period in F '20.
Our NexSys TPPL and recently released lithium variants continue to generate enthusiasm in the market.
In addition, the restructuring of our Hagen Germany facility nears completion ahead of schedule on cost and timing, with savings beginning to be realized.
We will also continue to extract additional savings with further standardization of our legacy product offering and other business transformation initiatives.
We remain well positioned to benefit from a steady recovery in this business throughout the balance of the fiscal year.
Similar to Motive, our Specialty business delivered a solid quarter.
A&D is performing well and demand in the transportation business remains extremely strong, slowed [Phonetic] only by TPPL supply constraints in Americas and Europe.
We expect very robust transportation growth in Q3 as a result of our focus on aligning capacity with demand and our belief that the truck market will continue its growth into calendar year '22 as a result of the improving economic -- improving economy and their anticipation that chip shortages will improve.
Our Thin Plate Pure Lead production capacity continues to grow and we will exit the fiscal year at our planned run rate of $1.2 billion per year.
The financial performance for TPPL manufacturing has been under significant pressure all year long with COVID-related staffing and supply chain shortages hampering productivity.
We expect significant reductions in manufacturing variances next fiscal year as the supply chain issues slowly subside.
Reduced manufacturing variances combined with a record backlog and continued strong demand signals from our transportation customers gives us immense confidence in the future of our Specialty business.
Our product road map is one of the most exciting areas of our business as the technology advancement of our product pipeline has been long in the making, but well worth the wait.
We have fully launched 11 lithium variants for Motive Power Group and continue to expand our product portfolio.
We have received OEM approvals and the family has successfully completed, all witness to our testing.
The demand for lithium products throughout our Energy Systems Group also continues to grow.
In addition to the lithium portion of the California PUC success mentioned earlier, telecom and residential home energy products are all performing well on UL tests.
Progress on the development of the TouchSafe product with Corning continues to go well.
Customer plans for their high-frequency networks using this solution are accelerating.
Last but certainly not least, our EV fast charge and storage initiative is quickly moving forward.
Feedback from our potential launch partner customer has been very positive, including speed and development as well as the level of software maturity.
We should see our first revenue for this product next fiscal year.
EV charging is a key focus of the recently passed Infrastructure Bill.
Looking ahead, our near-term challenges revolve around addressing global supply chain issues as well as rising commodity and labor costs and shortages.
We are actively working to mitigate these pressures through incremental price increases, alternative sourcing, engineering redesigns and aggressive hiring actions.
We will remain nimble as we adjust to the changing environment.
Despite these hurdles, there is a lot about EnerSys to generate real excitement.
Current demand for our products is greater than I can ever remember, fueled by a massive 5G build-out and high growth categories such as transportation.
Our future growth opportunities include significant investments in rural broadband, high frequency small cell deployment, EV charging, home energy storage, transportation market share growth, increased defense allocations and material handling OEMs returning to normalized levels.
We will continue to execute on our strategic initiatives and look forward to providing you updates on our progress in the quarters ahead.
With that, I'll now ask Mike to provide further information on our second quarter results and go-forward guidance.
I am starting with Slide 10.
Our second quarter net sales increased 12% over the prior year to $791 million due to an 11% increase from volume and 1% from price, net of mix.
On a line of business basis, our second quarter net sales in Energy Systems were up 9% to $370 million, Specialty was down 3% to $101 million and Motive Power revenues were up 22% to $321 million.
Motive Power's improvement was mostly from 20% growth in organic volume and 2% improvement from pricing.
The prior year Motive Power second quarter revenues were significantly impacted by the pandemic, resulting in a 21% decrease in organic volume.
Our Motive Power revenues for H1 of this year, however, are comparable to the pre-pandemic levels of two years ago.
Energy Systems had a 9% increase from volume as well as 1% improvement from FX, but had a 1% decrease in price after including negative mix.
Specialty had a 5% pricing improvement that was offset by an 8% erosion in volume due largely to delayed shipments.
We had no impact on revenue from acquisitions in the quarter.
On a geographical basis, net sales for the Americas were up 14% year-over-year to $550 million, with 14% more volume.
EMEA was up 5% to $180 million from a 3% increase in volume and 2% in pricing.
Asia was up 10% at $661 million on 7% more volume and 3% currency improvements.
On a sequential basis, moving to Slide 11, our second quarter net sales were down 3% from the first quarter, largely due to the normal vacation holidays in Europe and supply chain shortages.
On a line of business basis, Specialty decreased 6% with supply constraints pushing out order fulfillments into Q3.
Motive Power was down 5% due to the European holiday season previously mentioned and EMEA was flat -- excuse me, Energy Systems was flat.
On a geographical basis, Americas was also relatively flat and Asia revenues were up 8%, while EMEA was down 11% mostly from lower volumes.
On a year-over-year basis, adjusted consolidated operating earnings in the second quarter decreased approximately $5 million to $61 million with the operating margin down 160 basis points.
On a sequential basis, our second quarter operating earnings dollars eroded $14 million from $75 million, while the OE margin decreased 150 basis points to 7.8%, primarily due to the persistent supply chain headwinds and inflation in Energy Systems, which Dave has addressed.
Operating expenses, when excluding highlighted items, were at 14% of sales for the second quarter compared to 15.7% in the prior year and 16.1% from two years ago as our revenue growth exceeded our spending growth and we have maintained a more efficient operating leverage.
On a sequential basis, our operating expenses were relatively flat.
Excluded from operating expenses recorded on a GAAP basis in Q2 are pre-tax charges of approximately $12 million related to $6 million in Alpha and NorthStar amortizations and $4 million in restructuring charges from the previously announced closure of our flooded Motive Power manufacturing site in Hagen, Germany.
Excluding those charges, our Motive Power business generated operating earnings of $41 million or 12.8%, which was 370 basis points higher than the 9.2% in the second quarter of last year due to strong demand and easing of pandemic-related restrictions, favorable mix from maintenance-free growth and ongoing opex constraint or restraint.
Operating earnings dollars for Motive Power increased over $17 million from the prior year and $6 million from two years ago.
On a sequential basis, Motive Power's second quarter OE decreased 220 basis points from the 15.1% margin posted in the first quarter due to the vacation season volume decline noted earlier, along with higher lead and other input costs.
Energy Systems operating earnings percentage of 2.3% was down from last year's 8.8% and the prior quarter's 3.5%.
OE dollars of $9 million were $5 million below last quarter and $22 million below prior year.
The cost from higher freight, tariffs and materials caused the OE erosion with unfavorable mix from supply shortages offsetting the lagging pricing improvement realization.
Specialty operating earnings percentage of 11.8% was up from last quarter's 10.6% and last year's 11.4%.
OE dollars were largely flat sequentially and year-on-year, driving the margin improvement from improving pricing was the lower sales volume.
Please move to Slide 13.
As previously reflected on Slide 12, our second quarter adjusted consolidated operating earnings of $61 million was a decrease of $5 million or 7% from the prior year.
Our adjusted consolidated net earnings of $44 million was in line with prior year but $11 million lower than the prior quarter.
Our adjusted net earnings reflect the changes in operating earnings along with the lower adjusted tax rate.
Our adjusted effective income tax rate of 16% for the second quarter was slightly below the prior year's rate of 17% and lower than the prior quarter's rate of 18%.
Discrete tax items caused most of these variations.
Second quarter earnings per share rose slightly year-over-year to $1.01, although it was slightly below the bottom of our guidance range.
We expect our weighted average shares in the third fiscal quarter of 2022 to be approximately 42.5 million versus the 43.3 million in the second quarter.
Our Board of Directors also recently renewed the $100 million share buyback authorization we had in place over the last two years that was completed with these recent October purchases.
Last week, we also announced our quarterly dividend, which remains unchanged from prior levels.
Slides 14 and 15 reflect the year-to-date results and are provided for your reference, but I don't intend to cover these at this time.
Our balance sheet remains strong and positions us well to navigate the current economic environment.
We have $408 million of cash on hand and our credit agreement leverage ratio is now at 2.0 times, which allows nearly $550 million in additional borrowing capacity.
In July, we extended and amended our credit facility on favorable terms, which now is in place through 2026.
We expect our leverage ratio to remain between 2.0 and 2.5 times in fiscal 2022.
Our year-to-date cash flow from operations was a negative $66 million.
Included in that amount was $28 million in spending on the previously announced restructuring of our Hagen, Germany Motive Power Plant, which is in the second quarters -- which in the second quarter started delivering on cost savings that should exceed $20 million annually.
The negative operating cash flow was also due to our inventory expanding $123 million to meet rising revenues as well as from higher input costs and transit times, along with the other inefficiencies induced by supply chain disruptions.
Capital expenditures of $35 million were in line with our prior guidance.
Our capex expectation for fiscal 2022 remains approximately $100 million and reflects major investment programs in lithium battery development and our continued expansion of our TPPL capacity.
We anticipate our gross profit rate to remain near 22% in Q3 of fiscal 2022.
As Dave has described, all three of our lines of business find their products in high demand.
Near-term supply challenges are restricting our ability to execute fully on these opportunities.
As a result, our guidance range of $0.96 to $1.06 in our third fiscal quarter of 2022 reflects the impact of these supply chain challenges, which we continue to see as temporary.
Please move to Slide 17.
On a longer-term basis, we recently renewed -- or reviewed our updated five-year plan with our Board of Directors.
We remain confident that our top-line growth and overall profitability goals are still achievable with respect to the final years' deliverables.
However, those targets, as previously communicated, will take an additional year to be achieved compared to our Investor Day model in reflection of the delays the pandemic and supply chain challenges have had not only on our own progress but that of our customers and their broader markets.
After more than 25 years with the company and 12 years as Chief Financial Officer, Mike has announced his intention to retire at the end of this fiscal year.
While we will miss his wisdom and experience, we are very confident that Andy Funk is the right person to fill this role and help EnerSys complete its transition from a battery maker to a world-class energy systems leader.
| sees q3 adjusted earnings per share $0.96 to $1.06.
qtrly non-gaap earnings per share $1.01.
|
We will also present certain non-U.S. GAAP financial information.
A reconciliation of those figures to U.S. GAAP financial measures is available on our website.
Lastly, relative to the Ilim joint venture, slide two provides context around the joint venture's financial information and statistical measures.
We will begin our discussion on slide three.
In the third quarter, International Paper grew revenue, earnings and margins, and we continued to generate strong cash from operations.
We continue to see strong demand for corrugated packaging and solid demand for absorbent pulp.
We're making strong progress on price realization from our prior increases.
Having said that, the supply chain and input cost environment remains very challenging and it impacted our results much more than we anticipated.
The widespread supply chain constraints limited our ability to capture the full opportunity that comes with the strong level of demand that we're seeing.
Our mills performed well.
However, stretched supply chains impacted volume in our Industrial Packaging and Global Cellulose Fibers businesses.
Containerboard inventories in our packaging network improved in the latter part of the third quarter, and we are in a much better position as we enter the seasonally strong fourth quarter.
Input costs in the third quarter rose by about $230 million or $0.46 per share, which was more than 2 times what we had anticipated, with cost pressure in just about every category.
Our Ilim joint venture delivered another strong performance, with equity earnings of $95 million.
On capital allocation, we continue to make significant progress strengthening our balance sheet.
In the third quarter, we reduced debt by $235 million.
I would also highlight that our pension plan is fully funded.
This is a significant milestone that further strengthens the company.
In the third quarter, we also returned $411 million to our shareholders, including $212 million of share repurchases.
On October 1, we completed the spin-off of the Printing Papers business.
IP received a $1.4 billion payment from Sylvamo, and we retained a 19.9% interest in the new company, which we intend to monetize within one year.
The teams did an outstanding job executing the transaction in a very challenging environment.
We are laser-focused on strengthening the company and building a better IP for all of our stakeholders.
Tim and I will share more about the progress we're making during today's discussion.
Turning now to slide four.
We delivered EBITDA of $938 million and free cash flow of $519 million in the third quarter, which brings our free cash flow nearly $1.6 billion year-to-date.
Revenue increased by nearly $600 million or 12% when compared to last year.
And if we exclude the Printing Papers business, third quarter revenue grew by 14% as compared to last year.
We also expanded our margins in the third quarter with realization of our prior price increases.
We expect continued margin expansion in the fourth quarter.
Moving to the quarter-over-quarter earnings bridge on slide five, third quarter operating earnings per share were $1.35 as compared to $1.06 in the second quarter.
Price and mix improved by $0.43 per share, with strong price realization across the three businesses.
Supply chain constraints limited our ability to capture the full benefit of a strong demand backdrop.
We replenished our containerboard inventories in the latter part of the third quarter, which positions us well entering the seasonally strong fourth quarter.
In our cellulose fibers business, demand for absorbent pulp is solid.
Our pulp shipments were constrained due to significant port congestion and our backlogs remain stretched.
Our mills performed well.
Operating costs benefited by about $35 million of onetime items, including the sale of nitrogen credits and insurance recovery related to the winter storm earlier this year.
Supply chains are stretched, and transportation costs are elevated for both inbound materials and outbound shipments.
Every mode of transportation is tight, and we expect the transportation environment to remain tight for the foreseeable future.
Maintenance costs decreased as expected.
Input costs rose by $0.46 per share or about $230 million, which is more than double what we had anticipated for the quarter.
Higher fiber and energy cost accounted for about 80% of this increase.
Corporate expenses were essentially flat.
Tax expense was lower by $0.04 per share in the third quarter, with an effective tax rate of 18% as compared to 21% in the second quarter.
Most of this was related to adjustments to our federal tax provision after finalizing our 2020 tax return in the third quarter.
Equity earnings were lower sequentially following the final monetization of our stake in GPK in the second quarter.
Turning to the segments, I'll start with Industrial Packaging on slide six.
We are seeing strong demand across all channels, including boxes, sheets and containerboard.
Third quarter shipment across our U.S. channels improved by 1.3% year-over-year.
However, box shipments were hampered by low containerboard inventories and stretched supply chains.
We successfully replenished inventories across our box system in the latter part of the third quarter, which puts us in a much better inventory position as we enter the seasonally strong fourth quarter.
We expect supply chains to remain stretched for the foreseeable future, which requires us to carry more inventory given the slower velocity across our network.
To put the velocity into context, our mill-to-box plant containerboard supply chain is currently running three to four days longer than our normalized flow, and in some lanes, even longer.
Taking a look at third quarter performance.
Price and mix was strong.
Our March increase is essentially fully implemented, with $128 million of price realization in the third quarter.
Volume was lower by $45 million.
Box shipments in North America were impacted by low containerboard inventory, especially in the first half of the quarter.
Volume in EMEA was seasonally slower, as expected, representing about $10 million of the sequential decrease.
Operations and costs were essentially flat sequentially.
Our mill system performed at 100% and provided much needed inventory relief to our box system.
In the third quarter, we also received insurance proceeds of about $15 million related to the winter storm.
These benefits were largely offset by unplanned maintenance costs.
We are not seeing any relief on supply chain costs and are managing risk associated with transportation capacity and congestion across the rail and truck networks.
Input costs increased by nearly $190 million in the quarter.
OCC and wood fiber accounted for $120 million of that total.
Energy accounted for another $45 million, primarily in our recycled containerboard mills and our box plants.
Taking a closer look at fiber, our North American packaging fiber mix is around 65% virgin wood and 35% OCC.
Wood fiber costs rose sharply in the third quarter due to continued wet conditions across the Southern and Eastern regions as well as inbound transportation constraints.
Wood inventories are below our control limits, and we expect difficult operating conditions again in the fourth quarter.
We expect demand for OCC to remain strong, with no cost relief even as generation gradually improves.
As a reminder, we consume about 4.5 million tons annually in the U.S. and nearly 0.5 million tons in EMEA.
Moving to Global Cellulose Fibers on slide seven.
The business delivered earnings of $96 million.
Third quarter segment earnings included $13 million from the Sylvamo subsidiary and the Kwidzyn mill, which are no longer part of our operations in the fourth quarter.
Looking at our sequential earnings, price and mix improved by $59 million.
Volume improved by $11 million sequentially.
Demand for fluff pulp, which represents about 75 of our -- 75% of our mix remained solid.
Our shipments continue to be negatively impacted by unprecedented port congestion and vessel delays.
Keep in mind that we export about 90% of our volume in this business.
The majority of this is fluff pulp that ships in containers which is where port congestion is especially challenging.
We have systems in place to manage through this environment.
However, vessel delays and higher supply chain costs are expected to continue for the foreseeable future.
Our mills performed well.
We also benefited from about $20 million of onetime items related to the sale of nitrogen credits and lower corporate costs in the quarter.
These benefits were largely offset by $50 million of higher supply chain costs for export operations.
Maintenance outage costs decreased sequentially, while input costs were a significant headwind in the third quarter, driven primarily by higher wood and chemical costs.
Turning to Printing Papers on slide eight.
The business delivered earnings of $106 million in the third quarter, with strong momentum ahead of the spinoff.
Third quarter results includes the Kwidzyn mill until the sale on August 6.
Performance in the third quarter was strong with continued demand recovery globally and price realization outpacing rising input costs.
Now that the spin-off is complete, the historical results of the business will be treated as a discontinued operation with a full recast of previous periods.
And going forward, activity pertaining to the Printing Papers offtake agreement for Riverdale and Georgetown will be included in our Packaging and Global Cellulose Fiber segment earnings.
Looking to the Ilim results on slide nine.
The joint venture delivered another quarter of strong performance with equity earnings of $95 million and an EBITDA margin of 44%.
Solid price realization for pulp and container board were partially offset by lower volume due to high planned maintenance outages in the quarter as expected.
Volume in the fourth quarter is expected to improve.
However, shipping capacity remains tight and supply chains to China are stretched.
So now we'll turn to the fourth quarter outlook on slide 10.
In Industrial Packaging, we expect price and mix to improve by $70 million, mostly on the realization of our August 2021 price increase.
That includes a negative mix impact as we start to recover some export backlogs.
Volume is expected to improve by $65 million sequentially on strong seasonal demand even as we cut down free shipping days.
Operations and costs are expected to improve by $5 million, with the North American system benefiting from improved containerboard inventory levels, partly offset by onetime benefits in the third quarter.
Staying with Industrial Packaging, maintenance outage expense is expected to increase by $3 million.
Input costs are expected to increase by $50 million, mostly on the flow-through of higher third quarter input costs for fiber and energy.
In Global Cellulose Fibers, we expect price and mix to be stable.
Volume is expected to decrease by $5 million.
Operations and costs are expected to decrease earnings by $25 million due to the non-repeat of onetime benefits in the third quarter.
Maintenance outage expense is expected to increase by $37 million.
And input costs are expected to increase by $15 million on higher wood and energy costs.
On our outlook slide, we include the sequential earnings adjustment associated with the Printing Papers' spin and Kwidzyn sale for a total of $134 million across the three segments.
With regard to cash flow, I would note that our cash from operations in the second half 2021 includes cash taxes of about $450 million associated with the various monetization transactions from earlier this year.
Remember that the proceeds for these transactions are not captured in our free cash flow.
However, the resulting cash taxes are included in free cash flow and the majority will be paid in the fourth quarter.
Turning to slide 11, I'll take a moment to update you on our capital allocation actions in the third quarter and what you can expect from International Paper following the recent paper spin.
We will maintain a strong balance sheet.
As we previously said, we're comfortable taking our leverage below the stated target of 2.5 times to 2.8 times debt-to-EBITDA on a Moody's basis.
In the third quarter, we reduced debt by $235 million, which brings our year-to-date debt reduction to $1.1 billion.
We will also complete an additional $800 million of debt repayment by the end of this month.
Taking a look at pension, we are very pleased with the performance of our plan this year.
Our qualified pension plan is fully funded, and we feel really good about the actions we've taken to improve performance and derisk the plan.
Returning cash to share owners is a meaningful part of our capital allocation framework.
In the third quarter, we returned $411 million to share owners through dividends and share repurchases.
Share repurchases were $212 million, which represented about 3.6 million shares at an average price of $59.13.
Also earlier this month, the Board of Directors approved an additional $2 billion share repurchase program, which raises our total available authorizations to $3.3 billion.
We will continue to execute on that authorization in a manner that maximizes value for share owners over time.
With regard to the dividend, our policy does not change.
We are committed to a competitive and sustainable dividend, with a payout of 40% to 50% of free cash flow, which we will continue to review annually as earnings and cash flow grow.
Earlier this month, we decreased our dividend by 9.8% to $1.85 per share annually, following the spin-off of the papers business.
This adjustment is well below the 15% to 20% proportion of cash previously generated by the papers business as we outlined when we announced the spin last year.
Investment excellence is essential to growing earnings and cash generation.
We expect Capex in 2021 to be around $600 million, which is less than our original plan, primarily due to the timing of equipment delivery and a more challenging contract labor environment.
We will continue to proactively manage Capex and have the ability to increase or pull back if circumstances warrant.
You can expect strategic capital to be deployed mostly to our packaging business to build up capability and capacity needs to drive profitable growth.
We will continue to assess disciplined and selective M&A opportunities to supplement our goal of accelerating profitable growth.
You can expect M&A to focus primarily on bolt-on opportunities in our packaging business in North America and Europe.
Any potential opportunity we pursue must be compelling value for our shareholders.
I'm on slide 12 now.
Let's talk about the future and how we're going to accelerate value creation for IP and our shareholders.
We are building a better IP.
With the recent spin-off of the papers business, IP is really a corrugated packaging-focused company.
We are significantly less complex with a much narrower geographic footprint.
In addition, we have strengthened the company's financial footing, as Tim has described, significantly over the past few years.
Our focused profile and financial strength will further enable us to make sustainable, profitable growth and accelerate value creation.
As I said earlier in the process, we've been actively working on multiple streams of earnings initiatives over the past year.
We established a dedicated team that's been working closely with our businesses and external partners over the past year to identify, develop and pilot a wide range of highly attractive opportunities which are now moving to scaled implementation.
We will deliver $200 million to $225 million of gross incremental earnings in 2022.
That represents more than 2 times the dis-synergies resulting from the spin-off.
Our value drivers ramp up in '23 and 2024, with net incremental earnings of $350 million to $400 million in 2024.
These include around $300 million in cost reduction initiatives and at least $50 million through commercial and investment initiatives.
Our earnings catalysts are front-loaded, with significant benefits coming in 2022 from streamlining and simplifying the company and scaling a wide range of process optimization initiatives.
Streamlining and simplifying is all about agility and effectiveness.
The organization is being designed to support a packaging-focused company with a more focused footprint.
We are aligning our talent to accelerate performance.
We've also examined our processes to increase efficiency and reduce costs.
We are implementing and scaling new approaches for areas such as sourcing, supply chain and operations by leveraging technology and data analytics.
Let me give you a few examples of these value drivers for 2022.
We redesigned our sourcing process for our 200 converting facilities.
We're using data analytics and third-party partners to deploy an automated catalog of sourcing options for operating and repair materials in our box plants.
This program will deliver meaningful value in 2022.
We're also using data analytics to unlock capacity in our converting facilities by improving our planning and order execution process.
This includes, for example, how we aggregate and plan smaller orders and how we can optimize our manufacturing mix in each plant and each network of plants.
We've also developed a new application to further optimize containerboard replenishment to our box plants.
The system anticipates potential roll inventory stock-ups, which have been a big issue for us this year, and recommends the lowest-cost replenishment option to reduce premium freight.
There are many initiatives that contribute to our value drivers and the savings.
We have really good line of sight on the expected benefits in 2022 and the ramp-up as we move forward.
Our 2022 value drivers not only deliver meaningful benefits in the near term, they are also setting the foundation for IP going forward to accelerate commercial and investment excellence to drive profitable growth.
| q3 adjusted non-gaap operating earnings per share $1.35.
qtrly printing papers operating profits profits were $106 million versus $63 million.
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These risks include those set forth in the Risk Factors section of Hess' annual and quarterly reports filed with the SEC.
Also on today's conference call, we may discuss certain non-GAAP financial measures.
A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.
Today, I will review our continued progress in executing our strategy and our long-standing commitment to sustainability.
Greg Hill will then discuss our operations and John Rielly will cover our financial results.
Our strategy is to grow our resource base, have a low cost of supply and sustained cash flow growth.
Executing this strategy has positioned our company to deliver industry-leading cash flow growth over the next decade and has made our portfolio increasingly resilient in a low oil price environment.
Our strategy aligns with the world's growing need for affordable reliable and cleaner energy that is necessary for human prosperity and global economic development.
We recognize a climate change is the greatest scientific challenge of the 21st century and support the aim of the Paris Agreement and a global ambition to achieve net zero emissions by 2050.
The world faces the dual challenge of needing 20% more energy by 2040 and reaching net zero carbon emissions by 2050.
In the International Energy Agency's rigorous sustainable development scenario, which assumes that all pledges of the Paris agreement are met, oil and gas will be 46% of the energy mix in 2040 compared with approximately 53% today.
In the IEA's newest net zero scenario, oil and gas will still be 29% of the energy mix in 2040.
In either scenario, oil and gas will be needed for decades to come and will require significantly more global investment over the next 10 years on an annual basis than the $300 billion spent last year.
The key for our company is to have a low cost supply by investing only in high-return low cost opportunities.
The best rocks for the best returns.
We have built a differentiated and focused portfolio that is balanced between short cycle and long cycle assets Guyana is our growth engine and The Bakken, Gulf of Mexico and Southeast Asia are our cash engines.
Guyana is positioned to become a significant cash engine in the coming years, as multiple phases of low-cost oil developments come online, which we expect will drive our portfolio breakeven Brent oil price below $40 per barrel by the middle of the decade.
Based on the most recent third-party estimates, our cash flow is estimated to grow at a compound annual growth rate of 42% between 2020 and 2023, which is 75% above our peers and puts us in the top 5% of the S&P 500.
With a line of sight for up to 10 FPSOs to develop the discovered resources in Guyana, this industry leading cash flow growth rate is expected to continue through the end of the decade.
Investors want durability and growth in cash flow.
We are pleased to announce today that in July, we paid down $500 million of our $1 billion term loan maturing in March 2023.
Depending upon market conditions, we plan to repay the remaining $500 million in 2022.
This debt reduction, combined with the start-up of Liza Phase 2 early next year is expected to drive our debt-to-EBITDAX ratio under 2 times next year.
Once this debt is paid off and our portfolio generates increasing free cash flow, we plan to return the majority to our shareholders.
First, through dividend increases and then opportunistic share repurchases.
We expect to receive approximately $375 million in proceeds and our ownership in Hess Midstream on a consolidated basis, will be approximately 45% compared with 46% prior to the transaction.
On April 30, we completed the sale of our Little Knife and Murphy Creek nonstrategic acreage interest in The Bakken for a total consideration of $312 million effective March 1, 2021.
This acreage, most of which we were not planning to drill before 2026 was located in the Southern most portion of our Bakken position and was not connected to Hess Midstream Infrastructure.
The Midstream transaction and the sale of the Little Knife and Murphy Creek acreage bring material value forward and further strengthen our cash and liquidity position.
The Bakken remains a core part of our portfolio and our largest operated asset.
We have a large inventory of future drilling locations that generate attractive financial returns at $50 per barrel WTI.
In February, when WTI oil prices moved above $50 per barrel, we added a second rig, given the continued strength in oil prices, we are now planning to add a third rig in the Bakken in September, which is expected to strengthen free cash flow generation in the years ahead.
Key to our long-term strategy is Guyana with its low cost of supply and industry-leading financial returns.
We have an active exploration and appraisal program this year on the Stabroek Block, where Hess has a 30% interest and ExxonMobil is the operator.
We see the potential for at least six FPSOs on the block by 2027 and up to 10 FPSOs to develop the discovered resources on the block, and we continue to see multibillion barrels of future exploration potential remaining.
Earlier today, we announced a significant new oil discovery at Whiptail.
The Whiptail number 1 well encountered 246 feet of net pay and the Whiptail number 2 well, which is located three miles northeast of Whiptail-1 encountered 167 feet of net pay in high quality oil bearing sandstone reservoirs.
Drilling continues at both wells to test deeper targets.
The Whiptail discovery could form the basis for our future oil development in the Southeast area of the Stabroek Block and will add to the previous recoverable resource estimate of approximately 9 billion barrels of oil equivalent.
In June, we also announced the discovery at the Longtail-3 well which encountered approximately 230 feet of net pay including newly identified high quality hydrocarbon bearing reservoirs, below the original Longtail-1 discovery intervals.
In addition, the successful Mako-2 well, together with Uaru-2 well which encountered approximately 120 feet of high quality oil bearing sandstone reservoir will potentially underpin a fifth oil development in the area east of the Liza complex.
In terms of Guyana developments, the Liza Unity FPSO with a gross capacity of 220,000 barrels of oil per day is expected to sail from Singapore to Guyana in late August and the Liza-2 development is on track to achieve first oil in early 2022.
Our third oil development on the Stabroek Block at the Payara field is expected to achieve first oil in 2024, also with a gross capacity of 220,000 barrels of oil per day.
Engineering work for our fourth development on the Stabroek Block at Yellowtail is underway with preliminary plans for a gross capacity in the range of 220,000 to 250,000 barrels of oil per day and anticipated start-up in 2025 pending government approvals and project sanctioning.
Our three sanctioned oil developments have a breakeven Brent oil price of between $25 and $35 per barrel.
And according to a recent data from Wood McKenzie, our Guyana developments are the highest margin, lowest carbon intensity oil and gas assets globally.
Last week we announced publication of our 24th Annual Sustainability Report, which details our Environmental, Social and Governance or ESG strategy and performance.
In 2020 we significantly surpassed our five-year emission reduction targets reducing Scope 1 and 2 operated greenhouse gas emissions intensity by 46% and flaring intensity by 59% compared to 2014 levels.
Our five year operated emission reduction targets for 2025 which are detailed in the sustainability report exceed the 22% reduction in carbon intensity by 2030 in the International Energy Agency sustainable development scenario, which is consistent with the Paris Agreements ambition to hold the rise in global average temperature to well below 2 degrees centigrade.
We are also contributing to groundbreaking research being done by the Salk Institute to develop plants with larger root systems that are capable of absorbing and storing potentially billions of tons of carbon per year from the atmosphere.
We continue to be recognized as an industry leader for the quality of our ESG performance and disclosure.
In May, Hess was named to the 100 Best Corporate Citizens list for the 14th consecutive year, based upon an independent assessment by ISS ESG.
And we were the only oil and gas company to earn a place on the 2021 list.
In summary, oil and gas are going to be needed for decades to come.
By continuing to successfully execute our strategy and achieve strong operational performance, our company is uniquely positioned to deliver industry-leading cash flow growth over the next decade.
As our term loan is paid off and our portfolio generates increasing free cash flow, the majority will be returned to our shareholders, first through dividend increases and then opportunistic share repurchases.
In the second quarter, we continued to deliver strong operational performance.
Companywide net production averaged 307,000 barrels of oil equivalent per day excluding Libya, above our guidance of 290,000 to 295,000 barrels of oil equivalent per day, driven by good performance across the portfolio.
In the third quarter, we expect companywide net production to average approximately 265,000 barrels of oil equivalent per day excluding Libya, which reflects the Tioga Gas Plant turnaround in the Bakken and planned maintenance in the Gulf of Mexico and Southeast Asia.
For full year 2021, we now forecast net production to average approximately 295,000 barrels of oil equivalent per day excluding Libya, compared to our previous forecast of between 290,000 and 295,000 barrels of oil equivalent per day, so we're now forecasting to be at the top of the range.
Turning to the Bakken.
Second quarter net production averaged 159,000 barrels of oil equivalent per day.
This was above our guidance of approximately 155,000 barrels of oil equivalent per day, primarily reflecting increased gas capture which has allowed us to drive flaring to under 5%, well below the state's 9% limit.
For the third quarter we expect Bakken net production to average approximately 145,000 barrels of oil equivalent per day, which reflects the planned 45 day maintenance turnaround and expansion tie-in at the Tioga Gas Plant.
For the full year 2021, we maintain our Bakken net production forecast of 155,000 to 160,000 barrels of oil equivalent per day.
In the second quarter, we drilled 17 wells and brought nine new wells online.
In the third quarter, we expect to drill approximately 15 wells and to bring approximately 20 new wells online.
And for the full year 2021, we now expect to drill approximately 65 wells and to bring approximately 50 new wells online.
In terms of drilling and completion costs, although we have experienced some cost inflation, we are confident that we can offset the increases through technology and lean manufacturing efficiency gains and are therefore maintaining our full year average forecast of $5.8 million per well in 2021.
We've been operating two rigs since February, but given the improvement in oil prices and our robust inventory of high return drilling locations, we plan to add a third rig in September.
Moving to a three rig program will allow us to grow cash flow and production, better optimize our in basin infrastructure and drive further reductions in our unit cash costs.
Now moving to the Offshore.
In the deepwater Gulf of Mexico, second quarter net production averaged 52,000 barrels of oil equivalent per day compared to our guidance of approximately 50,000 barrels of oil equivalent per day.
In the third quarter, we forecast Gulf of Mexico net production to average between 35,000 and 40,000 barrels of oil equivalent per day, reflecting planned maintenance downtime as well as some hurricane contingency.
For the full year 2021, our forecast for Gulf of Mexico net production remains approximately 45,000 barrels of oil equivalent per day.
In Southeast Asia, net production in the second quarter was 66,000 barrels of oil equivalent per day, above our guidance of approximately 60,000 barrels of oil equivalent per day.
Third quarter net production is forecast to average between 50,000 and 55,000 barrels of oil equivalent per day, reflecting planned maintenance at North Malay Basin and the JDA as well as Phase-3 installation work at North Malay Basin.
Full year 2021 net production is forecast to average approximately 60,000 barrels of oil equivalent per day.
Now turning to Guyana, in the second quarter gross production from Liza phase one averaged 101,000 barrels of oil per day or 26,000 barrels of oil per day net to Hess.
The repaired flash gas compression system has been installed on the Liza Destiny FPSO and is under test.
The operator is evaluating the test data to optimize performance and is safely managing production in the range of 120,000 to 125,000 barrels of oil per day.
Replacement of the flash gas compression system with a modified design and production optimization work are planned for the fourth quarter, which will result in higher production capacity and reliability.
Net production from Liza Phase-1 is forecast to average approximately 30,000 barrels of oil per day in the third quarter and for the full year 2021.
The Liza Phase-2 development will utilize the 220,000 barrels of oil per day Unity FPSO which is scheduled to sail away from Singapore at the end of August and first order remains on track for early 2022.
Turning to our third development Payara.
The Prosperity FPSO oil is complete and will enter the Keppel yard in Singapore following sale away of the Liza Unity.
Topsides fabrication has commenced the dynamic and development drilling began in June.
The overall project is approximately 45% completed.
The Prosperity will have a gross production capacity of 220,000 barrels of oil per day and is on track to achieve first oil in 2024.
As for our fourth development at Yellowtail.
The joint venture anticipate submitting the plan of development to the Government of Guyana in the fourth quarter, with first oil targeted for 2025, pending government approvals and projects sanctioning.
During the second quarter the Mako-2 Appraisal well on the Stabroek Block confirmed the quality, thickness and areal extent of the reservoir.
When integrated with the previously announced discovery at Uaru-2, the data supports a potential fifth development in the area east of the Liza complex.
Drilling continues at both wells to test deeper targets.
In terms of other drilling activity in the second half of 2021 after Whiptail-2, the Noble Don Taylor will drill the Pinktail exploration well, which is located five miles southeast of Yellowtail one, followed by the Tripletail-2 appraisal well, located five miles south of Tripletail-1.
The Noble Tom Madden will spud the Kaieteur Block-1 exploration well located 4.5 miles southeast of the Turbot-1 discovery in early August.
Then in the fourth quarter, we will drill our first dedicated test of the deep potential at the [Indecipherable] prospect located 9 miles northwest of Liza-1.
In the third quarter, The Noble Sam Croft will drill the Turbot-2 appraisal well then transition to development drilling operations for the remainder of the year.
The Stena Carron will conduct a series of appraisal drill stem tests at Uaru-1, Mako-2 and then Longtail-2.
In closing, we continue to deliver strong operational performance across our portfolio.
Our Offshore assets are generating strong free cash flow.
The Bakken is on a capital-efficient growth trajectory and Guyana keeps getting bigger and better, all of which positions us to deliver industry-leading returns, material cash flow generation and significant shareholder value.
In my remarks today, I will compare results from the second quarter of 2021 to the first quarter of 2021.
Adjusted net income was $74 million in the second quarter of 2021, compared to net income of $252 million in the first quarter of 2021.
E&P adjusted net income was $122 million in the second quarter of 2021 compared to net income of $308 million in the previous quarter.
The changes in the after-tax components of adjusted E&P results between the second quarter and first quarter of 2021 were as follows: Lower sales volumes reduced earnings by $126 million; higher cash costs reduced earnings by $48 million; higher exploration expenses reduced earnings by $10 million; all other items reduced earnings by $2 million, for an overall decrease in second quarter earnings of $186 million.
Second quarter sales volumes were lower, primarily due to Guyana having two, 1 million barrel liftings of oil, compared with three, 1 million barrel liftings in the first quarter and first quarter sales volumes included non-recurring sales of two VLCC cargos totaling 4.2 million barrels of Bakken crude oil, which contributed approximately $70 million of net income.
In the second quarter, our E&P sales volumes were under lifted compared with production by approximately 785,000 barrels, which reduced our after-tax results by approximately $18 million.
Cash costs for the second quarter came in at the lower end of guidance and reflect higher planned maintenance and workover activity in the first quarter.
In June, the US Bankruptcy Court approved the bankruptcy plan for Fieldwood Energy, which includes transferring abandonment obligations of Fieldwood to predecessors in title of certain of its assets, who are jointly and severally liable for the obligations.
As a result of the bankruptcy, Hess as one of the predecessors in title in 7 Shallow Water, West Delta 79-86 leases held by Fieldwood is responsible for the abandonment of the facilities on the leases.
Second quarter E&P results include an after tax charge of $147 million representing the estimated gross abandonment obligation for West Delta 79-86 without taking into account potential recoveries from other previous owners.
Within the next nine months, we expect to receive an order from the regulator requiring us along with other predecessors in title to decommission the facilities.
The timing of these decommissioning activities will be discussed and agreed upon with the regulator and we anticipate the cost will be incurred over the next several years.
The Midstream segment had net income of $76 million in the second quarter of 2021 compared to $75 million in the prior quarter.
Midstream EBITDA before noncontrolling interest amounted to $229 million in the second quarter of 2021 compared to $225 million in the previous quarter.
Now turning to our financial position.
At quarter end, excluding Midstream, cash and cash equivalents were $2.42 billion, which includes receipt of net proceeds of $297 million from the sale of our Little Knife and Murphy Creek acreage in the Bakken.
Total liquidity was $6.1 billion, including available committed credit facilities, while debt and finance lease obligations totaled $6.6 billion.
Our fully undrawn $3.5 billion revolving credit facility is committed through May 2024 and we have no material near-term debt maturities aside from the $1 billion term loan which matures in March 2023.
In July, we repaid $500 million of the term loan.
Earlier today Hess Midstream announced an agreement to repurchase approximately 31 million Class B units of Hess Midstream held by GIP and us for approximately $750 million.
We expect to receive net proceeds of approximately $375 million from the sale in the third quarter.
In addition, we expect to receive proceeds in the third quarter from the sale of our interest in Denmark for total consideration of $150 million with an effective date of January 1, 2021.
In the second quarter of 2021, net cash provided by operating activities before changes in working capital was $659 million compared with $815 million in the first quarter, primarily due to lower sales volumes.
In the second quarter, net cash provided by operating activities after changes in working capital was $785 million compared with $591 million in the first quarter.
Changes in operating assets and liabilities during the second quarter of 2021 increased cash flow from operating activities by $126 million, primarily driven by an increase in payables that we expect to reverse in the third quarter.
Now turning to guidance.
Our E&P cash costs were $11.63 per barrel of oil equivalent including Libya and $12.16 per barrel of oil equivalent, excluding Libya in the second quarter of 2021.
We project E&P cash costs, excluding Libya to be in the range of $13 to $14 per barrel of oil equivalent for the third quarter, which reflects the impact of lower production volumes resulting from the Tioga Gas Plant turnaround.
Full year cash cost guidance of $11 to $12 per barrel of oil equivalent remains unchanged.
DD&A expense was $11.55 per barrel of oil equivalent including Libya and $12.13 per barrel of oil equivalent excluding Libya in the second quarter.
DD&A expense excluding Libya is forecast to be in the range of $12 to $13 per barrel of oil equivalent for the third quarter and full-year guidance of $12 to $13 per barrel of oil equivalent remains unchanged.
This results in projected total E&P unit operating costs, excluding Libya to be in the range of $25 to $27 per barrel of oil equivalent for the third quarter and $23 to $25 per barrel of oil equivalent for the full year of 2021.
Exploration expenses excluding dry hole costs are expected to be in the range of $40 million to $45 million in the third quarter and full-year guidance is expected to be in the range of $160 million to $170 million, which is down from previous guidance of $170 million to $180 million.
And Midstream tariff is projected to be in the range of $265 million to $275 million for the third quarter and full-year guidance is projected to be in the range of $1,080 million to $1,100 million, which is down from the previous guidance of $1,090 million to $1,115 million.
E&P income tax expense, excluding Libya is expected to be in the range of $35 million to $40 million for the third quarter and full-year guidance is expected to be in the range of $125 million to $135 million, which is updated from the previous guidance of $105 million to $15 million reflecting higher commodity prices.
We expect non-cash option premium amortization will be approximately $65 million for the third quarter and full-year guidance of approximately $245 million remains unchanged.
During the third quarter, we expect to sell three 1 million barrel cargoes of oil from Guyana.
Our E&P capital and exploratory expenditures are expected to be approximately $575 million in the third quarter.
Full-year guidance, which now includes increasing drilling rigs in the Bakken to three from two in September, remains unchanged from prior guidance at approximately $1.9 billion.
We anticipate net income attributable to Hess from the Midstream segment to be in the range of $50 million to $60 million for the third quarter and full-year guidance is projected to be in the range of $275 million to $285 million, which is down from the previous guidance of $280 million to $290 million.
Corporate expenses are estimated to be in the range of $30 million to $35 million for the third quarter and full-year guidance of $130 million to $140 million remains unchanged.
Interest expense is estimated to be in the range of $95 million to $100 million for the third quarter and approximately $380 million for the full year, which is at the lower end of our previous guidance of $380 million to $390 million reflecting the $500 million reduction in the term loan.
This concludes my remarks, we will be happy to answer any questions.
| qtrly net production from the gulf of mexico was 52,000 boepd.
qtrly net production from bakken was 159,000 boepd compared with 194,000 boepd in prior-year quarter.
net production, excluding libya, was 307,000 boepd in q2 of 2021, compared with 334,000 boepd in q2 of 2020.
2021 net production, excluding libya, is expected to be approximately 295,000 boepd.
excluding midstream segment, hess corporation had cash and cash equivalents of $2.42 billion at quarter-end.
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Mr. Brett McGill President and Chief Executive Officer; and Mr. Mike McLamb, Chief Financial Officer of the company.
These risks include, but are not limited to, the impact of seasonality and weather, general economic conditions, and the level of consumer spending, the company's ability to capitalize on opportunities or grow its market share, and numerous other factors identified in our Form 10-K and other filings with the Securities and Exchange Commission.
I'm very proud of the extraordinary achievements of our team in fiscal 2021; record revenue of more than $2 billion record gross margin of over 30%, record earnings per share, all while achieving record net promoter customer satisfaction scores.
Given the extremely lean inventory and well documented supply chain issues, this is a great achievement in 2021.
Today, I'd like to share highlights from our fourth quarter and full year, followed by a discussion of the results of our strategic growth plan, which will continue to create shareholder value in 2022 and beyond.
Then, Mike will discuss our financial results in more detail and provide color on our 2022 financial outlook.
Let me start by touching on our fourth quarter and full year performance.
For the quarter, we generated 16% revenue growth, record gross margin of almost 38%, and record earnings per share of $1.45.
I'm extremely pleased that our strategic acquisitions are exceeding expectations and diversifying our model resulting in robust margins and earnings growth.
Our same-store sales for the quarter were down 7% versus 33% growth a year ago.
As supply chain challenges and lean inventory environment worsened and impacted us as we move through the later part of the quarter.
However, demand remained strong and we see no softening as consumers are still actively seeking the boating lifestyle.
This strong demand environment is highlighted by our customer deposits, which jumped more than 3 times last year's level to over 100 million.
Last year was elevated with increased demand, so this increase, this year, is a significant sign of strong and growing demand.
For the full-year, same-store sales growth was over 13%, on top of 25% a year ago.
Our significant geographic and product diversification along with the effective utilization of our digital platform are driving profitability and growth.
The marine industry is continuing to experience an influx of new boaters.
Given our scale, and global presence, we are benefiting from our growing share of the market.
And based on available industry data, we believe we continue to gain market share.
From a cadence perspective, the supply chain headwinds deteriorated as we moved through the quarter.
I want to emphasize that we are not seeing a demand issue, rather the timing of shipments is impacting our ability to fulfill some customer orders and therefore recognize revenue.
Simply put, if we had the boats, they would be delivered and we'd have even higher revenue.
We are working closely with our manufacturing partners to satisfy the strong demand.
But as many experts in the industry are forecasting it, we'll likely not improve materially until later in fiscal 2022.
It's a unique environment and one that is challenging to predict, but our team will continue to perform.
I also want to underscore our strategic growth plan, and how it is not only driving market share and revenue growth, but expanding company wide margins.
This quarter, we increased our operating margin by 130 basis points over last year's record to 9.5%.
We also finished the fiscal year with an operating margin increase of more than 300 basis points to over 10%.
This performance is directly attributable to our ability to execute our strategy, focusing on higher gross margin businesses, including charter, finance, insurance, marina, storage, parts, service and brokerage.
The gross margin strength we produced in the first nine months of the year accelerated in the September quarter.
Additionally, as we integrate our acquisitions, they continue to outperform and are aligned with our strategy of attributing to MarineMax's record margin expansion.
Specifically, each company we have acquired has outperformed their best year, or is on pace to outperform their best year.
Earlier this month, we shared that we have entered into an agreement to buy Intrepid Powerboats.
Many of you know that Intrepid is an iconic brand led by one of the best management teams in the industry.
We are very excited about having Ken Clinton and the Intrepid team join the MarineMax family.
We plan to support them with their innovative plans, provide them capital, and arm them with the tools to better serve the Intrepid nation.
Now, let me discuss our confidence we have that our strategy will continue to create sustained growth and long-term shareholder value in 2022 and beyond.
We continue to make significant progress on our vision of creating exceptional customer experiences through best services, products, and technology.
Our team remains focused on these initiatives, resulting in strong demand and margin.
We will accomplish this through our global market presence, premium brand, valuable real estate locations, exceptional customer service, technology investments, strategic acquisitions, industry-leading inventory management, and finally, a continued commitment to build on our strong company culture.
Supported by one of the strongest balance sheets in the industry, we will continue to make strategic accretive acquisitions in a disciplined manner.
The combination of being well capitalized and having a broad global geographic presence, has allowed, and will allow us to grow in many ways by adding additional dealers, marinas, storage, service related offerings, manufacturing an asset-light business such as our superyacht services business.
We continue to have strong demand and are ready to keep serving our loyal customers.
As supply constraints are resolved by manufacturers, we expect to ramp sales in the future.
Our scale continues to be a competitive advantage as we leverage our deep manufacturing relationships, our nationwide shared inventory, and our strong balance sheet to support the growing demand.
We believe the combination of driving operating leverage and generating significant cash flow, coupled with strong consumer demand, will result in sustained growth well into fiscal 2022 and beyond.
And with that update, I will ask Mike to provide more detailed comments on the quarter.
For the quarter, revenue grew 16% to over $462 million, even with the lean inventory environment, as we benefited from the accretive acquisitions we completed during the year.
Overall, our growth has been demand driven across generally all segments of products and across every global market.
We expected inventory to remain low through the quarter, but with the increased supply chain challenges, retail deliveries grew more challenging, which impacted revenue in excess of 50 million.
This led to decline in same-store sales growth.
Our units declined in the quarter, double digits, while our average unit selling price continued to expand.
However, with increasingly strong customer deposit visibility, coupled with our broad product portfolio and production insight from our manufacturing partners, we believe we are better positioned than most in our industry, resulting in market share gains in all our major segments.
Gross profit dollars increased over $58 million, while our gross margin rose 860 basis points to almost 38%.
Our initiatives to drive margin growth over the last several years continue to generate solid results.
Margins rose with contributions from multiple segments and businesses, including new and used boats, storage, parts and service, higher margin, finance, insurance, and brokerage businesses, as well as our global superyacht services businesses Northrop & Johnson and Fraser Yachts.
As expected, with Europe reopening, we did see improved sales and charter revenue in August and September this year.
About half of our margin improvement came from the growth in our superyacht services businesses.
Regarding SG&A, the majority of the increase was again due to rising sales and related commissions, combined with the recent acquisitions.
SG&A rose as a percentage for a few reasons.
We did expect significantly more sales, which are not lost, but delayed.
Additionally, as our higher margin businesses grow, the compensation related to those businesses are higher.
We had elevated acquisition costs in a smaller quarter, not to mention some cost inflation.
We believe SG&A overall is generally on track on an annual basis, but we will watch the inflationary pressures carefully.
Our operating leverage in the quarter was about 15%, which drove very strong earnings growth, setting another quarterly record with pre-tax earnings of over $43 million.
Our record September quarter saw both net income and earnings per share rise over 21%, generating $1.45 in earnings per share versus an adjusted $1.19 a year ago.
For the full year, I will make a few comments.
The acquisitions we completed were all successfully integrated, resulting in record setting results for each.
Additionally, the acquisitions we completed over the last few years are all contributing greatly to our results.
The management teams of each acquired company also are contributing to our overall success.
Our ability to acquire and integrate companies is greater today than at any point in our history.
During the year, we added significantly to the strength of our balance sheet while continuing to make significant long-term investments in our real estate portfolio, our digital capabilities, and our team.
Lastly, for the full year, our earnings per share was close to double the midpoint of our initial guidance.
And I would add that $6.78 is a pretty strong year.
Moving on to our industry-leading balance sheet.
We continue to build cash with over $220 million.
Our inventory at quarter end was $231 million, down 22%, excluding SkipperBuds and Cruiser Yachts, inventory declined about double that percentage.
Looking at our liabilities, short-term borrowings decreased sharply due to lower inventory and related financing, as well as an increase in cash generation.
Due to the demand we are seeing, customer deposits, as Brett said, more than tripled to over $100 million, setting another new record.
Our current ratio is over 2, and our total liabilities to tangible net worth ratio is at 1; both of these are very impressive balance sheet metrics.
Our tangible net worth is about 400 million.
Our balance sheet has always been a formidable strategic advantage, and now more than ever, it provides the capital for growth and expansion as opportunities arise in good or bad times.
Turning to our guidance for fiscal year 2022.
Fiscal 2021 and the September quarter generated significant operating leverage and demand remains strong.
The challenge with projecting 2022, are the assumptions around the supply chain.
Today, given what we're being told from our various manufacturing partners, we do expect retail unit growth in 2022.
However, until we see more stabilization in the supply chain, our guidance assumes basically flat units.
This, combined with increases in our average unit selling price, should provide annual same-store sales growth in the mid-single digits.
Including the remainder of the Cruisers and Nisswa acquisitions, we expect total annual revenue growth in the high single digits to 10%.
Given the inflationary pressures in the marketplace, we do expect modest margin pressure.
We have levers to mitigate these pressures but believe it's prudent to include it in our expectations for now.
Our guidance is also, before any other acquisitions that we may complete, including Intrepid, using the low end of our historical leverage range, plus a modest share increase and a tax rate of 20%, results in our earnings per share guidance range of $7.20 to $7.50.
Obviously, we expect to update you throughout the year as our visibility increases on the supply chain.
Turning to current trends, October is forecasted to end with positive same-store sales growth and our backlog is at record levels.
As we have said, industry demand remains strong and we are generally outperforming these elevated levels.
2021 generated landmark metrics for MarineMax and I am very proud of our team's ability to execute on our strategy and to successfully integrate our recent acquisitions, driving superior operating leverage.
We are pleased to see our business continue to build strength and are confident in our strategy for 2022 and beyond.
Our operating margin ended the fiscal year at over 10%, almost double 2019.
This is the result of our team's commitment to capitalize on the strong industry demand.
While we know we will face a few challenges related to the supply chain and inventory as we start fiscal 2022, beyond our organic growth, we will pursue additional brand expansions and higher margin businesses to support our strategy to create long-term shareholder value.
| marinemax inc q4 same store sales fell 7 percent.
q4 same store sales fell 7 percent.
q4 earnings per share $1.45.
fourth quarter revenue increases 16% to $462 million.
q4 revenue increases 16% to $462 million.
company currently expects earnings per diluted share to be in range of $7.20 to $7.50 for fiscal 2022.
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These risks include those set forth in the Risk Factors section of Hess' annual and quarterly reports filed with the SEC.
Also on today's conference call, we may discuss certain non-GAAP financial measures.
A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.
Today, I will review our continued progress in executing our strategy.
Greg Hill then will discuss our operations and John Riley will cover our financial results.
With COP26 beginning this Sunday, it is appropriate to address the energy transition.
Climate change is the greatest scientific undertaking of the 21st century.
The world has two challenges to grow our global energy supply by about 20% in the next 20 years and to reach net zero emissions by 2050.
The International Energy Agency published its latest World Energy Outlook earlier this month, which provides four scenarios to shed light on these challenges.
It is important to remember that these are scenarios not forecast to help guide policymakers and business leaders in their decision making.
In all four scenarios, oil and gas will still be needed in the decades to come.
Significantly more investment will be required to meet the world's growing energy needs, much more in renewables and much more in oil and gas.
Our reasonable estimate for global oil and gas investment from these IEA scenarios is at least $400 billion each year over the next 10 years.
Last year, that number was $300 billion.
This year's estimate is $340 billion.
To ensure a successful an orderly energy transition, we need to have climate literacy, energy literacy and economic literacy.
Our strategy is to grow our resource base, have a low cost of supply and sustain cash flow growth.
While delivering industry-leading environmental social and governance, performance and disclosure by investing only in high-return, low cost opportunities, we have built a differentiated and focused portfolio that is balanced between short cycle and long cycle assets.
Our cash engines are the Bakken, the Gulf of Mexico and Southeast Asia, where we have competitively advantaged assets and operating capabilities.
Guyana is our growth engine and is on track to become a significant cash engine in the coming years, as multiple phases of low-cost oil developments come online.
Also, by adding a third rig in the Bakken in September and completing the turnaround and expansion of the Tioga Gas Plant, the Bakken is expected to generate significant free cash flow in the years ahead.
By successfully executing our strategy, our company is positioned to deliver strong and durable cash flow growth through the end of the decade.
Based upon the most recent sell side consensus estimates, our cash flow is estimated to grow at a compound annual growth rate of 42% between 2020 and 2023, which is 50% above our peers and puts us in the top 5% of the S&P 500.
As our portfolio generates increasing free cash flow, we will first prioritize debt reduction and then cash returns to shareholders through dividend increases and opportunistic share repurchases.
We have continued to maintain financial strength as well as managing for risk.
As of September the 30th, we had $2.4 billion of cash on the balance sheet.
In July, we prepaid half of our $1 billion term loan maturing in March 2023 and we plan to repay the remaining $500 million in 2022.
This debt reduction combined with the start up of lease of Phase 2 early next year, is expected to drive our debt to EBITDAX ratio under 2% and also enable us to consider increasing cash returns to shareholders.
In August, we completed the sale of our interest in Denmark for total consideration of $150 million effective January 1, 2021, and received $375 million in proceeds from Hess Midstream's buyback of Class B units from its sponsors Hess Corporation and Global Infrastructure Partners.
Earlier this month, our company also received net proceeds of $108 million from the public offering of Hess-owned Class A shares of Hess Midstream.
The Denmark sale and these Midstream monetizations brought material value forward and further strengthened our cash and liquidity position.
Key to our long-term strategy is Guyana, one of the industry's best investments.
On the Stabroek Block, where Hess has a 30% interest and ExxonMobil is the operator, we announced the 19th and 20th of significant discoveries during the third quarter at Whiptail and Pinktail.
And on October 7th, we announced the 21st significant discovery on the block at Cataback.
These discoveries will underpin our Q, our future low cost oil development.
We see the potential for at least six FPSOs on the Stabroek Block producing more than $1 million gross barrels of oil per day in 2027, and up to 10 FPSOs to develop the discovered resources on the block.
On October 7th, we increased the gross discovered recoverable resource estimate for the block to approximately 10 billion barrels of oil equivalent, up from the previous estimate of more than 9 billion barrels of oil equivalent.
And we continue to see multibillion barrels of future exploration potential remaining.
In terms of our current Guyana developments, gross production from the lease of Phase 1 complex average 124,000 barrels of oil per day in the third quarter.
The lease of Phase 2 development is on track for start-up in early 2022 with a gross production capacity of 220,000 barrels of oil per day and the leasing Unity FPSO arrived in Guyana on Monday.
Our third development on the Stabroek Block at the Payara field is on track to achieve first oil in 2024 also with a gross capacity of 220,000 barrels of oil per day.
Our three-sanctioned oil developments have a breakeven Brent oil price of between $25 and $35 per barrel.
The plan of development for our fourth development on the block at Yellowtail was recently submitted to the Government of Guyana for approval.
Pending government approvals, the project is envisioned to have a gross capacity of approximately 250,000 barrels of oil per day with first oil in 2025.
We are proud to be recognized as an industry leader in our environmental, social and governance performance and disclosure.
Earlier this month, our company received a AAA rating in the MSCI ESG ratings for 2021 after earning A ratings for the previous 10 consecutive years.
The AAA rating digit makes Hess as a leader in managing industry specific ESG risks relative to peers and reflects our strong management practices to reduce carbon emissions as well as our top quartile performance in areas such as biodiversity and land use, reduction of air and water emissions and waste, and making a positive impact on the communities where we operate.
In summary, we remain focused on executing our strategy and achieving strong operational and ESG performance.
Our company is uniquely positioned to deliver cash flow growth over the next decade.
That is not only industry leading, but which we believe will rank among the best in the S&P 500.
After our term loan is paid off and our portfolio generates increasing free cash flow, we will prioritize return of capital to our shareholders through dividend increases and opportunistic share repurchases.
In the third quarter, we continued to deliver strong operational performance, meeting our production targets despite extended hurricane-related downtime in the Gulf of Mexico and safely executing a major turnaround at our Tioga Gas Plant in North Dakota.
Companywide net production averaged 265,000 barrels of oil equivalent per day excluding Libya in line with our guidance.
In the fourth quarter and for the full year 2021, we expect companywide net production to average approximately 295,000 barrels of oil equivalent per day excluding Libya.
Turning to the Bakken, third quarter net production averaged 148,000 barrels of oil equivalent per day.
This was above our guidance of approximately 145,000 barrels of oil equivalent per day and primarily reflected strong execution of the Tioga Gas Plant turnaround and expansion, no small task in a COVID environment that required strict adherence to extensive safety protocols to keep more than 650 workers safe.
For the fourth quarter, we expect Bakken net production to average between 155,000 and 160,000 barrels of oil equivalent per day.
For the full year 2021, we forecast our Bakken net production to average approximately 155,000 barrels of oil equivalent per day, compared to our previous guidance range of 155,000 to 160,000 barrels of oil equivalent per day.
This guidance reflects an increase in NGL prices, which reduces volumes under our percentage of proceeds contracts, but significantly increases this year's earnings and cash flow.
In the third quarter, we drilled 18 wells and brought 19 new wells online.
In the fourth quarter, we expect to drill approximately 19 wells and to bring approximately 18 new wells online.
And for the full year 2021, we continue to expect to drill approximately 65 wells and to bring approximately 50 new wells online.
In terms of drilling and completion costs, although we have experienced some cost inflation, we are maintaining our full year average forecast of $5.8 million per well in 2021.
Since February, we've been operating two rigs.
But given the improvement in oil prices and our robust inventory of high return drilling locations, we added a third rig in September.
Moving to a three-year three rig program will allow us to grow cash flow and production better optimize our in basin infrastructure and drive further reductions in our unit cash costs.
Now moving to the offshore.
In the deepwater Gulf of Mexico, third quarter net production averaged 32,000 barrels of oil equivalent per day, compared to our guidance range of 35,000 to 40,000 barrels of oil equivalent per day.
Our results reflected an extended period of recovery following Hurricane Ida, which caused power outages at transportation and processing facilities downstream of our platforms.
Production was restored at all of our facilities by the end of September.
In the fourth quarter, we forecast Gulf of Mexico net production to average between 40,000 and 45,000 barrels of oil equivalent per day.
For the full year 2021, our forecast for Gulf of Mexico net production remains approximately 45,000 barrels of oil equivalent per day.
In Southeast Asia, net production in the third quarter was 50,000 barrels of oil equivalent per day in line with our guidance of 50, 000 to 55,000 barrels of oil equivalent per day, reflecting the impact of planned maintenance shutdowns and lower nominations due to COVID.
Fourth quarter net production is forecast to average approximately 65,000 barrels of oil equivalent per day and our full year 2021 net production forecast remains at approximately 60,000 barrels of oil equivalent per day.
Now turning to Guyana.
In the third quarter, gross production from Liza Phase 1 averaged 124,000 barrels of oil per day or 32,000 barrels of oil per day net to Hess.
Replacement of the flash gas compression system on the Liza Destiny with a modified design is planned for the fourth quarter and production optimization work is now planned to take place in the first quarter of 2022.
These two projects are expected to result in higher production capacity and reliability.
Net production from Liza Phase 1 is forecast to average approximately 30,000 barrels of oil per day in the fourth quarter and for the full year 2021.
Liza Phase 2 development will utilize the 220,000 barrels of oil per day Unity FPSO, which arrived in Guyana Monday evening.
Next steps will be more in line installation and umbilical and riser hook up.
First oil remains on track for first quarter 2022.
Turning to our third development at Payara, the Prosperity FPSO hull entered the Keppel yard in Singapore on August 1st.
Topside fabrication of dynamic and development drilling are underway.
The overall project is approximately 60% complete.
The Prosperity will have a gross production capacity of 220,000 barrels of oil per day, and is on track to achieve first oil in 2024.
As for our fourth development at Yellowtail earlier this month, the joint venture submitted a plan of development to the Government of Guyana, pending government approvals and project sanctioning.
The Yellowtail project will utilize an FPSO with a gross capacity of approximately 250,000 barrels of oil per day.
First oil is targeted for 2025.
As John mentioned, we announced three discoveries since July.
In July, we announced that the Whiptail 1 and 2 wells encountered 246 feet and 167 feet of high quality oil bearing sandstone reservoirs respectively.
This discovery is located approximately four miles southeast of well 1 and 3 miles west of the Yellowtail.
In September, we announced that the Pinktail 1 well located approximately 22 miles southeast of Liza 1 encountered 220 feet of high quality oil bearing sandstone reservoirs.
And finally earlier this month, we announced a discovery of Cataback located approximately 4 miles east of Turbot 1.
The well encountered 203 feet of high quality hydrocarbon bearing reservoirs, of which approximately 102 feet was oil bearing.
These discoveries further underpin future developments and contributed to the increase of estimated gross discovered recoverable resources on the Stabroek Block to approximately 10 billion barrels of oil equivalent.
Exploration and appraisal activities in the fourth quarter will include drilling [Indecipherable] exploration well located approximately 11 miles northwest of Liza 1.
This well as a significant step out tests that will target deeper Campanian and Santonian aged reservoirs.
Appraisal activities in the fourth quarter will include drill-stem tests at Longtail 2 and Whiptail 2 as well as drilling the Tripletail 2 well.
In closing, we have once again demonstrated strong execution and delivery and are well positioned to deliver significant value to our shareholders.
In my remarks today, I will compare results from the third quarter of 2021 to the second quarter of 2021.
We had net income of $115 million in the third quarter of 2021, compared with a net loss of $73 million in the second quarter of 2021.
On an adjusted basis, which excludes items affecting comparability of earnings between periods, we had net income of $86 million in the third quarter of 2021, compared to net income of $74 million in the second quarter of 2021.
Third quarter earnings include an after-tax gain of $29 million from the sale of our interest in Denmark.
On an adjusted basis, E&P had net income of $149 million in the third quarter of 2021, compared to net income of $122 million in the previous quarter.
The changes in the after-tax components of adjusted E&P results between the third quarter and second quarter of 2021 were as follows.
Higher realized crude oil NGL and natural gas selling prices increased earnings by $110 million.
Lower sales volumes reduced earnings by $147 million.
Lower DD&A expense increased earnings by $37 million.
Lower cash costs increased earnings by $14 million.
Lower exploration expenses increased earnings by $10 million.
All other items increased earnings by $3 million.
For an overall increase in third quarter earnings of $27 million.
Sales volumes in the third quarter were lower than the second quarter, primarily due to hurricane-related downtime in the Gulf of Mexico, planned maintenance downtime and lower nominations in Malaysia and lower sales in the Bakken, resulting from the planned Tioga gas plant maintenance turnaround.
In Guyana, we sold three 1 million barrel cargoes of oil in the third quarter, up from two 1 million barrel cargoes of oil sold in the second quarter.
For the third quarter, our E&P sales volumes were under lifted compared with production by approximately 175,000 barrels, which had an insignificant impact on our after-tax results for the quarter.
The Midstream segment had net income of $61 million in the third quarter of 2021, compared with $76 million in the prior quarter.
Third quarter results included costs related to the Tioga Gas Plant maintenance turnaround that was safely and successfully completed.
Midstream EBITDA before noncontrolling interest amounted to $203 million in the third quarter of 2021, compared with $229 million in the previous quarter.
Turning to our financial position at quarter-end excluding Midstream, cash and cash equivalents were $2.41 billion and total liquidity was $6 billion, including available committed credit facilities, while debt and finance lease obligations totaled $6.1 billion.
During the third quarter, we received net proceeds of $375 million from the sale of $15.6 million Hess-owned Class B units of Hess Midstream and proceeds of approximately $130 million from the sale of our interest in Denmark.
In July, we prepaid $500 million of our $1 billion term loan and we plan to repay the remaining $500 million in 2022.
In October, we received net proceeds of approximately $108 million from the public offering of 4.3 million Hess-owned Class A shares of Hess Midstream.
Our ownership in Hess Midstream on a consolidated basis is approximately 44% compared with 46% prior to these two recent transactions.
In the third quarter, net cash provided by operating activities before changes in working capital was $631 million, compared with $659 million in the second quarter.
In the third quarter, net cash provided by operating activities after changes in operating assets and liabilities was $615 million, compared with $785 million in the second quarter.
Changes in operating assets and liabilities during the third quarter decreased.
Net cash provided by operating activities by $16 million compared with an increase of $126 million in the second quarter.
Now turning to guidance.
First for E&P, our E&P cash costs were $12.76 per barrel of oil equivalent including Libya and $13.45 per barrel of oil equivalent excluding Libya in the third quarter of 2021.
We project E&P cash cost excluding Libya to be in the range of $12 to $12.50 per barrel of oil equivalent for the fourth quarter and $11.75 to $12 per barrel of oil equivalent for the full year, compared to previous full year guidance of $11 to $12 per barrel of oil equivalent.
The updated guidance reflects the impact of higher realized selling prices in 2021, which significantly improved cash flow, but reduced volumes received under percentage of proceeds contracts and increased production taxes in the Bakken.
DD&A expense was $11.77 per barrel of oil equivalent including Libya and $12.38 per barrel of oil equivalent excluding Libya in the third quarter.
DD&A expense excluding Libya is forecast to be in the range of $13 to $13.50 per barrel of oil equivalent for the fourth quarter and the full year is expected to be in the range of $12.50 to $13 per barrel of oil equivalent.
This results in projected total E&P unit operating costs excluding Libya to be in the range of $25 to $26 per barrel of oil equivalent for the fourth quarter and $24.25 to $25 per barrel of oil equivalent for the full year of 2021.
Exploration expenses excluding dry hole costs are expected to be in the range of $50 million to $55 million in the fourth quarter and approximately $160 million for the full year, which is at the lower end of our previous full year guidance of $160 million to $170 million.
The Midstream tariff is projected to be approximately $295 million for the fourth quarter and approximately $1.95 billion for the full year.
E&P income tax expense excluding Libya is expected to be in the range of $35 million to $40 million for the fourth quarter and the full year is expected to be in the range of $135 to $140 million, which is up from previous guidance of $125 million to $135 million, reflecting higher commodity prices.
We expect non-cash option premium amortization will be approximately $65 million for the fourth quarter.
For the year 2022, we have purchased WTI collars for 90,000 barrels of oil per day with the floor price of $60 per barrel and a ceiling price of $90 per barrel.
We have also entered into Brent collars for 60,000 barrels of oil per day with a floor price of $65 per barrel and a ceiling price of $95 per barrel.
The cost of this 2022 hedge program is $161 million, which will be amortized ratably over 2022.
During the fourth quarter, we expect to sell two 1 million barrel cargoes of oil from Guyana.
Our E&P capital and exploratory expenditures are expected to be approximately $650 million in the fourth quarter.
Full year guidance remains unchanged at approximately $1.9 billion.
For Midstream, we anticipate net income attributable to Hess from the Midstream segment to be approximately $70 million for the fourth quarter and the full year is projected to be approximately $280 million, which is at the midpoint of our previous guidance of $275 million to $285 million.
Turning to corporate, corporate expenses are estimated to be in the range of $30 million to $35 million for the fourth quarter and the full year is expected to be in the range of $125 million to $130 million, which is down from our previous guidance of $130 million to $140 million.
Interest expense is estimated to be in the range of $90 millon to $95 million for the fourth quarter and the full year is expected to be in the range of $375 million to $380 million, compared to our previous guidance of approximately $380 million.
This concludes my remarks.
We will be happy to answer any questions.
| q3 net profit 115 million usd versus -243 million usd loss year ago.
net production, excluding libya, was 265,000 boepd in q3 of 2021, compared with 321,000 boepd in q3 of 2020.
qtrly net production from bakken was 148,000 boepd compared with 198,000 boepd in prior-year quarter.
qtrly net production from gulf of mexico was 32,000 boepd, compared with 49,000 boepd in prior-year quarter.
q3 2021 e&p results include a pre-tax gain of $29 million associated with sale of corporation's interests in denmark.
on an adjusted basis, corporation reported net income of $86 million, or $0.28 per common share, in q3 of 2021.
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Joining you today from First Bancorp are Aurelio Alemain, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.
It was a very important quarter for our corporation and I would like to go over some key highlights and then expand in certain matters.
First of all, we're extremely pleased with -- that we completed our strategic acquisition by closing the Santander transaction on September 1.
This transaction not only solidifies our position in the island, but strengthens our competitiveness in commercial, retail as well as residential.
On the economic front, definitely the relief fund from the pandemic combined with 2017 hurricane funds being deployed have bolstered liquidity in our market and will continue to drive economic activity.
We'll touch on that.
On the balance sheet side, even following the completion of the acquisition we truly sustain a fortress balance sheet, our liquidity reserve capital levels are among the highest in the banking sector.
Core performance was strong for the quarter.
We generated $28.6 million of net income.
Pretax pre-provision was $77 million with only one month of earnings from the acquired operations and loan originations were strong at $971 million for the quarter.
We basically increased originations in all categories through the quarter.
Total deposits, excluding brokered and government, increased to $12.5 million.
And finally, our capital ratios remain among the highest in the banking sectors and capital actions remain a priority as we see the economic environment stabilizing.
Now let's cover more closely a few of these items on Slide 6, starting with Slide 6.
Let's talk about the transaction.
Definitely, it was a long time in the making.
And as you see, we really improved our market position in all key areas.
As you recall, the transaction was announced back in October 2019, and closing and completing was impacted by the COVID pandemic, definitely.
But since then, some of the deal metrics have improved from announcement.
We still expect 35% earnings per share accretion to consensus estimates.
The revised TBB at closing is estimated at 4%, lower than our original estimate.
And we expect less than two years of earnback now.
This improvement is driven by slightly smaller loan portfolio, additional reserve delivered at closing and the rate marks due to the rate environment.
While cost savings are estimated at $48 million, we definitely work harder to see the areas that we can achieve more.
But we're also focused on growing the franchise.
So it's a balancing act as we move forward and achieve our goals of being more efficient and increased market share.
I think together, we have an excellent team and we're working diligently to integrate and to turn on the growth engines as opportunities comes in the economy.
I want to touch on the integration.
We made a lot of progress on the first 45 days.
Integration is under way.
In those 45 days, we completed the conversion and integration of the mortgage business, the insurance agency and several administrative functions.
The plan is to complete the integration process by the end of the second quarter 2021.
And these do consider -- remember that we continue to operate under COVID limitation and distancing, and obviously a process of this magnitude takes time.
We also announced this month as part of the program -- as part of the synergies and integration, we announced a voluntary separation program that provides an opportunity for early retirement to approximately 160 employees of the combined institutions.
This program will be executed over the next three quarters, starting in the fourth quarter.
Other potential synergies identified include the opportunity of consolidating eight to 10 branches.
Definitely, the incremental utilization of digital channels could drive other efficiencies.
But again, we don't want to hamper our potential to grow our market share with the now expanded market distribution that we have.
So we'll continue to move and report on this effort.
Now let's move to Slide 7.
The new combined balance sheet is solid and well diversified.
The $2.6 billion acquired loan portfolio definitely complements ours nicely and the deposit books improves our funding.
Now the loan-to-deposit ratio stands at 78%.
And obviously, we have an expanded customer base to cross-sell and move to other products.
Let's move to Slide eight to talk about the economy.
I think in the quarter, we clearly saw the correlation of the reopening in our markets and the trends of economic recovery was clearly reflected in the third quarter.
Remember that in the case of Puerto Rico, we had some severe tightening in the second quarter, and some of those rules were relaxed later.
We're still operating under certain lockdowns.
But the -- I think the market has reacted very well to the situation and getting used to operate under that scenario.
Importantly, to support this economy, there is still over $60 billion of pandemic and hurricane relief.
So those are numbers that are big for this economy and there's a lot of going on regarding reconstruction.
Those funds are being deployed and they're definitely showing the liquidity and activity.
Employment figures continue to turn positive.
Recent numbers as of August are 92% of August 2019.
So definitely, there's a recovery on the employment side.
From the perspective of our client base, 100% of our corporate clients are operating and close to 99% of the business banking clients have reopened well.
There are sectors that are more sensitive.
The hospitality industry continued to reflect lower occupancy, but got improving trends.
Our hotel portfolio, it's below typical occupancy level and San Juan airport traffic is low, closer to 50%.
And as we are all aware, these are the segments that are more sensitive and will require longer recovery period.
So we continue to closely monitor.
On the other hand, from the business activity perspective, lending activity for the quarter was near pre-pandemic levels and digital activity is up significantly.
Retail lending for the quarter was very strong for both auto and mortgage lending and actually it came above pre-pandemic levels.
So we are optimistic with the recovery and the possibilities of additional stimulus, but we are also vigilant to the fact that potential economic hurdles could come if there is a need to implement additional restrictions for COVID in the future.
So we have to be watchful.
Please now let's move to Slide 9.
We wanted to give you an update on the relief programs trend.
The relief trends are actually positive.
The graph show the peaks and lows over the last six months, actually since March, of the different regions and products.
I think we see a positive trend during the quarter -- or actually, after the quarter closes.
Our active moratoriums were reduced to only 0.8% of the portfolio, less than 1%.
This is as of October 21.
I think so far the post-moratorium payment performance is positive with 98% of commercial clients current and 94% of retail as of October 21.
It's important to note that this data reflects only the due dates prior to October 21 regarding the payment patterns.
So we have to wait until the end of the month to see the final trend.
We do have a segment of the commercial portfolio that belongs to the industries that I mentioned, the more sensitive ones, such as hospitality, retail and entertainment that could need additional support through a longer stabilization period.
Those are being evaluated under the potential modification of terms provided by the Section 14 of the CARES Act.
So please let's go to Slide 8.
Here we have how -- the trend of the balance sheet, where we -- how we compare to peers and definitely post acquisition, our liquidity level, reserve coverage and capital position.
They really give us opportunity with the -- we're positioned well to take advantage of any growth opportunity.
We definitely will be good stewards of our capital position, and again, capital deployment opportunities remain a priority once our economic environment stabilizes.
Let's move to Slide nine for a moment.
I wanted to talk about and show you the trends of core metrics.
Obviously, this graph shows the trends and the positive impact of the acquired operation.
We generate the incremental PPNR and net income with only one month of earnings contribution for the core operations.
And again, the enhanced funding profile should help us driving additional revenues.
Loan origination, as I mentioned, were solid for the quarter, you look at the level.
And digital adoption rates continued to improve during this pandemic.
We will continue to work harder now with more clients and more distribution points to improve our level of service to all our customers.
I have to say that I'm really proud of my team and what we have been able to accomplish so far, managing the pandemic challenges, and we're definitely excited for the future growth prospects of our institution.
And we're also excited to show our patient investors what we are able to accomplish.
As Aurelio made reference to, net income for the quarter was $28.6 million or $0.13 a share compared to $21 million last quarter.
If we break down the components, you can see that corporation's legacy core business achieved a net income of $44.3 million, which mostly it's a result of reductions in the required provision for credit losses.
Last quarter, we had a provision of $39 million as compared to $8 million this quarter.
During the quarter, the improvements on macroeconomic projected variables in most portfolios, except for the commercial real estate, as well as some changes in portfolio balances led to this reduction.
The acquired Santander operation contributed $3.5 million of after-tax net income.
That excludes the one CECL adjustments, which I'll touch upon.
These results include the impact of the amortization of the fair value marks on all the assets and liabilities and the amortization of the resulting intangibles.
For example, one of -- few other things that had impact -- if we look at the investment portfolio, Santander had a U.S. treasuries -- a large U.S. treasuries portfolio that after March resulted in a portfolio of yields only 15 basis points.
Since then, we decided that to improve margin to sell this portfolio and reinvest it in other securities according to our policies, which yield around 94 basis points, which will improve going forward some of the yield.
On the other hand, amortization of some of the other discounts and intangibles resulted in about $1 million improvement in net interest income from the combination of loan and deposit, preliminary fair value adjustments that have been booked.
If we look at other -- at the other components of transactions, some large ones that were in the quarter, the first one would be the CECL I made reference to.
CECL requires that in the case of a business combination, we set up an allowance for credit losses on top -- on non-purchased credit deteriorated loans on top of or in addition to any kind of fair value measurement.
This resulted in a recognition of an allowance of almost $39 million for the quarter in addition to those fair value marks.
The non-purchased credit deteriorated portfolio, it's about $1.7 billion after marks.
During the quarter, we also decided to sell around $160 million of MBS that were experiencing significant prepayments, and that resulted in a gain of about $5.1 million from the transaction and it's being reinvested again in other instruments.
Merger and restructuring costs, Aurelio mentioned some of it.
During the quarter, we had $10.4 million, which compares to $2.9 million in the last quarter, which was mostly legal and financial consulting piece as well as some conversion-related cost as we prepare for the conversion.
So far, we have incurred about $25 million in expenses related to the transaction over the last few quarters.
And during the fourth quarter, we expect to have some amounts associated with the voluntary separation program that Aurelio mentioned as well as costs associated with branch and other consolidations as we finalize decisions on those processes.
Finally, the other large item.
We did have an analysis -- completed an analysis of the DTA now including the Santander operation, and that resulted in the reversal of approximately $8 million of deferred tax asset valuation allowance we had on the books.
Net interest income for the quarter was $148.7 million, which is $13.5 million higher than last quarter.
$14 million of that was the Santander operation.
On the other hand, the legacy FirstBank operation had a reduction of $500,000 in interest income as compared to last quarter.
And here, reduction in rates, obviously, accelerated.
Prepayments on the investment portfolio has been large.
Higher proportion of cash and investment securities to total earning assets have resulted in a reduction in the NIM on FirstBank.
Last quarter, we had 4.22% of NIM that you saw in our prior release.
That number is down to about 3.94% this quarter.
Breaking down some of the components.
Commercial loan repricing was about four basis points of the reduction, but the much higher proportion of cash and investment securities as well as the large prepayments and the alternative for reinvestment affected by 18 basis points more that margin.
Santander on a stand-alone was about -- the margin was about 3.89% considering the purchase accounting adjustments, and that combined with FirstBank ended up with a 3.93% margin that you see on the release.
Noninterest income improved to $29.9 million.
The $9 million -- this $9 million increase includes $5 million in the gains on sales that I made reference to before, of securities that I made reference to.
We had $3.4 million increase in revenue from mortgage banking activities.
Mostly or all of it, it's related to sales of residential mortgage.
This quarter, we had a much active -- much more active quarter on originations than what we had in the second quarter and ended up selling $98 million more in conforming paper than we did last quarter resulting in that revenue increase.
Also, the reopening of businesses, as we have seen on the quarter, seen a much higher level of credit and debit card activity, which improved -- that includes ATM, merchant fees and some of the other components, that improved fee income by about $2.8 million in the quarter.
And then the improvement we had in deposit service fees associated with the Santander transaction that brought in $1.1 million of additional deposit fees to the operation.
On the expense side, expenses were $107 million.
That includes $10.7 million in expenses for the acquired Santander operation and a $96.8 million for the FirstBank legacy operation.
This $96 million is $7 million higher than the 89 -- almost $90 million we had last quarter.
As I mentioned, the merger and restructuring costs for the quarter were $10.4 million, which is $7.5 million higher than last quarter, basically created most of the increase.
But in the quarter, we -- if we exclude this, FirstBank was $86.4 million of expenses.
COVID-related expenses were about $1 million this quarter, which is down about $2 million from last quarter.
But other expenses -- obviously, as we saw improvements in volume of transactions and improvement in fee, we also have some higher expenses associated with that volume of business in those debit and credit card transactions.
The allowance for credit losses has increased significantly.
As of September 30, the allowance for loans and leases only was up $65 million to $385 million as compared to June.
Mostly it's due to the initial allowance for credit losses required to the Santander operation.
If we look at total allowance for credit losses including unfunded commitments and debt securities, that's up to $403 million.
This quarter, as I mentioned before, we recorded about $38 million in allowance for credit losses in total.
$37.5 million of that is related to loans.
That build up -- that allowance associated with the portfolio.
And in addition, for PCD loans or purchased credit deteriorated specifically, we established a 20 -- almost $29 million allowance, which represents the fair value marks on this loan, which CECL requires that -- what is commonly referred to as a gross up, that the loans represented gross and the discount represented in the allowance.
Those two combined were about $65 million.
The ratio of the allowance for credit losses on loans -- to total loans was 3.25% at September, slightly down from 3.40% we had at June, but a very significant coverage if we consider that we added a large amount of portfolios, that a large part of it is also mark-to-market and fair value mark-to-market and has been discounted.
On a non-GAAP basis, if we exclude the PPP loans, which don't carry much reserve, the ratio of the allowance to total loans was 3.38% as compared to 3.55% last quarter.
Asset quality remained good in the quarter.
Non-performance are down $10.5 million, $293 million.
Most of the reduction happened on the OREO portfolio, which decreased $7.3 million.
Mostly sales were completed in the quarter.
Migrations to nonperforming were higher this quarter.
As moratoriums expire, we start getting back to levels of more -- to the normal levels that we were seeing before.
And we are in a position to continue to pursue some of the foreclosure processes that were put on hold for a couple of quarters as we provided those moratoriums to customers.
The inflows were $18.4 million this quarter, which is $10 million higher than last quarter.
Capital ratios remained really strong.
As you can see, even with the impact of the acquisition, we still have Tier one ratios of 17%.
The leverage ratio, I think that's important to mention.
You see it's about 13% for the quarter.
But we only had Santander operation for one month in the quarter, so average assets were less.
If we were to normalize and assume the full quarter of average assets, that ratio will be closer to 11%, just over that.
And that was -- we expect that it's still very significant with the acquisition of $5-plus million in assets in the quarter.
| compname reports q3 earnings per share $0.13.
q3 earnings per share $0.13.
net interest income increased by $13.5 million to $148.7 million for q3 of 2020, compared to $135.2 million for q2 of 2020.
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Even in this challenging environment caused by the ongoing impacts of the COVID-19 virus and the associated inflation and logistical challenges, the Brady team once again performed quite well.
I'm proud of how the team was able to navigate this challenging economic environment and deliver for both our customers and our shareholders.
This quarter, we grew sales by a very healthy 16% and we increased earnings per share by 4.7%.
If you exclude the impact of amortization, then our earnings per share was up even more significantly at 9.1%.
In addition to this solid revenue and earnings growth, we have a rock solid balance sheet.
This quarter, we returned more than $30 million to our shareholders in the form of dividends and buybacks.
And we're still in a net cash position of more than $90 million.
In our WPS business, sales were down by 7.8%.
This sales reduction was almost exclusively the result of very challenging comparables.
Last year, our WPS team did an excellent job of providing COVID-related products to our customers.
The sale of these products, which included social distance signage and personal protective equipment, has since waned, thus resulting in challenging comparables.
The best way to look at our WPS business is to compare sales to the pre-COVID period of fiscal 2020, which would show that our current sales levels exceeded those historic pre-COVID levels.
In our Identification Solutions business, we continue to post excellent results with sales growth of 25.4% and segment profit growth of 21.2%.
And if you exclude the impact of amortization expense, segment profit would have been up a robust 26.4%.
Our Identification Solutions business is a very strong franchise and continues to perform extremely well.
As we look ahead, our priorities are the first to drive organic sales growth and ensure we are serving our customers extremely well during this period of challenging logistics.
Second, it is to take the necessary cost and pricing actions to offset the impacts of this inflationary environment and return to pre-pandemic gross margin levels.
Third is to integrate our recent acquisitions, and finally, to deploy our capital to drive long-term shareholder value.
In our ID Solutions Business, we're embracing these priorities by increasing our investments in R&D, including the incremental R&D necessary to fully realize the benefits from our recent acquisitions.
We are certainly seeing benefits from our historical R&D focus as we're launching new products at an increasing rate, and we're continuing to distance ourselves from our competitors who neither have the scale nor financial wherewithal to invest as heavily in R&D.
We're also improving our online presence by upgrading our websites and investing more in digital marketing talent all while expanding our sales force and expanding geographically into underserved markets.
We're driving significant automation enhancements within our factories and distribution centers, which in a period marked by scarcity of labor and rising costs, this continuous push to drive automation is critical.
Our strong new product lineup, investments to drive sales and our positive momentum in driving efficiencies give us confidence that our ID Solutions Business will continue to generate strong organic sales growth with very healthy margins in fiscal 2022 and beyond.
In our Workplace Safety business, we're capitalizing our common web platform by using our much stronger market intelligence to quickly adapt to changing market dynamics.
We've increased our investments to new product development and the pace of new product launches in an effort to increase the percentage of proprietary high-value products sold to our customers which will have a positive impact on our profit margins.
And we're intensely increasing our advertising spend and our head count in certain businesses that have lagged in an effort to drive future revenues.
These investments resulted in reduced segment profit this quarter but will result in increased revenues as we progressed throughout the fiscal year.
Our Workplace Safety business is headed in the right direction, and I'm confident that the changes we've been implementing and the investments we've been making will help drive long-term sales and profit growth.
While we're investing in organic sales, we're also working to streamline our SG&A cost structure so that we can fund our sales growth initiatives while still driving down SG&A expense.
And we're focused on becoming a more efficient manufacturer by automating wherever we can.
In addition to our focus on driving organic sales growth and becoming a more efficient organization, we're also actively integrating the three acquisitions that we completed in the fourth quarter last year which includes building out our industrial track and trace solution set.
Much of the increased R&D that you see relates to the investments necessary to build out a comprehensive solution that will help move us into faster growing end markets and accelerate sales growth for years to come.
I'm confident we'll continue to see revenue growth in future quarters.
However, we're seeing inflationary pressures across many different cost categories from wages to freight to raw materials, and we've had challenges securing supply of certain products including chips and selected products for our supply chain originates in Asia.
In general, we've been overcoming these shortages, but it has resulted in increased freight charges as we've used airfreight more than we have in the past.
Even with these inflationary pressures, our gross profit margin was still an enviable 48.2%, which was right in line with the 48.2% experience in the fourth quarter of last year.
But our cost increases have neither been large enough nor fast enough to fully keep up with rising costs, resulting in our gross margins being down around 70 basis points and year-over-year basis.
As such, we're putting through additional price increases across many of our product lines to try to catch up with the rapidly increasing costs.
We believe that these gross margin challenges are temporary and that in the near term we'll return to our historical gross margin levels of close to 50%.
Even with this challenging logistical environment, Brady is well-positioned as we look to the rest of this fiscal year and beyond.
I'm confident in our ability to deliver results to our customers, our employees and, of course, our shareholders.
Then I'll return to provide specific commentary about our Identification Solutions and Workplace Safety businesses.
I'll start the financial review on slide number 3.
Sales in the first quarter were $321.5 million, which was an increase of 16% when compared to the same quarter last year, and GAAP pre-tax earnings increased 5.8% to $44.7 million.
Impacting earnings this quarter was a significant increase in amortization expense from the acquisitions completed at the end of last year.
If you exclude amortization expense from all periods presented, and our pre-tax earnings would have increased by 11.3% to $48.5 million.
GAAP diluted earnings per share was $0.67, which was an increase of 4.7% over last year's first quarter.
And if you exclude amortization expense, then earnings per share would have increased by 9.1% to $0.72 this quarter compared to $0.66 in the first quarter of last year.
So, financially, Q1 was another strong quarter even with the logistical challenges and the inflationary pressures that Michael just mentioned.
Moving to slide 4, you'll find our quarterly sales trends.
Our 16% sales increase consisted of organic sales growth of 7%, and increase from acquisitions of 8.3% and an increase from foreign currency translation of 0.7%.
Organic sales growth in our ID Solutions Business was a robust 13.2% in Q1.
Our Workplace Safety business benefited from strong COVID-related product sales in last year's first quarter, thus creating tough comparables.
As a result of these tough comparables, we saw a decline in WPS organic sales of 8.6% this quarter.
If we compare our sales levels to the pre-pandemic period, which for us would be the first quarter of fiscal 2020, you'll see that our total sales are up a full 12% over pre-pandemic levels.
And if you compare sales by division, you'll see that Identification Solutions is 15.6% above pre-pandemic levels and workplace safety is 1.2% above pre-pandemic levels.
This strong performance not only against last year, but also against the pre-pandemic period, is a direct result of the investments that we've been making and the strong sales momentum that we developed just before the pandemic hit.
Turning to slide number 5, you'll see our gross profit margin trending.
Our gross profit margin was 48.2% this quarter, compared to 48.9% in the first quarter of last year.
As Michael mentioned, we're seeing inflationary pressures, and we're finding it difficult to fill open manufacturing roles.
But we're automating wherever we can, we're driving efficiencies at a strong pace, and we're putting it through targeted price increases.
On slide number 6, you'll find our SG&A expense trending.
SG&A was $96.7 million this quarter, compared to $83 million in the first quarter of last year.
SG&A was heavily impacted by a full quarter of expense from the three acquisitions completed near the end of last year along with the increase in amortization expense that I just mentioned.
Amortization expense was $1.4 million in the first quarter of last year and was $3.8 million in the first quarter of this year.
And as a percent of sales, SG&A was 30.1% this quarter, compared to 30% in the first quarter of last year so effectively, right in line with the prior year.
However, if you exclude amortization expense from both the current year and the prior year then SG&A would have declined from 29.5% of sales last year to 28.9% of sales this year.
Slide number 7 is the trending of our investments in research and development.
This quarter, we invested $13.9 million in R&D.
We're committed to increasing our R&D investments as we continue to see opportunities for incremental R&D within our core business and, specifically, in building out a comprehensive industrial track and trace platform that encompasses our printers, high-quality materials, RFID scanners, and barcode scanners.
These investments in R&D are critical to help propel Brady's long-term sales growth and protect our gross profit margins.
Slide number 8 illustrates our pre-tax income trends.
Pretax earnings increased 5.8% on a GAAP basis and increased 11.3% if you exclude amortization expense from all periods.
Slide number 9 illustrates our after-tax income and earnings per share trends.
As I mentioned, our GAAP earnings per share was $0.67 this quarter compared to $0.64 in last year's first quarter, an increase of 4.7%.
And if you exclude the after-tax impact of amortization, our earnings per share would have increased by an even stronger 9.1%.
On slide number 10, you'll find a summary of our cash generation.
We generated $27.5 million of cash flow from operating activities and free cash flow was $16.2 million this quarter.
Our underlying cash flow was strong, but we intentionally invested in both inventories as well as capital expenditures.
This quarter, we purchased two previously leased manufacturing facilities for a total cash outlay of $7.6 million.
Both of these facility purchases were ROI positive and will help secure our long-term future.
This quarter, we also continued to increase inventories as we've been intentionally prioritizing customer service and product availability over trying to optimize inventory levels and risk running out of critical materials.
Over the last six months, we've increased our inventories by approximately $30 million.
Even after returning more than $30 million to our shareholders in the form of dividends and buybacks, having heightened capex and intentionally increasing inventory levels, on October 31, we were still in a net cash position of more than $90 million.
Our strong balance sheet puts us in a fantastic position to execute additional value-enhancing activities, including investing in R&D, completing additional acquisitions, and returning funds to our shareholders.
Our approach to capital allocation has not changed and has been serving us well.
First, we use our cash to fully fund organic sales and efficiency opportunities throughout the economic cycle.
This includes investing in new product development, sales-generating resources, IT improvements, capability-enhancing capital expenditures, and capex to further automate our facilities.
We will also -- sorry -- we will absolutely keep funding these investments where it makes sense and where the investments are ROI positive.
And second, we focus on returning cash to our shareholders in the form of dividends.
We've now increased our annual dividend for 36 consecutive years, which puts us in a pretty elite group of companies.
After fully funding organic investments and dividends, we then deploy our cash in a disciplined manner for either acquisitions, where we believe that we have strong synergistic opportunities or for buybacks when we see a disconnect in our view of intrinsic value versus Brady's trade-in price.
Slide number 12 summarizes our guidance for the year ending July 31, 2022.
Our full-year diluted earnings per share guidance, excluding amortization remains unchanged at a range of $3.12 to $3.32 per share.
On a GAAP basis, our full-year diluted earnings per share guidance also remains unchanged at a range of $2.90 to $3.10 per share.
Included in our GAAP earnings per share guidance is an increase in after-tax amortization expense of approximately $6 million.
After-tax amortization increases from about $5.5 million in fiscal 2021 to about $11.5 million in fiscal 2022, which is a delta of about $0.12 per share.
As we look at staging throughout the rest of this fiscal year, we anticipate our short-term gross profit margin challenges to persist throughout our fiscal second quarter, and history shows that our second quarter is seasonally our lowest quarter of the year and generally has earnings per share below that of Q1.
As we move beyond the second quarter, we expect to see increased benefits from our pricing actions as well as increased benefits from our many efficiency and automation projects.
As a result, we continue to expect that the majority of our earnings-per-share growth will come in the third and fourth quarters of this year.
We also expect total sales growth to exceed 12% for the full year ending July 31, 2022, which is inclusive of both organic sales growth as well as sales growth from the recently completed acquisitions.
We'll continue to make the investments necessary to drive organic sales growth, we'll continue to search for acquisitions that advance our strategies, and we'll continue to drive sustainable efficiency gains while being tight on non-revenue-generating expenses.
As for capital allocation, we'll keep investing in our organic business.
We'll keep investing in our industrial track-and-trace initiatives.
We'll continue to return funds to our shareholders through dividends and opportunistic buybacks.
We did just buy back $18.9 million worth of shares last quarter, and we'll continue to look for acquisitions where the price is right and the strategic fit is clear.
We have a strong balance sheet, and we'll use it as a tool to drive long-term shareholder value.
Potential risks to this guidance, among others, include the strengthening of the US dollar versus other major currencies such as the euro or the British pound, worsening logistics that don't allow us to meet our commitments to our customers, and further inflationary pressures that we cannot offset in a timely enough manner.
Slide number 13 outlines the first quarter financial results for our Identification Solutions business.
IDS sales increased 25.4% to $248.6 million.
This very robust sales growth is comprised of organic growth of 13.2%, acquisition growth of 11.6% and an increase of 0.6% from foreign currency translation.
Organic sales in our IDS division were once again very strong, not only versus the first quarter of last year but also against previous sequential quarters.
And on the cost side, our strong focus on sustainable efficiency gains partially offset the input cost increases that we've been experiencing.
Segment profit as a percentage of sales was 19.6%, which was down from 20.3% last year.
However, if you exclude the sizable increase in amortization that Aaron mentioned, then segment profit as a percentage of sales would have increased from 21% of sales to 21.1% of sales, so an increase of about 10 basis points compared to the first quarter of last year.
Regionally, organic sales in Asia were strong this quarter with growth of over 15% compared to the first quarter of last year.
This is the fourth consecutive quarter of Asian organic sales growth in excess of 10%.
Organic sales were also up more than 15% in EMEA despite several lockdowns continuing throughout most of the first quarter.
Our European team once again did an excellent job driving sales growth while handling the period interruptions caused by the lockdowns.
We also had organic sales growth of nearly 12% in the Americas.
We saw growth in all product lines and geographies throughout the quarter and we were especially pleased with the bounce back in our healthcare product line where organic sales growth increased approximately 11%.
In general, the sales trends and ideas are very positive.
Our commitment to R&D remains a high priority.
We've ratcheted up our investments to build a complete industrial track and trace solution.
And although we're probably a full two years away from having a complete track and trace solution, we've already been experiencing very nice synergies from our recent acquisitions and we expect these sales synergies to only increase from here on out due to the complementary nature of our product portfolios and the more complete product offerings that Code, Magicard and Nordic ID bring to Brady.
These acquisitions are performing slightly better than expected and bring us valuable technologies that help us round out our product offerings and make Brady more valuable to our customers.
Clearly, we're devoting a significant amount of time and money to our track and trace product offerings.
But we are not sacrificing R&D investments in other areas such as printers and materials.
We continued our steady stream of new printer introductions by launching the J4300 Brady Jet Label Printer.
This inkjet printer combines with pretty high efficiency proprietary materials to balance the safety and complexity of compliance labels with the demands of industrial environments.
Our industrial inkjet printers save our customers time by quickly and easily creating compliant, long lasting photo quality labels, signs and tags that are needed to create a safer, more efficient workplace.
It's a combination of our steady It's a combination of our steady stream of best-in-class printers, plus Brady's high-performance materials that sets Brady apart from our competition, from barcodes to extremely small text, to perfect photo quality images, our customers most important information needs to be visible and needs to stay put in any type of environment.
Simply stated, Brady's printers and materials are all about high performance in the harshest of environments.
Our R&D pipeline is strong and we continue to launch innovative new solutions that help our customers solve problems and be more efficient and effective.
I'm excited about what we're doing in an ID Solutions business and how our acquisitions of Code, Nordic ID and Magicard will further accelerate our growth.
We're improving our customer service, investing in our future and streamlining the rest of our cost structure.
These positive revenue trends combined with our strong cost discipline, will help offset inflationary pressures and paint a bright future for our IDS division.
Moving to slide number 14, you'll find a summary of Workplace Safety financial performance.
WPS sales declined 7.8%, which consisted of an organic sales decline of 8.6% and an increase from foreign currency of 0.8%.
This sales decline was primarily driven by challenging comparables to last year's first quarter.
Our WPS business performed extremely well and supplied our customers with a great deal of COVID-19-related products during the pandemic last year, and the demand for these types of products has declined substantially since then.
Our WPS sales were $72.9 million this quarter, which were above the pre-pandemic sales experienced in the first quarter of fiscal 2020.
Even in these challenging times with periodic shutdowns, our European WPS team did an outstanding job of increasing its customer base.
And for those customers who initially came to us to purchase COVID-related products, our team has done a nice job providing these same customers with our core safety and identification products as well.
Our Australian business performed similarly to our European business.
During the pandemic, our Australian business grew organic sales over 10% in last year's first quarter.
Looking back the challenging comparables, we were pleased with this quarter sales volumes as they were above pre-pandemic levels.
Over the last several quarters, we've increased our Australian customer base and we continue to find opportunities to enhance our digital marketing approach to ensure that we retain our new customers and turn them into long-term repeat customers.
The sale of COVID-related products declined in North America as well this quarter, and this decline was not fully offset by our non-COVID product offerings thus leading to a decline in organic sales in the Americas.
And as I alluded to earlier, we've made investments to improve certain of our lagging businesses in WPS including our business in the US that primarily serves micro businesses.
We've incurred start-up costs to open a new facility in the US, we've invested in head count, and we're also investing in additional advertising.
All in, these incremental investments were approximately $2.5 million.
These investments negatively impacted WPS' profitability this quarter, but we believe that these investments are critical to return our WPS business to sustainable, long-term, profitable growth.
In addition to these investments, our WPS business also experienced gross margin compression as a result of raw materials, freight and wage inflation as I mentioned.
Similar to our IDS business, we're taking actions to offset these cost increases.
WPS' segment profit was $2.3 million, compared to $8 million in last year's first quarter.
This reduction in segment profit was directly related to the reduced sales volumes, the incremental investments that I just mentioned, as well as significant cost pressures.
Our WPS team members are listening to their customers to identify what they need.
They're modifying their marketing campaigns to reach entirely new customers and entirely new industries, and they're working hard to address underperforming businesses within the portfolio.
Our Workplace Safety business has one more quarter of moderately difficult comparables ahead of it, but we're laying the foundation for a solid recovery.
I'm proud of the role that Brady played and continues to play in this long, ever-changing fight against COVID-19.
Identification Solutions and Workplace Safety products help companies with social distancing.
Our products help schools reopen safely and safety and identification products were used by our frontline workers all around the globe.
And now, our products are helping our customers increase efficiency to help them meet their own set of customer demand.
This pandemic is not over, and the financial impact stemming from the pandemic are certainly not over.
Throughout the pandemic, we invested in growth and efficiencies, and it's this continual level of investment that will enable us to keep this strong positive momentum.
Brady is in an enviable financial position.
We're coming off of record earnings per share here.
Our earnings are up, and our balance sheet is very strong.
We're in a net cash position even after making three acquisitions toward the end of last year and returning more than $30 million to our shareholders in the form of buybacks and dividends this quarter.
We will continue to invest in R&D, sales-generating resources and capacity-enhancing capex, all while being very tight on non-revenue-generating expenses and aggressively working through global logistical issues and inflationary forces.
I'm very proud of how our team performed throughout this challenging period.
Their ability to deal with uncertainty, think on their feet and solve problems quickly all while never compromising the long term has built a solid foundation for Brady's future.
With that, I'd like to now start the Q&A.
Operator, would you please provide instructions to our listeners?
| compname reports q1 diluted earnings per share of $0.67.
q1 sales $321.5 million.
diluted earnings per share in q1 fiscal 2022 is $0.67.
co's earnings per diluted class a nonvoting common share, excluding amortization guidance for year ending july 31, 2022 remains unchanged.
compname says earnings per diluted class a nonvoting common share on a gaap basis remains unchanged at $2.90 to $3.10 per share for fiscal 2022.
supply chains for certain components remain tight.
experiencing inflation in many areas including wages, freight, utilities, and raw materials.
|
We will begin with remarks from Lawrence Kurzius, Chairman, President and CEO; and Mike Smith, Executive Vice President and CFO, and we'll close with a question-and-answer session.
I will now turn the discussion over to Lawrence.
Our third quarter performance demonstrates again that the combination of our balanced portfolio with the effective execution of our strategies to capitalize on accelerating consumer trends and strong engagement with our employees have positioned us well to drive differentiated growth.
Remarkably, we delivered an 8% sales increase versus last year and 17% versus 2019.
Our third quarter results reflect a robust and sustained growth momentum, as we delivered organic sales growth on top of our exceptional third quarter performance last year.
Our third quarter results also included strong contributions from our Cholula and FONA.
Sales growth in our Flavor Solutions segment was broad-based, with the at-home products in our portfolio, flavors and seasonings growing at approximately the same rate as our away from home products, which was primarily driven by a robust recovery from last year's lower demand from our restaurant and other foodservice customers attributable to COVID-19 restrictions and consumers' reluctance to dine out.
Our Consumer segment results reflect the lapping of the year-ago elevated demand in the lockdown phase of the pandemic, from consumers eating and cooking more at home, as well as the sustained shift to consumer at-home consumption higher than pre-pandemic levels.
Taken together, these results continue to demonstrate the strength and diversity of our offering, the breadth and reach of our portfolio with compelling offerings for every retail and customer strategy across all channels creates a balanced and diversified portfolio that enables us to drive consistency in our performance even in a volatile environment.
Turning to slide 5.
Total third quarter sales grew 8% from the year-ago period or 5% in constant currency.
Substantial constant currency sales growth in our Flavor Solution segment more than offset a slight constant currency sales decline in our Consumer segment, driven by the factors I just mentioned.
Adjusted operating income was comparable to the third quarter of last year, including a 3% favorable impact from currency.
The benefit of higher sales was more than offset by higher cost inflation and industry logistics challenges as well as by a shift in sales between segments.
On the bottom line, our third quarter adjusted earnings per share was $0.80 compared to $0.76 in the year-ago period, driven by higher sales and a lower tax rate, partially offset by cost pressures.
As we have stated previously, we expect growth to vary by quarter in 2021.
Importantly, we have delivered outstanding year-to-date performance.
Sales and adjusted operating income are up 13% and 9% year-over-year respectively, both of which include a 3% favorable impact from currency and we've grown adjusted earnings per share of 8%.
Year-to-date versus 2019, we've driven sales, adjusted operating income and adjusted earnings-per-share growth of nearly 20% across all three metrics.
I'd like to say a few words about the current cost environments impact on our third quarter results as well as our outlook, which Mike will cover in more detail.
We stated in our July earnings call we are operating in a dynamic cost environment and like the rest of the industry experiencing cost pressures, we're seeing broad-based inflation across our raw and packaging materials as well as transportation costs to partially offset rising costs, we have raised prices where appropriate, but as usual, there is a timeline associated with pricing, particularly with how quickly costs are escalating and therefore the phasing of most of our actions has taken place during the fourth quarter.
Those pricing actions are on track and we appreciate our customers working with us to navigate this environment.
In the last few months, inflation has continued to ratchet up, mainly with packaging and transportation cost.
We are experiencing the highest inflationary period of the last decade or even two.
We, along with our peers and customer are also facing additional pressure on our supply chain due to strained transportation capacity and labor shortages and distribution.
These pressures not only impact costs but also negatively impact sales as the addition of further supply chain complexity makes it harder to get order shipped and received by customers.
And this pressure is amplified by continued elevated demand.
Overall, we have a demonstrated history of managing through inflationary period with a combination of pricing and cost savings and we expect to manage through this period as we have in the past.
Now let's turn to our third quarter segment business performance, which includes comparisons to 2019 pre-pandemic levels as we believe these will be more meaningful than the comparison for 2020 given the dramatic shift in consumer consumption between at-home and away from home experienced in the year-ago period.
Starting on Slide 7, Consumer segment sales grew 1%, including a 2% favorable impact from currency and incremental sales from our Cholula acquisition compared to the highly elevated demand levels of the year-ago period.
Our Consumer segment organic sales momentum on a two-year basis was up double digits, highlighting how the sustained shift in consumer consumption continues to drive increased demand for our products and outpaces pre-pandemic level.
Our Americas constant currency sales declined 1% in the first quarter, with incremental sales from our Cholula acquisition contributing 3% growth.
Our total McCormick U.S. branded portfolio consumption as indicated in our IRI consumption data and combined with unmeasured channels declined 10% following a 31% consumption increase in the third quarter of 2020, which results in a 19% increase on a two-year basis.
And that has remained high and we are realizing the benefit of our U.S. manufacturing capacity expansion, although some products remain stressed by sustained high demand.
Shelf conditions are improving and we're seeing sequential improvement in our share performance.
That said, as I mentioned a moment ago, the current issues related to logistics pressures continue to make it challenging for market leaders like McCormick to keep high demand products and stock, which has prevented us from making further progress in replenishing both retailer and consumer inventories in the third quarter.
Importantly though, we are better positioned than we were last year entering the holiday season and are confident in our holiday merchandising plans.
Focusing further on our U.S. branded portfolio, our 19% consumption growth versus the third quarter of 2019 was led by double-digit growth in spices and seasonings, hot sauces, both Cholula and Frank's RedHot, and barbecue sauce, as well as our Asian frozen product.
In pure play e-commerce, we delivered triple-digit growth compared to 2019, with McCormick branded consumption outpacing all major categories.
This is the sixth consecutive quarter our U.S. branded portfolio consumption grew double digits versus the same period two years ago, which reflects continuation of consumers cooking and using flavor more at home and the strength of our brands.
Our key categories continued to outpace the center of store growth rates versus the same period of two years ago, favorably impacting not only the McCormick brand but our smaller brands as well.
Household penetration and repeat rates have also grown versus 2019.
And when our consumers shop, they're buying more of our products than they were pre-pandemic.
McCormick continues to win in hot sauce.
Across our brands, McCormick grows to be the number one hot sauce manufacturer globally earlier this year.
In the third quarter, Frank's RedHot, the number one brand in the U.S., was joined at the top of the category by Cholula, which we have driven to the number two ranking.
Now turning to EMEA, which has continued its outstanding momentum.
We had strong market share performance in the third quarter versus last year, maintaining or gaining share across the region and key categories following our strong gains in the third quarter last year.
Compared to the third quarter of 2019, our total EMEA region we drove double-digit consumption growth in herbs, spices and seasonings.
And turning up the heat, Frank's RedHot has grown consumption 75% and had gained a significant share versus the two year-ago period.
Across the region, our household penetration and repeat rates have also grown versus the two year-ago period.
Our year-to-date higher brand marketing investments in EMEA are proving to be effective as evidenced by the metrics I just discussed, as well as our achieving above benchmark rates, the reach, engagement and click-through for instance in our digital marketing.
In the Asia-Pacific region, third quarter sales were strong, reflecting our continued recovery from China's lower branded foodservice sales last year.
Our consumer product demand in the region declined due to lapping significant growth last year.
The region is also experienced supply chain challenges with ocean freight capacity constraints impacting the quarter's growth.
In Australia, we continue to see strong consumption growth versus 2019, with key brands recently turning back toward 2020 levels, with Frank's RedHot already higher than the last year's elevated consumption.
Across all regions in our Consumer segment, we are continuing to fuel our growth with our strong brand marketing, new product launches and our category management initiatives.
We're making brand marketing investments across our portfolio to connect with our consumers, particularly online.
Early in the third quarter in the Americas, we began our search for the first Director of Taco Relations.
This was a dream opportunity for the over 5,000 applicants to showcase their Taco expertise and enthusiasm for our product and their video application.
To date, we have garnered over 1 billion earned impressions related to our search, and these will continue to grow upon the announcement of our new Director of Taco Relations next week, on October 4th, in celebration of National Taco Day.
We are not only creating buzz through our digital marketing, but also with our e-commerce direct to consumer new product launches.
In the Americas, we drove new passionate users to our brands and digital properties with the launch of Sunshine All Purpose Seasoning, a new product developed in partnership with social media influencer Tabitha Brown, inspired by her joyful personality and health and wellness focused recipes, the salt-free and gluten-free Caribbean inspired blend sold out in just 39 minutes, generating record sales from e-commerce driven innovation and over 700 million earned impressions.
Our new product launches differentiate our brands and strengthens our relevance with consumers.
And with our global leadership position in our sauce, we are in the perfect position to capitalize on consumers' rising demand for hot and spicy flavors through a global heat platform.
Our recent launches of Frank's RedHot frozen appetizers and Cholula Wing sauces in the Americas, as well as Frank's RedHot craft flavors in EMEA have made strong contributions to growth in the third quarter.
Just in time for Halloween, EMEA is introducing dead hot gift sets for e-commerce, featuring Frank's RedHot.
And in China, our recently launched ready to eat chili paste as the highest 30-day repeat rate of all McCormick direct to consumer products on Tmall.
Turning to category management.
Our initiatives are designed to strengthen our category leadership by driving growth for both McCormick and retailers.
These initiatives include simply changing shelf placement.
For instance, increasing Cholula velocity over 30% or changing the tile [Phonetic] placement at a large retailer, to reinventing the spice and seasoning of shopping experience.
In the U.S., we are anticipating a cumulative implementation of our spice aisle [Phonetic] program, so it began in 2020 at 10,000 stores by year-end versus 2019 to remove year over year noise, sales in the beginning of August show retailers that have adopted the spice aisle changes are growing the category faster than those who have not, and McCormick branded spices and seasoning portfolio is growing solid mid-single digits faster in implemented stores versus stores which have not the adopted the changes.
And in Eastern Europe, the rollout of our first choice bottle, which has perceived this premium and what was predominantly sachet only market is elevating the spices and seasoning category and driving increased share in our Eastern European market.
Moving forward, we are confident that we will continue the momentum of our Consumer segment.
We have more consumers than pre-pandemic.
They have come into our brands, are having a good experience and our buying our products again.
We are excited about our growth trajectory and expect long lasting growth from the sustained shift to consumers cooking more at home, fueled by our brand marketing, new products and category management initiatives.
Turning to Slide 9, our Flavor Solutions segment grew 21% or 17% in constant currency, reflecting both strong base business growth and contributions from our FONA and Cholula acquisition.
Our third quarter results includes the robust recovery from last year's lower demand from our restaurant and other foodservice customers, many of which are lapping the curtailment approach of away from home dining, as well as strong continued momentum with our packaged food and beverage customers.
Notably, growth was driven equally from both the at-home and the away from home products in our portfolio.
On a two-year basis, our sales also increased double digits, with strong growth in all three regions.
In the Americas, our FONA and Cholula acquisitions made a strong contribution to our significant third quarter growth, and we're executing on our strategy to shift our portfolio to more value-added and technically insulated products.
We continue to see outstanding growth momentum with our consumer packaged food customers to new products and base business constrain.
Consumers' rising global demand for hot and spicy flavors is driving growth for both our customer and for our seasonings that flavor them.
Compared to last year's third quarter, snack seasonings grew high single digits with strong growth in core iconic product as well as new products, and the innovation pipeline continues to be robust.
Our confidence will accelerate our global flavors platform continues to be reinforced by their excellent performance with double-digit sales growth compared to last year.
Beverages are driving significant growth with particular strength in the fast growing Performance Nutrition category.
And finally in the Americas, branded foodservice contributed significant growth for the quarter and our [Indecipherable] channel has continued to strengthen as more dining options reopen.
In EMEA, we had strong growth versus both last year and 2019 across all markets and channels.
Quick service restaurants or QSRs are driving growth through increased promotional activities and limited time offers.
Our branded foodservice sales with easing restrictions in the hospitality industry increased at a double-digit rate versus the third quarter of last year and as packaged food and beverage companies our performance was strong on top of last year's strong growth, but the hot and spicy trends fueling growth in snack seasonings particularly through new product innovation.
Our sales growth in the Asia Pacific region was partially impacted by the timing of our QSR customers strong limited time offers and the promotional activities in the third quarter of last year, which increased restaurant traffic as COVID-19 restrictions lifted.
As we've said in the past, limited time offers and promotional activities and cause some sales volatility from quarter to quarter.
We recognize a part of our third quarter Flavor Solutions results were due to the comparison to low away from home demand last year.
Notably, our growth also includes strong contributions from FONA and Cholula, robust growth with packaged food and beverage customers both in the base business and the new product wins, driven by our differentiated customer engagement and continuing momentum with QSR.
Year-to-date versus 2019, we delivered 13% constant currency growth, including FONA and Cholula and 6% constant currency organic growth.
These results combined with our effective growth strategies bolster our confidence and a continuation of our robust growth trajectory in our Flavor Solutions segment.
Now on Slide 10, I'm excited to share some important purpose-led performances.
Just a few days ago, we were named as a global compact lead company by the United Nations for our ongoing commitment to the UN Global Compact and its 10 principles for responsible business.
We are honored by this recognition for our commitment to sustainability and to be one of only 37 companies in the world and the only U.S.-based food producer to be included on this prestigious list.
Sustainable sourcing is the top priority and we've been actively working on initiatives such as our sustainability-linked financing partnership with IFC and Citi, which provides our urban spice suppliers in Indonesia and Vietnam with financial incentives linked to improvements in measures of social and environmental sustainability, as well as our partnership with Heifer International on the launch of the Cardaforestry project, which aims to increase smallholder farmer resilience and improve the quality of cardamom and all spice in Guatemala.
In addition, Latina Style, Inc. recently named us as one of the top 50 best companies for Latinos to work in the U.S.
We are thrilled to be recognized for our continued efforts for our diversity and inclusive.
We are committed to the long-term vitality of the people, communities and the planet we share and are proud of our impact in these areas.
We look forward to sharing more about these accomplishments as well as many others with you through our purpose-led performance report, which will be issued early next year.
Before turning it over to Mike, I'd like to make some qualitative comments regarding 2022.
To be clear, we are not providing 2022 guidance at this time.
We are a growth company and we expect to grow in both of our segments next year.
At the foundation of our sales growth is the rising consumer demand for flavor, fueled by younger generations.
We've intentionally focused on great categories that are growing and generating a long-term tailwind.
We are capitalizing on the long-term consumer trends that accelerated during the pandemic and for successfully executing on our strategies and initiatives.
In this dynamic and fast-paced environment, we are ensuring that we remain focused on long-term sustainable growth.
Recently, cost pressures have rapidly accelerated and we are preparing for that to remain in 2022.
We plan to mitigate these costs, which we expect to fully offset over time through a combination of CCI-led cost savings, revenue management initiatives and pricing actions as needed.
In addition, we're taking prudent steps to reduce discretionary spend where possible.
We also expect the impact of COVID-19 to persist into 2022, which will create continued broad-based supply chain challenges.
We successfully demonstrated in the past our ability to manage through inflationary environment and cost pressures.
Importantly, our strong growth trajectory supports our confidence that our long-term financial algorithm to drive continuous value creation to top line growth and margin expansion.
We have a strong foundation and remain focused on the long-term goals, strategies and values that have made us so successful.
For the reasons Lawrence mentioned, my comments will also include comparisons to 2019.
Starting on Slide 13.
Our top line growth continues to be strong.
We grew constant currency sales 5% during the third quarter compared to last year with incremental sales from our Cholula and FONA acquisitions contributing 4% across both segments.
Higher volume and mix drove our organic sales increase with Flavor Solutions growth offset any decline in the consumer segment.
Versus the third quarter of 2019, we grew sales 15% in constant currency with both segments growing double-digits.
During the third quarter, our Consumer segment continued to lap last year's exceptionally high demand.
Versus 2020, our third quarter Consumer segment sales declined 1% in constant currency, which includes a 3% increase from the Cholula acquisition.
Compared to the third quarter of 2019, Consumer segment sales grew 14% in constant currency.
On Slide 14, Consumer segment sales in the Americas declined 1% in constant currency, lapping the elevated lockdown demand in the year-ago period, as well as the logistics challenges Lawrence mentioned earlier.
Incremental sales from the Cholula acquisition contributed 3% growth.
Compared to the third quarter of 2019, sales increased 17% in constant currency, led by significant growth in the McCormick, Lawry's, Grill Mates, Old Bay, Frank's RedHot, Cholula, Zatarain's, Gourmet Garden, Simply Asia, Stubb's and [Indecipherable] branded products, that's a lot of brands, partially offset by a decline in private label.
In EMEA, constant currency consumer sales declined 11% from a year-ago, also due to lapping the high demand across the region last year.
Notably, this decline includes strong growth in our Eastern European market, on top of their significant volume growth last year, which was more than offset by declines in the region's other markets.
On a two-year basis, sales increased 10% in constant currency, driven by strong growth in our Kamis, Schwartz, and Frank's RedHot branded products.
Consumer sales in the Asia Pacific region increased 11% in constant currency due to the recovery of branded foodservice sales with a partial offset from the decline in consumer demand as compared to the elevated levels in the year-ago period.
Sales increased 4% compared to the third quarter of 2019, including a sales decline in India, resulting from a slower COVID-19 recovery.
Turning to our Flavor Solutions segment and Slide 17, we grew third quarter constant currency sales 17%, including an 8% increase from our FONA and Cholula acquisitions.
The year-over-year increase, led by the Americas and EMEA regions, was due to strong growth with both packaged food and beverage customers and in away from home products.
Compared to the third quarter of 2019, Flavor Solutions segment sales grew 16% in constant currency.
In the Americas, Flavor Solutions constant currency sales grew 19% year-over-year with FONA and Cholula contributing 12%.
Volume and product mix increased, driven by significantly higher sales to branded foodservice customers together with growth for packaged food and beverage companies, with strength in snack seasonings.
On a two-year basis, sales increased 15% in constant currency versus 2019, with higher sales from acquisitions and packaged food and beverage companies, partially offset by the exit of some lower margin business.
In EMEA, constant currency sales grew 19% compared to last year due to increased sales to QSRs and branded foodservice customers, as well as continued growth momentum with packaged food and beverage companies.
Constant currency sales increased 23% versus the third quarter of 2019, driven by strong sales growth with packaged food and beverage companies and QSR customers.
In the Asia Pacific region, Flavor Solutions sales rose 1% in constant currency versus last year and increased 8% in constant currency versus the third quarter of 2019, was driven by QSR growth and partially impacted by the timing of our customers limited time offers and promotional activities.
As seen on Slide 21, adjusted operating income, which excludes transaction and integration costs related to the Cholula and FONA acquisitions as well as special charges, was comparable to the third quarter of last year, including a 3% favorable impact from currency.
Adjusted operating income in the Consumer segment declined 10% to $180 million or in constant currency 12%, driven by the cost pressures from inflation and logistics challenges, partially offset by CCI-led cost savings.
These logistics challenges not only impacted cost, but also negatively impacted sales.
In the Flavor Solutions segment, adjusted operating income rose 32% to $84 million or 27% in constant currency.
Higher sales, CCI-led cost savings and favorable product mix as we continue to migrate our portfolio more than offset the cost pressures in this segment.
Across both segments, incremental investment spending for our ERP program was offset by lower COVID-19 costs compared to last year.
During the quarter, we invested in brand marketing ahead of last year and notably we have increased our investments 11% on a year-to-date basis.
As seen on Slide 22, adjusted gross profit margin declined 260 basis points, driven primarily by the cost pressures we are experiencing and the lag in pricing.
Our selling, general and administrative expense as a percentage of sales declined 110 basis points, driven by leverage from sales growth.
These impacts netted to an adjusted operating margin declined 150 basis points.
In addition to the factors I mentioned a few moments ago, the sales shift between segments unfavorably impacted both gross and operating margins.
Turning to income taxes.
Our third quarter adjusted effective tax rate was 14.1% compared to 19.3% in the year-ago period.
Both periods were favorably impacted by discrete tax items, with the larger impact this year due to the favorable impact of a reversal of a tax accrual.
Adjusted income from unconsolidated operations declined 5% versus the third quarter of 2020.
Based on our year-to-date results, we now expect a mid single-digit increase in our adjusted income from unconsolidated operations for 2021, up from our previous projection, but a low single-digit decrease.
This improvement is driven by strong performance from our McCormick de Mexico joint venture.
At the bottom line, as shown on Slide 25, third quarter 2021 adjusted earnings per share was $0.80 compared to $0.76 for the year-ago period.
The increase was primarily driven by lower adjusted income tax rate.
As compared to the third quarter of 2019, our 10% increase in adjusted earnings per share was primarily driven by sales growth.
On Slide 26, we summarize highlights for cash flow in the quarter end balance sheet.
Through the third quarter of 2021, our cash flow from operations was $373 million, which is lower than the same period last year.
The decrease was primarily due to the payment of transaction integration costs and higher use of cash associated with working capital.
This includes the impact of planned higher inventory levels to support significantly increased demand and to mitigate supply and service issues, as well as buffer against cost volatility.
Through the third quarter, we returned $272 million of this cash to our shareholders through dividends and used $190 million for capital expenditures.
Our priority is to continue to have a balanced use of cash, funding investments to drive growth, returning a significant portion to our shareholders through dividends and paying down debt.
Now turning to our 2021 financial outlook on Slides 27 and 28.
With our broad and advantaged flavor portfolio, our robust operating momentum and effective growth strategies, we are well positioned for another year of differentiated growth and underlying performance, tempered by the higher inflation ahead of pricing and the logistic challenges we previously mentioned.
For 2021, we are projecting topline and earnings growth from our strong base business and acquisition contribution with earnings growth partially offset by incremental COVID-19 costs and ERP investment, as well as a higher projected adjusted effective tax rate.
We continue to expect an estimated 3 percentage point favorable impact of currency rates on sales.
And for the adjusted operating income and adjusted earnings per share, a 2 percentage point favorable impact with currency rates.
At the topline, due to our strong year-to-date results and robust operating momentum, we now expect to grow constant currency sales 9% to 10%, which is the high end of our previous projection of 8% to 10%, and includes a 40% incremental impact from the Cholula and FONA acquisitions.
We had initially projected an incremental acquisition impact in the range of 3.5% to 4%.
We anticipate our organic growth will be led by higher volume and product mix, driven by our category management, brand marketing and new products, as well as pricing.
We're now projecting our 2021 adjusted gross profit margin to be 150 basis points to 170 basis points lower than 2020 due to the increase in cost pressures I mentioned earlier.
While we continue to expect a mid single-digit increase in inflation for the year, it has moved higher and is now approaching a double-digit increase in the fourth quarter.
Overall, our projected adjusted gross margin compression reflects unfavorable impact from sales mix between segments, cost inflation and COVID-19 costs, partially offset by pricing and margin accretion from the Cholula and FONA acquisitions.
As a reminder, we price to offset cost increases, we do not margin up.
Our estimate for COVID-19 costs remains unchanged at $60 million in 2021 versus $50 million in 2020, and is weighted to the first half of the year.
Reflecting the change in gross profit margin outlook, we are lowering our expected constant currency adjusted operating income growth.
Our adjusted operating income growth rate reflects expected strong underlying performance from our base business and acquisitions projected to be 8% to 10% constant currency growth, which includes the higher inflation ahead of pricing and logistics challenges and partially offset by a 1% reduction from increased COVID-19 costs compared to 2020 and a 3% reduction from the estimated incremental ERP investment.
This results in a total projected adjusted operating income growth rate of 4% to 6% in constant currency.
This projection includes the mid-single digit inflationary pressure as well as our CCI-led cost savings target of approximately $110 million.
It also includes an expected low single-digit increase in brand marketing investments.
Considering the year-to-date impact from discrete items, we now project our 2021 adjusted effective income tax rate to be approximately 21% as compared to our previous projection of 23%.
This outlook versus our 2020 adjusted effective tax rate is expected to be a headwind to our 2021 adjusted earnings-per-share growth of approximately 1%.
We are lowering our 2021 adjusted earnings per share expectations to 5% to 7% growth, which includes a favorable impact from currency.
This reflects our lower adjusted operating profit outlook and lower adjusted income tax rate, as well as the higher adjusted income from unconsolidated operations.
Our guidance range for adjusted earnings per share in 2021 is now $2.97 to $3.02.
This compares to $2.83 of adjusted earnings per share in 2020 and represents 8% to 10% growth in constant currency from our strong base business and acquisition performance, partially offset by the impacts related to COVID-19 costs, our incremental ERP investment and the tax headwind.
Now that Mike the shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 29.
Our third quarter results reflect a robust and sustained growth momentum as we drove strong sales growth despite a challenging year-over-year comparison.
Year-to-date versus 2019, we have driven significant double-digit growth rates for sales, adjusted operating profit and earnings per share.
We have a strong foundation and a balanced portfolio which drives consistency in our performance.
We expect higher at-home consumption will persist beyond the pandemic and are continuing the momentum we are gaining in away from home consumption.
We're are confident the growth and momentum of our business is sustainable.
As a reminder, McCormick has grown and compounded that growth successfully over the years regardless of short-term pressures.
Our strong growth trajectory supports our confidence in our long-term growth algorithm to drive continuous value creation to topline growth and margin expansion.
We're driving McCormick forward and building value for our shareholders.
| q3 sales rose 8 percent.
q3 adjusted earnings per share $0.80 excluding items.
for fiscal 2021, mccormick updated its sales outlook to expected growth of 12% to 13%, or 9% to 10% in constant currency.
operating income in 2021 is expected to grow by 2% to 4% from $1.0 billion in 2020.
projects 2021 adjusted earnings per share to be in range of $2.97 to $3.02.
|
Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer.
Whether working on-site performing essential maintenance or concierge duties, whether you're engaging remotely with prospects using our new touchless leasing process, or whether you are working from home in the many corporate roles that make Equity Residential hum, you are keeping our company rolling.
Now turning to our business.
The best way I can describe it in the last seven weeks is resilient.
In April, we collected in our residential business about 97% of the cash that we would usually collect.
While no part of our country's economy will be immune from the coming recession, we feel that our portfolio of properties, populated with residents having average annual household incomes of $164,000 and often employed in technology and other knowledge industries, will fare relatively well.
Our operations team has also shown resiliency.
When the pandemic hit in full force in mid-March, Michael Manelis and his team quickly pivoted, and over a few week period, adjusted our leasing and service operations dramatically.
On the leasing side, Michael and his team were able to quickly create a touchless process that made our customers comfortable to lease.
And on the service side, we focused on essential maintenance tasks and cleanliness, which helped our existing residents feel safe and comfortable living with us through this pandemic.
Michael will give you more details about all of this in a minute.
When the lockdowns were initially announced, we saw our leasing activity decline significantly, but demand has since picked up, as we noted in the release.
We see our recent pickup in demand as a further indication that our properties and markets will remain attractive places to live for our target demographic.
All in all, we think our people and our properties have been resilient, with the capital R going through this crisis.
We have further fortified our already strong balance sheet, as Bob Garechana will describe in a moment.
We are also preparing in earnest for our properties to operate with fuller staffing as lockdowns across the country are relaxed.
We will keep in mind the safety of our employees and residents as we reengineer our business.
Equity Residential has historically performed well in these downturns, and we would expect this to be no exception.
We are optimistic that we will perform well operationally given these circumstances and that we will find opportunities to add high-quality assets for our platform as the economy works its way through this recession.
Finally, we did withdraw guidance in the release.
We are unable to estimate with precision the continuing impact of the pandemic and the timing and character of the reopening process on our business.
It makes it impossible for us to give you the high-quality estimates of where our business might go in the near-term that you're used to receiving.
We did provide a significant amount of information on April's preliminary results and hope that is helpful.
So today, I'm going to provide a quick recap of operations over the past 45 days.
Prior to the COVID-19 pandemic, we were off to a very good start for the year.
Our occupancy was ahead of expectations, and we were well positioned for the primary leasing season.
And then COVID-19 hit, causing us to adjust our operations to this new unprecedented challenge.
Let me start by acknowledging the dedication and hard work of our employees during these unprecedented times.
They inspire me with their ability to quickly adjust operations while keeping an intense focus on our customers, properties, themselves and their families.
Shelter-in-place was mandated by governors in our markets in early to mid-March.
For us, this means that our more than 150,000 residents began staying at home 24 hours a day, seven days a week.
In response to shelter-in-place, we made some key changes to our operations.
We closed our common area amenities, we increased cleaning frequency, we quickly modified our website and our artificial intelligent E-Lead responses to pivot the entire sales process to virtual leasing.
Capturing video content and conducting the sales process via video conversations allowed the business to continue uninterrupted.
This process would have normally taken us several months to accomplish.
We also locked the office doors to encourage social distancing but kept the business running as we implemented shift rotations of the staff to reduce the number of employees coming to the property.
When we look back to March 15, we saw our traffic and applications drop 50% compared to the same period in 2019.
That being said, we continued to receive over 375 new applications each week through the end of March, which we see as a validation of the new leasing process.
With reduced traffic coming through the front door, our focus has been on keeping current residents in place.
We are currently offering residents the option to renew without increase.
Overall, retention in April and May has improved as we are now renewing in the mid- to upper 60% range, which is a 300 basis point improvement from last April and an almost 800 basis point improvement from last May.
New York is having the strongest renewal percents of nearly 70% for March, April and May.
Despite this good retention, our overall occupancy since March 31 has declined by 130 basis points.
We expect the occupancy impact to be the most pronounced in the second quarter, setting a new base from which we hope it will improve as shelter-in-place orders are lifted.
Let me share some color on the performance in April.
At the beginning of April, we began to notice an improvement in demand, with both traffic and leasing activity rebounding by almost 30% and actually now trending on par with last year.
In fact, we had over 900 applications last week, which is a significant improvement compared to the 375 that we were averaging in late March and very encouraging for us.
Given the activity in the last 45 days, we would like to see that volume grow even more to help offset the lower demand that we experienced in March and to match the increased volume of applications that we usually get in May.
What is clear is that our high-quality, well-located portfolio continues to attract future residents.
While the pandemic is certainly a deterrent, people have life reasons that require them to move like changes in jobs or partners.
On Page 13, we reported the first quarter and included April monthly pricing statistic by market.
I would remind everybody this is only one month of data, and that longer periods of time are usually required to show definitive trends.
Mark mentioned the strength and quality of our resident base.
This is evident by the fact that we received a very strong 97% of the cash collections in April relative to our March collections.
This resilience delivered 5.4% delinquency, which is quite good given these unprecedented circumstances.
Notably, Seattle and Denver were our markets with the lowest delinquency at below 3% and Los Angeles was the laggard close to 8%.
The rest of our markets were centered around the average.
We have also taken a cut at looking at property type.
And in most of our markets, our garden-style or more suburban assets have experienced higher delinquency than our mid-rise, high-rise more urban locations.
As we move through the continued disruptions created by COVID-19, we remain strategic in our pricing efforts.
Sitting here today, our base rents are down 4% compared to the same week last year.
Let me give you some color on notable markets.
Overall, our strongest market is Seattle, which has shown great resilience, with limited delinquency and the best overall revenue growth performance in the portfolio.
New York is a bit of a mixed story.
On one hand, it has the strongest retention of any market, but it has also not shown the signs of recovery that other markets have with traffic and applications.
Long term, we expect the New York market to benefit from low new supply and technology firms expanding their presence in the city.
We are hoping leasing activity will improve as the hard-hit New York area gets through the worst of the pandemic.
Finally, we started 2020 anticipating that Los Angeles would have a very challenging year given the new supply pressure.
COVID will definitely add to this.
Despite recent improvements in applications, we expect this market to remain challenged with meaningful pricing pressure that will continue as supply is delivered.
So where do we go from here?
Well, we're now in the early stages of preparing our properties for the new normal.
We expect things to shift over time.
Right now, the new normal is going to be focused on increased deep cleaning standards at the properties; adjustments to the layout of common areas, including fitness and lounges to accommodate social distancing; balancing the capabilities of virtual leasing with the need to engage with our customers; and ultimately, staggering work shifts to ensure that we limit the number of employees on-site at any given time.
These are challenging times, but our business is resilient, and our teams are positioned to deliver.
Starting with our new disclosures.
We've modified our disclosures to help better present our business and where it stands today.
We do so by providing April operational and collection statistics, by breaking out our same-store performance between residential and nonresidential, a practice that we would expect to continue as the performance from our main residential business, which makes up approximately 96% of total revenues, is likely to diverge meaningfully in the upcoming quarters for our much smaller nonresidential business.
This includes modifying the schedules on Pages 10 through 12 of the release.
And finally, by providing an update on liquidity and balance sheet information.
In order to accomplish this, we've defined a number of key terms in the back of the release.
We hope that these definitions will provide specificity and clarity to our disclosure.
Part of the new disclosure includes a breakout of nonresidential operations for our same-store portfolio.
This is a modest component of our business at 4% of total revenues and consists mostly of ground floor retail and public nonresident parking at our well-located apartment communities.
Ground floor retail makes up about 2/3 of this 4%, with public nonresident parking making up the rest.
As you would suspect, a good portion of the retail tenants that rent our space have been significantly impacted by shelter-in-place orders.
This is evidenced by the 58% April collection rate for all retail that we disclosed, which, while certainly below what we would have hoped, may be higher than many other retail landlords.
The drugstores, bank branches and national chains that occupy a good portion of these spaces have, for the most part, continued to pay rent, while local small business owners have struggled.
With nonresident parking, we've seen an approximately 30% decline in parking volume for April, given the lack of public events and increased work-from-home arrangements.
We suspect that this may recover as shelter-at-home orders are eventually lifted.
Finally, a few highlights on our balance sheet.
We ended the first quarter with an incredibly strong net debt to normalized EBITDA of 4.9 times and nearly $1.8 billion in liquidity under our revolving credit facility.
Subsequent to quarter end, we improved this already strong position by closing on a very attractively priced 2.6% or $195 million 10-year GSE loan and by closing on the sale of an asset in the San Francisco Bay Area.
With these steps, we sit here today with over 84% of our total NOI unencumbered, about $150 million in commercial paper outstanding and readily available liquidity of over $2.2 billion under our revolving credit facility, which does not mature until 2024.
This liquidity is more than sufficient to address our modest level of anticipated development spend, minimal debt maturities in 2020 and to address our next significant debt maturity, which isn't until December of 2021.
Our balance sheet is in excellent condition to weather the storm and take advantage of opportunities should they present themselves.
| equity residential withdraws full year 2020 earnings guidance.
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My name is Kevin Maczka.
I'm Belden's Vice President of Investor Relations and Treasurer.
Roel will provide a strategic overview of our business, and then Jeremy will provide a detailed review of our financial and operating results, followed by Q&A.
Additionally, during today's call, management will reference adjusted or non-GAAP financial information.
As a reminder, I'll be referring to adjusted results today.
We performed well again this quarter, and I'm pleased to report total revenues and earnings per share that exceeded the high end of our guidance ranges.
Our end markets continue to recover, and our global teams are meeting the robust demand levels and successfully navigating the inflationary environment.
This resulted in meaningful growth and margin expansion during the quarter.
Second quarter revenues increased 42% year-over-year to $603 million compared to our guidance range of $535 million to $550 million.
Organic growth is a key priority, and revenues increased 28% year-over-year on an organic basis.
The upside relative to our expectations was broad-based, with contributions from both the Industrial Solutions and Enterprise Solutions segments.
Incoming order rates were strong during the quarter, increasing 74% year-over-year and 18% sequentially.
This resulted in a healthy book-to-bill ratio of 1.19 times.
EBITDA increased 90% year-over-year to $93 million.
EBITDA margins expanded 390 basis points from 11.6% in the year-ago period to 15.5%.
EPS increased 163% year-over-year to $1.21 compared to $0.46 in the year-ago period and our guidance range of $0.88 to $0.98.
We are increasing our full year guidance to reflect the better-than-expected performance in the second quarter and an improved outlook for the second half of the year.
For the full year 2021, we are increasing the high end of our revenue and earnings per share guidance ranges by 170 and $0.77 respectively.
Turning now to our key strategic markets.
We had another great quarter in industrial.
Industrial Solutions revenues increased 32% organically with broad-based strength in each of our primary market verticals and regions.
Market conditions are clearly improving, and we continue to see a number of compelling longer-term demand drivers for automation solutions as industrial customers respond to increasing labor costs, increasing capacity requirements, the need to pandemic proof operations, and other factors.
Belden is extremely well positioned and highly differentiated in the marketplace, and we expect to deliver solid growth in this market going forward.
As we shared with you previously, we are making targeted investments throughout the company to support our customers by driving innovation and strengthening our product roadmap.
As just one example of our recent innovations in industrial automation, we launched an expanded suite of advanced connectivity solutions during the second quarter called LioN-X.
The LioN-X solutions provide manufacturers with a faster and more reliable approach to transmitting sensor and actuator data in automated production environments.
This is a state-of-the-art future-ready connectivity solution that is core to providing secure communication from the sensor to the cloud in industrial environments.
These enhanced capabilities reflect our leadership position in this important growth market.
We are also sharpening our commercial excellence in a number of areas such as solution selling.
Beyond individual product sales, Belden is uniquely positioned to offer differentiated solutions to our customers, including cable, connectivity, networking, and software products and services.
I would like to highlight a recent success story in industrial automation that illustrates our capabilities in solution selling and resulted in a significant new business win.
During the second quarter, we received a $6 million award for a project with a large investor-owned utility in the United States for the implementation of a critical communications network.
This is an important strategic win.
Over the course of the project, we will be providing an expanded solution from the combined Belden and OTN Systems, which we acquired in January to a longtime Belden customer that previously purchased our industrial automation and cybersecurity offerings.
It showcases our product and commercial synergies and is a great example of the opportunities we are now positioned to secure in this market.
This is the first phase of the project and significant future expansion is expected beyond this initial award.
Beyond this project, the continued upgrade of grid infrastructure by other utilities throughout the United States is expected to provide many other opportunities to deploy our technologies.
We also continue to make progress involving our portfolio and aligning with growth markets.
During the second quarter, we completed the divestiture of our copper cable product lines serving the oil and gas market in Brazil, which we do not view as a strategic priority.
These products previously contributed approximately $15 million in annual revenue, with an immaterial contribution to EBITDA and cash flow, and we were pleased with the $11 million sales price.
Turning now to Enterprise.
Enterprise Solutions revenues increased 23% year-over-year on an organic basis in the second quarter.
Within the segment, revenues in broadband and 5G increased 13% organically.
We see strong secular trends in this market, driven by the increasing demand for high-speed broadband and the desire to provide access to every household.
Broadband networks will need to be upgraded continuously to support high-definition video streaming, work from home, virtual learning, and many other applications.
We have sustainable competitive advantages in this market, and we are ideally suited to support both MSO and Telco customers as they upgrade and expand their networks.
Broadband fiber revenues increased 28% organically year-to-date in 2021 after similar growth in 2020.
We expect further robust growth going forward as we continue to strengthen our patent-protected fiber R&D capabilities, add engineering resources and reduce our time to market for new offerings.
Revenues in smart buildings increased 36% year-over-year on an organic basis, substantially exceeding our expectations.
We are very encouraged by the improvement we are seeing in this market and the strong execution by our teams.
We entered the year with an expectation that smart buildings revenue will decline in 2021, but we now expect to deliver solid growth in this market.
We are benefiting from commercial focus on growth verticals such as data centers and healthcare facilities.
In addition, our improved operational performance and superior lead times are enabling continued share capture.
To summarize, we had a great second quarter and first half of the year.
We are committed to driving robust organic growth in 2021 and beyond and are encouraged that our strategic initiatives are gaining traction.
I will now ask Jeremy to provide additional insight into our second quarter financial performance.
I will start my comments with results for the quarter, followed by a review of our segment results and a discussion of the balance sheet and cash flow performance.
As a reminder, I will be referencing adjusted results today.
Revenues were $603 million in the quarter, increasing $178 million or 42% from $425 million in the second quarter of 2020.
Revenues increased 28% organically compared to the prior year and 9% sequentially.
Importantly, we have not seen material restocking by our channel partners.
And so we believe this revenue performance is consistent with improving end demand.
Incoming order rates were also very strong during the quarter, increasing 74% year-over-year and 18% sequentially.
This resulted in a book-to-bill ratio of 1.19 times, including 1.22 times in Industrial Solutions and 1.16 times in Enterprise Solutions.
Gross profit margins in the quarter were 35.7%, increasing 30 basis points compared to 35.4% in the year-ago period.
As a reminder, as copper costs increase, we raised selling prices, resulting in higher revenue with minimal impact to gross profit dollars.
As a result, gross profit margins decrease.
In the second quarter, the pass-through of higher copper prices had an unfavorable impact of 320 basis points.
Excluding the impact of this pass-through, gross profit margins would have increased 350 basis points year-over-year.
This exceeded our expectations for the quarter, and we are especially pleased with the performance given the current inflationary environment.
We expect that inflationary pressures will likely persist, and we are proactively addressing this through price recovery and productivity measures to support gross profit margins.
EBITDA was $93 million, increasing $44 million or 90% compared to $49 million in the prior year period.
EBITDA margins were 15.5%, increasing 390 basis points compared to 11.6% in the year ago period.
Excluding the impact of higher copper pass through pricing, EBITDA margins would have increased 510 basis points year-over-year, demonstrating solid operating leverage on higher volumes.
Net interest expense was consistent with the year ago period.
At current foreign exchange rates, we expect interest expense to be approximately $62 million in 2021.
Our effective tax rate was 18.2% in the second quarter as we benefited from incremental discrete tax planning items.
We expect an effective tax rate of approximately 19% in the third quarter and 19.5% for the full year 2021.
Net income in the quarter was $55 million compared to $20 million in the prior year period.
Earnings per share was $1.21 compared to $0.46 in the second quarter of 2020.
We were very pleased to deliver such robust growth and margin expansion in the second quarter.
I will begin with our Industrial Solutions segment.
As a reminder, our Industrial solutions allow customers to transmit and secure audio, video, and data in harsh industrial environments.
Our key markets include discrete manufacturing, process facilities, energy and mass transit.
The Industrial Solutions segment generated revenues of $335 million in the quarter, increasing 51% from $221 million in the second quarter of 2020.
Segment revenues increased 32% organically.
Revenues in industrial automation, our largest market, increased 36% year-over-year on an organic basis, with broad-based strength across each of our primary market verticals.
Revenues for our integrated cybersecurity solutions also increased year-over-year for the second straight quarter.
We are pleased with the progress the team is making in advancing the product roadmap and identifying new commercial opportunities in industrial end markets.
Non-renewal bookings increased 12% year-over-year in the first half of the year.
Industrial Solutions segment EBITDA margins were 16.9% in the quarter, increasing 500 basis points compared to 11.9% in the year-ago period.
The year-over-year increase primarily reflects operating leverage and higher volumes.
Turning now to our Enterprise segment.
Our Enterprise solutions allow customers to transmit and secure audio, video, and data across complex enterprise networks.
Our key markets include broadband, 5G, and smart buildings.
The Enterprise Solutions segment generated revenues of $268 million during the quarter, increasing 32% from $203 million in the second quarter of 2020.
Segment revenues increased 23% organically.
Revenues in broadband and 5G increased 13% year-over-year on an organic basis.
The ever increasing demand for more bandwidth and faster speeds is driving increasing investments in network infrastructure by our customers.
This supports continued robust growth in our fiber optic products, which increased 21% organically in the second quarter.
Revenues in the smart buildings market increased 36% year-over-year on an organic basis, substantially exceeding our expectations.
Market conditions improved significantly in the quarter, and our commercial engagement and strong operational performance are driving notable share capture.
Enterprise Solutions segment EBITDA margins were 13.2% in the quarter, increasing 230 basis points compared to 10.9% in the prior year period.
Our cash and cash equivalent balance at the end of the second quarter was $423 million compared to $371 million in the prior quarter and $360 million in the prior year period.
We are very comfortable with our current liquidity position.
Working capital turns were 7.6 compared to 6.7 in the prior quarter and 5.5 in the prior year period.
Days sales outstanding of 53 days compared to 54 in the prior quarter and 60 in the prior year period.
Inventory turns were 5.1 compared to five in the prior quarter and 4.5 in the prior year, and our financial leverage improved significantly during the quarter.
Net leverage was 3.3 times net debt-to-EBITDA at the end of the second quarter compared to four times in the prior quarter.
We now expect to trend back within the targeted range of two to three times by year-end 2021.
Turning now to slide seven.
I will discuss our pro forma debt maturity schedule.
As a reminder, our debt at the end of the second quarter was entirely fixed at attractive interest rates.
We have no near-term maturities and no maintenance covenants on this debt.
Subsequent to quarter end, we took steps to further strengthen the balance sheet and extend our maturities.
Specifically, in July, we issued EUR300 million in new 10-year notes maturing in 2031.
The interest rate on these notes is 3.375%, which matches the lowest interest rate on 10-year notes in the history of the company.
We were very pleased to complete this transaction.
We intend to use the proceeds during the third quarter to redeem the full EUR300 million outstanding on our 2025 notes, so our total debt principal outstanding will be unchanged at the end of the third quarter.
Following the redemption, our debt maturities will range from 2026 to 2031, with an average interest rate of 3.6%.
This provides significant financial flexibility as we execute our strategic plans.
Cash flow from operations in the second quarter was $68 million compared to $40 million in the prior year period.
Net capital expenditures were $16 million for the quarter compared to $20 million in the prior year period.
And finally, free cash flow in the quarter was $52 million compared to $20 million in the prior year period.
We are pleased with the year-to-date free cash flow generation, which is approximately $50 million better than the first half of 2020.
End market conditions continue to improve, and I'm encouraged by our robust recent order rates and solid execution.
We are increasing our full year 2021 guidance to reflect better-than-expected performance in the second quarter and an improved outlook for the remainder of the year while considering the renewed uncertainty related to the global pandemic.
We anticipate third quarter 2021 revenues of $590 million to $605 million and earnings per share of $1.11 to $1.21.
For the full year 2021, we now expect revenues of $2.32 billion to $2.35 billion compared to prior guidance of $2.13 billion to $2.18 billion.
This $170 million increase to the high end of our guidance range includes approximately $140 million from improved operational performance and $30 million from higher copper prices and current foreign exchange rates.
Our revised full year guidance implies consolidated organic growth of approximately 15% to 17% compared to our prior expectation of 6% to 9%.
We now expect full year 2021 earnings per share to be $4.37 to $4.57 compared to prior guidance of $3.50 to $3.80.
Our revised guidance for the full year 2021 implies total revenue growth of 25% to 26% and earnings per share growth of 59% to 66%.
We expect interest expense of approximately $62 million and an effective tax rate of 19.5% for the full year 2021.
Now before we conclude, I would like to reiterate our investment thesis.
We are taking bold actions to drive substantially improved business performance, and you are seeing that in our much better-than-expected first half performance and increased full year outlook.
This includes aligning around growth markets, developing innovative networking solutions, and enhancing our commercial capabilities.
Our financial leverage improved significantly during the quarter, and we tend to return to our targeted leverage range by year-end 2021.
I am confident that we have the management team, strategy, and business system to successfully execute our strategic plans and drive strong returns for our shareholders.
Stephanie, please open the call to questions.
| q2 adjusted earnings per share $1.21.
sees q3 adjusted earnings per share $1.11 to $1.21.
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If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information link on the Investor Relations page of our website.
In particular, there are significant risk and uncertainties related to the scope, severity and duration of the COVID-19 pandemic along with the direct and indirect impacts that the pandemic and related mitigation efforts, including governmental requirements and private sector responses, may have on our financial condition and operating results and those of our customers.
At Cousins we have always taken the approach that if we take care of our dedicated employees who deliver excellent service to our customers, our Company will drive strong results for our shareholders.
In this challenging environment we have taken great care to ensure that we are staying true to our values and principles.
In the markets, we have adjusted our operations to ensure the safety of our employees and customers as our properties all remain open.
Across our portfolio, physical occupancy has remained at approximately 15% since early June.
Based on our discussions with customers, I anticipate a modest increase after Labor Day.
However, ongoing health concerns related to COVID-19 and child care challenges resulting from remote schooling will likely create headwinds to physical occupancy throughout 2020.
Despite the extraordinary environment, our team delivered solid financial results during the second quarter.
I will share a few of the highlights.
We reported FFO of $0.66 a share.
We collected 97% of total rents and 98% of office rents.
We leased 303,000 square feet with a weighted average lease term of 7.6 years.
Second generation cash rents grew by 20.6%.
Simply stated, our financial performance highlights the quality of our markets, our portfolio, our customers and, importantly, our team.
It will come as no surprise that many are continuing to speculate about the long-term implications of COVID on the office sector.
Work from home is undergoing a nationwide test and is proving serviceable thus far.
We have spent considerable time discussing this with our customers.
In fact, I recently asked the leadership of a Fortune 500 company with a growing Sun Belt footprint to share their perspective on the impact of COVID on their real estate strategy with the Board of Directors here at Cousins.
I will summarize some of their findings; a heightened focus on highly amenitized buildings with outdoor space in urban settings, a prioritization of health and wellness, an increase in work flexibility for employees, a commitment to provide employees with dedicated personal space and reduction in overall density.
As one of the company executives shared the pandemic has not changed our plans.
In fact, in many ways it makes our space even more important.
We've proven that remote work can be effective but we've also learned that it is no substitute for being together for activities like collaboration, relationship building, mentorship and so on.
The executive also added, while we've been able to maintain productivity during these challenging times, we're trading on the trust, relationships and understanding we've built by being together.
After a deep dive into the real estate strategy, this growing Fortune 500 company concluded that while the layout of the office would likely change post COVID, their overall space needs would not.
Their study found that increased flexibility would be offset by an increase in personal and collaboration space.
This was an encouraging feedback.
And while just one example, we received similar thoughts from many other customers.
Personally I believe the teams are ultimately stronger together.
The observations provided by this particular company point to other trends that we have been discussing even before the pandemic reached us, migration to the Sun Belt, flight to quality, and a growing emphasis on ESG.
In many ways the COVID pandemic has not created a new paradigm, it is simply accelerating trends already under way.
Many years ago we crafted a compelling and resilient strategic plan with the goal to position Cousins at the intersection of these trends.
In short, we prioritized trophy, Sun Belt properties, a disciplined approach to capital allocation, a best-in-class balance sheet and leading local operating platforms.
We have made great strides to date.
100% of our portfolio is located in the best amenitized submarkets across the Sun Belt, 100% is Class A. Our portfolio is among the newest vintage in the office sector, with an average building age of 2002.
Our average building size is just 347,000 square feet with the overwhelming majority having multiple elevator banks.
77% of the portfolio is near mass transit while also enjoying an average parking ratio of 2.9 per 1,000.
Net debt to EBITDA of only 4.4 times and liquidity in excess of $1 billion.
A $566 million development pipeline that's 82% committed and projected to add approximately $66 million of incremental NOI by year-end 2022.
Currently there is a lot of discussion in the market regarding urban versus suburban and hub and spokes.
At Cousins we believe our portfolio has attributes that check the box for all of the above.
In addition, the Company has a fortress balance sheet and attractive embedded growth through our development projects.
Nonetheless, we are not immune to the headwinds as a result of the COVID-19 pandemic and the associated economic recession.
Physical distancing and quarantines treat all markets the same.
During this period, leasing activity will likely be muted and parking income will be impacted.
The duration and severity of this downturn will be determined by the public health needs, which are and should be everyone's top priority.
Yet pandemics and recessions do end and as companies are able to safely return to work, the economy can transition from surviving to once again thriving.
However, this will take time.
At Cousins, we have long been disciplined with our strategy to build the preeminent Sun Belt office REIT.
I believe that we are in the right markets with the right portfolio.
Coupled with our strong balance sheet and an extremely talented team, we feel confident Cousins can weather this challenging environment.
At the same time, dislocation in the markets could create opportunities for us.
We are in a strong financial position to reinvest in our buildings, to take advantage of strategic land opportunities for future office and mixed-use projects and to pursue compelling investment opportunities that can add value for shareholders.
We will remain judicious and act at the appropriate time.
I appreciate your skills, your dedication and your resilience.
I'm so proud to be part of Cousins.
As Colin said, we are in the midst of a historically challenging economic environment.
And I want to lead off by saying that our team and operating portfolio are performing exceptionally well during this difficult time.
From the start of the pandemic, we have remained focused on the things that we can control and positively influence such as our leasing strategy, rent collections, managing deferral requests, property operations, expense control, customer outreach and relationship building.
Our team's professionalism and focus in these areas combined with top-quality assets in some of the best Sun Belt submarkets led to solid second quarter results.
As we all know, we felt the full impact of the ongoing pandemic for the entire second quarter, whereas we only saw a partial impact in the first quarter.
Given that I'm especially pleased to say that our team executed 303,000 square feet of leases in the second quarter with an average lease term of 7.6 years.
That average lease term is squarely in line with our long-term run rate.
Further, 32% of our leasing activity this quarter was new and expansion leasing.
I'm also pleased to report that rent growth remained exceptionally strong with second generation net rents increasing 20.6% on a cash basis, a level not seen since 2015.
This was driven primarily by continued excellent rent growth in Austin.
Net effective rents for the quarter came in at $25.43 per square foot, even higher than in the first quarter.
We also ended the second quarter at 92.5% leased with in-place gross rents posting another company record of $39.48 per square foot.
Finally, our same property portfolio leased percentage came in at a solid 94.4%.
We view these as fantastic results in light of current economic conditions.
I described the market backdrop last quarter as one of distinct uncertainty and while it is no longer quite as acute, significant uncertainty remains.
With new COVID-19 cases continuing at elevated levels, especially in the Sun Belt, leasing activity is considerably subdued and our pipeline of new leasing activity has been on the decline.
Rest assured, we are approaching all new leasing opportunities aggressively and there are some out there.
But we still expect most of our activity in the coming quarters will likely fall into the renewal category.
You will recall that our second quarter leasing activity did include the previously announced 74,000 square foot new lease with DLA Piper at Colorado Tower in Austin.
As I mentioned last quarter, this global law firm will occupy space currently leased by Parsley Energy with planned phased commitment starting early next year.
Our second quarter activity also included significant long-term renewals of a 112,000 square foot customer at The Domain in Austin and a 42,000 square foot customer at the Pointe in Tampa.
Now for some more general leasing market observations.
First, we still see leasing decisions being delayed more often than canceled all together.
The fact is most corporate real estate decision makers are still in an observation mode, evaluating their post-COVID real estate strategy and trying to determine what that might mean for existing and future requirements.
We expect this dynamic to continue at least through this year, but we are also hopeful that that will lead to some level of pent-up demand when the recovery begins.
Second it is still too early to identify any reliable price discovery trends in the leasing markets.
Transaction volume is simply too low and highly situational.
However, it is worth noting that quoted or face rents have yet to experience much pressure with most negotiations instead focusing on lower net effective rents through increased concessions.
With that said, face rates will almost certainly be impacted negatively over time with the magnitude of the impact likely correlated with the ultimate duration of the pandemic.
Third, while still at relatively benign levels compared to the past, we are seeing an uptick in sublease listings across some of our markets.
This is an expected and reliable leading indicator of the health of the office leasing markets.
In our view the CBD of Austin has seen the largest nominal amount of new subleased listings of any of our target submarkets.
Given the amount of new construction set to deliver over the next couple of years in the Austin CBD, we are watching this submarket particularly closely.
With that said, Austin was one of the first markets to emerge from the last downturn and we are confident that this will be the case once again.
Austin is a highly appealing metro area that will continue to attract great talent and businesses fleeing from areas such as California, the Northwest and the Northeast.
A prime example is Tesla's recent decision to build its newest auto assembly plant near Austin.
While this is obviously not an office requirement, the overall economic impact of this plant will be very positive for the Austin market as a whole.
On a similar note, we are also thrilled with Microsoft's recent decision to lease over 500,000 square feet in a new project in Midtown Atlanta, adding 1,500 new technology jobs in our hometown.
Like last quarter, I want to offer some insights into the condition of our current business activity beyond market conditions and leasing.
First, I'll cover rent collections.
In May, like many, we expressed concern about whether collections would become more challenging over time.
I'm very pleased to say the collections have remained solid.
97% of our customers overall paid rent during the second quarter and the collection rate among our traditional office customers was 98%.
Further 100% of our top 20 customers paid rent in the second quarter.
As of today, 98% of our customers overall have paid July rent charges.
Please note that these numbers reflect the impact of rent deferral agreements completed to date.
These numbers are very heartening and we continue to attribute them to high-quality customers and great teamwork.
As noted, last quarter we received requests for rent relief from the majority of our retailer and flexible office provider population and from a much lower share of our traditional office customers.
The team has done a fantastic job evaluating each request on its merits and negotiating relief where we deemed it appropriate.
The total cash rent deferred to date stands at $7.5 million or 1.1% of our annualized contractual gross rents.
While the volume of requests for rent relief has declined significantly relative to April and May, we do expect some deferral activity to continue until the pandemic has dissipated.
This activity is inherently hard to predict, but we view the highest risk customer segments to be our retailers and flexible office providers.
As a reminder, those two segments only represent 1.7% and 1.9% of our overall operating portfolio respectively.
Finally, I would like to touch on property operations.
Throughout this pandemic all of our properties have remained open to customers with common sense adjustments to our security, access, visitor and cleaning protocols.
Despite being open, the physical occupancy of our properties is currently only at about 15% on average with usage of our parking facilities at similarly low levels.
Gregg will touch on the financial impact of this lower parking utilization in a minute.
During the quarter, our operations team finalized, communicated and implemented a comprehensive plan for the anticipated return of our customers to the office.
The team has done a fantastic job preparing for this process at difficult operating conditions and I could not be prouder of what they've accomplished.
With that I will now hand it off to Gregg.
All things considered, second quarter results were solid and they were in line with the information we provided in April.
Looking specifically at our same-property performance, cash net operating income during the second quarter declined 1.6% compared to last year.
This was driven by a 4% decline in revenues and a 7.8% decline in expenses.
As Richard discussed earlier, we modified leases for certain customers to provide for temporary payment deferrals.
Adjusting for the impact of these deferrals, cash net operating income declined 0.1% during the second quarter.
Beyond lease deferrals, the largest item driving our same-property performance is the physical occupancy within our buildings which remains significantly below pre-pandemic levels.
Fewer customers coming to the office mean fewer cars and as a result, same-property parking income was down 30% compared to last year's second quarter.
This is comprised of a 12% decline in contractual parking and a 76% decline in transient parking.
Adjusting for the impact of both rent deferrals and reduced parking income, same property cash NOI was up 3.7% during the second quarter.
For the balance of the year we anticipate cash same-property performance will likely stay negative, potentially troughing in the third quarter.
In addition to continued rent deferrals and reduced parking demand, we are seeing some opportunities to execute lease extensions with existing customers that could pull forward free rent, which would impact cash NOI.
However, we believe these opportunities are positive long-term real estate decisions.
Before moving to external activities, I did want to touch on customer receivables.
During the second quarter FFO was reduced by approximately $400,000 due to a combination of rent write-offs and an increase in our allowance for uncollectible rents.
The comparable number for the first quarter was approximately $500,000.
These numbers are tied to specific customers and leases.
No general COVID-19 reserve has been taken to date.
To put these numbers in perspective, charges related to collectability averaged approximately $170,000 per quarter during 2019.
Turning to external activities.
We closed one acquisition during the second quarter, the purchase of 1,550 space parking deck in Uptown Charlotte for $85 million.
We also closed a one-year extension of the existing construction loan on our Carolina Square property in North Carolina during the second quarter.
Not only did we extend the maturity of this loan, we also reduced the interest spread from 190 basis points to 125 basis points and eliminated our repayment guarantee.
With this extension we've no further debt maturities for the remainder of 2020.
Looking at the balance sheet, we entered this period of volatility with exceptional financial strength, among the very best of our office peers.
Not only do we have low leverage, our liquidity position of over $1 billion at the end of the quarter represented over 15% of our total market cap at quarter-end and is more than enough to fund the remaining $160 million necessary to complete our current development pipeline.
Looking forward, our 2020 outlook remains generally in line with the information we gave in our previous earnings call in April.
Assumptions around the impact of COVID-19 on speculative leasing and rent deferrals remains within the ranges we provided.
First, we currently anticipate the parking deck that we purchased in early May to generate net operating income of between $1.5 million and $2 million during calendar year 2020.
To be clear, this is a pro-rata number and represents just under eight months of our ownership.
It's not an annualized number.
In addition, this number is not a stabilized figure.
It reflects our current belief that the physical occupancy of our buildings and the commensurate parking income will continue to be significantly impacted by the COVID-19 pandemic through the end of 2020.
We anticipate the annual stabilized NOI on this parking deck to be between $4.5 million and $5 million going forward.
Second, we continue to take a hard look at our general and administrative expenses.
Prior to COVID-19, our G&A load was already exceptionally low and we have taken steps to reduce it even further.
Our current 2020 forecast assumes corporate G&A expenses net of capitalized salaries of between $27 million and $29 million.
On both an absolute basis and as a percentage of enterprise value this range represents a very low cost to our shareholders.
Third, when we provided information around parking revenues in April, our range was primarily driven by the duration of the pandemic's impact on our portfolio's physical occupancy.
The low end of the range assumed we would start to see an improvement in occupancy beginning early in the third quarter while the high end of the range assumed improvement wouldn't take place until year-end.
As we sit here at the end of July at 15% fiscal occupancy, we clearly need to adjust low end of our range in this metric.
Finally, we have now completed the lease amendment with Parsley Energy at Colorado Tower that we discussed in our last earnings call.
Upon finalization of the accounting treatment, the amendment was deemed a lease modification rather than a termination.
The total earnings impact of the amendment remains unchanged at $2.1 million.
However, it's the timing of that impact that's now spread out over the remaining term of Parsley's retained space.
Specifically, instead of recognizing $2 million as a termination fee in 2020 and an additional termination fee of $100,000 in 2021, we will recognize $300,000 as property level NOI in 2020 and $1.8 million as property NOI over the course of the remaining lease term through mid-2025.
When taken together, we anticipate these four changes will net each other out in our 2020 earnings.
The positive impact of the parking deck purchase of approximately $1.7 million, if you use the midpoint of our guidance, combined with a reduction in G&A of $1 million equals the negative earnings impact of accounting for the Parsley lease as a modification and the commensurate $1.7 million reduction and the adjusted range in parking revenue of $1 million, again at the midpoint.
| cousins properties releases second quarter 2020 results.
cousins properties inc quarterly funds from operations per share was $0.66.
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Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations and there can be no assurance the company's actual future performance will meet management's expectations.
We're happy to have the opportunity to talk with you today.
We're pleased that in the first quarter of fiscal 2021 our operations continue to demonstrate their strength, agility, and ability to progress even during the continuing pandemic.
Specifically, as you can see in Slide 3, in the first quarter revenue was strong driven particularly by the strength and growth of All Access Pass and related sales, gross margins increased by 359 basis points compared to those in last year's strong first quarter, operating SG&A declined by $4.4 million, adjusted EBITDA was $3.7 million versus an expectation of between $2 million and $2.5 million, our net cash provided by operating activities increased 60% [Phonetic] or $4.1 million to $10.9 million, substantially exceeding even the $6.8 million of net cash provided by operating activities in last year's first quarter and we ended the quarter with approximately $49 million of liquidity, up from $42 million at the end of the fiscal year in August and up from $39 million at the start of the pandemic.
So we are pleased with the continued progress in the first quarter and I'd like to discuss the results in more detail in just a moment, but first just thought we'd provide a little context.
In our year-end conference call a little over two months ago, we reported that in our Enterprise Division in North America, which accounts for approximately 70% [Phonetic] of total enterprise sales and where all Access Pass and related sales account for 84% of total sales on the way to 90%, we reported first, as you can see on Slide 4, chart 1A on Slide 4 in the far left hand corner, we expect All Access Pass subscription sale -- that we as expected reported All Access Pass subscription sales had remained strong throughout the pandemic to date, growing 18% in North America for the period March through August and as indicated, we said that we expected All Access Pass subscription sales to continue to be strong through this year's fiscal first quarter and on an ongoing basis thereafter.
Second, as shown in the chart 1B on Slide 4, we said that after the initial disruption of live on-site coaching and training services during the first six weeks of the pandemic, are quick [Phonetic] to delivering training and coaching services live online, a capability we've had for more than a decade, allowed our add-on services to rebound quickly.
We reported that as a result by July, our new bookings of services had returned to essentially the same levels we had achieved in the prior year.
We said that we expected this booking trend to continue in Q1 and beyond.
Third and chart 1C, in our international operations, we reported that despite having had only nationed [Phonetic] All Access Pass subscription businesses in most of our international operations and that's a relatively small base of All Access Pass subscription revenue to cushion them, they had begun to recover.
As we said, we expected these operations to strengthen further as the year progressed and that the accelerated focus on All Access Pass in these offices would over the next few years allow them to achieve a strong base of subscription and related [Technical Issues] achieve revenue retention rates and build up the deferred revenue, similar to that currently being achieved in our North American operations.
And finally, as indicated in 1D, we said that in our education division, which accounts for just under 20% of total sales, we had achieved very high Leader in Me subscription school retention in last fiscal year and that remarkably in the middle of the pandemic, we had also added 300-plus new schools, almost all of which came on during the pandemic.
We said that notwithstanding a continued difficult school environment, we expect that our subscription retentions remain high and even increased in fiscal 2021 and that we expected to add even more new Leader in Me schools in fiscal 2021 than in fiscal '20.
While the environment has continued to be challenging, we're happy to report that as indicated in Slide 5, these positive trends have continued and even accelerated through the first quarter and continue to accelerate in the second quarter.
As shown, 1A All Access Pass subscription sales continued to be very strong in the first quarter and invoiced amounts accelerated even faster building the foundation for future acceleration of actual subscription sales.
Second, All Access Pass related sales rebounded quickly and are now exceeding the levels achieved last year even pre-pandemic.
1C, sales in China, Japan and among our other international offices have continued their strong recovery and finally Leader in Me membership retention from existing Leader in Me schools has been very strong in the first quarter we'll talk about and sales to new schools were off to a very encouraging start.
Diving a little deeper, I'd like to address each of these points so that you have some background and transparency on them.
First, as shown in chart 1A in Slide 6, total company All Access Pass subscription sales grew 16% in the first quarter to $17 million and grew 17% to $65 million for the latest 12 months.
In addition, as also shown in chart 1B in Slide 6, total company All Access Pass amounts invoiced which are added to the balance sheet and which form the basis for accelerated future growth in sales -- oops, we got some paper shuffling in the back here sorry somewhere, increased -- seeing our invoiced amounts increased an extremely strong 55% in the first quarter and even excluding a large government All Access Pass contract, growth was still very -- growth in invoice sales was still a very strong 32%.
This establishes a strong foundation for accelerating future growth.
Importantly, All Access Pass performance was strong across all of the key elements that we look at for All Access Pass, including sales to new logos, which increased substantially both in the first quarter and for the latest 12 months, nine of those 12 months of course took place during the pandemic and still had new logos increase every quarter.
Annual revenue retention, which continued to exceed 90% both for the quarter and for the latest 12 months as you can see in 1C and the sale of multi-year contracts, which as shown in 1D were unbilled deferred revenue related to multi-year contracts grew 19% in Q1 compared to Q1 '20 to $40.5 million.
So we're really pleased that all of the key underlying metrics and drivers were strong.
As shown in chart 1A then on Slide 7, in addition, in North America as previously noted, our almost immediate pivot to booking and delivering coaching and training engagements live online allowed us to continue to meet the needs of our customers remotely and interestingly the flexibility which live online delivery provides has in many cases also resulted in clients expanding the extent of their use of add-on services because they see it so simple to get people together and do it.
As shown, the strong booking trend for add-on services, almost all of which are now being delivered online, which by July had resulted in our booking pace equaling that achieved at the same time in the prior year and then exceeding it by the end of August has continued strong through December.
The increase in bookings, which is a lead measure or predictive measure to this booked, but not yet recognized drove an increase in the lag measure, which is the actual invoiced sale of services having been delivered and both bookings and sales of services have continued to strengthen.
As you can see in the chart one of Slide 7 with the beginning of the pandemic in March, bookings of live on-site services were [Phonetic] necessarily canceled, the stay-at-home restrictions and the year-over-year volume of services followed down with delivered engagements down 6.9 million in North America in the third quarter.
However in the fourth quarter of fiscal 2020, new bookings increased to the level nearly equal to that we'd achieved in the fourth quarter of fiscal '19 and this in turn drove an increase in the dollar volume of services actually delivered.
As a result, instead of being off $6.9 million as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million.
This same positive trend continued in the first quarter with total bookings were up year-over-year and invoice of sales which followed were only off $200,000 compared even to last year's very strong first quarter and when you add in December results for the first four months of fiscal 2021, September through December, actual sales of services delivered exceeded those achieved for the same four-month period last year, which was a very strong period for us last year pre-pandemic.
As shown in chart 1B in Slide 7, it's important that 87% of our clients have now shifted to live online delivery of services.
This is important, with 87% of our clients now having shifted to live online, our susceptibility to the future cancellations has been reduced substantially.
So we're very pleased with the trends continuing here.
Maybe just turn to our international operations.
Second, as you can see in Slide 8, sales in China, Japan, Germany and among our other direct offices and licensee partners in the first quarter improved substantially compared to both the third and fourth quarters.
At the start of the pandemic, we had to reschedule substantially all live on-site training engagements in these countries and since these countries were just starting to sell All Access Pass and therefore did not have a strong base of durable subscription revenue to cushion them, sales in these countries declined to only $4.1 million in the third quarter compared to $12.7 million in the third quarter of fiscal '19.
However, in last year's fourth quarter, while still operating well below the levels achieved in last year's fourth quarter, sequential sales in these countries increased 70% to $7 million from the $4.1 million in sales in this year's third quarter -- in last year's third quarter and we had said we'd expect that our international operation would continue to strengthen in the first quarter and we were pleased that they did.
As shown in the first quarter, international sales were $9.9 million, ahead of our expectation of $9 million and while still below the level achieved last year, this represented an increase of $2.9 million or 41% compared to the $7 million achieved in the fourth quarter and was 2.4 times the amount -- the $4.1 million amount achieved in the third quarter.
Importantly, in addition to the significant recovery in reported sales, our international operations have also seen strong increases in All Access Pass amounts invoiced, which are starting to build the balance of deferred revenue on the balance sheet that will drive sales in these countries in the future.
So we feel good about the direction in these countries and strategically also the acceleration of their shift to All Access Pass.
Finally, as shown in Slide 9, in the Education Division, despite an environment that continues to be very challenging, as we all know, we've seen some strengthening in trends in the first quarter, including one that the number of Leader in Me schools which have renewed or ready to renew their Leader in Me membership contracts has increased to 615 compared to 450 schools at the same time last year.
Second thing is that the number of new Leader in Me schools contracting or in the process of contracting after being down in the fourth quarter and equal to that achieved in last year's first quarter, which was of course pre-pandemic.
And so considering the current education environment, we feel very good and encouraged about these trends in education.
Let me now dive a little deeper into our first quarter performance.
Our adjusted EBITDA for the first quarter was $3.7 million, exceeding our expectation of achieving adjusted EBITDA between $2 million and $2.5 million.
These results are even more notable in light of the fact that last year's first quarter was itself very strong.
Next, as shown on Slide 11, our cash flow and liquidity position were also very strong.
As shown on Slide 11, our net cash generated for the quarter of $532,000 in our -- one of our lowest quarters, was $4.9 million higher than in last year's first quarter.
This reflects almost entirely that our significant growth in new All Access Pass contracts invoiced resulted in our net deferred revenue position not going down as much -- we're pulling stuff off the balance sheet versus what you added on actually improved by $6 million versus the prior year.
As you can see in Slide 12, also our cash flow from operating activities for the first quarter was $10.9 million, which was $4.1 million or 60% [Phonetic] higher than last year's $6.8 million.
This strong cash flow reflects an additional benefit of our subscription business model is that we invoice upfront and collect all of the cash faster than we recognize all of the income and so it actually generates cash faster than it generates income.
As a result, we ended our fiscal year in August with more than $40 million in total liquidity comprised of $27 million of cash and our $15 million revolving credit facility undrawn, an amount that was even higher than we had at the start of the pandemic and we're pleased that we added further to this liquidity during the first quarter and in the first quarter was $49 million of total liquidity comprised of $34 million of cash, which means no net debt and with our $15 million revolving credit facility still undrawn and available.
So we're pleased with the financial position.
This strong performance was driven by, you can see on Slide 13, strong growth -- our revenue growth, our revenue was $48.3 million, was strong and a little bit stronger than we would have thought, driven by -- particularly by our North American operations, which in turn was driven by the performance of All Access Pass.
As you can see in Slide 1A of Slide 14, companywide All Access Pass subscription sales grew 16% in the first quarter and in addition to the All Access Pass subscription revenue actually recognized in the quarter as we talked about and as shown in chart 1B of Slide 14, we also achieved an extremely strong 55% growth in All Access Pass amounts invoiced and as I mentioned, even excluding a large government contract, growth in All Access Pass amounts invoiced was still a very strong 32%.
As you know, most of the significant growth in All Access Pass amounts invoiced was not recognized in the quarter, but was added to the balance sheet as deferred revenue that will be recognized in future quarters accelerating our results in those quarters.
And as noted previously, also these new invoiced amounts included strong sales to new logos, a continued quarterly and latest 12-month revenue retention rate of greater than 19% [Phonetic] as you can see in 1C, the largest number of All Access Pass expansions and shown in 1D, a large volume of multi-year All Access Passes, which increased our unbilled deferred revenue, which of course will flow into sales in future quarters.
All Access Pass add-on sales were also very strong in the first quarter as we mentioned previously, our add-on services booking momentum, which is a lead indicator to actually add-on sales returned to levels equal to the prior year as early as July and our booking pace accelerated beyond that in August and through the first quarter and through December.
This is resulting in a strong booking pace that's resulted also then in strong actual delivered revenue where worldwide these services increased to $9 million, which was a bit above actually even that achieved pre-pandemic in last year's very strong first quarter where we actually saw very significant growth of add-on sales compared to the prior year.
Second, as you can see in Slide 15, All Access Pass drove also strong gross margin growth again in the first quarter.
The gross margin percent was 75.3%, it's up 359 basis points from the 71.7% achieved in the first quarter of fiscal 2020 and up 275 basis points for the latest 12 months.
As a result, our gross margin percentage for the Enterprise Division in the first quarter increased to 80.6% compared to 75.3% in last year's first quarter, an increase of 530 basis points.
You can see our SG&A was lower than last year, it came in at $32.7 million, which was $4.4 million lower than last year's first quarter and finally, the combination of these factors is in adjusted EBITDA as we mentioned before coming in at $3.7 million in the first quarter compared to an expectation of between $2 million and $2.5 million and just $1.3 million lower than in last year's very strong quarter despite the slower recovery in our international operations.
We mentioned again that we had strong invoice in multi-year sales in the first quarter and because most of these sales were not recognized, it built up our balance of deferred revenue, which as you can see in Slide 16, our total balance of billed and unbilled deferred revenue increased to $97.4 million, reflecting growth of $14.7 million or 18% compared to our balance of $82.7 million at the end of last year's first quarter.
As noted, last quarter, I'll just note again, approaching $100 million of deferred revenue -- billed and unbilled deferred revenue is a big landmark for subscription businesses.
This provides significant stability of and visibility into our future performance and this strong combination of factors both reported sales, new bookings, balance sheet improvement, and increases in balance of deferred revenue continues to drive our expectation that we will generate very high rates of growth in adjusted EBITDA and cash flow in 2021 and on an ongoing basis.
As you can see in Slide 17, you've seen this before, we expect to generate adjusted EBITDA of between $20 million and $22 million in fiscal 2021 and we're pleased to be off to a strong start toward this objective.
Achieving $20 million to $22 million in adjusted EBITDA would represent approximately 50% increase in adjusted EBITDA compared to the $14.4 million we achieved in 2020.
Our target is to see adjusted EBITDA then increase by approximately $10 million per year each year thereafter to approximately $30 million in 2022 to approximately $40 million in 2023.
These targets reflect our expectation that we will achieve at least high-single digit revenue growth each year, growth that's approximately $20 million per year of revenue growth.
Then on average approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow reflecting our high gross margins -- strong gross margins and variable selling costs.
We fully expect to achieve an adjusted EBITDA to sales margin of 20% in the coming years and really to become a $1 billion market cap company in the coming years even at an adjusted EBITDA multiple that's conservative relative to our adjusted EBITDA growth rate and without relying on multiples of revenue, which we should increasingly be able to garner.
Looking forward, I'd now like to address the three factors that we expect to drive us toward the achieving of these strong objectives and of our being a consistently we hope and expect high adjusted EBITDA growth, high cash flow growth company.
On move navigation Slide in 18, those three points are the three drivers.
Growth driver number one is the strength of the All Access Pass economic engine, which we've talked about.
Growth driver number two is that we are making significant ongoing investments in areas that are our customers value most and in which we already have significant competitive advantages.
And third is actually the strength of our organization and leadership in our teams throughout the world.
Shown in Slide 19, growth driver number one is the strength of the All Access Pass economic engine.
In Slide 20, you see the All Access Pass and related sales have driven the vast majority of our growth in revenue and adjusted EBITDA over the past five years.
You can see since 2015, annual All Access Pass and related sales have grown from really nothing to more than $90 million through fiscal year 2020 reflecting a huge compounded average growth rate and average absolute All Access Pass and related revenue growth of between $10 million and $20 million each year.
This growth in All Access Pass and related sales has generated the vast majority of the total revenue growth for the company overall during these years and in almost every individual year more than offsetting the early run-off of our legacy facilitator and onsite businesses which are now largely behind us with 84% of our revenue now in Enterprise Division in North America coming from All Access Pass and related.
Second, as you can see in Slide 21, in the first quarter, companywide All Access Pass subscription sales grew $2.3 million or 16% compared to the same period and for the latest 12 months, including nine months of the pandemic from March to November, All Access Pass subscription sales still grew 17% compared to the same nine-month period a year ago or latest 12 months a year ago.
Again, as shown in chart 1A of Slide 22, we've noted this that All Access Pass sales grew, the add-on services grew and that importantly our amounts invoiced of new sales that are put on the books grew 55%, including a large government All Access Pass contract but even excluding that, still grew 32% or $3.4 million.
The other thing about All Access Pass that's really driving it is shown in Slide 23 that's compelling business model economics.
As you can see, it's driving strong gross margins, it's high revenue retention is allowing us to reduce our operating SG&A as a percentage of revenues, so it is reducing operating costs.
That's giving us a high flow through with a combination of strong gross margins and declining operating costs as a percentage of sales, it is expected to allow approximately 50% of incremental revenue growth to flow through the increases in adjusted EBITDA and cash flow and then in terms of the visibility and predictability, the large and growing balance of billed and unbilled deferred revenue, which is approaching $100 million as we talked about and then also the predictability of the All Access Pass is key operating metrics including annual revenue retention of where the 90%.
The fact that more than a third of All Access Passes are entering into -- holders are entering into multi-year contracts and that our add-on services, which we've now proven to be extremely durable average 45%.
All of this we believe gives us significant durability, visibility, and predictability.
Growth driver number two is the ongoing investments we're making in areas where we're already strong.
We're making significant investments behind the things that are actually distinct and competitive advantages and these are the things our customers value most.
I just say that All Access Pass is not just another typical as we say all-you-can-eat subscription service providing unlimited access to large amounts of undifferentiated skills content, rather All Access Pass is a subscription service I'd say with a punch or as illustrated in 25 really four powerful strategic punches.
Franklin Covey is purposely and systematically built a strategic mat to establish best-in-class competitive moats in each of the following four areas that are important to our customers.
As you can see in Slide 26, moat number one is having the best-in-class solutions to our clients' highest impact must-win opportunities and challenges.
At any given time, most organizations have several high impact opportunities which if achieved or challenges which overcome, will have a significantly disproportionate positive impact -- a disproportionately positive impact on the organizational result.
These opportunities and challenges include things like successfully and systematically implementing a new or refined strategy.
Number two, getting an entire organization to nimbly adjust to necessary change as we've all had this past year.
Third, achieving a major non-linear operational breakthrough such as increasing sales performance or improving customer experience.
Four, establishing the foundation for winning and engaging culture.
Five, developing leaders at all levels -- leaders who as Eisenhower suggested get people to want to do the things that must be done.
And so while the rewards for achieving organizational breakthroughs in these areas can be truly significant, even great organizations often struggle to consistently address and achieve them.
These are challenges which can't be solved just by letting people search through a content library and pick topics interesting to them rather achieving breakthroughs in these areas requires collective organizational and behavioral change at scale.
When you step back from this, you recognize that there are certain things like strategic consulting that can have a big impact that are just not very scalable, it doesn't get behavioral change.
As you can see in Slide 20 -- well you can see in Slide 25 some of those solutions.
As you can see in Slide 27, our best-in-class solutions include a bunch of great solutions including four disciplines of execution, the speed of trust, four essential roles of leaders, multipliers and a wide variety of other offerings including our two most recent best-selling solutions, Six Critical Practices for Leading a Team and Overcoming Unconscious Bias to Unleash Potential.
And of course, these are in addition to our historical strong things -- solutions like Leader in Me in Education, and 7 Habits of Highly Effective people, both of which continue to set all-time usage records, even though they're now a minority of our offerings.
But even with this very strong collection of best-in-class solutions we're making ongoing investments in new contents, tend to end solutions, including a new change management solution, new leadership offerings.
Let me just refer you to in Slide 20, I've got something, it looks good with numbering from one of these slides, but were also the flexibility, as you can see in Slide 27, is also a big competitive moat for us because having best-in-class solutions for our clients biggest opportunities and toughest problems is critical.
However, they've also got to be able to deliver that and access it flexibly.
So we've made significant ongoing investments in technology, portals, digital learning, assessments, microlearning, coaching, and the latest instructional design investments, sorry.
We now got flexibility across a wide variety of modalities including digital, microlearning, live online, live on site, coaching, or any combination of thereof in almost any segment of time, which you see on Slide 27, on any device in more than 20 languages worldwide.
With digital live online or live coaching and other services available to support them.
And as a result, again, as shown on Slide 30 -- Slide 30, All Access Pass related sales jumped as a result they've increased from zero to more than $90 million, latest 12 months, some of the revenue retention has been high, at more than 90%.
More than 35% of Pass holding clients are signing multi-year contracts.
Our average Pass size has grown from 29,800 to 40,000 in the latest 12 months.
And again, our balance of billed and unbilled deferred revenue is really significant.
Maybe looking at Slide 31, which is the third puzzle piece, you can see in Slide 32, Franklin Covey has built a direct sales force of 247 client partners or sales associates in the US and Canada and in China, Japan, Australia, and in the UK, Ireland, Germany, Austria and Switzerland.
In addition, we expect to add 20 net new client partners this fiscal year to the 247 client partners we had at the end of Q1.
And Paul, let me turn the time to you to maybe talk about are also the licensee network that we've built and the other strategic moats that we have.
If you -- as you look there on slide -- if we go to Slide 33, in addition to a growing number of client partners who continue to ramp at/or above our expectations, which they themselves represent a great revenue driver for us as company, but on Slide 33, we've also built a network of approximately 80 international licensee partner offices, which cover most of the countries in the world.
These partner offices generate gross revenues of approximately $50 million and they pay Franklin Covey a royalty that's equal to about 15% of these revenues.
These licensee partner offices are strategically very important to us, not only do they work to penetrate their local market, but they also provide services to global clients with local offices.
And so this allows for example, a global client in Germany who buys an All Access Pass to roll out that solution in many countries around the world and have access to All Access support resources in just about any country that they might be operating in.
And then as shown in Slide 34, the fourth strategic moat is the power reach and influence of Franklin Covey's industry leading thought leadership.
Our years of investment in research and development and our thought leadership partnerships, not only result in solutions that provide enormous value for clients, but they create a large treasure trove of research and case studies that we used to broaden our thought leadership.
As shown in Slide 35, Franklin Covey and its key thought leaders publish what often become best sellers, which present the principles and solutions to help our clients.
Our key thought leaders in each solution area also write white papers and articles, they contribute to publications, they deliver podcast and webinars, and they speak some of the world's most influential events.
Franklin Covey's industry leading thought leadership includes best-selling books as well.
And to date we've sold more than 50 million copies of books worldwide in more than 50 -- in over 50 languages.
And to put that 50 million number in perspective, the number of books that we've sold as part of our thought leadership strategy is greater than the amount sold by a large number of our top competitors combined.
To achieve best seller status, a book typically needs to sell a little over 250,000 copies and so to reach 50 million copies sold and still counting is unprecedented in the industry.
These books, typically achieve best seller status, not only in the US and Canada, but also in other countries throughout the world.
And in addition, our practice and thought leaders regularly publish articles and podcasts in a variety of publications and outlets and speak at client events and on the World Business Forum stage.
This strong thought leadership helps to establish our position as a partner of choice for organizations that are truly seeking best-in-class solutions around the world and at scale.
And so Bob, you could talk about growth driver number three?
In fact Paul, why don't you just go ahead and talk about the strength of our organization.
Most of these people have grown up through use.
Yeah, see the navigation slide there, 36.
So speaking about the strength of our organization.
This is really kind of our third growth driver.
And ours is a culture where our leaders are experienced and trusted.
Our processes are disciplined and strong, and our team members are really highly engaged.
Most organizations correctly attribute their success to the strength of their people and they're correct in doing so.
However, with the opportunity of having a front-row seat deep inside the operations of thousands of organizations with whom we work, we know that Franklin Covey's organization, our leaders, and processes, and our culture are extremely strong, in fact they are among the strongest that we see.
As to our leaders being highly trusted, in our recent Annual Employee Engagement and Culture survey all of Franklin Covey associate where asked to rate on a zero to 10 scale, with 10 being the highest, how likely they would be to recommend their Leader or manager as someone to work for.
And you can see on Slide 37, 94% rated their leader 7 or above and 83% rated their Leader at 9 or a 10 on that question.
And this even in the middle of the pandemic when leaders are being stretched or required to deal with a number of additional challenges.
As to our process being strong, we do a lot of work with organizations as I mentioned earlier, helping them institutionalize their ability to execute on their key priorities.
We know that every organization has pockets of great performance and we know that every organization has variability in that performance.
What differentiates the great performers from lesser performers is the extent of that variability.
You can see a little diagram of this in Slide 38, top performers performance distribution curve is simply righter and tighter than that of their lesser performing counterparts.
In other words, on average their performance is better and there is less variability among their units.
This institutionalization of great results requires strong and consistent processes.
We've implemented the same strong execution processes throughout our own operations.
We use the four disciplines of execution as an example.
And we're pleased that as a result of our strong leaders and strong processes our leaders performance distribution curve is very right and tight.
Illustrative of their strong execution that as shown, you'll see on Slide 39.
In the first quarter, 12 of our 15 Managing Director, so each country has a Managing Director and in United States, we have 10 -- United in Canada, we have in hand and they lead our great sales teams, but each -- 12 of our 15 Managing Directors met or exceeded their quarterly revenue objective in Q1.
And the other three leaders who missed their goal, missed by an aggregate of only 1.3% of the total direct office sales goal.
And collectively, the group, all 15 exceeded their revenue goal.
In addition, as you can see there on the right of this slide 14 of the 15 Managing Directors met their EBITDA goal, with the one who missed missing by only $50,000 and collectively of course, this group exceeded -- they actually exceeded EBITDA by about $1 million collectively.
And finally, to the engagement of our associates around the world is shown in Slide 40, again on the same recent culture survey that we conducted.
Franklin Covey associates were asked to rate on a zero to 10, with 10 being the highest again, how likely they would be to recommend Franklin Covey has a great place to work.
Somebody that they would want to invite their friends and people that they know to come in and join.
And we're pleased that 92% of employees gave a rating of 7 or higher and 69% gave a rating of a 9 or a 10.
We have just a phenomenal group of associates around the world.
We're so grateful for their efforts.
They are tireless workers and not only do they bring a tremendous amount of energy and passion.
This is a group that execute very, very well and I think you see that in the results we've talked about today.
So Bob, I'll turn to you for any comments and I think you want to move on to guidance probably.
Yeah, so stepping back from it, we feel very -- we all wish were in the pandemic, but we are grateful pandemics proven that the solutions that we have are really valued by our clients.
The business model and subscription version of this has been extremely strong and positive.
Our teams who could have just hunkered down in the tent with avalanches coming down and it didn't, they got out of their tents and started climbing back up.
And regain traction very quickly and so we're really pleased and grateful to be where we are with strong people, strong teams strong offerings, the financial resources to continue to make good investments and significant liquidity to cushion us.
And with that, I'd like to ask Steve Young to review our outlook and guidance.
I enjoyed hearing about the business and I'm also very excited about where we are in the direction that we're going.
Pleased to talk a little bit about guidance and target.
So our guidance for FY '21 as discussed last quarter is that we expect to generate adjusted EBITDA of between $20 million and $22 million.
This result would be approximately 50% increase in adjusted EBITDA compared to the $14.3 million of adjusted EBITDA achieved last year.
This expected growth reflects everything that Bob and Paul have talked about including the continued strong performance of our North America operations, our All Access Pass, and other things.
Underpinning this guidance for the year are the following expectations that we talked about last quarter and are consistent with our first quarter results.
First, the recognition to sales during FY '21 of more than $60.6 million of deferred revenue already on the balance sheet at the end of last year and the recognition of a portion of the $39.6 million of unbilled deferred revenue which we had contracted.
These balances provided and provide significant visibility into our revenue and gross margin for FY '21.
Second, in addition to the recognition of deferred revenue, the factor which is expected to have the greatest impact on our FY '21 result is also a factor in which we have high confidence that is the strength of All Access Pass and related sales.
We expect that All Access Pass will continue to achieve strong growth in both sales and invoiced amounts, will achieve high revenue retention rates, strong sales of new logos and continued growth in Pass expansion and multi-year contracts.
We also expect that All Access Pass add-on sales will continue to be strong.
Driven by this in FY '21, we expect our operations in the US and Canada, including government to achieve an adjusted EBITDA contribution level higher than in FY '19 and even somewhat higher than we had originally expected to achieve in FY '20.
So the third underpinning of our guidance.
We expect that our revenue in Japan, China, and among our licensees will continue to strengthen.
The increase in All Access Pass, which we expect to achieve in these countries will of course result in a portion of the new sales being added to the balance sheet as deferred revenue.
And the fourth underpinning of guidance in education, we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools.
In addition, despite the fact that we could continue to be in a challenging and budget constrained environment for education in the remainder of FY '21, we still expect to achieve growth in the number of new Leader in Me school that we had this year compared to the number we added last year.
So affirming our annual guidance and we feel comfortable with that.
For our second quarter of this year, we expect that adjusted EBITDA will be between $1 million and $1.5 million compared to $4.1 million in adjusted EBITDA in last years very strong second quarter and still reflecting the expected strong performance of All Access Pass in the US, Canada and government and the same general expectations just outlined for international operations and education.
Please remember the last quarter we did say we expected Q2 this year to be less than the very strong Q2 last year.
Please also remember that our second quarter is typically been the lowest adjusted EBITDA, EBITDA quarter of the year due primarily to the holiday season.
And please also remember that even $1 million of adjusted EBITDA in Q2 would be more than the second quarter result in FY '18 or the second quarter results in FY '19.
Our second quarter result last year was just a very strong second quarter representing the momentum that we had and talked about at the time and are beginning to see again.
So that's guidance now.
Just a couple of thoughts related to general targets for the coming years and repeating a lot of what Bob said, building on our $20 million to $22 million of adjusted EBITDA, we expect to achieve this year and driven substantially by the expected continued growth in All Access Pass, our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY '22 and around $40 million in FY '23.
These targets reflect our expectation of being able to achieve as Bob talked about high-single digit revenue growth of around $20 million, 50% [Phonetic] revenue to adjusted EBITDA.
So those are our targets.
While changes in the World business outcome and many other factors could impact our expectation, we want to share these as our current internal targets and our assumptions and expectations.
We also wanted to share, again like we did last quarter, in order for the executive team to receive full long-term incentive pay, we need to achieve those targets.
So that's our guidance and a few thoughts about coming years.
| q1 sales $48.3 million versus refinitiv ibes estimate of $48 million.
affirms its previously announced guidance.
|
These types of statements are subject to various known and unknown risks, uncertainties, assumptions and other factors, including those described in MFA's annual report on Form 10-K for the year ended December 31, 2019 and other reports that it may file from time to time with the Securities and Exchange Commission.
Little did I know that I would have to compete for airtime with Chairman Powell who is testifying in the Senate at 10:00 AM.
I apologize for those of you who drew the short straw and get stuck on our call.
Before we begin, I want to give a shout out to our entire MFA team.
The last three months have obviously been extremely challenging and made exponentially more so by the fact that all of our efforts have been remote.
The Company fully implemented our business continuity plan during the third week of March and successfully completely transitioned to our remote work environment to address the operating risks associated with the global COVID-19 pandemic.
The effort and commitment displayed by our entire team over the last three months has been extraordinary and I've been humbled by their dedication.
Before we discuss the first quarter of 2020 financial results, which frankly at this point seems like ancient history, I'd like to spend some time discussing what other important work streams have been taking place at MFA since March 23 and I think it will be obvious why we've been silent on so many of these activities.
These critical efforts have been comprised primarily of three things.
One, forbearance; two, balance sheet and liquidity management; and three, sourcing third-party capital.
As arduous that these forbearance agreements have been to negotiate and operate through, they have provided us with the time to manage our balance sheet and liquidity while also working to source third-party capital and we are grateful to our lending counterparties that stuck with us through three versions of forbearance plans.
During April and May, we significantly reduced our balance sheet in an effort to raise liquidity and delever.
Importantly, because we entered into these forbearance plans, we were able to manage our balance sheet in a more judicious fashion, given the time allowed through forbearance.
Many of our asset sales, particularly on mortgage-backed securities, were at prices significantly higher than the price levels that existed in late-March.
Our sales during the month of April alone of legacy non-agencies, CRTs, and MSR-related assets generated over $150 million of realized gains versus March 31 marks.
Now, while still down significantly from values at the end of February, the patience permitted through forbearance enabled us to work hard to lessen book value erosion.
We were also able to manage the sale of a large non-QM whole loan portfolio that traded in late-April and closed in mid-May.
While we realized a significant loss on the sale, we are confident that we achieved a much better execution by controlling and managing the trade than we would have realized had the lender just liquidated the pool.
In the end, all of our lenders will have been fully repaid with no deficiencies, which is another of the design goals of the forbearance plan.
It was clear to us in late March that our situation was not due to bad assets, but the fragile funding and the path forward would require more durable forms of financing.
We also recognize that term financing, margin holiday and/or non-mark-to-market financing would necessarily require higher haircuts and therefore more capital.
Our method for seeking third-party capital began somewhat passively during the last week of March with fielding incoming indications of interest.
As this process intensified with more and more parties together with negotiating NDAs and then responding to voluminous data requests, all the while with our hair on fire negotiating a forbearance agreement while managing our balance sheet and liquidity and we engaged Houlihan Lokey at the end of March to manage this process for us.
Initial indications of interest from a number of capital providers came back in mid-April, but as we continue to delever and raise liquidity, it became evident that our third-party capital needs have already changed.
We extended our initial forbearance agreement at the end of April to June 1 and as we entered May, we began to obtain better price discovery, particularly on our loan portfolio, which gave us more clarity as to our path forward.
We started a second round of proposals from third-party capital providers in mid-May.
And as we held due diligence and informational calls with many of these institutions, we found that there was a competitive dynamic at work and a keen interest in pursuing a transaction with MFA.
We signed a term sheet over Memorial Day weekend and have been working since to negotiate and document this agreement.
For obvious reasons, we could not communicate publicly about these activities and it was frustrating not to be able to provide the public disclosure and transparency on which we pride ourselves.
We signed these agreements last night and we're happy to announce today that we have entered into an agreement with Apollo and Athene, an insurance company affiliate of Apollo, to raise $500 million in the form of a senior secured note.
But this $500 million note is only part of a holistic solution for MFA and a very strategic partnership with Apollo and Athene.
Apollo and Athene together have arranged a committed term borrowing facility with Barclays of approximately $1.65 billion that includes over $500 million for participation from Athene.
This term non-mark-to-market facility will provide us with durable financing for a large portion of our loan portfolio.
In addition, Athene has committed to purchase, subject to certain pricing conditions, a portion of our first securitization of non-QM loans.
And finally, Apollo and Athene are engaged with another of our lenders to structure an additional similar lending facility for our fix and flip portfolio in which Athene also intends to participate.
Pro forma for these facilities, approximately 60% of the Company's financing will be in the form of non-mark-to-market funding, providing shareholders with significant downside protection in the event of future market volatility.
We expect that upon closing and funding of these transactions, we'll be able to satisfy remaining margin calls, which were only $32 million as of June 12 and exit from the current forbearance agreement on or before June 26.
We also anticipate using some of the proceeds to pay accumulated unpaid dividends on our Series B and C preferred stock issues.
And finally, we expect that this transaction will provide us with substantial capital to once again begin to pursue attractive investment opportunities.
As part of this transaction, Apollo and Athene will receive warrants to purchase MFA common stock at varying prices over a five-year period and will appoint a non-voting observer to our Board of Directors.
Apollo and Athene have also committed to purchase the lesser of 4.9% or $50 million of MFA stock in the open market over the next 12 months.
We are extremely excited about this transaction, which we consider to be much more than a capital raise and very much a strategic alliance.
Moving on to the financial results for the first quarter of 2020.
As others have described before us, the first quarter of 2020 was literally a tale of two distinct and utterly different periods in time.
January, February and the first two weeks of March were very normal and a good start to the new year.
And in only a few days, the financial markets and the mortgage market in particular completely collapsed.
With the onset of the COVID-19 pandemic, pricing dislocations for markets and residential mortgage assets was so extreme that liquidity evaporated.
Prices of legacy non-agencies, which had not changed by more than 3 points in the last two to three years, were suddenly lower by 20 points.
CRT securities dropped as much as 20 points to 50 points and MSR-related asset prices were lower by 20 points to 30 points, all in a few days.
MFA received almost $800 million in margin calls during the weeks of March 16 and March 23 and over $600 million of these were on mortgage-backed securities.
In contrast, we received $7 million of margin calls on these portfolios during the entire week of March 2 and $37 million during the week of March 9.
And during the months of December, January, and February, we received a total of six margin calls, all related to factor changes with a total aggregate amount of $4 million.
During those same three months, we initiated 10 reverse margin calls totaling $14 million, meaning we received net $10 million more from our lenders due to price increases.
While we began selling assets during the week of March 16, the dearth of liquidity made this difficult.
We announced on March 24 that we had not met margin calls on March 23 and that we had initiated forbearance discussions with our financing counterparties.
As we began these negotiations, we continued to sell assets to raise liquidity and reduce leverage.
Our first quarter financial results were profoundly affected by realized losses, impairment losses, unrealized losses on loans accounted for at fair value, provisions for credit losses under the new CECL standard and valuation adjustments on assets designated and held-for-sale and resulted in a loss of $914 million or $2.02 per share.
Book value decreased to $4.34 per share at March 31 and economic book value decreased to $4.09 per share.
Steve Yarad will be available to discuss the financial results from the first quarter during the question-and-answer session.
I would now like to spend some time discussing balance sheet changes since March 31 and provide some perspective on what we envision after funding of the Apollo and Athene transaction and exit from forbearance.
Page 7 of the earnings deck shows portfolio activity from December 31 to March 31 and then again from March 31 to May 31.
As you can see from the pie charts, we have sold substantially all of our mortgage-backed securities and our $6.6 billion portfolio is approximately 94% whole loans.
This should not be a surprise as almost all of our portfolio growth and new acquisitions over the last two to three years has been in whole loans.
Mortgage-backed securities are admittedly more liquid and were therefore easier to sell, but we saw improvement in securities pricing through April and May whereas loan pricing changes were less defined and slower to occur, both on the way down and on the way back up.
More importantly, it is more difficult to get non-market -- non-mark-to-market financing on mortgage-backed securities than it is on loans due to certain regulatory issues.
So, the decision was relatively easy.
We view loans as generally more attractive assets and -- than securities and loans are more conducive to more durable financing arrangements.
In rough numbers, our whole loan portfolio today is comprised of non-QM loans, $2.4 billion, loans at fair value, $1.2 billion, fix and flip loans, $850 million, purchase credit impaired or reperforming loans, $660 million, single family rental, $500 million, season performing loans, $150 million, and REO or real estate owned of $375 million.
Looking forward, we will finance a significant portion of this portfolio through term non-mark-to-market financing, including securitization.
With the committed $1.65 billion in our existing securitizations of approximately $500 million, we will have over $2 billion of such financing.
And as mentioned previously, we are working on a similar committed line with Athene and another dealer for our fix and flip portfolio.
We will continue to pursue securitization, particularly for non-QM loans.
Spreads for AAA securities widened out from the 100 area, that's 100 over swaps in early March to as wide as plus 400 at the depth of the crisis, but they've been slowly grinding tighter and are now back to mid-100 levels.
We expect that following the closing and funding of these transactions, we will be able to declare and pay the accumulated dividends on our Series B and Series C preferred stock issues.
As we have disclosed previously, the terms of the forbearance agreement prohibited payments of dividends on any equity interests, including preferred stock.
Once the preferred stock dividends are current, we will no longer be prohibited from paying a common dividend.
As far as the dividend on MFA's common stock, the Board of Directors will determine our dividend policy going forward.
While we do not provide guidance as to expected future dividends, I will share several pertinent facts that will clearly be given consideration in framing dividend discussions with the Board.
One, at present we have undistributed REIT taxable income from 2019 of $0.05 per share.
In order to avoid paying corporate income tax, we are required to declare a dividend for this income prior to filing of our 2019 REIT tax return, which we do in October of this year and pay such dividend before the end of the year.
Two, estimated REIT taxable income or ordinary income for the first quarter of 2020, is approximately $0.10 per share.
In order to avoid paying a 4% excise tax on this amount, we are required to declare dividends in 2020 for at least 85% of our estimated 2020 REIT taxable income.
And three, capital losses, again for tax purposes, generated from sales of residential mortgage assets to date in 2020 are carried forward and offset future capital gains.
However, these capital losses do not offset ordinary REIT taxable income.
While we cannot forecast ordinary REIT taxable income for the balance of 2020, any such income generated will be added to the $0.10 in the first quarter in determining the threshold necessary to avoid the 4% excise tax.
Our other brief update.
At June 12, our unrestricted cash was $242 million.
Book value as of May 31 -- GAAP book value is estimated to have increased by approximately 2% to 3% versus March 31.
Economic book value is estimated to be flat versus March 31.
This is primarily because carrying value loan marks were lower in April than in March and while we have seen some appreciation from April to May, the May loan marks for carrying value loans, which is what determines economic book value for the difference between GAAP and economic book value, those marks are still below the March marks.
| compname posts q1 loss per share of $2.02.
compname announces $500 million capital raise with apollo and athene and $1.65 billion committed term borrowing facility.
q1 loss per share $2.02.
apollo and athene have committed to purchase lesser of 4.9% or $50 million of co's stock in open market over a 12-month period.
|
The fourth quarter showed once again that the global environment remains very dynamic, presenting new challenges that we've learned to turn into long-term opportunities.
Our top line momentum reached 10% or 9% organic in a constrained environment.
Institutional and specialty grew 19%; pest elimination 10%; and industrial remained strong, growing 8% in the quarter, and our new business and innovation pipelines remain really strong.
At the same time, COVID came back during the fall, especially in North America and in Europe.
As we all know, inflation kept rising substantially and still, top line gain momentum, including pricing, which accelerated to 4% as we exited the quarter.
This was required to compensate for significant incremental costs from supply constraints and much high inflation pressure on our raw material and freight costs, discussed by close to 20% in the fourth quarter, nearly double the rate we saw in the third.
And just being close to a total of $1 per share unfavorable impact for the full year with almost half of that in Q4 alone.
So once again, our team demonstrated our commitment to protect our customers' operations at all time and in any condition to ensure food, power, water, and healthcare supply are protected while we also keep enhancing our margins for the long run.
We now enter 2022 with confidence and well aware that the environment might change, but we will keep doing our very best to stay ahead.
We expect the global economy to remain strong even if not as a perfect straight line.
The exact timing for the end of COVID impact remains hard to predict, but we expect it to be mostly behind us by the middle of this year.
We also expect inflation to remain at a high level, at least for the first half of the year, while we expect it to ease during the second half, and we're getting ready for this, too.
We will keep driving growth by fueling the institutional recovery, which is going really well by generating strong new business by investing in our new growth engines like life sciences, data centers, or microelectronics.
And by making sure we remain one of the very best places to work for the most promising and diverse global talent.
We'll keep addressing inflation by further enhancing our productivity through digital automation as we've done over the past few years by leveraging high-margin innovation and naturally by accelerating our value pricing.
For the full year '22, we expect raw materials and freight costs to further increase with inflation remaining high before it eased during the second half of the year.
Our full year pricing expectation for '22 is expected to be in the 5 to 6% range, which combined with our steady productivity work is expected to get ahead of inflation dollar in the first half and enhanced margins in the second half of the year and certainly beyond as the Ecolab model has proven many times.
All these actions should lead to a strong '22 with strong top line and adjusted earnings growth in the low teens for the full year and a first quarter with very healthy sales growth and a flattish earnings per share as pricing keeps building fast.
Finally, as we've done throughout the pandemic and against major market disruptions, we will remain focused on the future.
For us, it's all about delivering long-term value to our customers and to our shareholders, while managing the short term.
Our mission of protecting people and the resources better to life is as important as it's ever been.
Our opportunity has never been larger as we chase a global market that's today greater than $150 billion and growing fast.
We have the confidence that we will look back on this period and truly feel we did the right things the right way by protecting our teams and our customers when they needed us the most and by protecting our company in ways that made Ecolab even stronger and more relevant.
As the infection prevention company, helping customers protect their customers and their businesses with Ecolab Science Certified.
And as the sustainability company, helping our customers progress on the net zero journey, all of which leading to strong top line and consistent, reliable double-digit earnings per share growth.
And ultimately, getting us back on our pre-COVID earnings trajectory.
That concludes our formal remarks.
As a final note, before we begin Q&A, we plan to hold our annual tour of our booth at the National Restaurant Association show in Chicago on Monday, May 23.
If you have any questions, please contact my office.
Operator, would you please begin the question-and-answer period?
| expect covid impacts to remain significant during first half of year.
qtrly net sales $3,364.6 million versus $3,065.3 million.
expect inflation to remain high before it progressively eases during second half of year.
expect these cost impacts to remain especially strong in q1 of 2022, even slightly higher than those experienced in q4.
ecolab - look for q1 to show healthy sales growth and flattish yoy earnings per share comparison impacted by continued high raw material and freight costs.
ecolab - for 2022, believe cost efficiency actions will enable to deliver continued strong sales gains with adjusted earnings per share growth reaching low-teens levels.
|
I'm Christine Marchuska, Vice-President of Investor Relations for Diebold Nixdorf.
Additional information on these factors can be found in the company's periodic and annual filings with the SEC.
Participants should be mindful that subsequent events may render this information to be out of date.
And now I'll hand the call over to Gerrard.
I am pleased to say that customer demand for our solutions remained robust in Q3 despite supply chain constraints, logistics and inflationary headwinds.
I'm encouraged by the support of our customers and the innovative spirit of our workforce as we navigate on-going supply chain challenges.
Most of all, I'm encouraged by how our company is positioned to offer solutions and growth opportunities for our customers who aren't who are addressing rapidly changing consumer demands, and difficult competitive landscapes.
More than ever, consumers are not only embracing, but expecting self service solutions.
Whether it's at a bank, grocery store, or retailer, and more than ever, we are committed to helping our customers deliver more digital, flexible, and effective customer consumer journeys.
In banking, consumer practices are shifting away from the traditional teller window toward ATMs with more omni channel functionality.
At the same time, banks are looking for more self-service options to meet consumer needs, the fewer tellers and fewer branch locations.
There is on-going steps toward reducing the branch footprints, and optimizing the real estate is crucial.
And our ATMs are helping our banking customers to continue providing the same level of customer service, including customer outreach through marketing, while at the same time, making better use of their available space.
In retail, the pandemic resulted in more focused shopping experiences and growth in e-commerce, while at the same time, as cited by recent studies, 75% or more of consumer purchases broadly, are still happening in the physical store.
It's important to understand, however, that while our consumers prefer physical shopping, they also prefer lower touch options during the purchase process.
Our self-checkout offerings create a safe, convenient and lower friction shopping experience, providing self-protection, produce scanning, the market leading camera technology to assist in age restricted purchases.
In short, what we're seeing is that consumers and retailers alike are embracing self-checkouts.
According to RBR, the self-checkout installed base will reach nearly 1.6 million terminals by 2026, almost tripling the global install base as of the end of 2020.
Indeed, we believe automation provides much needed cost efficiencies for the retailer and a more efficient shopping experience for the consumer at the last mile of the store.
We believe the accelerating demand for self service and automation signaled a structural change to the way business will be done going forward and gives us a long runway of opportunity.
I like to now provide remarks around our third quarter performance.
Although demand remain strong in Q3, fulfilment of product orders shifted from Q3 to Q4, and from Q4 to 2022 as we continue to work through supply constraints and logistics challenges.
Our entry continues to exceed our original models, and our backlog increased approximately 19% versus the same period last year.
Revenue for the quarter was down 4% as a portion of revenue has shifted out to future quarters due to the temporary supply constraints and logistics challenges we're currently facing.
Our retail segments continue to perform well, with growth and revenue of 10% as compared to the third quarter of 2020.
Moving on to our business highlights starting with banking.
Momentum for DN Series ATMs continued in Q3 as a great percentage of our total orders for these next generation devices.
And we see this trend continuing based on our orders for Q4 and early 2022.
Additionally, the DN Series is now live and fully certified in over 60 countries globally, contributing to our market expansion in the space.
I like to highlight some notable DN Series wins for the third quarter.
We secured a contract for over $12 million with Banco Azteca in Mexico, including our DN Series cash recyclers, a new service contract and software licenses expanding across 500 branches.
With this win, over 75% of Banco Azteca's fleet is not composed of DN devices.
In Greece, we displace the competitor and doubled our presence at Piraeus Bank.
Approximately 200 branches and 40 off-premise locations will be equipped with a modern technology including our DN Series cash recyclers.
Introduction of cash free cycling is a significant change for this market, which had not previously had recycling capabilities by branching DN's.
We earned this win based on the higher mechanical reliability of our hardware, the higher capacity of our ATMs and on cleaner, more environmentally sustainable profile.
This win also includes a five year maintenance coverage contract.
Lastly, we built a competitive win with Standard Chartered Bank Malaysia, upgrading all of their legacy vices to our DN Series, increasing our fleet to consist of 100% DN Series ATMs. We continue to see growth in demand for our AllConnect Data Engine with a number of connected ATMs, increasing approximately 23% sequentially in Q3 2021.
This is a significant milestone for us as more than 100,000 banking self-service devices are connected to this solution, which leverages real time Internet-of-Things connections from our deployed devices, and has consistently reduced customer downtime, by as much as 50%, resulting in greater than 99% uptime.
This drives multiple business benefits, such as higher end user satisfaction, lower total cost of ownership that increased operational efficiencies.
I'm proud to share that we also were awarded technology and service industry association's 2021 Star Award for best practices in the delivery of field services for our AllConnect Data Engine.
We believe that demand for differentiated market leading solutions that meet the needs of today's consumer will remain solid.
This is especially evident in our robust pipeline, our healthy backlog, the bank successes of our sales team in Q3 and the growth in our AllConnect Data Engine.
Moving on to our retail business, we continue to see strong demand for our self-checkout products as retailers look to be bought next door for comprehensive solutions that provide favorable consumer experiences and cost efficiency as they face staffing challenges and tough performance comparisons.
We secured a competitive takeaway with an Italian retailer to replace their competitor's advices with our DN Series, self-checkout solutions, along with our full self-checkout suite and other offerings from our retailer solution portfolio.
We also expanded an important customer relationship with a large multi country retailer in Europe, which included a competitive takeaway with SCO devices.
This win secures a strategic rollout of self-checkout devices, beginning with two stores before expanding to 300 stores in 13 countries and our eventual full rollout of 2500 stores in 15 countries over the span of two or three years.
Additionally, this retailer signed a three year services and maintenance contract.
We are well positioned for growth in retail services.
In the third quarter, we won a contract renewal with a large global petrol convenience store for the Malaysia sites.
This was a significant renewal totalling over $16 million for our systems and services, including point of sale, helpdesk support, software, and other solutions.
Overall, we feel confidence and the strength of our retail business as our large global retail customers reconfirmed their commitments to their store formats.
While some retailers are considering fewer locations, they all remain focused on increasing the level of automation and technology investment per store.
Additionally, in 2021, we're seeing growth in the absolute number of our self-checkout devices on a year-on-year basis.
And we anticipate that our retail business blend the year above our pre-pandemic levels witnessed in 2019.
Our core portfolio continues to benefit from the industry trends I discussed earlier.
Around consumers' desire for more self-service options and banking retail, resulting in our customer's needs for more automation and greater cost efficiencies.
It also lends itself to layering on additional offerings with large addressable markets, such as managed services, software, our dynamic payments platform and other adjacencies that provided trajectory for sustainable growth for the future of our business.
We are particularly proud of the progress we've made with our retail and banking customers.
We recently received the results from our annual customer satisfaction survey.
And I'm delighted that our customers are awarding us some of the highest levels of net promoter scores we've seen reinforcing what is now been a multi-year trend of improving results.
Turning now to our growth initiatives.
In managed services, we continue to move forward on securing more new business and remain in productive discussions with multiple financial institutions.
We also see a promising pipeline for managed services in 2022.
In Q3 in North America, we were awarded a large managed services agreement with a tier one financial institution, including a large order of DN Series ATMs. We continue to scale our debit and credit platforms, with our Vynamic Payments offering at a top 10 global bank cross more than 17,000 ATMs. As we continue to implement and scale our existing customers for our Payments Platform, our go-to-market team is growing a strong fire fighter [Phonetic] sales pipeline for 2022.
Additionally, I'm pleased to announce our entry into new horizontal electric vehicle charging stations.
This is a natural fit for our services business.
With our global network of 8000 experienced service technicians, and the similarities between ATMs and EV charging stations.
There are an estimated 1.5 to 2 million public charging stations even in the United States and Europe by 2025.
And this is an approximately an increase of over 200% from roughly 500,000 charging stations today split between about 300,000 in Europe, and 200,000 in the U.S.
We are currently in discussions with the top EV charging station private companies that have already secured contracts for our solution with some of the key players in this space.
This is a promising and rapidly growing market.
And we look forward to hearing more on this new offering in future quarters.
Now turning to another important area of our business sustainability.
Not only do we focus on attaining sustainable growth for our shareholders, we also focus on environmental sustainability of our facilities, practices and processes.
I'm proud to say that we were recently awarded Germany's best energy scouts 2021.
The German government initiative that encourages energy saving opportunities.
We installed a green roof, constructed a regional brasses [Phonetic] to improve energy savings at our Paderborn facility.
Additionally, we included a solar panel system and out of 36 charging ports, for cars and e-bikes in parking areas.
We consistently are working on initiatives that drive sustainable programs, with the goal to have no adverse effects or public health for the communities where we operate.
We look to operate our other facilities around the globe in sustainable greenways as part of our focus around environmental, social, and governance commitments.
Looking ahead to Q4, we remain confident in our market leadership, and ability to close out the year strong on a year-over-year basis.
As of today, our owners are 100% confirmed with customers committed to our products.
We see negligible risk of loss sales, with strong strength and demand for America's banking and retail business segments.
Additionally, in Q4 for our banking segments, we are starting this quarter with a backlog of approximately $205 million higher than the beginning of Q4 2020.
Specifically for America's banking, we're seeing over a 50% increase in our backlog as we enter the fourth quarter 2021 as compared to the same time last year.
We're working with all of our customers on a continuous basis to fulfill the high level of orders we're receiving on a timely basis.
As far as focus, we're taking steps to increase our stock of key components as well as pre-booked vessels further advance to accelerate revenue conversion from our backlog.
Furthermore, on a year-over-year basis, our outlook remains robust, as I confirmed orders for the first half of 2022, or above the levels for the first half of 2021 as of this same time last year.
While we continue to see significant opportunity in the markets, and in our ability to meet our customer's needs, we like many global companies for navigating inflationary pressures, and supply chain logistics that continue to impact our business.
As I discussed earlier, delays in delivering or in delivery of our products will cause some revenue to shift to future quarters.
Thus, we are revising our guidance for year-end 2021.
However, I believe it is important to note that we see Q3 broadly, as a peak inflection point in supply chain disruptions.
Our visibility into semiconductor chip markets has increased meaningfully, providing us with a line of sight to many of the two providers through the first half of 2022.
Additionally, they've deployed other strategic tactics internally, such as shifting our production capacity which leaves some of the dependencies we've previously had on logistics and shipping.
I'm extremely proud of the work of our DN team to mitigate these issues.
We are squarely positioned to meet the needs of our customers and expand our base of banks and retailers as consumers continue to demand more access, more convenience, and more innovation through automation and self-service.
Although supply chain challenges have led to a temporary pullback in performance, it's important to understand that we are doing everything possible to mitigate these challenges, and delivering for our customers remains a top priority.
My further remarks will include references to certain non-GAAP metrics such as gross profit, gross margin, and adjusted EBITDA.
Total revenue for the third quarter2021 was $958 million, a decrease over third quarter 2020 of approximately 4% as reported, a decrease of 5% excluding foreign currency benefit of $16 million and an $8 million impact from domestic businesses.
Adjusted for foreign currency and divestitures, product revenue decreased 3%, services revenue decreased 6% and software revenue increased 3% compared to Q3 2020.
During the quarter, approximately $90 million of revenue was delayed due to extended transport times and inbound technology component delays.
This primarily impacted the U.S., Latin America and certain APAC countries and reduced total revenue by approximately 900 basis points.
On a sequential basis, total revenue increased approximately 2%.
Non-GAAP gross profit for the third quarter was $263 million, or a decrease of approximately $22 million versus the prior year period on lower gross margins of 27.4%.
The deferral of revenue and non-billable inflation resulted in a reduction to third quarter gross margin of approximately $33 million.
Service margins increased 40 basis points versus the prior period and more in line with our expectations.
Product gross margins were down approximately 180 basis points versus the prior year period, primarily due to $10 million as a result of inflationary pressures and supply chain logistics, partially offset by a favorable DN Series versus legacy ATM and geographic customer mix.
Software gross margins declined 500 basis points versus the prior year period excluding the impact of a prior year prayer cost benefit of approximately $5 million that did not recur in 2021.
Software gross margins were down approximately 40 basis points due to unfavorable mix.
Operating expense of $182 million for the quarter decreased approximately $14 million versus the prior period, period and decreased $17 million sequentially.
Compared with prior year key variances include reductions in variable compensation, partially offset by unfavorable effects and investment and growth projects.
When compared with our second quarter operating expense decreased due to reductions in variable compensation.
The net result was an operating profit of $81 million and operating margin of 8.5% in the quarter, the same trends drove adjusted EBITDA of $103 million and adjusted EBITDA margin of 10.7% in the quarter.
Now I will discuss our segment highlights.
Eurasia group banking revenue of $323 million decreased approximately 11% versus the prior period and 12% after adjusting for foreign currency benefit of $7 million and a $3 million impact of divestitures.
Lower revenue was primarily due to supply chain delays affecting timing of deliveries and installations of product with collateral impact of services and software and revenue plus the termination of expired service contracts.
As expected, following a strong order entry in Q2 and several non-recurring liabilities in the prior year, segment product order growth decreased 35%.
We are forecasting a strong order entry end of Q4.
Gross profit for the segment decreased to $98 million year-over-year included favorable foreign currency balances of $4 million and an unfavorable divestiture impact of $1 million.
Gross margin at 30.3% was down 50 basis points, the decrease was primarily due to inflationary pressures, offset by our focus on cost management.
Americas banking revenue decreased $22 million, or approximately 6% to $347 million, primarily due to declines in software and services revenue due to the negative collateral impact of unfavorable geographic mix of installations from North America to Latin American.
Americas banking continues to be disproportionately affected due to the location of our customers and our primary manufacturing facilities for DN Series ATMs, which are located in Europe and Asia.
Segment gross profit of $86 million was down $17 million due to lower revenues.
Gross margin percentage declined due to the impact of supply chain inflation and unfavorable geographic mix as previously noted.
Our retail segment had another quarter of strong performance.
Retail revenue of $288 million increased 10% year-over-year as we reported an 8% after adjusting for $6 million currency benefit and investor headwind of $2 million.
Demand for our point-of-sale checkout -- self-checkout continued to increase versus the prior year period with proprietary growth of approximately 23%.
Retail gross profit increased 15% at $79 million driven by revenue growth, gross margin expanded by 110 basis points directly attributable to growth in self-checkout revenue.
As we continue, continue to work to optimize our portfolio and focus our core business segments, we made the decision to enter the share purchase agreement to sell our reverse expanding business with an approximate deal close date targeted for year end.
This business is less than 2% of our total annual retail revenues in order was a strategic fit for the second going forward.
Turning to our capital structure metrics.
Unlevered free cash flow used in the quarter increase $121 million versus the prior year primarily due to increases in inventory, which are necessary to support both Q4 production and delivery targets as well as increases in critical components for 2022 orders.
Company ended the quarter with $325 million of total liquidity, including $230 of cash and short term investments.
The company's cash balance as of September 30th reflects increased inventory levels and interest payments made during the quarter.
At the end of the quarter, the company's leverage ratio was 5.4 times, which continues to be below our covenant maximum of six times.
Turning to our updated outlook for 2021.
We are revising our revenue range to $3.9 million to $3.95 billion, which reflects approximately $140 million in revenue deferral from 2021 to 2022 due to the current supply chain challenges.
Accordingly, we are revising our adjusted EBITDA outlook by approximately $40 million to a range of $415 million to $435 million taking into account the gross margin associated with the aforementioned revenue deferral and an incremental $20 million for supply chain related inflation over previous estimates.
The total estimated impact on supply chain related inflation is now approximately $45 million.
Our free cash flow outlook is now $80 million to $100 million, reflecting our revised EBITDA outlook and the net incremental working capital timing impact of the revenue deferred.
I will now hand the call back to the operator for the Q&A session.
| diebold nixdorf inc - qtrly net loss $2 million versus $100.9 million.
diebold nixdorf inc - sees fy 2021 total revenue in the range of $3.90 billion to $3.95 billion.
diebold nixdorf inc - sees fy 2021 adjusted ebitda in the range of $415 million to $435 million.
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During the call, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors.
A transcript of this conference call will also be posted on our website.
As a result, the factors discussed in the annual report on Form 10-K of the fiscal year ended, December 31, 2020 and in other reports filed with the SEC.
Overall, I'm extremely pleased with how our team across the world performed in 2020, providing exceptional services to our clients, while successfully navigating the pandemic-related challenges and delivering solid results for all our stakeholders.
Our fiscal year was capped off by a better than expected performance in the fourth quarter, which is a testament to the growing strengths of our platform.
While we remained cautious about the first half of 2021 given the extent of uncertainty related to the pandemic, we are proud of JLL's execution for a unique year in 2020.
Before turning to the market environment and our financial performance, I wanted to briefly explain how some of the strategic investments made prior to 2020 supported us to successfully navigate this past year.
Our technology investments in finance and HR ERP systems, and the migration of all geographies and business lines into one accounting system, provided management much better visibility into our working capital position, while we were able to significantly improve our receivables collections and enhance cash generation.
I cannot emphasize enough how vital this was to effectively manage our overall liquidity, repaying debt ahead of our schedule and continuing to invest to drive future growth.
Secondly, the investment in our Capital Markets' CRM platform, while we also integrated our colleagues from HFF, allowed us to share client information seamlessly and promote cross-selling throughout the organization.
This has been a strong contributor to our success in 2020, also evidenced by our fourth quarter performance in Americas Capital Markets relative to the overall market.
We will continue to invest in superior technology tools and leveraging our data to further enhance our value proposition for customers, differentiate us from the competition and ultimately create value for shareholders.
In 2020, we also accelerated the organizational transformation initiated in January 2019 through the appointment of new global and regional leadership roles, further enhancing the global integration of our services and expertise.
It is also important to note that we are focused on helping our clients plan their transition to a post-pandemic environment, leveraging our thought leadership to advice on the future of work, the changing role of the office and the evolution of cities.
Turning to the market environment.
The development and administration of vaccines in the fourth quarter marked the first steps in a long march toward a post-pandemic environment.
While the second half of 2020 saw the beginning signs of recovery, many countries are witnessing record-breaking levels of new cases.
Significant uncertainty will continue to weigh on the overall recovery as the world waits for widespread immunization to an extent that will bring the pandemic under control and further bode for the economic development.
Relative to the global office leasing market, JLL Research reported that activity in the fourth quarter was down 43% from a year earlier.
The United States saw a much sharper decline compared to the other regions with activity down 53%.
EMEA and Asia Pacific recorded decreases in activity of 39% and 25% respectively relative to last year.
Vacancy rates increased across all regions in the fourth quarter with a global vacancy rate now at 12.9%, the highest level since 2014.
Global Capital Markets continue to recover from the sharp contraction recorded earlier in the year as declines in investment sales decelerated in the fourth quarter led by a robust rebound in activity in the Americas and large European markets.
Despite the challenges throughout the year, the decisive actions undertaken by our team as well as the overall resilience of our platform enabled JLL to deliver solid results for the year.
Consolidated revenue fell 8% to $16.6 billion and fee revenue declined 14% to $6.1 billion in local currency.
We recorded adjusted EBITDA of $860 million, a decline of 24% from the prior year and adjusted diluted earnings per share of $9.46, which represented a decline of 34% from the prior year.
It is worth noting that despite the challenges of 2020, we were able to achieve a full year 14% adjusted EBITDA margin, which is within our long-term target range of 14% to 16%.
We also generated a record $1.1 billion in operating cash flow, testament to the strength of our business model and ability to navigate a downturn.
Turning our attention to our fourth quarter performance.
Consolidated revenue fell 12% to $4.8 billion and fee revenue declined 19% to $2 billion in local currency.
Adjusted EBITDA of $417 million represented a decline of 18% from the prior year, although adjusted EBITDA margin increased 50 basis point to 21.3% as reported, driven by cost mitigation initiatives and some government COVID programs.
Adjusted net income totaled $276 million for the quarter and adjusted diluted earnings per share totaled $5.29.
As I alluded to on the third quarter earnings call, Capital Markets transaction volumes, especially in the Americas came back faster than Leasing as investors began to adapt to the current environment to put capital to work.
Logistics and multifamily housing continued to demonstrate resiliency.
However, though our transactional pipelines are building, the market remains uncertain in the near-term and activity has not yet normalized.
Throughout 2020, a key priority of management has been our revenue and corresponding refinement of our capital allocation strategy.
Our strategy is underpinned by a framework that considers allocation across three main pillars, maintaining an investment grade balance sheet, driving future growth through organic and inorganic investments in the business and returning cash to shareholders.
Our commitment to an investment grade balance sheet, enables access to the Capital Markets throughout the cycle.
We repaid the debt associated with the HFF transaction one quarter earlier than expected, which speaks to our diligent cash management and operational focus.
Our current approach is to operate within a reported net leverage range of 0.5 to 1.25 times, recognizing that there may be periods outside of this range due to seasonality and other short-term factors.
The strengths of our balance sheet and ability to generate meaningful cash flows and enable us to reinvest significantly into our business.
Funding initiatives that will drive profitable organic growth and attractive returns on capital and that are aligned with our beyond 2025 goals, remains the main priority for JLL.
This includes technology investments, which we believe is a significant differentiator for JLL.
M&A will continue to be an avenue of growth for JLL in a consolidating industry.
We will strategically evaluate opportunities as they arise.
There are no gaps in our portfolio, so our bar is high.
Any opportunity must meet our already rigorous standards specifically, they must be value-accretive acquisitions that are appropriately priced, have a strong cultural and strategic fit and generate a return on invested capital of at least 12%.
Over the long-term, we are committed to returning approximately 20% our free cash flow to shareholders.
The percentage will vary year-to-year depending on the investment opportunities we identify.
Before 2020, our primary method of returning cash has been through a dividend.
During 2020, we made the decision to shift our primary distribution method to share repurchases, due to the increased flexibility and attractive market conditions.
We evaluate share repurchases the same way we evaluate an acquisition or investment, by analyzing capital invested and expected returns.
If we expect to earn a higher return repurchasing JLL shares, then we will allocate capital accordingly.
Our 2020 repurchase activity was reflective of this approach.
We repurchased 100 million worth of shares at an average price of $111.
For perspective, this is slightly more than twice the amount we returned to shareholders via dividends in 2019.
We have 100 million remaining on our existing repurchase authorization and the Board of Directors recently authorized an incremental 500 million share repurchase program for a total of $600 million.
Our overall fourth quarter performance exceeded the upper end of our expectations, driven largely by Capital Markets.
I'll briefly highlight two notable items that speak to our cautious optimism for 2021, particularly the second half of the year.
First, the year-over-year Real Estate Services fee revenue percentage decline in the fourth quarter improved modestly versus the third quarter, indicative of solid performance of Americas Capital Markets.
Second, our continued focus on capital and operating efficiency coupled with earnings.
Once again, it yielded strong cash generation in the quarter, which we use to fully pay down our revolving credit facility and return an additional $50 million of cash to shareholders via repurchases.
Moving to a detailed review of operating performance.
Our transactional, Leasing and Capital Markets' businesses reflected ongoing uncertainty regarding the evolution of the pandemic and its impact on decision-making by corporate occupiers and investors.
While we are encouraged by the trends in our pipelines and recent performance in both service lines, we expect transactional activity to remain subdued over the near-term before picking up in the second half of the year with Leasing lagging Capital Markets.
Fourth quarter Capital Markets fee revenue declined 15% from 2019, a market improvement from the 43% decline in the third quarter.
The improvement was broad-based across our geographic segments and service offerings.
The resiliency of our multifamily business and notable improvement in our Americas investment and debt advisory businesses speaks to the breadth and strength of our platform, as well as synergies from the HFF acquisition.
It is also worth noting that we decreased our loan loss credit reserves in the Americas by $9 million, partly offsetting the $31 million charge we took in the first quarter.
I'd like to highlight one of many examples that demonstrate the power and cross-selling opportunities of our combined JLL-HFF Capital Markets platform.
The sale and financing of the iconic Transamerica Pyramid Center in San Francisco for $650 million and $390 million respectively during the fourth quarter.
Despite the pandemic, the expanded JLL-HFF footprint drove a strong and diverse bidder pool, ultimately securing a joint venture partnership between a domestic and cross-border buyer.
In addition to representing the seller, procuring the buyers and arranging the financing, JLL retained the property management and project and development services contracts, and successfully secured the Leasing mandate during the sales process.
Looking at the global capital markets environment, investment sales dropped 21% in the quarter and 28% for the year according to JLL Research.
While the secular trend of increasing capital allocations to commercial real estate remains evident, activity remains somewhat muted as investors continue to adjust valuations and pricing to reflect the current environment.
However, we saw an even more broad-based tightening of the bid-ask spreads than the prior quarter, particularly for higher quality assets and resilient sectors, such as industrial and logistics and the U.S. multifamily.
Turning to our 2021 Capital Markets outlook.
Our pipeline is reasonably consistent with our 2020 Capital Markets geographic fee revenue mix, and is well distributed across sectors.
We see a high degree of resilience in residential, and industrial and logistics, which are expected to continue that momentum in 2021.
Our pipeline coupled with improving liquidity in the market gives us confidence in generating growth in Capital Markets fee revenue in 2021.
The renewed lockdowns and economic uncertainty do present headwinds, particularly for the first half of the year.
Consolidated leasing fee revenue declined 28% compared with the prior year quarter, a slight improvement from the 30% decline in the third quarter as clients continue to delay significant decisions regarding future real estate strategies.
Our investments in the higher growth asset classes of industrial, supply chain, life sciences and data centers continue to provide partial offset to ongoing softness in the office sector.
Looking at the Leasing market environment, global activity continued to modestly recover from mid-year lows, driven mostly by smaller transactions.
Global office leasing volumes declined 43% in the fourth quarter compared with the 46% decline in the third quarter.
In the U.S. office market shorter terms and renewals have been preferred by occupiers.
In offices across major U.S. cities, we saw continued declines in net effective rents, which may eventually spur activity.
Our U.S. gross leasing pipeline has improved from mid-year lows and is up 5% year-over-year, though we emphasize closing rates and timing remain highly uncertain.
Based on our leasing pipeline and our overall view of the market, we expect leasing activity to remain tempered in the first half of the year before gradually starting to recover in the back half of the year.
Property and Facility Management remains a growth area, driven largely by new business wins and contract expansions in the Americas as corporate occupiers and investors seek our services due to increased building management standards.
Our Corporate Solutions business fee revenue declined 7% in the quarter, a strong growth in Americas Facility Management was more than offset by ongoing headwinds in our project and development services and U.K. mobile engineering businesses.
We continue to be encouraged by the secular outsourcing trend, especially as clients increasingly seek our sustainability consulting services.
LaSalle's quarterly and full-year comparisons were impacted by outsized incentive and transaction fees in 2019.
Advisory fees were resilient for the full year within a backdrop of continued capital raising.
Coming off a record $8 billion of capital raised in 2019, LaSalle raised $6.1 billion in 2020 demonstrating that capital continues to flow to investment managers with proven track records.
LaSalle's assets under management grew about $3 billion from the prior quarter to $69 billion.
For 2021, we anticipate around $25 million of incentive fees with very little in the first quarter.
Now, I'll provide some details around our cost mitigation actions.
Consistent with my statements on the third quarter call, we expect $135 million of annualized fixed cost savings from actions taken in 2020.
It is important to note that we see opportunities in the current environment and we will continue to invest for growth.
For the full year 2020, non-permanent cost savings totaled about $330 million, including about $85 million in the fourth quarter.
Major items that benefited our full-year profitability included approximately $250 million of cost mitigation savings in T&E, marketing and other expense areas and $80 million of government COVID relief programs.
Just under half of the $330 million of savings will not be repeated in 2021, as they represent finite actions, including government programs and temporary reductions to compensation and benefits.
The remainder of the non-permanent savings in 2020 are likely to return gradually as business volumes recover, and will often precede the revenue generation, for example, marketing expenses.
Considering our cost saving initiatives, business mix and growth initiatives, we expect to operate within our 14% to 16% long-term adjusted EBITDA margin target range in 2021 and the years ahead.
However, due to timing of expenses and the length of the sales cycle, particularly in the more transactional businesses, we expect adjusted EBITDA growth to lag fee revenue growth this year.
As we gain more visibility into the trajectory of the recovery as the year unfolds, we will provide more details on our 2021 expectations.
Shifting now to an update on our balance sheet and our thoughts on capital structure and efficiency.
The sequential improvement in earnings, our enhanced focus on improving asset efficiency and modest capex and investment spending allowed us to reduce net debt by $560 million in the quarter, which ended the year at $192 million.
At the end of December, reported leverage was 0.2 times, down from 0.8 times at the end of September and we had $3.3 billion of liquidity, including full availability of our $2.7 billion revolving credit facility.
As Christian mentioned, we are targeting reported net leverage ratio of 0.5 to 1.25 times over the long term, though there may be variances due to operational seasonality as well as timing of business reinvestment, M&A and share repurchases.
We are very focused on continuing to improve our capital efficiency, which was a key factor in our strong cash generation and debt reduction in the quarter and full year despite the operating environment.
Looking ahead to the full year 2021, we are encouraged by our pipelines and the momentum in our business and anticipate our business will grow this year.
However, the seasonality of our business and the recent renewed lockdowns across the world, create considerable uncertainty across the entire industry, making it premature to provide fee revenue and profitability targets for the year at this time.
We currently anticipate progressive improvement in the second half of the year, but much will depend on the evolution of the pandemic, the pace of vaccinations and economic activity globally.
Long-term, we remain focused on achieving our 2025 beyond targets, we have a steadfast commitment to meeting the evolving needs of our clients, people and broader community.
This coupled with our constant efforts to improve both, our operating and capital efficiency, positions us to improve our returns and free cash flow, consequently, generating significant stakeholder value in the years ahead.
Back to Christian for further remarks.
With the distribution of vaccines, the general sentiment supports a meaningful recovery in 2021, with some analysts forecasting global economic growth in excess of 5%, much of it coming in the second half of the year.
Our people are committed to aligning with our clients' objectives and providing advice about how to navigate the transitions ahead.
As corporate occupiers begin to reimagine the future of work, they will rely on best-in-class firms like JLL to help them with this transition.
Additionally, we will be working closely with our investor clients and leverage the firm's broader perspective to provide necessary insights.
As we enter 2021, we remain focused on achieving our long-term priorities.
Though we are mindful of the near-term challenges and uncertainty that remains, we are poised to seize the considerable opportunities in front of us while maintaining financial discipline, important to long-term sustainable growth.
In summary, I'm pleased with the way that JLL was able to navigate through such turbulent and trying times of the past year.
Results that we were able to achieve would not have been possible without the commitment and relentlessness of our employees as well as the resilience of the communities within which we operate.
At JLL, we are committed to our stated purpose of shaping the future of real estate for a better world.
We are cognizant of the important role that we play in today's challenging and evolving environment, we are well positioned to deliver on our purpose through JLL's thought leadership, the strong growth in our sustainability services and our ability to bring to market differentiating technology products.
I'm confident in our ability to generate long-term profitable sustained growth and shareholder value.
Operator, please explain the Q&A process.
| compname reports qtrly adjusted earnings per share $5.29.
q4 revenue $4.8 billion.
qtrly adjusted earnings per share $5.29.
cash provided by operating activities was a record $1,114.7 million in 2020, compared with $483.8 million in 2019.
no amounts drawn on credit facility as of december 31, 2020.
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These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors including those described in MFA's annual report on Form 10-K for the year ended December 31, 2020, and other reports that it may file from time to time with the Securities and Exchange Commission.
As we sit here today to talk about the first quarter of 2021, it's impossible not to recall where we were a year ago, and the difference between the two time periods could not be more stark.
A tenacious defensive stance is now a spirited and determined offense.
Today, we are reporting strong financial results, continued execution of a strategic plan that we implemented early last fall and a new exciting initiative that we announced today.
With vaccinations becoming more prevalent and the gradual easing of restrictions beginning to occur, we have reason to be optimistic about an eventual return to some semblance of ordinary.
While it is undoubtedly months away, we are cherishing brief snippets of limited normalcy, and it's great to see our colleagues at work in person rather than on video calls as we have for the last year.
A strong economic outlook, additional fiscal stimulus, and the expectation of more government spending pushed loan rates higher in the first quarter of 2021.
10-year treasuries backed up 83 basis points to 1.74 at the end of Q1, which by the way, is where they were in late January of 2020, and the curve steepened with two 10s widening by about 80 basis points to 158 basis points at March 31.
Short rates remain firmly anchored at very low levels, with twos only 4 basis points wider during the quarter.
Interestingly, although 10-year rates at 170 are back to levels seen in late 2019 and early 2020, two-year rates in the low to mid-teens have barely changed in the last year.
But twos were at 160 back in late 2019.
So clearly, the market anticipates some inflationary pressure in the future but sees fed policy as anchoring short rates at or around current levels for 2021 and 2022.
Agency origination crowded out nonconforming production for much of 2020.
But even with a modest increase in agency eligible mortgage rates, we've seen an increase in production from non-QM and business purpose loans in 2021.
With short rates at particularly low levels and credit spreads tight, suffice to say there are no cheap assets out there.
However, these same market conditions have pushed yields on issued securities to very low levels.
So while it is a difficult period for assets, it's an extremely attractive one for liabilities.
And MFA has taken advantage of this opportunity to lock in low cost, term, nonrecourse debt, which will substantially reduce interest expense in the future.
In addition, a strong housing market, together with our ability to actively manage residential mortgage credit assets has also been reflected in our financial results as we achieved better-than-expected results on credit-sensitive assets, resulting in reversals of prior credit reserves and sales of OREO properties at attractive levels.
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We reported GAAP earnings of $0.17 per share in the first quarter.
These results were driven by continued price appreciation of loans held at fair value and by further improvement in credit leading to credit loss reserve reversals.
GAAP book value was $4.63, up 2% from December 31s, and economic book value was $5.09, up 3.5% from December 31st.
GAAP economic return for the quarter was 3.6%, but economic book value economic return was up 5% for the quarter.
We repurchased 10.8 million common shares at an average purchase price of $4.14 or 80% of economic book value from March 1st through April 30th.
Our leverage declined slightly over the quarter to 1.6:1, and we paid a $0.075 dividend to shareholders on April 30.
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Our efforts to lower interest expenses through securitizations had visible impact on our first-quarter earnings as interest expense declined by 27% from the fourth quarter of 2020.
And the securitizations executed in Q1 had limited impact on the full quarter because they were closed in early February and late March.
Net interest income for the first quarter increased by $4 million versus the previous quarter and by $13 million versus Q3 of 2020 after adjusting for a large interest income contribution of $8 million from the payoff of a single non-agency bond with a very low amortized cost during the first quarter.
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Again, continuing the theme of aggressively taking advantage of available market opportunities, we have executed three additional securitizations on nearly $1 billion of UPB at attractive levels.
As you can see on this page, AAA yields on bonds sold on the INB-1 deal was 83 basis points and 112 basis points on the non-QM One deal with the blended cost of debt for both deals in the low 1s.
The NPL deal that closed in March replaces securitizations sold in 2018 at a blended cost of debt that's over 150 basis points cheaper than that -- they replaced.
Please turn to Page 7.
Robust increases in housing prices and strengthening credit fundamentals provide obvious tailwinds for MFA's mortgage credit exposure.
Home price increases in the last year are the largest, in some cases, in 20 years, and housing supply is at extremely low levels.
So this trend is not likely to abate soon.
We liquidated 177 OREO properties in the first quarter, generating $50 million in proceeds and $2.2 million in gains.
These strong housing fundamentals also support the performance of our nonperforming loans as we see more full payoffs and better prices on liquidated properties.
Finally, for borrowers, still negatively impacted by COVID, we can offer modifications and/or repayment plans to allow them to stay in their homes, restore their status to current, and keep the equity in their homes.
Please turn to Page 8.
Under our share repurchase program, we instituted a 10b5-1 plan in March that permits share repurchases at any time.
Previous to instituting a 10b5-1 plan, we were permitted to purchase shares only during open window periods.
And because our 10-K is filed later in the quarter than our 10-Qs, our open window period after our fourth quarter earnings call would have been very short.
And again, from early March through April 30th, we repurchased 10.8 million shares at an average price of $4.14.
Please turn to Page 9.
We illustrate our investment portfolio and summarize our asset-backed financing on this slide.
The investment portfolio has not changed materially since December 31.
We did purchase $253 million of loans in the first quarter.
And just to review, loans held at carrying value on our balance sheet are represented in three slices of this pie chart.
The purple section PCD or purchased credit deteriorated loans that's accounting speak for reperforming loans and other loans included in this purple slice are seasoned performing loans.
The gray slice business purpose loans, which are fixed and flip, and single-family rental loans and the red section, which is Non-QM loans.
On the financing side, you can see that 68% of our asset-based financing is non mark-to-market with the Non-QM securitization that we closed in April, it's now over 70%.
Please turn to Page 10.
This transaction will significantly enhance our ability to deploy capital in the business purpose space, and we believe that our capital base will fortify Lima One's already strong market presence.
We expect that this transaction will be accretive to MFA's earnings by $0.08 to $0.12 per year.
MFA currently owns a 43% equity stake in Lima One, and we have purchased over $1 billion of business purpose loans from Lima One since 2017.
We acquired our initial strategic minority ownership interest in Lima One in 2018, and our partnership with Lima One has grown over the years since.
This acquisition includes the Lima One operating platform as well as their $1 billion servicing book.
In reviewing our results this quarter, I guess I could say what a difference a year makes, but this simply doesn't do it justice.
A year ago, I had the unpleasant task of talking through a myriad of negative numbers on this slide, including realized and unrealized losses on securities and loans, impairment charges, CECL reserves, and other large and unusual items.
This quarter I am very pleased to be able to provide a much more positive report.
Much of the noise reported in our net income over the past several quarters, resulting from volatile changes in asset prices and cash flow estimates, driven by uncertainty related to the longer-term effects of COVID-19 have dissipated and hopefully are largely behind us.
While not fully reflecting MFA's normalized earnings for the short to medium term, I believe that Q1 results do provide a clearer picture of what the key drivers of our earnings will be for the next several quarters.
Specifically, our earnings will be driven by net interest income and gains on loans held at fair value.
This is -- there is also some potential for further adjustments to decrease CECL reserves if unemployment rates and home prices stabilize or continue to improve.
But absent any significant future macroeconomic shocks in the near term, I would anticipate that CECL reserve changes going forward will be primarily driven by net increases or decreases in our portfolio of carrying value loans.
Additionally, in anticipation of the successful completion of the acquisition of Lima One, starting in Q2, we plan to elect fair value accounting on all future whole loan purchases.
This should facilitate appropriate reporting of the economics of Lima One origination and servicing activities while still properly capturing the performance of loans originated and held on MFA's balance sheet.
Note that this accounting will only apply prospectively.
We are not able to retrospectively apply fair value accounting to loans that we currently report at carrying value.
So for the intermediate term until the majority of this portfolio of loans runs off, we expect to continue to report both GAAP and economic book value measures.
Turning now to the detail of our Q1 2021 results.
Net income to common shareholders was $77.3 million or $0.17 per share.
The key items impacting our results are as follows: net interest income of $31.8 million was $12.4 million higher sequentially.
This included approximately $8 million of accretion on a non-agency bond that we hold a significant discount par that was redeemed during the quarter.
It should be noted that gains of this nature are expected to occur somewhat less frequently going forward as our remaining portfolio of securities that we hold at a discount to par continues to run off.
One other point to highlight is the impact of the successful execution of securitization and other debt refinancing activity on our cost of financing.
As Craig noted, interest expense this quarter fell 27% sequentially and our overall cost of funds fell to 2.92% from 3.63% in Q4 2020.
We reduced our overall CECL allowance on our carrying value loans to $63.2 million, reflecting lower estimates of future unemployment and higher home price appreciation in our credit loss modeling as well as lower loan balances.
This reversal and other net adjustments to our CECL reserves positively impacted net income for the quarter by $22.8 million.
After the initial significant increase in CECL reserves taken in Q1 2020, when uncertainty related to COVID-19 economic impacts were at their highest, we have reduced our CECL reserves by more than $80 million in the subsequent four quarters.
Actual charge-off experience continues to remain very modest, with approximately $1.2 million of net charge-offs taken in the first quarter.
Once again, our loans held at fair value performed strongly this quarter.
Net gains of $49.8 million were recorded.
This overall gain is unchanged from the prior quarter.
And its components, which include $32.1 million of market value increases and $17.7 million of interest payments, liquidation gains and other cash income were also essentially unchanged quarter over quarter.
Finally, our operating and other expenses were $22.5 million for the quarter.
This is much closer to our expected normal run rate, but was elevated primarily due to costs related to replacing warehouse financing with securitization.
I will point out that following the confirmation of the Lima One acquisition, our overall G&A cost as a ratio of our stockholders' equity will rise.
We will endeavor to provide some additional color on the potential impacts on a future earnings call.
Turning to Page 12.
Housing has performed exceedingly well throughout the pandemic, and prices have accelerated in recent months.
The Zillow median home value was up 10.6% in March from a year ago.
Demographic trends, historically low rates and a severe lack of supply have all contributed to the rising prices.
The unemployment rate continues to recover from a peak of almost 15% down to 6% as the economy reopens.
With the vaccination rollout under way, the pace of reopening should pick up in the coming months, lowering the unemployment rate further.
All these factors, combined with monetary and fiscal support, have played a part in keeping mortgage credit performance strong and bode well for continued credit performance.
Turning to Page 13.
Non-QM origination volume increased over the quarter as rates offered to borrowers have been dropping.
We purchased over $200 million over the first quarter, which is more than double our acquisitions from the prior quarter.
Prepayment speeds remained elevated over the quarter as mortgage rates for Non-QM loans have come down in recent months.
The three-month average CPR for the portfolio remains around 30%.
We closed on another minority investment in an originator over the quarter, raising the number of Non-QM originators we have invested into three.
We believe the strategy of aligning our interest with select origination partners will allow us to effectively grow our portfolio over time while ensuring loan quality.
We executed on an additional securitization at the beginning of April, bringing a total amount of collateral securitized to approximately $1.75 billion.
These securitizations have lowered our financing costs and at the same time have provided additional stability to our borrowings.
Securitization, combined with non mark-to-market term facility has resulted in over 80% of our non-QM portfolio financed with non mark-to-market leverage.
We expect to continue to be a programmatic issuer of securitizations as it is currently the most efficient form of financing for our portfolio.
Turning to Page 14.
The significant percentage of our borrowers in the non-QM portfolio have been impacted by the pandemic.
Many of our borrowers are owners of small businesses, that were affected by shutdowns across the nation.
We instituted a deferral program at the onset of the pandemic in an effort to help our borrowers manage through the crisis.
Through our servicers, we granted almost 32% of the portfolio of temporary payment relief, which we believe helped put our borrowers in a better position for long-term payment performance.
Subsequent to June, we reverted to a forbearance program instead of a deferral as the economy opened up.
The forbearance program instituted are largely now determined by state guidelines.
For clarity, a deferral program tax on the payments missed to the maturity of the loan as a balloon payment.
Forbearance requires the payments missed to be repaid at the conclusion of the forbearance period.
If those amounts are unable to be paid in one-month sum, we allow for the borrower to spread the amounts over an extended period of time.
Over the first quarter, we saw a stable 60-plus delinquency rate as compared to the fourth quarter of 7.9%.
In addition, over 25% of those delinquent loans made a payment in March.
Many delinquent borrowers are in repayment plans, which will cause them to cure their delinquency status over the next six to 12 months.
As the economy -- as the economic recovery continues, the portfolio's credit performance should continue to improve.
Our strategy of targeting lower LTV loans should mitigate losses under a scenario with elevated delinquencies.
In many cases, borrowers, which no longer have the ability to afford their debt service, will sell their home in order to get the return of their equity.
Turning to Page 15.
Our RPL portfolio of $1 billion has been impacted by the pandemic but continues to perform well.
80% of our portfolio remains less than 60 days delinquent.
And although the percentage of the portfolio is 60 days delinquent and status is 20%, a quarter of those borrowers continue to make payments.
Prepaid fees in the first quarter continued to rise to a one-month CPR of 20 as mortgage rates continue to be historically low and more borrowers gain equity with the increase in home prices.
And while 30% of our RPL borrowers were impacted by COVID, we have worked with our servicers to provide assistance to borrowers and have seen improvement in delinquency levels over the quarter.
Turning to Page 16.
Our asset management team continues to drive performance of our NPL portfolio.
The team has worked in concert with our servicing partners to maximize outcomes on our portfolio.
This slide shows the outcomes for loans that were purchased prior to the year ended 2019, therefore, owned for more than one year.
37% of loans that were delinquent at purchase are now either performing or paid in full.
46% are either liquidated or REO to be liquidated.
Our REO sale -- our REO properties have continued at an accelerated pace at advantageous prices, selling 52% more properties over the last 12 months as compared to the year prior, and 17% are still on nonperforming status.
Modifications have been effective as almost three-fourths are either performing or is paid in full.
And we are pleased with these results as they continue to outperform our assumptions at the time of purchase.
Turning to Page 17.
First of all, I would like to say that we are very excited about the acquisition of Lima One.
The acquisition enhances our position as a long-term capital provider on the business purpose lending space, which we believe continues to benefit from positive fundamental and structural trends and offers one of the most attractive options to deploy capital in the residential mortgage credit space.
We have worked closely with Lima One since 2017, first as a loan buyer and later as an equity investor, and have seen firsthand the quality of their loan origination and servicing operations.
From our extensive experience in the BPL space, we know that Lima is one of the best operators in the space and look forward to collaborate with Lima's talented management team.
Lima One is a leading nation and originator of business purpose loans with a strong brand recognition in the BPL borrower community with over 50% of loan origination coming from repeat borrowers.
Their product offerings are diverse, serving the needs of short and long-term strategies within the BPL space.
They have an established track record of originating fix and flip and new construction loans, longer-term rental loans, and small balance multifamily value-add and bridge loans.
Lima has originated over $3 billion since inception and has shown that they can reliably originate over $1 billion annually.
We believe that by combining MFA's firm capital and capital markets expertise with Lima's capabilities, we can create a differentiated platform capable of providing best-in-class financing options to investors with a clear path to grow well beyond $1 billion in annual volume.
This acquisition will provide MFA with a reliable access to high-quality, high-yielding assets that are difficult to source in the marketplace.
We believe based on current market conditions, that loans originated by Lima and retained on MFA's balance sheet will provide mid-teens ROE with appropriate leverage, either in the form of warehouse financing or MFA sponsored securitizations.
Now we'll turn to portfolio activities in the quarter.
We continued to experience large principal pay downs in our fix and flip portfolio in the first quarter.
The strong housing market with home prices rising more than 10% annually has allowed many of our borrowers to successfully complete their projects and sell quickly into a strong market.
This combined with the seasoned nature of our portfolio, currently at a weighted average loan rates of 20 months, led to us receiving $144 million of principal payments in the quarter.
We expect this trend to continue in 2021.
MFA's fix and flip portfolio declined $117 million to $464 million UPB at the end of the first quarter.
Principal paydowns were $144 million, which is equivalent to a quarterly pay down rate of 69 CPR on an annualized basis.
We advanced about $12 million of rehab draws and converted $5 million to REO.
We purchased $20 million UPB of fix and flip loans in the first quarter.
Purchase activity has picked up in the second quarter as we have committed to acquire over $30 million so far in the second quarter and expect purchase volume to pick up meaningfully with the acquisition of Lima One.
The average yield on the portfolio was 4.93%, and all of our fix and flip financing is non mark-to-market debt with the remaining term of 15 months.
60-plus day delinquency declined $13 million to $149 million at the end of the first quarter.
And so far, in the second quarter, we continue to see positive delinquency trends.
Fix and flip loan loss reserves continued to trend down in the first quarter, declining by $4.7 million, primarily due to improved economic expectations and the strong housing market.
Turning to Page 18.
Seriously delinquent fix and flip loans decreased $13 million in the quarter to $149 million at the end of the first quarter.
In the quarter, we saw $18 million of loans payoff in full, $5 million cured to current or 30-day delinquent pay status, $5 million converted to REO while $15 million became new 60-plus delinquent.
As mentioned previously, we've continued to see positive delinquency spends in the second quarter.
Approximately half of the seriously delinquent loans are either completed projects or bridge loans where limited or no work is expected to be done, meaning these properties should be in generally salable conditions.
In addition, approximately 13% of the seriously delinquent loans are already listed for sale, potentially shortening with time until resolution.
When loans pay off in full from serious delinquency, we often collect default interest, extension fees and other fees of payoff.
For loans, where there is a meaningful equity in the property, these can add up.
Since inception, we've collected approximately $3.7 million in these types of fees across our fix and flip portfolio.
The housing market continues to be extremely strong with record low mortgage rates and low levels of inventories supporting annual home price appreciation in excess of 10%.
In addition, we continue to see unemployment declining and overall economic activity improving across the country.
We believe that the efforts of our experienced asset management team, combined with the recent strong economic trends, can lead to acceptable outcomes on our delinquent loans.
Turning to Page 19.
Our single-family rental loan portfolio continues to exhibit very strong performance.
Due to strong prepayment section and solid credit profile, the portfolio yield has remained steady in the mid-5% range post COVID and was 5.61% in the first quarter.
That number does not include prepayment penalties, which are a feature of almost all of our rental loans and are recorded in other income.
And including those, the single-family rental portfolio yield was 6.33% in the first quarter.
After temporarily increasing the fourth-quarter prepayments trended back down to the historical low mid teens range with the first quarter three-month prepayment rate at 12 CPR.
60-plus day delinquencies were relatively unchanged in the quarter in the mid- to high 5% area.
We acquired $20 million of rental loans in the first quarter.
Second quarter is off to a strong start with us committing to purchase over $35 million so far in the second quarter.
We expect purchase activity to continue to accelerate with the acquisition of Lima One.
We closed our first securitization, consisting solely of business purpose rental loans in the first quarter.
Approximately $218 million for loans were securitized.
We sold approximately 91% of the bonds at a weighted average coupon of 106 basis points.
This transaction lowered the funding rate of the underlying assets by over 150 basis points and increased the percentage of SFR financing that's non mark-to-market to 75% at the end of the first quarter.
Lima One originated rental loans that represented about two-thirds of the collateral in our inaugural rental securitization.
We believe that MFA's experience in the capital markets can provide meaningful funding advantages to Lima's origination activities and will significantly improve Lima's competitiveness in the BPL space.
We are pleased with the results of the first quarter of 2021 and even more excited about the future at MFA.
We are continuing to execute our strategic plan to lower and trim out borrowing costs, and we're beginning to see the results of this activity in our income statement.
The strength of the housing industry has obvious positive implications for our mortgage credit investments.
We have repurchased nearly 25 million shares of our common stock at levels that are accretive to book value and earnings.
And today's announcement of our acquisition of Lima One is an important initiative that will enhance our ability to deploy future capital in the BPL sector and grow our future earnings power.
| compname announces q1 earnings per share of $0.17.
q1 gaap earnings per share $0.17.
gaap book value at march 31, 2021 was $4.63 per common share.
qtrly net interest income $31.8 million versus $61.7 million.
|
The table providing supplemental information on adjusted EBITDA and reconciling to net income attributable -- attributable to HCA Healthcare Inc. is included in today's release.
As the COVID-19 pandemic continues to surge, we started the year with strong financial results in the first quarter.
The results were driven by better-than-expected revenue growth and improved operating margins.
Revenues grew over $1.1 billion, or 8.7% as compared to the prior year.
This growth was generated by highly acute inpatient volumes, better payer mix, and a rebound in surgical and outpatient volumes in March.
Generally speaking, March trends are continuing into April.
Inpatient revenues increased by 12%.
The acuity within our inpatient business was higher as reflected in both the case mix index, which increased 7% and length of stay which grew by 6%.
Additionally, commercial admits inside of our domestic operations represented 29% of total admits, compared to 26.5% last year.
The commercial payer mix has been consistently around this level for the past four quarters.
These two factors combined explain the 17% increase in inpatient revenue per admissions.
The total -- the total admits were down 4.2% year over year.
In comparison to 2019, admits were down approximately 3%, which was -- which was in line with our expectations.
In the quarter, we treated almost 50,000 COVID-19 inpatients, which represented 10% of total admissions.
Throughout the quarter, the percentage of COVID-19 admits to total admits declined.
January with 17%, February was 8%, and March was down to almost 5%.
Outpatient revenues increased 4.7% as compared to the prior year.
This result is better performance than the previous two quarters in which outpatient revenue was down approximately 5%.
Outpatient revenues declined in January and February, consistent with that trend.
But March, which had one additional weekday this year, increased by 30% as outpatient surgery and other procedures recovered strongly.
Same facility outpatient surgery volumes grew 2.3% as compared to last year.
As compared to 2019, they declined 3%.
E.R. visits declined 18%.
This decrease is generally consistent with the trends we experienced in the previous two quarters.
visits were down 19% compared to 2019.
Our teams continue to focus and deliver on our operating agenda.
The adjusted EBITDA margin for the company grew on a year-over-year basis and was consistent on a sequential basis with the prior quarter.
Diluted earnings per share, excluding losses and gains on sales as well as losses on debt retirement, increase 78% to $4.14.
During the quarter, we announced the definitive agreement to acquire a majority stake in the home health and hospitals business of Brookdale Senior Living.
This business provides us with a large platform that complements our local provider systems.
It will expand the services we offer across our networks and provide us with more enterprise capabilities to coordinate care for our patients and improve their experiences.
Additionally, we believe the home will become a more important setting for healthcare in the future with continuing growth and demand.
We anticipate this transaction will close in the third quarter and we look forward to our new partnership with Brookdale.
Also during the quarter, we opened two new hospitals.
One in Denver and one in Orlando.
Each of these hospitals will strengthen our system offerings in these communities.
In the second quarter, we expect to close on the acquisitions of two small hospitals both of which complement our networks in Nashville and Savannah.
And lastly, we continue to invest broadly across our networks to improve convenience, access, and value for patients by developing more outpatient facilities.
The pipeline for development and acquisition in this category remains strong.
As we look to the rest of the year, we have increased our annual guidance to reflect the first quarter's performance and better perspective on important macro factors.
Mainly, governmental reimbursement and economic outlooks for our markets including uninsured assumptions.
Bill will provide more details on our guidance in his comments.
The first corps is yet another period where the disciplined operating culture and strong execution by our teams were on display.
We could not have performed at this level without their unwavering commitment to our patients and the communities we serve.
As we continue to resource and execute on our strategic agenda, we will remain true to our mission of improving lives and delivering on the responsibilities we have to all our stakeholders.
Sam spoke to many of our operating metrics and results so I will discuss our cash flow and capital allocation activity during the quarter and then review our updated 2021 guidance.
As a result of the strong operating performance in the quarter, our cash flow from operations was $1.99 billion, as compared to $1.375 billion in the first quarter of 2020.
Capital spending for the quarter was $654 million and we completed just over $1.5 billion of share repurchases during the quarter.
We have approximately $7.3 billion remaining on our authorization and consistent with our year-end discussion.
We are planning on completing the majority of this in 2021 subject to market conditions.
Our debt to adjusted EBITDA leverage was 2.85 times and we had approximately $5.6 billion of available liquidity at the end of the quarter.
We expect revenue to range between $54 billion and $55.5 billion.
We expect full-year EBITDA to range between $10.85 billion and $11.35 billion.
We expect full-year diluted earnings per share to range between $13.30 and $14.30.
And our capital spending target remains at approximately $3.7 billion.
Our revised guidance considers the strong results in the first quarter, and also considers the extension of the public health emergency and the deferral of sequestration reductions through the end of the year.
In summary, we recognize some uncertainties remain as we go through the balance of the year, but we are confident in the company's ability to manage through various business cycles and we are well-positioned to continue to invest capital to capture growth opportunities and execute on acquisition opportunities if they become available.
Please remind everyone to limit their questions to one so that we may keep trying and get in the queue as possible.
| q1 earnings per share $4.14.
sees fy earnings per share $13.30 to $14.30.
qtrly same facility admissions declined 4.2 percent and same facility equivalent admissions declined 6.5 percent.
sees 2021 revenues $54.0 to $55.5 billion.
|
The slides that accompany today's call are also available on our website.
We'll refer to those slides by number throughout the call.
This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission.
We also have other company representatives available to help answer any questions you may have after Steve, Lisa and Darrel provide updates.
On Slide 4, we present our quarterly and annual financial results.
IDACORP's 2019 fourth-quarter earnings per diluted share were $0.93, an increase of $0.41 per share over last year's fourth quarter.
IDACORP's earnings per diluted share for the full-year 2019 were $4.61, an increase of $0.12 per share over 2018.
These full-year results represent the 12th straight year of earnings growth for IDACORP and are the highest achieved in its history.
IDACORP's cumulative average growth rate in diluted earnings per share is 7.9% since 2007.
Today, we also initiated our full-year 2020 IDACORP earnings guidance estimate to be in the range of $4.45 to $4.65 per diluted share with our expectation that Idaho Power will not need to utilize any of the tax credits in 2020 that are available to support earnings in Idaho under its settlement stipulation with the Idaho Public Utilities Commission.
Last week, we announced that after 24 years with the company that I would retire effective June 1 of this year.
In connection with this decision, our board of directors selected Lisa Grow to succeed me as president and CEO of IDACORP and Idaho Power effective June 1 and also appointed her to the boards of directors of both companies effective last week.
She's an electrical engineer by training and she's got over 32 years of experience at Idaho Power.
Not only does she have a long tenure at the company, she also has a long history with Idaho Power as her grandfather was a lineman with the company for 30 years prior to Lisa joining the company.
She has contributed significantly to the operational and financial success of Idaho Power since becoming an officer in 2005.
She has earned the opportunity to take over the reins as we move forward into 2020 and beyond.
I look forward to continuing to serve as a member of the board of directors once I step away from my executive roles.
With that short introduction, I will now turn the time over to Lisa for some updates on the company, as well as ongoing economic activities.
I am honored by the opportunity to succeed you, and I look forward to the exciting times ahead.
In addition to the financial success noted by Justin, Idaho Power set records across several of our important metrics: safety, customer satisfaction and reliability.
On Slide 5, we see details of the company's record employee safety results in 2019.
We are very excited and proud to see injuries at an all-time low as we continue to spend significant time on our safety culture and to emphasize the importance of safety at work and at home.
Our record-setting results in residential and business customer satisfaction are shown on Slide 6.
As the population within our service area continues to grow, Idaho Power is working hard to meet our customers' evolving needs.
Most Idaho Power customers experienced -- most Idaho customers experienced an overall price decrease for the second consecutive year in 2019 with business customers' rates going down by at least 5%.
Idaho Power's efforts to keep prices affordable, provide personal service and improve the customer experience are paying off as overall customer satisfaction metrics continue to rank near the top of the list among our peer utilities.
Reliability is a key piece of the customer satisfaction puzzle and is also included on Slide 6, which shows another outstanding year.
Idaho Power kept customers' lights on 99.975% of the time in 2019, and overall system reliability was among the best in company history, finishing very close to 2018's record results.
As noted on Slide 7, Idaho Power service area continues to experience substantial customer growth.
For the third year in a row, Idaho remains the fastest-growing state in the nation, and Idaho Power's customer base grew 2.5% in 2019, including a 2.7% growth rate for our residential customer segment.
Idaho Power now has more than 570,000 customers, and we view the reliable, affordable, clean energy that our company provides as a key driver for continuing to attract new customers.
The economy is thriving within Idaho Power's service area, and Moody's GDP forecast calls for sustained economic growth.
In 2019, Idaho Power experienced sales growth in its commercial and industrial sectors through a balanced mix of new business and expansion projects across the food processing, manufacturing, distribution and technology sectors.
Moody's current forecast of GDP in Idaho Power's service area predicts growth of 4.4% in 2020 and another 4.4% in 2021.
Meanwhile, employment increased 3.2%, and the unemployment rate was 2.8% at the end of 2019, compared with 3.5% nationally.
Turning to Slide 8.
Idaho Power's most recent integrated resource plan calls for continued work toward a unit-by-unit early exit from the Jim Bridger plant located in Wyoming by 2030.
In 2019, the company ended its participation in Unit 1 of the North Valmy plant in Nevada, which was a significant milestone in our path away from coal.
We also have an agreement to exit Unit 2 by 2025.
The Boardman plant in Oregon is also scheduled to cease operations this year.
In both cases, Idaho Power has State Public Utility Commission's support for a cost recovery framework to be applied through the end of their useful life, which we believe could provide a blueprint for a similar approach for Bridger.
We are continuing to explore options with PacifiCorp, the co-owner of Bridger, as we plan the end-of-life for the entire Jim Bridger plant.
PacifiCorp's IRP, as published last fall, showed early shutdown dates for two Bridger units as well.
Idaho Power's overall coal-fired generation has decreased for six consecutive years.
As recently as 2013, coal was our largest energy source at 47% of our total energy mix.
Today, that number is around 16%.
Our path away from coal, which is driven by the economics of the plant, aligns with our Clean Today, Cleaner Tomorrow plan to provide 100% clean energy by 2045.
Another key project in our Cleaner Tomorrow plan is the Boardman to Hemingway transmission project or B2H, which made solid progress in 2019.
The Oregon Department of Energy recommended approval of the 300-mile line.
The department is expected to release a proposed order, which is the next step in the permitting process, authorizing the transmission line this year.
If the permitting process remains on track, we expect the Oregon Energy Facility Siting Council to issue a final order and site certificate in 2021.
Following preconstruction activities, construction is expected to begin as early as 2023, with the line expected to be in service in 2026 or sometime thereafter.
The IRP we amended and filed at the end of last month also plans for us to include 120 megawatts of solar from the Jackpot Solar power purchase agreement.
Idaho Power evaluated purchasing the project and elected not to pursue it.
We do not expect Idaho Power to file a general rate case in Idaho or Oregon in the next 12 months.
The influx of new customers, constructive regulatory outcomes and effective cost management all play significant roles in this decision.
With that, I will turn the time to Steve, who will go through the 2019 financial results.
We had excellent 2019 results.
Weather challenges through the year were more than offset by a very good final quarter.
I'll walk you through the drivers year over year on Slide 9.
Strong net customer growth of 2.5% added $18.8 million to operating income in 2019.
A decline in usage per customer, mostly related to lower irrigation sales, decreased operating income by $21.4 million.
Greater precipitation and more moderate spring and summer temperatures led to 11% less use per customer for those in the agricultural irrigation class this year.
Further down the table, net retail revenues per megawatt hour decreased operating income by $2.8 million.
As anticipated, the settlement stipulations associated with income tax reform reduced revenues more significantly in 2019.
Idaho Power's open access transmission tariff rates declined by 10% in October of 2018 and again by 13% in October 2019, lowering transmission wheeling-related revenues by $5.3 million.
These rates reset each year to align revenues with the cost of the transmission system.
To a lesser extent, lower transmission volumes also contributed to an overall reduced wheeling revenue this year.
Next on the table, other operating and maintenance expenses decreased $8.7 million as our team's continued focus on cost management resulted in lower expenses across several areas.
Contributing to this decrease was lower bad debt expense of $1.1 million due to a strong economy and the nonrecurrence of a 2018 O&M expense of $4 million for a noncash amortization of regulatory deferrals related to tax reform.
Idaho Power's 2019 return on year-end equity in Idaho landed between the 9.5% tax credit support level and the 10% customer sharing line under the Idaho regulatory settlement stipulation.
So we did not record any additional tax credit amortization or provision against revenues for sharing with Idaho customers this year.
Last year, we recorded a $5 million provision against revenues for sharing, which did not recur.
Idaho Power has the full $45 million of approved credits available to support earnings in future years.
As a reminder, the tax credit support line will be at 9.4% for 2020.
These items collectively resulted in a year-over-year increase to Idaho Power's operating income of $2.3 million.
Nonoperating income and expenses netted to a $9.9 million improvement to pre-tax earnings due to several items.
A $4.2 million charge in 2018 related to Idaho Power's post-retirement plan did not recur.
This was anticipated and reflected in our prior earnings guidance ranges.
Next, our allowance for equity funds used during construction increased $2.7 million as the average construction work in progress balance was higher throughout 2019.
Finally, stronger asset returns this year led to $2.1 million of higher investment income from the Rabbi Trust associated with Idaho Power's nonqualified defined benefit pension plans.
On the next line, you will see income taxes were higher by $10.1 million.
Remember that 2018 included $5.7 million of benefits from remeasurement of deferred taxes at Idaho Power due to income tax reform, as well as $1.3 million of tax-deductible bond redemption costs incurred last year.
There was no such remeasurement or bond redemption in 2019.
Amortization of newly funded vintage investment tax credits helped lower tax expense in the current year, while higher pre-tax income primarily contributed to the remainder of the increases.
Finally, at IDACORP Financial Services, distributions from the sale of low-income housing properties led to approximately $3 million higher net income at that subsidiary.
While the nature, timing and amount of the underlying property sales at IFS are difficult to predict and are controlled by third parties, we do not expect them to be as significant in 2020.
Overall, Idaho Power's and IDACORP's net income were $2.1 million and $6.1 million higher than last year, respectively.
IDACORP and Idaho Power continue to maintain strong balance sheets, including investment-grade credit ratings and sound liquidity, which enable us to fund ongoing capital expenditures and dividend payments.
Regarding dividends, you'll note that in addition to the latest dividend increase of 6.3% announced by the board of directors last September, the board also increased IDACORP's target dividend payout ratio to 60% to 70% of sustainable earnings.
This reflects several years of our steady upward trajectory of dividend increases.
We expect to recommend an annual dividend increase of 5% or more to the board of directors in the coming year.
On Slide 10, we show IDACORP's operating cash flows along with our liquidity positions as of the end of 2019.
Cash flows from operations were $125 million lower than 2018.
These were mostly related to changes in regulatory assets and liabilities like those resulting from the power cost adjustment mechanism and the timing of working capital receipts and payments.
The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the bottom of Slide 10.
At this time, we do not anticipate issuing additional equity in 2020 other than relatively nominal amounts under the compensation plans.
Slide 11 shows our first look at full-year 2020 earnings guidance and our key financial and operating metrics estimates.
We are initiating IDACORP's 2020 earnings guidance in the range of $4.45 to $4.65 per diluted share, which is up roughly 4% over prior-year guidance range and assumes no use of additional tax credits under normal weather conditions.
Our record 12 years of earnings growth is something that sets us apart from our peers.
We expect O&M expenses to be in the range of $350 million to $360 million, which would keep O&M relatively flat for the ninth straight year.
We expect capital expenditures will lift somewhat to the range of $300 million to $310 million.
You'll note that our updated five-year forecast of capital expenditures is also higher than our previous plan, now forecasted to range from $1.6 billion to $1.7 billion over that time.
This forecast still does not include the majority of costs to build the major infrastructure projects, such as Boardman to Hemingway or increased compliance costs associated with the new Hells Canyon license due to the uncertainty and the exact timing of that spend.
Finally, our current reservoir storage and stream flow forecast suggests that hydropower generation should be in the range of 6.5 million to 8.5 million megawatt hours.
With that, I'll turn the time back to Darrel.
There is much to be proud of as we look back on the outstanding results of 2019.
While the energy industry is rapidly evolving, IDACORP continues to meet challenges and opportunities while delivering unparalleled results for customers and investors alike.
From meeting financial targets to striving for a cleaner energy future, we believe that our employees and our ongoing business strategy will help sustain our success into the future.
I will close with a look at weather on Slide 12.
The latest projections from the National Oceanic and Atmospheric Administration suggests an equal chance of above or below normal precipitation levels and a 40% to 50% chance of above normal temperatures from March to May.
We have seen a lot of snow and rain in recent weeks.
As a reminder, our power cost adjustment mechanisms in Idaho and Oregon significantly reduced earnings volatility related to changes in our resource mix and associated power supply costs that can fluctuate greatly due to weather.
With that, Steve, Lisa and I and others here today will be happy to answer questions you may have.
| compname announces q4 earnings per share $0.93.
sees fy 2020 earnings per share $4.45 to $4.65.
q4 earnings per share $0.93.
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If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website, cousins.com.
In particular, there are significant risks and uncertainties related to the severity and duration as the COVID-19 pandemic and the timing and strength of the recovery there from.
We began the third quarter with the expectation that our customers will begin bringing their teams back to the office post Labor Day.
Since then, the delta variant hit the Sun Belt hard and created delays.
However, as cases have now significantly declined, we're increasingly hearing from our customers that they plan to return toward the end of this year or early next year.
Our team delivered strong financial results during the third quarter.
Here are a few highlights.
On the earnings front, the team delivered $0.69 per share in FFO.
Same-property NOI on a cash basis increased 3.6%, and importantly, we leased over 597,000 square feet, including over 500,000 square feet of new and extension leases with 7.7 years of weighted average lease term and a net effective rent of $24.06 per square foot, which is higher than our 2019 average.
Second-generation cash rents increased 23.1%, our strongest rollout since 2015.
And we ended the quarter with net debt to EBITDA of 4.54 times.
While the macro narrative around office remains ambiguous, our leasing performance highlights three office sector trends that are becoming quite clear.
First, innovative and growing companies recognize that they are stronger in person at least most of the time.
In this persistent remote environment, employee attrition is at an all-time high.
Contrary to many of the media headlines, forward-thinking business leaders are connecting the dots between the great resignation and eroding corporate cultures.
Thus, companies are firming up plans for their return strategy and making long-term real estate decisions that they were not prepared to make just a few quarters ago.
Second, the migration of the Sun Belt has accelerated.
Cisco, Visa, Ark Invest and Tesla are just the latest examples.
There are more in the pipeline.
The rapid urbanization is places like Downtown Austin, Midtown Atlanta, in the south end of Charlotte, have changed the equation for companies previously located in more dense, larger cities in the Northeast and West Coast.
Sunbelt cities now offer a dynamic urban experience in addition to an attractive climate and a lower cost of living and doing business.
It's the best of both worlds.
Lastly, the flight to quality is intensifying.
Earlier this week, I've toured our recently completed Norfolk Southern headquarters project with a local business leader.
His feedback, much better than working at home, he said.
It was simple and spot on.
The development includes innovative collaboration space, neighborhoods for private working, state-of-the-art technology and countless amenities, all in the heart of Midtown Atlanta.
Our customers recognize that interesting and inspiring space will be a competitive advantage in retaining and recruiting talent as well as rebuilding culture and connectivity.
At Cousins, we have a unique and compelling strategy that positions us at the intersection of these trends.
As the market moves faster, we are responding.
Most recently, we acquired Heights Union, a 294,000 square foot office property in Tampa for a gross price of $144.8 million.
The Heights neighborhood has emerged as one of Tampa's signature gathering spots providing a unique live, work, play experience.
The two 6-story buildings, which were completed in 2020 are highly amenitized, authentic and efficient.
Including Heights Union, we have invested approximately $1.1 billion in new acquisitions and development since the start of the COVID-19 pandemic.
We are excited about the RailYard in Charlotte, 725 Ponce in Atlanta, Domain nine in Austin and New Hawk in Nashville.
They are representative of the Office of the Future in our all differentiated products in their respective markets.
During the same period, we have sold approximately $1 billion of noncore properties, including Hearst Tower and one South in Charlotte, and Burnett Plaza in Fort Worth.
The net result of these strategic transactions are value-add returns on a blended basis and a trophy portfolio positioned to capture outsized customer demand and a reduced capex profile.
As I mentioned earlier, we have completed the Norfolk Southern headquarters project.
The development was a highly profitable development for Cousins and a great outcome for our customer, a true win-win.
Nonetheless, we are excited to transition to the other side of this unconventional transaction.
The declining development fee stream has created challenging year-over-year earnings comps and the 370,000 square foot lease expiration on December 31 at 1,200 Peachtree created uncertainty.
Looking forward to 2022 and beyond, our story simplified, and we are already making great early progress on our releasing efforts at 1,200 Peachtree as we are approximately 40% committed including LOIs.
Richard will touch on this more in a moment.
In closing, Cousins is well-positioned for the future.
We have assembled a trophy portfolio in fast-growing Sun Belt markets.
We have organic growth opportunities within the portfolio as we drive occupancy gains and rental rate increases.
We have external growth opportunities in our $663 million development pipeline.
In addition, we have a well-located land bank that can support another $2.6 billion in development, including over three million square feet of trophy office and over 1,500 multifamily units.
Importantly, we have a rock-solid balance sheet that provides financial flexibility and a highly capable team to execute on the strategy.
They are the cornerstone of the company's success.
This quarter, we continue to see economic recovery in our core markets and along with it, an increase in leasing and transaction activity.
In short, our third quarter operational performance was strong.
While the pandemic still remains and the delta variant delay the return to the office for some, we are encouraged by the demand for high-quality office space across our markets.
Due to the delta variant, portfolio level utilization, as we measure it, did not significantly increase this quarter.
With that said, there is noticeably more activity and energy at most of our properties compared to last quarter.
This is evidenced by a 27% increase in transient parking revenue quarter-over-quarter.
Turning to third quarter results.
our total office portfolio lease percentage and weighted average occupancy came in at 91.3% and 89.8%, respectively.
Our lease percentage increased 30 basis points this quarter driven by new and expansion leasing activity at Terminus and 3350 Peachtree in Buckhead and at Domain Point in Austin.
Conversely, weighted average occupancy declined 120 basis points with the impact of the previously disclosed move out of Anthem at 3350 Peachtree in Buckhead.
As for general leasing activity this quarter, our team and portfolio produced fantastic results.
We executed 43 leases totaling 597,000 square feet in the quarter, and new and expansion leases were accounted for 84% of total activity.
Net effective rents were $24.06 this quarter, an improvement over the second quarter and $0.24 higher than our reported net effective rents for the full year of 2019.
The rent growth was outstanding this quarter as well with second-generation net rents increasing 23.1% on a cash basis.
Similar to this time last quarter, we are still seeing encouraging activity in our leasing pipeline, both for our existing portfolio and new development.
Tour volume in our portfolio was on a clear upswing in the second quarter, and it has held at a consistent level since then.
We are also optimistic about our Sun Belt markets' continued recovery as compared to the U.S. economy in the aggregate.
According to the Urban Land Institute, every market lost jobs during the pandemic, but the recovery has been much quicker in Sun Belt markets.
ULI projects that by the end of the year, those markets will collectively regain nearly all of their lost jobs in comparison to the greater United States, which is expected to still be down almost 2%.
Now I'll speak to some specifics about current conditions and activity in our markets.
I'll begin with Atlanta.
According to JLL, Atlanta saw positive net absorption this past quarter for the first time since the pandemic began at 756,000 square feet.
This is an encouraging milestone.
In our nearly eight million square foot Atlanta portfolio, we signed an impressive 299,000 square feet of leases in the third quarter.
That includes the previously disclosed 123,000 square foot lease with Visa at 1200 Peachtree in Midtown, serving as Visa's new Atlanta office hub.
We also have a final LOI in hand with another potential customer at that property for 31,000 square feet.
We view this activity at 1200 Peachtree as a strong validation of a truly irreplaceable location and quality of the to-be-repositioned assets.
Another example of demand for high-quality and well-amenitized properties is our redeveloped Buckhead Plaza project, producing 121,000 square feet of leasing activity year-to-date at record rental rates.
Our overall Buckhead portfolio also produced great activity this quarter, accounting for 43% of our Atlanta leasing activity.
This includes 29,000 and 50,000 square feet of new and expansion leasing at 3350 Peachtree and Terminus, respectively.
At one of our newest Atlanta assets located in Alpharetta, 10,000 Avalon, we signed a 51,000 square foot new lease after quarter end with [Indecipherable], a newly public financial technology company, taking the building to 99% leased.
In Austin, population growth continued to be strong as ever this quarter.
Further, CoStar showed a 496,000 square foot decline this quarter and Class A total sublease space available for lease.
The unemployment rate in Austin this quarter was at its lowest since March of 2020 with average asking rents and the market climbing.
Our Austin portfolio is currently 95% leased, with our 1.9 million foot -- square-foot operating portfolio and the core of the domain at 100% leased.
With regard to leasing activity in Austin, we signed 236,000 square feet of leases in the quarter, including a 73,000 square foot new lease with a growing technology company at Colorado Tower, which will entirely backfill the expiration of Atlassian at the end of January 2022.
In Charlotte, our now 1.4 million square-foot uptown and South end operating portfolio is well-ositioned at a solid 96.1% leased with very little existing space available.
Like in Austin, CoStar showed that Charlotte had a meaningful 139,000 square foot decline this quarter and Class A total sublease space available for lease.
According to JLL, third quarter activity was robust in Tampa, where we recently acquired Heights Union in the downtown submarket.
According to CBRE's 2021 Tech Talent report, Tampa ranks tenth among the 50 largest tech talent markets with its millennial population increasing by 14.5% since 2014.
While average direct asking rents are down 2.5% year-over-year overall, many Class A buildings in the Westshore submarket, where the bulk of our portfolio is located, have increased asking rates to at or above pre-pandemic levels.
We signed 41,000 square feet of leases in Tampa this past quarter.
The Greater Phoenix area is one of the few places in the country that now has more jobs than before the pandemic, recovering 102.6% of jobs since April of 2020.
When comparing year-to-date data versus 2019, Phoenix is also the second fastest growing metro in the country behind Austin, according to the Greater Phoenix Chambers annual economic outlook.
While our completed activity in Phoenix was light this quarter, the recovery is reflected in our pipeline as we are currently in lease negotiations for 95,000 square feet of new and extension leases at our $100 million new development.
They continue to produce great results and deliver excellent customer service.
I am grateful for all that you do.
I'll begin my remarks by providing a brief overview of our quarterly financial results, including some detail on our same-property performance, our development pipeline and our transaction activity followed by a quick discussion of our leverage position, before closing my remarks with updated information on our outlook for the balance of 2021.
As you can tell from Colin's remarks, we've been extremely busy.
However, we don't want all that positive transaction activity to take attention away from our very solid operating performance during the quarter.
Leasing velocity in particular, was outstanding, while second-generation cash leasing spreads were up the most since the fourth quarter of 2015.
Over the past two quarters, we've signed almost 1.1 million square feet of leases with almost 2/3 of that total representing new leases.
The ability to attract so many new customers to our properties is a powerful indication of our Class A Sun Belt strategy.
However, it's a big decision for a company to open a new office, especially if they're coming from out of market.
It's not easy from space planning to construction management, to the endless logistical details surrounding moving existing employees, hiring new employees and establishing a new address, it all takes a lot of time, which means the typical period between lease signing and revenue recognition is extended compared to a simple renewal.
A significant portion of the new leases we have signed over the last six months do not begin revenue recognition until late 2022 or early 2023.
Attracting new customers, the Sun Belt is our competitive advantage.
It often just takes time for this to turn into revenue.
Turning back to the third quarter results.
Our same-property performance continued to generate a significant and constructive change in trend.
NOI on a cash basis increased a very healthy 3.6% over the last year and excluding the single large move-out that Richard talked about, Athem's departure from our 3350 Peachtree property in Buckhead to a new consolidated campus in Midtown Atlanta, NOI on a cash basis would have increased 5.3%.
The largest variable in our same-property performance remains parking revenues.
After bottoming during the fourth quarter of 2020, same-property parking revenues are up over 20% in the last three quarters, but still remain 20% below pre-COVID levels.
Focusing on our development efforts, one asset, Domain 10 an office property primarily leased to Amazon in the Domain submarket of Austin was moved off our development pipeline schedule and into our portfolio statistics, while another asset, Neuhoff, a mixed-use property in the Germantown submarket of Nashville was added to our schedule.
Total development costs for Neuhoff are estimated to be $563 million with our joint venture interest representing 50% of that amount.
The current development pipeline represents a total Cousins' investment of $663 million across 1.9 million square feet in four assets.
On the transaction front, as Colin laid out at the top of the call, we've been very active.
As this series of transactions has unfolded, we've maintained our net debt-to-EBITDA around 4.5 times, as we've done with very few exceptions since 2014.
We believe this leverage profile provides both defensive support during challenging times as well as offensive firepower to execute compelling transactions when the opportunity presents itself.
If and when we commence additional developments and/or acquire additional properties, you should expect us to continue to fund these investments on a leverage-neutral basis over time.
On the Capital Markets front, we closed a $312 million construction loan for our new house development joint venture during the third quarter.
This new loan matures in September 2025 and includes a potential one year extension option.
I'll close by updating our 2021 earnings guidance.
We currently anticipate a full year 2021 FFO between $2.73 and $2.77 per share.
This is up $0.01 at the midpoint from our previous guidance.
There are no other dispositions, acquisitions or development starts included in our guidance.
The most significant variable behind our guidance remains parking revenue.
Our customers continue returning to the office during the third quarter, and we anticipate maintaining this trend into the year-end.
Our current parking revenue assumptions reflect this outlook.
| cousins properties inc - qtrly ffo per share $0.69.
cousins properties inc sees 2021 ffo $2.73 to $2.77 per share.
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Relations page of our website, cousins.com.
In particular, there are significant risks and uncertainties related to the severity and duration of the COVID-19 pandemic and the timing and strength of the recovery there from.
As we reach the midpoint of 2021, it has been wonderful to see many of our customers bringing their teams back to the office, and we anticipate seeing more post Labor Day.
While we continue to monitor our public health guidance around COVID-19 and specifically any office delays brought on by the delta variant, I also remain optimistic about the remainder of 2021 and beyond.
Our team delivered strong financial results during the second quarter.
Here are a few highlights.
On the earnings front, the team delivered $0.69 per share in FFO.
We leased over 484,000 square feet with a 12.9% increase in second-generation cash rents.
Same property NOI on a cash basis increased 7.1%.
And our net debt-to-EBITDA at quarter end was 4.55 times.
And G&A expenses as a percentage of total assets were at just 0.36%.
Turning to the business.
Our ongoing conversations with customers provide us unique insight into their evolving long-term office strategy.
And those plans are beginning to crystallize.
First, most of our large growing customers are excited about their return to the office.
While the delta variant could create delays, we now have conviction that a meaningful return to the office, it's not an if, it's just a win.
In some instances, employees will return for part of the week, which some call hybrid.
Importantly, the nature of the hybrids model coordinated in-office days, which are designed to facilitate collaboration, necessitates real estate sites for peak load and likely does not have a significant impact on office demand.
While it's hard to remember office life before the pandemic, this was already the reality for most technology and professional firms.
Second, companies and people are migrating to the Sun Belt, where the business climate is more friendly, housing is more affordable and commute times are shorter.
Third, as companies return to the office and migrate to the Sun Belt, they are trading up to be in an environment where employees are excited to come to work and collaborate.
This flight to quality trend existed before COVID but is clearly accelerating.
With these themes taking shape, in addition to our great quarter, we're seeing positive signs of economic recovery in our leasing, which continues to grow.
Our late-stage pipeline has increased significantly, and we are highly encouraged by the opportunities in front of us, both inbound growth and expansions from our existing customers.
Importantly, we are seeing activity in our higher profile vacancies, including 1200 Peachtree and 3350 Peachtree as well as in our development projects like Domain 9, 10000 Avalon and 100 Mill.
As I have mentioned in quarters past, we had a simple and compelling strategy at Cousins.
To assemble the premier urban Sun Belt office portfolio, to be disciplined about capital allocation so we can pursue new investments, we are operating and development platform can add value and to maintain a fortress balance sheet, which provides us significant financial flexibility.
At Cousins, we are positioned at the intersection of two powerful long-term trends, the migration of the Sun Belt and the flight to quality.
As these accelerate, we are responding.
Let me highlight some exciting announcements from yesterday.
Through our relationships, we sourced an off-market transaction that includes the recapitalization of Neuhoff, an exciting development project in Nashville and the acquisition of 725 Ponce in Atlanta.
Neuhoff is a transformative mixed-use project that marks our strategic entrance into the Nashville market.
It is located directly across the Cumberland River from Oracle's recently announced Nashville campus and provides a clear path for growth in this new market.
Construction has already commenced on Phase one of the project which will consist of approximately 388,000 square feet of office space, 542 multifamily units and 60,000 square feet of experiential retail.
Cousins investment of $275 million represents a 50% ownership interest and includes a Phase II office site that can accommodate 275,000 square feet of additional space as well as rights to future adjacent land parcels.
Neuhoff has a unique location, a differentiated adaptive reuse component and plans for an exciting new food hall.
There is simply nothing like it in Nashville.
We also acquired 725 Ponce, a 372,000 square foot office asset in East Midtown Atlanta for $300.2 million.
We view this property as one of the highest quality and most interesting buildings in Atlanta, located along the belt line, one of the city's premier public spaces and directly across from Ponce City market, one of the most highly amenitized and active areas in talent.
725 Ponce is currently 100% leased to customers, including BlackRock, McKinsey & Company and Chipotle.
Cousins also acquired a 50% ownership interest in adjacent land site for an additional $4 million that can accommodate 150,000 to 200,000 square feet of additional development.
We also announced that we sold One South at the Plaza, a 891,000 square foot, 58% leased office property in Charlotte for a gross sale price of $271.5 million.
Some might ask why sell One South now?
First, we remain extremely bullish on Charlotte and have a best-in-class portfolio, a talented team and great land sites in the south end for future growth.
So the simple answer is, in our view, the purchase price fully values the upside from releasing a 1970s vintage office property with a high capex profile and provides capital to reinvest in new and more compelling opportunities.
In summary, through these creative transactions, we have entered Nashville, an exciting new market for Cousins; acquired 725 Ponce, one of the best buildings in Atlanta with an additional pad for future development; and funded these transactions, in part through the sale of an older vintage property.
Overall, this enhances the portfolio quality, gives us opportunities for growth and shifts speculative leasing from a 47-year-old asset to brand new, highly differentiated products.
Interestingly, the purchase price of One South is approximately the same as our value from the tier merger pre-pandemic.
This is a strong read-through for capital interest in leading Sun Belt markets.
As we look ahead and hopefully emerge from the pandemic, our conviction around our Sun Belt trophy office strategy is as strong as ever.
Today, we have the leading trophy portfolio in the best Sun Belt submarkets in Atlanta, Austin, Charlotte, Dallas, Phoenix and Tampa plus we now have room to grow in Nashville.
Large growing companies recognize the value of office, migration of the Sun Belt is on the rise and companies continue to prioritize newer, amenitized experiential office space that excites employees to come together.
We are obviously watching the delta variant and any potential impact.
Nonetheless, we are thrilled with the company's position.
As we look ahead to 2022, the declining fees from a terrific transaction with Norfolk Southern will be behind us.
We have creatively and proactively addressed a large vacant block at One South and are excited to pursue new opportunities with our rock-solid balance sheet.
In closing, the power of Sun Belt trophy office is becoming increasingly clear.
They are the foundation of our company's success.
This quarter saw an improving economic backdrop and a more stable operating environment, resulting in a strong second quarter operating performance.
While pandemic is certainly not over and the delta variant persists, the demand for office space across our markets is improving.
As Colin mentioned, the vast majority of our customers have either already returned to the office or have signaled they will return sometime this fall, some fully and others in a phased or hybrid format.
From our perspective, post Labor Day seems to be the most common return timing cited.
For now, physical customer utilization in our portfolio sits around 30%.
The variation in utilization across markets that I mentioned last quarter remains with Atlanta, Dallas and Tampa, all running at higher utilization rates.
We still anticipate utilization to be largely back to normal portfolio by the end of 2021.
Turning to second quarter operating results.
Our total office portfolio lease percentage and weighted average occupancy both came in at 89.4% this quarter.
Our leased percentage declined 80 basis points this quarter which was mainly attributable to the previously known move-out of Anthem at 3350 Peachtree in Atlanta.
Given we report occupancy on a weighted average basis and Anthem expired at the quarter -- end of the quarter, we actually saw a modest increase in occupancy versus last quarter.
For the balance of the year, we expect our weighted average occupancy to remain relatively stable.
As a reminder, Norfolk Southern will vacate 370,000 square feet at 1200 Peachtree at the end of December, representing a fantastic value-creation opportunity going forward.
And looking forward to 2022, I would note that we have only 6.5% of our annual contractual rent expiring with no expirations greater than 100,000 square feet.
As for leasing activity, we executed a solid 39 leases, totaling 484,000 square feet this quarter, surpassing our level of reported activity in the first quarter of 2020.
Leasing volume wasn't the only metric back to pre-pandemic form this quarter.
Leasing mix was much improved with new and expansion leases accounting for 74% of total activity.
Recall that new and expansion leasing combined hit a pandemic low of just 14% of activity two quarters ago.
Net effective rents were $23.77 this quarter, an improvement over the first quarter and only $0.05 lower than our reported net effective rents for the full year of 2019.
Rent growth remained remarkably strong as well, with second-generation net rents increasing 12.9% on a cash basis.
And finally, our average lease term bounced back to 6.7 years on average.
These are great leasing results.
We are also still seeing encouraging activity in our leasing pipeline, both for our existing portfolio and new development projects.
Specifically, tour volume remains on the upswing.
In our Austin portfolio, second quarter tour activity was up 53% versus the first quarter.
While not specific to our portfolio, CBRE also recently noted that in Phoenix, June 2021 tour volume was 240% greater than the average monthly volume in 2019.
As we have pointed out many times, the pandemic has served as an accelerant to the migration of people and companies to the Sun Belt.
Companies are being driven to reconsider where they are located, primarily due to intensifying competition for talent.
Companies simply need to be where the talent is or wants to be.
And increasingly, that is in the Sun Belt.
Of CBRE's 2021 development opportunity watchlist, eight out of the 10 biggest development opportunities are located in the Sun Belt region.
Among the metropolitan areas with populations larger than 750,000 people, large Sun Belt cities led the way in terms of nominal population growth last year.
In fact, the top seven metropolitan areas for population growth in 2020 were all in the Greater Sun Belt region according to CoStar.
The recently released Newmark Opportunity Index showed that every one of our markets included in its index has experienced meaningful job recovery since the depths of the economic downturn.
Nashville, Tampa and Dallas ranked highest across the economic metrics in this index with Tampa at the very top.
Tampa's employment is the closest to pre-pandemic levels of all markets in Newmark's Index.
Not surprisingly, Austin remains near the top of the list for nominal population growth and its labor market continues to be one of the strongest nationally.
Austin's population increased by more than 67,000 new residents over the past year, second to Atlanta.
For JLL, overall leasing activity in Austin has increased every quarter since the pandemic began with this quarter's activity reaching 80% of pre-pandemic levels.
Further, according to Morgan Stanley, Austin was the only market to have a consecutive quarter improvement in sublease listings posting a decrease of 18%.
JLL estimated the quarterly decline was even greater at 29%.
There are promising trends in sublease listings in our other core markets as well.
Atlanta, our largest market, continues to see an uptick in demand, particularly from the technology sector and Midtown and Buckhead are leading the recovery so far this year.
In fact, JLL's second quarter office submarket reports for Buckhead stated that overall leasing activity was up 200% year-over-year.
Cousins bucket portfolio opportunity -- excuse me, Cousins Buckhead portfolio participated in this demand, signing 65,000 square feet of expansions with high-quality, publicly traded technology companies this past quarter alone.
Our current leasing pipelines in both Buckhead and Midtown are equally encouraging.
As we look ahead, we believe we will continue to see a noticeable flight to quality.
Companies are likely to increasingly view the office is critical to fostering culture, collaboration and career development, not to mention as a tool for attracting and retaining the best talent.
Recent data clearly demonstrates this dynamic.
For example, per CBRE 74% of new leasing activity in Phoenix this year has been in Class A projects.
By comparison, over the past five years, this percentage hovered under 50%.
Further, JLL recently noted that nationally, office projects delivered after 2015 actually experienced a net occupancy gain over the past five quarters in the teeth of the pandemic.
While the pandemic is certainly not over, and we are closely monitoring the impact of the delta variant, which could bring with it some economic fits and starts, we are optimistic about the balance of the year and a longer-term recovery.
Our markets and portfolio are extremely well positioned, and we have numerous exciting opportunities ahead of us.
They have worked tirelessly to produce strong results such as those delivered this quarter and through the entire pandemic.
I'll begin my remarks by providing a brief overview of our quarterly financial results, including some detail on our same-property performance, our development pipeline and our transaction activity, followed by a quick discussion of our leverage position before closing my remarks with updated information on our outlook for the balance of 2021.
As you could tell from Colin and Richard's remarks, we've been extremely busy.
However, we don't want all of that external activity to take attention away from our very solid internal performance during the quarter.
At $0.69 per share, FFO was up almost 5% compared to last year, and the important operating metrics that we all focus on were very strong.
Leasing velocity returned to pre-COVID levels Second-generation cash leasing spreads were up double digits.
And same property NOI on a cash basis increased 7.1% over last year.
Focusing on same-property performance, second quarter results represent a significant and a constructive changing trend.
Numbers were driven by improving revenue, which increased 6.6% on a cash basis.
This is the first year-over-year increase in same-property revenue since the first quarter of 2020.
The largest variable within our same-property performance remains parking revenues, which are in large part driven by the fiscal occupancy in our buildings.
After bottoming during the fourth quarter of 2020, same-property parking revenues are up 14%, but they still remain 23% below pre-COVID levels.
Turning to our development efforts.
One asset, 120 West Trinity, a mixed-use property in the Takeda submarket of Atlanta that we developed in a 20/80 joint venture was moved off our development pipeline schedule and into our portfolio statistics, while another asset, Domain 9, an office property in the Domain submarket of Austin, commenced development during the second quarter and was added to our schedule.
The current development pipeline represents a total Cousins investment of $492 million across 1.3 million square feet in four assets.
Our remaining funding commitment for this pipeline is approximately $210 million, which is more than covered by our existing liquidity and future retained earnings.
On the transaction front, as Colin laid out at the top of the call, we've been very active.
Domain nine represent over $1.1 billion in transaction activity year-to-date.
In addition, our joint venture partner at Dimensional Place in Charlotte has exercised their option to purchase our 50% interest in the property with the closing expected at the end of the third quarter.
As this series of transactions unfold, we intend to maintain our net debt to EBITDA around 4.5 -- excuse me, 4.5 times as we have done with very few exceptions since 2014.
We believe this leverage profile provides both defensive support during challenging times as well as offensive firepower to execute compelling transactions when the opportunity presents itself.
In addition, it's a small transaction, but we do want to call your attention to the sale of the land parcel adjacent to our 100 Mill development in Tempe, subsequent to quarter end.
The site was sold for $6.4 million earlier in July and will be developed into a Hyatt branded hotel.
It's a testament to the quality of that location that this sale held through the COVID pandemic.
This new hotel will be an important amenity for our 100 Mill customers as well as the customers and the other five buildings we own within two blocks of that site.
On the capital markets front, we closed on a $350 million unsecured term loan during the second quarter, replacing a $250 million term loan that was scheduled to mature later this year.
The new loan matures in 2024 and the applicable LIBOR spread was reduced by 15 basis points.
Covenant package remains unchanged.
It was a very solid execution beginning to end.
I'll close by updating our 2021 earnings guidance.
We currently anticipate full year 2021 FFO between $2.70 and $2.78 per share.
This is up $0.01 at the midpoint from our previous guidance.
There are no other dispositions, acquisitions or development starts included in our guidance.
The most significant variable behind our guidance remains our parking revenues.
As Colin discussed earlier, our customers have begun returning to the office, and we anticipate this trend accelerating after Labor Day.
Our current parking revenue assumptions reflect this outlook.
However, the delta variant could delay timing, but it's too early to know for sure.
| cousins properties releases second quarter 2021 results.
cousins properties - qtrly ffo per share $0.69.
cousins properties inc - raised its 2021 ffo guidance to $2.70 to $2.78 per share.
|
Joining today's call are Bob Blue, chairman, president, and chief executive officer; Jim Chapman, executive vice president, chief financial officer, and treasurer; and other members of the executive management team.
Before we provide our business update, I'd like to take a moment to remember our friend, Tom Farrell.
Tom's passing on April 2 was heartbreaking to those of us who loved, admired, and respected him.
We've heard from so many people, including many of you, about Tom's impact on the industry and the people who work in and around it.
It's quite clear that while Tom's list of professional accomplishments was long, the list of people whose lives he touched was much, much longer.
But much more often, we experienced his generosity, his loyalty, his dry sense of humor, and his focus on improving our company, our community, and our industry.
We should all seek to emulate his example, a consistent commitment to ethics and integrity, to excellence, and perhaps most of all, to the safety of our colleagues.
He cherished his friends and family, most of all.
We can't think of a better example of a leader, and we will miss him dearly.
As Bob said, we will very much miss Tom.
Let me now turn to our business update.
We are very focused on overall execution, including extending our track record of meeting or exceeding our quarterly guidance midpoints as we did again this quarter.
I'll start my review on Slide 4, with a reminder of Dominion Energy's compelling total shareholder return proposition.
We expect to grow our earnings per share by 6.5% per year through at least 2025, supported by our updated $32 billion five-year growth capital plan.
Keep in mind that over 80% of that capital investment is emissions reduction enabling and that over 70% is rider eligible.
We offer an attractive dividend yield of approximately 3.2%, reflecting a target payout ratio of 65% and an expected long-term dividend per share growth rate of 6%.
This resulting approximately 10% total shareholder return proposition is combined with an attractive pure-play, state-regulated utility profile characterized by industry-leading ESG credentials and the largest regulated decarbonization investment opportunity in the country, as shown on the next slide.
Our 15-year opportunity is estimated to be over $70 billion, with multiple programs that extend well beyond our five-year plan and skew meaningfully toward rider-style regulated cost of service recovery.
We believe we offer the largest, the broadest in scope, the longest in duration, and the most visible regulated decarbonization opportunity among U.S. utilities.
The successful execution of this plan will benefit our customers, communities, employees, and the environment.
Turning now to earnings.
Our first-quarter 2021 operating earnings, as shown on Slide 6, were $1.09 per share, which included a $0.01 hurt from worse than normal weather in our utility service territories.
This represents our 21st consecutive quarter, so over five years now, of delivering weather-normal quarterly results that meet or exceed the midpoint of our quarterly guidance range.
GAAP earnings for the quarter were $1.23 per share.
The difference between GAAP and operating earnings for the three months ended March 31 was primarily attributable to a net benefit associated with nuclear decommissioning trusts and economic hedging activities, partially offset by other charges.
Turning on to guidance on Slide 7.
As usual, we're providing a quarterly guidance range, which is designed primarily to account for variations from normal weather.
For the second quarter of 2021, we expect operating earnings to be between $0.70 and $0.80 per share.
We are affirming our existing full-year and long-term operating earnings and dividend guidance, as well.
No changes here from prior guidance.
Turning to Slide 8 and briefly on financing.
Since January, we've issued $1.3 billion of long-term debt, consistent with our 2021 financing plan guidance at a weighted average cost of 2.4%.
For avoiding some doubt, there's no change to our prior common equity issuance guidance.
Wrapping up my remarks, let me touch briefly on potential changes to the Federal Tax Code.
Obviously, it's still early days with a lot of unknowns.
But at a high level, we see an increase in the corporate tax rate as being close to neutral on operating earnings based on, as is the case for all regulated entities, the assumed pass-through for cost of service operations, an increase in parent level interest tax shield and the extension and expansion of clean or green tax credits, all of which will be offset by higher taxes on our contracted assets segment earnings.
We also expect modest improvement in credit metrics.
We're monitoring the contemplated minimum tax rules closely and we'd note the administration's support for renewable development suggests the ability to use renewable credits to offset any such minimum tax rule.
More to come over time on that front.
I'll begin with safety.
As shown on Slide 9, through the first three months of 2021, we're tracking closely to the record-setting OSHA rate that we achieved in 2020.
In addition, we're seeing record low levels of lost time and restricted duty cases, which measure more severe incidents.
Of course, the only acceptable number of safety incidents is zero, and we will continue to work toward that critical goal.
Let me provide a few updates around our execution across the strategy.
We're pleased that the 2.6-gigawatt Coastal Virginia offshore wind project has been declared a covered project under Title 41 of the Fixing America's Surface Transportation Act program, also known as FAST 41.
The federal permitting targets now published under that program are consistent with the project schedule that we shared on the fourth-quarter call in February.
Key schedule milestones are shown side by side on Slide 10.
We continue to be encouraged by the current administration's efforts to provide a pathway to timely processing of offshore wind projects.
In the meantime, we're advancing the project as follows: we're processing competitive solicitations for equipment and services to achieve the best possible value for customers and in accordance with the prudency requirements of the VCEA.
Interest in those RFPs has been robust.
We're analyzing performance data from our test turbines, which have been operational for several months now and are, to date, generating at capacity factors that are higher than our initial expectations.
Recall, we had assumed a lifetime capacity factor of around 41% for the full-scale deployment.
Further evaluation of turbine design and wind resource, in addition to the data we're gathering in real time, suggest that our original assumption is too low.
Higher generation would result in lower energy costs for customers.
We're monitoring raw material costs, and it seems to be the case across a number of industries right now, we're observing higher prices.
In the case of steel, for example, the return of pandemic-idled steelmaking capacity hasn't yet caught up to global demand.
We'll continue to monitor raw material cost trends as we move toward procurement later in the project timeline.
We're moving into the detailed design phase for onshore transmission.
As we observed within the industry recently, utility systems are only as good as they are resilient, which is one of the reasons that we made the decision in 2019 to go the extra distance to connect to our 500 kV transmission system to ensure that the project's power will be available when our customers need it most.
We believe that decisions we're making around the onshore engineering configurations will ultimately result in the best value for customers.
And finally, our Jones Act-compliant wind turbine installation vessel is being constructed and is on track for delivery in late 2023.
We expect to announce further details on nonaffiliate vessel charters in the near term.
In summary, lots of very exciting progress, which will continue through the summer, including our expected notice of intent from BOEM in June.
As is typical for a project of this size at this phase of development, there will be some puts and takes as work continues.
Taken as a whole, there's no change to our confidence around the project's expected LCOE range of $80 to $90 per megawatt-hour.
Near the end of the year, we'll file our CPCN and rider applications with the Virginia State Corporation Commission and we'll be in a position at that time to provide additional details around contractor selection and terms, project components, transmission routing, project costs, capacity factors and permitting.
Turning to updates around other select emissions reduction programs.
On solar, on Friday, the Virginia State Corporation Commission approved our most recent clean energy filing, which included 500 megawatts of solar capacity across nine projects, including over 80 megawatts of utility-owned solar, the fourth consecutive such approval.
We also recently issued an RFP for an additional 1,000 megawatts of solar and onshore wind, as well as 100 megawatts of energy storage and 100 megawatts of small-scale solar projects, and eight megawatts of solar to support our community solar program.
Our next clean energy filing, which we expect to include solar and battery storage projects, will take place later this year.
Since our last call, we've continued to derisk our plan to meet the VCEA solar milestone by putting another 30,000 acres of land under option, bringing the total to nearly 100,000 acres of options or exclusive land agreements, which is enough to support the approximately 10 gigawatts of utility-owned solar as called for by the Virginia Clean Economy Act.
The Surry station provides around 15% of the state's total electricity and around 45% of the state's zero-carbon generation.
This authorization is a critical step in ensuring the plant will continue to provide significant environmental and economic benefits for many years to come.
We expect to file with the SEC for rider recovery of relicensing spend late this year for both Surry and North Anna stations.
Our gas distribution business, as we've discussed in the past, our gas utility operations are enhancing sustainability and working to reduce scope on and three emissions, with focused efforts around energy efficiency, renewable natural gas and hydrogen blending, operational modifications, and potential changes around procurement practices.
For example, as part of our recently filed natural gas rate case in North Carolina, we asked the North Carolina Utilities Commission to approve five new sustainability-oriented programs: hydrogen blending pilot, that's part of our goal to be able to blend hydrogen across our entire gas utility footprint by 2030; a new option to allow our customers to purchase RNG attributes; and three new energy efficiency programs.
Finally, in South Carolina.
The South Carolina Office of Regulatory Staff recently filed a report finding that our revised IRP met the requirements of the law and the Public Service Commission's order requiring the modified filing.
As a reminder, the preferred plan and the revised filing calls for the retirement of all coal-fired generation in our South Carolina system by the end of the decade, which helps to drive a projected carbon reduction of nearly 60% by 2030 as compared to 2005.
While the IRP is an informational filing, it does not provide approval or disapproval for any specific capital project.
We look forward to continuing to talk with stakeholders, including the commission, about an increasingly low-carbon future.
An order is expected from the Public Service Commission by June 18.
Turning to the regulatory landscape, let me provide a brief update on our Virginia triennial review filing, which we submitted at the end of March.
As shown on Slide 12, the filing highlights Dominion Energy Virginia's exceptionally reliable and affordable service.
The state's careful and thoughtful approach to utility regulation has resulted in a model that prioritizes long-term planning that protects customers from service disruptions and bill shocks.
Consider these facts, 99.9% average reliability delivered at rates that are between 8% and 35% lower than comparable peer groups.
We're proud of our record and the work we do to serve customers every single day.
Our filing also reflects over $200 million of customer arrears forgiveness as directed by the general assembly, relief that is helping our most vulnerable customers address the financial impacts of COVID-19.
The filing also identifies nearly $5 billion of investment in rate base on behalf of our customers over the four-year review period, including $300 million of capital investment in renewable energy and grid transformation projects that we believe meet the eligibility criteria for reinvestment credits for customers.
The commission's procedural schedule is shown here.
We've included additional details regarding the case as filed in the appendix for your review and look forward to engaging with stakeholders in coming months.
It's clear to us that the existing regulatory model is working exceptionally well for customers, communities, and the environment in Virginia.
We're delivering increasingly clean energy while protecting reliability and safeguarding affordability.
In South Carolina, we continue to engage in settlement discussions with the other parties as highlighted in our monthly filings before the commission.
We aren't able to discuss specifics of that process but can report that all parties appear committed to working toward a mutually agreeable resolution.
Finally, let me highlight noteworthy developments in the legislative landscape for our company.
In Virginia, during the now adjourned session, the Virginia General Assembly passed House Bill 1965, which adopts low and zero-emissions vehicle programs that mirror vehicle emission standards in California.
The law, which has been signed by the governor, ensures that more electric vehicles are manufactured and sold in Virginia.
It will likely take a few years before we see the significant and inevitable ramp-up in electric vehicle adoption in our service territory, but we're taking steps today to be prepared for the incremental electric demand and associated infrastructure.
That includes regional coordination with other utilities to ensure highway corridors that ensure seamless charging networks, support for in-territory EV charging infrastructure, which includes a significant investment in a variety of grid transformation projects, as well as the rollout of time-of-use programs.
At the federal level, we're encouraged by the support we're seeing for our offshore wind project.
We applaud efforts to increase funding for the research and development of technologies that will allow the utility industry to drive further carbon emissions reductions.
We're philosophically aligned with the current administration in wanting to accelerate decarbonization across the utility value chain, while also recognizing that the energy we deliver must remain reliable and affordable.
It's still early, but we're engaging in the process of policy formation and monitoring developments closely and continue to believe we are well-positioned to succeed in an increasingly decarbonized world.
I'll conclude the call with the summary on Slide 13.
Our safety performance year to date is tracking closely to our record-setting achievement from last year.
We reported our 21st consecutive quarterly result that normalized for weather, meets or exceeds the midpoint of our guidance range.
We affirmed our existing long-term earnings and dividend guidance.
We're focused on executing across the largest regulated decarbonization investment opportunity in the nation for the benefit of our customers.
And we're aggressively pursuing our vision to be the most sustainable energy company in America.
| compname announces q1 earnings per share of $1.23.
sees q2 operating earnings per share $0.70 to $0.80.
q1 operating earnings per share $1.09.
q1 gaap earnings per share $1.23.
also affirms its long-term earnings and dividend growth guidance.
|
As the operator just mentioned, I'm Angie Park, Managing Director and Head of Investor Relations.
We hope you've had an opportunity to review the news release we issued a short time ago.
Let me quickly outline the agenda for today's call.
Julie will begin with an overview of our results, KC will take you through the financial details, including the income statement and balance sheet along with some key operational metrics for the first quarter.
Julie will then provide a brief update on our market positioning, before KC provides our business outlook for the second quarter and full fiscal year 2022.
During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors.
We include reconciliations of non-GAAP financial measures where appropriate to GAAP in our news release or in the Investor Relations section of our website at accenture.com.
Our results again this quarter reflect how you are living our purpose every day to deliver on the promise of technology and human ingenuity.
As more and more companies embrace compressed transformation, our clients are turning to us as their trusted partner as reflected in our outstanding growth of 27% this quarter.
We added 15 new Diamond clients, bringing the total to 244.
Diamond clients are our largest relationships and to give some context, we added 13 Diamonds in all of FY'21.
We also had record bookings of $16.8 billion, 30% growth year-over-year with 20 clients with bookings over $100 million, and we expanded operating margin 20 basis points in Q1, with adjusted earnings per share growth of 28%, while we continue to invest in our business and people, including $1.7 billion in acquisitions and in just the first quarter, we invested $215 million in learning for our people with 8.6 million training hours for approximately 14 hours per person.
The extraordinary demand we see in the market reflects the imperative of digital transformation.
Companies are making critical decisions about who will be their strategic partner and they are selecting us because of our talented people, our deep industry and technology capabilities and our commitment to both create value and need with value.
We predicted back in 2013 that every business would be a digital business and we have executed a clear strategy to rotate our business to anticipate and be ready to serve our clients.
And when the pandemic hit, we were ready with capabilities at scale reflected in 70% of our revenue at that time, being from digital cloud and security with strong relationships with the world's leading technology companies, which in some cases go back decades, with the focus on growing our people through learning, allowing us to rapidly reskill with an unwavering commitment to inclusion and diversity and the quality and caring for our people professionally and personally, making us a talent magnet in a tight labor market, adding 50,000 talented individuals in Q1.
And it is our breadth of capabilities across strategy and consulting, interactive technology and operations which is unique in our industry that allows us to work side-by-side with our clients to deliver results, and we believe our goal to create 360 degree value for our clients, people, shareholders, partners and communities is an essential part of our success.
Certainly, our commitment to creating a vibrant career paths for our people is an important part of this value and we just completed our annual promotion process.
I want to congratulate our 1,030 new promotes to Managing Director, 143 new appointments to Senior Managing Directors, and the more than 90,000 people we promoted around the world in Q1, overall.
Today, we launched our 360 Value Reporting Experience, a new way to show our progress and the value we create in all directions for all of our stakeholders.
More on that later.
KC, over to you.
We were very pleased with our overall results in the first quarter, which exceeded our expectations, setting a new bookings record at $16.8 billion with consulting bookings exceeding the previous record by more than $1 billion.
Our results reflected strong double-digit revenue growth across all dimensions of our business, our markets, services and industry groups, and we saw improved pricing in many parts of our business.
Based on the strength of our first quarter results and the demand we see in the market, we are significantly increasing our full year revenue and earnings per share outlook.
Now let me summarize a few of the highlights of the quarter.
Revenues grew 27% in local currency, increasing more than $3.2 billion over Q1 last year and more than $600 million above our guided range, with broad-based over delivery across all markets, services and industries, with all 13 industry groups growing double-digits.
We continue to extend our leadership position with growth we estimate to be more than 5 times the market, which refers to our basket of publicly traded companies.
Operating margin of 16.3% for the quarter, an increase -- with an increase of 20 basis points.
We continue to drive margin expansion, while making significant investments in our people and our business, including acquisitions.
We delivered very strong earnings per share of $2.78, up 20% over adjusted fiscal '21 results.
Finally, we delivered free cash flow of $349 million and returned $1.5 billion to shareholders through repurchases and dividends.
We also invested approximately $1.7 billion in acquisitions and we continue to expect to invest approximately $4 billion in acquisitions this fiscal year.
With those high-level comments, let me turn to some of the details, starting with new bookings.
New bookings were a record at $16.8 billion for the quarter, representing 30% growth in U.S. dollars and were $800 million higher than our previous record, with an overall book-to-bill of 1.1.
Consulting bookings were a record at $9.4 billion with a book-to-bill of 1.1.
Outsourcing bookings were $7.4 billion with a book-to-bill of 1.1.
We were very pleased with our bookings this quarter, which reflected 20 clients with bookings over $100 million.
All of our service dimensions, strategy consulting, technology services and operations, as well as our geographic markets delivered strong double-digit bookings growth in U.S. dollars.
Turning now to revenues.
Revenues for the quarter were $15 billion, a 27% increase in U.S. dollars and in local currency.
Consulting revenues for the quarter were $8.4 billion, up 33% in U.S. dollars and 32% in local currency.
Outsourcing revenues were $6.6 billion, up 21% in U.S. dollars and in local currency.
Taking a closer look at our service dimensions, strategy and consulting, technology services and operations, all grew very strong double-digit.
Turning to our geographic markets.
In North America, revenue growth was 26% in local currency, driven by double-digit growth in public service, software and platforms and consumer goods, retail and travel services.
In Europe, revenues grew 28% in local currency, led by double-digit growth in consumer goods, retail and travel services, industrial and banking and capital markets.
Looking closer to the countries, Europe was driven by double-digit growth in Germany, U.K., France and Italy.
In growth market, we delivered 30% revenue growth in local currency, driven by double-digit growth in consumer goods, retail and travel services, banking and capital markets and public service.
From a country perspective, growth markets was led by double-digit growth in Japan and Australia.
Moving down the income statement.
Gross margin for the quarter was 32.9%, compared with 33.1% for the same period last year.
Sales and marketing expense for the quarter was 9.7%, compared with 10.4% for the first quarter last year.
General and administrative expenses were 6.9%, compared to 6.6% for the same quarter last year.
Operating income was $2.4 billion in the first quarter, reflecting a 16.3% operating margin, up 20 basis points compared with Q1 last year.
Before I continue, as a reminder, we recognized an investment gain in Q1 last year, which impacted our tax rate and increased earnings per share by $0.15.
The following comparisons exclude these impacts and reflect adjusted results.
Our effective tax rate for the quarter was 24.4%, compared with an adjusted effective tax rate of 23.7% for the first quarter last year.
Diluted earnings per share were $2.78, compared with adjusted diluted earnings per share of $2.17 in the first quarter last year.
Days service outstanding were 42 days compared to 38 days last quarter and 38 days in the first quarter of last year.
Free cash flow for the quarter was $349 million, resulting from cash generated by operating activities of $531 million net of property and equipment additions of $182 million.
Our cash balance at November 30th was $5.6 billion, compared with $8.2 billion at August 31st.
With regards to our ongoing objective to return cash to shareholders.
In the first quarter, we repurchased or redeemed 2.4 million shares for $845 million at an average price of $346.19 per share.
At November 30th, we had approximately $5.6 billion of share repurchase authority remaining.
Also in November, we paid a quarterly cash dividend of $0.97 per share for a total of $613 million.
This represents a 10% increase over last year.
And our Board of Directors declared a quarterly cash dividend of $0.97 per share to be paid on February 15th, a 10% increase over last year.
So in summary, we are very pleased with our Q1 results and we are off to a very strong start in FY'22.
Starting with the demand environment.
As we expected, across industries and the globe, technology continues to be the single biggest driver of change, accelerating, disrupting and creating new opportunities.
More companies are embracing compressed transformation, underpinned by cloud and digital and are moving to build their digital core and use technology to transform how they operate and to find new ways to compete and grow as you would expect for 27% revenue growth.
We are seeing broad-based demand across all markets, services and industries with double-digit growth across all our strategic growth priorities, including Applied Intelligence, Cloud, Industry X, Interactive Intelligent Operations, Intelligent Platform Services, Security and Transformational Change Management.
Let me bring this demand to life.
First, compressed transformation is occurring across the globe and the key enabler is the cloud, across the continuum from public to hybrid to increasingly the edge and the move to leading SaaS platforms, along with the convergence of cloud and data.
For example, we are working with a leading global supplier of tires and mobility solutions to migrate to the cloud, modernize its IT platforms, use data to accelerate growth and value and shift to a digital supply chain.
We created a state-of-the-art systems to track inventory, sales, warranty information and returns all in the cloud, all in real time, and have already helped to increase customer satisfaction 35% with improved cost optimization and increased revenue up next.
We're also helping Mount Sinai Health System, New York City's largest academic medical system transform, modernize, and increase it's resilience by migrating it's clinical systems, non-clinical systems and clinical data to a stable, secure cloud-based infrastructure to proactively detect and prevent threat, adapt the business and regulatory changes, together with the potential to save millions over the next five years.
Savings that can be reinvested to fund strategic innovative programs and help meet skilled team.
Our deep industry expertise is helping companies find new solutions and path to growth and helping their customers.
For example, we are collaborating with OPay, a leading Finnish Financial Group to use automation, advanced analytics and other emerging technologies to increase business agility, reduce cost and deliver enhanced customer and employee experiences.
OPay will adopt the intelligent automation platform Accenture myWizard to enable the company to extract greater value from its technology investment.
We are working with TUGA, a leading utilities provider in Germany to create and operate a game-changing meter-to-cash IT platform in the cloud.
It will help reduce operating cost by up to 40%, accelerate time to market and free up resources for energy transition and innovations like smart metering, helping customers make environmentally conscious decisions and energy providers stay responsive and reliable.
And as we talked about last quarter, our sustainability services are focused on helping our clients across industries move from commitment to action at scale.
We see these services as critical to our clients' agendas.
I'm pleased to announce that we have signed an agreement to acquire Zestgroup, a Dutch sustainability services company with a 140 employees that specializes in energy transition services and sourcing renewables and other clean energy sources.
We look forward to welcoming them -- welcoming them and working together to help clients move at speed to achieve net zero carbon.
We continue to help our clients to enter the next digital frontier of Industry X. We're excited to have completed the acquisition of umlaut and are seeing the power of our combination already.
Together we're working with the global technology leader to transform from a traditional engineering platform to a more agile, model based engineering platform to use the simulation and analysis from design and development, all the way through the product life cycle.
We are also working with an American wireless operator to help improve daily operations and transform their network security by combining our deep security risk assessment and communications industry skills.
Of course, growth is at the heart of every clients agenda and Interactive is helping our clients capture new growth with their customers with our unique combination of creativity, technology, data, AI and industry expertise.
For example, we are applying our digital global capabilities to help Capri Holdings Limited, a global fashion, luxury group consisting of the iconic brands Versace, Jimmy Choo and Michael Kors translate its rich in-store luxury shopping experience to a digital experience that aligns with shifting customer behaviors and accelerate sustainable growth.
As a strategic partner with Volkswagen Group, a German motor vehicle manufacturer, we're helping Audi and VW to pave the way for sustainable growth to precise continuous commerce and rich experiences along the entire car buying -- car buying journey.
We are combining the power of AI and predictive analytics to deliver the right experiences at the right time to accelerate revenue growth through an expanded digital commerce ecosystem.
We're also working with VLI, a Brazilian logistics solutions company and Trato [Phonetic] its new platform business to provide a digital one-stop shop for self-employed truckers to enhance their growth to improve logistics by offering options from our profitable freight product as well as to provide them access to critical services such as insurance, loans and healthcare, all by combining [Indecipherable] analytics and AI.
We see an increasing demand to create the platforms that power the digital products and experiences our clients seek for their customers.
We're helping CLO [Phonetic] a leader in electronic payments in Latin America, become more competitive by migrating to the cloud, which will accelerate new product development and enable cutting-edge technology.
This will make it easier to launch innovative products, reduce time to market by two thirds and lower costs, all while enhancing their customers' experience.
And of course, security is critical to all our clients.
We were proud to be selected by the Department of Homeland Security Cyber Security and Infrastructure Security Agency CISA in the U.S., Americas risk advisor defending against today's threats with advanced cyber services to help the Department of Homeland Security protect federal, civilian, executive branch system against cyber attacks like ransomware [Indecipherable] and malware campaigns.
Even as companies undergo compressed transformation, exponential technology changes continue.
We are investing to anticipate the future and we are working with our clients to innovate and take advantage of emerging technologies to compete and win.
Our R&D is powered by central labs and ventures and extends across every part of our business so that we can quickly translate research into real results for our clients.
For example, we are working with ESPN to explore how emerging technologies can enable new ways for fans to experience sports at the ESPN edge innovation center, leveraging the years of early investments we have made an extended reality.
We've been a key participant in shaping the innovation in enterprise, blockchain technologies across the globe with applications and financial markets, supply chain and digital identity, which now are creating value for our clients.
From partnering with the Digital Dollar Foundation to explore a U.S. Central Bank digital currency, to working with Hong Kong Exchanges and Clearing Limited to build a new integrated settlement platform using digital asset modeling language smart contract.
And while the metaverse [Phonetic] has recently burst into the public eye, we've been an early innovator implying the technology.
In fact, we often innovate on cutting-edge technologies by deploying them at Accenture first.
We are proud to have the largest enterprise Medivirs [Phonetic] through what we call the nth four and are deploying over 60,000 virtual reality headsets and have created one Accenture Park, a virtual campus for on-boarding and immersive learning, including meeting rooms and collaborative experiences.
Our VR environments provide our people with a human connection and learning experiences in an immersive digital world.
We are also working with clients to help explore and shape their early forays into the metaverse through new digital experiences enabled by virtual reality and responding to their interest in new products enabled by NFT or non-fungible tokens in new ways to conduct commerce as the metaverse take shape.
Many of these client examples reflect our goal to create 360 degree value.
This goal reflects our growth strategy, our purpose, our core values and our culture of shared success.
It is also how we operate Accenture and we measure our success by how well we are achieving this goal for all our stakeholders.
And today we are proud to present our new 360 Degree Value Reporting Experience, a new way to share our progress, which is available on our website.
With this comprehensive digital tool you will find all our reporting and data in one place, measuring how we're doing.
We've expanded our ESG reporting with three additional ESG framework, the Sustainability Accounting Standards Board SASB, the task force on climate related financial disclosure TCFD, and the World Economic Forum International Business Council WEF, IBC metrics, while continuing to report against the Global Reporting Initiative GRI standards, the UNGC 10 principles and the Carbon Disclosure Project CDP, because we believe the transparency builds trust and helps us all make more progress.
Back to you, KC.
Now let me turn to our business outlook.
For the second quarter of fiscal '22, we expect revenues to be in the range of $14.3 billion to $14.75 billion.
This assumes the impact of FX will be about negative 4% compared to the second quarter of fiscal '21 and reflects an estimated 22% to 26% growth in local currencies.
For the full fiscal year '22 based on how the rates have been trending over the last few weeks, we now expect the impact of FX on our results in U.S. dollars will be approximately negative 3% compared to fiscal '21.
For the full fiscal '22, we now expect our revenue to be in the range of 19% to 22% growth in local currency over fiscal '21, which continues to assume an inorganic contribution of 5%.
For operating margin, we continue to expect fiscal year '22 to be 15.2% to 15.4%, a 10 basis point to 30 basis point expansion over fiscal '21 results.
We continue to expect our annual effective tax rate to be in the range of 23% to 25%.
This compares to an adjusted effective tax rate of 23.1% in fiscal '21.
For earnings per share, we now expect our full year diluted earnings per share for fiscal '22 to be in the range of $10.33 to $10.60 or 17% to 20% growth over adjusted fiscal '21 results.
For the full fiscal '22, we now expect operating -- operating cash flow to be in the range of $8.4 billion to $8.9 billion, property and equipment additions to be approximately $700 million and free cash flow to be in the range of $7.7 billion to $8.2 billion.
Our free cash flow guidance continues to reflect a very strong free cash flow to net income ratio of 1.1 to 1.2.
Finally, we continue to expect to return at least $6.3 billion through dividends and share repurchases as we remain committed to returning a substantial portion of cash to our shareholders.
I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask questions.
Operator, would you provide instructions for those on the call.
| q1 earnings per share $2.78.
q1 revenue rose 27 percent to $15 billion.
|
We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financials and Filings.
Mike will focus his comments on Q2 performance, largely compared to 2019 [Technical Issues] impact from COVID as well as future catalysts and the outlook for our business including Q3 and full year '21 guidance.
During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Ian Meredith and Dr. Ken Stein.
Before we begin, I'd like to remind everyone on the call that operational revenue growth excludes the impact of foreign currency fluctuation and organic revenue growth further excludes acquisitions and divestitures, for which there are less than a full period of comparable net sales.
Relevant acquisitions for organic growth versus 2020 and 2019 include Preventice which closed March 1, 2021, and Vertiflex and BTG Interventional Medicines, which closed in May and mid-August of 2019 respectively.
Divestitures include BTG Specialty Pharmaceuticals, which closed on March 1, 2021 and the global embolic microspheres portfolio and Intrauterine health franchise, which were divested in mid-August 2019 and second quarter of 2020, respectively.
Finally growth goals of 6% to 8%, ex-COVID, represent comparisons between time periods in which results are not materially impacted by the COVID-19 pandemic.
They include, among other things, the impact of the COVID-19 pandemic upon the Company's operations and financial results, statements about our growth and market share, new product approvals and launches, acquisitions, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales margins and earnings, as well as our tax rates, R&D spend and other expenses.
Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC.
These statements speak only as of today's date and we disclaim any intention or obligation to update them.
I'm pleased to report very strong Q2 financial results today as the resumption of elective procedures strengthened in the US and improved in many, but certainly not all regions, across the globe.
We are well positioned for the second half of 2021 and beyond as we continue to execute our category leadership strategy, driven by our innovative pipeline, expansion into faster growth markets, globalization efforts and enhanced digital capabilities.
Total company second quarter operational sales grew 50% versus 2020.
Organic sales grew 52% versus 2020 and 9% versus 2019, exceeding expectations as recovery from the pandemic occurred more quickly than expected, particularly in the US.
Importantly, six out of our seven businesses grew double digits organically versus 2019 and we estimate that five of our business units grew faster than their respective markets.
We are pleased with our ongoing and new product launches and we are now enrolling our clinical trials at pre-COVID run rates.
Q2 adjusted earnings per share of $0.40 grew 378% versus 2020 and 3% versus 2019, exceeding the high end of guidance by $0.02 primarily due to sales outperformance and lower spend.
Adjusted operating margin of 25.1% was slightly ahead of our expectations as we continued to balance investment with the sales recovery.
We continue to be pleased with our free cash flow, with second quarter free cash flow generation of $541 million and adjusted free cash flow of $838 million.
Given the second quarter outperformance, we are increasing and narrowing our guidance ranges for both sales and EPS, which assumes a manageable level of COVID impact in the second half of this year.
Compared to 2020, we target Q3 '21 organic revenue growth of 12% to 14% and full year 19% to 20%.
Compared to 2019, we target Q3 '21 organic revenue growth of 5%- to % and for the full year, growth of 6% to 7%.
Our Q3 '21 adjusted earnings per share estimate is $0.39 to $0.41, and we are updating full year adjusted earnings per share to a revised range of $1.58 to $1.62.
Dan will provide more details on both sales and earnings per share performance and outlook, including the revenue contribution from Preventice.
We continue to expect a Q3 close for Farapulse, and an second half '21 close for Lumenis Surgical.
I'll now provide additional highlights on Q2 '21 results, along with comments on our Q3 and 2021 outlook.
Within the regions, on an operational basis versus Q2 2019, the U.S. grew 22%, Europe/Middle East/Africa grew 9%, AsiaPac grew 4%, and Emerging Markets sales grew 11%.
Organically, in the U.S., U.S. grew 12% versus 2019 as strength was supported by faster than anticipated recovery of procedure volume levels, along with ongoing new product launches across the entire portfolio.
Operationally, EMEA delivered an excellent Q2 with broad based growth across nearly all major markets and franchises, even as some countries experienced COVID related lockdowns and procedural delays.
The EMEA region also had double digit growth in PI, EP, Endo and Neuromod, driven by products such as ACURATE Neo2, TheraSphere, POLARx, AXIOS and WaveWriter Alpha with notable strength in Middle East and North African countries.
In Asia Pacific, although Q2 results included approximately 600 basis points of negative impact from the China tender pricing versus 2019, five of our businesses grew double digits, with strong growth in China, Australia, and Korea.
While Japan's Q2 results were impacted by COVID, we are seeing success with ongoing and new product launches such as Ranger DCB, Stablepoint, and Watchman FLX.
China sales grew 16% versus 2019, with strong double-digit growth within all business units with the exception of Intervention Cardiology, which included the negative impact of tender pricing.
We continue to be pleased with our strong growth in Complex PCI and Imaging, enabled by both our innovative portfolio and by the tender win.
We continue to expect full year 2021 double-digit growth from China versus both 2019 and 2020.
I'll now provide some comments on business units.
Starting with Urology and Pelvic Health, sales were very strong, growing organically 16% versus 2019, with balanced growth across our Stone, Prostate Health and Pelvic Health franchises.
Stone, which is the largest franchise grew double digits, as enthusiasm continues ahead of the Lumenis acquisition, which will expand our category-leading Urology portfolio with this differentiated laser technology.
The Prostate Health franchise grew strong double digits, with continued strength in our Rezum and SpaceOAR businesses.
Rezum growth was driven by further traction of its direct to patient efforts in the United States, global expansion and continued appreciation for the long term durability and cost benefits of this minimally invasive therapy.
Within our SpaceOAR business, growth was supported by the ongoing launch of next generation SpaceOAR Vue hydrogel in the U.S. and our recent launch in Europe.
SpaceOAR Vue is visible under CT and negates the need for physicians to use MRI, an important step to optimizing treatment planning for patients undergoing prostate radiation therapy.
Our Endoscopy team delivered an excellent Q2 with sales growing organically 15% versus 2019.
Within the quarter, we completed CE Mark for Exalt B and are pleased with early launch feedback highlighting differentiated visualization and suction and remain on track to launch in the US in the second half of 2021.
We continue to make progress with Exalt D, with a physician peer training program launched in Q2 as well as the resumption of more normal market development activities as access to hospitals improves.
In Cardiac Rhythm Management, sales were down 6% organically versus 2019.
We believe that our CRM performance was slightly below the overall market, inclusive of a temporary impact from the recent EMBLEM S-ICD physician advisories.
Importantly, we recently began launching our enhanced SICD electrode and anticipate improved performance in overall CRM in the second half, as we expect SICD revenues to rebound.
In our diagnostics franchise, our Lux-Dx implantable cardiac monitor continues to perform very well and gain market share in the U.S.
We are also pleased with the strong growth and execution of the Preventice team and continue to anticipate full year growth in that business of at least 20% on a pro forma basis versus 2020.
Electrophysiology sales were up 10% versus 2019.
Strong international sales growth of 29% were driven by the ongoing success of POLARx in Europe and Stablepoint Force-Sensing catheter in Europe and Japan.
US EP sales will likely lag market growth until we receive approval for these therapies, which are currently enrolling in their respective U.S. IDE trials.
We also exercised our option to acquire Farapulse, which is a leader in pulsed field ablation, an emerging field that has the potential to improve safety, efficacy, and ease of use for cardiac ablation procedures.
Farapulse is the only company with a commercially approved pulse ablation product in Europe and is actively enrolling its US IDE, ADVENT trial.
We are excited to bring this differentiated therapy into our EP portfolio in Q3 2021.
In Neuromodulation, organic revenue grew 14% versus 2019.
Our Pain Management franchise growth accelerated in Q2, supported by the ongoing launch of our next gen WaveWriter Alpha SCS System with Cognita digital solutions and continued clinical evidence generation.
At the NANS mid-year meeting, we released the one-year follow-up data for our COMBO study demonstrating a sustained, high level of clinical and functional success at 84% responder rate.
We have also started reporting on the real-world results of the FAST therapy, which is designed to provide profound and immediate pain relief.
Beyond advancing outcomes for our existing indications, we are also pleased with the progress of our SOLIS Study, which is focused on non-surgical back population, which started in Q1 of this year and look forward to beginning our diabetic peripheral neuropathy study by the end of the year.
In Deep Brain Stimulation, the business continues to gain share globally and delivered strong double digit growth, driven by the launch of the Vercise Genus platform, the expansion of our commercial infrastructure, and partnership with Brainlab.
In Interventional Cardiology, organic sales grew 10% versus 2019 with double digit growth in Structural Heart Valves, WATCHMAN and Complex PCI and Imaging franchises.
The growth of the WATCHMAN franchise accelerated sequentially.
The impressive growth was driven primarily by increasing hospital and physician utilization rates in the US and some share gains in Europe.
Importantly, nearly all US accounts have fully transitioned from WATCHMAN 2.5 and are now using FLX exclusively.
Additionally, we're pleased with the two year results of PINNACLE FLX, featured as a late-breaker at TVT, which reinforced our positive one year primary outcomes and met its secondary effectiveness endpoint.
We remain excited about the outlook for the WATCHMAN franchise with our next generation FLX device, global expansion, and continued work toward indication expansion with ongoing clinical trials.
Notably the OPTION trial, comparing WATCHMAN FLX to first-line oral anticoagulants for patients with non-valvular afib who also undergo a cardiac ablation procedure, recently we completed enrollment ahead of schedule, in spite of challenges presented by the pandemic.
In TAVR, our ACURATE neo2 launch continues to do well in Europe supported in part by the real-world data presented at Euro PCR which demonstrate that the low ACURATE neo2 PVL rate is comparable to contemporary TAVI devices, with continued low permanent pacemaker implantation rates.
These outcomes were reiterated in the Early Neo2 Registry, also presented last week at TVT as a late-breaker.
Sentinel, our cerebral embolic protection device, achieved its highest quarterly sales to date with strong new account openings globally and we continue to enroll in the PROTECTED TAVR randomized clinical trial.
Coronary therapies declined mid-single digits versus 2019, attributable to Drug-Eluting Stents, which include the impact of China tenders and global price pressure.
We continue to see strong growth in Complex PCI and Imaging, with particular strength in RotaPro and IVUS.
Importantly, our global complex PCI and imaging business is now 50% larger than our DES business.
We're advancing opportunities for future growth drivers and within the quarter began enrollment in our AGENT DCB trial, which is a first in the U.S. study of coronary in-stent restenosis.
Peripheral Interventions delivered organic sales up 10% versus Q2 2019.
Within Interventional Oncology, TheraSphere grew over 30% versus 2019 on a pro forma basis in its first full quarter post PMA approval.
In Venous, Varithena continues to grow double digits and gain share in the varicose vein market.
Within Arterial, our Drug-eluting portfolio achieved record sales in Q2, supported by global expansion along with the sector's continuing recovery.
We are pleased to have started enrollment on the Elegance registry, a study that will gather clinical evidence on the risk of PAD in previously underrepresented patient populations.
The study will also look at long-term outcomes of patients being treated with Eluvia DES or Ranger DCB.
I'd also like to highlight Boston Scientific's recent inclusion on the JUST Capital Top 100 list of Companies Supporting Healthy Families and Communities along with our recognition as a Best Place to work for Disability Inclusion.
We are proud to be recognized for providing our employees an inclusive and supportive environment and remain committed to global sustainable practices.
Overall, we are pleased with our performance through the first half of this year and we remain bullish on the long-range outlook for Boston Scientific.
We look forward to sharing our strategic plan objectives at our hybrid Investor Day event on September 22nd.
Second quarter consolidated revenue of $3.077 billion represents 53.6% reported revenue growth versus the second quarter 2020 and reflects an $81 million tailwind from foreign exchange.
On an operational basis, revenue growth was 49.6% in the quarter.
Sales from the Preventice acquisition contributed 240 basis points, more than offset by the divestiture of Specialty Pharmaceuticals, resulting in 52.4% organic revenue growth, above our guidance range of 44% to 48% growth versus 2020.
Compared to second quarter 2019, organic growth was 8.9%, above our guidance range of 3% to 6%.
This 8.9% growth excludes $15 million in 2019 sales of divested intrauterine health and embolic beads businesses, as well as $178 million in 2021 sales of acquired businesses, which consists of two months of Vertiflex, and a full quarter of BTG Interventional Medicines and Preventice.
Top line results drove Q2 adjusted earnings per share of $0.40, representing 378% growth versus 2020, 3% growth versus 2019, and exceeding our guidance range of $0.36 to $0.38.
Adjusted gross margin for the second quarter was 70.5%, slightly above our expectations driven by sales outperformance in higher margin businesses.
As expected, we have materially worked through the COVID-driven negative manufacturing variances capitalized on the balance sheet in 2020, and as a result expect slight improvements in second half gross margin compared to the first half, though still not at full year 2019 levels as other headwinds remain, in particular, the lingering cost of running plants with COVID-specific measures, as well as some impact from inflation.
Not unique to us, this inflation includes items like increased freight costs, selective wage pressure and some price increase on direct materials.
Second quarter adjusted operating margin was 25.1%, slightly above our expectations driven by sales outperformance and balanced investment, and also includes a reserve for a legal settlement that we expect will improve access to additional markets for some of our cardiovascular technology.
GAAP charges within the quarter additionally include $298 million in litigation-related expenses to account for incremental costs to resolve newly estimable claims, as well as known claims and corresponding legal fees within our legal reserve.
Materially all U.S. claims remain settled or in the final stages of settlement.
Our reserve assumptions are based on full global resolution now in 2023 given recent claim activity and expected litigation.
Our total legal reserve was $617 million as of June 30, an increase of $162 million versus March 31 driven by the mesh reserve increase and cardiovascular settlement, partially offset by payments to close out majority of the state attorneys general mesh settlement as well as continuing mesh product liability payments.
Moving to below-the-line, adjusted interest and other expense totaled $107 million, in line with expectations.
Our tax rate for the second quarter was 11.1% on an adjusted basis, also in line with expectations.
Adjusted free cash flow for the quarter was $838 million and free cash flow was $541 million, with $643 million from operating activities less $102 million net capital expenditures.
Our goal remains to deliver adjusted free cash flow in line with 2020, approximately $2.0 billion, as we continue to expect increased working capital headwinds in inventory and accounts receivable during the remainder of the year.
As of June 30, 2021, we had cash on hand of $2.7 billion.
Our top priority for capital deployment remains tuck-in M&A and we continue to expect to close the acquisition of Lumenis Surgical in the second half of the year, and Farapulse in Q3.
We have capacity to pursue additional business development opportunities while continuing to remain active with our venture capital portfolio and consider opportunistic share repurchase.
We ended Q2 with 1.432 billion fully diluted weighted-average shares outstanding.
I'll now walk through guidance for Q3 and full-year 2021.
For the full year, we expect 2021 operational revenue growth to be in a range of 18.5% to 19.5% versus 2020, which includes an approximate net 50 basis point headwind from the divestiture of our intrauterine health franchise and Specialty Pharmaceuticals, partially offset by the acquisition of Preventice.
Excluding the impact of acquisitions and divestitures, we expect organic revenue growth to be in the range of 19% to 20% versus 2020, and 6% to 7% versus 2019.
For the organic comparison to 2019, full year 2019 sales exclude $50 million in sales of our embolic beads portfolio and intrauterine health franchise, as well as $81 million in Specialty Pharmaceutical sales; and at the midpoint of guidance, 2021 sales exclude approximately $490 million in sales from recent acquisitions, including Vertiflex through May, BTG Interventional Medicines through mid-August, and Preventice as of March, as well as $13 million of Specialty Pharmaceutical sales prior to divestiture.
For Q3 2021, we expect operational revenue growth to be in a range of 11% to 13% versus 2020, which includes an approximate net 100 basis point headwind from the divestiture of Specialty Pharmaceuticals, partially offset by the acquisition of Preventice.
Excluding the impact of acquisitions and divestitures, we expect organic revenue growth to be in a range of 12% to 14% versus 2020, and 5% to 7% growth versus 2019, which includes a 300 basis point sequential comp headwind from Q2 to Q3 2019.
Therefore, the midpoint of guidance assumes results in line with Q2 with a continued manageable level of COVID impact.
For the Q3 organic comparison to 2019, 2019 sales exclude $35 million in sales of our embolic beads portfolio, intrauterine health franchise and Specialty Pharmaceuticals and at the midpoint of guidance, 2021 sales exclude approximately $110 million in sales from the acquisitions of BTG Interventional Medicines through mid-August and Preventice.
For adjusted operating margin, we continue to target an average of 26% in the back half of the year while simultaneously investing to more normalized operating expense levels as the first half of 2021 remained below what we would expect for a near-term run rate.
We continue to forecast our full year 2021 operational tax rate to be approximately 11% and our all-in tax rate to be approximately 10%.
We continue to expect adjusted below-the-line expenses, which include interest payments, dilution from our venture capital portfolio, and costs associated with our hedging program, to be approximately $400 million to $425 million for the year.
We expect fully diluted weighted-average share count of approximately 1.437 billion shares for Q3 2021 and 1.435 billion shares for full-year 2021.
We are raising full year 2021 adjusted earnings per share guidance to a range of $1.58 to $1.62, which includes our update to sales guidance and considers Q2 results, which removed additional uncertainty from our previously wider range.
For the third quarter, adjusted earnings per share is expected to be in a range of $0.39 to $0.41.
Please check our investor relations website for Q2 2021 Financial and Operational Highlights, which outlines more detailed Q2 results.
Congratulations, Lauren, very well deserved, who will moderate the Q&A.
In order to enable us to take as many questions as possible, please limit yourself to one question and one related follow-up.
| sees net sales growth for 2021 to be about 19% to 20% on organic basis (adds source).
q2 sales $3.077 billion versus refinitiv ibes estimate of $2.94 billion.
q2 adjusted earnings per share $0.40.
sees net sales growth for 2021 to be about 21%-22% on a reported basis.
boston scientific-sees q3 earnings per share on a gaap basis in a range of $0.20 to $0.22 and adjusted eps, excluding certain charges (credits), of $0.39 to $0.41.
boston scientific - co sees net sales growth for fy 2021 to be in range of 21-22 percent on a reported basis & 19 - 20 percent on an organic basis.
sees net sales growth for q3 to be about 12% to 14% on both a reported and organic basis.
sees 2021 estimates earnings per share on a gaap basis of $0.79-$0.83, adjusted earnings per share excluding certain charges (credits) of $1.58-$1.62.
|
I'm Jason Feldman, Vice President of Investor Relations.
craneco.com in the Investor Relations section.
Please also mark your calendars for our May 26 Virtual Aerospace & Electronics Investor Day.
Well, what a solid quarter on so many levels.
I told you all that our February Investor Day that Crane was at an inflection point for accelerating growth after years of organic investments.
In the first quarter, you saw substantial evidence of that inflection and the related themes from Investor Day reading through.
We are well positioned for accelerating organic growth as our end markets continue to recover.
In addition, we are outgrowing our end markets because of our consistent and ongoing investment in technology, new product development, and commercial excellence.
Solid execution continues to leverage that growth into earnings and strong free cash generation, which creates substantial flexibility for capital deployment, and continued evidence of the value we create through acquisitions with stellar performance at Crane Currency, Cummins Allison and I&S.
As we announced last night, first quarter adjusted earnings per share was $1.66, a 44% increase from the prior year.
All three of our strategic global growth platforms performed better than we forecast, led by Crane Currency and with demand ahead of expectations across all businesses, most substantially at Fluid Handling.
In addition to market growth, the outperformance was driven by extremely strong fundamental execution at all levels across the business, from productivity, price actions, growth initiatives driving market outgrowth and new product development, all driven by our rigorous cadence and disciplined approach to managing our business.
Regarding market outgrowth, we will spend dedicated time on Aerospace & Electronics at our May 26 Investor Day, but I would like to highlight a handful of notable accomplishments this quarter in our other businesses.
At Fluid Handling, starting with our water and wastewater business.
We continue to make progress with the new products that Alex discussed in February.
Our new high-efficiency non-clog pump remains on track to launch in July.
And we are already seeing significant interest in the product with substantial momentum in quoting activity.
When launched, this will be the most efficient pump in the market with the proprietary cooling system that allows the motor operate with far less resistance, improving efficiency.
Our chopper pump introduced in 2018 has been proven to reduce maintenance costs by 75%.
A little over two years after launch, we continued to gain share, and we just had our best-ever sales month for this product in March.
Together, these two products are on track to drive $30 million of incremental sales by 2025.
For the core process part of the business, we continue to drive new product vitality to new levels in this business.
We've always had a strong process business known for its quality, reliability and differentiated designs but we've improved upon that solid position with a product development process that continues to drive greater innovation and speed to market.
In February, we presented, in addition to our triple offset valve line, the FK Tri-X product that is true breakthrough focused on replacing other valve technologies and expanding our addressable market by another $500 million for this product line.
This valve is completely new in the industry and delivers four to 6 times better flow than the competition, while maintaining the superior sealing technology of a triple offset valve, and therefore, reducing the total cost of ownership by 50%.
During the quarter, the team completed its fugitive emissions certification process and year-to-date is already more than double our original target.
We also continue to make progress with our large lined diameter pipe product that we presented in our February 2020 Investor Day event.
This product provides more resistance to delamination and corrosion and lasts over 10 times longer than competing products.
We just exited our best quoting month ever for this product, which was introduced in 2019, and we are on track to deliver sales approximately 4 times last year's levels.
Continued progress on new products as well as commercial excellence, driving share gains in above-market growth across the Fluid Handling business.
At our Crane Payment Innovations business, we continue to capture exciting opportunities across our various vertical markets with innovative and new to the market solutions.
In February, Kurt discussed the growth we are seeing in alternative self-checkout solutions that are smaller and more versatile than the traditional self-checkout lane to grocery stores.
Our new products in this area include our Pay Station and Paypod solutions for smaller retailers, convenience stores and quick service restaurants, which continue to gain traction with customer field trials and rollouts in midsized franchises.
We are also working with an increasing number of customers on localized retail solutions, particularly with large retailers, who want a fully custom self-checkout solution optimized for their footprint and needs.
Further, retail is seeing strong demand for various self-service kiosks for bill payment applications, sale of gift cards and even the purchase and exchange of cryptocurrencies.
Gaming is the other area where we're seeing a strong rebound in market demand, paired with increasing opportunities from the innovative solutions we're offering, from cashless solutions that are compliant with the stringent regulations governing casinos to our latest simplified software and connectivity suite for both front and back-office cash management.
CPI provides an unparalleled breadth of capabilities and a successfully increasing penetration and gaining share in gaming.
At Crane Currency, this quarter's results speak for themselves.
We are clearly outgrowing the international market with our portfolio of best-in-class anti-counterfeit security solutions and banknote printing capabilities.
While aided somewhat by demand positively in this COVID environment, the currency team continues to innovate and introduce a steady flow of new best-in-class security products.
To date, 147 denominations of specified Crane Currency's technology and 10 new denominations over the last 12 months, including the first for our new BREEZE product introduction.
The commercial focus in execution has also been outstanding from strategic account management, customer segmentation and holistic value selling and product management.
As planned when we initially acquired Crane Currency, we have driven substantial improvement in international margins over the last four years through consistent application of CBS, which continues to drive improvements in quality and efficiency.
For example, paper yields in our Swedish substrate operation are up 8% over the last 12 months, a material improvement that directly improves profitability.
When we announced this acquisition in late 2017, we targeted $1 of earnings per share accretion by 2021.
Based on where we ended the quarter, I am very confident we will exceed that $1.
In addition to outgrowing our markets, there was solid execution in the quarter.
We delivered these strong results in an environment with some supply challenges and continued uncertainty related to COVID, both which will continue through the balance of the year.
Similar to what many others are experiencing globally, we continue to manage through various supply chain disruptions.
No single major issue, but our teams continue to manage through various shipping delays and random supplier constraints whether due to COVID, lockdowns or short-term material availability.
We have also done an excellent job fully offsetting the material cost increases we are seeing across many of our businesses.
That pressure was most notable in Engineered Materials, where resin prices increased rapidly, partly because of shortages and outages following the storms earlier this year in Texas that disrupted production at some of our suppliers.
However, that team managed both the sharp increase in demand from RV customers as well as the immediate higher material costs extremely well.
This is an experienced and seasoned team that responded quickly, ramped up production, and implemented price surcharges, and this was all done in a manner that treated our customers fairly, met our customers' needs and will result in full price recovery and margin protection for our business on a full year basis.
Excellent performance by the team and excellent results in the environment.
We also had continued strong performance from our recent acquisitions.
Cummins Allison and I&S are on track to exceed our original full year expectations for 2021.
And remember that Cummins Allison delivered 2020 results ahead of its original plan despite the impacts of COVID.
And we have growing capacity for further acquisitions giving our strong balance sheet and strong free cash flow generation.
An excellent quarter and an outlook that is just as impressive.
We are trending ahead of our expectations on execution, free cash flow and margins and also on sales and orders, given improving trends across nearly all of our end markets.
The pace of that improvement varies across our businesses.
Some were not really impacted negatively by the pandemic, most notably Crane Currency, the military side of our Aerospace & Electronics business and our nuclear service business.
Some, like the recreational vehicle market and Engineered Materials and our shorter-cycle commercial Fluid Handling businesses are already seeing strong sales growth.
They should be followed over the next quarter or two by a sales inflection at our Crane Payment Innovations business and then by the longer cycle process side of our Fluid Handling business.
For commercial aerospace, we are already seeing very favorable leading indicators, but we don't expect positive year-over-year sales growth until the latter part of this year.
Based on what we can see, it feels like a solid phased improvement across all segments well into 2022.
However, while our markets are improving, our optimism is tempered somewhat by the ongoing uncertainty about how the rest of the year will unfold.
There are still COVID-related lockdowns throughout parts of Europe, a worsening situation in India, ongoing travel restrictions in many parts of the world and risks related to new COVID variants.
Balancing these factors, we are raising our adjusted earnings per share guidance by $0.65 to range of $5.65 to $5.85.
At the midpoint, that reflects 50% adjusted earnings per share growth.
We are raising our core sales growth forecast by two points to a range of 4% to 6%.
Inflection, we have clear momentum with increasing traction from our growth initiatives.
And I'm confident that we are on a path to generate substantial and sustainable value for all of our stakeholders.
Starting with Fluid Handling.
Sales of $288 million increased 12% driven by a 6% increase in core sales, a 5% benefit from favorable foreign exchange and modest acquisition benefit.
Fluid Handling operating profit increased by 24% to $39 million.
Adjusted operating margins increased 120 basis points to 13.4%, reflecting strong execution on productivity, benefits from last year's cost actions and the higher volumes.
Sequentially, trends in Fluid Handling improved across the board with foreign exchange neutral backlog up 4% and foreign exchange neutral orders up 15%.
Compared to the prior year, backlog increased 5% and orders increased 2%.
Throughout the quarter, the order growth was strongest in our shorter-cycle businesses.
Orders at our core process business inflected positive on a year-over-year basis in March, and we expect that trend to continue through the second quarter.
It is possible a portion of the strength in process orders is related to distributor restocking, but we are also seeing clear evidence of improving end demand, and in some cases, the start of released pent-up demand.
We expect the recovery to be led by the chemical and pharmaceutical end markets, both of which are continuing to show signs of strengthening.
For chemicals, leading indicators, including chemical production, are improving.
And for pharma, our project funnel continues to grow.
General industrial leading indicators are also turning even more favorable.
And given the long lead times for certain products in this vertical, we continue to build some inventory in advance of the eventual recovery.
Regionally, we still expect the recovery to be led by North America and China, with Europe lagging.
We had positive year-over-year sales growth across all parts of our commercial business with particular strength in Canada.
For Fluid Handling overall, we expect to do better than our original 2021 segment guidance.
In February, we guided to core growth of 0.5%, which is now expected to be in the mid-single-digit range.
Our original guidance for favorable foreign exchange of 2% is now running closer to 4%, and we still expect an incremental acquisition benefit of approximately $5 million this year from I&S.
Margins should also exceed our original 12.5% guidance.
However, remember, we told you last quarter that while we expect really solid operating leverage this year, the strongest leverage won't occur until our longer and later cycle process business picks up a few quarters from now.
Leverage is also temporarily muted by positive FX movements that we saw in the quarter.
At Payment & Merchandising Technologies, sales of $338 million in the quarter increased 13% compared to the prior year, driven by 8% core sales growth and a 4% benefit from favorable foreign exchange.
Segment operating profit increased 176% to $85 million.
Adjusted operating margins increased 1,500 basis points to 25.3%.
And while currency core sales increased 52%, our high-margin Payment business core sales declined 12% and is still several quarters away from a full recovery.
We do believe the first quarter will be the best of the year for the segment and for Crane Currency, and volume and mix certainly did help margins somewhat in the quarter.
However, I think it is also really important to remember several other factors here.
First, we have more than doubled international margins at Crane Currency, even after the significant intangible amortization that comes with purchase accounting.
And while volume helped, the execution at Crane Currency has consistently and steadily improved over the last four years.
Quality, delivery and cost metrics are in a completely different range than they were pre-acquisition and we continue to see improvements every day.
And while broad-based, I would highlight particularly notable improvement in our international operations.
The volume we saw in the quarter was also broad-based across the U.S., the international markets as well as across security, substrate and banknote printing.
And lastly, we are meeting our customers' needs better than ever before, and we are being paid for the value that we are providing.
And that's where we will remain focused, providing our customers a level of service and quality of products that they can't obtain anywhere else.
At Crane Payment Innovations, we continue to see improving trends across the business.
We continue to expect the greatest medium-term growth in the retail -- in retail, driven by self-checkouts, strong return on investment as well as the hygiene and health benefits of eliminating direct human interaction in the checkout process.
Transportation started the year strong.
And at gaming, we continue to gain traction with our connectivity solutions and cashless payment options.
Vending still remains our softest vertical given the number of offices and schools that are still operating remotely, but we have already seen a clear inflection in leading indicators with machines in public locations like airports on a clearer path to recovery.
Given all those favorable trends for 2021, core sales growth is likely to reach the high single digits this year, somewhat better than the 6% we originally guided to, with favorable foreign exchange now, a little above 3% benefit for the year.
The core sales growth reflects solid growth across both CPI and Crane Currency.
Margins are now likely to be above 20% on a full year basis, but we certainly expect margins to moderate somewhat as the year progresses.
At Aerospace & Electronics, sales declined 20% to $154 million with segment margins of 16.9%.
In the quarter, total aftermarket sales declined 29%, driven by a 43% decline in the commercial aftermarket and a 5% decline in military aftermarket sales.
Commercial OE sales declined 32%, but the defense OE business remained solid with sales up 4%.
We continue to believe that the fourth quarter of last year marked the trough for both sales and margins, and we will see improvement over the course of 2021.
We are gaining better line of sight to improvement with leading indicators like airline schedules and flight hours trending favorably.
However, we will have at least another quarter of year-over-year sales declines before sales growth inflects given the long and late cycle nature of this business.
On a full year basis, the core sales decline should be a couple of points better than the 8% decline we guided to earlier this year.
We still expect segment margins to recover back to north of 20% fairly quickly after 2021 as the commercial markets continue to recover on a substantially lower cost base.
For this year, we expect margins modestly better than the 15% that we guided to in January.
Engineered Materials sales increased 6% in the quarter to $54 million with 11.8% margins.
Sales strength was led by recreational vehicle demand, and we have good indications that building products demand is poised for a strong recovery in the coming quarters.
Margins in the quarter were impacted by rising resin prices.
The cost pressure on resin was exasperated by the storms in Texas that disrupted operations for several of our suppliers.
The resin supply is recovering quickly and we expect that to result in resin costs reverting to more normal levels in the next several months.
We have quickly implemented surcharges on our customer base and on a full year basis, we will fully offset the higher input costs with pricing.
Consequently, we are on track to meet or exceed our original 2021 guidance for this segment.
Turning now to more detail on our total company results and guidance.
We had very strong cash flow performance in the quarter, generating $45 million in free cash flow compared to negative $43 million in the first quarter of last year.
During the quarter, we also received $15 million from the sale of a property in Long Beach, California that is excluded from free cash flow given required classification of an investing activity.
However, this sale was directly enabled by our ongoing restructuring efforts as we moved operations from this facility to other locations.
Since 2017, we have received proceeds from real estate and other asset sales made possible by restructuring activities of approximately $47 million, which means that much of our restructuring has actually been self-funded.
We also continue to further improve our strong balance sheet.
Subsequent to the quarter end, on April 15, we repaid the term loan originated in April of 2020 in full using cash on hand and some commercial paper.
At Investor Day in February, I told you that we had very limited acquisition capacity today growing to about $750 million by the end of this year.
Given our revised outlook, that number is going to be somewhat higher.
We will remain disciplined, but I am confident we will continue to find attractive transactions where we can deploy our capital to create value for shareholders.
The adjusted tax rate in the quarter was 22.2%.
For the full year, we now expect an adjusted tax rate of 21% rather than the 21.5% prior guidance with the fourth quarter tax rate likely the lowest of the year.
As Max explained, we are raising our adjusted earnings per share guidance by $0.65 to a range of $5.65 to $5.85, reflecting the strong first quarter performance and our expectation that end markets and execution will be ahead of where we forecast them earlier this year.
That said, there is still some uncertainty in many of our markets as well as challenges in certain areas of the supply chain.
But again, this guidance appropriately balances our performance and the market environment.
For core sales, we now expect core growth of 4% to 6%, up two points from our prior guidance.
Foreign exchange has also become more favorable over the last several weeks, and we now expect favorable foreign exchange translation of 2.5%, up from 1.5% in our prior guidance.
Free cash flow guidance was increased to $300 million to $330 million, up $35 million from prior guidance, reflecting higher earnings.
Corporate expense is now expected to be $77 million, up $12 million compared to the prior guidance, reflecting a number of changes, including some timing items, some legal fees and higher bonus accruals.
Regarding the cadence of our earnings through the year.
Remember, last quarter, we discussed about $0.06 of earnings that we shifted from the end of last year into our first quarter given timing and logistics issues.
We also had some favorable timing and mix in the first quarter.
We expect a step-down in earnings per share next quarter with the second and third quarter and earnings per share levels similar to each other, and then fourth quarter will follow its usual pattern as the seasonally weakest quarter across most of our businesses.
Operator, we are now ready to take our first question.
| q1 non-gaap earnings per share $1.66 excluding items.
raises fy earnings per share view to $5.65 to $5.85 excluding items.
q1 sales rose 5 percent to $834 million.
|
I'm Martin Jarosick, Vice President, Investor Relations for CF.
These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements.
More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website.
Now let me introduce Tony Will, our President and CEO.
Before I jump into our financial results, I want to highlight the entire CF team for amazing execution across all areas of our business.
We set all-time company best records for safety, ammonia production and sales volumes, despite the challenges that 2020 hurled at us.
There was no playbook for how to manage through a global pandemic, yet this team developed and implemented plans to keep our people safe along with everyone who came on to our sites.
To date, we have no known transmissions of COVID-19 within any of our facilities.
On the safety front, we ended the year with only four recordable injuries and zero lost time injuries across the entire network for the whole year.
As is typically the case, safe operations are also more productive.
And we proved that again with an all-time ammonia production record of 10.4 million tons.
Our sales and logistics team rose to the challenge and set all-time sales and shipping records of over 20 million product tons.
Truly a remarkable performance by all.
Looking ahead, we are very optimistic about 2021.
As Bert will describe in a moment, the global nitrogen pricing outlook is much more positive than a year ago.
With strong commodity crop prices and significantly higher energy prices in Asia and Europe, we are seeing a robust demand environment, coupled with a steeper global cost curve.
The current conditions in the Southern Plains in Midwest have thrown another crisis at us, but as usual, the team has done a fantastic job responding to and navigating through these new challenges.
We have been able to quickly adjust our plant operations based on close communications with our gas suppliers.
Disruptions have been widespread across the US nitrogen industry and this should result in further tightening of nitrogen supply for the spring planting season in North America, additional support for an already strong 2021.
Longer term, we are pleased with the progress we are making on our commitment to the clean energy economy.
We continue to advance discussions with technology providers and partners, and we have seen new opportunities develop since our announcement.
These underscore how broad the demand for green and low carbon ammonia will be, and also the value of our unique capabilities.
Then Chris will follow to talk about our financial position and capital allocation outlook before I return for some closing comments.
Global nitrogen dynamics today with low-cost producers like CF are the most positive they have been since 2014.
Strong demand driven by high commodity crop prices and a steeper global cost curve are creating a tighter nitrogen supply and demand balance.
As a result, prices have risen significantly in recent months and are well above 2020 values.
Global demand is robust and broad-based.
Farmers in North America has seen nitrogen consuming coarse grains reach multi-year highs for both near term and futures contracts.
For corn, we have seen lower-than-expected supply and high global demand led by China.
As a result, the USDA is projecting that the corn stocks-to-use ratio for the marketing year-over-year will be at its lowest level since 2013.
This supports our projection of 90 million to 92 million planted corn acres in the US this year with upside potential.
Through the balance of the year, we continue to expect positive demand in most growing regions, particularly India and Brazil.
We expect the urea tender volumes in India this year will be well above the five year average and close to the 10 million metric tons of last year.
For Brazil, we project 2021 imports of urea to be approximately 6.57 million metric tons, similar to last year.
As demand was increasing, the cost curve steepened significantly.
From July 2020 to July -- to December 2020, the Dutch TTF natural gas price and the Asian JKM LNG price both increased about five times greater than the US Henry Hub natural gas price.
This had a number of impacts.
First, margin opportunities increased for low cost producers.
Second, the significant increase in energy prices for producers in Europe and Asia pressured their margins, not only leading to lower operating rates but creating demand for import ammonia into those regions.
This contributed to even tighter global market.
Over time, we expect the global nitrogen market to tighten further and faster driven by several factors.
In the near term, the need to rebuild the stock of commodity crops will underpin demand growth.
Longer term, a key driver will be emerging demand for ammonia for clean energy applications.
We believe this level of global demand will require more production from the highest cost plants until prices rise enough to incent greenfield construction in other parts of the world.
We are well positioned as we approach the spring application season and have the flexibility necessary to address any challenges that arise.
We believe that the recent weather conditions in the US, or [Phonetic] disruption that we've built our system to overcome.
We are looking forward to working with our customers and leveraging our optionality to ensure that these requirements are met as they make -- as our customers make their final preparations for spring.
For 2020, the company reported net earnings attributable to common stockholders of $317 million or $1.47 per diluted share.
EBITDA was $1.32 billion and adjusted EBITDA was $1.35 billion.
Net cash provided by operating activities was $1.2 billion and free cash flow was approximately $750 million.
These results reflect year over year, global nitrogen -- lower year-over-year global nitrogen prices, partially offset by higher sales volume and lower natural gas and SG&A costs compared to the year before.
The results also demonstrate our continued efficient conversion of EBITDA into free cash.
As you can see on slide 9, we converted more than 55% of our adjusted EBITDA into free cash in 2020, which is the highest rate among our peers.
Our free cash conversion continues to support our capital structure and allocation priorities.
This will lower our gross debt to $3.75 billion.
As we remain focused on investment grade and positioning the company to execute our clean energy growth strategy, we will continue to evaluate opportunities to further reduce gross debt over time.
We remain excited to invest in the clean energy growth opportunity given the expected return profile.
We will also continue to return cash to our shareholders through our quarterly dividend and opportunistic repurchases at attractive levels.
As we look ahead to 2021, I want to share some of our expectations for the year ahead.
We anticipate that our capital expenditures for 2021 will be in the range of $450 million.
This reflects a return to a normal level of planned maintenance and turnaround activities in the year ahead, and the first expenses associated with the Green ammonia project at Donaldsonville.
We also expect SG&A levels to return to a level closer to 2019 than 2020.
Our annual cash interest expense will fall to $175 million with the repayment of the 2021 notes.
With our planned maintenance schedule and recent gas driven curtailments, we expect gross ammonia production to be around 9.5 million to 10 million tons.
This, along with lower inventories to the start of the year will likely result in lower product tons sold than in 2020.
Additionally, based on forward curves, we project our natural gas costs will be somewhat higher in 2021 than in 2020.
However, we expect margins to improve this year given the positive nitrogen pricing outlook that Bert described.
As you can see on slide 12, increases in our realized urea price have a much greater impact on EBITDA than higher realized natural gas costs.
With that, Tony will provide some closing remarks before we open the call for Q&A.
Their commitment to our values and unwavering focus on safety and execution are truly the foundation of our success.
We feel very positive about the year ahead.
As Bert described, nitrogen industry dynamics for producers in North America are the most favorable we have seen in nearly a decade.
And longer term, the developing demand for ammonia in clean energy applications provides exciting growth prospects for us, where we are uniquely positioned to be a global leader providing clean energy for a better world.
Economies will continue to focus on decarbonization, and hydrogen will be a key solution, with ammonia a critical enabler of hydrogen as a clean fuel.
We have seen tremendous interest in our strategic direction since our announcement last fall, and see substantial opportunities ahead for clean and low carbon ammonia.
This will provide a growth platform for longer-term shareholder value.
| compname reports full year 2020 net earnings of $317 mln.
compname reports full year 2020 net earnings of $317 million, ebitda of $1,316 million, adjusted ebitda of $1,350 million.
projects capital expenditures for full year 2021 will be in range of $450 million.
|
This is John Faucher, Chief Investor Relations Officer.
Actual results could differ materially from these statements.
I will provide commentary on our Q2 performance as well as our latest thoughts on 2021 guidance before turning it over to Noel to provide his thoughts on the current operating environment and how we will continue to deliver on our growth trajectory.
We will then open it up for Q&A.
As usual, we request that you limit yourself to one question, so that as many people as possible get to ask a question.
As we report results at the halfway point of 2021, we remain pleased, but not satisfied with our performance so far as we navigate through what can charitably be described as a complicated year.
For both the second quarter and on a year-to-date basis, we delivered growth in organic sales, net sales, operating profit and net income.
This is despite difficult comparisons as we lapped last years strength in categories like liquid hand soap and dish soap.
We are also dealing with the impact of COVID restrictions in several markets, economic and political uncertainty, strong competitive activity, and of course, significantly heightened raw material and logistics headwinds.
We expect that all of these factors will continue to impact our business through the second half of this year.
Because of that, we remain focused on delivering impactful innovation, leveraging our revenue growth management capabilities to deliver on pricing and driving productivity up and down the income statement.
All of these are crucial to deliver long-term sustainable growth that will help us as we look to deliver TSR at the high end of our peer group.
We delivered 5% organic sales growth in the second quarter, which marked our 10th consecutive quarter, delivering organic sales growth either in or above our targeted range of 3% to 5%.
As we have discussed before, the key to delivering against our long-term targets is delivering balanced growth, which we did once again in the quarter by delivering both volume and pricing growth.
We delivered growth in both developed markets with 3% organic sales growth and emerging markets, which delivered 7% organic sales growth.
We delivered organic sales growth in every division in North America.
Our largest category, Oral Care, delivered organic sales growth of nearly 10%, with organic sales growth across toothpaste, manual toothbrushes and electric toothbrushes, and organic sales growth in every division.
Innovation continues to be a vital contributor to our Oral Care business, as we benefit from new products across all of our divisions.
Products like Co by Colgate, Colgate Elixir toothpaste, and Colgate enzyme whitening toothpaste are all delivering consumer desired benefits and premiumizing our portfolio.
Pet Nutrition delivered organic sales growth of 15%.
Personal Care and Home Care declined on an organic sales basis year-over-year in the quarter as expected, but net sales remain above 2019 levels.
Net sales increased 9.5% in the quarter, which was our highest net sales increased in almost 10 years.
Foreign exchange was a 4.5% benefit to net sales as we lap the peak of last year's COVID-driven strength in the dollar.
After a strong gross margin performance in 2020 and in Q1, our gross margin declined in the second quarter due to the rapid acceleration of raw material costs across our business and the lapping of lower promotional levels in Q2 2020.
We took additional pricing in the second quarter, which will help offset raw material costs in the second half of the year and we will continue to layer in additional pricing where possible.
We expect raw material costs to remain elevated throughout 2021, but we do expect some sequential lessening of inflation as we get into the fourth quarter.
Our efforts on premiumization and pricing, along with our focus on productivity, like our funding the growth initiatives, will also help us as we look to improve our gross margin performance.
In the second quarter, our gross profit margin was 60%, which was down 80 basis points year-over-year on both a GAAP basis and a base business basis.
Year-to-date, our gross margin of 60.4%, down 10 basis points.
Again, that is on a GAAP and base business basis.
For the second quarter, pricing was 90 basis points favorable to gross margin, less than in the first quarter as we lapped lower promotional spending in the year-ago period when many of our markets reacted to COVID restrictions by pulling back on promotional activity.
Raw materials were at 370 basis point headwind as we continue to see significant pressure from resins, fats and oils and agriculture-related costs, and many other materials.
This includes a slightly favorable transactional impact from foreign exchange.
Productivity was a 200 basis point benefit.
Our SG&A was up 100 basis points as a percent of sales for the second quarter on both a GAAP and base business basis.
This was primarily driven by an increase in logistics costs and also by a 30 basis point increase in advertising to sales.
Excluding advertising and logistics, our SG&A ratio declined year-over-year as our net sales growth and savings programs drove leverage on our overheads.
For the second quarter on a GAAP basis, our operating profit was up 5.5% year-over-year, while it was up 2.5% on a base business basis.
Our earnings per share was up 12% on a GAAP basis and up 8% on a base business basis.
Our free cash flow was down year-over-year in the quarter as we continue to lap very strong working capital performance in the year-ago period.
As we discussed previously, our capital expenditures are also up year-over-year as we invest behind growth, productivity and our sustainability strategy.
A few comments on divisional performance.
North American net sales declined 4% in the second quarter with organic sales down 4.5% and a modest benefit from foreign exchange.
Volumes were down 8.
5% in the quarter, driven by Home Care and Personal Care, which saw strong growth in the year ago period, driven by COVID-related demand.
Pricing across Home Care and Personal Care was positive as we worked to offset higher raw material costs.
Oral Care organic sales grew mid-single digits, driven by innovation and pricing.
I mentioned Co by Colgate before, which is helping us further expand into the beauty and direct-to-consumer channels.
We are pleased with the initial performance of the Colgate Keep manual toothbrush.
It comes with an aluminum handle and by using our replaceable heads, consumers can use 80% less plastic compared to similarly sized Colgate toothbrushes.
We're also excited about our Tom's of Maine relaunch, which is bringing new graphics and advertising to a historic natural segment brand.
Our logistics issues that we discussed on the first quarter call continue to negatively impact our promotional timing, but service levels have improved and we expect our promotional cadence will normalize as we go through the third quarter.
Latin America net sales were up 12.5% with 8.5% organic sales growth and a 400 basis point benefit from foreign exchange.
All three categories delivered organic sales growth in the quarter with Oral Care organic sales growth in the high teens.
Brazil and Mexico both grew organic and net sales double digits in the quarter.
Our strong innovation performance was led by core innovation behind Colgate Total Reinforced Gums in Mexico, which apparently sounds much better in Spanish and Portuguese than English and several Charcoal variance in Brazil.
Volume was plus 2.5% in the quarter despite a sizable negative impact due to political unrest in Colombia, our third largest market in Latin America.
We believe this disruption, which negatively impacted our distribution network for some time is largely behind us, but political disruption will remain a risk, not just in Columbia, but in several markets.
Pricing was up 6% despite lapping lower promotional spending in Q2 2020 as well as some incremental pricing in the year-ago period as we look to offset foreign exchange.
Europe net sales grew 15% in the quarter.
Organic sales grew 5% driven by mid-teens growth in Oral Care, offset by declines in personal and home care as we lap COVID-related demand in the year-ago period.
Volume grew 7% in the quarter, offset by a 2% decline in pricing as we lap lower promotions in the year-ago period as store traffic declined in Q2 2020 due to COVID restrictions.
I mentioned Colgate Elixir toothpaste before and we're very excited about this truly differentiated product.
We designed it with more of a beauty esthetic, including skincare inspired ingredients, a unique clear recyclable bottle and liquid glide technology that allows the pace to leave the bottle leaving no messy tube or cap.
This product began rolling out across the division in Q2 with further launches this quarter.
We delivered 7.5% net sales and 1% organic sales growth in Asia Pacific this quarter, with organic growth in oral care partially offset by a decline in home care.
Volume growth of 3.5% was partially offset by negative pricing as we cycled lower promotional levels in the year-ago period given COVID-related lockdowns across the region, with the biggest impact coming on our South Pacific business.
We have additional pricing planned in the second half across the division to offset raw material cost inflation.
Volume growth was led by India, despite the impact of COVID related disruption in May.
And Thailand, driven by naturals innovation in the Colgate Vedshakti and Colgate Panjaved line as we lapped COVID-related disruptions in the year-ago period.
Our volume in China declined on growth on the Colgate business, which was more than offset by weakness in sales for our Hawley & Hazel joint venture, which is primarily related to inventory reductions in our distributor network.
After Eurasia continued its strong performance trend in the third quarter with net sales growth of 15.5%, as we delivered strong organic sales growth throughout the division once again.
Volume grew 9.5% in the quarter, while pricing was up 3.5%.
Foreign exchange was a 2.5% benefit in the quarter.
Oral Care delivered high teens organic sales growth and we are relaunching several of our naturals businesses with new packaging and flavors.
Hill's strong growth continued in the second quarter with 18% net sales growth and 15% organic sales growth.
Both developed and emerging markets delivered 10% volume growth as our increased investment around the globe is driving this highly differentiated brands.
In particular, we are seeing good results from our Hill's master brand campaign to end Pet obesity as well as our new campaign for Hill's Pet Essentials, our vet-distributed wellness product in Europe.
And now for guidance.
We still expect organic sales growth to be within our 3% to 5% long-term target range.
There is no meaningful change in our category expectations at this point.
The categories that benefited from COVID-related demand are behaving in line with our expectations with sales below 2020 levels, but ahead of 2019 levels.
Please note that given widespread COVID outbreaks in many of our markets, we could still see an impact from government actions to stem the spread of COVID and other disruptions related to COVID, and this is not in our guidance.
Using current spot rates, we expect foreign exchange to be a low-single digit benefit for the year, although slightly less favorable than when we gave guidance in April.
All in, we still expect net sales to be up 4% to 7%.
We have reduced our gross margin guidance for the year and we now expect gross margin to be down year-over-year for the full year on both the GAAP and base business basis given the additional cost inflation we have seen.
We expect the gross margin percentage to improve sequentially in the second half, which would leave us down modestly for the year.
As I mentioned above, we are taking many steps to mitigate the impact of these costs, including additional pricing, optimizing trade spending, accelerating FTG where available and many others.
Advertising is still expected to be up on both a dollar and a percent of sales basis.
Logistics will continue to be a headwind as costs also have risen faster than anticipated, particularly in the U.S.
We still expect these costs to moderate somewhat as we go through the balance of the year.
Our tax rate is now expected to be between 23% and 24% for the year on both a GAAP and base business basis.
On a GAAP basis, we still expect earnings-per-share growth in the low-to-mid single digits, but most likely toward the lower end of that range.
On a base business basis, we continue to expect earnings-per-share growth in the mid-to-high single digits.
Again, we would expect to land at the lower end of that range.
So the overriding message I want to lead with you today is that our strategy to reaccelerate profitable growth by focusing on our core adjacencies all over the world, new channels and markets is really working, as we like to say nothing moves in a straight line, but we now have 10 straight quarters of organic sales growth at or above our long-term target range.
Year-to-date, we at the high end of the range despite difficult comparisons and continued volatility in the business.
We're making good progress on our journey, but we still have more work to do.
And as I look back at my comments to you over the past 18 months that we've been dealing with the implications of COVID, there's one consistent theme that we keep coming back, managing through this crisis with an eye on the future.
This is still very appropriate theme, although obviously some of the elements have changed.
The prevalence of the vaccine in many developed markets gives us a sense of guarded optimism, but we've highlighted that many emerging markets which represent almost half of our revenues, the availability of the vaccine remains very low, case rates are high, and governments continue to put in restrictions to help stop the spread of the virus.
We remain hopeful that we will get to a post-COVID sooner rather than later, but we're not there yet.
We will continue to manage to the retail and supply chain disruptions, changes in consumer behavior and government actions to stem the spread of the virus, all while doing our best to protect the health and safety of our employees, which remains our number one priority.
But there are changing headwinds as well.
Last year, we were faced with adverse foreign exchange movements, heightened consumer and customer demand, supply chain volatility and uncertainty for our customers about changing business models and retail environments.
This year, we're faced with unprecedented cost increases for raw materials like resin, fats and oils and many others.
Logistic networks are taxed, whether it's the trucking and warehousing here in the U.S., or ocean freight coming from Asia to the rest of the world, and we're seeing some political disruption in markets like Colombia and Myanmar.
So 18 months into the COVID, many of the challenges are the same, some have changed, but our approach remains we will manage through the crisis with an eye on the future, and so far we feel we've done a pretty good job.
But we know the markets look forward at our potential, not backwards at our achievements.
We know that to deliver top-tier TSR, we need to balance organic sales growth both volume and pricing, all four of our categories and across all of our divisions.
We've talked to you a lot about our changes in strategy that will enable us to continue delivering this balanced growth.
First is our focus on breakthrough and transformational innovation.
Our emphasis is on faster growing channels and markets continues to pay off to growth in e-commerce, direct-to-consumer, discounters, club stores and pharmacies.
We're supporting these products with increased focus on our digital media and emerging data analytical capabilities.
But we have to deliver gross margin expansion to fund our brand investment, while we know -- while we now expect gross margin to be down modestly for 2021, it comes on the heels of strong gross margin expansion in 2020 and in the face of unprecedented increases in raw material prices.
We will continue to leverage our robust revenue growth management program and drive productivity so we can return to gross margin expansion.
We have made progress in our journey to improve our mix, but we have further upside potential on this given the benefits we provide to consumers and the fact that our brands under indexing pricing relative to the category across many geographies.
We're working to accelerate our productivity programs like funding the growth wherever possible to try and create additional offsets.
All this should help us in our drive to return to gross margin expansion.
And while the raw material inflation is obviously negatively impacting our gross margin performance this year, we're optimistic that this raw material inflation could drive an improvement in emerging market fundamentals.
Again, we need to first get through the difficulty surrounding COVID, but on the back of our continued rebound in emerging market organic sales growth, particularly in Latin America, we have some optimism that we could see some additional GDP growth and therefore higher category growth on the back end of this movement in commodities.
We have seen some of the emerging market currency stabilize for the first time and what seems like several years, and are optimistic this may be a first step.
And since our last call, we have released our 2025 sustainability strategy.
This comprehensive plan highlights the actions we're taking around climate, plastics, sourcing, diversity equity and inclusion, and all the other areas that are vital to the future, not only of our Company, but our communities and our planet.
| qtrly net sales increased 9.5%, organic sales increased 5.0%.
expect difficult cost environment to continue in back half of year.
despite significant raw material and logistics cost headwinds, we delivered another quarter of increased operating profit.
still expects 2021 net sales to be up 4% to 7% including a low-single-digit benefit from foreign exchange.
colgate-palmolive - on gaap basis, now expects increased advertising investment & earnings per share growth at lower end of its low to mid-single-digit range in 2021.
colgate-palmolive - on non-gaap basis, now expects increased advertising investment & earnings per share growth at lower end of its mid to high-single-digit range in 2021.
|
This is John Faucher, Chief Investor Relations Officer.
Actual results could differ materially from these statements.
I will provide commentary on our Q3 performance, as well as our latest thoughts on 2021 guidance before turning it over to Noel to provide his thoughts on how we will continue to deliver on our growth trajectory.
We will then open it up for Q&A.
As usual, we request that you limit yourself to one question, so that as many people as possible get to ask a question.
Our focus on innovation, premiumization, pricing and productivity allowed us to deliver solid Q3 and year-to-date results despite a very difficult operating environment.
We continue to deliver against our targets because we are executing consistently on the strategy Noel laid out at CAGNY back in 2019.
We are focused on delivering consistent, sustainable, profitable growth; both volume and pricing growth, growth in all of our categories, growth in all of our divisions, emerging and developed markets.
And this has enabled us to deliver 11 straight quarters with organic sales growth in line with or above our long-term target of 3% to 5%.
This is despite very difficult comparisons and a challenging operating environment.
The current operating environment is challenging in many different ways.
Consumer mobility is limited in many markets, particularly in Asia, due to government restrictions to stop the spread of COVID-19, which is having a negative impact on category growth.
These restrictions have also led to temporary closure of manufacturing facilities across many industries as you've heard in the news and from other companies.
We are not immune to these restrictions, although, given the essential nature of our categories, we produce products that people and their pets use on a daily basis to lead healthier lives.
We have been able to resume production throughout our network, although, sometimes at a lower-than-normal level.
This did have a slight impact on sales in the third quarter and we expect a modest impact in the fourth quarter as we ramp production back up.
We are fortunate to have a flexible and resilient global supply chain that has helped us to offset some of the effects of the supply chain challenges, albeit sometimes with additional logistics costs.
Speaking of logistics, the stress on global logistics networks is creating shortages of raw materials, lengthening shipment times, increasing costs and adding additional uncertainty.
All of this is on top of the significant increases in raw material costs and continued movement in foreign exchange.
These challenges will continue into next year but we will continue to meet them head on.
Our net sales grew 6.5% in the quarter, driven by 4.5% organic sales growth and a 2% benefit from foreign exchange.
Our organic sales growth in the third quarter was led by Oral Care, where we were up mid-single-digits, and Pet Nutrition, where we were up double-digits.
We delivered organic sales growth in Home Care, despite a difficult comparison, which puts our Home Care business at double-digit growth on a two-year stack.
As expected, organic sales in Personal Care declined mid-single-digits as we lapped the COVID-related growth in liquid hand soap in the year ago period but sales remain above 2019 levels.
We grew volume 1.5% in the quarter.
Pricing grew 3% in the quarter, up sequentially from Q2, despite a more difficult 4.5% comparison as we continued to layer in new pricing to try to offset accelerating raw materials costs.
Pricing was up in every category and every division.
Raw materials continued to increase in Q3, putting further pressure on our gross margins, despite additional pricing and productivity efforts.
Our gross margin was down 180 basis points in the quarter.
Pricing was a 110 basis point benefit to gross margin, while raw materials were a 510 basis point headwind, despite a slight benefit from transactional foreign exchange.
Productivity was favorable by 220 basis points.
On a GAAP and Base Business basis, our SG&A was up 50 basis points on a percent of sales, driven by significant increase in logistics costs as advertising was up on a dollar basis, but flat on a percent of sales basis.
Excluding logistics and advertising, our overheads were down slightly on a dollar basis and down nicely on a percent of sales basis.
We continue to increase our investments in capabilities like digital, e-commerce and data and analytics, but this was more than offset by sales leverage and tight expense controls.
For the third quarter, on a GAAP basis, our operating profit was down 5% year-over-year, while it was down 3% on a Base Business basis.
Our earnings per share was down 7% on a GAAP basis and up 3% on a Base Business basis.
A few comments on our divisional performance.
Net sales in North America grew 1% in the third quarter with organic sales growth of 0.5% and 50 basis points of favorable foreign exchange.
Volumes were flat in the quarter, despite a negative nearly 400 basis point impact from lower liquid hand soap volumes, while pricing was slightly favorable.
We made significant progress on our North American business in the quarter with solid Oral Care growth, driven by mid-single-digit growth in toothpaste, which led to improved toothpaste market share performance through the quarter.
Personal Care and Home Care were both down as we lapped COVID benefits in the year-ago period, although EltaMD and PCA Skin delivered strong growth in the quarter.
North America operating margins were negatively impacted by raw materials and higher logistics costs.
The impact of plant closures on our global supply chain required us to incur additional air freight charges to fulfill customer orders in the quarter.
We also incurred some additional manufacturing costs in the quarter that should help improve the long-term profitability of the division.
Latin America net sales were up 11% with 8% organic sales growth and a 300 basis point benefit from foreign exchange.
All three categories delivered organic sales growth in the quarter with Oral Care organic sales growth in the high-single-digits.
Volume was plus-2.5% in the quarter, while pricing was up 5.5%.
Brazil and Mexico led the growth in the quarter, while Colombia delivered double-digit growth following last quarter's political unrest.
The Naturals segment continues to be a key driver of growth for us across Latin America, particularly Colgate Natural Extracts Charcoal and we recently launched Colgate Zero Toothpaste in Brazil.
Our strong Latin America pricing growth highlights the success of our revenue growth management program with a combination of list price increases, premium innovation and trade promo adjustments.
Europe net sales grew 1% in the quarter with organic sales minus-1% and foreign exchange adding 2%.
Volume was down 1% and pricing was flat.
Oral Care organic sales grew high-single-digits, while Personal Care organic sales were down sharply, driven by difficult liquid hand soap comparisons due to COVID-related consumption in the year-ago period and a decline in Filorga duty-free sales.
Colgate Elixir Toothpaste continued to drive growth in the quarter along with strong contributions from elmex and meridol.
Asia-Pacific net sales grew 1% and organic sales declined 0.5% in the quarter, with volume down slightly and pricing and foreign exchange, both slightly positive.
Oral Care saw low-single-digit organic sales growth in the quarter, while Personal Care and Home Care were down due to difficult COVID comparisons.
We did see government-imposed mobility restrictions negatively impacting category volumes in several markets, including many in Southeast Asia.
India and the Colgate China business both delivered strong volume growth behind robust innovation in the ayurvedic segment in India, and in e-commerce in China.
Our Hawley & Hazel JV saw significantly improved performance in Q3 versus Q2 with trends also improving sequentially during the quarter.
Africa/Eurasia net sales grew 1% in the quarter with organic -- with an organic sales decline of 1% lapping double-digit organic growth in the year-ago period, more than offset by a 2% positive impact from foreign exchange.
Volumes were minus-4.5% while pricing was plus-3.5%.
The organic sales growth decline in the quarter was driven by Personal Care as we lapped double-digit growth in the year-ago period due to COVID-related demand and pricing.
Oral Care organic sales in the quarter were flat as disruptions in the global supply chain had a negative impact on product availability.
Hill's strong growth continued in the third quarter with 20% net sales growth and 19% organic sales growth with strong growth in both emerging and developed markets.
Organic sales growth was driven by double-digit volume growth and high-single-digit pricing through list price increases and our premiumization strategies.
And now for guidance.
We still expect organic sales growth for the year to be within our 3% to 5% long-term target range.
As I mentioned previously, we have seen an impact from government actions to stem the spread of COVID-19, including reduced consumer mobility and supply chain interruptions.
We are managing through these issues, but we would expect modest headwinds from this to continue in the fourth quarter.
Using current spot rates, we expect foreign exchange to be a low-single-digit benefit for the year, although slightly less favorable than when we gave guidance in July.
Please note that at current spot rates, foreign exchange would have a negative impact on Q4.
All in, we still expect net sales to be up 4% to 7%.
Given the continued pressures from raw materials, we are projecting a greater decline in gross margin than when we last gave guidance in July.
Fourth quarter gross margin is expected to be roughly in line with the third quarter, although the raw material situation remains very difficult.
We continue to take additional steps to mitigate the impact of these cost headwinds, including additional pricing, optimizing trade spending, accelerating FTG where available, and many others.
We are focused on recouping the gross margin we have lost due to cost inflation over time and are planning to take the actions necessary to do so.
Advertising is still expected to be up on a dollar basis, but flat on a percent of sales basis.
Given the issues surrounding logistics networks on a global basis, our logistics costs will continue to be a headwind, particularly in the U.S. and Africa/Eurasia.
Our tax rate is now expected to be between 22% and 23% for the year on both a GAAP and Base Business basis.
On a GAAP basis, we still expect earnings-per-share growth in the low-to-mid single-digits and, as we said on the second quarter call, toward the lower end of that range.
On a Base Business basis, we continue to expect earnings-per-share growth in the mid-to-high single-digits.
Again, we would expect to land at the lower end of that range.
So what I take away from our performance, I guess, both in the third quarter and on a year-to-date basis is that we continue to make good progress on our strategic and operational journey despite the significant volatility we are encountering across our entire business.
At the heart of this is our strategy to deliver broad-based sustainable profitable growth; every division, every category, both volume and pricing.
That's our aspiration and over the past few years, we have changed our mindset about how we drive growth.
We're more proactive in attacking the opportunities for growth, think core, premium adjacencies, faster alternative channels and markets.
And of course, we've talked a lot about building capabilities, think digital, data, e-commerce, innovation.
All of these are helping us mine these important areas of growth.
While lapping our most difficult comparisons in over a decade, we delivered organic sales growth at the high end of our long-term target range of 3% to 5%.
And on a two-year basis, both pricing and volume growth increased sequentially in the quarter.
Importantly, this growth has been driven by our two most important categories: Oral Care and Pet Nutrition.
Oral Care organic sales were up mid-single-digits in Q3 against the mid-single-digit comparison and are up high-single-digits year-to-date.
We're driving this growth through more impactful innovation, share growth in faster growth channels like e-commerce and pharmacies, and higher more efficient marketing spending.
Our premiumization strategy is paying off with our focus on breakthrough and transformational innovation, changing how we interact with the people who use our products.
A great example of this is how we've changed our approach to whitening.
In the U.S,, you're familiar with Optic White Renewal, which has done incredibly well.
Outside the U.S., the story needs to be more about just hydrogen peroxide levels.
In China, it's about enzyme-based whitening.
In other markets, we have whitening products targeted toward consumers who love tea or coffee or consumers who love wine or tobacco.
We're targeting a whitening opportunity much more broadly with new technologies, formulations and delivery systems, expanding our growth potential.
Pet Nutrition organic sales growth was up 19% in the quarter against an 11% comparison and is now up 14% year-to-date through quarter three.
This growth is driven by Hill's science-based equity messaging behind our core.
It's driven by meaningful premium innovation and the continued expertise of our digital and e-commerce teams.
The launch of Prescription Diet Derm Complete through [Phonetic] its breakthrough therapeutic nutrition for both food and environmental sensitivities has led to share gains in the category and is being rolled out internationally over the next few quarters.
Hill's goal of ending pet obesity, where a study show over 50% of pets are overweight, is the impetus for our Hill's master brand campaign.
This campaign has been rolled out globally and has driven growth in both our therapeutic and wellness anti-obesity products.
In this type of environment, we couldn't deliver the results without -- this year without the amazing work done by Colgate people every day.
Our customer development organization is reacting quickly to the changing cost environment so we can take pricing as part of the revenue growth management initiative.
Marketing and R&D are working together to accelerate the launch of premium innovation to drive mix and profitability.
And most importantly, our global supply chain team has delivered these results despite freight and logistics disruptions, plant closures, congested ports and supplier outages.
Importantly, all of the efforts we have put into building capabilities over the past few years is not just about driving growth, it's also about creating an organization that can respond more rapidly to all these challenges we face around the world.
For example, our focus on data and analytics is helping our revenue growth management program pinpoint the best opportunities for incremental pricing as costs continue to rise.
We're getting this pricing out in the market more quickly and the data that drives that process gives our people on the ground more confidence in their decisions.
Our investment in e-commerce and digital marketing continues to pay off.
In our six largest e-commerce markets for Oral Care, we finished the third quarter with year-to-date net sales already ahead of '22 net sales -- 2020 net sales, and toothpaste share growth in five of the six markets.
We've implemented new media buying strategy to drive efficiencies, both online and offline, and launched a 4-tier training program to enable 14,000 of our employees to help drive our digital strategy.
As I've said, the key through all of this is that we recognize that the strategy is working.
And while we address the pressing issues of raw materials, logistics and supply chain, we can't lose sight of our long-term areas of focus.
Our Innovation calendar for 2022 will show an increase in the percentage of innovation that is breakthrough and transformational.
We've announced our new sustainability and social impact strategy this year, which includes 11 new targets and actions in areas like zero-waste, climate change, using less plastic, as well as Bright Smiles, Bright Futures and our diversity, equity and inclusion efforts.
And we will continue to build our people and capabilities through new ways of working that are truly changing how Colgate people do their jobs.
2021 has been very challenging year for us and many of these challenges will continue in 2022, but I'm confident of the changes that Colgate people put in place over the past several years, which will allow us to continue to deliver our goal of sustainable profitable growth.
| confirmed its financial guidance for full year 2021.
qtrly net sales increased 6.5%, organic sales increased 4.5%.
|
This is Tim Argo, Senior Vice President of Finance for MAA.
Actual results may differ materially from our projections.
We are encouraged with the solid start to the year as core FFO results were well ahead of our expectations.
A recovery in rent growth is clearly getting started.
Our overall blended rents on a lease-over-lease basis are running slightly ahead of last year, and our forecast is for continued improvement.
A combination of the recovery within the Sunbelt economies that is just starting to build, coupled with the continued migration of employers and jobs to this region, are driving higher level of demand across our portfolio.
We like the trends that we're seeing as we head into the important summer leasing season.
Our teams are off to a strong start this year with our unit interior redevelopment program, the rollout of our Smart Home technology platform as well as several new projects aimed at full repositioning of communities to higher price points.
We're excited about the upside in rent growth to capture from all three of these programs.
It was about this time last year when we hit the pause button on these projects in order to protect residents and staff during the initial months of COVID, and we expect to make solid progress this year.
Our new development platform continues to expand, and we're excited to have closed this month on our first opportunity in the Salt Lake City market.
We see continued strong job growth and positive migration trends to this market and look forward to expanding our presence there.
Supported by our strong balance sheet and growing demand for apartment housing across our Sunbelt markets, we believe we are poised to capture increasing earnings contribution from our development pipeline over the next few years.
As the Sunbelt market economies begin to reopen, it seems clear that based on the trends that we're seeing, that the worst of the pressures associated with COVID are behind us.
MAA's unique approach to diversifying across the Sunbelt has clearly worked to soften some of the pressures surrounding the recession and the slowdown in leasing over the past few quarters.
However, we're frankly more excited about the prospects for outperformance over the coming recovery cycle, the growing appeal of the Sunbelt markets, the upside that we have to capture in redevelopment within our existing portfolio, higher efficiencies, we expect to harvest from several new technology initiatives, and finally, a growing impact from our external growth pipeline, all combined to put MAA in a solid position for the coming recovery cycle.
Your commitment to our mission of serving those who depend on our company is much appreciated.
The recovery continued across the portfolio for the first quarter.
Leasing volume for the quarter was up 16%.
This drove blended pricing achieved during the quarter up 2.7%.
This is even with the very strong start we had in the first quarter of 2020 and up 200 basis points from the fourth quarter.
In addition, we were able to maintain strong average daily occupancy of 95.7%, and all-in place rents or effective rent growth on a year-over-year basis improved to 1.3% in the first quarter.
Collections during the quarter were strong.
We collected 99.1% billed rent in the first quarter.
We've worked diligently to identify and support those who need help because of COVID-19.
The number of those seeking assistance has dropped over time.
In April of last year, we had 5,600 residents on relief plans.
The number of participants has decreased to just 325 for the April of this year rental assistance plan.
This represents only 20 basis points of April billed rent.
We saw steady interest in our product upgrade initiatives.
We're off to a strong start for the year on our interior unit redevelopment program as well as installation of our Smart Home technology package that includes mobile controlled lights, thermostat in security as well as leak detection.
We completed 964 redevelopment units and 13,975 Smart Home packages.
For the full year of 2021, we expect to complete just over 6,000 interior unit upgrades and install 22,000 Smart Home packages.
We are also in the final stages of completing the repositioning work on our first six full reposition properties and have another eight that will begin this year.
April's collections are in line with the good results we saw in the first quarter.
As of April 27, we've collected 98.7% of rent billed, which is at least 10 basis points ahead of each of the comparable numbers for January, February and March of this year.
Leasing activity for April is strong.
New lease-over-lease pricing in April is running close to 4% of rent on the prior lease.
Renewal lease pricing in April is running 6.5% ahead of the prior lease.
Our resident satisfaction scores remained strong and are actually ahead of last year by 120 basis points, which should support continued strong renewal lease pricing.
We still have a few down units in April as a result of the winter storm, and including the impact of those, average daily occupancy for the month of April is currently 96.1%, which is 100 basis points better than April of last year.
Exposure, which is all vacant units plus notices through a 60-day period, is just 7.2%.
This is 180 basis points better than the prior year and supports our ability to continue to prioritize our focus on rent growth.
We are well positioned as we move into our busy leasing season.
Led by job growth, which is expected to increase 4.9% in 2021 versus the negative 5% in 2020 for our markets, we expect to see the broad recovery in our region of the country continue.
We expect Phoenix, Tampa, Raleigh and Jacksonville to be our strongest markets and expect Houston, Orlando and DC to recover but at a slower rate.
They've shown tremendous adaptability and resilience over the last year.
I'm proud of them and excited about their strong start to 2021.
Investor demand for multifamily product within our region of the country remains strong.
However, a lack of properties for sale is causing a supply demand imbalance that continues to drive already aggressive pricing.
This robust investor demand supported by continued low interest rates has further compressed cap rates, which are frequently in the mid-3% and low 4% range for high-quality properties in desirable locations within our markets.
Transaction cap rates on closed projects that we underwrote were down 25 basis points from last quarter and down 50 basis points from first quarter of 2020.
We remain active in the transaction market, but as outlined in our guidance, we are not forecasting executing on any acquisitions of existing communities between now and year-end.
While acquiring existing assets is a challenge, we continue to make progress on the expansion of our development pipeline.
As noted in our release, we closed on two land parcels in April as part of our prepurchase program, where we partner with third-party developers.
We expect to start construction on both of these projects in the second quarter.
Our Atlanta project is a 5-story mid-rise development located along the belt line extension in the West Midtown area of Atlanta, less than two miles from Microsoft's recently announced campus.
We also closed on a 4-story surface park project in the Daybreak master-planned community of Salt Lake City, one of the top five master-planned communities in the United States.
We are excited to expand our footprint into Salt Lake City, a market that shares many of the attributes that characterize our overall footprint: good job growth, great migration trends and a highly educated workforce.
In addition to these two projects, we have several other project -- or development sites within our footprint, owned or under contract, that we hope to start construction on later this year and into next year.
We have seen material run-up in construction costs, and specifically lumber.
But our construction team as well as our partners have done a good job helping us to mitigate some of this increase.
We continue to see some supply chain disruptions on appliances, cabinets, windows and other items, but on the majority of our projects, we've been able to work around these issues with minimal impact to our delivery schedules.
We continue to see strong leasing demand in our region of the country, and our two lease-up properties in Dallas and Fort Worth as well as our under construction property in Phoenix, all continue to perform very well, with rents and leasing velocity in line with or ahead of our pre-COVID expectations.
As part of our planned dispositions for 2021, we took our Jackson, Mississippi properties to market in the first quarter and received very strong investor interest, with the strongest bidding coming from portfolio buyers wanting all four properties.
The properties are currently under contract with our buyers inspection period ending soon.
We expect this transaction to close in the third quarter.
We are also on track to execute on the remainder of our 2021 disposition plan in the fourth quarter.
Our view of new supply remains unchanged with the expectation that 2021 looks very similar to 2020.
Based on 2020's permitting trends, we still expect new deliveries to start trending down late this year and into next year before possibly increasing in 2023, reflecting the recent increase in permitting and starts data.
That's all I have in the way of prepared comments.
Core FFO per share performance of $1.64 for the first quarter was $0.05 per share ahead of the midpoint of our guidance.
As expected, operating trends continued to improve through the quarter, producing same-store revenue and NOI performance that was slightly ahead of our forecast, providing about $0.01 per share on favorability for the quarter.
We continue to expect stable occupancy and strong pricing trends to have a growing impact on effective rents over the remainder of the year.
But keep in mind that only about 20% of our leases were effective in the first quarter, and we still have the majority of our leases to be signed during the summer leasing season in the second and third quarter.
The remaining favorability came from overhead and interest expense, which were both lower than projections for the quarter.
So overhead costs are expected to grow more in line with our original projections as the year progresses as our travel and other activities move toward more normalized levels.
Winter storm Uri impacted a portion of our portfolio during the quarter, where unusually cold temperature and electrical outages led to frozen pipes and damage at a number of our Texas communities.
Our operating teams worked hard to take care of our residents and get affected units back online quickly.
We incurred some casualty losses during the first quarter related to the storm.
We established a receivable for the vast majority of the costs, which are expected to be reimbursed through insurance coverage.
Net earnings impact to MAA during the quarter was only about $765,000, primarily related to down units.
Our balance sheet remains in great shape.
During the quarter, we paid off the $118 million of secured mortgages at an expiring rate of 5.1%.
We also funded an additional $64 million of cost toward completion of our development pipeline, which, at quarter end, included seven communities with total projected cost of $528 million, of which $193 million remains to be funded.
As Brad mentioned, we acquired two land parcels in April as part of repurchase development deals, which should begin construction later this year.
And as discussed previously, we expect our development pipeline to grow to around $800 million by year-end, which is well within our development autonomous limits.
As Tom mentioned, we also continue to make good progress during the quarter on our three internal investment programs: interior redevelopment, property repositioning projects and Smart Home legislations.
We funded a total of $22.7 million toward these programs during the first quarter, which are expected to begin contributing to our growth more strongly in late 2021 and 2022.
We ended the quarter with low leverage, debt-to-EBITDA of only 4.9 times and with $644 million of combined cash and borrowing capacity under our line of credit.
And finally, in a way to reflect the first quarter earnings performance, we increased our full year guidance range for core FFO by $0.05 to a range of $6.35 to $6.65 per share.
Our same-store performance trends were essentially in line with our forecast, and we expect pricing trends to continue to improve over the remainder of the year, with the most favorable prior year revenue comparisons coming in the second quarter due to the initial impact of COVID-19 last year.
We plan to revisit guidance after the second quarter when we'll have more clarity on several key assumptions.
So that's all we have in the way of prepared comments.
Christy, are you there?
| qtrly core ffo per share $1.64.
sees 2021 core ffo per share $6.35 to $6.65.
|
I'm pleased that you are joining us for DXC Technology's third-quarter fiscal 2021 earnings call.
After the call, we will post these slides to the investor relations section of our website.
In accordance with SEC rules, we have provided 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.
I will walk through today's agenda in a moment.
As we announced last month, we received an unsolicited and nonbinding proposal from Atos to purchase DXC.
Our Board reviewed the proposal carefully with our financial and legal advisors and found it to be inadequate and lacking certainty, given the value our Board believes we can create on a stand-alone basis by executing on our transformation journey.
After sharing some high-level information with Atos to help them understand why their proposal undervalue DXC, Atos and DXC agreed to discontinue further discussions.
We are confident in our transformation journey, and our Q3 results show strong evidence that our team is executing.
We are flattered that Atos saw the value we are creating and clearly has taken notice of our new leadership team and how we are delivering for our customers and winning in the market.
I was pleased with how we managed the proposal.
As it did not linger, we stayed focused on our business and it helped highlight some areas where we can accelerate our transformation journey and create additional value.
With the new leadership team in place, I'm looking forward to sharing the details of our FY '22 full year plan and longer-term expectations on our Q4 earnings call.
We're also planning an Investor Day to discuss in more detail our plans and introduce you to our leadership team.
Now let me turn to today's agenda.
I will start by giving you a quick update on our strong Q3 performance.
Next, I will highlight the progress we're making on our transformation journey.
Our strong Q3 results were driven by executing against the three key areas of our transformation journey, which are focused on customers, optimize cost and seize the market.
I will then hand the call over to our new CFO, Ken Sharp, to share our detailed Q3 financial results and guidance for Q4.
Regarding our Q3 performance, our revenues were $4.29 billion, approximately $90 million above the top end of our guidance.
This is the second straight quarter of revenue stabilization, and we expect this trend to continue in Q4.
Our sequential revenue stabilization is positive evidence that we will achieve year-on-year revenue stability.
Concerning adjusted EBIT margin, we delivered 7%, also higher than the top end of our guidance.
Like revenue, we expect margins to continue to expand in Q4.
Book-to-bill for the quarter was 1.13, underscoring the success of bringing the new DXC, which focuses on our customers and people to the market.
This is the third straight quarter that we've delivered a 1.0 or better book-to-bill, and we also expect this trend to continue in Q4.
I'm pleased about the level of stability and momentum we are achieving.
We have done well attracting talent, improving the environment for our people, strengthening our customer relationships, taking out cost without disruption and continuing to win in the market.
Now before I go through the progress of our transformation journey, I would like to comment on two recent hires that have allowed me to finalize our new leadership team.
We completed our CFO search and hired Ken Sharp.
Ken returns to DXC after being the CFO of Northrop Grumman's Defense Systems business.
Prior to that, Ken was SVP of finance at Orbital ATK and has over a decade of experience in our industry.
Ken has a strong operational focus and has led large-scale finance transformations.
These skills are important to us as we continue executing on our transformation journey.
We also added Michael Corocoran to our team.
Michael has joined us as chief strategy officer and has a track record of transforming and growing businesses.
Michael joins us from WPP, where he led strategy and operations.
Prior to WPP, Michael was at Accenture, where he spent a number of years with me and created the strategy for Accenture operations.
The amount of transformation and industry experience of this team is substantial, and they are the main reason for our strong execution and results.
You will hear in a moment why Ken joined DXC and his comments concerning the opportunity to create value do a really nice job capturing why talent joins DXC.
Now I will cover the good progress we are making on our transformation journey, starting with our customers.
Our focus on customers continues to be the primary driver of revenue stabilization.
As I've said time and time again, when we deliver for our customers and are seen as a trusted partner, customers are more likely to renew existing work and consider us for new work.
Let me give you two good examples that have happened in Q3.
Molson Coors renewed two pieces of work with us this quarter.
The first is in application management, and the second is across multiple layers of the enterprise technology stack, including ITO, Modern Workplace, cloud and security.
Next, our strong relationship and flexible delivery model led to an expanded agreement with Pacific Life insurance, which includes application development and support for its retirement and life divisions, enabling them to reduce cost and improve efficiency.
These are two perfect examples of the great job we're doing, strengthening our customer relationships and gives us confidence that we can continue to stabilize revenue.
Now let me turn to our cost optimization program.
We will achieve our goal of $550 million of cost savings this year.
Our cost optimization program was responsible for our strong adjusted EBIT margin of 7% in Q3.
We were able to expand margins despite a 200 basis point headwind from the sale of the U.S. state and local health and human services business.
We have done well optimizing our costs and continuing to deliver for our customers without disruption.
Seize the market is the final area of our transformation journey.
In this area, we are focused on cross-selling to our existing accounts and winning work with new customers.
The 1.13 book-to-bill number that we delivered this quarter is consistent evidence that our plan is working.
In Q3, 55% of our bookings were new work and 45% were renewals.
Let me give you a good example of new work with a new customer.
We signed a three-year deal with Ferrari, where we will modernize their IT platforms with services, including security and modern workplace.
Our ability to deliver a consistent book-to-bill number of over 1.0 in the first three quarters of FY '21 is clear evidence that our transformation journey is not only working but we can absolutely win in the IT services market.
Turning now to our healthcare provider software business.
We are on track to complete the sale of this business and use the roughly $450 million of net proceeds to pay down debt, further strengthening our balance sheet.
Let me begin by saying how excited I am to join DXC and be part of the team that Mike has assembled.
Let me provide you some insight into my thought process on why I joined, which came down to three main factors: the team Mike assembled; the transformation journey; and third, the investment thesis of how DXC would create value.
After spending time with Mike and the team, I'm convinced that DXC can execute on the investment thesis I was contemplating.
This includes stabilizing revenue, expanding margins and delivering free cash flow.
When we achieve this thesis, I believe DXC will be successful in unlocking significant value.
Now let me talk about the team Mike assembled.
Companies with the best people win.
The strength of the team delivering on the transformation journey is clearly visible in our Q3 results.
At DXC, there are three main areas that our finance team will focus on.
First, we will work hard to demonstrate the true earnings power of DXC.
We will focus on cash flow, paying particular attention to reducing outflows.
We intend to continue investing in our people and delivering for our customers.
At the same time, we will be disciplined in reducing spend in areas such as restructuring, transaction and integration, capital expenditures, excess facilities and our outsized overhead.
We believe we will create the most value by growing the underlying business.
That means organic growth and at the same time improving cash flow.
Second, we are committed to putting in place a disciplined capital deployment program that will maximize the value creation of our cash flow engine.
Based on rigorous analysis, we will carefully evaluate the returns associated with capital deployment options.
Now that we've strengthened our balance sheet, we are turning to solidify our cash flow.
With a strong balance sheet and a cash flow outlook, we will be in a position to execute a disciplined capital allocation program.
Third, we will improve our financial visibility.
We are committed to providing annual guidance and our longer-term expectations on our next earnings call.
We are also planning an Investor Day to discuss in more detail our longer-term plans and introduce you to our leadership.
Moving on to our Q3 results.
In the quarter, DXC exceeded the top end of our revenue, adjusted EBIT and non-GAAP earnings per share guidance.
GAAP revenue was $4.29 billion and $88 million better than the top of our guidance range.
Currency was a tailwind of $58 million sequentially and $118 million year over year.
On an organic basis, revenue increased 1.7% sequentially.
Organic revenue declined 10.5% year over year due to previously disclosed runoffs and terminations.
We expect this to be the high watermark for organic year-over-year revenue declines.
As you will see from our Q4 guidance, we expect to continue delivering stable sequential revenue.
And during fiscal year '22, we expect this to translate into year-over-year revenue stability.
Adjusted EBIT was $300 million.
Our adjusted EBIT margin was 7%, a sequential improvement of 80 basis points despite an approximate 200 basis point headwind from the HHS sale.
Non-GAAP income before taxes was $246 million.
Non-GAAP diluted earnings per share was $0.84 due to a lower-than-expected tax rate of 10.2%.
Using our guidance tax rate of 30%, non-GAAP earnings per share was $0.65.
This was $0.10 higher than the top end of our guidance range.
Our Q3 tax rate primarily benefited from the reversal of certain tax reserves related to tax audits, the expectation of higher utilization of foreign net operating losses and the ability to utilize state tax credits related to the HHS sale.
In Q3, bookings were $4.9 billion for a book-to-bill of 1.13.
Like Mike mentioned earlier, we are encouraged to see three consecutive quarters with a book-to-bill greater than 1.0.
Turning now to our segment results.
The GBS segment, the top of our technology stack, includes analytics and engineering, applications and the horizontal BPS business.
The GBS segment previously included the HHS business, which we sold on October 1 and includes the healthcare provider software business, which we are in the process of selling.
GBS revenue was $1.92 billion or 45% of our total Q3 revenue.
Organic revenues increased 2.2% sequentially, primarily reflecting the strength of our analytics and engineering business.
Year over year, GBS revenue was down 7% on an organic basis.
GBS segment profit was $273 million and profit margin was 14.2%.
Margins improved 10 basis points sequentially despite a headwind of about 300 basis points from the HHS sale.
GBS bookings for the quarter were $2.7 billion for a book-to-bill of 1.35.
Now turning to our GIS segment, which consists of IT outsourcing, cloud and security and the modern workplace layers of our enterprise technology stack.
Revenue was $2.37 billion, up 1.3% sequentially and down 13.2% year over year on an organic basis.
GIS segment profit was $88 million with a profit margin of 3.7%, a 210 basis points margin expansion over Q2.
GIS bookings were $2.2 billion for a book-to-bill of 0.95.
Now before I discuss the details of the enterprise technology stack on Slide 13, I wanted to point out that there is no better slide that drives home the positive impact of our transformation journey.
The proof points on the slide include continued revenue stabilization and strengthening of our book-to-bill for each layer of our stack that has been part of the transformation journey since Q1.
As you can see in Q1, all four layers of our stack had negative sequential growth, whereas we are now reporting sequential growth improvement for all layers in Q3.
Also, it is positive to see the revenue mix beginning to change in shifting up the stack.
Now let me drill down one level to comment on the performance of the layers of our enterprise technology stack.
IT outsourcing revenue was down 1.8% sequentially, an improvement as compared to Q2 where it was down 4.7%.
ITO revenues declined 17.7% year over year due to the previously disclosed runoffs and terminations.
Book-to-bill was 0.96 in the quarter.
We believe building strong relationships with our ITO customers and delivering effective solutions will improve revenue performance.
Cloud and security revenue was up 4.7% sequentially and down 1% year over year.
Book-to-bill was 1.0 in the quarter.
Moving up the stack, the applications layer posted 2.6% sequential revenue growth and was down 9.3% year over year.
Analytics and engineering was up 4.6% on a sequential basis and flat compared to the prior year.
Analytics and engineering book-to-bill was 1.2 in the quarter.
The modern workplace and BPS businesses increased 2.6% sequentially and was down 12.6% compared to the prior year.
I should note that Q3 positively benefited from increased volume of resales.
As you may recall, these two businesses were part of the strategic alternatives initiative and are just beginning their transformation journey.
As a result, you should expect some unevenness in performance.
Moving on to cash flows on Slide 14.
Our cash flow from operations totaled an outflow of $187 million, and adjusted free cash flow for the quarter came in at negative $318 million.
As discussed on our prior earnings call, we had cash disbursements of $332 million that impacted free cash flow related to the HHS sale.
In addition, during the quarter, we normalized payments to our suppliers and partners.
Our effort to normalize our supplier and partner payments is not expected to reoccur and had an approximate $400 million negative cash flow impact in the quarter and $500 million negative cash flow impact through the first three quarters of our fiscal year.
We believe treating our partners appropriately will allow us to further leverage the partner ecosystem.
If these two items had not occurred, our free cash flow would have been more than $700 million higher in the quarter.
The company has traditionally reported adjusted free cash flow that adjusts for capital expenditures, restructuring, transaction, separation and integration costs.
On Slide 15, we detail the efforts we have undertaken to strengthen our balance sheet.
As we previously disclosed, we utilized $3.5 billion of net proceeds from our HHS sale to reduce debt.
Additionally, we continue to make progress on our plan to sell our healthcare provider software business, and we will use the proceeds to pay down debt and further strengthen our balance sheet.
Cash at the end of the quarter was $3.9 billion.
Total debt, including capitalized leases, was $6.2 billion for a net debt of $2.3 billion.
We expect to make tax payments of approximately $900 million in Q4 related to our divestitures.
I would like to emphasize our commitment to an investment-grade credit rating.
As you can see, our net debt to EBITDA improved more than one full turn from 2.4 times at the end of September 2020 to 1.2 times at the end of December.
We fully expect our leverage ratio to continue to improve.
Moving on to guidance on Slide 16.
We are targeting Q4 revenues of $4.25 billion to $4.3 billion, adjusted EBIT margins of 7% to 7.4%, non-GAAP diluted earnings per share of $0.65 to $0.70, net interest expense of $60 million and an effective non-GAAP tax rate of about 28%.
And let me share three key takeaways on our progress we are making at DXC.
First, we're bringing the new DXC to the market and have demonstrated solid momentum in executing on our transformation journey.
This is translating into consistent quarter-on-quarter revenue stability, sequential margin expansion and a book-to-bill number of one or greater.
Second is we are on track to complete the sale of the healthcare provider software business and use the proceeds to pay down debt, further strengthening our balance sheet.
Third, with the additions of Ken and Michael, we have built and finalized the new leadership team that is executing on our transformation journey and producing strong results.
In closing, I am pleased with the level of stability and momentum we are achieving.
We have done well attracting talent, improving the environment for our people, strengthening our customer relationships, taking out costs without disruption and continuing to win in the market.
We expect all of this positive momentum to continue in Q4.
| compname reports q3 non-gaap earnings per share of $0.84.
q3 non-gaap earnings per share $0.84.
q3 earnings per share $4.29.
q3 revenue $4.3 billion versus refinitiv ibes estimate of $4.2 billion.
|
I'm Hallie Miller, Evercore's Head of Investor Relations.
These factors include, but are not limited to, those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We continue to believe that it is important to evaluate Evercore's performance on an annual basis.
As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
What a difference a year makes.
This time last year, we were in the early stages of the global pandemic.
There was uncertainty about the science and trajectory of the virus and there was no visibility on vaccines.
The economic environment was weak, and the pace and shape of an economic recovery was unclear.
With so much uncertainty and the weak economic environment and outlook, most of our clients turned inward to focus on operations, liquidity and in many cases, restructuring, while restructuring activity was -- and strategic activity was paused.
From an operational perspective, I don't think any of us expected to spend the remainder of 2020 and a good portion of '21 working predominantly remotely.
Fast forward one year and we've made tremendous progress.
Monetary and fiscal stimulus helped stabilize the economy, and financial markets and the recovery is well under way.
Vaccine distribution is gaining momentum and as a firm, we are actively planning for a gradual return to our offices over the next several months.
And our business is robust, as we continue to act as an advisor to clients on strategic financial investment and capital initiatives.
The momentum we experienced through the first half of last year has continued into the first quarter.
Our results, which represent our best first quarter ever, reflect our team's client focus, the breadth of capabilities that we can offer and the continued favorable environment for M&A and capital raising activity.
Transactions announced in the second half of 2020 and some even earlier moved toward completion during the quarter and translated to revenues.
We've also realized revenues from transactions announced and closed within the first quarter and it benefited from increased demand for activist defense advice over the past several months.
Capital advisory, both public and private, has continued its strong contribution.
The breadth of our equity capital markets capabilities, including IPOs and follow-ons, convertibles and SPACs has enabled us to participate in a meaningful way in the sustained strong levels of market issuance.
In the first quarter, we participated in nearly 40 public market transactions that raised more than $22 billion in total proceeds.
In Private Capital Advisory, GP-led transactions remained strong during the quarter and we have seen a strong recovery of volumes in new capital needs.
In the face of economic recovery and strength in M&A and capital raising, classic restructuring activity has slowed and is concentrated among key sectors and issuers that have not rebounded as quickly as some others have.
Our Equities business, Evercore ISI, has continued to stay connected and engaged with our clients and has provided valuable research insight and sales and trading execution.
And solid performance drove AUM growth in our Wealth Management business.
We continue to focus on expanding coverage of key industries and building out our capabilities.
And we are benefiting from Kristy Grippi joining us earlier this year as our new Head of ECM, as well as other strategic adds we've made on our ECM team.
With the key ingredients for M&A activity in place, a positive economic outlook, strong equity markets and available credit, high CEO confidence and continued private equity activity, the momentum for strategic activity continues and the desire for capital raising persists.
Several of our key markets continue to be busy and our backlogs are strong.
The strategic merger market accelerated in the first quarter.
Global and US announced M&A dollar volume increased 95% and 164% respectively compared to the first quarter of 2020 and increased 3% and 13% respectively from a strong fourth quarter.
In ECM, the desire for capital raising remained strong, though we have seen a cooling off in the SPAC underwriting market over the past several weeks.
Our investments in SPAC capabilities have positioned us well to serve many new clients, though we remain selective in our participation in underwriting opportunities.
We continue to see activity and shareholder advisory and activist defense.
The number of new activist positions in the US reached its highest level in more than two years at the end of 2020 and activists are focusing on larger targets.
On the private capital advisory side of things, we are seeing accelerating activity in both capital raising for new funds as well as secondary and GP level activity.
In short, we feel continuing momentum in our business and we are excited by the prospects we see in front of us.
Our broad capabilities have positioned us well to offer more services to clients as they execute on their priorities.
Let me now turn to our financial results.
We achieved record first quarter adjusted operating income, adjusted operating margin, adjusted net income and adjusted earnings per share driven by solid revenue growth and good operating leverage.
First quarter adjusted net revenues of $669.9 million grew 54% year-over-year.
First quarter advisory fees of $512.1 million was 43% year-over-year.
Based on current consensus, estimates and actual results, we expect to maintain our number-four ranking on advisory fees among all publicly traded investment banking firms for the last 12 months and to grow our market share relative to these same firms.
We also continued to narrow the gap between us and the number-three ranked firm on a latest 12-month advisory revenue and market share basis.
Our first quarter underwriting fees of $79.3 million more than tripled year-over-year.
As we said last quarter, this business experienced a step-up in 2020 as the demand for capital raising increased substantially and the expansion of our capabilities and enhanced sector coverage enabled us to work on diverse assignments for clients.
We've continued to broaden our participation across sectors, which we believe is helping us grow our business.
While healthcare still represents the largest portion of revenues, TMT and Industrials more than tripled their combined portion of revenues in the first quarter compared to full year 2020.
First quarter commissions and related revenue of $53.5 million decreased 4% year-over-year as volumes declined relative to the elevated levels in the first quarter of 2020.
First quarter asset management and administration fees of $17.8 million increased 16% year-over-year on higher AUM, which was $10.6 billion at quarter end, an increase of 11% year-over-year.
Turning to expenses, our adjusted compensation revenue for the first quarter is 59%.
First quarter non-comp costs of $72.7 million declined 12% year-over-year.
Our non-compensation ratio for the first quarter is 10.9%.
Bob will comment more on our non-comp expenses in his comments.
First quarter adjusted operating income and adjusted net income of $201.8 million and $162.5 million increased 145% and 181% respectively.
We delivered a first quarter adjusted operating margin of 30.1% and a first quarter adjusted earnings per share of $3.29 increased 172% year-over-year.
Finally, we continued to execute on our capital return strategy.
We returned $275.3 million to shareholders during the quarter through dividends and the repurchase of 1.9 million shares.
And we achieved our commitment to offset the delusion associated with our annual bonus RSU grants through share repurchase in the first quarter.
Our Board declared a dividend of $0.68, an increase of 11.5%.
We expect to continue our annual reassessment of the dividend each April.
Our Board also approved a refresh of our share repurchase authority to $750 million.
We will resume our historical policy of returning cash not needed for investment in our business to our shareholders through additional share repurchases.
Our first quarter results clearly demonstrate that we are operating at a higher level than the level at which we have operated historically as measured by any financial metric; revenues, operating income, net income, earnings per share, operating margins and Senior Managing Director productivity and Advisory.
While our operating margins clearly are benefiting modestly from the decline in travel and entertainment due to the pandemic, the strength in the other financial metrics is indicative of a real uptick in our business.
Our diverse capabilities and the more balanced mix of our business contributed to our record first quarter results, the third best quarter in our firm's history as well as to the record fourth quarter and full year results last year.
On top of our strong financial performance, we sustained our number-one league table ranking in the dollar volume of announced M&A transactions both globally and in the US among independent firms for the last 12 months ending March 31 and in the first quarter of 2021.
And we advised on the two largest M&A transactions announced in the first quarter.
Additionally, while not first quarter events, we have prominent roles on the two biggest tech announcements this year, both of which were announced in April.
We served as the lead advisor on Grab's $40 billion IPO buyer, a SPAC merger, the largest tech merger this year, the largest SPAC merger in history and the largest pipe issued in conjunction with a SPAC merger at a little over $4 billion.
And we also served as the sole advisor to Nuance on its pending $19.7 billion sale to Microsoft, the second largest tech merger this year.
These are franchise-defining transactions for our clients and for Evercore and are reflective of the breadth of our capabilities and the strength of collaboration and teamwork across the firm.
Our underwriting business continues to perform well and produced its third best quarter ever.
When we first acquired ISI almost seven years ago, we identified one of the most important opportunities created by that transaction to be our ability to increase our underwriting revenues to perhaps $75 million to a $100 million of revenue per year over the ensuing few years.
It unquestionably took a little bit longer than we initially expected to get to that level of revenue annually, but we have definitely seen a real step function increase in this business.
In fact, three of the past four quarters, including the first quarter of 2021, where in just one quarter, within that $75 million to a $100 million target that we had set for the full year.
Activity in backlogs and underwriting continued to be strong, and we remain focused on building out this business strategically so that we can continue to serve the needs of our clients without any use of our balance sheet.
Needless to say, our revenue aspirations for this business have grown materially.
The first quarter also saw a number of significant transactions in the convertible debt space, which we launched in the third quarter of 2020, including our first sole book-run convertible offering and an active book-runner position on a biotech convert.
These transactions are indicative of the breadth and diversity of our platform and our capacity to meet increasingly diverse client needs.
Our investments in ECM have earned us a place in the top 20 for underwriting revenue as estimated by Dealogic when bot deals are excluded.
We continue to believe that we have runway here and we are focused on systematically gaining share as we have done in Advisory historically.
The breaking into the Top 10 currently seems challenging given our aversion to block trades and our independent balance sheet light approach.
Activity in our Private Capital Advisory businesses.
Our secondaries advisory business, which we call PCA; our primary fundraising business, which we call PFG; and our real estate fund-raising in secondaries business, which we call RECA continues to be strong as volumes increased meaningfully during the quarter.
Our success in this area is driven by the strength of our client relationships and our superb execution track record, including our unique success executing transactions done solely through remote communication.
In restructuring, the team's activity level and footprint are resetting back toward historical levels as the economy and debt market liquidity have meaningfully improved.
The team continues to work through assignments started in 2020 and is also focused on new liability management, private financing and conventional restructuring assignments in sectors that are still stressed by the pandemic.
In equities, client connectivity and engagement continue to be strong as our macroeconomic and fundamental analysts continue to provide valuable insights to institutional clients.
Our team also has continued to meet high client demand for our robust virtual conferences, webinars and corporate access events.
The investments that we have made in our platform to support our ECM franchise including convertibles performed well during the quarter and are natural capability extension for us.
And we continue to expand our sector coverage with Mark Mahaney's launch on Internet stocks earlier this month.
And as we've always said, we will continue to look for senior impactful analysts who will serve our clients and contribute to the growth of this business.
Finally, our Wealth Management business continue to grow AUM as long-term performance has remained very solid and as we have continued to provide important advice to our client.
Let me now turn to discuss some of our priorities for the remainder of the year.
As we think about the rest of the year, we are focused on several important items.
First, we are intensely focused on continuing to position our business for sustaining long-term growth by number one, providing outstanding advice and execution of our clients as we continue to advise them on their most important strategic financial and capital decisions; number two, by continuing to enhance our coverage of the most significant client groups, including our initiatives around the Evercore 100 and financial sponsors; number three, investing to further deepen and broaden our capabilities by continuing to build out certain industry groups, geographies and product capabilities.
Second, we are focused on planning for our return to our offices globally with the health and safety of our employees and their families paramount as we develop and execute our plans.
Third, we are highly focused on integrating diversity, equity and inclusion and sustainability more completely into how we conduct our business and how we hire, train and mentor our talent.
And finally, we are focused on operating with financial discipline and delivering strong returns to our shareholders, returning excess cash not needed for growth investments to our shareholders through dividends and share repurchases while maintaining a strong and liquid balance sheet.
We are actively recruiting A-plus and A talent in advisory to our team, and we continue to have many conversations with talented individuals in key sectors and geographies, including TMT, fintech, biopharma, healthcare, consumer, financial sponsors, and Europe.
Equally important is our long-term commitment to attracting, recruiting, mentoring and promoting talented professionals and promoting them to Senior Managing Director from within.
We strongly believe that in-person collaboration, training and mentorship are crucial to our culture and our apprenticeship model.
These experiences are most effective when we are together and contribute to the development of our future leaders, which is why we are so focused on our return to office over the next several months.
We are pleased to be sustaining advisory Senior Managing Director productivity that is at a materially higher level than our long-term average.
However, we are finding, probably due to the pandemic, that it is taking new hires and new internally promoted Senior Managing Directors a little longer, perhaps a year or so longer, to reach full productivity.
Fortunately, this longer ramp time means that we have more partners who will contribute to our future growth.
The first quarter results and achievements that John and I have summarized and really are results over the past year could not have happened without the dedication, teamwork, collaboration and commitment of our entire team.
Every single one of our employees has stepped up to the challenges of the past year plus and there have been many such challenges.
We very much look forward to bring our teams back together in person soon, so that we can continue to build and strengthen the culture that has been the foundation of our success.
Beginning with GAAP and some related metrics.
For the first quarter of 2021, net revenues, net income and earnings per share on a GAAP basis were $662 million, $144 million and $3.25 respectively.
Our GAAP tax rate for the first quarter was 16.1% compared to 25.8% for the prior year period.
The appreciation in the firm's share price upon vesting of employee share-based awards above the original grant price positively affected our effective tax rate on both the GAAP and adjusted basis.
On a GAAP basis, our share count was 44.5 million shares for the first quarter.
The share count for adjusted earnings per share was $49.4 million for the quarter.
Focusing for a moment on non-compensation costs, as John noted, we continued to generate significant operating leverage, in part due to lower non-compensation costs.
Firmwide non-compensation costs per employee were approximately $40,000 for the first quarter, down 9% on a year-over-year basis.
The decrease in non-compensation costs per employee versus last year primarily reflects lower travel and related expenses.
As we continue to evolve toward more normal operations, including returning to our offices and engaging in person with our clients, costs associated with recruiting, travel, entertainment and other expenses are expected to increase.
Commissions and Related Fees has been renamed to Commissions and Related Revenues and now includes riskless principal profits, which were previously in Other Revenue including interest and investments.
The reclassified revenue principally represents the spread income earned from riskless principal transactions in convertibles and other fixed income securities.
Finally, focusing on the balance sheet, two points.
On March 29th, we issued $38 million of aggregate principal amount of unsecured senior notes with a 1.97% coupon through a private placement.
We used the proceeds from the notes to refinance senior notes that matured on March 30th.
And finally, at the end of the quarter, we held $411 million in cash and cash equivalents and $873 million in investment securities down from year-end due to compensation-related payments and strong return of capital.
Operator, if you could open the line?
| compname reports record first quarter 2021 results increases quarterly dividend to $0.68 per share.
compname reports record first quarter 2021 results; increases quarterly dividend to $0.68 per share.
qtrly earnings per share $3.25.
qtrly adjusted earnings per share $3.29.
qtrly adjusted net revenues of $669.9 million increased 54%.
|
These beliefs are subject to known and unknown risks and uncertainties.
Many of which may be beyond our control, including those detailed in our periodic SEC filings.
Please note that the company's actual results may differ materially from those anticipated, and we undertake no obligation to update these statements.
There will be an opportunity for Q&A at the end of the call.
I'm proud of our performance in the first quarter of fiscal 2022.
Our team delivered sales growth of 17%, expanded our operating profit margin by 160 basis points, and increased diluted earnings per share by 57%, despite global supply chain challenges and unpredictable market conditions.
Our performance demonstrates that by prioritizing customers, we are driving sales growth and turning that into operating income, while continuing to invest in the long-term growth and transformation of the company.
I want to start today's call by taking a deep dive on the current market conditions.
As you are aware, this is a dynamic market with a fair share of paradoxes.
Demand across our end markets remain strong.
At the same time, the availability and cost of key inputs remain challenging.
In short, it's the best of times and the most challenging of times.
Business is strong both in ABL and in spaces.
Within ABL, demand is strong across all of our channels to market, except retail, which we expect to improve this calendar year.
In this dynamic pricing environment, we have been prudent and successful passing on price increases, while at the same time, providing as much consistency as we can to our customers so that they can plan and execute their projects effectively.
At the same time, input costs and availability remain unpredictable, and we expect this to continue.
Obviously, everyone is dealing with this.
Our strategy for managing through this has been consistent: prioritize satisfying customer demand and ensuring the health and well-being of our associates.
So now let me spend a minute on what we mean by satisfying our customer demand.
First, we have chosen to honor pricing on all of our placed orders.
As I've said before, it is important to me that we are known in the industry for doing what we say.
There is a gap in time between when we receive orders and when we fulfill them in normal times, and that is even greater now.
Therefore, we believe that this position will serve us well in the long term with specific customers and with the industry.
From there, we are also doing everything that we can to fulfill these orders as quickly as we can.
While we don't disclose backlog, what I will say is that it is meaningfully higher than during normal periods.
This is the result of higher demand, coupled with changing component availability and the general supply chain and transportation challenges.
Again, these are not unique to Acuity.
To combat these, we have prioritized three key activities.
First, we have focused and invested in our strategic relationships with manufacturers and suppliers to procure as much of the available component supply as possible.
We benefit from being the largest and most consistent in the industry.
Second, we have empowered our teams to source components in the spot market, and we have prioritized speed and access over cost.
This allows us to maintain higher levels of production at the expense of some higher cost.
Third, our product, engineering and manufacturing teams have been continuously redesigning and reengineering existing products based on what components are available.
To give you an idea of the magnitude of that effort, our Distech engineers spent over half their time in the last quarter dedicated to this type of redesign.
Our ABL team made the same commitment in addition to changes and improvements in our manufacturing processes to ensure consistent production.
These efforts also extend beyond our company into our broader ecosystem.
We have been working with suppliers to help them find necessary components and make engineering changes in the products that they supply to us.
The overall effort has been herculean, and our teams continue to remain flexible and to adapt to an ever changing environment.
The changes that we have implemented over the last two years have enhanced our ability to see across our business, work across our stakeholders and improve our service levels.
So where are we on our transformation?
One of the points that I stress to our team is that transformation is a process, not a destination.
In challenging times, sometimes, the first reaction is to revert to what you know.
In our case, we are using these times to redouble our transformation efforts.
Let me start with the ABL business.
Trevor and his team are focused on maintaining high product vitality, continuing to elevate industry service levels and continuing to use technology to differentiate us.
During the first quarter, we launched several interesting products to drive our portfolio expansion, products like the STACK PACK and STACK Switch products.
These are the next generation of center-element LED lay-in lights for commercial indoor spaces.
The STACK has a lower profile and more efficient packaging that saves on transportation costs.
It also has an adjustable lumen output that can be reconfigured at any time through the STACK Switch.
This means that there is no time wasted on a job site if there need to be changes to the configuration.
In controls, we introduced the CLAIRITY link.
This is part of our nLight lighting controls platform that offers remote connectivity capability.
The remote capabilities reduce the need for in-person visits, offering quick troubleshooting resolutions and a reduction in maintenance cost.
This product fundamentally changes the way we service projects and is an important step forward for our customers.
Now moving to the Intelligent Spaces Group.
The mission of ISG is to use technology to solve problems in spaces in order to make them smarter, safer, and greener.
We do this in two ways.
We collect data through hardware, for example, the Distech controller; and then analyze and take action on the data through software applications powered by Atrius.
Our ISG group had an eventful quarter.
As I mentioned, even though the engineering team at Distech spend over half their time focused on redesigning Distech products for the available components.
We continued to roll out several important products and product enhancements.
The Distech ECLYPSE APEX was introduced in the first quarter and is the most advanced version of our controller for HVAC and building automation.
The APEX introduced artificial intelligence to the edge and increases compute capacity in buildings, which helps customers manage energy usage more effectively.
We also further expanded the availability of our Atrius Building Insights service by enabling it for additional languages and local privacy requirements.
Atrius Building Insights is now available in the U.K., Ireland, France, Germany, Spain, and Norway.
We are currently and expect to continue to be operating in unpredictable times.
Input prices and availability can sometimes feel like a game of whack-a-mole, and we are dealing with omicron, which materialized only a few months ago.
As we face these challenges and new challenges we will maintain our focus on satisfying customer demand in ensuring the health and well-being of our associates.
I remain optimistic about 2022 and our ability to effectively manage in this environment.
We have a great team who are executing today while also remaining focused on the long-term growth and transformation of the company.
And then I'll be back for the Q&A and for some closing remarks.
I continue to be impressed by our team's dedication to our transformational priorities while we continue to navigate the day-to-day performance of the business.
We delivered a strong first quarter performance.
Net sales were $926 million, an increase of 17% compared to the prior year.
This performance was driven by our improved service levels, a continued recovery in the end markets of both of our business segments, and the benefits of recent price increases.
Gross profit was $386 million, an increase of $53 million or 16% over the prior year.
This improvement was driven by revenue growth and by offsetting the significant increase in material and freight costs through price increases and product and productivity improvements.
Gross profit as a percentage of sales was 41.7%, a decrease of 30 basis points from 42% in the prior year, a significant achievement given the cost environment.
Reported operating profit margin was 12.4% of net sales for the first quarter of fiscal 2022, an increase of 160 basis points over the prior year.
Adjusted operating profit margin was 14.4% of net sales, an increase of 120 basis points over the prior year.
The majority of this was the result of improved operating leverage as we continued to balance cost management and growth investments.
The effective tax rate for the first quarter of fiscal 2022 was 19.6%.
In the same period of 2021, the rate was 24.7%.
The decrease in the effective income tax rate was primarily due to favorable discrete items recognized in the first quarter of fiscal 2022 related to excess tax benefits on share-based payments.
We expect our tax rate for the full year of 2022 to normalize to around 23% absent these discrete items.
Finally, we saw a significant improvement in diluted earnings per share for the quarter of fiscal -- for the first quarter of fiscal 2022.
Diluted earnings per share of $2.46 increased $0.89 or 57% over the prior year.
And adjusted diluted earnings per share of $2.85 increased $0.82 or 40% over the prior year.
Our share repurchase program favorably impacted adjusted diluted earnings per share by $0.07 and the tax impact was approximately $0.16.
Moving on to our segments.
During the quarter, our Lighting and Lighting Control segment saw sales increase 17% to $884 million versus the prior year.
This was driven by improvements within our independent sales network, which grew 14%, and the direct sales network, which grew about 12%.
These increases were a direct result of our strong go-to-market efforts and an improved demand environment as well as the favorable impact of price increases.
Our corporate accounts channel saw an increase in sales of approximately 62% compared to the prior year, as large accounts began previously deferred maintenance and renovations.
The performance in this channel is dependent upon our customers' renovation cycles and can be uneven quarter to quarter.
Sales in the retail channel declined approximately 16% in the current quarter.
ABL operating profit for the first quarter of fiscal 2022 increased 30% to $128 million versus the prior year, with operating margin improving 160 basis points to 12.4%.
Adjusted operating profit of $138 million improved 28% versus the prior year, with adjusted operating margin improving 140 basis points to 15.6%.
Now moving on to the results for our Intelligent Spaces Group.
For the first quarter of 2022, sales in spaces increased approximately 14% to $46 million versus the prior year, reflecting continued demand primarily across our building and HVAC controls.
Spaces' operating profit in the first quarter of 2022 increased approximately $2 million to $2 million versus the prior year.
Adjusted operating profit of $6 million increased approximately $2 million versus the prior year as a result of the strong sales growth.
Now turning to cash flow.
We continue to generate solid cash flows.
The net cash from operating activities for the first three months of fiscal 2022 was $84 million.
This was a decrease of $40 million or 32% compared to the prior year and reflects an increased investment in inventory to drive growth.
Additionally, cash flow was impacted by the timing of income tax payments and the prior-year deferral of withholding taxes as a result of the CARES Act.
We invested $9 million or 1% of net sales in capital expenditures during the first three months of fiscal 2022.
During the quarter, we continued to execute on our capital allocation strategy and repurchased approximately 300,000 shares of common stock for around $53 million at an average price of $176 per share.
We have approximately 3.5 million shares remaining under our current board authorization.
Our capital allocation priorities remain the same.
We will continue to prioritize investments for growth in our current businesses, to invest in acquisitions, to maintain our dividend, and to allocate capital to share repurchases when there is an opportunity to create permanent value for our shareholders.
I would now like to spend a few minutes addressing current topics of note.
First, on the pricing environment.
As Neil said, we are managing price aggressively while at the same time balancing the relationships with our customers.
We announced another price increase this week effective for orders placed in February.
We will continue to be deliberate in our strategic approach to pricing.
Next, I would like to update you on the OSRAM integration.
We have made significant progress in our integration of OSRAM.
We bought the OSRAM North American DS business to ensure control over the technology, to expand our OEM channel and for the benefit it brings through the integration into our supply chain.
The addition of OSRAM contributed over 300 basis points to our sales growth in this quarter.
There was also a relatively small dilutive impact to gross profit margin, but OSRAM was an overall positive contribution to operating profit.
The acquisition is delivering on our expectations and we are very excited that the OSRAM team is now part of Acuity.
We have included EBITDA and adjusted EBITDA in our tables of reconciliation to enable easier comparisons and to improve the consistency around reported adjustments.
As we continue to navigate 2022, we will continue to prioritize our customers to drive sales growth and operating income.
We will also continue to allocate capital in a way that drives long-term growth and that creates permanent value for our shareholders.
| q1 adjusted earnings per share $2.85.
q1 earnings per share $2.46.
|
Mark will review our first quarter results and provide our outlook for 2021 and the second quarter.
Andrew will provide an overview of select financial items.
Information presented represents our best judgment based on today's understanding.
Actual results may vary based upon these risks and uncertainties.
Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, free cash flow and organic revenue growth, all of which are non-GAAP financial measures.
Please note that as used in today's discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA.
A reconciliation and definition of these terms as well as any other non-GAAP financial terms to which we may refer during today's conference call are provided on our website.
Our first quarter results were in line with our guidance and expectations.
Revenue and earnings were down as forecasted, though earnings were modestly above the midpoint of our guidance.
We continue to expect a good second quarter and a strong full year.
We had two important product launches in the quarter, Overwatch Herbicide based on our Isoflex active in Australia and Xyway fungicide in the U.S. Isoflex is one of 11 new active ingredients we plan to launch this decade.
Both launches have exceeded our expectations and have delivered approximately $50 million of Q1 sales.
In March, we announced an important agreement with UPL to toll manufacture Rynaxypyr insect control in India and to distribute products based on the active ingredient in selected markets.
In the future, FMC will supply Rynaxypyr active to UPL for use in product formulations developed and marketed by UPL around the world.
This agreement is the next step in growing our important diamide franchise and accelerating FMC's long-term plans to expand the franchise in diverse geographies and crops with differentiated formulations.
It also reaffirms the strength of our patent portfolio that protects our diamide franchise, far beyond just the composition of matter patents.
We returned over $135 million to shareholders in the quarter through our recently increased dividend and share repurchases.
Our guidance for Q2 indicates an expected return to mid-single-digit growth on the top line, with slightly lower earnings growth because of higher costs compared to Q2 2020.
These higher costs are principally related to increasing raw materials and logistics.
Additionally, we will be spending more on SG&A and R&D compared to the abnormally low spend in Q2 2020.
I'd like to take a moment to provide a COVID-19 update on our business.
All our manufacturing facilities and distribution warehouses remain operational and properly staffed.
Our research laboratories and greenhouses also have continued to operate throughout the pandemic.
While many of FMC's other employees continue to work from home, plans are in place to resume in-office operations where permitted by local authorities.
Finally, we are all aware of the challenges India is facing with significant increases of COVID cases across that country.
Last week, FMC announced it will donate seven pressure swing absorption oxygen plants to hospitals across five states in India to help address the rapidly increasing demand for medical oxygen.
This program focuses on rural areas where we are providing further community support.
Turning to our Q1 results on Slide three.
We reported $1.2 billion in first quarter revenue, which reflects a 4% decrease on a reported basis and a 5% decrease organically.
As planned, we saw slower sales in Brazil as we drew down channel inventories in that country as well as the shortfall in EMEA due to Brexit-related sales that occurred in Q4 2020.
In North America, we saw very good demand based on strong fundamentals in row crops and commodity prices, offset by a shift of diamide third-party sales to Latin America.
In Asia, double-digit sales growth in Australia, Japan and our Asian subregion drove revenue performance in that region.
Adjusted EBITDA was $307 million, a decrease of 14% compared to the prior year period and $2 million above the midpoint of our guidance range.
EBITDA margins were 25.7%, a decrease of 290 basis points compared to the prior year.
Adjusted earnings were $1.53 per diluted share in the quarter, a decrease of 17% versus Q1 2020, but also $0.03 above the midpoint of our guidance range.
The year-over-year decline was primarily driven by the decrease in EBITDA, partially offset by lower interest expense.
Moving now to Slide four.
Q1 revenue decreased by 4% versus prior year, driven by a 4% volume decrease and a 1% price decline.
Foreign currencies were a modest tailwind in the quarter on the top line.
Sales in Asia increased 18% year-over-year and 13% organically, driven by double-digit growth in Australia, Japan, the Philippines, Thailand and Vietnam.
We had strong Overwatch Herbicide sales for cereals, and sales of our diamides were robust for fruit and vegetable and rice applications.
Insecticides also performed well in Indonesia, helped by our recent expanded market access in that country, and improved weather helped sales across the ASEAN subregion.
EMEA sales were down 4% year-over-year and 8% organically.
We had strong sales of diamides and other insecticides as well as fungicides, but these were more than offset by headwinds from the Brexit-related U.K. sales in Q4 that we described a quarter ago as well as discontinued registrations.
In North America, sales decreased 8% year-over-year.
Our herbicide business grew double digits, partially due to the timing of some sales that shifted from Q4 to Q1 as well as the continued strength of Authority Edge and Authority Supreme herbicides.
We also had a strong launch in the U.S. of Xyway fungicide for corn and Vantacor insect control for specialty crops.
These were offset primarily by a shift of diamide third-party partner sales from North America to Latin America, as one of our key partners adjusted the way it purchases from FMC globally.
This was simply a move of purchasing location and not a change in demand.
Excluding this shift, our North America sales were up low double digits.
Moving now to Latin America.
Sales decreased 22% year-over-year and 13% organically.
As a reminder, we were facing a particularly difficult comparison in Latin America, where sales increased 26% year-over-year and 38% organically in Q1 2020.
Brazil's cotton business was very strong for us a year ago, which did not repeat this season as cotton hectares were down 15%.
We also proactively reduced channel inventory of FMC products as planned in Q1, improving our inventory situation in Brazil.
And our Andean Zone subregion continued the momentum from 2020 with double-digit sales growth.
Turning now to the first quarter EBITDA bridge on Slide five.
EBITDA in the quarter was down $50 million year-over-year due to a very strong Q1 2020 comparison.
Volume headwinds in Latin America and EMEA were partially offset by new product launches in Asia and North America.
In Latin America, we focused on reducing channel inventory to set ourselves up for a much stronger pricing environment in the second half of 2021.
Cost headwinds were slightly higher than expected, while FX headwinds were far lower than in the prior four quarters.
Turning now to our view of the overall market conditions for 2021.
We continue to expect the global crop protection market will be up low single digits on a U.S. dollar basis.
Relative to this time last year, commodity prices for many of the major crops are higher, and stock to use ratios are much improved.
All regions are seeing some benefit from better crop commodity prices, while the negative impact from COVID on crop demand appeared to be modest.
The only change to our regional forecast is that we now forecast mid-single-digit growth in the EMEA market versus low single-digit growth before.
This improved view is due to the strengthening of currencies in that region relative to the U.S. dollar.
Market growth in Asia is still expected to be in the low to mid-single digits, driven by India, Australia and ASEAN countries, while growth in the North American and Latin American markets is still projected to be in the low single digits.
Basic crop fundamentals remain strong.
However, our overall forecast for the total crop protection market remains low single-digit growth due to signs of supply chain constraints in the industry as well as modest channel inventory overhang in certain countries.
Although Brazil and India are facing significant increases of COVID cases, we are not seeing signs that this is impacting their respective agricultural markets at this time.
This is, however, something we are continuing to watch closely.
Turning to Slide six and the review of FMC's full year 2021 and Q2 earnings outlook.
FMC full year 2021 earnings are now expected to be in the range of $6.70 and to $7.40 per diluted share, a year-over-year increase of 14% at the midpoint.
This is up slightly versus our prior forecast, reflecting the share count reduction from our Q1 share repurchases.
Consistent with past practice, we do not factor in any benefit from future share repurchases in our earnings per share guidance.
Our 2021 revenue forecast remains in the range of $4.9 billion to $5.1 billion, an increase of 8% at the midpoint versus 2020 and 8% organic growth.
We believe the strength of our portfolio will allow us to deliver this organic growth, continuing a multiyear trend of above-market performance.
EBITDA is still expected to be in the range of $1.32 billion to $1.42 billion, representing 10% year-over-year growth at the midpoint.
Guidance for Q implies a year-over-year sales growth of 6% at the midpoint on a reported basis and 5% organically.
We are forecasting EBITDA growth of 1% at the midpoint versus Q2 2020, and earnings per share is forecasted to be up 3% year-over-year.
Turning to Slide seven and full year EBITDA and revenue drivers.
Revenue is expected to benefit from 6% volume growth, with the largest growth in Asia and a 2% contribution from higher prices.
FX is now forecasted to have no impact on the top line.
We continue to expect broad growth across all regions and a very strong second half of 2021.
New products like Overwatch herbicide, Xyway fungicide and Vantacor insect control, are already making meaningful contributions.
We are also planning to launch Fluindapyr fungicide in the U.S. for non-crop applications later this year.
We expect new products to contribute $400 million in revenue this year.
This includes all products launched since 2018.
We are forecasting strong growth in each of our product categories in the year.
In addition to the continued growth of Rynaxypyr and Cyazypyr insect controls, we expect growth from other key insecticide brands in our portfolio, including Avatar, Hero and Talisman.
Our herbicide portfolio is also expected to grow led by brands, including Authority, Gamit, Spotlight Plus and Overwatch.
Xyway is expected to lead growth of our fungicide portfolio, building on the successful launch of Lucento fungicide a couple of years ago.
Our EBITDA guidance reflects significant volume and pricing benefits, offset partially by increases in R&D spending, the reversal of some temporary cost savings from 2020 as well as increase in raw material and logistics costs.
As we've stated in February, we are forecasting an increase in R&D to bring us to a level of funding that keeps all projects on a critical path to commercialization.
We are taking cost control actions to limit the net cost headwind to an incremental $10 million versus what we showed in February.
We also intend to offset the higher raw material costs with an additional $10 million in price increases, which will come primarily in the second half of the year.
Moving to Slide eight, where you can see the Q2 drivers.
On the revenue line, we are expecting positive contributions from all categories: volume 4%, pricing 1% and FX 1%.
We're expecting solid sales growth in Asia, EMEA and Latin America.
Asia growth is expected to be broad based across the region, with particular strength in India, Australia and China.
Growth in EMEA will be driven by improved crop conditions for cereals and sugar beets.
Latin America, growth should be supported by improved conditions in both Brazil and Mexico and the continuation of strong growth in the Andean Zone.
We see good conditions in North America for row crops and a positive outlook for our new products.
Regarding EBITDA drivers, positive contributions from volume, price and FX more than offset the increased costs, which we previously discussed.
Turning now to Slide nine.
With the guidance for Q2 and the full year on record, we would like to also show the implied forecast for the second half.
We have a very strong outlook for H2, and let me outline the drivers for that growth.
We forecast year-over-year revenue growth of 15% in the second half driven by five main elements.
First, our expectations are strong for the U.S. and Brazil, following our weak Q4 2020 performance in those countries.
Second, price increases, primarily in Brazil, with contributions from numerous other countries will help offset the FX headwind from last year and the higher costs from raw materials this year.
Thirdly, new products will continue to be a major factor, Overwatch in Australia, Xyway and diamide formulations Elevest and Vantacor and Fluindapyr for non-crop applications in the U.S. and Authority NXT herbicide in India.
Fourth, improved crop fundamentals.
Cotton in Brazil is the most obvious to us, as growers have indicated, a 15% increase in hectares for next season.
And we also expect a strong Q4 in North America and Latin America, driven by good fundamentals for soybeans and corn.
And finally, fifth, improved market access and expansions into new geographies and crops.
This is having a significant impact in Asia with recent initiatives in India, Indonesia, Philippines and Vietnam all forecast to drive high-growth rates.
Our guidance also implies a 30% year-over-year EBITDA growth in the second half of the year.
Much of that will come directly from the volume and pricing growth I just described, but we also expect to limit the raw material and supply chain cost headwinds with sustained cost discipline in other areas.
FX was a modest tailwind for revenue growth in Q1 at 1% versus our expectations of a 2% headwind, as the U.S. dollar weakened against many currencies with the notable exception of the Brazilian reais.
Interest expense for the first quarter was $32.4 million, down $8.4 million from the prior year period, with the benefit of lower LIBOR rates as well as lower foreign debt and lower term loan balances, partially offset by higher average commercial paper balances.
We continue to anticipate interest expense between $130 million and $140 million for the full year.
Our effective tax rate on adjusted earnings for the first quarter was 13.1% as anticipated and in line with our continued expectation for a full year tax rate between 12.5% and 14.5%.
Moving next to the balance sheet and liquidity.
Gross debt at the end of the quarter was $3.6 billion, up over $300 million from the prior quarter, with the expected seasonal build of working capital.
Gross debt to trailing 12-month EBITDA was 3.0 times at the end of the first quarter, while net debt-to-EBITDA was 2.7 times.
Both metrics were above our targeted full year average levels due to the seasonality of working capital.
We expect that this will improve throughout the year, and we will return to target levels by year-end.
Moving on to Slide 10 and cash flow and cash deployment.
Free cash flow for the first quarter was negative $354 million.
Adjusted cash from operations was similar to the prior year period, with improved working capital offset by changes in nonworking capital items and lower EBITDA.
Capital additions were somewhat higher as we ramped up spending following deferral of projects last year due to COVID.
Legacy and transformation spending was substantially lower with the completion of our SAP program.
We continue to expect to generate full year free cash flow within a range of $530 million to $620 million, with the vast majority of this cash flow coming in the second half of the year.
We returned $137 million to shareholders in the quarter via $62 million in dividends and $75 million of share repurchases, buying back 696,000 shares in the quarter at an average price of $107.73 per share.
We continue to anticipate paying dividends approaching $250 million and repurchasing $400 million to $500 million of FMC shares this year.
And with that, I'll hand the call back to Mark.
Our Q1 financial performance was in line with our expectations.
We are now focused on delivering against our full year forecast.
COVID-19 continues to be a factor to watch, and we're closely monitoring raw material and supply chain costs.
We remain confident in our full year forecast that builds upon the new technologies and improved market access that are driving our growth.
The market demand for our most recent product launches is important as it confirms the strength and value that our innovative R&D pipeline delivers to growers.
We expect this momentum to continue to accelerate over the coming years, with launches of new active ingredients and products as well as outcomes from technology partnerships we've established in the past year.
Finally, we remain committed to our cash deployment plan.
We are on track to deliver more than $700 million to shareholders this year, building on a trend since 2018 of improving cash generation and returning excess cash to shareholders.
| sees fy adjusted earnings per share $6.70 to $7.40.
sees fy revenue $4.9 billion to $5.1 billion.
qtrly revenue of $1.2 billion, a decrease of 4 percent versus q1 2020.
qtrly consolidated adjusted earnings per diluted share of $1.53.
|
We had an excellent second quarter.
The team delivered on all four of our long-term operating priorities to drive shareholder value.
We grew through acquisitions, improved our productivity, all while raising our quality and maintaining our unique Gallagher culture.
For our combined Brokerage and Risk Management segments, we posted 17% growth in revenue, 8.6% organic growth, but it's over 10% when adjusted for timing, which Doug will spend some time on in a few minutes.
Net earnings margin expansion of 107 basis points, adjusted EBITDAC margin expansion of 30 basis points, and we completed eight new mergers in the quarter with more than $70 million of estimated annualized revenue.
Most importantly, our Gallagher culture continues to thrive.
Just a fantastic quarter on all measures.
Now before I discuss how each of our businesses performed in more detail, let me comment briefly about the termination of our agreement to purchase certain Willis Towers Watson brokerage operations.
We were excited about the opportunity.
I would have loved to complete the transaction.
There are a lot of great people at Willis, and they would have been a great addition to our team.
But here's the key point.
With or without this, we remain very well positioned to support our clients, compete for new ones and ultimately drive value for all of our stakeholders.
We're in the greatest business on earth, our culture is stronger than ever, and I'm excited about our future.
Back to our quarterly results, starting with our Brokerage segment.
Reported revenue growth was strong at 16%.
Of that, 6.8% was organic revenue growth, a little better than our June IR Day expectation and closer to 9% adjusted for timing.
Our net earnings margin moved higher by 53 basis points, and our adjusted EBITDAC margin expanded by 23 basis points, highlighting our continued expense discipline.
Another excellent quarter from the Brokerage team.
Let me walk you around the world and break down our organization by geography, starting with our PC operations.
First, our domestic retail operations were very strong with more than 8% organic.
New business was excellent, nicely above second quarter 2020 levels.
Risk Placement Services, our domestic wholesale operations, grew 12%.
This includes nearly 25% organic in open Brokerage and 6% organic in our MGA programs and binding businesses.
New business and retention were both better than 2020 levels.
Outside the U.S., our U.K. operations posted more than 9% organic.
Specialty was 10% and retail was excellent at 9%, bolstered by new business production.
Canada was up an outstanding 16%, fueled by rate and exposure growth on top of solid new business and retention.
And finally, Australia and New Zealand combined grew nearly 4%, benefiting from good new business and stable retention.
Moving to our employee benefit brokerage and consulting business.
Second quarter organic was up about 4%, which is also ahead of our June IR Day commentary and another sequential step-up over first quarter 2021 and the second half of 2020.
As business activity improves, we're seeing more favorable growth in our core health and welfare, fee-for-service and retirement consulting businesses, which is encouraging -- it's an encouraging sign for the second half of the year.
So when I combine PC at 9-plus percent and benefits around 4%, total Brokerage segment organic was pushing 9% but with timing reported 6.8%.
Either way, another really strong performance.
Next, I'd like to make a few comments on the PC market.
Global PC rates remain firm overall, and at the same time, we are seeing increased economic activity across our client base.
Customers are adding coverages and exposures to their existing policies, and monthly positive policy endorsements are trending higher than pre-pandemic levels.
And overall, second quarter renewal premium increases were similar with the first quarter.
Moving around the world.
U.S. retail was up about 8%, including double-digit increases in professional liability.
Canada was up 9%, driven by increases in professional liability and package.
New Zealand was flat and Australia up 6%.
Moving to the U.K., retail was up about 8%, with most classes of specialty business over 10%.
And finally, within RPS, wholesale open brokerage was up 12%, while our binding operations were up 4%.
So clearly, premiums are still increasing across nearly all geographies.
Looking forward, it feels that the current renewal environment will persist for some time.
Carriers that cut back capacity in some of the less profitable lines of business like property, professional liability, umbrella and cyber have yet to budge on terms or conditions or haven't reverted back to offering more limits or lower attachment points.
And elevated natural catastrophes, continued impacts of the pandemic, social inflation and low investment returns are all continuing to pressure rates.
And on top of this, the potential for increased claim frequency as economies recover and carriers are making a strong case, the rate increases are likely to persist for some time.
We, too, see the global PC environment remaining difficult for our clients, and that is likely to remain for the foreseeable future.
Moving to our benefits business.
Our customer base is returning toward pre-pandemic levels a little more slowly than headline-grabbing sectors like retail, leisure and hospitality.
So we are expecting even better organic in the second half.
Further, our HR consulting units are very well positioned to deliver solutions as clients and prospects pivot away from controlling costs to growing their businesses and attracting, motivating and retaining their workforce in 2021 and beyond.
So as I sit here today, I think second half Brokerage organic will be better than the first half and could take full year 2020 organic toward 8%.
That would be a terrific step-up from the 3.2% organic we reported in 2020.
Moving on to mergers and acquisitions.
We completed seven Brokerage and one Risk Management merger during the second quarter, representing over $70 million of estimated annualized revenues.
As I look at our tuck-in merger and acquisition pipeline, we have more than 40 term sheets signed or being prepared, representing around $300 million of annualized revenues.
Our platform continues to attract entrepreneurial owners looking to leverage our data, expertise, tools and market relationships to grow their businesses.
And we expect that our U.S. pipeline will grow in the second half of the year given the potential changes in capital gains taxes.
So 2021 is setting up to be another successful year for our merger strategy.
Next, I'd like to move to our Risk Management segment, Gallagher Bassett.
Second quarter organic growth was pushing 20%, better than our June IR Day expectations of mid-teens, and our adjusted EBITDAC margin exceeded 19%.
We benefited from a revenue lift related to our 2020 new business wins, increased new arising claims within core workers' compensation and an easier pandemic-era comparison.
Looking forward, the rebound in employment, economic activity and our solid new business should lead to third and fourth quarter organic nicely in double digits.
For the year, we expect organic to be just over 10% and our EBITDAC margin to remain above 19%.
So what an exciting time to be part of Gallagher.
And that's because of our 35,000-plus employees and our unique Gallagher culture.
It's our culture that keeps us together during the depths of the pandemic.
And as we open offices around the globe yet preserving the flexibility we mastered over the last 16 months, I'm hearing the excitement about being back together.
Ultimately, it's our employees that wake up every day and decide to do things the right way, the Gallagher way.
That's what makes us different.
It makes us special as a franchise.
It attracts the very best people and merger partners and ultimately clients.
I believe our culture has never been stronger.
So with two quarters in the books, 2021 is shaping up to be an excellent year.
As Pat said, an excellent quarter and first half of the year.
Today, I'll spend a little extra time on organic and then give you our current thinking on expenses and margins.
Then I'll walk you through some of the items on our CFO commentary document, and I'll finish up with some comments on cash, liquidity and capital management.
Headline all-in organic of 6.8%, excellent on its own, but as Pat said, really running closer to 9%.
There's two reasons for that.
First, recall that we had some favorable timing in our first quarter related to contingent commissions that caused a little unfavorable timing here in the second quarter.
Call that 70 basis points.
Second, also recall that we took our 606 revenue accounting adjustment in the first quarter of 2020.
We then adjusted that in the second quarter of 2020.
So that creates a more difficult compare this year second quarter.
Call that about 150 basis points.
These two items combined for about 220 basis points of a headwind here in the second quarter.
We don't expect similar headwinds in the second half.
Let's go to Page six to the Brokerage adjusted EBITDAC table.
You'll see that we expanded our EBITDAC margin by 23 basis points here in the second quarter.
Considering last year's second quarter was in the depth of the pandemic and our Brokerage segment saved $60 million in that quarter, to post any expansion at all this quarter is terrific work by the team.
It shows we are indeed holding a lot of our savings.
So the natural question is, when you levelize for the $60 million of pandemic savings last year's second quarter and about $15 million of costs that came back this second quarter, what was the underlying margin expansion?
Answer to that is about 125 basis points, which on 6.8% organic feels about right.
That $15 million mostly relates to higher utilization of our self-insurance medical plans, a modest tick-up in T&E expenses and incentive comp.
So we held $45 million of cost savings this quarter, and that's really terrific.
Looking forward, we continue to think we can hold a lot of our pandemic period savings, perhaps more than half.
But naturally, some of those costs will come back.
As of now, we think about $20 million of cost returned in the third quarter and $30 million return in the fourth quarter.
Both of those numbers are relative to last year's same quarters.
So again, the natural question might be, what organic do you need to post third and fourth quarter to overcome those expenses and still have margin expansion?
Math would say about 7%, which is really the real story.
Recall at the beginning of the year, after expanding margins 420 basis points in 2020, we were looking at just holding margins flat.
Now we're looking at a full year margin expansion story.
So even with the return of the expenses and again, let's say, assuming for illustration a full year organic of 7%, math would show another full point of margin expansion in 2021.
That would mean our cumulative 2-year margin expansion would be well over 500 basis points.
That really highlights the improvements in productivity that are now ingrained in how we do business and how we operate.
What a great story.
Let's move on to the Risk Management segment EBITDAC table on Page 7.
Adjusted EBITDAC margin of 19.7% in the quarter is fantastic.
And we continue to expect the team to deliver margins above 19% for the full year, showing that our Risk Management segment can also hold some of the pandemic-induced cost savings, meaning that the 2020 step-up in margin can be sustained in 2021.
Let's move now to Page four of the CFO commentary document that we posted on our website.
Comparing second quarter results in the blue section to our June IR Day estimate in the gray section, interest and banking is in line.
Accordingly, we are increasing our full year net earnings range to $75 million to $85 million on the back of the second quarter upside.
You'll also notice two non-GAAP adjustments.
One related to the costs associated with the terminated Willis Towers Watson acquisition, and the other is a onetime deferred tax revaluation charge related to the statutory increase in the U.K.'s 2023 corporate tax rate.
When you control for those two items, it shows that adjusted M&A and corporate lines were both pretty close to our June 17th estimates.
Looking ahead to the third quarter, and that's in the pinkish section, you'll see non-GAAP after-tax adjustment for $12 million to $14 million.
This charge is mostly related to redeeming $650 million of debt.
That's the 10-year senior notes we issued in mid-May.
This should also lead to lower third and fourth quarter adjusted interest and banking expense, savings maybe of $2 million to $3 million after tax each quarter.
If you turn now to Page five of the CFO commentary, go to the peach-colored section.
Just another reminder of what we've been discussing in these calls and during our IR Days for the last couple of years.
2021 is the last year our clean energy investments will show GAAP P&L earnings.
Rather, beginning in 2022, we will show substantial cash flows through our cash flow statement, call it $125 million to $150 million a year for, say, six to seven years.
I know I've highlighted this a lot, but I just want to make sure you consider this as you build your 2022 models and beyond.
So next, let's go to the balance sheet on Page 14, the top line cash.
At June 30, cash on hand was $3.2 billion, and we have no outstanding borrowings on our credit facility.
We'll use that first to redeem the $650 million of debt I just discussed.
And also today, we announced a $1.5 billion share repurchase program.
That would leave us with about $1 billion of cash.
Then add to that about $650 million of net cash generation in the second half.
That's after dividends, capex, interest, taxes, et cetera.
And we would also have another $600 million to $700 million of borrowing capacity.
Means we have upwards of $2.5 billion for M&A.
When I look at the pipeline and if a capital gains tax rate change gets momentum, I think we'll have plenty of opportunities to put that capital to work at really fair multiples.
Those are my comments, an excellent quarter, an excellent first half, a bright outlook for the second half and a really terrific cash position.
Back to you, Pat.
Laura, I think we can take some questions now.
| arthur j gallagher authorized repurchase of up to $1.5 billion of common stock.
authorized repurchase of up to $1.5 billion of common stock under a new plan.
arthur j gallagher - if economic conditions continue to improve, may see favorable revenue benefits in brokerage, risk management segments in q3, q4.
arthur j gallagher - if economic conditions continue to improve, may see favorable revenue benefits in clean energy investments in q3, q4.
|
Participating in today's call will be Bruce Schanzer, Chief Executive Officer; Robin Zeigler, Chief Operating Officer; and Philip Mays, Chief Financial Officer.
These statements are subject to numerous risks and uncertainties, including those disclosed in the company's most recent Form 10-K to the year ended 2019, as updated by our subsequently filed quarterly reports on Form 10-Q and other periodic filings with the SEC.
As you all realize, this has been and continues to be a time of incredible stress, with many folks worrying about contracting a frightening virus, and managing all of the personal challenges this pandemic has engendered.
Although, we usually describe our grocery anchored shopping center assets as being resilient, I can proudly say that the members of team Cedar are most valuable assets, have proven themselves to be even more resilient than our shopping centers, as they have performed their jobs with a characteristic focus on everyday excellence, collegiality, and collaboration.
Since the outset of the pandemic, we have focused on a number of pressing matters in order for us to emerge from this period on a strong footing as possible.
First and foremost, we have endeavored to help our tenants survive the economic shutdown, and ideally pay their rents or at a minimum agree to a forbearance arrangement, whereby we have the right to collect the rent in the future.
Second, we have awaited the reopening of the real estate debt capital markets in order to arrange the refinancing of our $75 million term loan maturing in February 2021, as well as addressing our other upcoming debt maturities.
Third, we have advanced our redevelopment projects, while exploring joint venture arrangements for the initial phases, especially the recently announced DGS building.
Fourth, we have used this period to take a rigorous zero based approach to many G&A categories, and have identified substantial savings that we anticipate benefiting from not only in 2020, but more generally in 2021 and beyond when we see the full-year impact of some of these measures.
Before walking through each of these areas of focus during the pandemic, it is worth reflecting on a remarkable revelation afforded by this period.
At Cedar, we have consistently articulated a two pronged long-term business strategy that we have steadfastly pursued for many years through the ups and downs of the market and our stock price performance.
First, we have focused on a core portfolio of grocery anchored shopping centers in the D.C. to Boston corridor, and have therefore systematically divested non-core assets.
Second, we have pursued mixed use urban redevelopment projects in high population density submarkets within our D.C. to Boston footprint, with a particular focus on building affordable and market rate workforce housing at these projects.
Remarkably, the pandemic has highlighted the very trends we have anticipated and been building toward with our two pronged strategic plan.
Specifically, the accelerated secular demise in many bricks and mortar retail categories has led to grocery anchored shopping centers being the strongest performing category within retail real estate.
Notably, our grocer anchors have experienced a growth in sales during this period, and the inline tenants and junior anchors in our centers have benefited from the strong traffic and overall center vitality resulting from the strong grocer performance.
Additionally, the pandemic triggered a wave of de-urbanization from center cities and significant pressure on higher end multifamily, while highlighting the inequality of housing opportunities within our cities, and the growing need for attractive and reasonably priced workforce housing.
Thus, the particular multifamily market opportunity which we are targeting with our mixed use projects has grown deeper during this period.
Now some comments on our four primary focus areas over the last few months.
This appears to be among the better collection rates for all retail REITs in the third quarter.
Cedar's relatively high degree of success is a direct result of the tirelessness with which the team approach the challenges presented by the pandemic, as well as the aforementioned decision made when we arrived at Cedar back in 2011 to hone our portfolio to focus on a core portfolio of grocery anchored shopping centers in the D.C. to Boston corridor.
At the outset of the pandemic, we formed a cross functional committee within Cedar that engaged with all of our tenants in an effort to make sure that they endure and come out of this crisis as favorably positioned as possible.
In addition, this cross functional committee laid the groundwork for a highly detailed and analytical approach that included using legal tools, center and tenant monitoring, as well as repeated tenant outreach.
As they say, the proof is in the pudding.
And apparently our approach has proven effective as measured by our rent collections over the past two quarters.
We felt this was a prudent move since while we are comfortable that the mortgage debt markets are open and attractive, we didn't want to have to worry about the closing dragging a bit nor do we want to have to deal with the possibility of further dislocation in the capital markets, owing to a second wave in the coming winter months.
As Phil will describe, there appear to be interesting and attractive refinancing options for both the term loan, as well as our other near-term financing needs.
Third, as was announced in July, and discussed at our second quarter earnings call, we have finalized a 20-year built-to-suite office deal with DGS at our Northeast Heights project in Washington D.C.
This building will serve as an anchor for the project and also represents the first phase of the project.
We have been actively engaged with various debt and equity financing sources and are optimistic that we will be able to finalize an arrangement later this year or early next that will allow us to break ground and get started with this exciting project.
More generally, much as our strategic decision early on to focus on grocery anchored to the exclusion of other retail asset types has proven to be a good decision.
Our particular redevelopments have proven to be well positioned as we begin to hope we come out of this pandemic period.
Fourth, we have taken a zero based approach to our G&A in evaluating many corporate expenses.
A great example of how this approach has borne fruit is our decision to relocate our headquarters office from a building in Port Washington Long Island, where we rent space on a lease expiring in February of 2021 to the back of a Carman's Plaza Shopping Center in Massapequa Long Island, where we are converting a space that has been essentially unrentable during my tenure into office space, which we will occupy rent free.
Considering that our full-year rent expense is approximately $500,000, this is a terrific G&A savings opportunity.
More generally, we anticipate reducing year-over-year G&A by an excess of $2 million through the zero based cost savings approach.
In sum, we have navigated through this period of unprecedented personal and professional stress remarkably well thus far.
First, we have managed to bounce back from the initial shocks to our business with a collections level this past quarter of 91%, representing among the better performances through the third quarter among retail REITs.
Second, we've addressed our near-term debt maturities and are optimistic about closing on a permanent refinancing later this year or in early 2021.
Third, we are similarly focused on finalizing both the debt and equity financing needs of our redevelopment projects, especially the DGS building, which will position us to commence the project in early 2021.
Last, we have tightened up our overhead in the face of all distress with full-year G&A savings anticipated to be in excess of $2 million in 2021.
Our progress to this point is not an accident.
It begins with my colleagues on team Cedar, who have conducted themselves with exceptional resilience and professionalism during this time of great stress.
They are supported by decisions we have made many years ago to focus strategically on grocery anchored shopping centers in the D.C. to Boston corridor, and on urban mixed use projects with an affordable or market rate workforce housing component.
In the coming months and quarters, we look forward to announcing continued progress on all these endeavors, while we hope that there is no second wave, and that this terrible pandemic recedes into the rearview mirror.
With that, I give you Robin to provide greater detail on many of these topics.
Not only are we living in unprecedented times, but we are operating shopping centers in unprecedented times as well.
While our team has been focused on working with tenants through deferral negotiations and the collections process, we are also laser focused on what happens on the other side of this pandemic.
What do our tenants need from their landlord to maximize their ability to survive this pandemic?
How can we help our tenants pursue omnichannel operating measures to hedge their risk and pivot into a new operating environment?
What cost savings measures can we put into place that help both the tenants and the landlord from a CAM and capital expenditures standpoint.
These are among the topics we are addressing as we deliberately, thoughtfully and strategically advance our operations.
The professionalism of our team has been exemplary as they deal with not only ordinary course business challenges of daily operations, but astutely balancing those with the video conferences, field visits, and the ongoing impact from social unrest in some of our urban markets.
Our centers remained open during the third quarter with 96% of our tenants opened for business.
The users that have not reopened are mainly movie theatres, fitness and buffet style restaurants.
We have had another successful quarter of rent collections reaching our highest yet collection rates since the inception of COVID of 91%.
Moreover, October collections are currently at 91%, which does not reflect one high credit anchor that pays at the end of the month, which will take us to approximately 92.5% for October.
In order to ensure tenant health and occupancy, we have actively engaged with almost all of our over 800 tenants during the pandemic.
We completed 105 deferral and waiver agreements through September 30, 2020, totaling $3 million of deferred rent with a required payback beginning over a period ranging between July 2020 and March 2021.
The number of months differed averages four months for an average payback period of 10 months.
$900,000 of rent was waived as of September 30, 2020, for an average of four months.
These agreements were made with tenants in an effort to not only sustain their viability, but also to achieve some landlord favorable concessions including sales reporting, additional lease term and modification of key lease provisions.
Despite the pandemic our leasing momentum remained strong.
32 leases were signed this quarter, eight new deals totaling 72,800 square feet, and 24 renewals totaling 167,300 square feet.
The new deals executed were at a positive spread of 21.5% and include two anchor deal Shoppers Road at Jordan Lane [Phonetic] at a spread of 44% and America Sprayed at Golden Triangle [Phonetic] at a spread of 23%.
The renewals were done at a negative spread of 3.1% when analyzed in total.
The negative spread is a result of anchor and junior anchor renewals with home goods at New London mall, Goodwill at Groton and Yes!
Organic at Shoppes at Arts District, which were done with the objective of retaining these important anchor and junior anchor occupancies and missed the pandemic.
The spread increases to positive 2.8% excluding these three tenants.
As of September 30, 2020 our current lease same center occupancy is 91.7%, a 0.2% increase from prior quarter.
We continue to have momentum on our redevelopments and value add renovations.
At Fishtown crossing Starbucks had their grand opening in September, GameStop and T-Mobile have relocated, Nifty Fifty was delivered in August, and the original Hot Dog Factory was delivered in September.
We expect the IGA grocery store facade renovation to be completed by the end of the year and the remaining facade renovation for the rest of the center to be completed in 2021.
Also in Philadelphia, we are making progress on site plan amendments to our Revelry project.
Our original site plan was based on a movie theatre anchor.
Since the pandemic shutdowns, United Artists Cinema at Revelry has not yet reopened.
We are in discussions with the potential replacement anchor tenant for this project, and we expect to regain possession of the theatre space effective in November 2020 incident to the termination of their tenancy.
We think that the potential alternate anchor will be a great catalyst for the Revelry redevelopment.
Northeast Heights continues to progress at a steady pace as well.
We contunue last -- I'm sorry, we announced last quarter that our lease was executed with the District of Columbia for a 260,000 square foot office building, including ground floor retail for the Department of General Services.
This government agency comprises more than 700 skilled professional employees with expertise in the areas of construction, building management and maintenance, portfolio management, sustainability and security at district owned properties.
This office building is slated to be built as part of the first phase of Northeast Heights.
The DGS lease structure includes a 20-year 10-month term based on a net rent of $22.52 per square foot and a gross rent of $56.43 per square foot, which includes a TI amortization of $14.09 per square foot.
Plans are under way to commence construction in early 2021.
The DGS building is a central element of Cedar's vision to realize a true metamorphosis for Ward 7 and is emblematic of the type of neighborhood we are endeavoring to create with Northeast Heights.
As always, our team remains focused and motivated to continue to create value even during these unprecedented time.
With that, I will give you Phil.
Today we announced sequential quarterly improvements in both FFO and same property NOI.
FFO increased to $8 million or $0.09 per share, compared to $5.7 million or $0.06 per share reported for the previous quarter.
Same property NOI decreased 9.1% over the comparable period in 2019, and marked improvement from the 14.6% decrease we reported in the previous quarter.
Both of these improvements were driven by our strong cash collections that Bruce and Robin discussed.
Last quarter, I walked through our cash collections and revenue recognition in a fair amount of detail and received comments that was very helpful in understanding our results.
Accordingly, I want to take a minute to once again walk through our revenue recognition in detail.
Our total tenant billings for base rent and recoveries combined for this quarter were $31.6 million.
During the quarter, we collected and recognized as revenue $30.1 million or 91% of these billings.
Additionally, we recognized another $1.1 million or 3% as revenue that we determined to be collectible, the majority of which is covered by signed deferral agreements.
Accordingly for this quarter, we recognize as revenue 94% of our build rent and recoveries for the quarter.
The $1.9 million or 6%, that we did not recognize consists of $1.8 million that was not paid by tenants, and which we have determined at this time should be accounted for on a cash basis, and $100,000 that we agreed to waive.
As reminder, just because we have placed certain tenants on the cash basis it does not mean we will not collect anything from them.
While some cash basis tenants may fail, we expect some will simply make inconsistent payments or partial payments, which we will recognize as revenue if and when received.
Moving to the balance sheet.
On our prior quarter call, we discussed that we were exploring secured debt to refinance our $75 million term loan that was scheduled to mature in February of 2021.
As the secured financing market has opened for pressured anchored shopping centers with high cash collection rates, we have engaged with two financial institutions to assist with placing secured debt.
We are working diligently toward closing secured loans in amount equal to or greater than $75 million in early 2021.
To that end, earlier this week, we utilized our revolving credit facility and retired the $75 million term loan scheduled to mature in February of 2021.
Our revolving credit facility matures in September of 2021 and has a one year extension option.
Accordingly, as Bruce noted, this provides us with flexibility concerning the timing of closing these secured loans.
And they've been a second wave of COVID should again temporarily dislocate the capital markets.
Another note worth the balance sheet matters, receivable we now have for deferral agreements.
As Robin noted, we have signed deferral agreements for $3 million, of which approximately $250,000 was repaid this quarter, and $250,000 relates to the remainder of the year, resulting in us carrying a $2.5 million receivable for deferral agreements at the end of this quarter.
The vast majority of this receivable is scheduled to be repaid in 2021, with approximately $700,000 in each Q1 and Q2 of 2021, and approximately $500,000 in each Q3 and Q4 of 2021.
The collection of these amounts will increase our cash flows from operations in 2021, but will not impact earnings as they've already been recognized.
This reverse split will not only assist with maintaining compliance with the New York Stock Exchange listing requirements, but will also reset our share price above the $5 minimum requirement of some investment funds and do so while keeping more than 10 million shares outstanding to assist with trading liquidity.
With that, I'll open the call to questions.
| q3 operating ffo per share $0.09.
qtrly same-property noi decreased 9.1% compared to a 14.6% decrease in prior quarter.
|
I'm here today with Chairman and CEO, Todd Bluedorn and CFO, Joe Reitmeier.
Todd will review key points for the quarter.
Joe will take you through the company's financial performance for the quarter and year as well as the outlook for 2021.
To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and requeue for any additional questions.
All comparisons mentioned today are against the prior year period.
For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.
In the fourth quarter, we continue to see strong momentum in our Residential business, and year-over-year improvement in Commercial and Refrigeration.
Overall for the company, revenue was up 3% and hit a new fourth quarter high of $914 million.
GAAP operating income was $139 million compared to $192 million in the prior year quarter that included $93 million net gain from insurance recoveries.
GAAP earnings per share from continuing operations was $2.91 compared to $2.92 in the prior year quarter that included $93 million in insurance benefit I mentioned and a $39 million pre-tax pension settlement.
In addition to record fourth quarter revenue, the company set new fourth quarter highs for total segment profit, and margin, and adjusted earnings per share from continuing operations.
As reported, total segment profit was a fourth quarter record, a $139 million, up 5% from the prior year quarter that included $25 million of insurance recovery.
Total segment margin was a fourth quarter record 15.2%, up 10 basis points.
Adjusted earnings per share from continuing operations rose 18% to a fourth quarter record of $2.89.
From an operating perspective excluding the $25 million of insurance benefit in the prior year quarter, total segment profit was up 29%, and segment margin expanded 300 basis points.
Looking at our business segments for the fourth quarter, Residential set new fourth quarter records for revenue, profit and margin.
Residential revenue was up 11% on double-digit growth in both replacement and new construction business.
Residential indoor air quality revenue was up more than 30% in the quarter.
Segment profit rose 18% and segment margin expanded 130 basis points to 20.9%.
From our operational perspective, adjusting for the $25 million of insurance benefit in the prior year quarter, Residential profit rose 58% and margin expanded 630 basis points.
In Commercial, fourth quarter revenue was down 13% and profit was down 11%.
Segment margin expanded 40 basis points to a fourth quarter record 19.4%.
We continue to see year-over-year improvement in the business in both replacement and new construction, as well as national accounts and regional and local business.
Commercial equipment revenue overall was down mid-teens in the quarter.
Within this, replacement revenue was down low-single digits at constant currency, but with planned replacement down high single-digits and emergency replacement up low double digits.
New construction revenue was down a mid 20s percentage.
Breaking our revenue another way, regional and local business revenue was down low-double digits.
National accounts equipment revenue was down mid-teens.
On the service side, Lennox National Accounts Service revenue was down high single-digits.
Some highlights to mention for commercial.
Our team added six new National Account equipment customers in the quarter to bring the total to 32 for the year.
While small today, we are seeing fast indoor air quality revenue growth led by our new Building Better Air initiative.
And in the first quarter, we are on track with the launch of our new Model L rooftop unit as we continue to lead the field in energy efficiency.
The Model L features variable speed technology and an all-new advanced control system.
We are seeing higher -- we are seeing high customer interest in this industry leading product for 2021.
Overall commercial backlog is up double digits.
In Refrigeration for the fourth quarter, revenue was up 7% as reported and up 3% at constant currency.
North America revenue was up low-single digits.
Europe refrigeration revenue was up mid-single digits as reported and low single-digits at constant currency.
In Europe, HVAC revenue was up mid-teens as reported and up high single digits at constant currency.
Refrigeration segment profit declined 28% and margin contracted to 360 basis points to 7.5% on the timing of expenses in the quarter and unfavorable mix with the strong growth in Europe HVAC.
Currently refrigeration backlog is up double digits led by North America and we are seeing strong order flow.
We expect segment margin to be up year over year starting in the first quarter and be up for the full year in 2021.
For the company overall in 2021, we are reiterating guidance.
We expect revenue growth of 48% this year and GAAP and adjusted earnings per share from continuing operations, up $10.55 to $11.15 for the full year.
While there is an economic and market uncertainty, momentum continues for the company and we are well positioned for a year of strong growth and profitability.
Given the outlook and the company's strong balance sheet and cash generation, we are restarting our stock purchase program in 2021 and plan to buyback 400 million this year.
Let me start with a quick summary of our full-year 2020 for the company and then the financial details on the business segments for the quarter and full year.
Overall for the company, revenue for 2020 was $3.63 billion, down 5% on a GAAP basis and down 4% on an adjusted basis, excluding the impact from the divestitures in the prior year.
Foreign exchange was neutral to revenue.
GAAP operating income was $479 million compared to $657 million in the prior year, that included a $179 million net gain from insurance recoveries.
GAAP earnings per share from continuing operations was $9.26 compared to $10.38 in the prior year, that included the $179 million insurance benefit and $99 million in pre-tax pension settlements.
Total adjusted segment profit for the full year was $507 million compared to $610 million in the prior year, that included a $99 million of insurance recovery.
Total adjusted segment margin was 13.9% for the year compared to 16.2% in the prior year with the insurance benefit.
Adjusted earnings per share from continuing operations was $9.94 compared to $11.19 in the prior year with the insurance benefit and pension settlements.
From an operational perspective, excluding the $99 million of insurance benefit in the prior year, total segment profit was down 1% and total segment margin was up 40 basis points.
Now turning to the business segments for the quarter and the year.
In the fourth quarter, revenue from Residential Heating & Cooling was a fourth quarter record $553 million, up 11%.
Volume was up 10%.
Price was up 1%, and mix was flat, with foreign exchange neutral to revenue.
Residential profit was a fourth quarter record $116 million, up 18%.
Segment margin was a fourth quarter record 20.9%, up 130 basis points.
And as Todd mentioned, operationally profit was up 58% and margin expanded 630 basis points.
Segment profit was primarily impacted by higher volume, favorable price, lower material and other product costs, higher factory productivity, and lower SG&A.
Partial offsets included $25 million of non-recurring insurance proceeds in the prior year quarter, the COVID-19 pandemic, and higher tariffs, freight distribution, and warranty.
For the full year, Residential segment revenue was a record $2.36 billion, up 3%.
Volume was up 2%.
Combined price and mix was up 1% with both up.
Foreign exchange was neutral to revenue.
Residential profit was $429 million, down 8% from the prior year that had been $99 million of insurance recovery.
Segment margin was 18.1%, down 220 basis points as reported.
Operationally, excluding the insurance recovery in the prior year, segment profit was up 17% and margin expanded 210 basis points.
Now turning to our Commercial Heating & Cooling business.
In the fourth quarter, Commercial revenue was $226 million, down 13%, volume was down 8%, price was flat, and mix was down 5%.
Foreign exchange was neutral to revenue.
Commercial segment profit was $44 million, down 11%.
Segment margin was a fourth quarter record 19.4%, up 40 basis points.
Segment profit was primarily impacted by the COVID-19 pandemic, lower volume, unfavorable mix, and higher freight distribution and SG&A.
Partial offsets included lower material and other product costs, higher factory productivity, lower warranty and tariff exclusions and refunds due to exclusions.
For the full year, Commercial revenue was $801 million, down 15%.
Volume was down 14%.
Price was flat, and mix was down 1%.
Foreign exchange was neutral to revenue.
Segment profit was $137 million, down 17%.
Segment margin was 17.1% down 40 basis points.
In Refrigeration, revenue was $135 million, up 7%.
Volume was up 3%, price was up 1%, and mix was down 1% and foreign exchange had a favorable 4% impact on revenue.
Refrigeration segment profit was $10 million in the fourth quarter, down 28%.
Segment margin was 7.5%, down 360 basis points.
Segment profit was primarily impacted by the COVID-19 pandemic, unfavorable mix, higher distribution, warranty and other product costs, and the timing of SG&A expenses.
Partial offsets included higher volume, favorable price, and lower material costs.
For the full year, Refrigeration revenue was $472 million, down 12%.
Volume was down 14%.
Price was up 1%, and mix was flat.
Foreign exchange had a favorable 1% impact.
Segment profit was $33 million, down 47%.
And segment profit margin was 7%, down 470 basis points.
Regarding special items in the fourth quarter, the company had net after-tax gain of $800,000 that included a net gain of $3.4 million for insurance recoveries related to damage at the Company's manufacturing facility in Iowa, a benefit of $2.3 million related to environmental liabilities, a benefit of $1.5 million for excess tax benefits from share-based compensation.
For charges we had $2.7 million for asbestos related litigation, $1.5 million for special product quality adjustments, $1.4 million for personal protective equipment and facility deep cleaning expenses incurred due to the COVID-19 pandemic, and a net change --charge of $800,000 in total for various other items.
Now looking at special items for the full year, the company had net after-tax charges of $26 million and they included a charge of $8.5 million for other tax items, $8.4 million for restructuring activities, $6.2 million for personal protective equipment and facility deep cleaning expenses incurred due to the COVID-19 pandemic, $4.2 million for asbestos related litigation, a net loss of $2.3 million related to damage of the company's manufacturing facility in Iowa, a net charge of $600,000 in total for various other items, and a benefit of $4.2 million for excess tax benefits from share-based compensation.
Corporate expenses were $30 million in the fourth quarter, and $92 million for the full year.
Overall, SG&A was $143 million for the fourth quarter or 15.7% of revenue, down from 16.3% in the prior year quarter.
For 2020 overall, SG&A was $556 million or 15.3% of revenue, down from 15.4% on an adjusted basis in the prior year.
For 2020, the company had cash from operations of $612 million compared to $396 million in the prior year.
Capital expenditures were approximately $78 million for the full year compared to $106 million in the prior year.
And proceeds for damage to property and disposal of property were $1 million compared to $81 million in the prior year.
Free cash flow was $535 million for the year compared to $371 million in the prior year.
In 2020, the company paid $118 million in stock -- in dividends and repurchased $100 million of company stock.
Total debt was $981 million at the end of the fourth quarter, and we ended the year with a debt to EBITDA ratio of 1.7, and cash and cash equivalents were $124 million at the end of the year.
Our underlying market assumptions for the year remain the same.
We expect industry to see mid-single digit shipments growth in residential, commercial unitary and refrigeration markets in North America.
The company's guidance for 2021 remains the same as we presented at the December Investment Community Meeting.
Our guidance for 2021 revenue growth is 48% with neutral foreign exchange impact.
We still expect GAAP and adjusted earnings per share from continuing operations in a range of $10.55 to $11.15, with about half of the earnings in the first half of the year and half in the second half of the year.
Let me now run through other key points on our guidance assumptions and the puts and takes for 2021, all of which are unchanged.
We expect a benefit of $50 million in price for the year.
We expect a benefit of $25 million from sourcing and engineering led cost reductions, and a $20 million benefit from factory productivity.
We are guiding for residential mix to be neutral.
[Technical Issues] foreign exchange will be neutral as well.
For the headwinds in 2021, we expect a $30 million headwind from commodities.
Freight is expected to be a $5 million headwind.
We will be at more -- at a more normal run rate with distribution investments this year with 30 new Lennox stores planned.
Tariffs are expected to be a $5 million headwind.
We are planning for SG&A to be up approximately 7% for the year or headwind of about $45 million.
Within SG&A, we will be making investments in R&D and IT for continued innovation and leadership in products, control, e-commerce, factory automation, and productivity.
A few other guidance points.
Corporate expenses are targeted at $90 million.
Net interest in pension expense is expected to be approximately $35 million.
We expect an effective tax rate of approximately 21% on an adjusted basis for the full year.
We are planning capital expenditures to be approximately $135 million this year, about $30 million of which are for the third plant and our campus in Mexico.
We expect construction to be completed by the end of 2021 and have the plant fully operational by mid 2022.
We expect nearly $10 million in annual savings from the third plant.
Free cash flow is targeted at $325 million as we reinflate working capital to support strong growth.
And over the long term we expect free cash flow to approximate net income on average.
And finally, we expect the weighted average diluted share count for the full year to be between 37 to 38 million shares, which incorporates our plans to repurchase $400 million of stock this year.
And with that, John, let's now go to Q&A.
| compname reports q4 revenue of $914 mln.
q4 adjusted earnings per share $2.89 from continuing operations.
q4 gaap earnings per share $2.91 from continuing operations.
q4 revenue $914 million versus refinitiv ibes estimate of $884.8 million.
reiterating 2021 guidance for adjusted revenue growth of 4-8%.
reiterating 2021 guidance for gaap and adjusted earnings per share from continuing operations of $10.55-$11.15.
reiterating 2021 guidance for $400 million of stock repurchases.
sees 2021 capital expenditures of approximately $135 million.
|
Going to Slide two.
Today we have on the call, Drew DeFerrari, our Chief Financial Officer and Ryan Urness, our General Counsel.
Now moving to Slide four, and a review of our fourth quarter results.
As we review our results, please note that in our comments today and in the accompanying slides, we reference a certain non-GAAP measures, specifically in accordance with our 52/53 week calendar.
This quarter included a 14th week.
All references to organic revenue and organic growth, exclude the effect of this additional week.
We refer you to the quarterly report section of our website for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.
We are living in truly unprecedented and trying times for our country.
I could not be prouder of our employees as they continue to serve our customers with real fortitude in difficult times.
Now, for the quarter.
Revenue was $750.7 million, an increase of 1.8%.
Organic revenue excluding $5.7 million of storm restoration services in the quarter declined 6.2%.
As we deployed 1 gigabit wireline networks, wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from one of our top five customers.
Adjusted gross margins were 14.3% of revenue, reflecting the continued impacts of the complexity of a large customer program.
Adjusted general and administrative expenses were 8.5%, and all of these factors produced adjusted EBITDA of $45.7 million or 6.1% of revenue, an adjusted diluted loss per share of $0.07, compared to a loss of $0.23 in the year ago quarter.
Liquidity was strong as cash and availability under our credit facility was $570.5 million.
Finally, during the quarter, we repurchased 1.32 million shares of our common stock for $100 million, representing just over 4.15% of common stock outstanding.
Even after the substantial repurchase, notional net debt only increased by $14.6 million during the quarter.
In sum, over the last four quarters, we have reduced notional net debt by over $275 million, increased availability under our credit facility by a similar amount and meaningfully reduced shares outstanding.
As our most recent share repurchase authorization has been exhausted, our Board has newly authorized $150 million in share repurchases.
Now going to Slide five.
Today, major industry participants are constructing or upgrading significant wireline networks across broad sections of the country.
These wireline networks are generally designed to provision 1 gigabit network speeds to individual consumers and businesses, either directly or wirelessly using 5G technologies.
Industry participants have stated their belief that a single, high capacity fiber network can most cost-effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment.
This view appears to be increasingly appetite for fiber deployments and we believe that the industry effort to deploy high capacity fiber networks continues to meaningfully broaden our set of opportunities.
Access to high capacity telecommunications has become increasingly crucial to society in the time of the COVID-19 pandemic, especially in rural America.
The wide and active participation in the recently completed FCC RDOF auction augurs well for dramatically increased rural network investment supported by private capital that in case -- that in the case of at least some of the participants is expected to be significantly more than the FCC subsidy.
We are providing program management, planning, engineering and design, aerial, underground and wireless construction, and fulfillment services for 1 gigabit deployments.
These services are being deployed -- being provided across the country in numerous geographical areas to multiple customers, including customers who have initiated broad fiber deployments, as well as customers who will shortly resume broad deployments and with whom order flow has recently increased markedly.
These deployments include networks consisting entirely of wired network elements, as well as converged wireless/wireline multiuse networks.
Fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal incentives.
We continue to provide integrated planning, engineering and design, procurement and construction and maintenance services to several industry participants.
Near-term, macroeconomic effects and uncertainty may influence the execution of some customer plans.
Customers continue to be focused on the possible macroeconomic effects of the pandemic on their business with particular focus on SMB dislocations and overall consumer confidence and creditworthiness.
We see some uncertainty in the overall municipal environment as authorities continue to manage the general effects of the pandemic on permitting and inspection processes.
Overall, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers.
Moving to Slide six.
During the quarter, we experienced increased demand from one of our top five customers, organic revenue decreased 6.2%.
Our top five customers combined produced 69.4% of revenue, decreasing 15.5% organically, while all other customers increased 25.3% organically.
Comcast was our largest customer at 18.8% of total revenue or $140.9 million.
Comcast grew 28.8% organically.
Revenue from AT&T was $126.2 million or 16.8% of revenue.
AT&T was Dycom's second largest customer.
Verizon was our third largest customer at 15.7% of revenue or $117.8 million.
Lumen was our fourth largest customer at $100.5 million or 13.4% of revenue.
And finally revenue from Windstream was $36 million or 4.8% of revenue.
Windstream was our fifth largest customer.
This is the eighth consecutive quarter where all of our other customers in aggregate, excluding the top five customers have grown organically.
In fact, our business with these customers has grown organically by double digits each of the last two quarters.
Of note, fiber construction revenue from electrical utilities was $44.1 million in the quarter or 5.9% of total revenue.
This activity increased organically 125% year-over-year.
We have extended our geographic reach and expanded our program management and network planning services.
In fact, over the last several years, we have meaningfully increased the long-term value of our maintenance and operations business, a trend which we believe will parallel our deployment of 1 gigabit wireline direct and wireless/wireline converged networks as those deployments dramatically increase the amount of outside plant network that must be extended and maintained.
Now going to Slide seven.
Backlog at the end of the fourth quarter was $6.81 billion versus $5.412 billion at the end of the October 2020 quarter, increasing approximately $1.4 billion.
Of this backlog, approximately $2.787 billion is expected to be completed in the next 12 months.
The increase in backlog reflects renewals and new awards across a significant number of customers, offset in part by adjustments resulting from further communications regarding the reprioritization and rescoping of the components of a large program and our assessment of the expected pace of another component of the same program.
From AT&T, we received extensions as well as awards, expanding our covered services across a significant majority of our business.
First, construction expansions in Kentucky, Tennessee, North Carolina, South Carolina, Alabama, Georgia and Florida.
Second, extensions for construction and maintenance services agreements in Kentucky, Tennessee, North Carolina, South Carolina, Alabama, Georgia and Florida.
Third, an extension and scope expansion for wireless services in Kentucky, South Carolina, Alabama and Georgia.
And finally, a five-year extension for locating services in California.
For Comcast, Engineering agreements in Michigan, Massachusetts, Pennsylvania, Maryland, Delaware and Georgia.
For Charter, Construction & Maintenance agreements in New York and Ohio.
From Frontier, Construction agreements in Connecticut and Florida, and a Construction & Maintenance agreement in Florida.
For Verizon, a construction agreement in Texas and renewal in Maryland and Virginia.
And locating agreements for various customers in Maryland and New Jersey.
Headcount increased during the quarter to 14,276.
Going to Slide eight.
Contract revenues for Q4 were $750.7 million and organic revenue declined 6.2%.
Q4 '21 included an additional week of operations due to the company's 52/53 week fiscal year.
Adjusted EBITDA was $45.7 million or 6.1% of revenue compared to $44.5 million or 6% of revenue in Q4 '20.
Non-GAAP adjusted gross margins were at 14.3% in Q4 and increased 10 basis points from Q4 '20.
Gross margins were within our range of expectations for the quarter, but approximately 80 basis points below the midpoint of our expectations.
This variance reflected approximately 100 basis points of pressure from a large customer program offset in part by approximately 20 basis points of improved performance for several other customers.
G&A expense increased 25 basis points, reflecting higher performance-based compensation offset in part by lower administrative costs, compared to Q4 '20.
The Q4 '21 non-GAAP effective income tax rate was 30%, including incremental tax benefits related to recent tax filings.
For planning purposes for fiscal 2022, we estimate the non-GAAP effective income tax rate will be approximately 27%.
Non-GAAP adjusted net loss was $0.07 per share in Q4 '21, compared to a net loss of $0.23 per share in Q4 '20.
The improvement resulted from the after-tax benefits of higher adjusted EBITDA, lower depreciation and lower interest expense.
Now going to Slide nine, our balance sheet and financial position remains strong.
During Q4, we repurchased 1,324,381 shares of our common stock at an average price per share of $75.51 in the open market for $100 million.
Our Board of Directors has approved a new authorization of $150 million for share repurchases through August 2022.
Over the past four quarters, we have reduced notional net debt by $276.4 million.
We ended the quarter with $11.8 million of cash and equivalents, $105 million of revolver borrowings, $421.9 million of term loans and $58.3 million principal amount of convertible notes outstanding.
As of Q4, our liquidity was strong at $570.5 million, cash flows from operations were robust at $102.4 million, bringing our year-to-date operating cash flow to $381.8 million from strong conversion of earnings to cash and prudent working capital management.
The combined DSOs of accounts receivable and net contract assets was at 136 days, reflecting the impact of a large customer program.
We expect improvement in the DSO metric in fiscal 2022 as the impact of this large customer program declines.
Capital expenditures were $20.4 million during Q4 net of disposal proceeds, and gross capex was $21.9 million.
Looking ahead to fiscal year 2022, we expect net capex to range from $150 million to $160 million.
In summary, we continue to maintain a strong balance sheet and strong liquidity.
Going to Slide 10.
As we look ahead to the first quarter of fiscal 2022, we expect our results to be impacted by the adverse winter weather conditions experienced in many regions of the country.
For the quarter ending May 1st, 2021, as compared sequentially to the quarter ended January 30th, 2021, the company expects contract revenues to range from in-line to modestly lower and non-GAAP adjusted EBITDA as a percentage of contract revenues to range from in-line to modestly higher.
The company believes the impact of the COVID-19 pandemic on its operating results, cash flows and financial condition is uncertain, unpredictable and could affect its ability to achieve these expected financial results.
Moving to Slide 11.
Within a challenged economy, we experienced strong award activity and capitalized on our significant strengths.
First and foremost, we maintained significant customer presence throughout our markets.
We are encouraged with the emerging breadth in our business.
Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities.
Fiber deployments enabling new wireless technologies are under way in many regions of the country.
Telephone companies are deploying fiber-to-the-home to enable 1 gigabit high speed connections, increasingly, rural electric utilities are doing the same.
Cable operators are deploying fiber to small and medium businesses and enterprises, a portion of these deployments are in anticipation of the customer sales process.
Deployments to expand capacity, as well as new build opportunities are under way.
Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing, particularly upstream.
Customers are consolidating supply chains creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business.
As our nation and industry continues to contend with the COVID-19 pandemic, we remain encouraged that our major customers are committed to multiyear capital spending initiatives.
We are confident in our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our management team as we navigate challenging times.
| compname reports q4 adjusted non-gaap loss per share $0.07.
q4 adjusted non-gaap loss per share $0.07.
|
During today's call, we Will also reference non-GAAP metrics.
I want to start by welcoming Charley to the team.
He joined Donaldson last week after two decades on the sell side, which included 15 years of covering our company.
He already knows us well, so our Investor Relations program is in good hands.
Turning to the quarter, we feel good about our results.
First quarter sales were up 3% sequentially, which is not typical seasonality, signaling that the worst of the impact from the pandemic on our business may be behind us.
Sales of replacement parts outperformed first-fit by a wide margin providing valuable stability, and we saw continued evidence of share gains in strategically important markets and geographies helped in part by our robust portfolio of innovative products.
First quarter profit performance was another highlight.
Gross margin was up 60 basis points from the prior year resulting in the highest first quarter gross margin in four years, and the best sequential improvement in at least a decade.
We reduced operating expenses by 5% while maintaining investments in our strategic growth priorities, particularly as they relate to the Industrial segment.
And altogether, we had a decremental operating margin of only 4% which we view as very positive given the uneven economic environment.
Finally, our company remains in a strong financial position.
We had excellent cash conversion during the quarter and our balance sheet is solid.
We're on track to deliver our strategic and financial objectives in fiscal '21 and we'll talk about those plans later in the call.
But first, let me provide some additional color on recent sales trends.
Total sales were down 5.4% from prior year or 6.4% in local currency.
In the Engine segment more than a third of the decline came from Aerospace and Defense, due largely to the significant impact from the pandemic on commercial aerospace.
We have a great team and strong customer relationships, so we expect our Aerospace business Will recover.
In the meantime, we are pursuing optimization initiatives to put our cost structure on a firmer footing during this rough patch.
In our other Engine businesses trends seem to be improving.
On-Road sales were down 21% in the quarter, which is still a steep decline, but notably better than the past few quarters.
Although Class 8 truck production in the US remains depressed, order rates are increasing and third party forecast for the next calendar year suggest the Class 8 recovery is on the horizon.
Should that happen, we believe our strong position with OEM customers would give us nice momentum in the On-Road first-fit market.
In Off-Road, trends were mixed by region.
In Europe, sales from new Exhaust and Emissions programs were not yet enough to offset the lower rate of production for programs already in place.
In the US, lower production of construction and mining equipment is still a headwind for Off-Road but we had a meaningful sequential increase in first quarter and year-over-year trends are also improving.
We had a very strong quarter in China with Off-Road sales up more than 50%.
Their economic recovery appears to be under way and we are also benefiting from new relationships with Chinese manufacturers that want our high-tech products, including PowerCore.
China [Indecipherable] is more heavy duty equipment than any other country in the world and our team is doing an excellent job building and strengthening relationships with large local customers.
While we expect to have some variability in quarter-to-quarter trends, we are also confident that we have a long runway for growth in China.
First quarter sales and aftermarket were down only slightly from the prior year and they were up 6% from the prior quarter.
All of the year-over-year decline in aftermarket came from the US.
The independent channel is still being impacted by the oil and gas slowdown, which we partially offset with pricing actions implemented earlier this calendar year.
And large OE customers are still tweaking inventory to match demand.
Outside the US, aftermarket performed very well.
In Europe, first quarter sales were up 4% in local currency as conditions improved in Western Europe.
In China, first quarter sales of Engine aftermarket were up more than 30% reflecting strong growth in both channels.
We are gaining share with the new OEM customers and end users are paying greater attention to equipment maintenance.
Part of our success in China is due to PowerCore which is growing rapidly from a small base.
Importantly, PowerCore continues to do well outside of China.
Global sales of PowerCore replacement parts were up in the low single-digits last quarter and we set another record.
PowerCore is our most mature example of how our razor to sell razor blade strategy works and the brand is still going strong after 20 years.
Turning now to the Industrial segment.
First quarter sales were down about 6% including a benefit from currency of about 2%.
The decline was driven primarily by Industrial Filtration Solutions or IFS.
The pandemic is creating a headwind in terms of equipment utilization and a lower willingness to invest.
Quoting activity for new dust collectors was down in the first quarter and the quote-to-order cycle remains elongated.
Generally, customers are focusing on must do projects, while deferring expansion in productivity investments to a future date.
With the market under pressure, we are focused on building our brand and gaining share.
We have strengthened our capabilities related to market analysis and virtual selling and our e-commerce platform gives us incredible reach.
We also continue to leverage our technology advantage and we are encouraged by the opportunity that presents in an underserved market like China.
For quarter -- first quarter sales of dust collectors were up modestly in China and the needs in that region are changing in our favor.
Some manufacturers are dealing with compliance upgrades related to the Blue Sky initiative, while others are going beyond the minimum requirements and striving for better air quality.
That shift represents an exciting opportunity for us, so we Will continue to invest for growth in that region.
Process Filtration for the food and beverage market is another exciting opportunity.
We launched our LifeTec brand filter late in 2016, and we have seen tremendous growth since then.
Sales of Process Filtration parts were up again last quarter with a low single-digit increase which partially offset the pandemic related pressure on sales of new equipment.
Our strategy for growing Process Filtration is solid.
We are focused on winning new contracts with large global manufacturers which gives us the opportunity to sell their plants.
Some of these customers have hundreds of plants, so we are once again doubling our sales team for Process Filtration.
We also made an organizational change to better align our team with the needs of our food and beverage customers.
While these type of optimization initiatives are standard work for us, I'm calling it out because during our fourth quarter call, we said Process Filtration sales were about $50 million of fiscal 2020.
Following our reorganization that number is more like $68 million.
Our IFS numbers are unchanged, but we wanted you all to have the right baseline as we talk about year-over-year trends in this exciting business.
Trends across the balance of our Industrial segment were mixed.
Sales of Gas Turbine Systems were up 11%, driven by strong growth of replacement parts and we continue to gain share.
In Special Applications, we faced pressure from the secular decline in the disk drive market, combined with lower sales of our membrane products.
We partially offset the decline with strength in our Venting Solutions business, which is also benefiting from share gains as we expand into new markets including the auto industry.
Overall, we see strong evidence of how our diverse business model is providing some insulation from the pandemic.
We are gaining share in strategically important markets and geographies.
We are investing to keep the momentum and we continue to show progress on our initiatives to increase gross margin.
I'll talk more about our longer term plans in a few minutes.
He's got great perspective and he is a strong addition to our team.
We are excited to have him join us and I hope you all Will have a chance to connect or reconnect with him soon.
Now turning to the quarter, like Tod said, we are pleased with our results.
Economic conditions were better than what we had in the fourth quarter and we made progress on our strategic initiatives.
First quarter margin was a highlight for us in terms of year-over-year and quarter-over-quarter performance.
Versus the prior year operating margin was up 50 basis points, driven entirely by gross margin.
That translates to a decremental margin of 4%, but that's probably not the level to expect over time.
For a better comparison, I'd point you to our sequential trends.
First quarter sales were up 3% from the fourth quarter and our operating profit was up almost 6%.
That yields in incremental margin of 24.5%, which is in line with our longer term targets from Investor Day and several points ahead of our historic average.
As I've said many times, we are committed to increasing levels of profitability and increasing sales, and we have solid plans to keep driving margins higher.
We saw evidence of those actions last quarter.
So let me share some details.
First quarter gross margin increased 60 basis points to 35% despite the impact from the loss of leverage and higher depreciation.
On the other hand, gross margin benefited from lower raw material costs.
Our procurement team has done an excellent job capturing cost improvements by working with existing suppliers and identifying new ones, which added to the benefits from lower market prices.
We also had a favorable mix of sales in the first quarter, specifically aggregate sales of our Advance and Accelerate portfolio which includes a significant portion of our replacement part sales along with many of our higher tech businesses outperformed the company and our Advance and Accelerate portfolio also comes with a higher average gross margin.
As we continue to drive investments into these businesses, we are shifting more weight toward higher margin categories.
Over time, mix should be a constant factor in driving up our gross margin.
Our strong gross margin performance in the first quarter was complemented by disciplined expense management.
Operating expenses were down 5% from the prior year, which resulted in a slight increase as a rate of sales.
We had significant savings in discretionary categories like travel and entertainment, due in large part to pandemic related restrictions.
At the same time, we continue to invest in our strategic priorities.
We are building teams and adding resources to areas like R&D, Process Filtration, Connected Solutions and dust collection.
These investments are tilted heavily toward the Industrial segment, which contains most of the Advance and Accelerate businesses.
Given that dynamic, we are not surprised that the first quarter Industrial profit margin was down slightly.
Importantly first quarter gross margin was up in both segments, so we feel good about where we ended.
As our investments translate to grow, we expect our margin and return on invested capital Will go up over time.
Moving down the P&L, first quarter other expense of $1.5 million compared with income in the prior year of $2.6 million.
The delta was largely due to a pension charge and the impact of certain charitable options.
During the first quarter we contributed to Donaldson Foundation and there was also a charge for securing face masks that were billed to frontline workers in our communities.
We generally spread these contributions over our fiscal year, so the impact is more timing related than a change in trajectory for us.
I also want to share some highlights of our capital deployed in the first quarter.
As expected capital expenditures dropped meaningfully from the prior year, with our large projects related to capacity expansion mostly complete, we are turning our attention to optimization and productivity initiatives.
We returned more than $40 million of cash to shareholders last quarter, including a repurchase of 0.3% of outstanding shares and dividends of $27 million.
We have paid a dividend every quarter for 65 years and we are on track to hit another milestone next month.
January marks the five-year anniversary of when we were added to the S&P High Yield Dividend Aristocrats Fund.
So this anniversary signals that we have been increased our dividend annually for the past 25 years.
We are proud of this record and we intend to maintain our standing in this elite group.
As we look to the balance of fiscal '21, there are still plenty of reasons to be cautious.
The magnitude and ultimate impact from the pandemic are still unknown and we continue to face uneven economic conditions.
Given these dynamics, we feel prudent to hold back on detailed guidance, but we did want to expand our information provided during our last earnings call.
In terms of sales, we expect second quarter Will end between a 4% decline and a 1% increase from the prior year and that means sales should be up sequentially from the first quarter.
We also expect a year-over-year sales increase in the second half of fiscal '21, and sales are planned to migrate toward a more typical seasonality meaning that second half Will carry slightly more weight than the first.
We are modeling a full year increase in operating margin driven by gross margin.
Our productivity initiatives should ramp up over the fiscal year and we expect benefits from lower raw material costs and mix Will still contribute to a higher gross margin, but to a lesser extent than what we have been seeing.
Of course the caveat to the gross margin impact from a strong recovery, while we Will be happy of our first-fit businesses accelerate beyond our expectations, that could create a scenario or mix close from a tailwind to a headwind.
That's obviously a high-grade problem and we would address situation if that's the case.
As the rate of sales, we intend to keep fiscal '21 operating expenses about flat with the prior year.
Specifically, the second half of the year, we are still expecting headwinds from higher incentive compensation and planning a return to a more normal operating environment, we would anticipate year-over-year increase in expense categories that have been significantly depressed by the pandemic.
But as always, we are exploring optimization initiatives to offset these headwinds.
I am confident that we can maintain an appropriate balancing -- balance, allowing us to invest in our longer term growth opportunities by driving efficiency elsewhere in the company.
For our full year tax rate, we are now expecting something between 24% and 26%.
The forecast oriented is more now than last quarter, simply due to having a clarity with the first quarter complete.
There were no changes to our other planning assumptions.
So let me share some context.
Capital expenditures are planned meaningfully below last year, reflecting the completion of our multi-year investment cycle.
Our long-term target is plus or minus 3% of sales and we would expect our capex to be below that level this year.
We plan to repurchase at least 1% of our outstanding shares which Will opt dilutions [Phonetic] with stock based compensation.
Should we see incremental improvement in the economic environment, it is reasonable to expect that we Will repurchase more than 1% this fiscal year.
Finally, our cash conversion is still expected to exceed 100%.
We had a very strong cash conversion in the first quarter driven by reduced working capital, lower capital expenditures and lower bonus payouts.
As sales trends improve versus the first quarter, we would expect our cash conversion to drift down a bit over the year, which is typical of a more favorable selling environment.
Stepping back to the numbers, our objectives for the year are consistent with what I shared last quarter, we Will invest for growth and market share gains in our Advance and Accelerate portfolio, execute productivity initiatives that Will strengthen gross margin, maintain control of operating expenses including the implementation of select optimization initiatives and protect our strong financial position through disciplined capital deployment and working capital management.
We had a solid start to the fiscal year, despite the pandemic fatigue [Phonetic] that I know everyone is feeling.
I am proud of what you all accomplished and I look forward to continued success.
I wish you and your family my best as you move to Europe.
The good news is we Will still work together.
This year we have a straightforward plan.
We play offense where we can and defense where we must.
Our defensive efforts are all about managing costs and one way we are doing that is through optimization.
The most significant example relates to productivity improvements in our plants, which are being enabled by the capital investments we made over the last two years.
But it's not just about large projects for us, our employees have a continuous improvement mindset and our culture has a shared commitment to operating efficiently.
Our teams are consistently finding ways to leverage tools and technology and their work allows us to deploy more resources to support our strategic growth priorities.
As we look forward, we are excited about those opportunities.
For example, food and beverage is the first step on our journey into life sciences.
We expanded production capabilities of our LifeTec filters and our new R&D facility in Minnesota, we believe we are in an excellent position to press forward.
At the same time we're pressing forward in our more mature markets, driven by our spirit of innovation, we continue to bring new technology to applications that have been using old technology for a long time.
A great example is a recently announced product for Baghouse dust collection.
Baghouses have used the same low-tech solution for decades, and they represent about half of the $3 billion to $4 billion industrial air filtration market.
Our game-changing product the Rugged Pleat Collector delivers improved performance and lower cost of operation for customers, heavy-duty applications like mining, wood working and grain processing.
So we Will deploy new technology to gain share in this significant market.
In the Engine segment, we continue to lead with technology which is critical given the size of the opportunity.
We are currently competing for projects with an aggregate 10 year value of more than $3.5 billion, telling us the market for innovation is healthy and we have a significant opportunity to win new business.
Our OE customers are working to improve fuel economy and reduce emissions from the diesel engine and they are also increasingly interested in growing their parts business.
Our products meet both of those needs.
We have a multi-decade track record of providing industry-leading performance and we can also show that our technical and design characteristics help our customers retain their parts business.
Based on the opportunities in front of us, we believe the diesel engine Will remain a valuable part of our growth story for a long time, but we also know the market is changing.
So our focus on growing the Industrial segment, while expanding our global share of the Engine market, including new technologies related to air filtration for hydrogen fuel cells puts us in a strong position for long-term growth.
I also want to touch on the role of acquisitions in our growth formula.
With capital markets recovering from the pandemic, we've been getting more questions lately about our philosophy.
So I thought I'd take a minute to realign everyone.
Our focus is very consistent with what we laid out 18 months ago at our Investor Day.
At a high level, we remain a disciplined buyer.
We're most interested in new capabilities and technologies, especially those that accelerate our entrance into strategically important markets.
And we are targeting companies that Will be accretive to our EBITDA margin.
As always, we Will pursue companies that align with our long-term plans versus simply buying share.
The filtration market is split between a small number of large companies, us included and a significant number of smaller companies.
The timing for executing an acquisition is always uncertain, so we Will continue to work our process.
Additionally, we recognize and appreciate that filtration is a high value market.
So our goal is finding the best opportunity at a reasonable price.
With a robust acquisition strategy and significant organic growth options we feel confident that we can continue to drive strong returns on invested capital for a long time to come.
The level of global coordination and collaboration continues to impress me and I believe we have done very well during the pandemic as a business and as a culture.
| fiscal 2021 operating margin expected to be up from prior year, due to higher gross margin.
sales trends improving, with year-over-year growth anticipated in second half of fiscal 2021.
donaldson company - q2 sales expected to be up sequentially from q1, with a year-over-year change between a 4 percent decline and a 1 percent increase.
donaldson company - sales in h2 of fiscal 2021 expected to increase.
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As a reminder, before we begin, the company has a slide deck to accompany the earnings call this quarter.
Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations.
I'm going to pass it over to Tom to begin.
So I'm going to start and I'll walk through the slide deck, so, as usual, I'll refer to the page numbers so you can follow along; try to be as descriptive as possible if you don't have the slides with you.
For the quarter, the company's net income rose to $38.2 million as compared to $5.3 million in the second quarter of 2020.
On an earnings per share basis, that is $0.75 per diluted common share in 2021 as compared to $0.11 for the quarter in 2020.
That was on Slide 5.
If you flip to Slide 6, I can talk briefly about the year-to-date results.
Here we have a net income of $35.2 million on a year-to-date basis.
That compares to a net loss in 2020 of $15 million.
And on a per share basis, we have earnings of $0.69 per share in 2021 and that compares to a loss of $0.31 in 2020.
And for the year-to-date, the capital investments, I will highlight $138.5 million of capital investments as compared to $133.5 million of capex in 2020.
Flipping to the next slide, Slide 7, the story here in the second quarter is very similar to what we talked about at the end of the first quarter.
The financials are primarily better because we have the result of the 2018 California Water Service Company General Rate Case.
And that did a number of things for us.
First of all, if you'll recall, last year, in the second -- first and second quarters, we did not book the interim rates or the regulatory mechanisms that the company eventually got approved by the Commission because of the uncertainty at that time.
So, we did book those in the third quarter of 2020.
So, when you're comparing our results here in 2021 to those results from 2020, keep in mind that you were missing a big chunk of what ended up being earnings in 2020.
Our core operating costs are increasing as expected.
We have lower equity AFUDC as anticipated, as we've talked about before.
Capital spending is on track to our target, which is between $270 million and $300 million for the year.
We did have some other impact in the quarter.
And I'll talk a little bit more extensively about the unbilled revenue accrual because that's giving us a big pop for the quarter and the market value of our -- some of our pension assets reduced our earnings per share by about $0.03 on the quarter.
Flipping to Slide 8, you can see the earnings bridge.
These are the factors we were just talking about, rate relief, regulatory mechanisms, opex, there's benefit plan investments mark-to-market there.
The unbilled revenue is adding $0.17 on the quarter and I guess I can talk about that now, it's also on the next slide.
But what we've experienced in California is a warmer and drier year, as Marty will talk about a little bit later.
And what we believe is happening is we've advanced the unbilled revenue which normally pops for us in the third quarter.
We see that unbilled revenue accrual increasing very rapidly here in the second quarter.
This happens from time to time with the company.
We have inflections in our water sales that usually happen around June, July as the weather gets hotter in California.
That seems to have happened on the earlier end this year.
And so what we're looking at is earnings associated with recording the unbilled revenue accrual that would more likely, in a different year, be third quarter earnings.
And so we can talk a little bit about what that means.
But our -- with the expectation that we would have as described on Slide 10 is that unbilled revenue generally will not add to earnings over the course of the entire year.
And so this is really a seasonal effect.
And so, if you're looking at this from a modeling standpoint, this is not some -- it's not some new factor that's going to give us extra profits for the year in most cases and typically that's going to come back down to around zero at the end of the year.
Talking about Slide 10, I do want to emphasize a couple of other notes.
These are things that we've generally talked about on prior calls, but I wanted to remind the community and interested parties about these.
As I mentioned, in Q3 of 2020, we recognized $43 million of net income, which was attributable to Q1 and Q2 of 2020 and that was because of the delayed California General Rate Case, we had not booked interim rates and we had not booked the regulatory mechanisms because we weren't sure of the probability of recovery and we did end up booking those in the third quarter.
So keep that in mind when you're thinking about the third quarter earnings coming up.
Once again, our authorized rate base for all operations in total is $1.82 billion.
That is -- remember, we're rate-regulated with a rate of return on rate base and so you can work into a general range of earnings, so to speak, with respect to the company just by calculating the rate base times the rate of return and get to -- and the capital structure there, and get to that number.
Our operating costs are increasing as expected; depreciation, property taxes and wages, in particular.
As I mentioned on the last call -- last couple of calls, the eligible mains and services state tax deductions will be lower in 2021 and that raises our effective tax rate and that was something at the end of 2020 where we saw a big bump-up from the enormous amount of state tax repairs deduction that we received that year.
The net income from recognition of equity AFUDC in 2021 is lower and is expected to be lower because we have fewer long duration projects that are accruing equity AFUDC.
Finally, to add here is that the market value of the certain retirement assets that was -- it was up quite a bit in 2020 and it's up a fair bit in 2021.
We don't ever know what the market is going to do.
I'm sure all of us would like to know what the market is going to do in the future.
But-so we can't predict what that will add or subtract from earnings for the total year.
Turning to Slide 11.
I'm pleased to report that California Water Service Company filed its General Rate Case with the Public Utilities Commission on time, July 1.
This rate case, the largest in our history, is requesting approval of just over $1 billion in capital expenditures during the three-year rate case cycle.
We worked very hard on addressing customer affordability when preparing this case and have been able to keep increases under $5 per month for the median residential customer in all of our service areas.
Because this will be our first rate case in which the full WRAM MCBA is not part of the filing, we've also taken a deeper dive into sales forecasting and rate design to enable us to balance customer affordability, revenue stability and conservation.
This has led to a 6% lower sales forecast than in our last adopted, but also an innovative rate design, which provides significant discounts for the first 6 units of water used each month and increases the amount of revenue collected in our fixed monthly service charge.
We're now in the discovery phase of this case and expect the Commission decision before the end of 2022.
Just recently, Commissioner Darcie Houck was named as the Assigned Commissioner in our rate case.
She's the newest Commissioner at the Public Utilities Commission but has been an Administrative Law Judge at the Commission, is an attorney and understands Commission processes.
Commissioner Houck is also the Assigned Commissioner for our cost of capital case which we expect a decision by the end of this year.
In other news, a week ago, we filed our General Rate Case in Washington State, which covers both our legacy Washington Water Service Company customers plus our new East Pierce customers that we acquired from the Rainier View Water Company.
And we expect the decision in that case sometime this fall.
With that, I will hand this off to Marty.
Two areas I want to provide operational updates on, starting off on Page 12, talking about the recently declared droughts and I say droughts as plural, given the approach the state has set forth early on in the second quarter and by doing so they were evaluating drought conditions on a county by county basis.
As we wrapped up the second quarter, the drought kind of quickly spread and we have 51 of the 58 counties in the State of California now under a declared drought emergency.
Accordingly, as part of our planning process and rate case process with the Public Utilities Commission, we filed, what's called, Rule 14.1, which is our water supply master plans in June and within that water supply master plans is something called Schedule 14.1, which is our water supply contingency plans, which cover the various stages of drought.
Very happy to share that on July 14, the Commission approved our Rule 14.1 plan, as well as our Schedule 14.1 water supply contingency plans.
We are officially in a Stage 1 drought in all the districts that we operate in.
We are currently monitoring water supply conditions at every location within the State of California that we have.
We have asked our customers for a voluntary 15% reduction over the summer months and we're utilizing the same model that we developed during the last drought, which is really doing a -- what we call the customer-first approach, trying to give our customers as many options as we can to help them hit their reduction targets.
So we're utilizing that same model, which includes a Drought Steering Committee that we have within the company that I meet with every other week as we go into the summer months.
I think what's important to note about the current drought conditions in the State of California is it highlights the proactive moves we've made over the last two years on the ESG and risk management front to prepare for drought and more riskier weather type of conditions.
One of the things we did is we combined our water supply planning team and our water conservation teams, which were in different parts of the organization, to come together as one team to look at supply and demand within one group and focus on water supply resiliency, including the impacts of climate change.
So we're going to continue the path that we're on.
The foundation has been laid for our contingency plans as we move throughout the stages of the drought and we're going to take the same approach that we had in the last major drought, which all of our customers said then, what was the 25% reduction targets.
Moving on to talk about the continued impacts of COVID-19 and the pandemic.
All of our company's employees have returned to work.
We started a phasing back in the first week of July to get our employees back at work.
Remember that 90% of our employees have been at work every day throughout the pandemic so the one's we phased back in, most of them are corporate staff and jobs that could be worked on remotely during the pandemic.
We have phased them back in at work.
We continue to be vigilant for employee and customer safety, including all of our campuses are still locked down.
We have encouraged and put incentives out there for vaccination rates for our employees.
We follow our local masking rules and we have employee screenings at every location every day.
Again, despite the pandemic, we have been at work every day, 365 days a year, 24 hours a day.
Looking at the collectability process and what's happening on the receivable front in New Mexico and Hawaii.
They have allowed us to start the billing collection process again.
In California and Washington, we're still under a moratorium.
The moratorium in Washington will end on October 1 and in California, we're working through our recent decision that came out from the PUC that lays out the rules that will allow us to restart the collection process here.
So I don't have an exact date yet.
The decision just came out last week and we're working through that now.
At the end of the second quarter, we saw increases in customer accounts and remember that we have suspended collection activities.
We haven't done that in about a -- well over a year.
Bills outstanding increased slightly to $12.5 million.
We think that's good news.
It's leveled out a little bit.
We have continued to increase our reserve for doubtful accounts from $5.7 million now to $6.3 million and within the budget for the State of California, which is our largest operating entity, the states that we operate in and California is the largest, the State of California has reserved a $1 billion for water utilities arrearage management relief.
So in other words, the State is going to be picking up a good chunk of the tab of these late receivables.
The process and how they're going to be distributing that money is still being determined.
We're working with the State and through our association with the other water companies to determine the best process forward, but it looks like there will be some relief that comes from the State to help offset the bills for the people affected by COVID and their ability to pay their water bills.
The incremental cost of COVID-19 for the second quarter continued to run about $200,000 a quarter.
So we're up to about $1.3 million total since the beginning of the pandemic.
That's being captured in a memo account.
It's interesting to note that water sales in California are at 103% of the adopted numbers that were approved in the last General Rate Case.
And year-over-year, residential consumption is up 4% and that's been offset by lower business in industrial sales and, of course, as the economy was slowed and stalled out there for a little bit.
But as businesses come back, we expect to see the business in residential sales to continue to climb.
Liquidity remained strong at the end of the quarter with over $66 million cash on hand and additional borrowing capacity of $405 million on the line of credit, subject to various borrowing conditions, but liquidity remained strong, as we move into the warmer summer months.
California Water Service Group has been busy in the business development area.
In May, we announced our establishment of Texas Water Service and our entry into the fast-growing region of Texas, known as the Austin-San Antonio corridor.
As part of our entry into Texas, we also announced our majority ownership of the BVRT Water Resource Company, which in turn owns four wastewater utilities in this Austin-San Antonio corridor.
Also, in May, we closed on our acquisition of the Kapalua Water and Kapalua Wastewater Company and added a 1,000 new Maui customers to our Hawaii Water Service Company.
Last month, in June, we announced the execution of a definitive agreement to acquire a wastewater utility on the island of Kauai in Hawaii, which will bring 1,800 Equivalent Dwelling Units to our Hawaii Water Service Company, and we will be filing the application with the Hawaii Public Utilities Commission shortly for its approval of this purchase.
And next week, we anticipate that the California Public Utilities Commission at its August 5 open meeting will approve our newest California utility known as The Preserve at Millerton, which is a greenfield or new development, water, wastewater and recycled water utility, which will ultimately bring about 2,800 customer connections to California Water Service Company.
Remember that Boston and San Antonio are among the five fastest growing cities in the U.S.
We have approximately 2,500 customers and customer commitments today in these -- among these four utilities and anticipate that their combined service areas could build out to over 60,000 customers.
Meanwhile, Texas Water Service is seeking out other opportunities in Texas.
We have a full pipeline of growth opportunities and we are excited by the potential to further grow the company through acquisitions and through other deals.
I'm looking now at Slide 17, and as promised in the first quarter, we've updated Slide 17 and 18 which are capex and our rate base slides to reflect the proposal that's been made in the California General Rate Case.
And so the last three bars on each of these charts represent the effect of the proposal and I do want to remind everyone, obviously, that this is a proposal that's been made to the Commission and is going to be evaluated by the CPUC and a determination will be made, as Paul suggested, late in the year 2022 with an effect date of 2023.
And so, these numbers can obviously change as we go through the regulatory process.
But what it does show for 2022 through 2024 is that we would anticipate our combined capex with California and the other states to be in the range of $355 million to $365 million a year and that corresponds to the $1 billion proposal that Paul's group put to the CPUC plus the capex that we're spending in our other states.
And then the result of that, if you flip to Slide 18, is the estimated rate base that's associated with that.
And once again, our current rate base is about $1.82 billion for 2021.
We have another step increase that's associated with the last California rate case and that would potentially impact 2022 to give us a higher rate base adopted there.
But the proposal that Paul has put forth to the CPUC, his team, would increase our rate base to the point of $2.2 billion, $2.5 billion and $2.75 billion combined, again with the other states, if that proposal were adopted as proposed.
Most certainly a lot for us to do in the regulatory process, but good news ahead from a company growth standpoint in all of the respects.
The heavy lift, so to speak, right?
Paul's got that two big generating -- revenue generating items.
Well, I'm going to wrap us up here.
Just in summary, Q2 results were in line with our expectations.
Sorry for the lumpiness sifting through the financials.
As Tom did a really good job pointing out in our graphs and our earnings reconciliations, that was really driven by the late GRC that we had and there was not much we can do about that but just to remind everyone that those comparables quarter-over-quarter, year-over-year, you got to factor in that delayed General Rate Case.
Clearly, we're seeing the effects of the drought in the second quarter with that unbilled revenue, which is really our revenue accrual.
We typically see -- as consumption increases as we move into the warmer months of the summer, you'll see that accrual go up and then you'll see a turndown in the winter when you see consumption go down as the rain starts out on the West Coast.
So we clearly saw a pickup from the unbilled revenue due to the drought and weather conditions.
So consumption went up earlier than we anticipated.
Tactically, there are really kind of four things going on that we're focused on as we move into the fourth quarter.
Obviously, the cost of capital, first and foremost, and trying to get that wrapped up this year, followed by, as Paul said, the discovery phases of our 2021 General Rate Case for the State of California, which is a herculean event.
There is a lot of data requests that go back and forth; hundreds and hundreds and hundreds of data requests.
So we're going to stay vigilant and stay keenly focused on wrapping up those two regulatory proceedings.
We look forward to working with Commissioner Houck to bringing those to a successful resolution on time and on schedule.
Additionally, tactically, two big things going on, on the West Coast and specifically in California.
One is the drought, and as I said, we are officially in a Stage 1 drought for our customers.
And the second thing is, it's wildfire season.
There are currently nine wildfires burning in the State of California, two major wildfires.
The two major wildfires are burning a national forest area so there are no threat to our service areas that we operate in.
Big accolades to the operations team for their early readiness for fire season this year, that August, September and October, given the dry conditions, we think, could be pretty volatile.
But I will say the team finished their wildfire readiness planning ahead of schedule.
All the employees have gone through all their trainings and we're ready to go into the hotter, drier summer months focused on minimizing any damage from wildfires and making sure that our customers stay supplied with clean fresh drinking water.
If you haven't read our ESG report that's been put out there, I strongly encourage you to do that.
This is going to strategically be a keen focus of the company here I think for years to come.
So, with that, Carol, we will officially end our prepared comments and we will open it up for Q&A.
| california water service group q2 earnings per share $0.75.
q2 earnings per share $0.75.
|
Before we begin, I have an important reminder.
We appreciate your participation today and if I should visit Lincoln's website www.
After their prepared comments, we will move to the question and answer portion of the call.
Lincoln had an excellent second quarter with record adjusted operating earnings per share and operating revenues and earnings growth in all four businesses.
The impact of pandemic related claims on earnings continues to decline and was more than offset by another quarter of strong returns from our alternative investment portfolio.
Driving these results is the execution of our reprice, shift and add new product strategy, expense management and improving customer experience from digital and virtual enhancements and a strong balance sheet, providing room for increased share repurchases; touching on each of these.
First, our product introductions are adding new consumer value propositions, which open new market segments to us, further broadens our sales opportunities up an already strong base of products and increases our long-term sales growth potential.
Our expanding shelf space and ongoing improvements in distribution productivity are effectively getting these new products into the hands of consumers and we are achieving attractive new business returns on capital deployed.
Second, we have a successful track record of increasing the expense efficiency of our product manufacturing, back office operations and distribution functions while enhancing the customer and partner experience.
This quarter we reported lower expense ratios companywide and in most of our businesses.
As we've talked about recently we are about to start on another program that will further improve efficiency and the customer experience and enable us to achieve meaningful savings.
We are excited to provide you with more details next quarter.
Third, our high quality investment portfolio higher statutory capital in RBC ratios along with cash at the holding company and contingent capital all provide capital deployment flexibility.
Now, turning to the business segments; starting with Annuities.
We have long been a leader in annuities with a diversified product portfolio that provides a broad range of customer value propositions.
Total annuity sales this quarter were again strong as we grew 14% sequentially with growth across all product categories for the second quarter in a row and a good mix of product sales.
Last year, we established ourselves as a leader in indexed variable annuities.
This year we are seeing growth in both index variable annuities and traditional VAs without living benefits.
We also see ongoing market demand for with guaranteed living benefits at attractive economics to Lincoln has protected income solutions continue to resonate with customers.
We had projected total annuity sales to begin the year at a similar pace to what we saw in the fourth quarter then build over the course of the year, benefiting from shelf space, we added last year and are adding this year, which is driving indexed variable annuity growth opportunities.
We are pleased to see sales year-to-date ahead of our expectations.
Looking forward near-term sales may be impacted by typical summer seasonality, but we are confident that full year sales we remain ahead of our earlier expectations.
Turning to flows VA net flows were positive and while we reported negative net fixed annuity flows this is a direct result of past management actions taken to maintain rigorous return standards and allow us to direct capital to its highest and best use.
We expect Annuities earnings to continue to benefit from new sales growing fees on AUM from the strong stock market and our diversified high quality in-force book.
In Retirement Plan Services we once again reported excellent results and remain well positioned with scale in our target markets of small and mid-case 401(k) healthcare, government and not-for-profit; a broad suite of products, a competitive cost structure and award winning digital technology.
Total deposits were up 21% and included double-digit growth in both first-year sales and recurring deposits.
Sales continue to benefit from the success of YourPath our target date fund alternative.
We have continued to innovate introducing Pathbuilder income, which includes an income solution as part of a target date like investment option.
This type of innovation will serve as a catalyst for future growth.
Finally, we once again reported positive net flows and while flows can be lumpy we expect this positive momentum to persist.
It was another outstanding quarter for the retirement business.
We continue to excel in our target market segments as we benefit from our attractive competitive position continued investments in the plan sponsor and plan participant experience and our expanding set of solutions aimed at helping people secure their retirement.
Within the Life Insurance business, we continue to execute our product strategy that increases consumer value propositions, while further diversifying our product risk profile.
Our investment in new products for the broadens our portfolio and supports shelf space expansion with new distribution partners, including in the P&C space.
Complementing this expansion has been our continued focus on simplifying the client and advisor experience.
Nearly all of our business is E-submitted an e-delivered and our recently expanded online interview capabilities are resulting in higher placement rates at a lower cost per policy; this makes it easier for customers to do business with us and generates cost savings.
Our strategies have taken hold and are driving double-digit sequential sales growth.
By product category, Individual Life sales were up sequentially with growth seen in term life as well as across our expanded UL will variable UL and MoneyGuard solutions.
In addition, our Executive Benefits sales remained strong through the first half of the year and we expect momentum to continue into the second half.
I'm confident the actions we have taken will result in sequential sales growth accelerating in the second half of the year as our new product offerings continue to garner additional shelf space supported by our industry-leading distribution.
Lastly, on Group Protection, where we have been driving toward our target margin range 5% to 7%.
Our selective price increases as well as our successful efforts to raise persistency led to a 2% increase in premiums over the prior year period.
Although sales and what is a seasonally smaller quarter were down versus the strong prior-year quarter we continue to have success expanding into higher margin employee paid products, which represented 56% of second-quarter sales.
Included within our employee paid products is supplemental health insurance where we will be adding a hospital indemnity solution another example of Lincoln, expanding our already broad portfolio of high quality offerings.
As we have communicated, we continue to take action to increase group Protection's underlying operating margins excluding pandemic related claims and excess alternative investment income we are in the middle of our target range and expect further expansion over time as we drive premium growth continue to invest in our claims organization and diligently manage expenses.
A few words on one of our key competitive advantages; our industry leading distribution.
As the industry evolves the strength of our distribution franchise remains the constant.
We are known in the marketplace for our consistent distribution presence with broad reach across channels as demonstrated by our recent Life insurance shelf expansion with a large P&C insurer.
Nearly 100,000 active producers, wholesalers, Group represented consultants and other distribution professionals sell our products and through strategic investments in technology and training we have positioned ourselves to influence where and how we engage with our active producers leading with a virtual first model for the long term.
We already see this as a distribution team is begin meeting with their clients in person again while still leveraging virtual tools both to improve service we deliver and tightly manage our expenses.
Our distribution team's productivity metrics are up and our efforts are being recognized as we received two industry awards this quarter for innovation in virtual training and digital marketing.
Briefly, on investment results, credit quality remains excellent.
Our general account portfolio is predominantly comprised of fixed income investments of which approximately 97% are investment grade and within that 59% are rated single A, single A equivalent or better examples of the underlying asset classes includes corporates, commercial mortgage loans and structured securities.
The commercial mortgage loan portfolio is high quality, well diversified and continues to perform well with nearly 100% of the loans and the two highest CML rating categories and within that 85% in the highest rating category and virtually no credit losses or loan modifications.
Additionally, the structured securities are predominantly rated double-A, and higher with nearly no exposure to below investment grade securities.
During the quarter we invested new money at an average yield of 2.7% with approximately 50% in shorter duration assets reflecting our shorter duration product sales.
60% of our purchases were in investments other than public corporates providing diversification and good relative value and adding approximately 100 basis points of yield over comparably rated public corporates.
Lastly, our alternative performance was once again strong, driven by portfolio construction that has emphasized buyout and growth equity strategies with a 10% return in the quarter, significantly exceeding our long-term target quarterly return of 2.5%.
In summary, our product strategy is helping sales momentum build at attractive returns, driven by new product introductions expanding shelf space and overall distribution strength.
Group Protection margins are recovering.
Expense savings initiatives will continue to contribute to earnings growth and our strong balance sheet and free cash flow generation and potential block sale transactions all put Lincoln in an excellent position to fund sales growth while increasing our capital deployment.
In short, we are very confident in our ability to continue to generate good earnings growth for shareholders.
As we've mentioned before, low rates affect us in three principal ways.
First; is product pricing and design and their impact on consumer demand.
Second; is spread compression.
Third; is the impact of cash flow testing on reserve requirements.
Second our focus on expenses, including the meaningful cost saving program.
I mentioned earlier, is expected to replace all earnings loss to spread compression over the next few years.
Third and finally, we have no significant cash flow testing reserve implications.
In some low rates have already been with us for some time and going forward, we expect to continue to meet or surpass our 8% 10% long-term earnings per share growth target.
Last night we reported second quarter adjusted operating income of $608 million or $3.17 per share.
Both record highs for Lincoln.
There were no notable items in the current or prior year quarter.
Additionally, this quarter's result was impacted by pandemic related claims, which reduced earnings by $43 million or $0.22 per share.
While results benefited from strong performance in the alternatives investment portfolio boosting earnings by $113 million or $0.59 per share above target.
It was an extremely strong quarter that highlights our underlying earnings power.
Net income totaled $642 million or $3.34 per share, boosted by gains in the investment portfolio an excellent performance from the variable annuity hedge program.
This quarter's record bottom line result was driven by strong top line performance with adjusted operating revenue up 16% from the prior year which included growth in each of the four businesses.
And the solid expense management as our expense ratio came down 130 basis points.
Consistent with the record earnings key financial metrics were excellent as adjusted operating return on equity came in at 78.3% and book value per share excluding AOCI grew 9% and stands at $75.45, an all-time high.
Now, turning to segment results; starting with Annuities.
Operating income for the quarter was $323 million compared to $237 million in the prior year quarter.
The quarter's earnings were driven by record average account values of $166 billion, up 24% over the past year and $12 million of favorable alternative investment income.
Base spreads excluding variable investment income decreased 7 basis points sequentially.
Looking forward, we'd expect spreads to be in this range turning up modestly over time.
Expense ratio improved to 110 basis points compared to the prior year period as our focus on expenses continues to benefit the bottom line.
Return metrics remained solid with return on assets coming in at 78 basis points and return on equity at 25%.
Risk metrics on the VA book once again demonstrate the quality of our in-force with the net amount at risk at 47 basis points of account values for living benefits and at 33 basis points for death benefits.
Growing account values, the high quality and high return book of business, and ongoing expense discipline are all indicators of strong future performance from the Annuities business.
Retirement Plan Services reported operating income of $62 million compared to $30 million in the prior year quarter.
This quarter's results were driven by higher fees on account values and included $7 million of favorable alternative investment results.
Total deposits of $2.8 billion helped drive $0.5 billion of net flows in the quarter.
Over the trailing 12 months net flows of $1.6 billion combined with favorable equity markets drove average account values up 28% to $94 billion.
The expense ratio improved 240 basis points over the prior year quarter a strong revenue growth combined with diligent expense management led to an increase in profitability.
Base spreads excluding variable investment income compressed 8 basis points versus the prior year quarter, better than our stated 10 to 15 basis point range as credit in rate actions continue to take hold.
Strong net flow performance and great expense management position our retirement business nicely moving forward.
Turning to Life Insurance; we reported operating income of $255 million versus a loss of $37 million in the prior year quarter.
This quarter's earnings included $83 million of favorable alternative investment experience and a return to pre-pandemic levels of mortality as pandemic related claims of $15 million were largely offset by favorable underlying mortality.
Earnings drivers, continue to grow with average account values up 12% and average life insurance in force of 7% over the prior year.
Base spreads excluding variable investment income declined 7 basis points compared to the prior year quarter, in line with our 5 to 10 basis point expectation.
Expense ratio improved 90 basis points over the prior year quarter as our efficiency efforts continue to benefit margins.
The combination of accelerating sales, expense discipline and the timing impact from pandemic mortality positions us well for a strong second half of the year.
Group Protection reported operating income of $46 million compared to $39 million in the prior year quarter.
This quarter's earnings included $8 million of favorable alternative investment results.
Compared to the first quarter operating income rose from a loss of $26 million driven primarily by improved pandemic related claims of $28 million, down from $90 million sequentially.
As that just noted, excluding pandemic claims and favorable alternative investment income, the Group margin of 6.1% was in the middle of a 5% to 7% range, an improvement from the first quarter.
The loss ratio was 79% in the quarter, a 750 basis point sequential improvement.
Excluding pandemic related claims from both periods loss ratio improved 50 basis points to 76.1% due to better mortality results.
Group's expense ratio rose 30 basis points year-over-year as we make ongoing investments in our claims organization to address elevated claim volume due to the pandemic.
We expect the expense ratio to improve when the pandemic subsides and we execute our ongoing expense savings initiatives.
Growing operating revenues coupled with improving underlying margin performance as what the Group business on much firmer footing looking forward.
Turning to capital and capital management; we ended the quarter with $11.2 billion of statutory surplus and estimate our RBC ratio at 483%.
As a reminder our RBC ratio includes 26 percentage points from non-economic goodwill associated with the Liberty acquisition that we expect will go away by year-end.
We estimate C1 factor changes being implemented by the NAIC will negatively impact our year-end RBC ratio by approximately 15 percentage points.
We are supportive of this factor changes and would note that they have no impact on our view of credit nor do we expect them to change our capital deployment strategy.
Cash at the holding company stands at $762 million above our $450 million target as we have pre-funded our $300 million 2022 debt maturity.
We deployed $150 million toward buybacks in the second quarter, in line with our goal communicated last quarter to return to pre-pandemic quarterly buyback levels.
Supported by the strength of our balance sheet we intend to repurchase up to $200 million of stock in the third quarter.
This will position us to have full year buybacks in line with pre-pandemic levels.
To conclude, we delivered excellent results with record earnings, book value excluding AOCI, and adjusted operating ROE.
For all the reasons we discussed today, we feel great about continuing our excellent performance looking forward.
We will now begin the question-and-answer portion of the call.
As a reminder, we ask that you please limit yourself to one question and one follow-up and then requeue if you have additional questions.
| compname reports q2 earnings per share $3.34.
q2 adjusted operating earnings per share $3.17.
q2 earnings per share $3.34.
|
Joining us on our call today are Mike Doss, the Company's President and CEO, and Steve Scherger, Executive Vice President and CFO.
These risks and uncertainties and include, but are not limited to, the factors identified in the beliefs and in our filings with the Securities and Exchange Commission.
Our performance in the quarter was strong.
We successfully navigated a complex supply chain and labor environment, we raised prices where necessary to offset accelerated commodity input cost inflation, we received the required regulatory approvals for our AR Packaging acquisition and made significant strides toward completion of our transformational CRB platform optimization process.
All of these accomplishments are aligned with the goals we established with Vision 2025, and have us on track to meet or exceed our long-term aspirations for the business.
Demand for more sustainable and circular packaging options continues to accelerate globally.
The ongoing evolution to practice and promote more environmentally responsible behaviors is evidenced by the increasing number of new pledges made by global corporations to eliminate waste and increase the focus on recyclability, all supportive of commitments to lowering carbon footprints.
Examples include proactive announcements by retailers around the world moving to minimize the impact that packaging has on our planet.
Consumers are making their preferences known and companies that are serving them are responding.
The fiber-based packaging solutions we are developing and the role we play in providing consumers with packaging choices to promote a more sustainable and circular economy provide our employees with an immense sense of pride.
This shows through our continued innovation and new product development initiatives along with service levels we provide our customers in today's very challenging supply and labor environment.
We established Vision 2025 in September of 2019 and have demonstrated a very real pivot to organic growth since that time.
While Q3 organic sales declined slightly, we still expect to deliver organic sales growth in 2021 at the high end of our 100 to 200 basis points annual target on top of the 4% organic growth we generated in 2020.
On Slide 3, let me cover additional highlights from the third quarter.
We have been successful in positioning the company to capture growth opportunities in this very strong demand environment.
We are growing with existing customers while ramping up with new ones in new markets.
Momentum for fiber-based consumer packaging solutions is materializing at a time when we are experiencing unprecedented inflation, supply chain bottlenecks, and labor market challenges.
We estimate that the constraints in supply and labor markets resulted in approximately $25 million in delayed sales in the third quarter.
We delivered strong adjusted EBITDA growth of $284 million, up 14% year-over-year.
EBITDA growth was driven by positive price realization of $53 million and favorable net performance of $79 million, which offset unprecedented commodity input cost inflation of $88 million experienced in the quarter.
The current environment with all its twist and turns is not deterring us from the focus on meeting or exceeding our Vision 2025 goals, and capturing global demand for sustainable packaging solutions.
Our dedicated teams are working tirelessly to keep customers in supply while backlogs remain elevated across all our paperboard substrates.
As a result of the continued inflation in commodity input costs, we have taken swift pricing actions to recover the price cost dislocation we are experiencing this year.
We committed the unit price would offset commodity input costs over time and that any dislocation would be short-lived, we are delivering on that promise.
As we have discussed with you over the past several quarters, we have implemented a number of initiatives to reduce pricing and recovery lags with customers and have been negotiating positive modifications of other business terms.
While the inflation we are experiencing this year is one for the history books, we are doing what we said we would do.
Approximately $650 million in pricing initiatives have been implemented and will be recognized over the 2021 and 2022 time horizon.
We recently published our latest comprehensive ESG report.
In it, we outlined the many initiatives underway to further drive sustainability across operations and innovation and product development with the end customer in mind.
We intend to continue to invest in innovation and promote progress and sustainability to support the migration to a more circular economy.
10 months earlier we have been pursuing the required regulatory approvals for the AR Packaging acquisition we announced in May of this year.
I'm pleased to report that we have received the final necessarily regulatory approvals this month and we are working toward a November 1st close.
In addition, our CRB platform optimization project remains on track for a start-up of coated recycled paperboard production on our K2 machine in the fourth quarter.
Turning now to Slide 4, you will see the innovation powerhouse that the combination of AR Packaging will create where the large distributed footprint of AR Packaging, it's 25 converting facilities across Eastern and Western Europe add significant scale and cost-efficiency benefits.
The completion of this transformational acquisition extends our global reach, expands our service offerings, and advances our commitment to sustainable packaging solutions for customers around the world.
We intend to share our growth plans and milestones for the integration of AR Packaging along with an update on Vision 2025 when we report our fourth quarter and full year 2021 results.
Turning to Slide 5.
In a second extremely impactful and well-time strategic initiative, you can see the picture of our new state-of-the-art K2 CRB machine.
Our team is executing a significant investment in our paperboard capabilities.
The build-out and start-up of the K2 machine in Kalamazoo, Michigan is the largest component of our CRB platform optimization project, and we are on track for paperboard production to begin in the fourth quarter.
We are well into the operational readiness space, we have our teams in place, and we are completing the most extensive training effort in our company's history.
We look forward to bringing this world-class, lower-cost, higher-quality CRB platform investment to light over the coming quarters, working with our customers to grow their commitment to the recycled fiber-based solutions while generating the returns we are committed to achieving.
Turning to Slide 6, I will provide a few additional remarks on the current environment for pricing and the positive momentum we have to offset historically high commodity input cost inflation.
We have executed $63 million, a positive price that is flowing through the business over the first nine months of 2021, and we expect to realize approximately $77 million of positive pricing during the fourth quarter.
We're currently targeting $510 million of pricing in 2022 based on implemented and recognized pricing initiatives.
The price actions are intended to fully offset the inflation we are experiencing across a wide array of commodity input costs.
In total, at this point, we expect to execute approximately $650 million in price actions over the 2021 and 2022 time horizon.
As I have shared today, global demand for fiber-based packaging solutions continues to grow.
On Slide 7, let me touch on the steady and consistent nature of the value paperboard substrates have earned over time.
Over the 15-year period captured here, you can see the steady but increasing pricing for our paperboard substrates.
This can be interpreted to a healthy underlying demand for paperboard solutions, supply levels required to meet customer demand, and the introduction of new packaging solutions driving growth in existing and new addressable markets.
We surpassed our net organic sales growth goal in 2020 delivering 4% growth, and we expect to deliver at the high end of our targeted 100 to 200 basis points goal this year.
Notably, this year's expected net organic growth of approximately 200 basis points reflects growth on top of the very strong growth we drove in 2020.
The year-to-date picture on the slide tells the same story.
Net organic sales have experienced growth of 2% compared to the same period in 2020, and the two-year compounded annual growth rate for organic sales since 2019 is 3%.
This trajectory is consistent with our organic growth expectations for the business as we continue to see conversions to fiber-based packaging solutions.
We have positioned the company to capture growth opportunities in the years ahead, and we've accomplished a great deal so far this year.
We look forward to closing the acquisition of AR Packaging in the next week, and we look forward to closing the acquisition of AR Packaging in the last week, and the start-up of our K2 machine in the fourth quarter.
Simply put, we're running a different race.
The strategic priorities we are focused on and executing are redefining our leadership in the industry.
Moving to Slide 9, focused on key financial highlights.
Net sales increased 5% or $84 million from the prior year period to $1.8 billion.
The year-over-year increase in sales was driven by higher pricing flowing through the business and acquisitions.
Adjusted EBITDA increased 14% to $284 million resulting in an improved adjusted EBITDA margin of 15.9%.
Adjusted earnings per share grew 31% to $0.34 a share.
Finally, our integration rate increased to 73% as we continue to internalize all paperboard into our converting operations.
On Slide 10 and 11, you'll see our revenue and EBITDA waterfalls.
The drivers of the 5% year-over-year increase in sales were $53 million in pricing, $20 million of higher volume mix and $11 million of favorable foreign exchange.
Adjusted EBITDA increased $34 million or 14% year-over-year to $284 million in the third quarter versus the prior year period.
The increase is low given accelerated commodity input cost inflation that materialized in the quarter.
Adjusted EBITDA growth was driven by $53 million in price, $3 million in volume mix, and $79 million in improved net productivity.
Adjusted EBITDA was unfavorably impacted by $88 million of commodity input cost inflation, and $13 million of labor, benefits, and other inflation.
On Slide 12, you will find additional financial and market detail.
Our foodservice business continue to recover from last year, growing 11% year-over-year.
Our food, beverage, and consumer sales improved 3% including acquisitions.
9 point to $25 million in delayed sales resulting from supply chain and labor market constraints during the quarter.
All the supply chain bottlenecks impacted all areas of our business.
Labor availability challenges are more specific to our foodservice business as we continue to ramp up production from the declines experienced in 2020.
Without these delayed sales, net organic sales growth would have been flat for the quarter, in line with our expectations.
AF&PA industry operating rates were strong again in the third quarter.
CRB was 95% while SBS improved sequentially and was 96% at the end of the quarter.
Our CUK operating rate continue to be well about 95%.
These operating rates reflect the strong demand environment for paperboard.
AF&PA third quarter data also showed continued declines in industry inventory levels with balances at multi-year levels.
Backlogs were elevated at eight-plus weeks across CUK and CRB and on the six-plus weeks in SBS.
We ended the quarter with net leverage of 3.97 times.
I will discuss our cash generation expectations with you shortly.
We have clear line of sight to bring leverage down to 3.5 times or lower at the end of 2022, after leverage peaks in the fourth quarter due to the financing for AR Packaging acquisition.
Global liquidity was $1.8 billion at the end of the third quarter.
Importantly, after we found and complete the AR Packaging acquisition, our global liquidity will remain substantial with approximately $1 billion available.
Turning now to full year 2021 guidance on Slide 13.
We've updated guidance to reflect additional price actions, higher commodity input cost inflation, higher net performance, and the assumption AR Packaging as part of our business effective November 1.
2021 adjusted EBITDA is projected to be in a range of $1.04 billion $1.06 billion.
The largest important of the EBITDA guidance change is the accelerated commodity input cost inflation occurring in the second half 2021.
As Mike mentioned, we are actively taking the price actions necessary to offset this increased level of inflation.
We anticipate cash flow will be in the range of $100 million to $150 million for the year.
Capital spending has increased modestly driven by inflation across raw materials and the labor required to complete critical strategic projects on time.
We continue to be very confident.
In the guard rails we provided last quarter for adjusted EBITDA in the $1.4 billion-plus range.
Importantly, on this slide, you can see the components and the walk through the substantial estimated EBITDA growth we will be driving next year.
AR Packaging and Americraft are expected to contribute $160 million and $30 million before synergies respectively.
For the base business, it is reasonable to assume at least $20 million from our traditional EBITDA drivers of volume mix and net performance, more than offsetting labor, benefits, other inflation, and FX.
The first $50 million of incremental EBITDA from our Kalamazoo project and a minimum recovery of $170 million of 2021 price cost dislocation provided a clear step-change higher to adjusted EBITDA of $1.4 billion-plus in 2022.
The significant expected growth in EBITDA coupled with our commitment to meaningfully lower capital expenditure next year following the large capital project to Kalamazoo, result in significant cash flow generation.
The material EBITDA growth and cash flow generation projections give us line of sight to year-end 2022 leverage at 3.5 times or lower.
We look forward to providing you with more detailed 2022 guidance when we meet with you in February.
| q3 adjusted earnings per share $0.34.
q3 sales rose 5 percent to $1.782 billion.
net organic sales declined 1% during quarter as supply chain and labor market constraints delayed sales.
remain on track to achieve approximately 200 basis points of full year organic sales growth.
executing approximately $650 million in pricing actions to address commodity input cost inflation.
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Speaking on the call will be Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO.
Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission.
I'm excited to discuss quarterly results with you today and the positive developments that we are driving in our pursuing Vision 2025.
We are delivering for customers and providing packaging solutions that are resonating with consumers in the marketplace.
New innovative packaging introductions continue as our teams expand the new product pipeline and fuel our organic growth strategy.
We are executing strategic M&A with transactions that are strengthening our capabilities, expanding our geographic reach and positioning us in growing markets and importantly, we are delivering on our commitments to stockholders.
Notably these swiftly address the heightened inflationary environment with multiple price initiatives in the quarter that will play out in the second half of 2021 and 2022 in order to limit the impact of the current price cost dislocation and ensure is short-lived.
Turning to second quarter highlights on Slide 3.
We delivered a meaningful 5% net organic sales growth in the quarter across all our markets.
We continue to see significant demand for more sustainable packaging solutions.
Our focus on innovation and our design for the environmental approach, which is an integral part of our new product development process are providing continued opportunities to satisfy this demand.
We are ahead of our 100 to 200 basis point organic sales growth goal for the first half of 2021, expect to be at or above the high end of that range for the full-year.
Adjusted EBITDA in the second quarter was $248 million.
Importantly, EBITDA was positively impacted by $15 million of improved volume mix related to net organic sales growth and $36 million of favorable net performance.
Our teams did an excellent job of navigating the challenging operating environment to meet customer demand and deliver sales growth.
The solid execution was however offset by $67 million of accelerated inflation across the broad basket of commodities.
We address the inflationary environment head on during the quarter successfully implementing multiple pricing initiatives.
This included Paperboard price increases across all 3 substrates as well as positive modification of other business terms.
One example is our move to shift freight recovery and contracts where we are responsible for product delivery costs to 4 openers per year.
A second example is the date specific implementation of price increases for paperboard purchases in the open market, replacing the linkage of price increases to industry trade obligations.
We committed to stockholders that we would shorten the time period for price to offset commodity input cost inflation and we demonstrated commitment in the second quarter.
We have changed the pricing dynamics in our business since the last period of dislocation between 2016 and 2018 and this will be on full display as we progress through the second half of 2021.
I will talk more about this shortly.
While navigating the challenges supply chain environment, our teams worked tirelessly to meet strong customer demand.
Our foodservice business increased sales by 22% year-over-year as consumer mobility picked up well food, beverage and consumer sales improved a healthy 4% year-over-year.
I'm excited to see the growing global interest for fiber-based consumer packaging solutions.
Growth in fiber-based packaging is now being realized as we projected at our Investor Day in September of 2019.
Since that time, we've continue to position the company to meet increased demand through our ongoing investments in our leading paperboard platform, our teams and through strategic acquisitions.
In May, we announced the acquisition of payer packaging and more recently, we successfully completed the acquisition Americraft Carton.
These transactions are aligned with our growth ambitions and have us on a path to achieving our Vision 2025 goals.
On Slide 4, let me recap the compelling strategic rationale there packaging combination and provide an update on timing.
The transaction brings together 2 highly innovative workforces serving diverse a complementary customer sets.
The acquisition expands our global scale and strengthens our presence in Europe, which is driving the world and a push toward a more circular economy.
We see significant opportunities to expand and grow with global customers as the premier fiber based consumer packaging leader, we are encouraged that the regulatory approval processes are proceeding as expected and anticipated close by the end of the year.
Recognizing the impact to leverage from the announced day, our Packaging transaction.
It is important to reiterate that we are fully committed to utilizing our significant cash flow generation to reduce leverage back to our targeted 2.5 to 3 times range.
We intend to be back to targeted levels within 24 months following the close of the acquisition.
Turning to Slide five.
Innovation and new product development continue across our 3 growth platforms as we rollout packaging solutions designed to address retailer and producer calls for fiber-based packaging alternatives.
Last quarter, I discussed the rapid acceptance we are seeing for our PaperSeal line the food trade Packaging in Europe and Australia and the excitement over the new Punnet tray line introduced from [Indecipherable] snacking size vegetables.
Last week, we introduced a new product line OptiCycle to grow in our foodservice markets.
Our OptiCycle line includes an innovative non-polyethylene coating alternative to traditional PE and PLA coated products.
On Slide six, you can see the details of this latest innovation in the foodservice packaging.
OptiCycle uses a water-based coating instead of polyethylene.
The foodservice cup and containers feature should require less coating material versus traditional options and are designed to be more easily recyclable.
When we pull 98% of the fiber, can be recovered and used to make other recycled products.
We continue to push forward with our sustainability journey and OptiCycle fits squarely with our ESG commitment to decrease our LDPE usage by 40% by 2025.
With this non-PE packaging solution, we are providing a new option for customers to evaluate as they pursue their own sustainability goals and meet the needs of today's consumer.
We expect the line to be commercialized in North America in the next few months.
As we enter the second half of 2021, I'm pleased with the path we are on.
Employees have produced exceptional results and demonstrated commitment to customers as an essential supplier.
We have rolled out new product innovations provided outstanding customer service and captured additional demand.
In addition, in support of our investments for growth and expansion.
We have prudently and effectively raised in deploying capital.
We continue to differentiate ourselves by the investments we are making in our paperboard infrastructure.
On Slide eight, you will see details of our transformational Kalamazoo recycled paperboard investment.
This project is a pivotal case in point.
We expect our new world-class coated recycled board machine to be producing paperboard in a few short months.
With it, we will serve existing and new customers, delivering the highest quality product in the marketplace at the lowest cost to produce.
Furthermore, the investment provides environmental and sustainability benefits through the reduction of greenhouse gases, purchased energy and water usage in the paperboard production process.
We remain confident in $100 million of incremental EBITDA for this investment once it's fully implemented and expect to capture the first $50 million of additional EBITDA in 2022.
Another area where we are redefining leadership in the industry is through our solid track record of execution and integration of strategic acquisitions.
The announced acquisitions we have touched on today and our capabilities position us and new growing markets and allow us to further integrate our paperboard platform.
Vertical integration is a strategic priority, and we expect meaningful increases in our integration rate in the quarters ahead.
As we grow organically internalize more paperboard from recent acquisitions and unwind existing supply agreement.
Our vertically integrated model price increase operating efficiencies that benefit both stakeholders and customers.
The final point I will make on Slide seven is something I noted earlier, I would like to spend a bit more time discussing with you today.
Over the past couple of years, we have successfully implemented numerous pricing model revisions that are now flowing through the business during this time of accelerated inflation.
Realization of our pricing initiatives will be on full display over the next 2 quarters and then into 2022.
This is the primary reason we expect to generate significantly stronger EBITDA in the second half of the year.
Moving to slide 9.
I will talk through material price cost spread of recovery that we expect will occur in the second half of the year and in the 2022.
The on the left hand of the slide reflects the heightened inflationary environment we experienced in the first half of 2021 and our expectations for inflation during the second half.
The right hand of the slide shows pricing that has been successfully implemented and recognized and it's flowing through our contracts over the coming 6 months.
We expect approximately $120 million of pricing in the second half of 2021, which is intended to address the negative price cost spread experienced in the first half of 2021.
The recovery occurring in just 6 months clearly demonstrates more constructive pricing dynamics inherent in our model.
Implemented and recognized pricing will yield a cumulative $400 million over the 2021 and 2022 time horizon, as we actively address commodity input cost inflation.
Overall, we are confident in the actions we are taking to address inflationary headwinds and more broadly, we remain confident in the fundamental drivers of our business and our ability to capitalize on the opportunities ahead.
Simply put, we are running a different race.
We are executing for customers driving our growth strategy forward and strategically positioning the company to capture global demand opportunities in the fiber based consumer packaging.
We are on track to achieve our Vision 2025 growth goals.
Moving to Slide 10, focused on key financial highlights in the second quarter of 2021, net sales increased 8% from the prior year to $1.7 million driven by 5% net organic sales growth.
Adjusted EBITDA declined from the prior year due to the accelerated inflationary environment.
Importantly, we are known organic volume growth, which positively impacted EBITDA performance by $15 million and we generated, of a favorable $36 million in net performance.
I'd like just discussed, we have implemented multiple pricing initiatives to offset the current inflationary environment and we expect our adjusted EBITDA dollars and margins will improve in the second half of 2021 and 2022, all consistent with our Vision 2025 financial goals.
Additional financial and market detail can be found on slide 11.
AF&PA industry operating rates increased sequentially with SBS and CRB at 95% and 98% respectively at the end of the second quarter.
Our CUK operating rate was over 95%, reflective of the continued strong demand environment.
AF&PA Second quarter data also reflected continued declines and industry inventory levels with balances at multi-year logs, backlogs increased from the previous quarter and all three substrates we're an 8 plus weeks at quarter end.
On Slide 12 and 13, you will see our year-over-year revenue and EBITDA waterfalls.
Net sales increased $126 million very solid 8% in the second quarter of 2021.
Strong growth was driven by $76 million of higher volume mix resulting from 5% organic sales growth of $14 million in pricing and $36 million of favorable foreign exchange.
Adjusted EBITDA decreased $12 million to $248 million in the second quarter versus the prior year period.
Adjusted EBITDA benefited from $14 million in price $15 million in volume mix, $36 million in improved net productivity and $4 million from favorable foreign exchange.
Adjusted EBITDA was unfavorably impacted by $67 million of commodity input cost inflation and $14 million of labor benefits and other inflation.
We ended the quarter with net leverage of 3.7 times.
As we previously shared, leverage is currently above our long-term target of 2.5 to 3 times as we execute on critical investments to achieve our Vision 2025 goals.
We have clear line of sight to the cash flow generation required to drive leverage down to our targeted levels of 2.5 to 3 times within 24 months following the close of the AR Packaging transaction.
We have a substantial total liquidity with $1.9 billion available as of the end of the second quarter.
In July, we raised approximately $530 million to support our acquisition activity at very effective interest rates below 2%, $250 million was raised in a 7-year floating rate term loan from the farm credit system in a similar structure to the farm credit loan we raised earlier this year.
In addition, we raised Euro based debt when the EUR210 million delayed-draw term loan along with a EUR25 million increase in our European line of credit.
We funded the farm credit loan last week.
While we anticipate drawing the euro term loan in connection with the close of the AR Packaging transaction.
Turning now to guidance on slide 14 and 15.
We are updating our full-year EBITDA guidance to incorporate recent price actions expected commodity input cost inflation and the close of the Americraft Carton acquisition.
2021 adjusted EBITDA is projected to be in a range of 1.0-8 to $1.2 billion.
Components of EBITDA have changed modestly as higher contribution from volume mix and net performance are being offset by the transitory negative price cost spread that occurred in the first half of the year.
Notably on Slide 15, you'll see the significant increase in EBITDA, we are projecting in the second half of 2021.
Implemented price initiatives are expected to yield a material price cost recovery benefit to EBITDA in the second half of the year in a range of $80 to $120 million compared to the first half.
The Americraft acquisition closed on July 1 and is expected to provide an incremental $15 million to the second half adjusted EBITDA.
Turning back to the cash flow guidance on slide 14, we anticipate a range of $175 to $225 million for the year.
Guidance for capital expenditures in 2021 has been adjusted, modestly higher, as we are experiencing similar inflationary environment from materials and labor as we complete critical capital projects on time in 2021.
Interest and working capital components to cash flow have improved related to the attractive refinancing from our debt completed this year at very low interest rates and the positive impact on working capital as we have worked down inventories on stronger demand.
As we look through 2022, we remain committed to capital expenditures, returning to a more normalized range of $450 million and look forward to generating significant cash flow as we earn on the investments we've made to materially improve the profitability of the company.
For reference, $450 million in capital expenditures, estimated in 2022 includes both the AR Packaging and Americraft acquisitions.
Wrapping up my comments on Slide 16 and the conclusion of our successful partnership with International Paper during the quarter.
Partnership was foundational to building the highly integrated fiber-based consumer packaging business we are today and it created value for stakeholders.
Conclusion of the partnership with IP, return ownership interest of the partnership back to 100%.
| compname reports second quarter 2021 results: 5% net organic sales growth driven by strong demand for fiber-based consumer packaging solutions.
global liquidity was $1.9 billion at quarter end.
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As we begin 2021, we remain cautiously optimistic with the vaccine rollout gaining traction that will emerge from the global pandemic this year.
I think it's only confirmed by the increased economic activity we're all seeing.
That said, risks do remain.
And if you're so inclined to follow along, I'm going to be speaking to the highlights slide, which is slide three.
Our investment in key capabilities and the tremendous focus on our clients continues to produce good momentum in our business.
We have now achieved nine straight months of net long-term inflows.
In the first quarter, net long-term inflows were $24.5 billion.
This is a record level of inflows for the firm.
Net -- this follows net long-term inflows of nearly $18 billion in the second half of last year, and this represents nearly a 9% annualized long-term organic growth rate, led by net flows into ETFs, continued strength in fixed income and net inflows into the balanced funds.
And as you can see on slide three, the key areas that were highlighted in January: we have scale, investment readiness and competitive strength drove the growth in the quarter.
These are areas where investment performance is strong.
We're highly competitive, and we're well positioned for growth.
Retail flows significantly improved in the quarter and were $21.2 billion out of $24.5 billion of the net long-term flows.
Our ETFs, excluding the Qs, generated net long-term inflows of $16.8 billion.
This is also a record for the firm, which contributed significantly to the $10 billion of net long-term inflows generated in the Americas.
Invesco's U.S. ETFs, excluding the Qs, captured 6.7% of the U.S. industry net ETF inflows.
This is more than two times our 3% market share.
Within private markets, we launched two CLOs, which raised $800 million.
And we remain focused on our alternative capabilities of space, where we also see the benefits of our MassMutual.
MassMutual has committed over $1 billion to various strategies, including providing a credit facility to one of our private market funds.
We had net long-term inflows of $6.5 billion within active fixed income.
And within active global equities, our nearly $50 billion developing markets fund, key capability acquired in the Oppenheimer transaction, saw $1.3 billion of inflows.
That said, there's still areas of improvement within active equities, where we continue to work and remain focused on those opportunities.
Net long-term inflows into Asia Pac were $16.7 billion in the first quarter, following $17 billion of net inflows in the second half of 2020.
The China JV launched nine new funds with $6.2 billion of net long-term inflows.
In addition, our solutions-enabled institutional pipeline has grown meaningfully and accounts for over 60% of our pipeline at the end of the quarter.
Allison will provide more information in a few minutes on the flows, the pipeline, the results for the quarter.
But I would note, we generated positive operating leverage, producing an operating margin of 40.2% for the quarter.
Strong cash flows being generated from our operations improved our cash position, resulting in no drawdown on our credit facility at quarter end, a quarter where we experienced seasonally higher demand on our cash flow.
The Board also approved a 10% increase in the quarterly dividend to $0.17 per share.
Given our historical investments in the business and our most recent efforts to further align our organization with our strategy, I'm confident, talent, capabilities, the resources and the momentum to drive -- to deliver for our clients and drive further growth and success.
Moving to slide four.
Our investment performance improved in the first quarter, with 70% and 76% of actively managed funds in the top half of peers on a five year and a 10-year basis, respectively.
This reflected continued strength in fixed income, global equities, including emerging markets equities and Asian equities, all areas where we continue to see demand from clients globally.
This transition more closely aligns our data to the investment performance data reviewed by our U.S. clients and is more consistent with how our peers reflect investment performance.
Additionally, we've expanded the population of AUM included in performance disclosures by about $150 billion for each period presented through the addition of benchmark-relative performance data for institutional AUM, where pure rankings do not exist.
This approach is used by certain of our peers, and we believe it more meaningfully represents the contribution of our institutional AUM to our performance metrics.
Moving to slide five.
You'll notice we reorganized our ending AUM and net long-term flow slides to group the ending AUM and net long-term flows together for each cut of our data by total, investment approach, channel, geography and asset class.
We believe this will better illustrate our flows in the context of our overall AUM for each category.
We ended the quarter with just over $1.4 trillion in AUM.
Of the $54 billion in AUM growth, approximately $25 billion is a function of increased market values.
Our diversified platform generated net long-term inflows in the first quarter of $24.5 billion, representing 8.8% annualized organic growth.
Active AUM net long-term inflows were $7.5 billion or 3.4% annualized organic growth rate.
In passive AUM, net long-term inflows were $17 billion or a 31.3% annualized organic growth rate.
The retail channel generated net long-term inflows of $21.2 billion in the quarter, an improvement from roughly flat performance in the fourth quarter, driven by the positive ETF flows.
Institutional channel generated net long-term inflows of $3.3 billion in the quarter.
Regarding retail net inflows.
Our ETFs, excluding the QQQ suite, generated net long-term inflows of $16.8 billion, including meaningful net inflows into our higher-fee ETFs.
Net ETF inflows in the U.S. were focused on equities in the first quarter, including a high level of interest in our SandP 500 Equal Weight ETF, which had $4 billion in net inflows in the quarter.
In addition to the SandP 500 Equal Weight ETF, we had five other ETFs that reported net inflows of over $1 billion each.
These six ETFs represented $10 billion in net inflows for the quarter.
It's also worth noting that our Invesco NASDAQ Next Gen 100 ETF, the QQQJ, surpassed the $1 billion AUM mark in the quarter following its inception in October of 2020.
This is on the heels of our successful QQQ marketing campaign and sponsorship of the NCAA Championship in the first quarter.
Looking at flows by geography on slide six.
You'll note that the Americas had net long-term inflows of $10 billion in the quarter, an improvement of $7.8 billion from the fourth quarter.
The improvement was driven by net inflows into ETFs, institutional net inflows, various fixed income strategies, and importantly, focused sales efforts.
Asia Pacific delivered one of its strongest quarters ever with net long-term inflows of $16.7 billion.
Net inflows were diversified across the region.
$9.4 billion of these net inflows were from Greater China, including $8.5 billion in our China JV.
The balance of the flows in Asia Pacific were comprised of $3 billion from Japan, $1.9 billion from Singapore and the remaining $2.3 billion was generated from several other countries in the region.
Net long-term inflows for EMEA excluding the U.K. were $3.7 billion driven by retail flows, including particularly strong net inflows of $1.2 billion into our Global Consumer Trends Fund, the growth equities capability, which saw demand from across the EMEA region.
ETF net inflows in EMEA were $1.6 billion in the quarter, including interest in a wide variety of U.S.- and EMEA-based ETFs.
Notably, we saw net inflows of $0.5 billion into our blockchain ETF and $400 million into one of our newly launched ESG ETFs in the quarter, the Invesco MSCI USA ESG Universal-Screened ETF.
And finally, the U.K. experienced net long-term outflows of $5.9 billion in the quarter driven by net outflows in multi-asset, institutional quantitative equities and U.K. equities.
Turning to flows across asset class.
Equity net long-term inflows of $9.8 billion reflect some of the capabilities I've mentioned, including the Developing Markets Fund, the Global Consumer Trends Fund and ETFs, including our SandP 500 Equal Weight ETF.
We continue to see strength in fixed income across all channels and markets in the first quarter with net long-term inflows of $7.6 billion.
This following net inflows of $8.2 billion in fixed income in the fourth quarter.
It's worth noting that the net inflows in the balanced asset class of $7.3 billion arose largely from China.
In alternatives, net long-term inflows improved by $4.1 billion due to a combination of inflows in senior loan, commodities and newly launched CLOs during the quarter.
Moving to slide seven.
Our institutional pipeline grew to $45.5 billion at March 31 from $30.5 billion at year-end.
The growth in the pipeline this quarter includes a large lower-fee passive-indexing mandate in Asia Pacific, assisted by our Custom Solutions Advisory team.
This is an opportunity for us to offer solutions-based differentiated passive investment to meet the needs of a key strategic client with the potential to expand the relationship over time with access to higher-fee opportunities.
We are also able to leverage our in-house indexing capabilities with this mandate.
Excluding this large mandate in Asia Pacific, the pipeline remains relatively consistent to prior quarter levels in terms of size, asset mix and fee composition.
While there's always some uncertainty with large client funding, we're currently estimating that between 50% and 65% of the pipeline will fund in the second quarter, including the large indexing mandate.
The funding of this mandate will also have a slight downward impact on our net revenue yield next quarter.
Overall, the pipeline is diversified across asset classes and geographies, and our solutions capability enables 61% of the global institutional pipeline and created wins and customized mandates.
This has contributed to meaningful growth across our institutional network, warranting our continuing investment and focus on this key capability.
Turning to slide eight.
You'll notice that our net revenues increased $23 million or 1.8% from the fourth quarter as higher average AUM in the first quarter was partially offset by $71 million decrease in performance fees from the prior quarter.
The net revenue yield excluding performance fees was 35.7 basis points, a decrease of 0.3 basis point from the fourth quarter yield level.
This decrease was driven by lower day count in the first quarter that negatively impacted the yield by 0.8 basis point and higher discretionary money market fee waivers that negatively impacted the yield by 0.3 basis point.
These negative impacts were partially offset by the positive impact of rising markets and net long-term inflows during the quarter.
Going forward, we do expect money market fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels.
Total adjusted operating expenses increased 0.7% in the first quarter.
The $5 million increase in operating expenses was driven by higher variable compensation as a result of higher revenue as well as the seasonal increase in payroll taxes and certain benefits, offset by the reduction in compensation related to performance fees recognized last quarter and savings that we realized in the quarter resulting from our strategic evaluation.
Operating expenses remained at lower than historic activity levels due to pandemic impact to discretionary spending, travel and other business operations that have persisted in the quarter.
Moving to slide nine, we update you on the progress we've made with our strategic evaluation.
As we've noted previously, we're looking across four key areas of our expense base: our organizational model, our real estate footprint, management of third-party spend and technology and operations efficiency.
Through this evaluation, we will invest in key areas of growth, including ETFs, fixed income, China, solutions, alternatives and global equities while creating permanent net improvements of $200 million in our normalized operating expense base.
A large element of the savings will be generated from compensation, which includes realigning our nonclient-facing workforce to support key areas of growth and repositioning to lower-cost locations.
The remainder of the savings will come through property, office and technology and GandA expenses.
In the first quarter, we realized $16 million in cost savings.
$15 million of the savings was related to compensation expense.
The remaining $1 million in savings was related to facilities, which is shown in the property office and technology category.
The $16 million in cost savings were $65 million annualized, combined with the $30 million in annualized savings realized in 2020, brings us to $95 million or 48% of our $200 million net savings expectation.
As it relates to timing, we still expect approximately $150 million or 75% of the run rate savings to be achieved by the end of this year, with the remainder realized by the end of 2022.
Of the $150 million in net savings by the end of this year, we anticipate we will realize roughly 65% of the savings through compensation expense.
The remaining 35% would be spread across occupancy, tax spend and GandA.
The breakdown for the remaining $50 million in net cost saves in 2022 will be similar.
With $95 million of the expected $150 million in net savings by the end of this year already in the quarterly run rate, the degree of net savings per quarter will moderate going forward.
In the first quarter, we incurred $30 million of restructuring costs.
In total, we recognized nearly $150 million of our estimated $250 million to $275 million in restructuring costs that were associated with this program.
We expect the remaining transaction cost for the realization of this program to be in the range of $100 million to $125 million over the next two years, with roughly 1/2 of this amount occurring in the remainder of 2021.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Our expectations are for second quarter operating expenses to be relatively flat to the first quarter, assuming no change in markets and FX levels from March 31.
We entered the second quarter with $1.4 trillion in AUM driven by net inflows and market tailwinds from the first quarter.
These tailwinds will have a modest impact on both revenues and associated variable expenses.
The impact on expenses will be offset by lower compensation expense related to seasonality in payroll taxes and benefits, plus incremental savings related to the strategic evaluation.
We also expect a modest increase in marketing-related expenses as the first quarter is typically the low point in marketing spend annually.
One area that is still more difficult to forecast at this point is when COVID-impacted travel and entertainment expense levels will begin to normalize.
With the rollout of vaccines, we believe we might begin to see a modest resumption of travel activity later in the second quarter and perhaps more in the third quarter.
Moving to slide 10.
Adjusted operating income improved $18 million to $503 million for the quarter driven by the factors we just reviewed.
Adjusted operating margin improved 70 basis points to 40.2% as compared to the fourth quarter.
Most importantly, our degree of positive operating leverage reflected in our non-GAAP results was 2 times for the quarter, underscoring our focus on driving scale and profitability across our diversified platform.
Nonoperating income included $25.9 million in net gains for the quarter compared to $31.9 million in net gains last quarter as higher equity and earnings primarily from increased CLO marks were more than offset by lower market gains on our seed portfolio as compared to the prior quarter.
The effective tax rate for the first quarter was 24% compared to 21.7% in the fourth quarter.
The effective tax rate on net income was higher in the first quarter primarily due to an increase in income generated in higher-taxing jurisdictions relative to total income.
We estimate our non-GAAP effective tax rate to be between 23% and 24% for the second quarter.
The actual effective tax rate may vary from this estimate due to the impact of nonrecurring items on pre-tax income and discrete tax items.
Turning to slide 11.
Our balance sheet cash position was $1.158 billion at March 31, and approximately $760 million of this cash is held for regulatory requirements.
Cash balances are impacted by the typical seasonal increases in cash needs in the first quarter related to our compensation cycle.
We also paid $117 million on a forward share repurchase liability in January.
In addition to using excess cash to reduce leverage, we seek to improve liquidity and our financial flexibility.
Despite the increased cash needs in the quarter, the revolver balance was 0 at the end of March, consistent with our commitment to improve our leverage profile.
Additionally, the remaining forward share repurchase liability of $177 million was settled in early April.
We also renegotiated our $1.5 billion credit facility, extending the maturity date to April of 2026 with favorable terms.
We believe we're making solid progress in our efforts to build financial flexibility and as such, our Board approved a 10% increase in our quarterly common dividend to $0.17 per share.
The share buybacks dating back to last year on slide 11, which reflects $45 million in the first quarter of this year, are related to vesting of employee share awards.
We remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.
In summary, Marty highlighted the growth we've seen in our key capabilities and our continued focus on executing the strategy that aligns with these areas.
We're also executing on our strategic evaluation and reallocating our resources to position us for growth.
And finally, we remain prudent in our approach to capital management.
Our focus on driving greater efficiency and effectiveness into our platform, combined with the work we've done to build a global business with a comprehensive range of capabilities, puts Invesco in a very strong position to meet client needs, run a disciplined business and to continue to invest in and grow our franchise over the long term.
| quarterly dividend increase of 10% to $0.17 per common share.
net long-term inflows were $24.5 billion for q1 of 2021, compared to inflows of $9.8 billion in q4 of 2020.
$1,404.1 billion in ending aum at quarter-end, an increase of 4.0% over the prior quarter.
qtrly total operating revenues $1,659.7 million versus $1,598.9 million.
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Today, we'll update you on the Company's fourth quarter results.
Jim has been our Corporate Controller since 2009 and was recently announced as my successor.
First, I want to congratulate Jim on his new position.
I've worked with him for more than 10 years and look forward to Jim further enhancing our business strategies and results in his new role.
We had a very strong first[Phonetic] quarter and delivered record sales of $2.6 billion, an increase of 9% as reported, with adjusted operating earnings and earnings per share of $305 million and $3.54.
The business was stronger than we had anticipated with residential markets outperforming around the globe.
Our free cash flow for the fourth quarter was about $248 million after capital investments of $160 million.
For the year, we generated a record cash flow of more than $1.3 billion.
In the first half of last year, our industry was under enormous stress as the pandemic spread, and we responded to this disruption by minimizing costs, lowering inventory levels, initiating restructuring actions, and reinforcing our liquidity.
In the second half, the residential flooring demand recovered significantly faster than expected, as people spent more time at home.
Meanwhile, commercial flooring demand remains depressed due to business investments being postponed or canceled.
Our inventory levels decreased in the second and third periods as sales strengthened and production was limited by capacity, workforce absenteeism and labor shortages.
SG&A investments and promotional activities were curtailed during the year to improve our margins.
The pandemic created substantial differences between our segments due to varying restrictions, stimulus, consumer responses and our ability to raise production levels.
Our revenues and operating income rebounded and surpassed the prior year for both the fourth quarter and the second half.
Our fourth quarter results exceeded our expectations as we posted our highest-ever quarterly sales, even with increasing COVID cases around the world.
All of our markets saw strengthening residential purchases with laminate, LVT and sheet vinyl outperforming other flooring categories.
Our residential performance was partially offset by a weak commercial market in the regions where we have more significant business in that channel.
Our results were improved by higher volumes, restructuring and greater leverage on costs while being adversely affected by lower production runs and inventory, absenteeism and labor shortages in some operations.
We are also seeing greater inflationary pressures in many product categories, and we are increasing prices to recover.
Our Flooring Rest of the World segment continued to outperform with significant sales growth, higher operating leverage and improved productivity.
The segment delivered further improvements in LVT production and cost, which enhanced our performance in the period.
Our Global Ceramic and Flooring North America segments also improved, although both experienced a greater impact from commercial headwinds.
Through the fourth quarter, we achieved about $50 million of the projected $100 million to $110 million in anticipated savings from our restructuring initiatives.
We continue to assess some projects based on changing market conditions.
After paying off our short-term debt and pre-funding our longer-term maturities in the second quarter, our net debt leverage is at historical low.
Our strong financial position gives us flexibility to pursue additional opportunities, including internal investments, acquisitions and stock purchases.
Since the third quarter, we've acquired approximately 1 million shares of our stock for $130 million as part of our share repurchase plan.
As the pandemic began, our organization has been protecting one another and supporting our customers around the world.
We are mitigating the spread of COVID utilizing best practices while testing and tracking employees with potential contacts.
I would like to add that I am both honored and excited about the opportunity to lead Mohawk's very talented global finance team.
Now let's review our financial performance for Q4 2020.
Sales exceeded $2.6 billion for the quarter, a 9% increase as reported or 5.5% on a constant basis, with our Flooring Rest of World segment outperforming.
Q4 had two additional shipping days in most businesses.
And as you consider 2021's financial projections, please remember to take into account the following items.
Across most of our businesses, Q1 has three additional days or approximately 5% more, and Q4 has four fewer days or approximately 6% less compared to prior year.
This year sales should continue higher growth and full-year operating margin should improve.
Our Q2 comps were very low and the second half comps are more difficult with the rebound that occurred last year.
Also last year, in Q3 and Q4, there was less time off for holidays for our customers and us.
Time off should be greater this year.
Now coming back to the P&L.
Gross margin was 27.9% as reported or 28.8% excluding charges, increasing 120 basis points from 27.6% in the prior year.
The year-over-year increase was driven primarily by higher volume of $51 million, productivity of $50 million, and lower inflation of $21 million, partially offset by price/mix of $30 million.
SG&A as reported was 17.2% or 17.3% versus 19.1% in the prior year, both excluding charges.
The lower SG&A percent was driven by improved leverage on increased volume and stronger productivity of $21 million.
Operating income as reported was 10.7%.
Restructuring charges for the quarter were $22 million and our restructuring initiatives are on track with year-to-date savings accounting for approximately $50 million of our announced $100 million to $110 million plan.
Operating margin, excluding charges, $305 million or 11.6%, improving from 8.4% last year or 320 basis points.
This increase was driven by productivity of $71 million, stronger volume of $42 million, and reduced inflation of $12 million, partially offset by the previously noted unfavorable price/mix of $30 million.
Interest expense of $16 million, including the impact of our new 2020 bond offerings, and we expect Q1 to be approximately $16 million to $16.5 million.
Other income of $7 million driven by favorable transactional FX and short-term investment returns.
Our Q4 non-tax -- non-GAAP tax rate at 14.8% versus 18.9% in the prior year, benefiting in part from the U.S. CARES Act.
We expect Q1 2021 to be approximately 21%.
Earnings per share as reported of $3.49 or excluding charges of $3.54, growing 57% year-over-year.
Now turning to the segments.
Global Ceramic had sales of $920 million, a 7% increase as reported with the business up 6% on a constant basis, with growth across all geographies, the largest increase being in Brazil and Russia.
Operating income, excluding charges, of $88 million, a 9.5% return.
That's up 65% or 330 basis points versus prior year.
The increase was from productivity of $28 million, volume of $16 million, and lower shutdown expense of $4 million, partially offset by unfavorable price/mix of $12 million and unfavorable FX of $4 million.
Flooring North American sales of $963 million or 3% increase as reported were flat on a constant basis, led by strength in our residential-focused products, offset by the weakness in the commercial channel.
Operating income, excluding charges, of $91 million or 9.5%.
That's an increase of 27% or 180 basis points compared to prior year.
This increase was driven by higher productivity of $26 million, lower inflation of $7 million, and increased volume of $3 million, partially offset by price/mix of $18 million.
And Flooring Rest of the World with sales of $759 million, a 20% increase as reported or 13% on a constant basis, driven by our resilient, laminate and panels businesses in Europe and our carpet business in Australia and New Zealand.
Operating income, excluding charges, of $138 million or 18.2%, up 420 basis points or 57% versus prior year.
The main drivers were the higher volume of $23 million, improved productivity of $16 million, and lower inflation of $8 million, partially offset by unfavorable FX of approximately $4 million.
Corporate and eliminations came in at $12 million and you would expect 2021 to be approximately $40 million.
Turning to the balance sheet.
Cash and short-term investments increased over $1.3 billion, driven by the Q4 free cash flow of $248 million, bringing the full-year 2020 -- full-year cash flow -- free cash flow to approximately $1.3 billion.
Receivables were just over $1.7 billion with DSO improving to 59 days versus the prior year 62 days.
Inventories just over $1.9 billion, dropped almost $400 million or 16% from prior year with a marginal sequential increase of approximately $30 million adjusting for FX from Q3.
Inventory days are at 103 days versus 134 days in the prior year.
Property, plant and equipment just under $4.6 billion with capex of $116 million for the quarter, in line with our D&A.
And full-year capex was $426 million with D&A of just over $600 million.
We estimate that 2021 annual capex to be in line with our D&A of approximately $590 million.
And lastly, the balance sheet and cash flow remained very strong with gross debt of just over $2.7 billion, total cash and short-term investments, as previously noted, over $1.3 billion, leading us to a leverage of 1 time adjusted EBITDA.
Sales for our Flooring Rest of World segment increased 20% in the period as reported or 13% on a constant basis, significantly exceeding our forecast.
Margins expanded over last year to 17.5% as reported or 18.2% excluding restructuring charges, due to higher volume and positive leverage on SG&A and operations, partially offset by currency headwinds.
Sales and margins were strong in most categories and geographies, with most of our plants operating near capacity in the fourth quarter.
Raw material costs began to rise in many of our product categories and we were taking pricing actions to respond to the increases.
Laminate, the segment's largest flooring category, delivered significant growth in the period across most of our markets.
Our margins increased as higher volumes drove greater absorption of manufacturing and SG&A costs while increased productivity and better throughput enhanced our results.
We continue to focus on our premium collections that feature superior visuals and waterproof technology.
Our service levels showed improvement during the period though they remain below our standards.
To satisfy higher demand for existing products, we chose to postpone introductions of our next-generation laminate collections in most markets.
Our LVT sales increased substantially in the quarter, led by accelerated growth of our rigid collections.
Both our LVT margins and profitability improved, due to increased volume, lower production costs and SG&A absorption.
We have increased staffing to operate all LVT line seven days per week.
We are introducing new collections with enhanced visuals and exclusive water-tight joints that better prevent water damage.
We are implementing price increases in our LVT collections to compensate for rising material costs.
Our sheet vinyl business rebounded as our retailers reopened their shops and our export markets picked up.
Our plants ran at high production levels that reduced our operating cost, though unfavorable currency partially offset.
All of our European sheet vinyl plants were running near capacity and we've announced price increases.
Our greenfield Russian sheet vinyl plant's volume has grown to a level that its margins are in line with our other businesses.
We have completed the consolidation of our wood operations in Malaysia.
During the period, our production was impacted by equipment installation and transportation challenges due to COVID.
The equipment from our closed European plant has now been installed and we are improving our throughput and wood sourcing strategies.
Our wood panels performed well in the period, with sales limited by our capacity and low inventories.
Our productivity improved in the quarter, increasing our volume and throughput.
Demand for our customized mezzanine floors is growing, as greater e-commerce sales have increased the need for warehouse space.
To cover rising material costs for our wood panels, we're also implementing price increases.
Product mix continues to improve due to a higher share of stylized products, due to sales investments to increase project specifications.
We are expanding our capacity in melamine products to further improve our margins.
In insulation, volume was good, though our margins were impacted by significant material inflation due to supply constraints.
We have implemented a price increase and have announced another to keep pace with the rising costs.
Demand for the category remained strong, enhanced by government incentives for energy savings.
Sales in Australia and New Zealand were strong in the fourth quarter and margins improved with higher volume and lower material costs from our longer supply chain.
We enhanced our market position with more aggressive sales initiatives and by providing more consistent service under difficult circumstances.
We have leveraged our relationship with carpet retailers to expand sales of our hard surface products.
Our results are benefiting from upgrades to our carpet and hard surface offering, manufacturing assets, and distribution capabilities that we've implemented since we acquired Godfrey Hirst.
For the quarter, our Global Ceramic segment sales rose 7% as reported with improved results across the world, led by growth in the residential channel from heightened remodeling and home sales.
Operating margins for the segment expanded to 8.7% as reported or 9.5% excluding restructuring costs, due to higher volume and improved productivity somewhat reduced by commercial product mix and currency.
Our Brazilian and Mexican businesses delivered record quarterly sales and expanded margins, even with inflationary headwinds.
Manufacturing constraints and low inventories limited growth in most of our regions.
Material, energy and transportation costs are rising, and we are increasing prices in most markets to offset these pressures.
Our U.S. ceramic business delivered strong residential sales growth while commercial remained challenged as businesses defer investments.
Our service centers are experiencing improved customer traffic due to higher home sales and remodeling activity.
The home center channel outperformed with increased demand and inventory replenishments.
To provide additional features and benefits, we are expanding our higher value collections with high gloss polished tiles, antimicrobial treatments, and matching floor and wall combinations.
We have announced price increases across most of our collections to pass through higher transportation costs.
Our ceramic plant productivity and cost improved during the period, due to higher volumes and continued process improvements.
Our restructuring initiatives are progressing and we should complete our ceramic plant consolidations by the end of the first quarter.
Our countertop business is increasing substantially with sales of our quartz products growing significantly.
Our quartz countertop production, cost and margins continue to improve our results and we are increasing our mix with higher value stylized products.
Our Mexican ceramic business delivered its best quarterly sales and performance, even with capacity constraints.
Our margins improved with higher productivity, partially reduced by inflation and product mix.
Our inventories declined and our backlog remained high as we ended the period.
Our customers have opened 30 exclusive Dal-Tile stores in the country, which will enhance our sales and strengthen our brand.
To cover rising inflation, we have announced price increases.
Brazil also delivered record sales in the period with all channels performing well.
Our margins improved due to increased volume and productivity, partially offset by inflation and product mix.
Our Brazilian plants are operating at capacity and have been allocating production to customers.
Our backlog remains high and we are increasing price to recover inflation.
We are investing to further upgrade our manufacturing assets this year.
For the quarter, our European ceramic sales and profitability were above last year.
Some Southern European economies were more affected by COVID and have remained softer than other regions.
Our residential sales were stronger, with more competitive pricing and lower commercial sales negatively impacting our product mix and margins.
We are launching differentiated collections to improve our mix with small sizes, large porcelain slabs, outdoor products, and enhanced design technology.
In the period, our service levels improved with the plants operating at higher rates, though inventories remained low due to higher demand.
Our Russian ceramic business delivered strong results during the period, even with inflation and currency headwinds.
Sales rose significantly in all channels, led by new residential construction, which benefited from historically low interest rates.
To meet higher demand, we ran more production by limiting holiday shutdowns.
We are successfully ramping up our new premium sanitaryware manufacturing and will expand it further this year.
The sanitaryware complements our ceramic tile collections and will enhance our product offering in our owned and franchised stores.
For the period, our Flooring North America sales increased 3% as reported, and our adjusted margins expanded 8.6% as reported or 9.5% excluding restructuring costs.
We had strong growth in the residential channel, offset by lower commercial, which improved from its low base in prior periods.
Our service levels improved as we increased production in the period, though high demand required allocating some products.
Due to higher demand and COVID disruptions in our plants, our inventories did not grow as we anticipated.
To improve our margin and mix, we're launching many innovative products that address the needs of families spending more time at home.
We are taking pricing action in most products due to rising material, labor and transportation costs.
We have executed a large part of our restructuring initiatives, which is benefiting our results, with some of the savings flowing through inventory in future periods.
Some of our operations were inhibited by increased absenteeism and labor shortages due to COVID, and we anticipate higher production levels will improve our service and our inventory positions.
Our residential carpet sales grew during the period as comfort and noise reduction have become more important to consumers.
The demand for residential carpet is strong, and our sales momentum should be solid.
We have taken many actions to improve our productivity, including rationalizing our product offering and reducing our operational complexities.
Our restructuring actions have lowered our overhead and improved our cost and yields.
Our new carpet collections will provide improved margins while offering superior styling, features and value.
We are introducing SmartStrand collections with a new patented hypoallergenic packing, making installation faster and recycling easier.
We're adding new pattern technologies and expanding our unique Continuum polyester collections made from recycled bottles.
We've announced price increases due to increasing inflation in materials, labor and transportation.
Our commercial business has improved from its bottom, but remains depressed along with their retail, hospitality, office and aviation sectors.
Our commercial hard surface sales are outperforming carpet, and we have improved our online tools to make it easier for designers to select and customize our products.
We are managing our cost structures, which have been deleveraged by lower volume, and we have announced price increases across our product offering.
Our laminate business is growing substantially in all channels as our unique visuals and waterproof technology have become desirable alternatives to both natural wood and LVT.
Our plants are running at capacity to meet the exceptional demand, and we're supplementing domestic production with laminate sourced from our worldwide operations.
We have executed numerous process enhancements to increase our laminate and board production, and by the end of the year, a new line should be operational with additional capabilities.
We announced a price increase on our laminate collections because of rising cost.
We have repurposed a plant in Virginia to manufacturer a premium wood flooring collection that has been in development for four years.
Applying our exclusive technologies, we created a truly waterproof wood flooring with dramatically improved scratch, dent and wear resistance for today's active households.
We've also updated our other wood collections to align with evolving market trends.
Sales of both our LVT and sheet vinyl improved substantially during the period, supported by strength in new housing starts and residential remodeling.
We have multiple engineers from our European business working in our U.S. operations to implement demonstrated improvements to increase output, reduce material cost, and enhance product visuals and performance.
We're introducing updated residential and commercial products with our new water-tight technology that will improve our mix and margins.
As in other categories, we've announced price increases due to rising material and transportation costs.
Our fourth quarter sales and operating performance were much stronger than we had anticipated.
We ran our plants around the world at high levels during the period, but fell short of the inventory build we anticipated.
Our operations are taking actions to optimize throughput and reach our desired service levels.
Given present trends, the momentum of our residential business should remain strong, while commercial should slowly improve from its trough.
We will benefit from structural improvements in our costs and innovative new products that will enhance our mix.
Most of our COVID -- most of the COVID restrictions around the world have not directly impacted the sales or installation of our products.
Continued government subsidies and low interest rates should support economic recoveries, new home construction and residential remodeling.
We see increasing inflation in most of our product categories and are raising prices in response.
Assuming current conditions continue, we anticipate our first quarter adjusted earnings per share to be between $2.69 and $2.79, excluding restructuring charges.
The strength of our organization was demonstrated by our management of last year's historic decline in sales and the subsequent spike in demand while protecting our employees and customers.
Our strategies and initiatives remain flexible to adapt to changing economic conditions.
With improving sales and cash flows and a strong balance sheet, we are well positioned to take advantage of future opportunities.
| q4 earnings per share $3.54 excluding items.
q4 sales $2.6 billion versus refinitiv ibes estimate of $2.49 billion.
sees q1 adjusted earnings per share $2.69 to $2.79 excluding items.
q4 earnings per share $3.49.
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We look forward to discussing our second quarter 2021 results with you today.
Joining me for Assurant's conference call are: Alan Colberg, our Chief Executive Officer; Keith Jennings, our President; and Richard Dziadzio, our Chief Financial Officer.
Yesterday after the market closed, we issued a news release announcing our results for the second quarter 2021.
The release and corresponding financial supplement are available on assurant.com.
We will start today's call with remarks from Alan.
Keith and Richard before moving into a Q&A session.
During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance.
We are very pleased with our second quarter results.
Our performance so far this year across our Global Lifestyle and Global Housing businesses demonstrates the power of our strategy to support consumers' connected lifestyle and continues to give us strong confidence in the future growth prospects for Assurant.
Prior to reviewing our progress against our 2021 financial objectives, I wanted to take a moment to express my deep gratitude to our employees around the world, specifically for their continued dedication and support for all of Assurant stakeholders during my tenure as CEO and especially over the last 18 months of the pandemic.
Our talent is a great enabler of our company's growth and progress and Keith Jennings' appointment as my successor is evidence of that.
With a 25-year-long career at the company, he has a clear track record of success and personifies the values and integrity that are emblematic of Assurant's culture and is a natural choice as our next CEO.
His deep operational experience and strong engagement with clients has been instrumental in guiding Assurant's growth across the enterprise.
As CEO, Keith will drive innovation through our Connected World and Specialty P&C businesses.
The completion of the sale of Global Preneed to CUNA Mutual Group marks another important milestone for Assurant, as it enables our organization to further deepen our focus on our market-leading Lifestyle and Housing businesses.
As we look to the convergence of the connected mobile device, car and home, we believe our Connected Living, Global Automotive and Multifamily Housing businesses will continue their compelling history of strong growth into the future.
Not only do our Connected World businesses have a history of profitable growth, more than tripling earnings over the last five years, were also characterized by partnerships with leading global brands; broad multi-channel distribution that provides consumers a choice, value and exceptional service and the track record of innovative offerings that have become industry standards.
ESG is core to our strategy, ensuring we'll build a more sustainable Assurant for all of our stakeholders, focusing on talent, products and climate.
During the quarter, we continue to advance our ESG efforts as we work to create an even more diverse, equitable and inclusive culture that promotes innovation, and enhances sustainability and minimizes our carbon footprint.
We recently completed our 2021 CDP Climate Survey, our sixth annual scoring submission expanding this year to include Scope 3 greenhouse gas emissions across several categories.
The CDP survey is an important climate change assessment, which many of our key stakeholders rely on each year.
Our efforts have led to a recognition that we're proud of.
During the quarter, Assurant was recognized as a 2021 honoree of The Civic 50 by Points of Light, thus claiming [Phonetic] Assurant as one of 50 most community-minded companies in the U.S.
We are proud of our progress and believe the future of Assurant is bright.
Together, Lifestyle and housing should continue to drive above-market growth and superior cash flow generation, with the ability to outperform in a wide spectrum of economic scenarios and ultimately continue to create greater shareholder value over time.
Year-to-date, excluding reportable catastrophes, net operating income per share was $6.02, up 14% from the first half of last year and net operating income was $366 million, an increase of 30%.
Adjusted EBITDA increased 12% to $600 million.
These results support our full-year outlook of 10% to 14% growth in net operating income per share excluding affordable catastrophes.
While we expect earnings growth in the second half on a year-over-year basis, our outlook for the full year assumes a decline in earnings from the first half, reflecting increased investments to support long-term growth in our Connected World businesses, lower investment income and increased corporate and other expenses due to timing of spending.
From 2019 through June of this year, we've returned to shareholders over 88% or almost $1.2 billion of our three-year $1.35 billion objective.
In July, we repurchased an additional 737,000 shares for $150 million and declared our quarterly common stock dividend for the third quarter, essentially completing our objective when paid.
In addition to completing this objective, we expect to return $900 million in net proceeds from the sale of Global Preneed within the next 12 months and therefore expect buybacks to continue at a higher-than-usual level throughout the remainder of the year and into 2022.
Through his strategic vision and intense focus on the evolving needs of our clients and end consumers, Alan and our team have solidified market-leading positions in our Connected World and Specialty P&C businesses, help Assurant establish a strong growth capital-light service-oriented business model where our Connected World offering is now comprised approximately two-thirds of our segment earnings and ultimately work together to unlock the power of our Fortune 300 organization -- prioritizing resources against initiatives with the highest growth potential and standing of key enterprise capabilities and functions, which we can now leverage across our growing client and customer base.
As a result, Assurant is on track to deliver our fifth consecutive year of strong profitable growth.
As I continue to work closely with Alan over the coming months.
I'm also engaging with many of our key stakeholders, including shareholders and analysts who shared valuable perspectives as we define our multi-year plan.
As I identify key focus areas, I will prioritize developing and recruiting top talent, investing strategically to sustain and accelerate growth through product innovation and new distribution models, differentiating us further from our competition through continuous improvement in our customer service delivery, and supporting the investment community in better-understanding our portfolio as we look to drive further value creation.
Our long-term goal will continue to be to deliver sustained growth and value to all of our stakeholders.
Our ability to deliver on these ambitions will require additional innovation and investments to ultimately provide a superior customer experience and deepen our client relationships.
Innovation will continue to be a key differentiator for Assurant, especially as we evolve with the convergence of the connected consumer.
As part of our ongoing commitment to delivering a superior customer experience with a range of service delivery options, we will be further building out our same-day service and repair capabilities for which there is growing demand.
This requires upfront investments, which we expect to accelerate in the second half of this year as we look to provide additional choice and convenience for the end consumer.
As we look to continue our culture of innovation.
You may have seen, we recently announced two key leadership changes to support those efforts.
Manny Becerra, a 31-year veteran of Assurant who was instrumental in driving the growth of our mobile business was appointed to the newly created role of Chief Innovation Officer.
Given his many contributions to our success including the development of our mobile protection and training and upgrade business, he will bring dedicated resources to accelerate innovation across the enterprise to capitalize on the rapid convergence across our home, automotive and mobile products.
Biju Nair will now lead our Connected Living business as its President.
His strong track record of delivering profitable growth and client service excellence, combined with his depth of experience, particularly of the former CEO of Hyla Mobile makes him the perfect choice.
A prime example of how innovation has allowed us to deepen and expand client relationships, as well as create new revenue streams is our long-standing partnership with T-Mobile.
Over the past eight years, we have worked together to offer their customers innovative device protection, trade-in and upgrade programs, while further developing our supply chain services to support their mobile ecosystem.
We are happy to announce that T-Mobile has extended our partnership as their device protection provider.
While we are currently finalizing contract terms, we are excited about the multi-year extension of our relationship and our ability to continue to expand our services to deliver a superior customer experience.
In addition to our innovation efforts, or investments over the past several years has supported our growth through the success of new and strengthened client relationships.
After an initial investment in 2017, this quarter, we purchased the remainder of Olivar, a provider of mobile device lifecycle management and asset disposition services in South Korea.
While small in size, this acquisition enhances our global asset disposition capabilities and deepened our footprint in the Asia-Pacific region while complementing the recent acquisitions of Alegre in Australia and Hyla Mobile.
These investments have enhanced our technology, operational capabilities and partnerships in the trade-in and upgrade market, positioning us to capitalize on the 5G upgrade cycle over the next several years.
Although this year the growing availability of 5G smartphones combined with trade-in promotions demonstrate increasing momentum for the upgrade cycle.
For carriers, retailers, OEMs and cable operators, 5G offers an opportunity to drive additional revenue and gain market share.
Strong trading and upgrade promotions have also led to higher trading volumes for Assurant as well as higher net promoter scores and net subscriber growth within our client base.
Our focus on our client relationships, combined with our willingness to innovate to enhance the end consumer experience continue to create momentum for our businesses.
Over the last few months, we have delivered several new partnerships and renewals throughout the enterprise including the renewal of two key European mobile clients representing 7,000 subscribers; renewal of eight global automotive partnerships representing over 10 million policies across our distribution channels; renewal of three Multifamily housing property management companies including two of the largest in the U.S. as we continue to grow the rollout of our Cover360 product; renewal of three clients and two new partnerships in lender-place as we provide critical support for the U.S. mortgage market.
In summary, I'm very excited to lead our 14,000 employees into the future and build on the tremendous momentum created under Alan's leadership.
We're pleased with our second quarter performance, especially when compared to our strong results last year.
For the quarter, we reported net operating income per share excluding reportable catastrophes of $2.99, up 12% from the prior year period.
Excluding cats, net operating income for the quarter totaled $184 million and adjusted EBITDA amounted to $298 million, a year-over-year increase of 12% and 10% respectively.
Our performance across Lifestyle and Housing remains strong and we also benefited from a lower corporate loss and higher investment income, primarily related to the sale of a real estate joint venture partnership.
Now let's move to segment results, starting the Global Lifestyle.
The segment reported net operating income of $124 million in the second quarter, a year-over-year increase of 2%.
This was driven by growth in Global Automotive and more favorable claims experience in Global Financial Services.
Diving deeper into earnings.
In Global Automotive, earnings increased $7 million or 16% from continued strong year-over-year growth related to our U.S. clients across various distribution channels.
Results within auto also included a $4 million increase from the sale of the real estate joint venture partnership.
Absent this gain, investment income in auto was down.
Connected Living earnings decreased by $9 million compared to a strong prior-year period.
The decline was primarily driven by less favorable loss experience in our extended service contract business.
Mobile earnings were modestly lower.
The less favorable loss experience and service contracts in mobile was primarily related to our European and Latin American businesses.
These regions benefited from lower claims activity in the prior year period due to the pandemic.
Our underlying mobile business continue to grow in North America and Asia Pacific from enrollment increases that mobile carriers and cable operators, with an increase of over one million covered devices in the last year.
In addition, contributions from acquisitions such as Hyla Mobile benefited results.
For the quarter, Lifestyle's adjusted EBITDA increased 6% to $186 million.
This reflects the segments increased amortization related to higher deal-related intangibles for more recent transactions in mobile in Global Automotive.
IT depreciation expense also increase stemming from higher investments.
As we look at revenues, Lifestyle increased by $169 million or 10%.
This was driven mainly by continued growth in Global Automotive and Connected Living.
Within Global Automotive, revenue increased 13% reflecting strong prior period sales of vehicle service contracts.
Industry auto sales continue to increase during the quarter with April seeing record levels in the U.S.
This was reflected in our net written premiums of roughly $1.3 billion in the quarter, the highest quarter ever recorded.
Connected Living revenues were up 7% for the quarter.
In addition to growth in service contracts, mobile fee income was driven by strong trading volumes, including contributions from Hyla.
For the full year, Lifestyle revenues are expected to increase modestly, compared to last year's $7.3 billion, mainly driven by year-to-date Global Auto and Connected Living growth.
We continue to expect to cover mobile devices to grow mid-single digits in 2021 as we increased subscribers in key geographies like the U.S. and Japan.
This also reflects the reduction of 750,000 mobile subscribers related to a European banking program that moved to another provider in the second quarter.
As we previously outlined.
This is not expected to significantly impact our profitability.
For 2021, we still expect Global Lifestyle's net operating income to grow in the high-single digits compared to the $437 million reported in 2020.
While we expect earnings growth year-over-year for the second half, earnings in the second half of the year are expected to be lower compared to the strong first half performance primarily due to two items: first, investments will increase across Connected Living in the second half of the year, including our same-day service and repair capabilities.
While these investments will mute earnings growth in the short term, they are expected to generate growth over the long term; and second, the investment income will be lower as we are not expecting gains from real estate joint venture partnerships that benefited the second quarter in auto.
Adjusted EBITDA for the segment is still expected to grow double-digits year-over-year at a faster based in segment net operating income.
Moving now to Global Housing.
Net operating income for the quarter totaled $94 million, compared to $85 million in the second quarter of 2020 due to $10 million of lower reportable catastrophes.
Excluding catastrophe losses, earnings were relatively flat as growth within lender-placed and higher investment income was offset by the expected increase in non-cat loss experience across all lines of business.
Investment income included a $4 million increase from the sale of a real estate joint venture referenced earlier.
Regarding the non-cat loss ratio, the second quarter 2020 benefited from unusually low non-cat losses, including impacts from the pandemic.
As anticipated, we saw an increase in the frequency and severity of claims in the second quarter.
We also increased reserves related to the cost of settling run-off claims within our small commercial book.
In Multifamily housing, underlying growth was offset by increased investments to further strengthen our customer experience including our digital-first capabilities.
Within lender-placed, higher revenues and investment income were partially offset by unfavorable non-cat loss experience and declining REO volumes from ongoing foreclosure moratoriums.
Looking at loans track, the $1.5 million sequential loan decline was mainly attributable to a client portfolio that rolled off in the second quarter.
However, the decline in loans track should be partially offset by two new client partnerships in the quarter, which should enable us to onboard approximately 700,000 loans by year-end.
We also continue to reduce risk within housing.
At the end of June, we completed our 2021 Catastrophe Reinsurance program.
To mitigate multi-event risk, we added a flexible limit that can be used to reduce our retention from $80 million to $55 million in certain second and third events, or increase the top-of-the-tower $50 million in excess of $950 million in the rare case of a 1 in 174-year event.
We also increased our multi-year coverage to over 50% of our U.S. tower.
In terms of revenue, Global Housing's revenue increased 5%, primarily due to double-digit growth in Multifamily housing, as well as higher revenue in lender-placed including higher premium rates and average-insured values.
As a result of the strong first half, we now expect Global Housing's net operating income excluding cats to be flat compared to the $371 million in 2020.
This is above our initial expectations that earnings would be down this year.
Earnings in the second half are expected to be lower than the first half of the year, primarily related to three items: first, lower net investment income, particularly considering the real estate joint venture gain in the second quarter; second, lower results in our Specialty P&C offerings after our strong first half; and third, continued investments in the business, particularly in Multifamily housing to sustain and enhance our competitive position.
We also continue to monitor the REO foreclosure moratoriums and any additional extensions that may be announced.
At corporate, the net operating loss was $12 million, compared to $29 million in the second quarter of 2020.
This were driven by two items: first, lower employee-related expenses and third party fees, which we expect to increase in the second half of the year; and second, we had $6 million of favorable one-time items including a tax benefit and income from the sale of the real estate joint venture partnership.
We also anticipate higher spending in the second half of the year compared to the first half due to an increase in recruiting and moderate travel and related expenses as we expect to begin a phased reentry of our workforce.
In addition, third-party expenses are expected to increase due to acceleration and timing of investments.
For the full year of 2021, we now expect the Corporate net operating loss to be approximately $85 million.
This compares to our previous estimate of $90 million.
Turning to holding company liquidity.
We ended the second quarter with $353 million, which is $128 million above our current minimum target level.
This excludes both the $1.2 billion in net proceeds from the sale of Preneed and the net proceeds from the second quarter debt offering, which were used for the July redemption of senior notes due in 2023.
In the second quarter, dividends from our operating segments totaled $243 million.
In addition to our quarterly corporate and interest expenses, we also had outflows from three main items: $191 million of share repurchases, $42 million in common stock dividends and $17 million mainly related to mobile acquisitions including Olivar and Assurant venture investments.
For the overall year, we continue to expect dividends to approximate segment earnings, subject to the growth of the businesses, rating agency and regulatory capital requirements, investment portfolio performance and any impact on a potential change in corporate U.S. tax rates.
In summary, our strong performance for the first half of the year positions us nicely to meet our full year financial commitments, while continuing to invest in our long-term growth.
| q2 operating earnings per share $2.99 excluding items.
continue to expect to grow eps, ex.
catastrophes, by 10 to 14 percent for 2021.
|
Dave Lesar, our CEO; Jason Wells, our CFO; and Tom Webb, our Senior Adviser, will discuss the company's first quarter 2021 results.
Actual results could differ materially based upon various factors as noted in our Form 10-Q, other SEC filings and our earnings materials.
We will also discuss earnings guidance and our utility earnings growth target.
In providing this guidance, we use a non-GAAP measure of adjusted diluted earnings per share.
We previously referred to our earnings guidance as guidance basis EPS, and we'll now refer to it as non-GAAP earnings per share or utility EPS.
Similarly, we will refer to our 6% to 8% non-GAAP utility earnings per share target growth rate as utility earnings per share growth rate.
As a reminder, we may use our website to announce material information.
Information on how to access the replay can be found on our website.
Now I'd like to turn the discussion over to Dave.
We are observing a sense of normalcy starting to return here in Texas and in many of our other jurisdictions.
Just as important to me is that I look forward to an opportunity to meet you in person and tell you about the amazing things we have accomplished in less than a year and what our strategy entails moving forward.
I want to share with everyone our excitement about the progress CenterPoint is making and our continued belief in the utility assets that we operate.
We believe they are premium assets and want you to believe that too.
Today, we will provide an update on the continued disciplined execution of our strategy that we outlined during our Investor Day just five short months ago.
I hope you see that we are developing a track record of being consistent and accountable against the goals that we set.
As you know, I'd like to lead with headlines, and we have some worthy ones to cover this quarter.
First, we delivered very strong results for the first quarter of 2021, including $0.47 of utility EPS.
Because the higher natural gas prices are pass-through costs for our business, they did not impact this quarter's utility results.
In addition, our first quarter results are in line with recent historical trends in which the first quarter contributed close to 40% of the full year utility EPS.
We are, of course, reaffirming our full year utility earnings per share range for 2021 of $1.24 to $1.26 and our long-term 6% to 8% utility earnings per share annual growth target.
We are off to a great start for the year, so let's check the utility earnings box as being on track.
The second big headline is, of course, the announced agreement to sell our Arkansas and Oklahoma gas LDCs, which is anticipated to close by the end of the year, subject to regulatory approvals.
These are premium assets, and this was demonstrated by the level of interest we saw and, of course, in the price we got for them.
The landmark valuation was 2.5 times 2020 rate base.
This outcome was well beyond what even the most optimistic observers thought we would achieve.
We saw extraordinary interest from over 40 parties, 17 of which made bids, including strategics, infrastructure funds and PE firms.
There are a number of key takeaways from this great outcome.
First, it validates our strong and stated belief that our remaining gas LDCs are significantly undervalued, and investors should rethink their position as to the value of our remaining gas LDCs in our share price.
This also illustrates the strength, viability and value of the broader gas LDC industry.
The premium multiple these assets garnered in the marketplace shows that investors continue to see natural gas as an essential fuel that is efficient, valuable and affordable energy source.
This transaction demonstrates how we can efficiently finance our industry-leading rate base growth.
This is a perfect example of the efficient capital recycling strategy we committed to you on our Investor Day.
It's a simple model.
You sell at 2.5 times rate base and invest at 1 times rate base.
Naturally, this begs the question if we would consider more LDC sales in the future.
Currently, we're content with our utility portfolio mix.
But that being said, if we see another opportunity to recycle capital in a similarly attractive way, we would explore it as part of our broader strategy.
Our Investor Day plan highlighted that we had the opportunity to spend an additional $1 billion over our current $16 billion five-year capital plan.
At this price, the LDC transaction will provide us with $300 million of incremental proceeds on an after-tax basis compared to the five-year plan we showed you on our Analyst Day.
We will first look to deploy this $300 million in incremental proceeds into high-value utility capital spend opportunities that are part of those additional $1 billion in capital opportunities.
This incremental capital spending is likely to be spent in 2022 and begin to flow into earnings in 2023 and allow us to continue to provide reliable, essential services to our customers.
Therefore, this transaction will not impact our long-term growth plans or earnings trajectory.
On the contrary, we believe this will even more strongly support consistent 6% to 8% utility earnings annual growth rate in our industry-leading 10% rate-based CAGR targets.
We previously committed to you a 2Q sales announcement, and we delivered on that.
So let's also check that box as being done.
Turning now to the Enable transaction.
We anticipate the transaction between Enable and Energy Transfer to close in the second half of the year.
We remain absolutely focused on reducing and eliminating our midstream exposure through a disciplined approach.
And to reiterate what we said when we announced the news of a transaction back in February, completing this transaction also will not change our 6% to 8% utility earnings per share annual growth target or our 10% rate base CAGR.
So that box stays checked as we remain on track to reduce midstream exposure.
Turning to the impacts from the winter storm, Uri.
Last quarter, many of you questioned the incremental gas costs and the likelihood and timing of recovery.
We said that the storms impacts won't change the utility earnings per share target range and they will not.
We also said we believe we had a handle on the issue but needed some time to work through it with our regulators.
Let me give you an update on what progress we have made on that front.
First, in part by actively engaging, auditing and challenging our gas suppliers, we have reduced our incremental gas costs by over $300 million since our initial estimates, resulting in reduced customer incremental gas cost exposure of $2.2 billion.
We won't stop pursuing these actions, because we believe this is the right thing to do for our customers.
We are also beginning to seek the timely recovery of these costs through early adjustments to our normal cost recovery mechanisms.
We have started recovery in Arkansas and Louisiana, including some carrying costs.
Both Arkansas and Oklahoma have also passed legislation for securitization.
In Minnesota, we are pursuing recovery of storm-related costs, including some carrying costs due to the existing gas cost recovery mechanism over a two-year period.
And in Texas, a state-sponsored securitization bill on incremental gas cost has already passed through the house and is being considered by the Senate.
We believe there is good momentum behind this bill.
So while not completely behind us, we are getting closer to checking the incremental gas cost box.
We have said all along that we have strong regulatory relationships, and that belief is supported by our progress in working through this event.
On the electric side, the Texas PUC is undergoing a complete turnover, and we look forward to building our relationships with the new team.
There's also been some legislative progress around the proposal to increase grid resiliency in Texas.
In Texas, several proposed bills have been moving that are intended to protect systems and customers from a repeat of the electric disruption we saw in February.
We are very encouraged by the progress, and we see this as an opportunity for the system as a whole to find better ways to serve our community.
We remain on course for a $16 billion-plus capital spending program and industry-leading 10% compounded annual rate base growth target over the next five years.
For 2021, we are on track to spend the full $3.4 billion outlined on our Investor Day.
Similar to our earnings, there is a seasonality to our capital spend where we typically ramp up spending as the year progresses.
As stated previously, we have opportunities above our current $16 billion five-year plan and the $300 million in incremental proceeds from the ultimate sale of our Arkansas and Oklahoma LDC assets transaction will provide additional capacity for us to pursue some of these, if we so choose.
So let's check the capital spending box as being on track.
We have talked about our industry-leading organic customer growth rates.
Despite the impact of COVID, we again saw about 2% growth rates quarter-over-quarter, reinforcing the value of the fast-growing markets that we serve.
That organic growth plays a part in keeping our service costs reasonable for our customers.
In addition, we take a disciplined approach to reducing our O&M expenses to benefit our customers.
We are on track to reduce O&M by 2% to 3% in 2021.
However, given the incremental opportunity set we see to reinvest in our business, we may take the decision to reinvest some O&M savings back into our utility assets this year.
This is a great luxury to have.
So for 2021 on O&M, let's check that box as being on track.
Next up is our commitment to environmental stewardship.
We are well under way in developing and then announcing what we believe will be an industry-leading carbon strategy.
On that front, a critical constructive piece of news was recently received in Indiana, where we received a very positive Indiana Director's report for our IRP.
Though our Indiana IRP does not require approval, the directors report has provided us with the confidence that we are headed down the right renewable path with both regulators and our communities.
Since our last earnings call, we have reviewed our updated ESG plans with our Board and are preparing a rollout of our transition to net zero.
We should be in a place to disclose these exciting plans in the third quarter.
Since this is still a work in progress, we cannot check the box here, but I am very happy with the progress that we are making.
I've been looking forward to these calls every quarter, because we have so many exciting things to share with you as we execute our long-term strategy that we outlined on Investor Day.
I strongly believe that the strategy we laid out and the progress we have made so far more than demonstrates what a unique value proposition CenterPoint offers.
Just to echo Dave's sentiment, we're looking forward to seeing more of you in person in 2021.
To continue the theme of execution and delivery, I want to start by reviewing our quarterly results with you as well as provide some incremental details on a few events Dave highlighted.
Let me get started with our first quarter earnings.
On a GAAP basis, we reported $0.56 for the first quarter of 2021 compared to a loss of $2.44 for the first quarter of 2020.
Looking at slide four.
We reported $0.59 of non-GAAP earnings per share for the first quarter of 2021 compared to $0.60 for the first quarter of 2020.
Our utility earnings per share was $0.47 for the first quarter of 2021, while midstream investments contributed another $0.12 of EPS.
The notable drivers when comparing the quarters are strong customer growth across all of our jurisdictions and rate recovery, which makes up $0.05 of the favorable impact.
Our disciplined O&M management contributed another $0.03 of positive variance for the quarter.
The growth drivers were partially offset by the $0.09 from share dilution due to the large equity issuance back in May 2020 and $0.03 due to the nonrecurring CARES Act benefit we received last year.
Turning to slide five.
We are very pleased with the high level of interest we received for our Arkansas and Oklahoma gas LDCs as we've conveyed through the entire process.
As Dave said, there were interested parties across the spectrum, which drive a highly competitive auction process.
The successful outcome emphasizes the high-quality nature and supportive regulatory frameworks that are present in all of our businesses.
We're preparing to commence the regulatory approval process and anticipate a close by the end of the year.
The integrated nature of the operations between these two jurisdictions will also accelerate the carve-out in integration process with the new owners as we work toward closing and will facilitate delivering on our commitment of reducing any remaining allocated O&M.
As shown on the slide, this transaction priced at $2.15 billion, inclusive of $425 million of incremental gas cost recovery.
The $1.725 billion in proceeds, after the natural gas cost recovery, represents a multiple of 2.5 times 2020 rate base and a multiple of 38 times 2020 earnings for those businesses.
This earnings multiple is based on the purchase price of $1.725 billion, reduced by approximately $340 million of implied regulatory debt compared to $36 million of 2020 full year earnings.
This transaction multiple, consistent with some of the highest multiples paid for gas LDCs, demonstrates that the market continues to see gas LDCs playing a pivotal role in our country's energy supply by providing affordable, efficient and lower carbon energy sources for our customers.
The net proceeds from this sale are estimated to be $1.3 billion after tax and closing costs as our Arkansas and Oklahoma assets have a relatively low tax basis of approximately $300 million.
While there's been a lot of focus on tax leakage, we were clear at our Investor Day that our five year plan assumed full tax on the gain on sale for these assets given the low tax basis.
Therefore, the headline is the competitive auction process will, at close, result in generating an additional $300 million in after-tax proceeds than what was assumed in the original five year plan.
To zero in on the use of the incremental $300 million of proceeds, we will prioritize funding an increase in our capital investment plan.
It is important to note this incremental capital will be deployed in 2022, and as a result, will likely impact 2023 earnings and beyond once the capital has been approved in rate base.
We will also evaluate using some of the excess proceeds to delay the start of our at-the-market equity program that was originally slated for 2022.
We're grateful I have these options.
I'd also like to reiterate that this disposition will not change our 2021 utility earnings guidance range.
It is also important to reiterate Dave's point that the premium multiple achieved through this transaction as well as the performance of the systems through the recent winter storms reinforces that there are many states that see natural gas as a viable low carbon fuel source and the market has been undervaluing these assets.
And as renewable fuels continue to advance, our systems will have the proven capabilities to adapt and evolve along with them.
Turning to slide six.
Dave discussed that we are still on pace to close the Enable and Energy Transfer merger in the second half of this year, and then we'll look to liquidate our midstream position in a disciplined but efficient manner.
As a reminder, we will have $385 million of energy transfer preferred units that we can liquidate at any time after the merger closes.
The $200 million of Energy Transfer common units we will receive in the merger will be registered through a process that will likely take two to three months after close.
We will have the flexibility to either dribble those units into the marketplace or sell through up to five block offerings.
As we've noted in the past, our negative tax bases at Enable will carry over to Energy Transfer units and will result in an effective 50% tax on the sale.
As previously discussed, we continue to explore tax mitigation strategies across the company to offset the burden that may come with a common unit sales and continue to have confidence we can reduce the tax leakage.
As a result, I'd like to reaffirm that the sale of the Energy Transfer units will not change our utility earnings per share growth target of 6% to 8% annually.
As Dave mentioned, we have actively worked with suppliers, which has, in part, helped to reduce the overall incremental gas costs from the winter storm to $2.2 billion, down from $2.5 billion we signaled last quarter.
In addition, CenterPoint regulators and legislators have all been working over the past few months to align on cost recovery methods that suit the needs of all of our stakeholders.
As laid out on slide seven, we have multiple mechanisms available to us for cost recovery.
two states have already initiated interim recovery.
Another two states have enacted a legislation enabling securitization, and Texas has a securitization bill pending.
Between the securitization, the sale of the gas LDCs and the interim rate recovery, we now expect between $1.6 billion and $1.7 billion of the total incremental gas costs to be recovered before the one year anniversary of the storm, assuming the Texas securitization bill is signed into law.
We are grateful for the diligence of our regulatory team and the constructive support of our commissions across our jurisdictions for getting us to this point.
Turning to our financing updates.
We closed our $1.7 billion CERC senior notes offering on March 2, which included $1 billion of floating rate notes and $700 million of fixed rate notes, both due in 2023.
The proceeds for the $1.7 billion issuance were used to pay for the incremental gas costs for the winter storm and the notes have an optional redemption date at any time on or after September two of this year, giving us full flexibility to pay down this debt consistent with our regulatory recoveries.
Recovery of the carrying costs and the majority of the impacted states such as Texas, Louisiana, Arkansas and Oklahoma will help offset the incremental interest cost from this debt issuance.
Our current liquidity remains strong at approximately $2.1 billion after the issuance of the senior notes proceeds and the payments made for the incremental gas costs.
Our long-term FFO to debt objective is between 14% and 14.5% and is consistent with the expectations of the rating agencies.
We continue to actively engage with them, and they are comfortable with the outlook and thresholds we've indicated.
I'd like to reiterate, we have no large equity issuance needs over our current planning horizon and can now reevaluate the need for our ATM program in 2022, depending on how we utilize the expected proceeds from our LDC asset sale.
I hope it's becoming clear that our story is streamlining nicely as we prove to you, our investors, that we're delivering on our plan as outlined.
We are reducing our exposure to nonutility businesses, realigning our balance sheet to reduce our reliance between intercompany borrowings and parent debt and committing to efficiently fund our industry-leading rate base growth.
These are the updates for the quarter.
Both Dave and I are excited about the direction CenterPoint is taking, and we cannot wait to share more good news with you as we continue to execute on our plan throughout 2021 and beyond.
Over to you, Tom.
Five months after our strategy-revealing Investor Day, CenterPoint, as you just heard, is well under way executing its strategy.
It's dispensing with volatile noncore nonutility businesses, think Enable; implementing efficient financing, think gas LDC sales; introducing clean energy, think coal closures, renewable additions and much more; and improving performance, think continuous improvement, a whole new culture.
Dave and Jason already have highlighted details about each of these as strategic changes are nearing completion, our premium utility operation is humming.
I hope you see it.
I hope you feel it.
We really sweat the details, so you don't have to.
We have superior rate base growth, delivering needed capital investment.
Our growth rate target of 10% outstrips the peer average of about 7%.
Our resulting utility earnings per share growth target at 6% to 8% every year is well above the peer average of 5%.
And our customer growth at 2% is something we would celebrate at my old company, with top quartile customer satisfaction, we still seek to hold down customer price increases, reducing our O&M cost by 1% to 2% every year.
Coupled with customer growth, this creates a lot of headroom for the needed capital investment.
Five months ago, we showed you our five year plan to reduce costs 1% to 2% each year.
We added the detail for 2021 during our last call.
And here, you can see our progress in the first quarter.
We plan for a fast start with 2021, down 2% to 3%, with results in the first quarter faster yet.
Please keep in mind, some of this is timing.
We still expect to reduce costs by about 2% to 3% for the year.
As you know, one of our tools is our continuous improvement initiative.
We improve our processes from the ground up to enhance safety every day; quality, doing things right the first time; delivery, doing things on time; cost, we see and eliminate waste; and morale, higher and higher every day.
Each day, I observe more who are proud to wear the colors.
Continuous improvement takes time to ramp up.
It's a powerful process.
It shifts dependence from heroic individual work to better processes that can be repeated.
As we succeeded eliminating human struggle, the cost will fall out.
My favorite chart is on the right.
We take on the headwinds.
We take advantage of the tailwinds.
We deliver our earnings per share commitment consistently every year.
We really do sweat the details, so you don't have to.
As I have experienced elsewhere, this management team may do so well on cost reductions that it can pull ahead work from next year, reinvesting savings to benefit our customers sooner.
We did this last year.
We maximize resources for customers and deliver our commitment to you, our investors.
No more, no less, a win-win.
Dave, Jason and this superb leadership team know the secret sauce.
They are working for both our customers and our investors, no or's here.
Back to you, Dave.
I want to reemphasize what we consider critical elements as we transform CenterPoint into a premium utility we believe it can be.
We will continue to deliver sustainable, predictable and consistent 6% to 8% earnings growth year after year.
With our industry-leading organic customer growth and our disciplined O&M management, we believe we can generate robust capex and 10% rate base growth while continuing our focus on safety.
We also look forward to unveiling our enhanced ESG strategy that will put us as an industry leader for a net-zero economy.
We will continue to keep our eyes on maintaining and enhancing our balance sheet and credit profile.
We have executed on our capital recycling strategy through our announced gas LDC sale at 2.5 times rate base and investing at 1 times rate base, and we will continue to explore opportunities to do more of this.
We remain absolutely committed to delivering an economically viable path to minimize the impact of our midstream exposure and eventually eliminate it.
And finally, as we work to move toward a fully regulated business model, we continue to stay focused on our utility operations and improving the experience for our customers.
I hope you will join us on this path of transitioning CenterPoint into a premium utility.
While myself, our team and our employees are only 10 months into this new journey, I could not be more pleased by the momentum we have, what we've accomplished and the bright future we see for CenterPoint.
What you see is the new CenterPoint, where you can expect consistent and predictable earnings and rate base growth, world-class operations and growing service territories and a commitment to delivering on our promises to you, our investors.
We sweat the details, so you don't have to.
We will now take questions until 9:00 a.m. Operator?
| centerpoint energy - qtrly earnings per share $0.56.
q1 non-gaap earnings per share $0.59.
q1 earnings per share $0.56.
reaffirming 2021 utility earnings per share guidance range of $1.24 - $1.26 and reiterating 6% - 8% utility earnings per share annual growth rate target.
on path to deliver 10% compound annual rate base growth through $16 billion 5-year capital plan.
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The theme for our on-hold music today was coping with the chaos.
Last year when the pandemic began, we held a companywide conference call to share some of the lessons learned from the great financial crisis.
I started the call with the first line of the famous retro kicking palm if looks like this.
If you can keep your head when all about you are losing theirs and blaming it on you.
We went on to lay on a list of suggestions to help cope with the chaos that we knew it was headed our way.
Among other ideas, a few suggestions were included in our on-hold music today.
We knew that Queen and David Boy and our teams are going to find themselves under pressure.
And we new when that happened, we told them just to take the advice from the Eagles and take it easy.
We encourage them to embrace innovation, tail path, and as Boston reminds us, don't look back.
We said we rely on Camden's values and culture and do things our way because like Bon Jove, we were born follow.
And finally, we encourage them to get on board the REO speed wagon and roll with the changes.
At the end of the call, we showed a video that was produced by our Dallas Texas operations group during the great financial crisis.
That seem just as appropriate for what we faced at the beginning of the pandemic.
We thought you might find that interesting today.
So go ahead and roll the video.
When we held our first quarter earnings call, we are beginning to see an acceleration in both occupancy and pricing power across our markets.
The actual rate of acceleration that occurred since the call, which far exceeded our estimates and resulted in the improved earnings guidance we released last night.
Across the board, we are seeing a very strong performance and continued improvements in our operating fundamentals.
And in almost all cases where current rental rates exceed the pandemic levels.
The outlook from our third-party economists and data providers is also quite positive.
And they expect the apartment business will continue to thrive as we move into the second half of 2021 and into 2022.
Despite the ongoing levels of high supply in many markets, demand has been greater than anticipated, allowing positive absorption of newly delivered apartment homes.
Our occupation is currently 97%, leasing activity is strong, and turnover remains low.
So overall, I would say our outlook for Camden in the multifamily industry is very good.
We are excited to have entered the national market with the acquisition of two high-quality apartment properties.
Our acquisition and development teams continue to work hard and smart to find opportunities in a very competitive environment.
I want to give a shout out to our amazing Camden team members for doing a great job in taking advantage of this strong market.
Great customer service and sales acum is very important in a market like this.
We must deliver great customer service and support the Camden value proposition when asking for and getting double-digit rental increases from our customers.
Next up is our co-founder, Keith Oden.
Now for a few details on our second quarter operating results.
Same-property revenue growth was 4.1% for the quarter and was positive in all markets, both year-over-year and sequentially.
We have remarkable growth in Phoenix and Tampa both at 9.1%, Southeast Florida at 8.6%, Atlanta at 5.7% and Raleigh at 4.6%.
We thought the April new lease and renewal numbers we reported on last quarter's call were pretty good at nearly 5%.
But as Ric mentioned, pricing power continues to accelerate.
For the second quarter of '21, signed new leases were 9.3% and renewals were 6.7% for a blended rate of 8%.
For leases which were signed earlier and became effective during the end -- during the second quarter, new lease growth was 5.4% with renewals at 4% for a blended rate of 4.7%.
July 2021 looks to be one of the best months we've ever had with new signed -- signed new leases trending at 18.7%, renewals at 10.5% and a blended rate of 14.6%.
Renewal offers for August and September were sent out with an average increase of around 11%.
Occupancy has also continued to improve, going from 96% in the first quarter this year to 96.9% in the second quarter and is currently at 97.1% for July.
Net turnover ticked up slightly in the second quarter to 45% versus 41% last year due to the aggressive pricing increases we instituted, but it remains well below long-term historical levels.
Move-outs to home purchases also ticked up slightly from 16.9% in the first quarter this year to 17.7% in the second quarter, which reflects normal seasonal patterns in our markets.
So despite the constant headlines regarding increased number of single-family home sales, it really has not had an effect on our portfolio performance as the move-outs to purchase homes are still slightly below our long-term average of about 18%.
It's something we discuss internally often.
Our purpose or why is to improve the lives of our teammates, customers and shareholders, one experience at a time.
In our companywide meeting at the beginning of the pandemic, we shared the Star Wars video, and we emphasize that the chaotic months ahead would provide an extraordinary number of opportunities to improve lives one experience at a time.
We focused our efforts on improving our teammates lives who likewise focus their attention on improving our residents' lives.
The results have been truly amazing, and we could not be more proud of how Team Camden has performed throughout the COVID months.
Improving the lives of our team and customers has in turn improved the lives of shareholders, including the approximately 500 Camden employees who participated in the employee share purchase plan this year.
Before I move on to our financial results and guidance, a brief update on our recent real estate activities.
During the second quarter of 2021, as previously mentioned, we entered the Nashville market with a $186 million purchase of Camden Music Row, a recently constructed, 430-unit, 18-story community and the $105 million purchase of Camden Franklin Park, a recently constructed 328-unit, 5-story community.
Both assets were purchased at just under a 4% yield.
Also, during the quarter, we stabilized both Camden RiNo, a 233-unit $7 million new development in Denver, generating an approximate 6% yield in Camden Cypress Creek II, a 234-unit joint venture in Houston, Texas, generating an approximate 7.75% yield.
Clearly, our development program continues to create significant value for our shareholders.
Additionally, during the quarter, we began leasing at Camden Hillcrest, a 132-unit, $95 million new development in San Diego.
On the financing side, during the quarter, we issued approximately $360 million of shares under our existing ATM program.
We used the proceeds of the issuance to fund our entrance into Nashville.
Our existing ATM program is now fully utilized.
And in line with best corporate practices, we will file a new ATM program next week.
In the quarter, we collected 98.7% of our scheduled rents with only 1.3% delinquent.
Turning to bad debt.
In accordance with GAAP, certain uncollected revenue is recognized by us as income in the current month.
We then evaluate this uncollected revenue and establish what we believe to be an appropriate reserve, which serves as a corresponding offset to property revenues in the same period.
When a resident moves out OMS money, we typically have previously reserved all past due amounts, and there will be no future impact to the income statement.
We reevaluate our reserves monthly for collectibility.
For multifamily residents, we have currently reserved $11 million as uncollectible revenue against a receivable of $12 million.
Turning to financial results.
What a difference a year or a quarter can make.
Last night, we reported funds from operations for the second quarter of 2021 of $131.2 million or $1.28 per share, exceeding the midpoint of our guidance range by $0.03 per share.
This $0.03 per share outperformance for the second quarter resulted primarily from approximately $0.03 in higher same-store NOI, resulting from $0.025 of higher revenue, driven by higher rental rates, higher occupancy and lower bad debt and $0.05 of lower operating expenses driven by a combination of lower water expense and lower salaries due to open positions on site and approximately $0.02 in better-than-anticipated results from our non-same-store and development communities.
This $0.05 aggregate outperformance was partially offset by $0.01 of higher overhead costs, primarily associated with our employee stock purchase plan, combined with a $0.01 impact from our higher share count resulting from our recent ATM activity.
Last night, based upon our year-to-date operating performance and our expectations for the remainder of the year, we also updated and revised our 2021 full year same-store guidance.
Taking into consideration the previously mentioned significant improvement in new leases, renewals and occupancy, and our resulting expectations for the remainder of the year, we have increased the midpoint of our full year revenue growth from 1.6% to 3.75%.
Additionally, as a result of our slightly better-than-expected second quarter same-store expense performance and our anticipation of the trend continuing throughout the year, we decreased the midpoint of our full year expense growth from 3.9% to 3.75%.
The result of both of these changes is a 350 basis point increase to the midpoint of our 2021 same-store NOI guidance from 0.25% to 3.75%.
Our 3.75% same-store revenue growth assumptions are based upon occupancy averaging approximately 97% for the remainder of the year, with the blend of new lease and renewals averaging approximately 11%.
Last night, we also increased the midpoint of our full year 2021 FFO guidance by $0.18 per share.
Our new 2021 FFO guidance is $5.17 to $5.37 with a midpoint of $5.27 per share.
This $0.18 per share increase results from our anticipated 350 basis points or $0.21 increase in 2021 same-store operating results, $0.03 of this increase occurred in the second quarter, with the remainder anticipated over the third and fourth quarters and an approximate $0.06 increase from our non-same-store and development communities.
This $0.27 aggregate increase in FFO is partially offset by an approximate $0.09 impact from our second quarter ATM activity.
We have made no changes to our full year guidance of $450 million of acquisitions and $450 million of dispositions.
Last night, we also provided earnings guidance for the third quarter of 2021.
We expect FFO per share for the third quarter to be within the range of $1.30 to $1.36.
The midpoint of $1.33 represents a $0.05 per share improvement from the second quarter, which is anticipated to result from a $0.04 per share or approximate 2.5% expected sequential increase in same-store NOI, driven primarily by higher rental rates, partially offset by our normal second to third quarter seasonal increase in utility, repair and maintenance, unit turnover and personnel expenses.
A $0.015 per share increase in NOI from our development communities in lease-up, our other nonsame-store communities and the incremental contributions from our joint venture communities.
And a $0.02 per share increase in FFO resulting from the full quarter contributions of our recent acquisitions.
This aggregate $0.075 increase is partially offset by $0.025 incremental impact from our second quarter ATM activity.
Our balance sheet remains strong with net debt-to-EBITDA at 4.6 times and a total fixed charge coverage ratio at 5.4 times.
As of today, we have approximately $1.2 billion of liquidity, comprised of approximately $300 million in cash and cash equivalents and no amounts outstanding under our $900 million unsecured facility.
At quarter-end, we had $302 million left to spend over the next three years under our existing development pipeline, and we have no scheduled debt maturities until 2022.
Our current excess cash is invested with various banks, earning approximately 25 basis points.
| qtrly ffo per share $1.28.
sees q3 ffo per share $1.30 - $1.36.
sees 2021 ffo per share $5.17 - $5.37.
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We look forward to discussing our third quarter 2021 results with you today.
Joining me for Assurant's conference call are Alan Colberg, our Chief Executive Officer; Keith Demmings, our President; and Richard Dziadzio, our Chief Financial Officer.
Yesterday, after the market closed, we issued a news release announcing our results for the third quarter 2021.
The release and corresponding financial supplement are available on assurant.com.
We'll start today's call with remarks from Alan, Keith and Richard before moving into a Q&A session.
During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance.
Our third quarter results were strong, driven by double-digit operating earnings growth in Global Lifestyle.
The strength of our Global Automotive and Connected Living offerings continue to validate our long-term strategy of focusing on our higher growth fee-based and capital-light businesses.
We continue to make progress in building a more sustainable company for all stakeholders.
During the quarter, a few key highlights included.
For the first time, Assurant was awarded a Bronze accreditation by EcoVadis, one of the largest sustainability ratings companies, ranking Assurant among the top 50% of all 75,000 participating companies.
In addition, this quarter we provided additional transparency to track our progress on our journey to build a more diverse and inclusive Assurant, with the recent disclosure of our EEO-1,which provides gender, race and ethnicity data by job category for our U.S.-based employees.
We believe a diverse and inclusive workforce will best foster innovation, a key ingredient to sustaining our outperformance longer-term.
Looking at our financial performance year-to-date, net operating income per share excluding reportable catastrophes was $8.75, up 12% compared to the first nine months of last year.
Net operating income and adjusted EBITDA also excluding cats, both increased by 10% to $528 million and $862 million, respectively.
These results support our full year outlook of 10% to 14% growth in net operating income per share excluding reportable catastrophes, marking our fifth consecutive year of strong profitable growth.
Given year-to-date results and our expectations for the fourth quarter, we would expect to end the year closer to the top half of this range.
We've also now completed our three-year $1.35 billion capital return objective from our 2019 Investor Day, a quarter ahead of schedule.
Following the close on the sale of Global Preneed in August, we've also made meaningful progress in returning an additional $900 million to shareholders.
Our 2021 earnings per share outlook is driven by at least high single-digit net operating income growth, excluding cats, as well as share repurchases.
Turning to our business performance.
In Global Lifestyle, we are on track to grow adjusted EBITDA by double digits in 2021 from $637 million in 2020, driven by Global Automotive and Connected Living.
We have benefited from the stable recurring revenue stream of our installed base of mobile subscribers and our success in launching additional offerings and capabilities for mobile carrier, cable operator, OEM and retail clients globally.
Additionally, our mobile trade-in upgrade business and expanded service delivery options are increasingly important to our profitability and also on providing a differentiated and superior customer experience.
Within Global Automotive, we benefited from increased scale, growing the number of vehicles we protect by 20%, over 52 million since The Warranty Group acquisition in 2018.
We believe Auto will continue to be one of our key growth businesses in the future.
In Global Housing, we continue to be on track for another year of better than market returns, with an annualized operating ROE of nearly 15% for the first nine months of this year.
This includes $113 million of catastrophe losses, which further demonstrates the superior returns of this differentiated business.
Our counter-cyclical lender placed insurance business remains an integral part of the mortgage industry framework in the U.S. Within lender placed, as we renew existing clients and add new partners, we will continue to enhance the experience through the ongoing rollout of our single source processing platform.
Our Multifamily Housing business now supports over 2.5 million renters across the U.S. and has more than doubled earnings since 2015 through our strong partnerships with our affinity and property management company clients.
Our investments in digital capabilities, such as our cover 360 property management solution continues to drive more value for our partners and an enhanced customer experience.
Overall, we believe our portfolio of high growth, fee based capital-light offerings and high return Specialty P&C businesses sets us apart as a long-term outperformer and sustained value creator for our shareholders.
Most of all, I'm humbled by our 15,000 employees, who through their dedication to serve our clients and our 300 million customers worldwide have successfully transformed Assurant.
Together, we have significantly strengthened our Fortune 300 company that should continue to deliver above-market growth and superior cash flow.
With our President, Keith Demmings, succeeding me as CEO in January, I'm confident Assurant will accelerate our strategy and continue to differentiate our superior customer experience will further deepen in client relationships.
I've been fortunate to have had a front-row seat and a role in supporting Alan's vision and the transformation of Assurant.
Importantly, he has continued to evolve the purpose of our company to drive value for all stakeholders, customers, employees, communities and shareholders.
The impact he has had on our people and the overall culture of our company has been exemplary.
And I appreciate Alan personal mentorship and partnership and wish him the very best in his retirement.
As we build on Assurant's momentum over the long-term, I believe our talent and innovation will be critical factors to achieving success and growth, especially as we focus more on the convergence around the connected consumer.
From a talent perspective, Assurant has developed a deep and diverse bench of internal leaders.
A few weeks ago, I announced our refreshed Management Committee effective in January, including two new leadership appointments illustrating our strong bench.
First, Keith Meier, our current President of International will succeed Gene Mergelmeyer as Chief Operating Officer, as Jim will be retiring at year-end.
Gene's significant contributions to Assurant over the last 30 plus years, including as COO over his last five years have been instrumental in creating market-leading positions, producing profitable growth and transforming the organization.
In succeeding Gene, Keith Meier brings nearly 25 years of experience at Assurant to the COO role.
Since 2016 as President of Assurant International, he has driven growth across our global markets, most recently with strong success in Asia Pacific.
In this new role, Keith will be focused on advancing Assurant's business strategy and market leadership positions as well as identifying additional opportunities to deliver a superior customer experience.
Second, Martin Jenns, will become President of Global Automotive.
With over 30 years of experience, he currently leads the transformation and growth strategy for Auto and has been instrumental in our introduction of innovative new products like EB-1, our electric vehicle warranty protection.
In addition to emerging opportunities and innovation, Martin will be focused on driving growth and improving the customer experience, including working with our partners to deliver best-in-class dealer training.
These two new appointments along with recent appointments of Biju Nair as President of Connected Living and Manny Becerra as our Chief Innovation Officer, as well as the other management committee members represent a strong team to help lead us into the future.
In addition to talent, innovation is an important strength of the organization.
, not only the development of new digital products and offerings for our clients, but also through new path to grow and scale Assurant's businesses.
Within Connected Living, innovation was a significant theme this quarter through ongoing enhancements of our mobile service delivery options.
As part of the recently finalized multi-year contract extension with T-Mobile, we're expanding the services Assurant provides to continuously improve the customer experience for millions of T-Mobile customers.
As of November 1st, Assurant is partnering with T-Mobile to begin the nationwide rollout of in-store device repair services to approximately 500 stores, provided by Assurant's industry certified repair experts.
In addition, we have also transitioned all of the legacy Sprint protection subscribers to the new T-Mobile Device protection offering.
As a result, this significantly adds to our mobile device count, now at roughly 63 million as of November 1st.
Overall, the expansion of our service delivery options is critical to sustaining our competitive advantage.
We also recently signed a multi-year renewal with Spectrum Mobile, continuing to provide a comprehensive and Pocket Geek mobile [Technical Issues] on-device diagnostic tool.
With the renewal, we will also be expanding the offering to include Pocket Geek privacy, which enables consumers to better protect and manage their personal information online through various features.
This is another example of how we're able to grow by adding services and capabilities to existing clients.
In addition, the mobile business continues to see strong attachment rates given the increased reliance on mobile devices as well as rising device prices.
Our fee-driven trade-in and upgrade business, including the previous acquisitions of Hyla and Alegre have performed extraordinarily well already this year as we enter the early innings of the 5G upgrade cycle.
In fact, almost a year after the transaction of Hyla closed, I'm happy to report the acquisition has performed better than expected, ahead of the low-teens forward EBITDA the acquisition was valued on.
With the growing availability and popularity of 5G-enabled smartphones, we expect to see our 30 plus trade-in and upgrade programs continue to grow.
Our progress is demonstrated through our ability to manage large scale programs with superior technology.
This is further supported by increasing our attach rates for trade-in programs as our clients promotional efforts encourage consumers to upgrade.
Overall, we have processed nearly 18 million devices so far this year, reducing e-waste and increasing digital access with high quality, affordable phones.
Through the scale and capabilities of our trade-in and upgrade programs, we benefit from an additional source of profits and improved client economics and customer retention.
This quarter, we are pleased to announce that we have signed a multi-year contract extension with AT&T to manage their device trade-in program.
This includes providing analytics as well as device collection and processing for all of their sales channels, including retail, B2B, dealer and direct to consumer.
AT&T was the key client added with the Hyla acquisition and we look forward to continuing to do business with them, specifically as we help support the growing adoption of 5-G-enabled devices.
In Global Automotive, policies increased by $4 million or 8% year-over-year and production is well above pre-pandemic levels as we continue to take advantage of our scale and talent.
So far this year, the business has also the benefited from strong used car growth which tends to earn faster than new car sales.
This along with the fact that earnings from the business are recognized over a multi-year period provides good visibility into future performance of the business.
As we drive innovation within Auto, we continued the global rollout of EV-1, an electric vehicle and hybrid protection product to North America.
EV-1 has now been rolled out in seven countries.
While the electric vehicle market is still in its infancy, our EV-1 product will allow Assurant an opportunity to better evaluate customer demand and leverage our learnings to position us well for the expected increase in electric vehicle adoption in the future.
Our Multifamily Housing business grew policies by 7% year-over-year from growth in our affinity partners as well as our PMC relationships, where we continue the rollout of our innovative cover 360 product.
In addition, we have seen other digital investments create opportunities for future growth.
Our newly designed digital sales portal, which makes it faster and easier for residents to sign up for a policy is driving significantly higher product attachment rates.
Our new portal has seen an increase in conversion rates versus our legacy website since it was first introduced last year.
In summary, our ability to strengthen insurance talent and innovation, supported by critical investments has and should continue to drive momentum for the future.
As Alan noted, we are pleased with our third quarter performance as our results reflect strong growth across Global Lifestyle and solid earnings in Global Housing.
For the quarter, we reported net operating income per share excluding reportable catastrophes of $2.73, up 5% from the prior year period.
Excluding cats, net operating income and adjusted EBITDA for the quarter, each increased 4% to $162 million and $262 million, respectively.
Now let's move to segment results, starting with Global Lifestyle.
This segment reported net operating income of $124 million in the third quarter, continued earnings expansion within Connected Livings mobile business.
In Global Automotive, earnings increased $8 million or 21% from continued global growth in our U.S. national dealer and third-party administrator channels, including contributions from our AFAS and international OEM channels.
Better loss experience in select ancillary products and higher investment income also supported earnings growth in the quarter.
Connected Living earnings increased by $6 million or 9% year-over-year.
The increase was primarily driven by continued mobile subscriber growth in North America and better performance in Asia Pacific, as well as higher trading volumes, led by contributions from our Hyla acquisition and carrier promotions.
This quarter, Global Automotive and Connected Living results also included a modest one-time tax benefit that improved earnings.
For the quarter, Lifestyle's adjusted EBITDA increased 17% to $177 million.
This reflects the segments increased amortization resulting from higher deal related intangibles from more recent transactions in mobile in Global Automotive.
IT depreciation expense also increased, stemming from higher investments.
As we look at revenues, Lifestyle revenues increased by $158 million or 9%.
This was driven mainly by continued growth in Connected Living and Global Automotive.
Within Connected Living, revenue increased 10% boosted by mobile fee income that was driven by strong trade-in volumes, including contributions from Hyla.
Trade-in volumes were supported by new phone introductions and carrier promotions from the introduction of new 5G devices.
Higher revenue from growth in domestic mobile subscribers was offset by declines in run-off mobile programs.
Mobile subscribers were up slightly year-over-year and flat year-to-date as mid-single digit subscriber growth in North America was offset by declines in other geographies mostly due to three factors.
First, the 750,000 subscribers related to a run-off of European banking program previously mentioned, which is not expected to be a significant impact in our profitability.
Second, subscriber growth for existing programs moderating in Asia Pacific.
And third, a slower than expected recovery from the pandemic in Latin America.
In Global Automotive, revenue increased 8%, reflecting strong prior period sales of vehicle service contracts.
Industry auto sales remained elevated in the third quarter and we benefited from this trend as reflected in the year-over-year growth of our net written premium by 12%.
We have though seen this trend begin to normalize beginning into the fourth quarter.
For the full year, Lifestyle revenues are expected to increase modestly compared to last years $7.3 billion, mainly driven by Global Auto and Connected Living growth.
For all of 2021, we still expect Global Lifestyle's net operating income to grow in the high single digits compared to 2020.
Adjusted EBITDA for the segment is expected to grow double digits year-over-year, which continues to grow at a faster pace in segment net operating income.
As previously reported, we began our investment in the [Technical Issues] capability this quarter.
However, due to the timing of the rollout, most of our associated start-up costs will occur in the third quarter.
These costs primarily relate to technician hiring and parts sourcing.
We do expect these costs to meaningfully impact Connected Livings profitability as we end the year.
In addition, we expect our effective tax rate to return to a more normal level, approximately 23%.
Looking ahead to 2022, we expect earnings expansion to continue, but more likely at more moderated levels as we continue to invest for growth including additional implementation start-up costs for in-store service and repair.
Moving to Global Housing, net operating income excluding catastrophe losses was $81 million for the third quarter, including the $78 million of pre-announced catastrophe losses mainly from Hurricane Ida, net operating income totaled $3 million.
Excluding catastrophe losses, earnings decreased $19 million due to anticipated higher non-cat losses, which returned to levels more in line with historical averages.
As a reminder, favorable non-CAT losses in 2020 were not representative of historical trends and third quarter 2020 marked the lowest point of last year, mainly driven by loss experience within lender placed and specialty products.
The year-over-year earnings decline was nearly all driven by unfavorable non-cat loss experience from several factors.
The largest driver which contributed close to half of the increase was from the expected normalization of the non-cat loss ratio.
The balance of the decline was split relatively evenly between increased reserves related to our Specialty P&C offerings, primarily in our on-demand sharing economy business as well as higher claims severity.
Claims severity included moderate impacts from inflationary factors such as higher labor and material costs.
While there is always a lag.
If this trend continues, we would expect higher loss cost to be offset by increased rates over time.
In Multifamily Housing, underlying growth was offset by increased investments to further strengthen our customer experience, including our digital first capability.
Global Housing revenue decreased slightly year-over-year from lower Specialty P&C revenues as well as a cat reinstatement premium resulting from Hurricane Ida and lower REO volumes in lender placed.
This was partially offset by higher average insured values and premium rates in lender placed and growth in Multifamily Housing.
We continue to expect Global Housing's net operating income excluding cats to be flat for the full year compared to 2020.
For the fourth quarter and into 2022, we would expect non-cat losses to continue to be above 2020, but in line with year-to-date 2021 experience, which is consistent with long-term trends.
We also continue to monitor the REO foreclosure moratoriums and any additional extensions that may be announced.
At Corporate, the net operating loss was $21 million, an improvement of $4 million compared to the third quarter of 2020.
This was driven by two items.
First, lower employee-related expenses and third-party fee.
And second, expense savings associated with reducing our real estate footprint.
In the fourth quarter, we do anticipate a higher loss due to the timing of spend.
For the full year 2021, we now expect the Corporate net operating loss to be approximately $80 million, driven by favorable year-to-date results mainly from the one-time tax and real estate joint venture benefits in the second quarter.
This compares to our previous estimate of $85 million.
As we look forward to 2022, we would expect our net operating loss in Corporate to be closer to $90 million, more in line with historical trends.
Turning to the holding company liquidity, including the net proceeds from the sale of Preneed in August, we ended the third quarter with over $1.3 billion, well above our current minimum target level.
In the third quarter, dividends from operating segments totaled $127 million.
In addition to our quarterly corporate and interest expenses, we also had outflows from three main items, $323 million of share repurchases, $39 million in common stock dividends and $11 million mainly related to Assurant ventures investment.
In addition to completing our 2019 Investor Day objective of returning $1.35 billion to shareholders from 2019 through 2021, we have also completed roughly one-quarter of our objective to return $900 million in Global Preneed sale proceeds through share repurchases.
For the year overall, we continue to expect dividends to approximate segment earnings subject to the growth of the businesses, rating agency and regulatory capital requirements and investment portfolio performance.
I also want to provide a quick update on the Assurant Ventures, our venture capital arm.
In the third quarter, three investments in our portfolio went public via SPACs.
We are pleased with the results as the three investment exceeded a 7 times multiple on investment capital under their respective SPAC transaction terms.
These transactions combined with strong performance in the broader ventures portfolio led to a $75 million after-tax gain flowing through net income in the quarter.
In addition to strong returns, these investments also provide key insights into emerging technologies and capabilities within our Connected Consumer businesses.
In addition to positioning Assurant for long-term success and growth, he has created an environment of inclusion in community, truly representative of our core values, common sense and common decency.
Alan, I wish you all the very best in retirement, well deserved.
| qtrly net operating income, ex.
reportable catastrophes, per diluted share $2.73.
qtrly total revenues $2,637.8 million versus $2,376.7 million.
assurant - sees for 2021, assurant net operating income, ex.
reportable catastrophes, per diluted share, to increase about 10% to 14% from 2020.
|
Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I'm going to start today with the end in mind, strong quarter and a great first half of the year, giving us confidence as we target the high end of the guidance range.
Rejji will walk through the details of the quarter, and I'll share what the strong results mean for 2021 earnings.
Needless to say, I'm very pleased.
An important gene sale of EnerBank at 3 times book value, moving from noncore to the core business with a strong focus on regulated utility growth.
The sale of the bank provides for greater financial flexibility, eliminating planned equity issuance from 2022 to 2024.
And in the end, Reggie will share how we have reduced our equity issuance need for 2021 in today's remarks.
Furthermore, with the filing of our integrated resource plan, you can see the path for more than $1 billion into the utility, again, without equity issuance.
Not only is there visibility to that investment, that's certainly in the time line for review.
I'm excited about this IRP.
It's a remarkable plan.
Many have set net zero goals.
We have industry-leading net zero goals and this IRP provides a path and is an important proof point in our commitment.
We are leading the clean energy transformation.
It starts with our investment thesis.
This simple but intentional approach has stood the test of time and continues to be our approach going forward.
It is grounded in a balanced commitment to all our stakeholders and enables us to continue to deliver on our financial objectives.
With the sale of EnerBank and the plan to exit coal by 2025, our investment thesis gets even simpler.
But now it's also cleaner and leaner.
We continue to mature and strengthen our lean operating system, the CE Way, which delivers value by reducing cost and improving quality, ensuring affordability for our customers, and our thesis is further strengthened by Michigan's supportive regulatory construct.
All of this supports our long-term adjusted earnings per share growth of 6% to 8%, and combined with our dividend, provides a premium total shareholder return of 9% to 11%.
All of this remains solidly grounded in our commitment to the triple bottom line of people, planet and profit.
As I mentioned, our integrated resource plan provides the proof points to our investment thesis, our net zero commitments and highlights our commitment to the triple bottom line by accelerating our decarbonization efforts, making us one of the first utility in the nation to exit coal or increasing our renewable build-out, adding about eight gigawatts of solar by 2040, two gigawatts from the previous plan.
Furthermore, this plan ensures reliability, a critical attribute as we place more intermittent resources on the grid.
The purchase of over two gigawatts of existing natural gas generation allows us to exit coal and dramatically reduces our carbon footprint.
Existing natural gas generation is key.
And like we've done historically with the purchases of our Zeeland and Jackson generating stations.
This is a sweet spot for us where we reduce permitting, construction and start-up risk.
It is also thoughtful and that is not a 40- to 50-year commitment that you would get with a new asset, which we believe is important, as we transition to net zero carbon.
And, yes, on other hand, our plan is affordable for our customers.
It will generate $650 million of savings, essentially paying for our transition to clean energy.
This is truly a remarkable plan.
It is carefully considered and data-driven.
We've analyzed hundreds of scenarios with different sensitivities and our plan was thoughtfully developed with extensive stakeholder engagement.
I couldn't be more proud of this plan and especially the team that put it together.
We've done our homework, and I'm confident it is the best plan for our customers, our coworkers, for great state of Michigan, of course, you, our investors to hit the triple bottom line.
The Integrated Resource Plan is a key element of Michigan's strong regulatory construct, which is known across the industry as one of the best.
It is a result of legislation designed to ensure a primary recovery of the necessary investments to advance safe and reliable energy in our state.
It enables us and the commission to align on long-term generation planning and provide greater certainty as we invest in our clean energy transformation.
We anticipate an initial order for the IRP from the commission in April and a final order in June of next year.
The visibility provided by Michigan's regulatory construct enables us to grow our capital plan to make the needed investments on our system.
On Slide six, you can see that our five-year capital plan has grown every year.
Our current five-year plan, which we'll update on our year-end call includes $13.2 billion of needed customer investment.
It does not contain the upside in our IRP.
The IRP provides a clear line of sight to the timing and composition of an incremental $1.3 billion of opportunity.
And as I shared on the previous slide, the regulatory construct provides timely approval of future capital expenditures.
I really like this path forward.
And beyond our IRP, there is plenty of opportunity for our five-year capital plan to grow given the customer investment opportunities we have in our 10-year plan.
Our backlog of needing investments is as vast as our system, which serves nearly seven million people in all 68 counties of Michigan's Lower Peninsula.
We see industry-leading growth continuing well into the future.
So where does that put us today?
The bank sale and now the IRP filing provide important context for our future growth and positioning of the business.
Let me share my confidence.
For 2021, we are focused on delivering adjusted earnings from continuing operations of $2.61 to $2.65 per share, and we expect to deliver toward the high end of that range.
For 2022, we are reaffirming our adjusted full year guidance of $2.85 to $2.87 per share.
Given the strong performance we are seeing this year, the reduced financing needs next year and continued investments in the utility, there is upward momentum as we move forward.
Now many of you have asked about the dividend.
We are reaffirming again no change to the $1.74 dividend for 2021.
As we move forward, we are committed to growing the dividend in line with earnings with a target payout ratio of about 60%.
It's what you expect, it's what you own it, and it is big part of our value.
I will offer this.
Our target payout ratio does not need to be achieved immediately, it will happen naturally, as we grow our earning.
Finally, I want to touch on long-term growth rate, which is 6% to 8%.
This has not changed.
It's driven by the capital investment needs of our system, our customers' affordability and the need for a healthy balance sheet to fund those investments.
Historically, we've grown at 7%.
But as we redeploy the proceeds from the bank, we will deliver toward the high end through 2025.
I'll also remind you that we tend to rebase higher off of actuals.
We have historically either met or exceeded our guidance.
All in, a strong quarter, positioned well for 2021 with upward momentum and with EnerBank and the IRP, it all comes together nicely positioned for the long term.
Before I walk through the details of our financial results for the quarter, you'll note that throughout our materials, we have reported the financial performance of EnerBank as discontinued operations, thereby removing it as a reportable segment and adjusting our quarterly and year-to-date results in accordance with generally accepted accounting principles.
And while we're on EnerBank, I'll share that the sale process continues to progress nicely, as the merger application was filed in June with the various federal and state regulators will be evaluating the transaction for approval, and we continue to expect the transaction to close in the fourth quarter of this year.
Moving on to continuing operations.
For the second quarter, we delivered adjusted net income of $158 million or $0.55 per share, which excludes $0.07 from EnerBank.
For comparative purposes, our second quarter adjusted earnings per share from continuing operations was $0.09 above our second quarter 2020 results, exclusive of EnerBank's earnings per share contribution last year.
The key drivers of our financial performance for the quarter were rate relief, net of investment-related expenses, recovering commercial and industrial sales and the usual strong tax planning.
Year-to-date, we delivered adjusted net income from continuing operations of $472 million or $1.64 per share, which excludes $0.19 per share from EnerBank and is up $0.37 per share versus the first half of 2020, assuming a comparable adjustment for discontinued operations.
All in, we're tracking well ahead of plan on all of our key financial metrics to date, which offers great financial flexibility for the second half of the year.
The waterfall chart on Slide nine provides more detail on the key year-to-date drivers of our financial performance versus 2020.
As a reminder, this walk excludes the financial performance of EnerBank.
For the first half of 2021, rate relief has been the primary driver of our positive year-over-year variance to the tune of $0.36 per share given the constructive regulatory outcomes achieved in the second half of 2020 for electric and gas businesses.
As a reminder, our rate relief figures are stated net of investment-related costs, such as depreciation and amortization, property taxes and funding costs at the utility.
The rate relief related upside in 2021 has been partially offset by the planned increases in our operating and maintenance expenses to fund key initiatives around safety, reliability, customer experience and decarbonization.
As a reminder, these expenses align with our recent rate orders and equate to $0.06 per share of negative variance versus 2020.
It is also worth noting that this calculation also includes cost savings realized to date, largely due to our waste elimination efforts through the CE Way, which are ahead of plan.
We also benefited in the first half of 2021 from favorable weather relative to 2020 in the amount of $0.06 per share and recovering commercial and industrial sales, which coupled with solid tax planning provided $0.01 per share of positive variance in aggregate.
As we look ahead to the second half of the year, we feel quite good about the glide path to delivering toward the high end of our earnings per share guidance range, as Garrick noted.
As always, we plan for normal weather, which in this case, translates to $0.02 per share of negative variance, given the absence of the favorable weather experienced in the second half of 2020.
We'll continue to benefit from the residual impact of rate relief, which equates to $0.12 per share of pickup.
And I'll remind you, is not subject to any further MPSC actions.
We also continue to execute on our operational and customer-related projects, which we estimate will have a financial impact of $0.21 per share of negative variance versus the comparable period in 2020 given anticipated reinvestments in the second half of the year.
We have also seen the usual conservatism in our utility non-weather sales assumptions and our nonutility segment performance, which as a reminder, now excludes EnerBank.
All in, we are pleased with our strong start to the year and are well positioned for the latter part of 2021.
Turning to our financing plan for the year.
I'm pleased to highlight our recent successful issuance of $230 million of preferred stock at an annual rate of 4.2%, one of the lowest rates ever achieved for a preferred offering of its kind.
This transaction satisfies the vast majority of funding needs of CMS Energy, our parent company for the year and given the high level of equity content ascribed to the security by the rating agencies, we have reduced our planned equity issuance needs for the year to up to $100 million from up to $250 million.
As a reminder, over half of the $100 million of revised equity issuance needs for the year are already contracted via equity forwards.
It is also worth noting that given the terms and conditions of the EnerBank merger agreement in the event EnerBank continues to outperform the financial plan prior to the closing of the transaction, we would have a favorable purchase price adjustment related to the increase in book equity value at closing, which could further reduce our financing needs for 2021 and provide additional financial flexibility in 2022.
Closing out the financing plan, I'll also highlight that we recently extended our long-term credit facilities by one year to 2024, both at the parent and the utility.
Lastly, I'd be remiss if I didn't mention that later today, we'll file our 10-Q, which will be the last 10-Q owned by Glenn Barba, our Chief Accounting Officer, who most of you know from his days leading our IR team.
Glenn announced his retirement earlier this year after serving admirably for nearly 25 years at CMS, which included him signing over 75 quarterly SEC filings during his tenure.
As we've highlighted today, we've had a great first half of the year.
We are pleased to have delivered such strong results.
We're positioned well to continue that momentum into the second half of the year as we focus on finalizing the sale of the bank and moving through the IRP process.
I'm proud to lead this great team, and we can't wait to share our success as we move forward together.
This is an exciting time at CMS Energy.
With that, Rocco, please open the lines for Q&A.
| reaffirms fy adjusted non-gaap earnings per share view $2.61 to $2.65 from continuing operations.
reaffirms fy adjusted earnings per share view $2.85 to $2.87.
q2 adjusted earnings per share $0.55 from continuing operations.
q2 earnings per share $0.55 from continuing operations.
|
Before I turn to the results, I want to take a moment and congratulate the entire Extra Space team.
One of our goals for this year was to get to 2021 stores in the year 2021.
And we've achieved that, which is a great thing.
When I first started with Extra Space, we had 12 stores and it's incredible to see the exceptional growth of this company, the value we've created for our shareholders.
I'm also happy to announce that we recently published our 2020 sustainability report with disclosures and information related to the company's environmental, social and governance initiatives.
I invite our listeners to review the report on the Sustainability page of our Investor Relations website.
Heading into this quarter -- I'm sorry, heading into the second quarter, our management team had high expectations due to our record high occupancy levels, significant pricing power and a relatively easy 2020 comparable, and actual performance far exceeded these elevated expectations.
Same-store occupancy set another new high watermark at the end of June at 97%, which is incredible, as you consider the diversification of our national portfolio.
The elevated occupancy led to exceptional pricing power with achieved rates to new customers in the quarter over 60% higher than 2020 levels.
While this is inflated by an artificially low prior year comp, achieve rates were over 30% greater than 2019 levels and accelerated through the quarter.
In addition to the benefit from new customer rates, we have continued to bring existing customers closer to current street rates as more of the state of emergency rate restrictions are lifted throughout the country.
Other income is no longer a drag on revenue due to late fees improving year-over-year and actually contributed 20 basis points to revenue growth in the quarter.
And finally, higher discounts, primarily due to higher rates were offset by lower bad debt.
These drivers produced same-store revenue growth of 13.6%, a 900 basis point acceleration from Q1, and same-store NOI growth of 20.2%, an acceleration of over 1,300 basis points.
In addition, our external growth initiatives produced steady returns outside of the same-store pool, resulting in FFO growth of 33.3%.
Turning to external growth.
The acquisition market continues to be, in our view, expensive.
Given the pricing we are seeing in the market, we have listed an additional 17 stores for outright disposition, which we expect to close during the back half of 2021.
We continue to be actively engaged in acquisitions, but we remain disciplined.
Year-to-date, we have been able to close or put under contract acquisitions totaling $400 million of Extra Space investment.
These are primarily lease-up properties and several of the properties came from our Bridge Loan Program.
We have increased our 2021 acquisition guidance to $500 million in Extra Space investments.
Looking forward, many of our acquisitions will be completed in joint ventures, and we have plenty of capital to invest if we find additional opportunities that create long-term value for our shareholders.
We were active on the third-party management front, adding 39 stores in the quarter and a total of 100 stores through the first six months.
Our growth was partially offset by dispositions where owners sold their properties.
In the quarter, we purchased 11 of these stores in the REIT or in one of our joint ventures.
Our first half outperformance coupled with steady external growth and the improved outlook for the second half of 2021 allowed us to increase our annual FFO guidance by $0.50 or 8.3% at the midpoint.
While we still assume a seasonal occupancy moderation of approximately 300 basis points from this summer's peak to the winter trough, the moderation will begin from a higher starting point than we previously expected.
As a result, we assume minimal impact on revenue growth from the negative occupancy delta in the back half of the year.
Our guidance assumes moderating but still strong rate growth for the duration of 2021, which should result in another great year for Extra Space Storage.
I would now like to turn the time over to Scott.
As Joe mentioned, we had an excellent quarter with accelerating same-store revenue growth driven by all-time high occupancy and strong rental rate growth to new and existing customers.
Core FFO for the quarter was $1.64 per share, a year-over-year increase of 33.3%.
Property performance was the primary driver of the beat with additional contribution coming from growth in tenant insurance income and management fees.
Despite property tax increases of 6%, we delivered a reduction in same-store expenses in the quarter.
These increases were offset primarily by 13% savings in payroll and 31% savings in marketing.
Our guidance assumes payroll savings will continue throughout the year, however, at lower levels due to wage pressure across the U.S. Marketing spend will depend on our use of this lever to drive top line revenue, but it should also remain down for the year.
In May, we completed our inaugural investment-grade public bond offering, issuing $450 million in 10-year bonds at 2.55%.
Access to the investment-grade bond market provides another deep capital source at low rates and will allow us to further extend our average maturities.
Our year-to-date dispositions, equity issuances and NOI have resulted in a reduction in our leverage.
Our quarter end net debt-to-EBITDA was 4.8 times, giving us significant dry powder for investment opportunities since we generally target a range of 5.5 to 6 times on this metric.
Last night, we revised our 2021 guidance and annual assumptions.
We raised our same-store revenue range to 10% to 11%.
Same-store expense growth was reduced to 0% to 1%, resulting in same-store NOI growth of 13.5% to 15.5%, a 750 basis point increase at the midpoint.
These improvements in our same-store expectations are due to better-than-expected achieved rates, higher occupancy and lower payroll and marketing expense.
We raised our full year core FFO range to be $6.45 to $6.60 per share, a $0.50 or 8.3% increase at the midpoint.
Due to stronger lease-up performance, we dropped our anticipated dilution from value-add acquisitions and C of O stores from $0.14 to $0.12.
We're excited by our strong performance year-to-date and the success of our customer acquisition, revenue management, operational and growth strategies across our highly diversified portfolio.
| compname reports q2 ffo per share $1.64.
q2 ffo per share $1.64 excluding items.
qtrly ffo attributable to common stockholders and unit holders of $1.64 per share.
qtrly core ffo $1.64 per share.
sees 2021 ffo and core ffo of $6.45-$6.60.
|
Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I'm pleased to share we've delivered another strong quarter and continue to be ahead of plan for the year.
I'll walk through the specifics in a moment, but I couldn't be more pleased with the strong execution demonstrated by the team, both operationally and financially.
We continue to deliver every day for our customers, coworkers and for you, our investors.
Earlier this month, we completed the sale of EnerBank, grossing over $1 billion in proceeds.
The sale of the bank simplifies and focuses our business model squarely on energy, primarily the regulated utility, an important step as we continue to lead the clean energy transformation.
The proceeds from this sale will fund key initiatives in our utility business related to safety, reliability, resiliency and our clean energy transformation.
As shared in previous calls, we have eliminated our equity needs from 2022 through 2024.
The keyword there, continued.
As we double down on the clean energy transformation, I'm also pleased to share that we received approval for our Voluntary Green Pricing program, which would add an additional 1,000 megawatts of owned renewable generation to our growing renewable portfolio.
This program is in high demand and currently oversubscribed.
And more importantly, it's what our customers are asking for, an important step in offering renewable energy solutions for our customers.
As we prepare for the grid of the future, we have a highly visible and detailed capital plans outlined in our recently filed electric distribution infrastructure investment plan.
This plan provides a 5-year view of the projects down to the circuit level where we plan to invest to ensure the reliability and resiliency of our electric infrastructure and aligns with our operational and financial plans.
As always, we balance these investments with customer affordability.
Our prices remain competitive as the average residential customer pays about $2 a day to heat their home and $4 a day to keep the lights on.
And because we know our most vulnerable customers still struggle, our team has mobilized resources at the state and federal levels to ensure their protection.
In fact, as we approach the winter heating season, our 90-day arrears are back to prepandemic levels with an 80% reduction in our uncollectible accounts.
Our commitment to identifying and eliminating waste means that we keep our prices affordable.
This commitment is evident in our results.
In the first nine months of this year, we surpassed our full year cost reduction target of more than $40 million.
The CE Way is in our DNA, and we continue to deliver savings in the near term and well into the future.
Speaking of the future, this year, we grew our EV program with PowerMIFleet.
This is part of our long-term planning in collaboration with Michigan businesses, governments and school systems looking to electrify their vehicle fleets.
Within just a few months of the program introduction, we were working with nearly 20 different customers on their fleets and have another 50 who have indicated interest in the next tranche, exceeding our expectations.
This is an important contribution to our long-term sales growth.
And finally, one of my favorites which speaks to our culture, our coworkers and our ability to attract the best talent.
Our commitment to diversity, equity and inclusion continues to be recognized nationwide and most recently by Forbes, where we were ranked the #1 utility in the U.S. for both America's best employers for women and #1 for diversity, delivering excellence every day continues to position the business for sustainable long-term growth.
Strong execution leads to strong results.
but two are linked.
One drives the other.
In early August, we experienced one of the worst storms in our company's history.
Our team established and into command structure to deploy resources and took decisive action to restore customers.
We had a record number of crews on our system.
The speed of our response led to the highest positive customer sentiment we have ever received during a major storm.
During the storm, we had more than 3,700 members of our team working around the clock to safely restore customers.
Like we do every year, through storms, pandemics, and on seasonal weather, we continue to deliver.
And when there's upside, we reinvest.
This is the CMS model of responding to changing conditions that allows us to deliver consistently year after year.
Year-to-date, we've delivered ahead of plan with adjusted earnings per share of $2.18 for continuing operations.
Our strong performance, coupled with the completion of the EnerBank transaction and the financial flexibility that provides -- gives us further confidence in our ability to meet our full year guidance, which we've raised to $2.63 to $2.65 from $2.61 to $2.65 for continuing operations.
For 2022, we are reaffirming our adjusted full year guidance of $2.85 to $2.87 per share.
And our continued strong performance in 2021 builds momentum for 2022 and beyond.
Longer term, we are committed to growing our adjusted earnings per share toward the high end of our 6% to 8% growth range as we highlighted on our Q2 call.
As previously stated, we are committed to growing the dividend in 2022 and beyond.
That's what you expect, why you own us, and we know it's a big part of our value.
As we move forward, we continue to see long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time.
Many of you have asked about gas prices and the impact on our business and more importantly, our customers.
Let me tell you about our gas business.
We have one of the largest storage field in the U.S. and compressing resources to match.
That is a significant advantage.
We started putting natural gas into our storage field in April and continued throughout the summer when natural gas prices were low.
Right now, our fields are full and ready to deliver for our customers' heating needs throughout the winter months.
Most of the gas is already locked in at just under $3 per thousand cubic feet, which is well below current levels in the spot market and offers tremendous customer value.
Given the operational certainty of storage as well as the financial protection of a pass-through clause, our customers stay safe and warm all winter long and have affordable bills.
Heat in Michigan is not an option.
And we don't leave it up to the market.
We buy, store and deliver.
That's what we do.
Michigan's strong regulatory construct is known across the industry as one of the best.
It includes the integrated resource plan process, which is a result of legislation designed to ensure timely recovery of the necessary investments to advance safe, reliable and clean energy in our state.
It enables the company and the commission to align on long-term generation supply planning and provide certainty as we invest in our clean energy transformation.
Here's what I like about our recently filed IRP.
There is a win in it for everyone.
It is a remarkable plan that addresses many of the interests of our stakeholders and ensure supply reliability.
It reduces costs and it delivers industry-leading carbon emission reductions.
We continue to have constructive dialogue with the staff and other stakeholders, and we anticipate seeing their positions later today.
I'm pleased to offer the details of another strong quarter of financial performance at CMS, as a result of solid execution across the company.
As a brief reminder, throughout our materials, we report the financial performance of EnerBank as discontinued operations thereby removing it as a reportable segment in reporting our quarterly and year-to-date results from continuing operations in accordance with generally accepted accounting principles.
Now on to the results.
For the third quarter, we delivered adjusted net income of $156 million or $0.54 per share.
The key drivers for the quarter were higher service restoration expenses, attributable to the August storms that Garrick mentioned and planned increases in other operating and maintenance expenses in support of key customer and operational initiatives.
These sources of negative variance for the quarter were partially offset by favorable weather, the continued recovery of commercial and industrial sales in our electric business and higher rate relief net of investment-related expenses.
Year-to-date, we've delivered adjusted net income of $628 million or $2.18 per share, which is up $0.19 per share versus the first nine months of 2020, exclusive of EnerBank's financial performance.
All in, we continue to trend ahead of plan and have substantial financial flexibility heading into the fourth quarter.
The waterfall chart on Slide eight provides more detail on the key year-to-date drivers of our financial performance versus 2020.
For the first nine months of the year, rate relief continues to be the primary driver of our positive year-over-year variance to the tune of $0.45 per share given the constructive regulatory outcomes achieved in the second half of 2020 for our electric and gas businesses.
As a reminder, our rate relief figures are stated net of investment-related costs such as depreciation and amortization, property taxes and funding costs at the utility.
This upside has been partially offset by the aforementioned storms in the quarter, which drove $0.16 per share of negative variance versus the third quarter of 2020 and $0.11 per share of downside on a year-to-date basis versus the comparable period in 2020.
To round out the customer initiatives bucket, planned increases in our operating and maintenance expenses to fund safety, reliability and decarbonization initiatives added the balance of spend for the first nine months of the year, which, in addition to the August storm activity, added $0.35 per share of negative variance versus the comparable period in 2020.
As a reminder, these cost categories are still net of cost savings realized to date, which as Garrick mentioned, have already exceeded our target for the year with more upside to come.
To close out our year-to-date performance, we also benefited from favorable weather relative to 2020 in the amount of $0.07 per share and another $0.02 per share of upside, largely driven by recovering commercial and industrial load.
As we look ahead to the remainder of the year, we feel quite good about the glide path for delivering on our earnings per share guidance range, which has been revised upward to $2.63 to $2.65 per share, as Garrick noted.
As we look ahead, we continue to plan for normal weather, which in this case, translates to $0.06 per share of positive variance, given the absence of the unfavorable weather experienced in the fourth quarter of 2020.
We'll also continue to benefit from the residual impact of our 2020 rate orders, which equates to $0.07 per share and is not subject to any further MPSC actions.
And we'll make steady progress on our operational and customer-related initiatives which are forecasted to have a financial impact of roughly $0.07 per share of negative variance versus the comparable period in 2020.
Lastly, we'll assume the usual conservatism in our utility non-weather sales assumptions and our nonutility segment performance.
All in, we are pleased with our strong execution to date in 2021 and are well positioned for the remainder of the year.
Turning to Slide 9.
I'm pleased to highlight that this year's financing plan has been completed ahead of schedule.
In the third quarter, we issued $300 million of first mortgage bonds at a coupon rate of 2.65%, one of the lowest rates ever achieved at Consumers Energy.
We also remarketed $35 million of tax-exempt revenue bonds earlier this month at a rate of under 1% through 2026.
Due to the strong execution implied by these record-setting issuances coupled with the EnerBank sale, which provided approximately $60 million of upside relative to the sale price announced at signing, we now have the flexibility to reduce our equity needs for the year even further, which will now be limited to the $57 million of equity forwards we have already contracted.
Our simple investment thesis has stood the test of time and continues to be our approach going forward.
It is -- it's grounded in a balanced commitment to all our stakeholders, enables us to continue to deliver on our financial objectives.
As we've highlighted today, we've executed on our commitment to the triple bottom line through the first nine months of the year.
We're pleased to have delivered strong results.
We're positioned well to continue that momentum into the last three months of the year as we move past the sale of the bank and continue progress to the IRP process.
This is an exciting time at CMS Energy.
With that, Rocco, please open the lines for Q&A.
| sees fy adjusted non-gaap earnings per share $2.63 to $2.65 from continuing operations.
reaffirms fy adjusted earnings per share view $2.85 to $2.87.
q3 adjusted earnings per share $0.54 from continuing operations.
q3 earnings per share $0.54 from continuing operations.
sees fy 2021 adjusted earnings from continuing operations in the range of $2.63 per share to $2.65 per share.
raised its full-year 2021 adjusted earnings from continuing operations guidance to $2.63 to $2.65 per share.
reaffirmed 2022 adjusted earnings guidance of $2.85 - $2.87 per share.
|
I'm joined by our President and CEO, Joe Raver; our Executive Vice President and incoming CEO, Kim Ryan; and our Senior Vice President and CFO, Kristina Cerniglia.
These statements are not guarantees of future performance, and our actual results could differ materially.
Before I start, I'd like to take a moment to introduce our new Investor Relations' Director, Sam Mynsberge who kicked off today's call.
Sam brings more than a decade of finance experience to the position and has been with Hillenbrand since 2014 serving in a variety of finance roles.
Given Sam's knowledge of our business and strong financial acumen, we're excited to have him lead our Investor Relations efforts.
I'll now turn to an overview of the year.
Fiscal 2021 was marked by record performance for Hillenbrand, achieving new milestones for order intake, revenue, earnings and cash flow, driven by strong demand for our products and solutions and outstanding execution by our people.
We capped off this strong performance with a solid fourth quarter, as all three segments delivered margins and cash flow that exceeded our expectations coming into the quarter, which Kristina will discuss in more detail later in the call.
As we approach the second anniversary of the Milacron acquisition, the integration continues to progress well.
We accelerated our synergy realization and exceeded our goal for the year, achieving approximately $30 million of incremental cost savings, bringing our total synergy realization to date to nearly $60 million.
We remain confident in achieving our target of $75 million in run rate synergies by the end of year three.
The Milacron integration has served as a catalyst in establishing the foundation for accelerating value capture from future M&A and in driving many of the improved processes that have allowed us to effectively navigate this difficult operating environment.
We are a stronger company because of the Milacron acquisition, and I'm excited about the opportunities that lie ahead.
We also achieved significant strategic milestones, successfully streamlining our portfolio through the announced divestitures of Red Valve and ABEL during the fiscal year and just last month, TerraSource Global.
We made good progress on our sustainability journey this year, including the hiring of our first Chief Sustainability Officer and the issuance of our second sustainability report in September.
This year was not without its challenges however as global supply chains remain stressed, inflation in commodities and transportation has not abated, the impact of COVID-19 continues to persist, and labor shortages continue throughout the US.
Nevertheless, I'm proud of the dedication and resiliency displayed by our associates as they successfully executed our strategy and served our customers in the face of these external challenges.
Hillenbrand has a proven track record of execution, and I'm confident in our position as we enter fiscal 2022.
Our experienced leadership team, healthy balance sheet, strong backlog and focused portfolio position us well for continued growth and success.
As I've mentioned before, Kim and I have worked together for a number of years at Hillenbrand, and we have a high degree of trust.
Together with our Board, we've been executing a detailed plan to ensure a smooth and effective transition.
I'm confident that Kim and the rest of our executive team will do a great job leading Hillenbrand into the future.
Joe has led the transformation of Hillenbrand into a global industrial company through the integration of Coperion and the acquisition of Milacron.
He also led the transformation of talent and capabilities of the company by bringing in excellent leaders with strong industrial background and deep operational expertise at all levels of the organization.
I'm grateful for his mentorship and partnership over the years.
And I'm confident that our leadership team will be able to build upon our strong foundation to drive profitable growth for years to come.
Now, let me turn to our strategy.
The company achieved strong results in 2021 despite the escalating global challenges that we are all facing.
During these times, it's critical that we remain focused on executing our strategy to drive long-term shareholder value.
And I believe our performance demonstrated that throughout the year.
As you know, our strategy is comprised of four pillars.
The first strategic pillar is to strengthen and build business platforms, both organically and through M&A.
Over the past 12 months, we completed the divestitures of three businesses from our APS segment.
This enables us to focus our capital allocation toward driving growth in our large industrial platform where we partner with our customers to develop highly engineered equipment and solutions that optimize quality, output and energy efficiency to achieve a lower total cost of ownership.
The strength of our customer relationships, our deep application expertise and our innovative product offerings enabled us to achieve record order intake in fiscal 2021, resulting in a strong backlog that positions us well for growth in fiscal 2022 and beyond.
We continue to see significant opportunity in several areas of strategic focus, such as food, including texturized proteins, recycling, biopolymers and batteries, which tend to be less cyclical than our other industrial end markets and have attractive long-term growth prospects.
As customer needs in these markets evolve toward higher output and more technically demanding applications, we are confident in our ability to win due to three key factors, our leading product offerings, our application engineering expertise, and finally, our global service network.
Additionally, the opportunities we see in these end markets aligned with our purpose of shaping a more sustainable future.
We are making organic investments to better position ourselves to win in these end markets, while also evaluating strategic acquisitions to accelerate our growth.
In recycling, for example, our investments have resulted in the introduction of several new products, the establishment of reference sites across all three recycling processes and key strategic partnerships that position us well for our future in this exciting area of opportunity.
Our next strategic pillar is to manage Batesville for cash.
As we continue to grow our industrial product platforms, Batesville is becoming a smaller part of the portfolio, now comprising only about 20% of the company revenues.
Throughout this unfortunate and unprecedented pandemic, the Batesville team has remained relentlessly focused on serving our customers and living up to their mission of helping families honor the lives of those they love.
Batesville's strong execution over the last two years has delivered over $200 million of free cash flow paying -- playing a key role in the actions we took to aggressively pay down debt, accelerate growth investments in our industrial platforms and return cash to shareholders.
Our third strategic pillar is to build scalable foundations for growth using the Hillenbrand Operating Model.
The Hillenbrand Operating Model is at the core of how we run and grow our businesses.
During Joe's tenure, the Hillenbrand Operating Model evolved from a lean manufacturing system to a full operating model that enables continuous improvement across all aspects of the business, including operations, supply chain, global support functions and strategy.
I've been fortunate to partner with the leadership team and the development of the operating model, while also experiencing firsthand the benefits of its deployment during my time as President of Coperion and through my involvement in the integration of Milacron.
The Hillenbrand Operating Model is a key enabler of the success we've seen so far in the Milacron integration, but the benefits will go far beyond the synergies realized from this particular acquisition.
We are confident that the capabilities we have developed and the organizational structures we have established will enable us to accelerate the integration and synergy realization of future acquisitions.
As we continue to utilize the tools and expand the capabilities of the HOM, we expect to drive further efficiencies throughout the enterprise, while also enhancing our growth tools, specifically around innovation, digitization and commercial excellence.
Our fourth and final pillar is to effectively deploy strong free cash flow.
We generated record cash flow in fiscal 2021.
This allowed us to reinvest in the business for growth and productivity to strengthen our balance sheet and to return over $180 million in cash to shareholders through share repurchases and quarterly dividends.
Since acquiring Milacron two years ago, we've reduced our leverage by nearly 2.5 turns.
We have a healthy and flexible balance sheet enabling us to further accelerate our growth through strategic investments in our industrial platforms, exploring potential inorganic opportunities that maximize long-term shareholder value and considering opportunistic share repurchases.
As always, we remain disciplined in our approach to deploying cash.
We issued our second sustainability report this past September.
We introduced a framework for how we prioritize our efforts based on the feedback of our stakeholders.
We also aligned our reporting framework to the United Nations Sustainable Development Goals and the Global Reporting Initiative.
We believe sustainability is a source of opportunity, innovation and competitive advantage for Hillenbrand, which will ultimately drive long-term profitable growth and shareholder value.
This is a priority of mine, and I'm excited to continue sharing our progress with you over the quarters and years to come.
Throughout my section, I will be referencing year-over-year comparisons on a pro forma basis, which are adjusted for acquisitions and divestitures.
We believe these pro forma comparisons provide a better assessment of our ongoing operations.
And you will find a reconciliation of reported and pro forma results in the appendix of the earnings slide deck.
During the fiscal fourth quarter, we delivered total revenue in the quarter of $755 million, an increase of 12% on a pro forma basis or a 11% excluding the impact of foreign currency.
We saw year-over-year increases in all three segments, led by volume growth in the injection molding product line within MTS.
Adjusted EBITDA of $140 million increased 2%, while adjusted EBITDA margin of 18.5% decreased 180 basis points, as cost inflation, unfavorable mix and an increase in strategic investments more than offset operating leverage from higher volume, favorable pricing and productivity improvements, including approximately $7 million of year-over-year synergies realized in the quarter.
Despite the decline compared to prior year, adjusted EBITDA margins in the quarter exceeded our expectations for all three segments.
As communicated last quarter, we have been actively taking pricing actions to help mitigate the impact of rising inflation.
We had approximately 70% price/cost coverage in the quarter, which was more favorable than we had expected, primarily due to better pricing realization in some of our shorter cycle injection molding products and in Batesville.
However, we expect to see continued price/cost pressure in the first half of fiscal '22, due -- in part due to the delivery of longer lead time injection molding equipment from the backlog that was priced at pre-inflationary levels.
Additionally, we expect our primary commodity costs of steel, electrical components, wood and fuel to remain elevated through at least the first half of fiscal 2022.
We will continue to monitor our pricing structures and take further action as appropriate.
We reported GAAP net income of $55 million, or $0.74 per share, which increased from a loss of $0.09 per share in the prior year.
Adjusted net income was $74 million, or $1.00 per share, an increase of $0.08 or 9%.
And the adjusted effective tax rate for the quarter was 29.2%.
We had cash flow from operations of $86 million in the quarter, which was better than our expectations coming into the quarter, but lower than last year, primarily due to timing of working capital requirements.
Capital expenditures were approximately $18 million.
We repurchased approximately 1.8 million shares for $78 million in the quarter and returned $16 million to shareholders in the form of quarterly dividends.
Moving to segment performance.
APS revenue of $340 million increased 9% on a pro forma basis, driven by higher volume of large plastics projects and separation equipment.
Aftermarket revenue was relatively flat year-over-year, but up 6% sequentially.
And we had another solid quarter of aftermarket orders.
We expect continued growth in this highly profitable part of the business in fiscal year 2022.
Adjusted EBITDA of $69 million increased 8% on a pro forma basis, while adjusted EBITDA margin of 20.3% was higher than expected, down only 30 basis points from the prior year.
Cost inflation was largely offset by price, but the impact of unfavorable mix from a higher proportion of large plastics projects and strategic investments for growth more than offset operating leverage from higher volume and productivity improvements.
Order backlog of $1.3 billion increased 41% year-over-year on a pro forma basis, primarily driven by large plastics projects.
While backlog declined 2% sequentially, it remains at a high level, providing us a strong foundation for growth in fiscal '22 and beyond.
The pipeline for large plastics projects continues to be healthy, particularly in Asia.
And as Kim mentioned, we have made solid advances in our product innovations and strategic partnerships in recycling as well as food, biopolymers and batteries.
Although these areas are not significant portions of our revenue today, we are focused on building our capabilities to win in these end markets in the future through strategic partnerships and organic investments, while also evaluating inorganic opportunities.
Turning to Molding Technology Solutions.
We saw year-over-year growth in all product lines, led by strong volume growth for injection molding equipment.
Both revenue and margins exceeded our expectations coming into the quarter.
Revenue of $260 million increased 20% compared to the prior year.
The team executed well in the quarter and was able to largely mitigate the impact of a chip shortage that we communicated coming into the quarter.
Adjusted EBITDA of $54 million increased 6%, while adjusted EBITDA margin of 20.6% decreased 270 basis points, as higher volume and productivity were more than offset by unfavorable mix due to an increased proportion of injection molding equipment, which comes at a lower margin compared to hot runners, cost inflation, not fully offset by price, and higher labor and manufacturing premiums, including outsourcing.
We continue to deploy the Hillenbrand Operating Model in the MTS segment, particularly in injection molding where we expect to achieve sustained margin improvement over the coming years.
Order backlog of $366 million increased 51% compared to the prior year and decreased 6% sequentially as order volumes normalized, in line with our expectations.
Batesville performed above our expectations for both revenue and margin given the unfortunate circumstances with the Delta variant.
Revenue of $155 million increased 5%, due to higher average selling price and an estimated increase in deaths associated with the pandemic.
While we are closely monitoring the continued impact of COVID-19, we expect deaths to normalize as we progress through fiscal year 2022.
Adjusted EBITDA margin of 21.6% declined 270 basis points compared to the prior year, primarily due to cost inflation and higher transportation and manufacturing cost premiums required to respond to the increased demand driven by the ongoing COVID-19 pandemic.
As we've discussed before, the Batesville team has been fully focused on meeting the elevated demand needs of their customers throughout the pandemic.
When demand normalizes, the business plans to reallocate resources to drive productivity projects.
Now, I'll briefly cover our full year results.
Consolidated pro forma revenue of $2.8 billion increased 13% or 10%, excluding the impact of foreign currency exchange.
Pro forma revenue for APS of $1.2 billion increased 5% compared to the prior year, including a 4% contribution from the impact of foreign currency.
MTS revenue of $996 million grew 25% on a pro forma basis or 22% excluding the impact of foreign currency.
Batesville revenue of $623 million increased 13%.
Pro forma adjusted EBITDA of $534 million increased 20% compared to the prior year, while pro forma adjusted EBITDA margin of 18.8% improved 100 basis points, primarily driven by operating leverage from higher volume in Batesville and MTS and productivity improvements, including synergies.
We accelerated the timing of our synergy capture in the year, realizing approximately $30 million of incremental cost savings, which exceeded our target of $20 million to $25 million, and we remain on track to achieve our three-year run rate synergy target of $75 million.
GAAP net income of $250 million resulted in GAAP earnings per share of $3.31.
Adjusted net income of $286 million resulted in adjusted earnings per share of $3.79, an increase of $0.60, or 19% compared to the prior year.
And our adjusted effective tax rate was 28.7% for the full year.
We generated record operating cash flow for the year of $528 million, up $174 million compared to the prior year, and our free cash conversion rate was 171% of adjusted net income for the year.
We continue to leverage the Hillenbrand Operating Model to drive greater efficiency across the business, including focused initiatives on improving working capital management, particularly within the MTS segment.
Capital expenditures for the year were $40 million, which was lower than originally expected due to longer lead times from suppliers.
We remain focused on investing for growth as we head into fiscal '22.
Turning to the balance sheet.
Net debt at the end of the fourth quarter was $767 million, and the net debt to adjusted EBITDA ratio of 1.4 times was down from 2.7 times at the beginning of the fiscal year.
As of quarter end, we had liquidity of approximately $1.3 billion, including $446 million in cash on hand and the remainder available under our revolving credit facility.
As of September 30, we had no borrowing on our revolver and no near-term debt maturities due.
Moving to capital deployment, we returned approximately $185 million to shareholders during the year through the repurchase of 2.8 million shares for approximately $121 million and $64 million through our quarterly dividend.
Subsequent to the year end, we repurchased an additional 620,000 shares for $29 million, and we have $50 million remaining under our share repurchase authorization.
Our top priorities for capital continues to be strategic investments to accelerate profitable growth and our large platforms in APS and MTS.
Additionally, we are evaluating acquisition targets that are a good strategic fit and that we expect will provide a high return to shareholders over the long term.
We will also continue to evaluate opportunistic share repurchases.
Our guidance will be on a pro forma basis, which excludes the divested Red Valve and ABEL businesses from the prior year.
Our guidance also excludes the divested TerraSource Global business from the prior year and the period of October 1 through October 22, 2021.
As the basis for our outlook, we expect supply chain disruptions, high transportation costs and labor market shortages to persist through the majority of the fiscal year.
And as I mentioned earlier, we expect commodity costs to remain elevated through at least the first half of the fiscal year.
Additionally, we expect currency to be a headwind on a year-over-year basis.
We expect full-year revenue of $2.8 billion to $2.9 billion, an increase of 1% to 4%, driven by our strong backlog and solid underlying growth in our industrial end markets, partially offset by Batesville, the impact of supply chain disruptions and foreign currency translation.
We expect adjusted earnings per share in the range of $3.70 to $4.00 for the full year.
Total material and supply chain inflation for the year is expected to be approximately $95 million.
We anticipate offsetting the majority of this impact with price on a dollar-for-dollar basis, but this will have a dilutive impact to margins.
We expect inflation to be more of a headwind in the first half of the year with price/cost coverage of approximately 70% improving to approximately 100% in the second half.
For our fiscal first quarter, we expect adjusted earnings per share in the range of $0.87 to $0.94, down versus the prior year, primarily due to lower volume in Batesville, higher inflation and supply chain costs, and the impact of the divestitures.
We expect free cash flow as a percent of adjusted net income to be approximately 100% for the year.
Including capex of approximately $75 million.
Now to our segment outlook.
Turning to Advanced Process Solutions, we expect full-year revenue to be up 8% to 12%, primarily due to continued strength in large plastics projects as well as solid growth in aftermarket revenue.
This growth includes an anticipated currency headwind of 3%.
We expect adjusted EBITDA margin of 21% to 21.5%, up 150 basis points to 200 basis points.
We anticipate supply chain challenges will more heavily impact the segment in the first half of the fiscal year, and we expect price to generally cover inflation for the year.
For the first quarter, we expect low-double-digit revenue growth year-over-year, but down high-single-digits sequentially, which is in line with historical seasonality trends.
Turning to Molding Technology Solutions, we expect full-year revenue to be up 2% to 5% with modest growth in both hot runners and injection molding equipment.
We have a strong backlog, and underlying demand trends remain solid, but we anticipate supply chain disruption and labor shortages to be a headwind throughout the year.
Additionally, we expect sales for the hot runner equipment to be negatively impacted over the near term, primarily in the first quarter due to disruptions in China.
We expect adjusted EBITDA margin of 20% to 21% compared to 20.3% in fiscal '21.
We anticipate a higher degree of price/cost pressure in the first half of the year, due to injection molding equipment converting to revenue from the backlog, which was priced pre-inflation.
We expect price/cost coverage to improve in the second half.
For Q1, we expect revenue to be modestly higher than prior year, but down sequentially.
And we anticipate modest year-over-year margin pressure, due to inflation and unfavorable mix from a higher proportion of injection molding equipment, which comes at a lower margin.
Finally, with Batesville, we expect revenue to be down 11% to 13%, due to an anticipated decline in burial demand as just normalized during the year.
We expect COVID-related volumes to be significantly lower than the prior year, in line with external estimates.
While we anticipate price/cost coverage will be better than it was in fiscal '21 due to the pricing actions we have taken, we expect adjusted EBITDA margin of 19% to 20% to be down 570 basis points to 670 basis points, primarily due to lower volume as well as supply chain premiums and inflation, not fully covered by price.
We expect price/cost coverage to be approximately 60% in the first half of the year, and we anticipate this will improve in the second half.
For Q1, we expect Batesville to be approximately flat on revenue with modestly higher margin on a sequential basis compared to Q4.
We expect the impact of the price increase to be largely offset by lower base deaths and continued pressure from inflation and other supply chain premiums.
Overall, heading into fiscal year 2022, we have a strong backlog and our key industrial end markets remain healthy.
We continue to be focused on investing for growth and serving our customers, while continuing to leverage the Hillenbrand Operating Model to help us navigate through the difficult global operating environment.
Our teams have demonstrated the ability to execute through challenging circumstances, and I'm confident that we will continue to drive sustainable improvement and achieve our targets for the coming year.
First, underlying industrial end market demand remains solid, and we have a strong backlog as we head into 2022.
This provides visibility and gives us confidence as we operate in this uncertain macro environment.
Second, through the Milacron integration, we've significantly expanded our capabilities and improved our operating model.
And this has enabled our strong execution during the past year, provides a scalable foundation for future growth.
And last, we have a talented and experienced leadership team to drive Hillenbrand's profitable growth strategy into the future.
Finally, it's been a great honor and privilege to serve at Hillenbrand over the last 28 years.
I've been fortunate to lead the organization through a period of significant transformation, which could not have been possible without our dedicated employees, our talented leadership team and the support of our Board, shareholders, customers and other stakeholders.
I'm excited about Hillenbrand's future, and I'm confident in its continued success under Kim's leadership.
| compname reports q4 gaap earnings per share of $0.74.
q4 gaap earnings per share $0.74.
q4 adjusted earnings per share $1.00.
sees q1 adjusted earnings per share $0.87 to $0.94.
sees fy adjusted earnings per share $3.70 to $4.00.
qtrly revenue of $755 million increased 9%.
|
With me is Bruce Caswell, president and chief executive officer; and Rick Nadeau, chief financial officer.
Please remember that such statements are only predictions.
Actual events and results may differ materially as a result of the risks we face, including those discussed in Exhibit 99.1 of our SEC filings.
Management uses this information in its internal analysis of results, and we believe this information may be informative to investors, engaging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons.
And with that, I'll hand the call over to Rick.
First, let me say that since the COVID-19 pandemic, Bruce and I have never been prouder to lead an organization with such heart, dedication, ingenuity, and collaboration at all levels.
Underscoring the critical nature of our work, many of our core program operations in the United States and abroad, have been deemed essential to ensure that vital government programs continue to operate and citizens continue to receive critical assistance at a time when the need for healthcare and safety net programs is rising.
The entire MAXIMUS team has met this challenge and worked tirelessly to ensure that we continue to support citizens during this unprecedented health pandemic.
Our employees are accomplishing extraordinary things during the COVID-19 pandemic.
Bruce will discuss in greater detail, but I would like to highlight some important accomplishments.
First and foremost, we implemented robust pay leave options to ensure the safety and well-being of those employees who experienced COVID-19-related absences.
We mandated social distancing across all operations, significantly enhanced our sanitation measures, and most importantly, we continue to transition more employees to work from home.
Outside the United States, we have partnered with the government in the United Kingdom to redeploy some of our healthcare professionals directly into the National Health Service, as well as case management and administrative staff into the Department for Work and Pensions to provide vital frontline support.
Our priority has been the health and safety of our employees and ensuring that we can continue to support our government clients in whatever model that takes, as demand for government services surges.
No one can predict with certainty the scale or length of disruption from the COVID-19 pandemic or how deep and severe economic impacts will be.
We completed our normal bottoms-up quarterly review in April and reinstating guidance for fiscal 2020.
We think it is important to give our investors a sense of our current expectations for the fiscal year.
Please note, however, that our actual results could vary from the guidance due to numerous factors, including a worsening of the pandemic; erosion due to budgetary pressures; additional steps were taken by federal, provincial, state, or local governments to restrict business operations or limit office occupancy; delayed or missed payments by customers or supply chain disruptions affecting IT or safety equipment.
The ranges we have used are wider than typical at the midpoint of the year and reflect the increased risk and variability we face.
It is possible that actual results could vary materially from our current expectations.
We anticipate that fiscal 2020 revenue will range between 3.15 to $3.25 billion and diluted earnings per share to range between $2.95 and $3.15 per share.
Cash from operations is now expected to range between 250 and $300 million and free cash flow between 200 to $250 million.
While we feel comfortable with this cash flow range, I will point out that delays in collections of receivables can cause significant variation at year end.
For the remainder of the fiscal year, we anticipate continued disruption across all segments with some offsetting favorability from new work.
This disruption is expected to be most pronounced in our outside the US segment.
We expect some positive impacts in the two US segments from opportunities that in some cases we have won and in other cases are pursuing.
Bruce will provide more detail in his remarks.
Let me touch on second-quarter results, COVID-19 impacts, as well as the challenges and opportunities that lie ahead.
Revenue for the second quarter of fiscal 2020 totaled $818.1 million, which included the full ramp-up of the Census contract in the US federal services segment.
Total company operating margin was 4.6% and diluted earnings per share were $0.43, reflecting two substantial impacts in the quarter.
First, we had a pandemic-related writedown of approximately $24 million or $0.28 per share related to the decline in estimates for future period outcomes-based payments on welfare-to-work programs in the United Kingdom and Australia.
Second, a change order for approximately $9 million or $0.11 per share was signed after quarter end in the US health and human services segment.
The related costs were incurred in the first two quarters of fiscal 2020, but the revenue will be recognized in the third quarter, which falls to the bottom line in that period.
I will now review the segments.
Second-quarter revenue for the US health and human services segment increased 6.2% over the prior year and all growth was organic, resulting from new contracts and the expansion of existing work.
Both revenue and the 15% operating margin were tempered largely by the change order previously discussed.
The COVID-19 pandemic impacted the last three weeks of March 2020.
Disruption to our US health and human services business has varied as local and state governments imposed different working requirements designed to ensure worker safety, leading us to, in some cases managed through temporary site closures.
To address social distancing requirements in our call centers, our work from home capabilities was scaled at a rapid pace to enable continued support of essential services and to meet deliverables on the predominantly performance-based contracts in this segment.
Our current assumptions indicate economics for this segment will continue to experience minor disruption, and we expect an operating margin between 17% and 18% for the full year.
Looking ahead, not only have the MAXIMUS operational teams been able to manage core operations in an ever-evolving environment, but they have also taken on new work associated with unemployment insurance and a variety of COVID-related work.
Further, the business development teams have launched rapid action plans to help states address needs, resources, and gaps with support services.
Revenue for the second quarter of fiscal in the US federal services segment increased to $393.4 million.
All growth in this segment was organic.
Excluding the citizen engagement centers' contracts, organic growth was 6.7%, driven by new work and growth on existing contracts.
The operating margin for this segment in the second quarter of fiscal 2020 was 7.7%, which was tempered by unfavorable impacts from the COVID-19 pandemic on performance-based work and ongoing investments in business development.
The majority of revenue in this segment is generated by cost plus contracts, which means that we can recover certain COVID-related costs, such as increased facility cleaning incurred on these contracts.
The Census contract is now approaching its peak level of operations and delivered approximately $140 million of revenue in the second quarter, yielding year-to-date revenue of approximately $210 million.
The teams have continued to solve unique challenges for our clients in our Census contract is no exception.
We implemented operational changes to ensure that our support is available to citizens so they can complete their census questionnaires and we will continue providing assistance through the Census Bureau's extended response period which now ends October 31.
As a result, our contract has expanded to support the new deadline and we now estimate that the Census contract will deliver between $430 and $450 million for the full year.
This is an increase from our previously expected revenue of $360 million in fiscal 2020 from this contract.
The economics of this segment are largely intact through fiscal 2020.
The US federal services segment is estimated to deliver a full-year operating margin between 8% and 9% resulting from a slightly greater mix of cost plus work from previously anticipated, as well as our continued investment in both business development and technical capability.
The COVID-19 pandemic has had the most pronounced effect on our outside the US segment.
Second-quarter revenue was $116.0 million and this segment had a loss of $26.7 million.
As a reminder, this segment has several significant performance-based contracts where payments are tied directly to job seeker outcomes with the primary goal of placing individuals into long-term, sustained employment to achieve economic independence.
Revenue was recognized based on our estimate of the number of individuals who we anticipate reaching these milestones.
As a result of the pandemic, we reduced our estimates of those job seekers who are likely to achieve employment outcomes.
The accounting rules require us to record our best estimate of the future outcomes and therefore the impact of those reestimates immediately.
This resulted in a pandemic related writedown of approximately $24 million or $0.28 per share related to a decline in estimates for future period outcomes-based payments on welfare-to-work programs in the United Kingdom and Australia.
Although we are continuing to service participants in these programs where we can, many participants have underlying health conditions that require them to self-isolate at home and the pool of available employment opportunities is currently significantly lower than before.
The remainder of fiscal 2020 is expected to experience impacts from the COVID-19 pandemic related to our HAAS contract in the UK.
While our face-to-face assessments work is currently suspended, we are working to introduce telephone assessments and continuing to process paper-based assessments.
We are proud to partner with the government to be a part of the solution to this worldwide health crisis.
In the last few weeks, many of our healthcare professionals have volunteered to be seconded to the National Health Service.
We will act in an agency capacity for those employees on secondment and will receive reimbursement of most of our costs, but we will not earn revenue or profit.
This segment is expected to end the full year in an operating loss position.
To give you more color, we expect the fourth quarter for this segment to come in a little below break-even.
Our objective is for a progressive improvement in the third quarter with an aim to cut the second-quarter loss in half.
Looking ahead, we are starting to see new opportunities develop to address the significant impact of the pandemic on global labor markets.
In fiscal 2021 and beyond, we anticipate we will see an expanded need for our services as we help our government's expand and adapt their employment programs to cope with widespread unemployment.
In the UK, we are in the process of transitioning some of our outcomes-based employment services contracts that are currently in a loss position to cost recovery contracts which should provide considerably more stability and flexibility.
We expect these contract changes will be temporary, as we work with the Department on transitioning to a new model with rising unemployment.
Turning to the balance sheet.
We finished the second quarter with cash and cash equivalents of approximately $126 million.
Cash provided by operations was $22 million.
Free cash flow was $13.4 million in the quarter.
Second-quarter cash provided by operations was tempered by a combination of lower income and a higher proportion of income taxes paid in the quarter and accounts receivable grew in the first half of the fiscal-year 2020 due to increased revenue levels.
DSOs were 72 days.
We are continuing to monitor collections closely and I would like to point out that one day of DSO is roughly $9 million receivables, which directly impacts estimated cash provided by operations and free cash flow.
We entered the COVID-19 pandemic with a strong balance sheet and a resolve to manage liquidity and maintain flexibility.
While we face uncertainties including state budgetary pressures, payments to date from our customers have continued without disruption.
Our historical experience during economic downturns is that our designation as an essential service provider in the United States puts us in a favorable position in working with our clients on invoicing and payments.
However, we recognize that our customers are experiencing significant disruption to their tax receipts, and we will continue to manage the company in a conservative manner.
Going forward, the management team and the board of directors intend to take a prudent and constructive approach to deployment over the coming months.
Currently, we do not anticipate disruption to our future quarterly cash dividends.
Our quarterly 10b5-1 Share Purchase Plan expired naturally in March when the cap embedded in the program was met.
We have paused share purchases in significant M&A activity until we see an easing of the uncertainties resulting from the COVID-19 pandemic.
We continue to work on smaller, tuck-in transactions that will support future organic growth in a meaningful way.
Bruce and I are optimistic the MAXIMUS will emerge from this disruption as a stronger company.
We have been able to demonstrate that we can navigate, innovate, and showcase our operational effectiveness during challenging events while continuing to support the most vulnerable populations and protecting our workforce during this world crisis.
We believe that our efforts over the past two months have further cemented our position as a trusted reliable partner that brings scale, talent and real business solutions to bear.
And with that, I will hand the call over to Bruce.
Like Rick, I could not be more proud of our employees' efforts during these unprecedented times.
COVID-19 is a global pandemic that impacts all of us.
We are working around the clock to ensure we protect our employees, while still serving government and the vulnerable populations who rely on the health and human services programs we operate; a demand, which is only increasing under the impacts of this pandemic.
In mid-March, we rapidly developed a response to fast-moving COVID-19 challenges and implemented new policies emphasizing paid sick leave, social distancing, and significantly enhanced cleaning regimens to keep our employees safe and healthy.
And I'll touch on some of the most salient actions taken in my remarks.
If you hover over each box, additional details will be highlighted for each initiative.
As part of our efforts, we are following the more restrictive recommendations outlined in the Federal Families First Coronavirus Response Act, and in some cases, we are exceeding the Act.
While the Act does not apply to MAXIMUS because we have more than 500 employees, we felt it provided a good benchmark for supporting and safeguarding our employees.
Our income continuity plans are fully funded by MAXIMUS and cover a variety of scenarios, including quarantine, child care, government-mandated restrictions, office closure, and employees who are in high-risk categories.
Under these leave options, an employee's health insurance is also protected and we are not requiring them to take their accrued paid time off or PTO in order to access these leave options.
We also realize that employee stress and anxiety is heightened during this time.
Balancing the strains of normal life during the crisis has been difficult for us all.
Consistent, frequent, and transparent communications to our staff remain vital.
To further support our team members, we've launched topical videos from our chief medical officer, mental health seminars, virtual development training classes, as well as wellness apps such as Headspace and Wellbeats.
Moving on to the next slide, one of the most impressive things we've done is the systematic and ongoing transition of employees to work from home.
This has been a heroic effort in procuring new equipment, increasing network capacity, and deploying new services, all while keeping operations running to meet program needs.
There are significant IT challenges in transitioning to a work from a home model, ranging from information security and privacy requirements to ensuring continuity of services.
Many government programs were never designed to be carried out in a remote environment, presenting high hurdles to immediately enable a remote workforce.
This transition is also taking place during a pandemic is driven global IT equipment supply chain shortage.
Equipment such as laptops and headsets are imperative for our customer service representatives to effectively serve citizens.
But we've been working diligently with suppliers and have made great progress.
MAXIMUS has also been able to overcome these challenges by capitalizing on the strategic investments we've made in our IT infrastructure including emerging technologies such as secure remote network platforms and cloud-based omnichannel telephony environments.
For example, we leveraged our planned migration to Amazon Web Services or AWS to provision nearly 9000 secure agent desktops through the Amazon WorkSpaces as a service model thus far, in addition to approximately 7500 VPN connection users.
Our ability to deploy HIPAA-compliant work from home capabilities enabled us to maintain operational continuity and assist program participants remotely for more complex services including clinical and social assessments required to access important government benefits and services.
Most importantly, we believe we are forging a path forward for government services longer term.
The pandemic offers us a unique opportunity to test and learn new models with full support from our clients.
It gives us the opportunity to trial new ways of serving and engaging citizens who now, more than ever, need access to vital services.
We also have gained an entirely new dataset related to citizen engagement, channel preferences, and agent performance, which enables us to optimize this model.
This also allows us long term to evaluate the optimal environment for each individual employee.
While not every employee is best matched to a remote work environment, the results of early pilots indicate no statistically significant reduction in agent performance on the contracts being measured.
This type of robust data will be meaningful in solutioning new delivery methods.
As we move into the next phase of this pandemic, we believe one of the most important ways to safeguard employees, keep operations running and ensure citizens can access the services they need is to implement an employee wellness check before and during their workday.
Our digital team developed a health assessment mobile application called Clear To Work.
An employee will use the app before coming to work each day, the app takes them through a series of questions, including a self-administered temperature check.
The app either clears the employee to come to work or instructs them to stay at home that day.
If the employees are cleared, they are given a time-limited digital credential to show when they arrive at work, and then complete a second temperature check during their day.
The app was developed and implemented in roughly two weeks and is being systematically deployed across operational sites to review other geographic rollouts based on local health guidance and requirements.
In concert with this, we've also implemented a mandatory face-covering policy across our US operations, while ensuring our servicing approach protects supplies to front-line health professionals.
And while we've talked about the operational disruptions and how we're tackling those, I've been pleased with how our teams have responded to the calls for support from our clients as they rapidly design and procure solutions to address the pandemic.
Our ability to quickly pivot has underscored the resilience of our business model and our position as a trusted partner to governments worldwide.
Over the last four weeks, we've been helping our clients solve real challenges of rising caseloads and reduced resources.
To this end, we've won a number of COVID-related contracts, as well as new work associated with rising unemployment.
Let's start with our Federal team, as you may recall Maximus was already supporting the CDC's information line.
At the beginning of the pandemic, the CDC requested that MAXIMUS provide bilingual support for COVID-19 phone lines and emails.
This 24/7 coverage began with 50 agents and has grown 250 plus more than 40 nurses.
Our most recent statistics show that we are responding to more than 16, 000, and 2000 emails per day.
We were also selected to deliver the Federal Health and Human Services community-based testing centers or result center.
Under this contract, MAXIMUS provides COVID-19 test results to patients that are tested at various federal testing centers across the nation.
Our team did an astounding job in solutioning a turnkey contact center in less than six days which has since seen enormous growth.
The contract launched with 260 call center agents, making outbound calls to patients to deliver test results from 47 emergency facilities across the US Today, a team of more than 2,000 agents now contacts 10,000 individuals per day and provides real-time geo-mapping of COVID-19 test results to the US Department of Health and Human Services.
MAXIMUS has played a critical role in supporting Federal agencies following the Cares Act implementation.
Firstly, MAXIMUS supported the IRS to ensure that the economic impact payments were paid in a timely manner while continuing our normal tax season support.
Secondly, as you may be aware, MAXIMUS operates the debt management project at Federal Student Aid.
We waived payment on student loans during the pandemic.
Within 10 days of this waiver, MAXIMUS sent more than 2 million letters to student loan holders and made system changes to support the waivers.
On the state level, we've partnered with the California Department of Public Health to answer phone calls from state residents and provide basic, general, non-medical information about COVID-19.
We are in the process of working to potentially expand our offerings to include digital channels such as webchat to further engage and support California residents.
Importantly, this project is using an entirely work from a home model, protecting our staff and helping employ residents who may have experienced job loss during the crisis.
Since mid-April, MAXIMUS has been providing New York State with dedicated COVID-19 support including ramping up the state's COVID-19 hotline to screen and schedule tests for New Yorkers, as well as helping the state manage outbound calls to reach healthcare workers to volunteer to help with the COVID-19 crisis.
Our call center representatives have managed to successfully connect more than 30,000 New Yorkers to critical COVID-19 testing resources and obtain more than 14,500 responses from healthcare workers through surveys.
And just last week, we won our first state contract in Indiana to centralize contact tracing for Hoosiers who test positive for COVID-19.
We'll hire and train an estimated 500 people under the supervision of the Indiana State Department of Health epidemiologists.
The remote call center is anticipated to be operational by May 11, and we'll support individuals at least through the end of the year, if not longer, dependent upon the pandemic needs of the state and its citizens.
Our Canadian team also quickly adapted and in only two days launched a COVID-19 information line for our British Columbia provincial government client.
Those team members answer important questions about testing locations, employment concerns, quarantine non-compliance reports, and the like.
Across the globe, unemployment benefit claims have skyrocketed.
As of May 1st, more than 30 million people in the United States filed claims triggered by the COVID-19 pandemic.
This forewarns of more downstream implications to governments at all levels.
Safety net programs like Medicaid, SNAP and others are expected to face similar surges in applications.
Government programs face staffing, process, and system challenges in meeting the demand.
Governments also face the daunting task of governing under a new normal, enabling citizens to return safely to a normal life under the continuing threat of new outbreaks and the consequences of a damaged economy.
MAXIMUS has rapidly responded to meet the immediate demand for information and application assistance while positioning to provide longer-term services as the economy recovers.
Let me give you a few examples of new work with compressed time scales that we have met with our response.
In only eight days, we launched a contact center to support the District of Columbia office of unemployment compensation.
In North Carolina, we launched a new project to support questions pertaining to the unemployment insurance program.
This was done in less than a week to support the division of economic security and has rapidly scaled to 1800 agents.
We are also doing similar work in Arkansas, Rhode Island, and Vermont, responding to frequently asked questions and assisting residents with their unemployment applications.
Across the country, other team members continue to support our health and human services clients, ensuring vitally important services are delivered to the public.
Moving on to new awards in the pipeline.
Our reported numbers reflect the status as of March 31st and much has changed since then.
Before I address some of these dynamics, I'll briefly cover the awards in the pipeline at March 31st.
For the second quarter of fiscal-year 2020, signed awards were $729.8 million of the total contract value at March 31st.
Further, at March 31st, there were another $215.8 million worth of contracts that had been awarded, not yet signed.
Let's turn our attention to our pipeline of addressable sales opportunities.
Our total contract value pipeline at March 31st was $29.2 billion, compared to $30.6 billion reported in the first quarter of FY '20.
Of our total pipeline of sales opportunities, 65.7% represents new work.
In regard to pipeline dynamics, we cannot accurately predict the pattern this pandemic may follow nor the timing and form of the recovery.
Certain clients impacted by COVID-19 are making awards in record time and relying heavily on existing contract relationships and trusted partners like MAXIMUS.
This comes in some cases at the cost of delaying other prior procurements that were in process.
In other instances, particularly in Federal, agencies not impacted significantly by the pandemic have stuck closely to procurement schedules.
Therefore, it's important to put all of this in context.
While we are excited about the new work, many of the new COVID-related programs are expected to be temporary, but provide flexibility to scale and extend services as circumstances warrant.
We also must be mindful that many of our government clients will likely face budgetary pressures as a result of a pandemic driven economic recession.
While we're cautiously optimistic, it's difficult to predict what impact these events may have on erosion, timing on new work, and simply getting some of our operations back to somewhat of a normal cadence.
The updated guidance, of course, incorporates all of these dynamics, based on what we know today.
We actively manage a portfolio of work and have earned a reputation as a trusted long-term partner, all of which enables us to adapt to changing economic times.
I've been inspired by the dedication, selflessness, and resilience seen across our business in recent weeks.
The resilience of our business model has also been impressive and of our employees, even more so.
As Rick mentioned, one of the most inspiring stories comes from our colleagues in the United Kingdom, where we're in the process of deploying nearly 1,000 volunteer doctors, nurses, and other clinicians to the NHS to provide vital support on the front line.
Dr. Paul Williams, division president of MAXIMUS, UK, volunteered to serve along with our team members.
In addition, non-clinical colleagues are preparing for redeployment in support of the national effort.
This represents the true heart of MAXIMUS and our more than 35,000 employees around the world.
It has been remarkable to witness how our colleagues are coming together to support the global effort against this pandemic, and the safety and well-being of our employees will continue to remain our top priority.
Governments are also planning for the time when as we emerge from this crisis, our core capabilities in finding jobs for the unemployed, ensuring access to healthcare, and administering critical safety net programs will be needed more than ever.
The world will be a different place for sure, but so will the landscape for services and how they are delivered.
The work we've done in helping clients innovate, scale, and still meet citizens' needs will be a game-changer.
New opportunities will also emerge and we are well-positioned to respond.
With that, we'll open up the line for Q&A.
| sees fy 2020 earnings per share $2.95 to $3.15 .
q2 earnings per share $0.43.
sees fy 2020 revenue $3.15 billion to $3.25 billion.
q2 revenue $818.1 million versus refinitiv ibes estimate of $770.3 million.
maximus - reinstated guidance for fiscal 2020 with diluted earnings per share to range between $2.95 and $3.15.
maximus - experienced in quarter, covid-19 pandemic related write-down of approximately $24 million or $0.28 of diluted eps.
change order for about $9 million or $0.11 of diluted earnings per share was signed after march 31, 2020, in u.s.
health & human services segment.
sees 2020 cash flows from operations to range between $250 and $300 million, free cash flow between $200 and $250 million.
|
We appreciate you participating in our conference call today to discuss Flowserve's First Quarter 2021 Financial Results.
These statements are based upon forecasts, expectations and other information available to management as of May 4, 2021, and they involve risks and uncertainties, many of which are beyond the company's control.
We are pleased with our strong start to 2021.
Flowserve's adjusted earnings per share of $0.28 increased over 47% compared to last year's first quarter.
And our bookings for the first three months of 2021 were up by over 16% compared to the average of last year's final three quarters.
We were especially encouraged with this performance given that our first quarter results are traditionally lower.
Given what we saw in the first quarter, we believe that we are off to a strong start in 2021.
In the last two earnings calls, we indicated that we believe our end markets are well positioned for a post-pandemic recovery, and our first quarter results support this belief.
Although the various regions and countries we serve are on different trajectories in terms of vaccinations, infection rates, return to mobility and overall economic recovery, we are confident that the world is making steady progress as economies emerge from this global pandemic.
As a result, we have started to see these green shoots of activity translate into sequential bookings growth.
Assuming vaccines continue to roll out globally, and COVID issues subside without new setbacks, we are confident in our ability to deliver substantial year-over-year bookings growth in 2021.
With an improving environment, combined with our Flowserve 2.0 growth initiatives, we were encouraged to book $945 million in the first quarter, which represented over 15% growth sequentially and was driven primarily by increased MRO and aftermarket activity.
As we move through the quarter, our bookings by month tracked the overall pandemic progress.
January was slow, February improved but was impacted by severe cold weather in the Gulf Coast and March activity steadily increased.
In total, our bookings growth this quarter exceeded our original expectations.
The market inflection seems to have begun a quarter or two earlier than we had anticipated.
While North America led the increased activity levels, we delivered sequential bookings growth in all of our served regions.
In addition to increased aftermarket and MRO-related activity, we were pleased that project bookings levels approached approximately 85% of 2020's first quarter.
We saw a number of smaller projects get awarded with the largest of these in the $10 million to $15 million range.
We also experienced good diversity in our end markets and geographic regions, which highlights the comprehensive nature of our reach and offering.
These projects included a nuclear upgrade in Korea, a pipeline in Central America, a refinery in Mexico and a chemical plant in Asia.
The impact of the February winter storms forced us to close our Texas and Louisiana operations for about a week.
But we did see increased repair and replacement work in the storm's aftermath which drove an estimated $20 million of incremental repair in replacement business as we supported more than 30 customer installations in the region.
Flowserve's QRC footprint and our proximity to impacted customers uniquely positioned us to assist them in getting back online quickly and efficiently.
In addition, our channel partners and distributors also received unplanned storm-related business from a variety of end markets, including water and power, that should benefit us in future periods as they reorder and restore their inventory positions.
Despite damage and power outages to their own homes, our associates were committed to providing the necessary equipment and services to support our customer base and restore their critical operations.
We are confident that helping our customers in a time of need will result in stronger relationships and increased future business for Flowserve.
There is still work to be done at some of our customers' facilities to restore their operations to normal conditions.
We anticipate additional bookings at about the same level as we saw in February and March to continue throughout the second quarter related to the storm impact.
Turning now to our end markets and booking outlook.
Our discussions with customers indicate increasing optimism.
Rising utilization levels across industrial assets should result in an increase in their spending levels to maintain uptime and address pent-up maintenance activity that was deferred throughout 2020.
We continue to believe that the aftermarket and MRO will lead the early phases of the recovery throughout the year.
Project activity is also beginning to pick up and we expect this to increase as the year progresses.
Currently, our project funnel is about 12% higher than a year ago, and the compare period includes many of the projects that were placed on hold due to the pandemic.
We expect many of these delayed projects to progress toward funding in the coming quarters.
Opportunities are apparent across all end markets, but we expect general industry in chemical projects to lead the return to growth in a recovering economic environment.
In conclusion, it was a strong start to the year, both at our bookings and financial results.
We believe our end markets remain well positioned to benefit from the recovering economic environment.
While we expect to see COVID flare-ups in some regions, like what we're seeing in India today, we are optimistic that with increasing vaccinations, the world is beginning to move in the right direction, which will ultimately help support our ability to deliver bookings growth.
We are very pleased with our financial results in the first quarter.
Our adjusted earnings per share was up significantly compared to last year, and the margins we delivered in our SG&A levels continue to reflect the benefit of the decisive cost actions we took in 2020 and the ongoing Flowserve 2.0 transformation program.
For the first quarter, we delivered solid results, including an adjusted earnings per share of $0.28, which represents an increase of nearly 50% versus prior year.
On a reported basis, earnings per share of $0.11 included $0.08 of realignment, $0.04 of costs related to early retirement of debt and $0.05 of below-the-line FX currency impact.
As a reminder, with our focus on improving the quality of our earnings, we are now including 2021 transformation costs in our adjusted earnings in contrast to prior years when this expense was adjusted out.
First quarter revenue of $857 million was down 4.1% versus the prior year primarily driven by the 10% sales decline in original equipment, including FPD's 15% original equipment decrease.
We were pleased to see modest aftermarket sales growth as revenue of $450 million increased 2%, with both FPD and FCD contributing.
Our first quarter performance was largely driven by the significant cost actions we took in the middle of 2020 as well as ongoing transformation-driven operational improvements and a 400 basis point mix shift toward higher-margin aftermarket revenue, partially offset by increased under-absorption.
Adjusted gross margin of 30.4% was roughly flat versus prior year and the sequential quarter, driven by FPD's 60 basis point increase offset by FCD's 170 basis point decline, both as compared to 2020's first quarter.
On a reported basis, first quarter gross margin decreased 50 basis points to 29.3% due primarily to absorption headwinds and higher realignment costs versus the first quarter of 2020.
First quarter adjusted SG&A decreased $34 million to $194 million versus prior year and was largely flat on a sequential basis.
As a percent of sales, first quarter adjusted SG&A declined 290 basis points year-over-year.
The decisive cost actions we took in mid-2020 and our ongoing focus on cost control drove the improvement.
Reported SG&A decreased $47 million versus prior year, where in addition to cost action benefits, adjusted items were down $13 million compared to the first quarter of 2020.
We delivered a $20 million increase in adjusted operating income in the first quarter, a strong performance considering the $36 million decrease in revenue.
As a result, adjusted operating margin improved 250 basis points versus last year to 8.1%, driven by the previously mentioned cost actions, ongoing operational progress and the mix shift to higher-margin aftermarket products and services.
FPD and FCD improved 230 and 60 basis points to 10.3% and 10.4%, respectively.
First quarter reported operating margin increased 380 basis points year-over-year to 6.5%, including the roughly $12 million reduction of adjusted items.
Our first quarter adjusted tax rate of 23.2% is in line with our full year guidance of 22% to 24%.
Turning now to cash and liquidity.
Our first quarter cash balance of $659 million decreased $436 million compared to the year-end 2020 level.
The primary use of cash was for debt reduction, with the $407 million payment to retire the remaining portion of our euro notes.
Additionally, we returned over $30 million to shareholders through dividends and share repurchases.
Our ability to both pay down debt and return cash to shareholders underscores the strength of our balance sheet and our focus on value creation through capital allocation.
Total debt at quarter end was $1.3 billion compared to over $1.7 billion at year-end.
Compared to last year's first quarter, gross debt is down over $50 million, while the cash balance is up over $35 million.
Flowserve's quarter end liquidity position remained strong at over $1.4 billion, including $742 million of availability under our undrawn senior credit facility.
First quarter free cash flow was approximately $25 million.
And for the second year in a row and only the third time in the last 15 years, Flowserve delivered positive free cash flow in the first quarter.
This trend is an indication that our focus on cash management is delivering results.
As is typical, working capital was a use of cash in the first quarter of $40 million driven primarily by a reduction in accounts payable.
Inventory was also a use of $17 million, but I was pleased that our focus and improved processes to control inventory drove a 60% reduction versus last year's first quarter use.
Accounts receivable and contract liabilities were sources of working capital cash this quarter.
Taking a look at primary working capital as a percent of sales, we saw 110 basis point sequential increase to 29.6%, again, driven primarily by accounts payable and a lower top line.
Although our backlog increased over $30 million, we were pleased that inventory, when including contract assets and liabilities, decreased $4 million versus the fourth quarter of 2020.
As we continue to drive the integration and utilization of enterprisewide business planning systems across our operations and functions, we have direct line of sight on consistent improvement in our working capital metrics throughout the year.
And importantly, we remain confident in achieving free cash flow conversion in excess of 100% in 2021.
Turning now to our outlook for the remainder of 2021.
Based on our strong first quarter bookings and visibility into improving end markets, Flowserve increased and tightened our adjusted earnings per share guidance range for the full year to $1.40 to $1.60 per share and reaffirmed all other guidance metrics.
We now expect full year 2021 bookings to increase mid-single digits versus our prior outlook of low single digits.
And further expect the majority of this increase to occur in our aftermarket and shorter cycle MRO original equipment products where associated revenue may be recognized in 2021.
Based on the expected increase in short-cycle activity, we now expect the revenue decline in the 3% to 5% range versus our initial guide of down 4% to 7%.
The adjusted earnings per share target range continues to exclude expected realignment expenses of approximately $25 million as well as below-the-line foreign currency effects and the impact of potential other discrete items which may occur during the year.
On a quarterly basis, we expect our adjusted earnings per share to increase sequentially over the course of 2021 as we see the benefit of our first quarter bookings flow through and from the expected increase in short-cycle activity.
With our Flowserve 2.0 transformation program and its elements now embedded in our operations and functional teams, we expect 2021 transformation expenses of roughly $10 million, representing a decline of over 50% versus the prior year.
As previously mentioned, we are now including these costs in our adjusted earnings per share guidance.
Additional guidance components remain unchanged with expected net interest expense in the range of $55 million to $60 million and an adjusted tax rate between 22% and 24%.
Lastly, looking at cash.
As is historically the case, we expect free cash flow will be weighted to the second half of the year, largely in the fourth quarter.
Major planned cash usages this year include the recently completed retirement of our euro notes and an expectations to return over $100 million to shareholders through dividends and share repurchases.
We also intend to invest in our business as we return to the growth aspects of our Flowserve 2.0 program, including capital expenditures in the $70 million to $80 million range which includes spending for enterprisewide IT systems to further consolidate our ERP platform and support our transformation-driven productivity improvements.
In conclusion, based on our first quarter performance, we are more optimistic than ever about the opportunities in 2021.
Our end markets are likely improving at a rapid pace.
Our balance sheet remains strong and our operational and cost discipline has us well positioned for margin expansion and free cash flow generation as revenues grow.
I want to wrap up today with some comments around two key strategic priorities.
Our ongoing Flowserve 2.0 transformation and how Flowserve will support energy transition.
Let me first provide an update on our Flowserve 2.0 transformation progress.
In 2020, the pandemic-driven downturn dictated that we focus heavily on cost reduction.
We shifted our efforts and accelerated the cost reduction aspects of the transformation last year.
Additionally, we continue to progress our strategy to improve our overall enterprisewide IT systems.
These improvements in the overall rationalization are improving our visibility, streamlining our operations and improving our overall productivity.
All of these enhancements support the new Flowserve 2.0 operating model.
As our new operating model takes hold throughout the enterprise, we expect to continue to deliver margin and productivity improvements throughout the business.
As we look to fully embed the transformation into our operations by the end of 2021, I am confident that our Flowserve 2.0 process improvements will continue to provide benefit to Flowserve and our customers for years to come.
All of the fundamentals are now in place to fully leverage the expected market recovery.
During 2021, our transformation priorities are focused primarily on growth, including an improved customer experience, accelerated product innovation and further market penetration.
With our strengthened operating model, we are also better positioned to pursue value-added partnerships, and we are more confident in our ability to integrate potential acquisitions.
An important aspect of Flowserve's strategy in the coming years will be driven by the expected growth investment related to energy transition.
The energy transition theme is real, and we expect investments to rapidly increase in the near-term to support this global call to action.
We believe Flowserve is well positioned with our current portfolio to benefit from increased spending from our customers to achieve their carbon reduction targets and energy efficiency goals.
Energy transition has been at play for much of the last two decades.
However, 2020 served as a pivotal year, and began first with COVID, been an acceleration of investments in alternative sources of energy and further driven by social, political and regulatory changes.
These multifactor dynamics are accelerating the transition, resulting in increased urgency across the industrial sector and especially within the energy sector.
Our approach to energy transition includes: first, supporting our existing customers and markets by delivering energy efficiency through systems, automation, uptime and a life cycle view plan.
Second, we are scaling our flow control solutions for emerging and new value chains in gasification, carbon capture, hydrogen, energy storage, and non-fossil fuel energy sources.
And finally, by evolving flow control into autonomous flow using data and science to monitor, diagnose and correct through built-in intelligence, utilizing our recently launched RedRaven platform.
As part of our first quarter bookings, we participated in projects related to biodiesel, concentrate solar power, carbon capture and energy efficiency.
And we believe that this is just the beginning.
As an example, in the third quarter of 2020, we introduced a new liquid ring compressor designed specifically for flare gas and other vapor recovery.
This product positions us to support our customers' greenhouse gas emission-reduction goals through the production of blue hydrogen in carbon capture.
Since introduction, we have already received over $30 million of orders for the product, and we see growing demand for years to come.
The more conversations I have with our customers about their energy transition plans, the more excited I get about the opportunities that energy transition can offer Flowserve.
We are making good progress on developing our go-to-market strategy, and we are currently working closely with a few select customers to demonstrate and prove how our suite of capabilities can help them to drive efficiency and reduce emissions.
In addition to our current customers, we also believe energy transition will provide opportunities across the industrial spectrum, including end markets where we currently have limited scale, like water, food and beverage, cement, steel and mining.
We expect the largest near-term opportunities for Flowserve will be helping our existing customers achieve improved energy efficiency and reduced emissions.
We believe that our flow control expertise across pumps, valves and seals, combined with enhanced data analytics, can dramatically improve our customers' energy consumption and reduce carbon emissions.
We are also actively developing technology to expand our presence in other forms of energy, including solar, hydrogen and lithium mining and processing.
Overall, we feel that Flowserve is uniquely positioned to help our customers today and grow our business through the energy transition.
In January, we launched our RedRaven IoT offering, which can further instrument pumps, valves and seals to provide the capability to assist our customers with a data-driven approach on how to improve their operations, increase asset uptime and reduce associated energy consumption.
We are really pleased with the market's response to our IoT offering.
Since the rollout of RedRaven, we have been awarded, on average, one new contract or site installation per week and the pipeline of interesting parties continues to build.
The first quarter provided us a better start to the year than we previously expected, with bookings inflecting earlier and at a higher level than we initially assumed in our February guidance.
With an improved outlook for the remainder of the year, we feel confident in our ability to raise our adjusted earnings per share guidance.
We have improved visibility to market growth and are confident in our ability to execute.
We believe we are firmly in recovery from the pandemic-driven downturn.
Additionally, many countries around the world are announcing significant infrastructure spending plans that will inevitably include flow control equipment.
And finally, we are confident in our longer-term outlook and see energy transition as a significant growth opportunity for Flowserve.
After three years of hard work on our Flowserve 2.0 transformation program, we are now operating at a higher level and we are well positioned to transition to growth.
I am confident that we'll capitalize on the opportunities ahead of us and create value for our shareholders and other stakeholders.
| flowserve q1 adjusted earnings per share $0.28.
q1 adjusted earnings per share $0.28.
q1 earnings per share $0.11.
raised full-year 2021 revenue and adjusted earnings per share guidance, reaffirmed all other metrics.
sees 2021 adjusted earnings per share $1.40 - $1.60.
|
Both are now available on the Investors section of our website, americanassetstrust.com.
I am pleased to report that we continue to make great progress on all fronts as we rebound from the impact of COVID-19.
We knew at the onset of the pandemic that we would not be impervious to its economic impact, but we were confident that the high-quality, irreplaceable properties and asset class diversity of our portfolio, combined with the strength of our balance sheet and ample liquidity would help us pull through and maybe even come out on the other side better off than at the beginning.
We continue to be optimistic as we meaningfully rebounded in 2021 and anticipate further growth in 2022 and beyond.
That's why we've aggregated the portfolio comprised of a well-balanced collection of office, retail, multifamily and mixed-use properties located in dynamic high barrier to entry markets, where we believe that the demographics, pent-up demand and local economies remain strong relative to others.
Our properties are more resilient in our view to economic downturns as they are in the path of growth, education, and innovation and importantly can likely withstand the impact of long-term inflation, perhaps even benefit from the benefits of long-term inflation.
Along those lines during the past quarter, we used our liquidity to acquire two complementary and accretive office properties in Bellevue, Washington, a market that we remain very bullish on and in which we expect continued rent growth.
Meanwhile, our development of La Jolla Commons III into an 11 story, approximately 210,000 square foot Class A office tower remains on time and on budget for Q2 or Q3 2023 delivery.
We are encouraged about the leasing prospects in the UTC submarket for high-quality, large blocks of space, where both tech and life science funding continues at record levels and same tenants continue to expand.
But we don't have specific news to share on that front at this time.
The same holds true for our One Beach Street development on the North Waterfront of San Francisco, which we believe to be a unique opportunity for a full building tenant with delivery expected in Q2 or Q3 of 2022.
Additionally, I'm happy to inform you that our Board of Directors has approved the quarterly dividend of $0.30 a share for the third quarter, which we believe is supported by our expectations for operations to continue trending positively.
It will be paid on December 23 to shareholders of record on December nine.
As we look at our portfolio, we are always reminded of the importance of owning and operating the preeminent properties in each of our markets.
That's why we focused on continuing to enhance our best-in-class community shopping centers to promote a better experience for our shoppers with the expectation that this will further strengthen our properties as the dominant centers in our submarkets.
And we understand the importance of modern state-of-the-art amenities in our office projects, which assist our tenants in the hiring and retention of talent in what is currently a very competitive job market.
We feel strongly that consistently improving and monetizing our properties, including incorporating sustainability and health and wellness elements is critical to remaining competitive in the marketplace in order to attract the highest quality and highest credit tenants.
Meanwhile, we are encouraged by our approximately 97% collection percentage in Q3, increased leasing activity across all asset classes, fewer tenant failures and bankruptcies than we expected and many modified leases hitting percentage rent thresholds sooner than expected and are collecting of approximately 96% of deferred rents due during the third quarter, all validating the strategies we implemented during COVID to support our struggling retailers through the government-mandated closures as we are fortunate to have the financial ability to do so.
Briefly on the retail front, we've seen an improved leasing environment over the past few quarters with positive activity engagement with new retailers for many of our vacancies, including recently signed new deals with Columbia Sportswear, Williams-Sonoma, Total Wine and First Hawaiian Bank to name a few, and renewals with Nordstrom's, Petco and Whole Earth among others as well as many other new deals and renewals in the lease documentation process.
Retailers are choosing our best-in-class locations to improve their sales, all the while we remain selective in terms of merchandising our shopping centers for the longer term.
Chris Sullivan and his team have done a tremendous job on that front despite some of the continuing headwinds at our Waikiki Beach Walk retail.
On the multifamily front as of quarter end, we were 96% leased at Hassalo in Portland, and 98% leased in San Diego multifamily portfolio.
All of the master lease units in San Diego that you've heard us discuss previously were absorbed by early August.
Though multifamily collections have been particularly challenging in Portland due to COVID-related government restrictions, we have started receiving meaningful checks from government rental assistant programs to drive down our outstanding amounts owed and expect more checks to come.
We are confident that Abigail's strong leadership at San Diego multifamily and Tania's new energy at Hassalo will drive improvements at our multifamily properties, both operationally and financially.
Last night we reported third quarter 2021 FFO per share of $0.57, and third quarter 2021 net income attributable to common stockholders per share of $0.17.
Third quarter results are primarily comprised of the following: actual FFO increased in the third quarter by approximately 11.4% on a FFO per share basis to $0.57 per FFO share compared to the second quarter of 2021, primarily from the following four items: first, the acquisitions of Eastgate Office Park in Corporate Campus East III in Bellevue, Washington, on July seven and September 10, respectively, added approximately $0.023 of FFO per share in Q3.
Second, Alamo Quarry in San Antonio added approximately $0.017 of FFO per share in Q3, resulting from 2019 and 2020 real estate tax refunds received during the third quarter of 2021, which reduced Alamo Quarry's real estate tax expense.
Third, decrease of bad debt expense at Carmel Mountain Plaza added approximately $0.005 per FFO share in Q3.
And fourth, the Embassy Suites and Waikiki Beach Walk added approximately $0.012 of FFO per share in Q3 due to the seasonality over the summer months.
Let me give you an update on our Waikiki Embassy Suites hotel.
Due to the impact of the delta variant, Hawaiian Governor Ige made a formal announcement on the third week in August that if you have plans or are thinking of coming to Hawaii, please don't come until we tell you otherwise.
It was not a mandate, but it did create a detrimental impact to our visitors to Hawaii and resulted in huge cancellation starting in August and into September.
Our results for Q3 at Embassy Suites hotel were expected to be much higher.
Overall, occupancy, ADR and RevPAR continued to increase on heading in the right direction.
As of October 19, Governor Ige made another formal announcement to begin welcoming all essential and nonessential travel, starting November 1, 2021.
We look forward to welcoming the fully vaccinated individuals and ramping up our visitor industry.
On our Q2 earnings call, I mentioned that Japan, who was then approximately 9% fully vaccinated, is now over 65% fully vaccinated and is expected to hit 80% by November.
All emergency measures in Japan were lifted on September 30 and lifted the intensive antivirus measures.
It marks the first time since April that Japan is free of corona virus declarations and intensive measures.
We expect to start seeing the Japanese tourists beginning to slowly start revisiting the Hawaiian Islands beginning in November, including Waikiki.
Now as we look at our consolidated statement of operations for the three months ended September 30, 2021, our total revenue increased approximately $6.5 million over Q2 '21, which is approximately a 7% increase.
Approximately 43% of that was from the two new office acquisitions.
Same-store cash NOI overall was strong at 14% year-over-year, with office consistently strong before, during and post-COVID and retail showing strong signs of recovery.
Multifamily was flat primarily year-over-year as a result of higher bad debt expense at our Hassalo on eight departments in Portland, but it was still approximately 5% higher than Q2 2021.
As previously disclosed, we acquired Corpus Campus East III on September 10, comprised of an approximately 161,000 square foot multi-tenant office campus located just off Interstate 405 and 520 freeway interchange, less than five minutes away from downtown Bellevue, Washington.
The four building campus is currently 86% leased to a diversified tenant base, which we saw as an opportunity when in-place rents were compared to what we were seeing in the marketplace.
The purchase price of approximately $84 million was paid with cash on the balance sheet.
The going-in cap rate was north of 3% as a result of the existing vacancy.
Our expectation based on our underwriting is that this asset will produce a five year average cap rate over 6% and a strong unlevered IRR of 7%.
Let's talk about liquidity.
At the end of the third quarter, we had liquidity of approximately $522 million, comprised of approximately $172 million in cash and cash equivalents and $350 million of availability on our line of credit.
Our leverage, which we measure in terms of net debt-to-EBITDA was 6.4 times.
Our focus is to maintain our net debt-to-EBITDA at 5.5 times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at 3.9 times.
As we approach year-end, we are providing our 2021 guidance.
The full year range of 2021 is $1.91 to $1.93 per FFO share with a midpoint of $1.92 per FFO share.
With that midpoint, we would expect Q4 2021 to be approximately $0.46 per FFO share.
The $0.11 estimated difference in Q4 FFO per share would be attributable to the following: approximately a negative $0.025 of FFO per share relating to nonrecurring collection of prior rents at one of our theaters in Q3 that will not occur in Q4 2021.
Secondly, our mixed-use properties are expected to be down approximately $0.037 of FFO per share relating to the normal seasonality of the Embassy Suites hotel and the related parking.
Third, Alamo Quarry is expected to be down approximately $0.02 of FFO per share relating to the nonrecurring property tax refund that was received in Q3 2021 for 2019 and 2020.
And we expect G&A and interest expense to increase and therefore, decrease FFO by approximately $0.02 per FFO share.
Additionally, we plan to issue 2022 full year guidance subject to Board approval when we announce year-end 2021 results in February of 2022.
Historically, we have issued our full year guidance on the Q3 earnings call.
We believe resetting the issuance and cadence of our guidance to the Q4 earnings call going forward is more in alignment with our peers and also gives us more clarity as to the following year guidance.
We will continue our best to be as transparent as possible and share with you our analysis, interpretations of our quarterly numbers.
Our office portfolio grew by approximately 440,000 square feet or nearly 13% in Q3 with the two new office acquisitions.
We brought up these assets on board at approximately 92% leased with approximately 20% rolling through 2022, which provides us with the opportunity to deliver start rates from approximately 10% to 30% over ending rents.
At the end of the third quarter at One Beach, which remains under redevelopment, our office portfolio is approximately 93% leased with 1.5% expiring through the end of 2021, approximately 9% expiring in 2022 with tour and proposed activity that has increased significantly.
Our office portfolio has weathered the storm well.
In the second and third quarters, we executed 57,000 annual square feet of comparable new and renewal leases with increases over prior rent of 9.2% and 14.5% on a cash and straight-line basis respectively.
New start rates for the 2021 rollover are estimated to be approximately 17% above the ending rates.
In fact, we are at least documentation for over half of the space rolling in 2021 as start rates nearly 28% over ending rates.
New start rates for the 2022 rollovers are estimated to be approximately 18% above the ending rates.
We are employing multiple initiatives to drive rent growth and occupancy, including renovating buildings with significant vacancy, adding or enhancing amenities, aggregating and white boxing larger loss of space where there is a scarcity of such blocks and improving our smaller spaces to be move-in ready.
By way of a few examples, we are just completing renovations of two buildings at Torrey Reserve in San Diego.
Those two buildings represent 80% of the total project vacancy.
We now have leases signed or in documentation for over half of that vacancy at premium rates.
We will be completing similar renovations Eastgate Office Park where leasing activity is already robust, but we anticipate taking this property to the next level of quality.
We are adding new fitness and conference facilities at Torrey Reserve, City Center Bellevue and Corporate Campus East III and will be further enhancing the employee's amenities building at Eastgate.
We believe that our continued strategic investments in our portfolio will position us to capture more than our fair share of that absorption at premium rents as the markets improve.
And we have more to look forward to with redevelopments and development.
In addition to One Beach Street and La Jolla Commons previously mentioned by Ernest, construction is nearly complete on the redevelopment of seven Tower Square in the, on our market at Portland, which will add another 32,000 rentable square feet to the office portfolio.
In summary, our office portfolio is on us as we move forward into the rest of 2021 and beyond.
| sees fy ffo per share $1.91 to $1.93.
q3 ffo per share $0.57.
qtrly earnings per share $0.17.
|
And the 10-Q for the quarter will be filed later today after the call.
David McElroy, CEO of general insurance; and Kevin Hogan, CEO of life and retirement; will be available for Q&A.
These statements are not guarantees of future performance or events and are based on management's current expectations.
Actual performance and events may materially differ.
Factors that could cause results to differ include the factors described in our 2020 annual report on Form 10-K and our other recent filings made with the SEC.
Additionally, some remarks may refer to non-GAAP financial measures.
I will then review results from general insurance and the significant progress we've made with our portfolio, which allowed us to pivot from remediation to grow heading into 2021.
Following that, I will review first-quarter results for life retirement.
I will then provide an update on the work we're doing on the separation of life retirement from AIG.
And lastly, I'll provide an AIG 200 update.
Mark will give you more details on the financial results and then we will take questions.
AIG had an excellent start to the year and we have significant momentum across the entire organization.
In the first quarter, we delivered an outstanding performance in general insurance.
We saw continued solid results in life retirement.
We made meaningful progress on the separation of life retirement from AIG and we significantly advance AIG 200 with the transformation remaining on track to deliver $1 billion in savings by the end of 2022 against the cost to achieve $1.3 billion.
In addition, our balance sheet and financial flexibility remain exceptionally strong allowing us to focus on profitable growth across our portfolio, prudent investments in modern technology and digital capabilities, separating library retirement from AIG in a manner that maximizes value for our stakeholders and positions both companies for long-term success, and returning capital to our shareholders when appropriate.
We ended the first quarter with parent liquidity of $7.9 billion and we repurchased $92 million of common stock in connection with warrant exercises and an additional $207 million against the $500 million buyback plan we mentioned on our last call.
We expect to complete the additional $230 million of that buyback plan by the end of the second quarter.
Turning to general insurance, net premiums written increase approximately $600 million year over year, or approximately 6% on an FX constant basis, driven by nearly $1 billion, or a 22% year-over-year increase in our global commercial businesses.
This 22% increase in global commercial was driven by higher retentions; excellent new business production, particularly in international; strong performance in first-quarter portfolio repositioning; and continued rate momentum.
North America commercial net premiums written grew by approximately 29%, an outstanding result due to a variety of factors including increased 1/1 writings on the balance sheet, continue strong submission flow in Lexington, rate improvement, strong retention and higher new business and segments we have been targeting for growth.
In addition, as a result of the improved quality of our North American commercial portfolio and our improved reinsurance program, which now includes lower attach points in North America, we did not need to purchase as much CAT reinsurance limit in 2021.
The benefits of which will come through in future quarters.
The international commercial had an exceptionally strong first quarter with the year-over-year growth in net premiums written of approximately 13% on an FX constant basis.
Increases were balanced across the portfolio with the strongest growth in international financial lines followed by our specialty business.
Looking ahead, we expect overall growth in net premiums written for the remainder of 2021 to be higher than the 6% we saw in the first quarter of this year with more balance in growth across our global commercial and personal portfolios.
With respect to rate, momentum continued with overall global commercial rate increases of 15%.
North America's commercial rate increases were also 15%, driven by improvements in Lexington casualty with 36% rate increases, excess casualty with 31% rate increases, and financial lines with rate increases over 24%.
International commercial rate increases maintain strong momentum at 14%in the first quarter of 2021, which is typically the largest quarter of the year for our European business.
These increases were driven by energy with 26% rate increases, commercial property with 19% rate increases, and financial lines with 20% rate increases.
Turning to global personal insurance, net premiums written in the first quarter declined 23% on an FX constant basis due to our travel business continuing to be impacted by the pandemic as well as reinsurance sessions to Syndicate 2019.
Our partnership with Lloyd's.
Adjusted for these impacts, global personal insurance, net premiums written were down only 1.6% on an FX constant basis.
We expect to see strong year-over-year growth for the remainder of the year with a rebound in global personal insurance as the effects of COVID subside, the repositioning and reunderwriting this portfolio nears completion, and a full year of reinsurance sessions relating to Syndicate 2019 will be complete.
We are very pleased with the continued improvement in our combined ratios, including and excluding CATs.
I don't need to remind everyone where we were when I outlined our turnaround strategy three years ago.
In the first quarter of this year, the adjusted accident year combined ratio was 92.4%, a 310-basis-point improvement year over year, driven by a 440-basis-point improvement in our adjusted commercial accident year combined ratio.
The adjusted accident year loss ratio improved 160 basis points, to 59.2%, driven by a 330-basis-point improvement in global commercial.
The expense ratio improved 150 basis points reflecting the impact of AIG 200 savings and continued expense discipline.
We expect to continue to improve the expense ratio throughout 2021, particularly as we deliver on our AIG 200 programs.
To provide further color on combined ratio improvements, in North America, the adjusted accident year combined ratio improved to 95.6%, 210-basis-point improvement year over year.
This reflects a 370-basis-point improvement in the North American commercial lines adjusted accident year combined ratio, which came in at 93.9%.
In international, the adjusted accident year combined ratio improved to 90.2%, a 340-basis-point improvement year over year.
This reflects a 490-basis-point improvement in the international commercial lines adjusted accident year combined ratio, which came in at 86.8%, 150-basis-point improvement in the international personal lines adjusted accident year combined ratio which was 94%.
With respect to catastrophes, first quarter 2021 was the worst first quarter for the industry in over a decade in terms of weather-related cap losses largely due to winter storms in Texas.
Net cap losses in general insurance are $422 million primarily driven by the Texas storms and do not include any new COVID-related estimated losses for the first quarter.
Now let me touch on reinsurance assumed.
As I noted, Validus Re saw strong 1/1 renewals across most lines with attractive levels of risk-adjusted rate improvement.
The team focuses on prudent capital deployment and portfolio construction while improving technical ratios and reducing volatility.
With respect to April 1 renewals, within the international property, rate adjustments varied from mid-single-digits to upwards of 30% and loss impacted accounts and our Japanese renewals were very successful with 100% client retention, net limits largely similar year over year, and risk-adjusted rate increases, which were in the high single-digits.
Before moving on, I want to highlight the quality and the strength of our general insurance portfolio.
Of course, optimization work will continue but the magnitude of what was accomplished over the last three years is worth reflecting on because the first quarter of 2021 was an important inflection point for our team.
Our focus pivoted from remediation to driving profitable growth.
These are a couple of concrete examples of how we have repositioned the global portfolio.
Growth limits and global commercial will reduce by over $650 billion.
North America excess casualty removed over $10 billion in mid-limits and increased writings in mid-excess layers in order to achieve a more balanced portfolio.
And in Lexington, we reposition this business to focus on wholesale distribution.
The team grew the top line in 2020 for the first time in over a decade.
The portfolio is now more balanced and the submission flow has increased over 100% over the last couple of years.
The enormity of the turnaround and the complexity of execution that was accomplished cannot be understated.
We now have a disciplined culture that is grounded in underwriting fundamentals, a well-defined and articulated risk appetite, we remain laser-focused on terms and conditions, and obtaining rate above loss cost.
And we have an appropriate reinsurance program in place to manage severity and volatility.
Our global portfolio is poised for improving profitability and more predictable results.
While all this was taking place in general insurance, our colleagues in life retirement did an excellent job maintaining a market-leading position in the protection and retirement savings industry and, together with our investment colleagues, consistently delivered a solid performance against the backdrop of persistent low-interest rates and challenging market conditions.
Turning to life retirements first quarter.
This business also had strong results.
Adjusted pre-tax income in the first quarter was $941 million, an adjusted return on common equity was 14.2% reflecting our diversified businesses and high-quality investment portfolio.
The sensitivities we provided last quarter generally held up with respect to equity markets, 10-year reinvestment rates, and mortality although first-quarter results were toward the higher end of our mortality expectations of reinsurance and other offsets.
We continue to actively manage impacts from the low-interest rate and tighter credit spreads environment and the range we previously provided for expected annual spread compression of 8 to 16 basis points has not changed.
Our high-quality investment portfolios well-positioned to navigate uncertain environments as demonstrated by our steady performance through the macroeconomic stress and high levels of volatility in 2020.
And our variable annuity hedging program has continued to perform as expected, providing offsetting protection during periods of volatile capital markets.
We believe life retirement is positioned to deliver strong, sustainable financial results due to the quality of its balance sheet, diversified product offerings and distribution, effective hedging programs, and disciplined risk management.
With respect to the separation of life retirement from AIG, we continue to work diligently and with a sense of urgency toward an IPO of about 19.9% of the business.
We've made significant progress on several fronts including preparing stand-alone audited financials and having an independent party conduct a thorough actuarial review.
No concerns have been raised about the life retirement portfolio as a result of this work.
As I noted on our last earnings call, we did receive a number of credible increases from parties interested in purchasing a minority stake in life retirement and our investment management group.
We conducted a robust evaluation of those opportunities to determine if they offered a better long-term outcome for our stakeholders than an IPO.
At this time, we believe an IPO remains the optimal path forward to maximize value for our stakeholders and to position the business for additional value creation as a stand-alone company.
In addition, an IPO allows AIG to retain maximum flexibility regarding the operations of the business, as well as the separation process.
Overall, I'm pleased with the progress we've made.
Turning to AIG 200, all 10 operational programs are deep into execution mode.
Our transformation teams continue to perform exceptionally well despite the continued remote-work environment.
Recent progress on IT modernization has enabled us to reach the halfway point or $500 million of our run-rate savings target.
$250 million in cumulative run-rate savings has been realized in APTI through the first quarter of this year with $75 million of incremental savings achieved within the first-quarter income statement.
Key highlights on our progress include the successful transition of our shared services operations and over 6,000 colleagues to Accenture at year-end 2020.
This partnership is going extremely well with KPIs at or better than pre-transition levels.
We also negotiated a multi-year agreement with Amazon Web Services to execute on an accelerated cloud strategy, which is a significant step forward in modernizing our infrastructure.
And with a new highly experienced leader in Japan, we made significant progress during the first quarter on our AIG 200 strategy in Japan and are on track to finalize target outcomes as we modernize this business by developing digital capabilities with agile product innovation.
The last year in particular brought unimaginable stress and tragedy across the world.
And for our colleagues, it came during a time of significant and foundational change.
Yet they never lost sight of our purpose at AIG and continue to be focused and dedicated to the important work we do, each other, and the communities in which we live and work.
I could not be prouder of what we've achieved together.
We are in great businesses, a global scale, loyal clients, exceptional relationships with distribution of reinsurance partners, world-class experts and industry veterans, and we strive to be a responsible corporate citizen with a diverse and inclusive workforce that delivers value to our shareholders and all other stakeholders.
I am confident AIG is on its way to becoming a top-performing company in everything that we do.
Since Peter has already provided a good overview of the quarter, I'll just add that we've posted a 7.4% annualized adjusted return on common equity at the AIG level, an 8.2% adjusted return on tangible common equity at the AIG level, an 8.5% adjusted return on segment common equity for general insurance, and a 14.2% adjusted return on segment common equity for life and retirement.
Now moving to general insurance, first-quarter adjusted pre-tax income was $845 million, up $344 million year over year, primarily reflecting increased underwriting income in international, as well as increased global net investment income driven by alternatives.
Catastrophe losses totaled $422 million pre-tax or 7.3 loss ratio points this quarter, compared to 6.9 loss ratio points in the prior-year quarter.
The CAT losses were mostly comprised of $390 million related to the winter storms, primarily impacting commercial lines including AIG rate.
The net impact of the winter storms reflects the benefit of our commercial reinsurance program and changes to our PCG portfolio as a result of syndicate 2019.
Overall, prior-year development was $56 million favorable this quarter, which included $58 million of net favorable development in North America, driven by $52 million of favorable development from the ADC amortization, and $2 million of net unfavorable development in international.
It's worthwhile to note that general insurance still has $6.6 billion remaining of the 80% quota share ADC cover.
There was also, embedded within these figures, $33 million of unfavorable development related to COVID-19 claims that relate back to 2020 loss occurrences or a movement of less than 3%, emanating primarily from Validus Re and Talbot or Lloyd's syndicate.
Our general insurance business continued to materially improve, driven largely by strong accident year 2021 ex-CAT showings in both North America and international commercial lines.
So, rather than double up on facts that Peter has shared, the main drivers of the attrition with underwriting gain improvements were for North America commercial, Lexington, financial lines, and excess casualty.
And from international commercial, the main drivers of improvement stemmed from property, Talbot, and financial lines.
As Peter, noted on a global-commercial-lines basis, the accident year combined ratio, excluding CAT was 90.4%, which represents a 440-basis-point improvement over the prior year's quarter with 75% of that improvement attributable to a lower loss ratio and 25% of the improvement attributable to a lower expense ratio.
Turning to personal insurance, starting in the second quarter of this year, meaning next quarter, our year-over-year comparisons will begin to improve, given the timing of the initial COVID-19 impacts and the formation of syndicate 2019 in May of 2020.
Although North American personal lines had a 74% drop in net premiums written as Peter highlighted, it's also important to understand that the other units within the segment which represented nearly 50% of the quarter's net written premium is comprised mostly of warranty and personal A&H business had their net premium only fall marginally.
Our international personal lines business, which by size dominates our overall global personal insurance business, continues to perform well with 150-basis-points improvement in the accident year ex-CAT combined ratio, reflecting an improved loss ratio and expense discipline.
Now, to expand on some of Peter's marketplace commentary, various areas continued to accelerate the adequacy of achieved rate beyond that of prior quarters.
For example, the level of excess casualty rate increases continues and in many units, exceeds prior results such as CAT excess coverage out of Bermuda, North America corporate, and national admitted excess, and the Lexington.
The increase achieved in the first quarter of 2020 and compounded in the first quarter of 2021 alone, ignoring prior to 2020 rate increases, exceeded 150% for Bermuda-based capacity business, which makes sense given recent years' price deficiency on these capacity excess layers, and approximately 115% for the other mentioned units.
financial lines on the same compound basis has seen in excess of 80% increases for the staples of D&O and EPLI.
Internationally, the 14% first-quarter overall rate increase saw continued rate expansion in key markets, such as the U.K. at plus 23%, global specialty at plus 15%, Europe and the Middle East at 14%, Latin America at 13%, and Asia Pacific also at 13% when excluding the tempering influence of predominantly Japan at 3%.
Lastly cyber achieved our highest rate increase yet at 41% for the quarter.
These increases are clearly broad-based by region and line of business all around the world.
I'd now like to spend a few minutes on two observations.
One, the impact of net rate change versus gross rate change.
And two, some examples of new business rate adequacy relative to a renewal rate adequacy.
So, first, our achieved North America commercial rate change for the quarter on a net basis is now estimated to be at least 150 basis points stronger than the corresponding growth rate change, largely due to our increased net positions across selected product lines.
Last year much of the achieved growth rate increase was being ceded to reinsurers, where now there is much less so.
The shift to higher net positions resulted directly from our prior-stated strategy of improving the gross book such that we had increased competence to retain the appropriate amount of net, and because we could not take a higher net position previously because of the legacy imbalance of very large limits written.
Now, moving on to relative rate adequacy, we see continuing indications in North America of new business having stronger relative rate adequacy over renewal rate levels in most lines of business.
This likely doesn't reflect different class mixes, but instead an additional margin for a lesser-known exposure.
However, this should be expected and is also historically supported given where we are in the underwriting cycle as new business is less established with an insurer versus an existing client renewal relationship.
A further related item involves renewal retentions.
As general insurance implemented revised underwriting standards, renewal retentions predictably would have been impacted, especially in the target lines.
Now, even with superior risk selection rate and term condition changes that have been achieved, renewal retentions have improved to the mid-80% in the aggregate across all commercial lines in both North America and across internationally.
We also see improvement in the Lexington, where E&S has lower industry retentions based on the nature of the business, and this is very positive for the book.
And we see it across specialty lines and across most admitted retail books.
This is indicative of the reunderwriting actions being successful, having settled down, and now with general insurance being comfortable with the underlying insured exposures that meet our risk appetite.
Based on current market conditions and our view of the foreseeable future, we continue to anticipate earned margin expansion throughout 2021 and into 2022 resulting from AIG's favorable underwriting actions taken, favorable global market conditions, maturely improved terms and conditions, and a more profitable, less volatile business mix.
As a result, I would like to reconfirm our outlook for a sub-90% accident year combined ratio excluding CAT by the end of 2022.
Global commercial lines are very nearly at the sub-90% level now and global personal lines is running at 96% for the first quarter.
Given our portfolio composition, and market conditions, and our strategic repositioning of North America personal, we anticipate greater continued margin expansion within commercial lines than personal lines.
We are highly confident that we will achieve our sub-90% target and have several pass to help us get there.
Some by a mix, some by a reasonable market conditions persisting, and some via expense levers.
Now, I'd also like to unpack some of Peter's high-level net written premium growth comments for 2021 with an emphasis here on next quarter, second quarter.
North America commercial is expecting to see growth of approximately 10% for the second quarter of 2021 relative to the prior-year quarter, driven mostly from Lexington across a host of product lines and admitted casualty both primary and excess.
This growth will be two-pronged as growth on the front end will be coupled with lower reinsurance sessions, especially from those lines subject to the casualty quota share.
North America personal is expected to see significant second-quarter 2021 growth, but it is driven by the syndicate 2019 reinsurance session change that we've been signaling.
You will recall, North American personal had a negative $150 million net written premium in the second quarter of 2020 due to many syndicate 2019 treaties becoming effective, including an unearned premium cover for the PCG high-net-worth book.
That distortive spike in sessions, which is not repeatable in the second quarter of 2021 will give the appearance of considerable growth, but instead will provide a PCG net premium that is more stable on an ongoing basis.
So, overall, for North America, both personal and commercial combined, we anticipate net written premium growth between 35% to 40% for the second quarter over the second quarter of the prior year.
International commercial in the second quarter of 2021 is expected to be roughly plus 7% net written premium growth, driven by global specialty, financial lines, and Talbot, and international purpose -- personal is expected to be approximately flat relative to the prior-year quarter.
Now, turning to life and retirement, adjusted pre-tax income increased by 57% or $340 million compared to the first quarter of 2020 with favorable equity markets driving higher private equity returns, lower deferred acquisition and cost amortization, a rebound in most areas of sales, and higher-fee income.
The increase also reflects favorable short-term impacts from tighter credit spreads driving higher call and tender income and higher fair value option bond returns.
This increase was partially offset by adverse mortality as U.S. COVID-related population death of approximately 205,000 in the first quarter were higher than or earlier anticipated which was also reflected in our own experience.
In terms of premiums and deposits, we continue to see encouraging improvement in retail sales.
Individual retirement premium and deposits grew 8% from the prior-year quarter, which we consider a pre-COVID quarter as the sales pipeline carried through March of last year with index and variable annuities, both exceeding prior-year levels.
In group retirement, group acquisition deposits increased significantly from prior year, although both periodic and nonperiodic deposits declined, leading to a marginal reduction in overall gross group premiums and deposits of 2%.
In life insurance, premiums and deposits grew 6% overall with year-over-year growth in both the U.S. and international.
Finally, while institutional markets did not conclude any significant pension risk transfer transactions in the quarter, the pipeline of direct and reinsurance transactions going into the second quarter is very strong, particularly with many defined benefit plans nearing fully funded status.
Turning to net flows and related activity.
Our portfolio reflects the dynamic environment quarter by quarter of the last year.
Individual retirement net flows improved by approximately $1 billion over the first quarter of 2020 driven by variable annuities and retail mutual fund.
And yet when excluding retail mutual funds, net flows were positive, led by index annuities rebounding to be plus 1 billion for the quarter, which is virtually identical to one year ago, but with steady progress from a low of 439 million in the second quarter of 2020 to the plus 1 billion this quarter.
Surrender rates were up slightly over the last few quarters within individual retirement for fixed and index, whereas variable annuity surrender rates have been more comparable as have for group retirement.
Similarly, the life business has seen consistently lower lapse and surrender rates over the last four quarters than prior.
Life and retirement continue to actively manage the impacts from the low-interest rate and tighter credit spread environment, and the previously provided range for expected annual spread compression has not changed.
New business margins generally remain within our targets at current new money returns due to active product management, disciplined pricing approaches, and our significant asset origination and structuring capabilities.
Moving to other operations.
Adjusted pre-tax loss was 530 million, which was inclusive of 176 million of losses from the consolidation and eliminations line, which principally reflects adjustments, offsetting investment returns in the subsidiaries by being eliminated in other operations.
So it wouldn't be double counting.
Before consolidation and eliminations, adjusted pre-tax loss was $354 million, which was $481 million better than the first quarter of 2020, which included a $317 million adjusted pre-tax loss related to Fortitude and a $30 million one-time cash grant given to employees to help with unanticipated costs when the global pandemic began last March.
The first quarter also reflects lower corporate interest expense and lower corporate general expenses, and we expect this to continue throughout 2021.
However, one might expect some continued volatility within the consolidation and eliminations line, which can fluctuate based on investment returns.
Now, shifting to investments.
Net investment income on an APTI basis was 3.2 billion or 492 million higher than the first quarter of 2020.
Adjusting first-quarter 2020 for Fortitude's investment income to make the comparison apples to apples, this quarter's net investment income on an APTI basis was actually 611 million higher than the prior year, or plus 23%, reflecting strong private equity and real estate returns, as well as bond tender and call premiums, which more than offset the lower income on the AFS fixed income portfolio.
We continue to have a high-quality investment portfolio that is positioned well under any market conditions.
Turning to the balance sheet.
At March 31, book value per common share was $72.37, down 5.3% from year-end, reflecting net unrealized mark-to-market losses on the investment portfolio.
Adjusted book value per share was $58.69, up nearly 3% from December 31.
At quarter-end, AIG parent, as Peter noted, had cash and short-term liquidity assets of $7.9 billion, and we repaid our March debt maturity of $1.5 billion and repurchased the $362 million of shares, as Peter outlined.
Our GAAP debt leverage at March 31 was 28.4%, flat to year-end given downward fixed income market movements negatively impacting AOCI despite the repaid debt maturity mentioned earlier.
Our primary operating subsidiaries remain profitable and well-capitalized.
For general insurance, we estimate the U.S. pool fleet risk-based capital ratio for the first quarter to be between 465% and 475%, and life and retirement fleet is estimated to be between 435% and 445%, both well above our target ranges.
And Jake, I think we're ready to start Q&A.
| book value per common share was $72.37 as of march 31, 2021, down 5.3% from dec 31, 2020.
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Both are now available on the Investors section of our website, americanassetstrust.com.
We are making great progress on all fronts as we focus our efforts on our rebound from COVID-19's impact, by enhancing and amenitizing existing properties, acquiring new accretive properties like Eastgate Office Park in Bellevue, which the team will talk about more in a bit, retaining and adding new customers to our portfolio, furthering our development of La Jolla Commons of which we recently bottomed out our excavation and otherwise remain on time and on budget and of course, growing our earnings and net asset value for our stockholders.
We have been through hard time before, and each time we have emerged stronger, which remains our expectations in mind now.
I want to mention that the Board of Directors has approved the quarterly dividend of $0.30 per share for the third quarter, an increase of $0.02 per share or 7% from the second quarter, which is, we believe, is supported by our increased collection efforts in the second quarter, improving traffic in Waikiki at our Embassy Suites and our expectation for operations to continue trending favorably in the near term.
I'm also pleased to announce that the Board has appointed Adam Wyll, to the position of President in addition to his Chief Operating Officer role and title.
As many of you know, Adam is a valuable and hard-working member of our executive team.
And this title describes the breadth of responsibilities and leadership that he has successfully taken on, prior to and during the pandemic.
As well as the confidence, our board and myself and our management team has in him to manage, in partnership with our excellent executive team, the day-to-day operations of AAT.
I personally am blessed with excellent health, and this company is very important to me.
I intend to continue my role as chairman and CEO for the foreseeable future.
However, it is very important to our board, myself and shareholders that you know this company will always remain in very capable hands and that we are fortunate to have such a great management team and group of associates at AAT, all of whom work together as we continue on as a best in classes, class REIT.
I very much appreciate the kind words and leadership opportunities, none of which would have been possible without your mentorship, not to mention the daily collaboration with such an incredible management team and top-notch team members and colleagues.
We continue to feel bullish about our portfolio, particularly with government restrictions lifted in all of our mainland markets in Hawaii, having lightened its reopening restrictions considerably.
And we are seeing firsthand consumer behavior reverting to pre-pandemic levels with packed parking lots and tons of shoppers at all our retail properties.
We're already seeing many of our retailers with gross sales above pre-pandemic levels in our restaurants recovering, which is obviously very encouraging.
Our collections have continued to improve each quarter with a collection rate north of 96% for the second quarter.
Furthermore, we had approximately $850,000 of deferred rent due from tenants in Q2 based on COVID-19 related lease modifications.
And we have collected approximately 94% of those deferred amounts, further validating our strategy of supporting our struggling retailers through the government-mandated closures.
Remaining collection challenges at this point are primarily with a handful of local retailers at our Waikiki Beach Walk property.
But with Hawaii tourism back in large numbers, we think we'll have an opportunity to rebound, to be viable long term, even more so once Asian countries relax their travel restrictions to Hawaii later this year or early next.
Additionally, we are seeing positive activity engagement with new retailers, including mid box retailers.
About half of our over 250,000 square feet of vacant retail space or in lease negotiations or LOI stage, deals that we believe we have a good likelihood of being finalized.
And the vast majority of our retailers are renewing their leases at flat to modest rent increases.
On the multifamily front, with new management in place at Hassalo, we are currently 99% leased and asking rents are trending up almost 20% since December 2020.
The multifamily collections have been more challenging in Portland due to eviction protection still in place through the next month or so.
But we are doing everything we can to stay on top of that, which include government rental assistance programs that we expect meaningful disbursements from soon.
In San Diego, our multifamily properties are currently 97% leased, and we have leased approximately 90% of the 133 master lease units that expired less than two months ago and expect the remaining to be leased over the next few weeks.
Asking rents at our multifamily properties are trending up as well in San Diego, almost 10% since December 2020.
Last night, we reported second quarter 2021 FFO per share of $0.51 and second quarter '21 net income attributable to common stockholders per share of $0.15.
Let me share with you several data points that support my belief.
First, as Ernest previously mentioned, the Board has approved an increase in the dividend to its pre-COVID amount of $0.30 per share based on the continued improvement in our collections as expected, but the overriding factor was the strong results we are seeing at the Embassy Suites Hotel in Waikiki beginning in mid-June and increasing into July with a strong pent-up demand.
Q2 paid occupancy was 67%, and the month of June by itself reached approximately 83%.
The average daily rate was $274 for Q2 and approximately $316 for the month of June.
RevPAR or revenue per available room was $184 for Q2 and approximately $262 for the month of June.
It is definitely heading in the right direction.
Effective July 8, all travellers entering into Hawaii who are vaccinated in the U.S. can skip quarantine without getting a pre-travel COVID test by uploading proof of their vaccination to the state of Hawaii safe travel website.
The Oahu is still under tier five of its reopening plan until Hawaii's total population is 70% fully vaccinated, which should occur in the next month or two.
Bars and restaurants in Oahu can be at 100% capacity as long as all customers show their vaccination card or a negative COVID test on entry.
The Japanese wholesale market had accounted for approximately 35% to 40% of our customer base pre-COVID.
Japan is currently just 9% fully vaccinated.
Though with its current pace of over one million vaccines a day, Japan is expected to be completing vaccinations by this November and to start issuing vaccine passports in the next 30 days, in anticipation of opening up international travel.
In the meantime, there is a pent-up demand from U.S. West and Canada that is expected to keep the hotel occupied and on track with this recovery.
Secondly, looking at our consolidated statement of operations for the three months ended June 30th, our total revenue increased approximately $7.8 million over Q1, which is approximately at 9.3% increase.
Approximately 37% of that was the outperformance of the Embassy Suites Hotel as California and Hawaii began to open up travel.
Additionally, our operating income increased approximately $6.3 million over Q1 '21, which is approximately an increase of 31%.
Third, same-store cash NOI overall was strong at 23% year-over-year.
With office consistently strong before, during and post COVID and retail showing strong signs of recovery.
Multifamily was down primarily as a result of Pacific Ridge Apartments at 71% leased at the end of Q2 due to the recurring seasonality of students leaving in May, including the expiration of the USD master lease and new students leasing over the summer before school starts in late August.
Generally, approximately 60% of our 533 units at Pacific Ridge are leased by students, with the USD campus right across the street.
As of this week, we are approximately 90% leased at Pacific Ridge with approximately 150 students moving in over the next several weeks in August.
Hassalo on Eighth in the Lloyd District of Oregon is a 657 multifamily campus.
At the end of Q1, occupancy was approximately 84% due to the lingering impact of COVID and political challenges in the prior months.
As of Q2, we have increased the occupancy to approximately 95%.
But in doing so, we had to adjust the rent and increase concessions.
Pacific Ridge and Hassalo on Eighth are the two factors that impacted our multifamily same-store this quarter.
As Adam mentioned, asking rates have been trending favorably on our multifamily properties recently, which we expect to provide meaningful growth going forward.
Note that our same-store cash NOI does not include our mixed-use sector, which will return with Q3 and Q4 2021 after completing the renovation of the Embassy Suites Hotel during COVID.
And fourth, as previously disclosed, we acquired Eastgate Office Park on July 7th, comprised of approximately 280,000 square foot multi-tenant office campus, in the premier I-90 corridor submarket of Bellevue, Washington, one of the top-performing markets in the nation, the Eastside market is anchored by leading tech, life science, biotech and telecommunication companies.
The four-building Eastgate Park is currently greater than 95% leased to a diversified tenant base with in-place contractual lease rates that we believe are 10% to 15% below prevailing market rates for the submarket.
Additionally, Eastgate Park recently obtained municipal approval for rezoning, increasing the floor area ratio from 0.5 to 1.0, which will allow for additional development opportunities.
The purchase price of approximately $125 million was paid with cash on the balance sheet.
The going-in cap rate was approximately 6% with an unlevered IRR north of 7%.
We believe this transaction will be accretive to FFO by approximately $0.05 for the remainder of 2021 and $0.10 for the entire year of 2022.
These four items are the data points that are pointing to the beginning of AAT's recovery story starting to unfold.
One last point of interest is that on page 16 of the supplemental, total cash net operating income, which is a non-GAAP supplemental earnings measure, which the company considers meaningful in measuring its operating performance is shown for the three months, ended June 30, at approximately $58.7 million.
If you use this as a run rate going forward, it would be approximately $234 million, which would exceed 2019 pre-COVID cash NOI of approximately $212 million.
A reconciliation of total cash NOI to net income is included in the glossary of terms in the supplemental.
At the end of the second quarter, we had liquidity of approximately $718 million, comprised of $368 million in cash and cash equivalents and $350 million of availability on our line of credit.
Our leverage, which we measure in terms of net debt-to-EBITDA was 6.0 times.
Our focus is to maintain our net debt-to-EBITDA at 5.5 times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at 3.7 times.
As far as guidance goes, we are in the middle of budget season now for 2022.
We hope to begin issuing formal guidance again for 2022 on our Q3 '21 earnings call.
At the end of the second quarter, excluding One Beach, which is under redevelopment, our office portfolio stood at approximately 93% leased with less than 1% expiring through the end of 2021.
Our top 10 office tenants represented 51% of our total office-based rent.
Given the quality of our assets and the strength of the markets in which they are located with technology and life science as the key market drivers, our office portfolio is poised to capitalize on improving dynamics, especially in Bellevue and San Diego.
Q2 portfolio stats by region were as follows, our San Francisco and Portland office portfolios were stable at 100% and 96% leased, respectively.
City Center Bellevue was 93% leased, net of a new amenity space under development, and San Diego is 91% leased, net of new amenity spaces being added to Torrey Reserve.
We had continued success in Q2 preserving pre-COVID rental rates with, 13 comparable new and renewal leases, totalling approximately 50,000 rentable square feet, with an over 9% increased over prior rent on a cash basis, and almost 15% increase on a straight-line basis.
The weighted average lease term on these leases was 3.6 years, with just over $7 per rentable square foot in TIs and incentives.
We experienced a modest small tenant attrition during the quarter due to COVID, resulting in a net loss of approximately 16,000 rentable square feet or less than 0.5 point of occupancy, none of which was lost to a competitor.
Our outlook moving forward is one of positive net absorption with 200 proposal activity picking up significantly.
At this point in time, we are seeing smaller tenants willing to commit to longer-term leases at favorable rental rates.
Even more exciting is the push to return to the office in the emerging large tenant activity and competition for quality larger blocks of space in select markets, including San Diego and Bellevue, of which we have current availability and active prospects.
Our continued strategic investments in our current portfolio will position us to capture more than our fair share of net absorption as the markets improve.
The renovation of two buildings at Torrey Reserve is near completion.
We have aggregated large blocks of space to meet demand and take advantage of pricing power, and we have active large deals and negotiations on both buildings.
The final phase of the renovation will include a new state of the art fitness complex and conference center, both serving the entire 14 building Torrey Reserve Campus.
Construction is in full swing on the redevelopment of One Beach Street in San Francisco, delivering in the first half of 2022, and construction is nearly complete on the redevelopment of 710 Oregon Square in the Lloyd Submarket of Portland.
One Beach will grow to over 103,000 square feet and 710 Organ Square will add another 32,000 square feet to the office portfolio.
As Ernest mentioned, construction is well underway on Tower three at La Jolla Commons with expected completion in Q2, Q3 of 2023, and we are encouraged by the emerging large tenant activity and competition for quality large blocks of space and UTC.
Finally, leasing activity is robust for our upcoming availabilities at Eastgate Office Park in Suburban Bellevue, even prior to executing the exciting renovation plans under development to take this special property to the next level of quality and customer experience.
In summary, our office portfolio is on offense as we move forward into the rest of 2021 and beyond.
| compname reports q2 ffo per share $0.51.
q2 ffo per share $0.51.
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I'm Andy Simanek of investor relations for Hewlett Packard Enterprise.
Also, for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website.
Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency.
While great progress is made in the fight against COVID, it's also clear that it's still a global challenge.
We will continue to do everything we can to support our team members, customers, and communities through this very challenging time.
Hewlett Packard Enterprise had a strong second quarter.
I'm very pleased with our results and that they are marked by revenue growth, strong profitability, and free cash flow.
The overall demand environment is improving, and we are seeing traction across our portfolio.
We saw solid sequential improvement in total HPE orders growth that was up mid-single digits with double-digit growth in HPE GreenLake and HPC business segments.
We expect to continue to see improvement in customer IT spending throughout 2021.
Our disciplined execution on our strategic priorities outlined at the Security Analyst Meeting last fall is positively impacting both top and bottom-line performance.
We are strengthening our core businesses, doubling down in key areas of growth, and accelerating our ultra service pivot while advancing our cloud-first innovation agenda to become the edge-to-cloud Platform-as-a-Service choice for our customers and partners.
We have also executed well throughout the industrywide tightening and cost inflationary trends with minimal impact to our first half.
We have taken proactive inventory buffering measures to position us well for the second half.
We will continue to take additional inventory actions as appropriate, in alignment to the market demand by leveraging great engineering capabilities and our long-term agreements with our suppliers.
Our continued strong performance gives us the confidence to raise our fiscal year '21 earnings per share and free cash flow outlook for the third time since our Security Analyst Meeting.
We will provide more details about this new guidance later in the call.
First, let me review some key Q2 highlights.
Revenue of $6.7 billion was up 9% year over year, with better-than-normal sequential seasonality.
I'm particularly pleased with the double-digit revenue growth in both our HPC and Intelligent Edge businesses that together now represents two -- 22% of our HPE total revenue.
Our as-a-Service annual recurring revenue growth was an impressive 30% year over year, which underscores our momentum in enabling consumption-based IT.
This is an important long-term growth driver for our company.
We made significant improvements in both gross and operating margins.
Our non-GAAP gross margin of 34.3% is at record level and up 210 basis points year over year.
Our non-GAAP operating profit of 10.2% is up 300 basis points year over year.
And our non-GAAP earnings per share of $0.46 is up 70% year over year and above the high end of our outlook range.
These results contribute to Q2 free cash flow of $368 million, which is up $770 million year over year, bringing our first half fiscal year '21 free cash flow to a record $931 million.
Tarek will discuss the financial results and outlook in greater detail.
Before he does that, I want to provide additional comments on our business segment performance and highlight some of the innovative solutions and experiences we introduced during the quarter.
HPE has been a driving transformation in our businesses to deliver a modern secure cloud experience everywhere to help our customers with their digital transformations.
Our Intelligent Edge business accelerated its momentum with an outstanding quarter across all metrics.
Revenue of $799 million grew 17% year over year, and operating profit expanded 320 basis points year over year.
This is the third consecutive quarter of year-over-year revenue growth and sixth consecutive quarter of operating profit expansion.
Edge-as-a-Service offerings were up triple digits year over year and now a meaningful contributor to HPE's overall ARR.
Extended to the edge has never been more critical for enterprises.
At Aruba Atmosphere, our signature event for Aruba customers and partners, we announced an expansive set of cross-portfolio edge-to-cloud security integrations for our Aruba Edge Services Platform, or ESP, including SD-WAN technology from our recent Silver Peak acquisition.
Today, our Aruba Edge Services platform already supports well over 100,000 customers with 150 new customers added every day, connecting over 1 billion active devices.
Aruba building identity network security is unique in the market and provides the ideal foundation for building a zero-trust and Secure Access Service Edge.
Our comprehensive portfolio and AI-powered, cloud-driven platforms like Aruba ESP and Aruba Central will continue to accelerate WAN and security deployment, advanced cloud and IoT adoption, and fast-track digital transformation.
Customers like Walgreens Boots Alliance and Mercado Libre chose Aruba in Q2 for these reasons.
I am tremendously pleased with Aruba's impressive performance, and it is against this successful backdrop that I want to share that Aruba founder, Keerti Melkote, has made the decision to retire from HPE.
We acquired Aruba in 2015 when we saw the edge as the next frontier.
Aruba and Keerti has been instrumental in accelerating this business to the $3 billion business it is today.
I'm incredibly grateful for his leadership, and I have personally benefited from his counsel, knowledge, and friendship.
Keerti will remain as an advisor to me for the remainder of 2021.
I am pleased to announce that effective today, Phil Mottram will take over the leadership of our Aruba Intelligent Edge business.
Phil is a result-driven leader with extensive experience implementing growth strategies and leading transformation initiatives.
He joined HPE in 2019 and most recently assumed the role as the General Manager of our Communications Technology Group, leading a team of more than 5,000 team members who drive $500 million in CPG-specific revenue and $3.5 billion in total revenue for HPE.
In our high-performance compute and mission critical solutions business, revenue of $685 million was up 11% year over year.
We are the undisputed market leader with an industry-leading portfolio in AI and people learning solutions for the new Age of Insight.
We continue to execute on over $2 billion in awarded contract, and we are pursuing a robust pipeline of another $5 billion in market opportunity over the next three years.
In Q2, we announced several new HPC systems deals and collaborations.
This includes building new supercomputer to advance scientific research for the Swiss National Supercomputing Centre, the United States Department of Energy Los Alamos National Laboratory, and the National Supercomputing Center in Singapore.
As we have noted on previous calls, this is an inherently lumpy business due to the lead times between ordinary revenue recognition, but we remain on track to deliver our target of 8% to 12% annual growth in this business this year.
Our compute and storage businesses performed very well in the quarter.
Our strategy to grow in profitable segments of the market and pivot to more as-a-Service solutions is paying off.
In Compute, revenue of $3 billion was up 10% year over year.
We drove strong operational performance, expanding operating margins by 550 basis points.
We expanded our portfolio with the latest AMD EPYC and Intel Xeon Scalable Processors, which include launching three new HPE ProLiant solutions targeting 5G deployments in telco, virtual desktop infrastructure, and storage optimized solutions for database workloads in enterprise.
In storage, revenue of $1.1 billion was up 3% year over year with a strong operating profit of 16.8%, up 110 basis points year over year.
We continue to see strength in key software-defined solutions, which drive our ability to attach rich services to our product offerings.
HPE Primera and Nimble dHCI both grew triple digits.
Our HPE's All-Flash Array portfolio grew 20%.
On May 4, we introduced a new portfolio of cloud-native data infrastructure called HPE Alletra.
This portfolio delivers workload-optimized systems and provides customers with architectural flexibility to run any application without compromise from edge to cloud with a cloud operational experience.
These innovations are propelling our storage business into our cloud-native software-defined data services business.
Our pivot to as-a-Service continued its strong momentum.
Our annualized revenue run rate of $678 million was up 30% year over year.
We saw strong total as-a-Service order growth of 41%.
Over 900 go-to-market partners are now actively selling HPE GreenLake as a part of their own marketplace.
And we average a 95% renewal rate with billings from those customers at 124% usage of the regional contract commitments.
We have an unmatched portfolio of hybrid cloud services that spans all aspects of networking, compute, storage, VMs, containers, ML Ops, HPC, and more.
On the innovation front, we announced a transformative new data storage services platform that brings a cloud operational model to whatever data it is by unifying data operations.
The platform will be available through HPE GreenLake Central and includes a new data services cloud console and a suite of software subscription services that simplifies and automates global infrastructure and scale.
Our industry-leading HPE GreenLake Cloud Services experience enables us to gain more than 90 new customers during the quarter.
Carestream is a great recent customer, for example.
In a three years multimillion-dollar deal, Carestream selected HPE GreenLake Cloud Services with HPE Ezmeral software HPE Pointnext services to power a transformative new healthcare initiative based on Artificial Intelligence-as-a-Service.
We will continue to invest aggressively in HPE GreenLake Cloud Services to provide a true cloud experience and operating model, whether at-the-edge, on-premise, or across multiple clouds.
HPE's businesses that provide services and capability of our customers recently transformed also performed well in Q2.
HPE Pointnext Operational Services had another solid quarter with revenue growing year over year as reported.
We expect to see growth for the full fiscal year, driven by our growing services intensity and other service momentum.
HPE Financial Services continue to play an important role helping our customers as they rebuild and rethink their IT transformation requirements.
Cash collections continue to improve, and HPE FS delivered a return on equity of 18.3%, well above prepandemic levels.
This business continued to perform very well.
Over the past year, our global communities have faced a catastrophic health crisis and significant business disruption.
At HPE, we accelerated our strategy to be the edge-to-cloud Platform-as-a-Service company to support our customers' rapidly changing needs, who have defined our 60,000 team members' demonstrated amazing agility and perseverance.
And I'm tremendously proud of our team members' response during this unprecedented time.
As businesses emerge from the pandemic and move beyond the realities of COVID, digital transformation is at the forefront of their strategic initiatives.
At our Discover event on June 22, you will hear more about how HPE is at the center of this super-charged digital economy.
Our edge-to-cloud architecture, software, and solutions all delivered as-a-Service will continue to help our customers transform their businesses, optimize their applications, and data clouds are increasingly distributing work and be future-ready today.
I'm excited about our momentum, and I believe the HPE represents a strong investment opportunity for our shareholders.
I'll start with a summary of our financial results for the second quarter of fiscal year '21.
Antonio discussed the key highlights for this quarter on Slide 1, and now let me discuss our financial performance, starting with Slide 2.
I am very pleased to report that our Q2 results reflect continued momentum in revenue, strong growth and operating margin expansion, and robust cash flow generation.
We delivered Q2 revenues of $6.7 billion, up 9% from the prior-year period, a level better than our normal sequential seasonality.
I am particularly proud of the fact that our non-GAAP gross margin is at the record level of 34.3%, up 210 basis points from the prior-year period and up 60 basis points sequentially.
This was driven by strong pricing discipline, cost takeouts, and an ongoing favorable mix shift toward higher-margin, software-rich offering.
Our non-GAAP operating expenses increased in the quarter, as we've previously indicated due to the planned hiring increases along with R&D and go-to-market investments, this offset by our continued progress delivering on the savings from our cost optimization plan, which is on track.
Even with our investments, our non-GAAP operating margin was 10.2%.
That is up 300 basis points from our prior year, which translates to a 59% year-over-year increase in operating profit.
Within other income and expense, we benefited from one-time gains related to increased valuations in our Cohesity and IonQ investments within our Pathfinder venture portfolio.
As a result, we now expect other income and expense for the full year in fiscal year '21 to be an expense of approximately $50 million.
With strong execution across the business, we ended the quarter with non-GAAP earnings per share of $0.46, up 70% from the prior year and meaningfully above the higher end of our outlook range for Q2.
Q2 cash flow from operations was $822 million and free cash flow was $368 million, up $770 million from the prior year, driven by better profitability and strong operational discipline, as well as working capital benefits.
This puts us at a record level of free cash flow for the first half at $931 million.
Finally, we paid $156 million of dividends in the quarter and are declaring a Q3 dividend today of $0.12 per share payable in July.
Now let's turn to our segment highlights on Slide 3.
In Intelligent Edge, we accelerated our momentum with rich software capabilities to meet robust customer demand, delivering 17% year-over-year revenue growth across the portfolio.
Switching was up 17% year over year, and wireless LAN was up 16%.
Additionally, the Edge-as-a-Service offerings were up triple digits year over year and now represent a meaningful contribution to HPE's overall ARR.
We also continue to see strong operating margins at 15.5% in Q2, up 320 basis points year over year, which is the sixth consecutive quarter of year-over-year operating margin expansion.
Silver Peak continues to perform well, leveraging the high-growth SD-WAN market opportunity and contributed about five points to the Intelligent Edge top-line growth.
In HPC-MCS, revenue grew 11% year over year as we continue to achieve more customer acceptance milestones and deliver on our more than $2 billion of awarded contracts.
We remain on track to deliver on our full-year and three-year revenue growth CAGR target of 8% to 12%.
In compute, revenue grew 10% year over year and was down just 1% sequentially, reflecting much stronger-than-normal sequential seasonality.
Operating margins were up meaningfully year over year due to disciplined pricing and the rightsizing of the cost structure in this segment.
We ended the quarter with an operating profit margin of 11.3%, up 550 basis points from the prior-year period and toward the upper range of our long-term margin guidance for these segments provided at SAM.
Within storage, revenue grew 3% year over year, driven by strong growth in software-defined offerings.
Nimble grew 17% with ongoing strong dHCI momentum growing triple digits.
All-Flash Arrays grew 20% year over year, led by Primera, that was up triple digits and is expected to surpass 3PAR sales next quarter.
The mix shift toward our more software-rich platforms and operational execution helped drive storage operating profit margin to 16.8%, up 110 basis points year over year.
With respect to Pointnext operational services, including Nimble services, revenue grew for the second consecutive quarter year over year as reported with further growth expected for the full year of fiscal year '21.
This has been driven by the increased focus of our BU segments on selling product and service bundles, improve service intensity, and our growing as-a-Service business, which I'll remind you, enrolls service attach rates of 100%.
This is very, very important to note because all of our OS revenue is recurring with three-year average contract length, and OS is the highest operating margin contributor to our segments.
Within HPE Financial Services, revenue was down 3% year over year as the pandemic did not materially impact this business until later in 2020.
As expected, we are seeing continued sequential improvements in our bad debt loss ratios ending this quarter at just 75 basis points, which continues to be best-in-class within the industry.
We have also seen improved cash collections well above pre-COVID levels.
Our operating margin in this segment was 10.8%, up 160 basis points from the prior year and our return on equity at 18.3% is well above pre-pandemic levels and the 15%-plus target that we set at SAM.
Slide 4 highlights key metrics of our growing as-a-Service business.
Similar to the past couple of quarters, we are making great strides in our as-a-Service offering with over 90 new enterprise GreenLake customers added.
That is in Q2, bringing the total to well over 1,000.
I am pleased to report that our Q2 '21 ARR was $678 million, which was up 30% year over year as reported.
Total as-a-Service orders were up 41% year over year, driven by strong performance in North America and Central Europe.
Our Edge-as-a-Service offerings also continued to grow revenue strong triple digits year over year.
Based on strong customer demand and recent wins, I am very happy with how this business is executing and progressing toward achieving our ARR growth targets of 30% to 40%, a CAGR from FY '20 to FY '23.
Slide 5 highlights our revenue and earnings per share performance to date where you can clearly see the strong rebound and momentum from our Q2 '20 trough.
For the past two quarters, revenue has exceeded our normal sequential seasonality, reflecting the improving demand environment.
And with the operational execution of our cost optimization and resource allocation program, we have increased non-GAAP earnings per share in Q2 by 70% year over year.
Turning to Slide 6.
We delivered a record non-GAAP gross margin rate in Q2 of 34.3% of revenues, which was up 60 basis points sequentially and up 210 basis points from the prior year.
This was driven by strong pricing discipline, operational services margin expansion from cost takeout and automation, and a positive mix shift toward high-margin, software-rich businesses like the Intelligent Edge and next-generation storage offering.
We have also benefited from the new segmentation we implemented beginning of fiscal year '20 that has given us much better visibility into each business unit and enabled better operational discipline.
Moving to Slide 7.
You can also see we have expanded non-GAAP operating profit margin substantially from pandemic lows of -- to 10.2%, which is up 300 basis points from the prior-year period.
We have done this by driving further productivity benefits and delivering the expected savings from our cost optimization plan while simultaneously increasing our investment levels in R&D and field selling costs, which are critical to fuel our long-term innovation engine and revenue growth targets.
Q2 operating expenses also included planned increased hiring and spending on select investments to drive further growth.
Turning to Slide 8.
We generated a record first half levels of cash flow with $1.8 billion of cash flow from operations and $931 million of free cash flow, which is up $1.5 billion year over year.
This was primarily driven by the increased profitability, strong operational discipline, and some in near timing-related benefits.
I would like to underscore that this year, our free cash flow profile seasonality will be different as a result of our back-end-loaded restructuring costs and investment in inventory for our supply chain to cater for rising demand and chip shortages as the economic recovery accelerate.
Now moving on to Slide 9, let me remind everyone about the strength of our diversified balance sheet.
As of April 30 quarter end, we have improved the operating company to a net cash neutral position with our strong free cash flow.
portfolio securitized by year end.
The refinancing of higher-cost unsecured debt with ABS financing allows us to boost access to financing markets at a cheaper cost of debt capital, as well as diversifying and segregating our balance sheet between our operating company and our financial services business.
Bottom line, our improved free cash flow outlook and cash position ensures we have ample liquidity available to run our operations, continue to invest in our business, drive growth and execute on our strategy.
Now turning to our outlook on Slide 10.
I am very pleased to announce that we are once again raising our full-year guidance to reflect the continued momentum in the demand environment and our strong operational performance to date.
This will be our third guidance increase in SAM in October 2020.
We now expect to grow non-GAAP operating profit by 25% to 35% and deliver fiscal year '21 non-GAAP diluted net earnings per share between $1.82 and $1.94.
This is a $0.09 per share improvement at the midpoint of our prior earnings per share guidance of $1.70 to $1.88 and a $0.22 per share improvement at the midpoint since SAM.
With respect to supply chain, we have executed well to date with minimal impact and continue to take proactive inventory measures where possible.
We do see further industrywide tightening and inflation persisting in the near term, which has been factored in our outlook from both a revenue and cost perspective.
But overall demand remains strong.
From a top-line perspective, we are pleased with the momentum we saw in the first half.
And while we continue to see further demand improvement, we remain prudent as certain geographies continue to navigate the pandemic, and we continue to observe uncertainties in the supply of commodity.
More specifically for Q3 '21, we expect revenue to be in line with our normal sequential seasonality of up low single digits from Q2.
For Q3 '21, we expect GAAP diluted net earnings per share of $0.04 to $0.10 and non-GAAP diluted net earnings per share of $0.38 to $0.44.
Additionally, given our record levels of cash flow in the first half and raised earnings outlook, I am very pleased to announce that we are also raising FY '21 free cash flow guidance to $1.2 billion to $1.5 billion.
That is a $350 million increase at the midpoint from our original SAM guidance.
So overall, Antonio and I are very proud of the progress we have made in the first half.
We have navigated well through the pandemic and are exiting the first half with improved revenue momentum, strong profitability, and robust cash flow.
Our growth businesses in the Intelligent Edge and HPC-MCS have accelerated top-line performance.
Our core business of Compute and Storage revenues are growing with improved margins, and our as-a-Service ARR is accelerating.
We also continue to execute well against our cost optimization and resource allocation program, which has made us leaner, better resourced, and positioned to capitalize on the economic recovery currently at play.
| q2 revenue $6.7 billion versus refinitiv ibes estimate of $6.62 billion.
q2 non-gaap earnings per share $0.46.
hewlett packard enterprise - sees fiscal 2021 q3 gaap diluted net earnings per share to be in range of $0.04 to $0.10.
sees fiscal 2021 q3 non-gaap diluted net earnings per share to be in range of $0.38 to $0.44.
raises 2021 gaap diluted net earnings per share outlook to $0.60 to $0.72 , non-gaap diluted net earnings per share outlook to $1.82 to $1.94.
raises 2021 free cash flow guidance to $1.2 to $1.5 billion.
|
Before we get into Armstrong's fourth quarter and full year 2020 financials, I want to take a moment to recognize what we've all been through, on a personal level, these last 12 months.
Our 2,700 Armstrong employees, our communities, our partners, suppliers, our customers and our shareholders have, no doubt, been impacted by the multiple crisis we've all faced.
And I want to share my admiration for the creativity and the teamwork and many acts of selflessness that I have witnessed within our own organization and in our communities.
It's been an extraordinary year.
And I wish us all a healthy and prosperous 2021.
I have a lot to cover today.
I'll begin by reviewing our financial results with some commentary on fourth quarter market conditions.
And then I'll recap our 2020 accomplishments, and there are many, including launching new products in response to the threats posed by COVID-19, AirAssure and VidaShield.
And then I will discuss the increasing importance of Healthy Spaces before turning the call over to Brian to provide a detailed review of our financial performance for both the quarter and the year.
With regard to the marketplace, in the fourth quarter, we saw sequential improvement, pretty much as we expected.
The various end markets and channel activity continued to be mixed by territory and vertical.
New Orleans, for example, exhibited quarter-over-quarter strength related to hurricane damage and the Pacific Northwest continued to improve.
Meanwhile, the Upper Midwest and Southern California moderated.
The number of healthcare projects bid during the quarter picked up nicely but was offset by slower activity in education.
So although we saw overall sequential improvement, underlying conditions remain choppy and drive near-term uncertainty as building owners seek to determine the best path forward to adapt their facilities to enable the safe return of occupants.
For the full year, 2020 sales of $937 million were down 10% from 2019.
Adjusted EBITDA of $330 million was down 18% from 2019, coming in at the high end of our guidance range.
Adjusted free cash flow for the year was a strong $212 million or 23% of sales, once again demonstrating the strength of Armstrong's best-in-class value creation model even in the face of a pandemic-driven sales declines.
Full year 2020 results were characterized by a significant drop in sales in the second quarter as the pandemic struck and certain markets were effectively shut down by government mandates.
Since the second quarter, we have experienced sequential improvements on both a month-to-month and a quarter-to-quarter basis.
In the Mineral Fiber business, in addition to significant volume declines, we were faced with two unusual mix headwinds that impacted AUV or average unit value.
Beginning in the second quarter, we experienced significant negative territory mix as our key seven territories, including the New York metro area, were disproportionately affected by the construction shutdowns.
This trend moderated and continued to improve in the fourth quarter.
A compounding AUV headwind was channel mix, driven by stronger sales to big-box customers as work from home became a reality for many.
This was a good result from a volume perspective and reflects the hard work of our teams with these channel partners.
However, price points in this channel are lower than our overall average and drove a headwind on mix fall through, particularly in the most recent quarter.
We expect these timing-related trends to normalize beginning in the second quarter of 2021.
Core product mix, the underlying driver of AUV improvement for the past 10 years has continued to be positive in 2020 as our higher-end solutions, including the Total Acoustics and Sustain families, outperformed the lower price range of our portfolio, reflecting the continued desire of architects and building owners to improve the performance and aesthetics of their spaces.
The other component and underlying driver of AUV is like-for-like pricing.
Once again in 2020, we delivered positive like-for-like pricing and price greater than input cost inflation.
Operationally, our plants ran well, adopting new safety protocols.
And we were able to maintain high levels of quality, service and productivity.
I'm extremely proud of the way our manufacturing teams innovated to find ways to keep our plants operating and servicing customers throughout this year and do it safely.
Architectural Specialties experienced similar disruptions as large renovation and new construction projects were delayed at the outset of the pandemic.
But as with Mineral Fiber, sales recovered sequentially as markets reopened and contractors adapted to the new safety protocols.
The Architectural Specialties business exited 2020 with a record backlog and is well positioned for 2021.
Now more than any year in my memory, 2020 was about more than just financial results.
In a year of a health crisis and a resulting economic crisis and a social crisis on top of that, 2020 was about responding to short-term priorities while preserving the foundation for longer-term opportunity.
When the pandemic first hit, our priorities were protecting the health and safety of our people, adapting our business practices to maintain connectivity and collaboration with our customers and continuing to supply essential products with a special emphasis on serving healthcare projects.
Once the immediacy of the crisis passed, we made several strategic decisions based on the belief that the pandemic will end and the innate human desire for connection and community will once again return us all to offices, schools and shops.
We made decisions to conserve cash and manage expenses, to retain our talent and preserve organizational capability and capacity that we have worked really hard to build over the past several years.
We remain committed to our digital and M&A initiatives.
And we pivoted our new product development efforts to meet the need for Healthy Spaces with an emphasis on improving indoor air quality.
Now sitting here today, I believe those decisions were the right ones and are delivering on our objective of emerging from this crisis a stronger, more capable and competitive company.
As you recall, when the pandemic hit, we suspended our share repurchase program and trimmed capital expenditures prudently to conserve cash.
We identified and acted on $40 million of temporary cost savings that would not impact our growth and value creation opportunities.
With the return of some stability in the marketplace, we have resumed our share repurchase program, we are returning our capital expenditures to pre-pandemic levels and we are enhancing our investments in our digital and Healthy Space initiatives.
As we have reported, we did not furlough our salespeople.
We did not lay off resources or slow work on key initiatives.
In fact, we launched new digital tools, like Projectworks, to keep our sales teams better connected to customers.
And we added resources to our organization in order to accelerate the work around these and other key strategic initiatives.
Specifically, we launched a new digital platform in the fourth quarter that will enable Armstrong to drive Mineral Fiber volume growth.
I'm going to provide more details on this in a moment.
But I believe these actions collectively will further extend Armstrong's leadership position and allow us to accelerate growth as the economy recovers.
Now looking back on 2020, acquisitions were also a bright spot.
Despite the challenges presented by COVID, we were opportunistic and pursued and completed three transactions with Turf, Moz and Arktura.
These companies each bring unique and exciting capabilities as well as talent that cement Armstrong's leadership in felt products, custom metal capabilities and maybe most importantly bring design and technology capabilities that can be integrated and scaled across our entire company.
Our M&A pipeline remains active.
And we continue to have the capability to execute additional acquisitions and partnerships.
In new product introductions, we also had a strong year.
We launched 35 new products in 2020.
That's a 50% increase from our normal pace of activity.
I could not be more proud of our NPD team.
And I know that they are working very hard to develop important, groundbreaking new products and solutions to further contribute to the healthy space demand that we'll all have in 2021 and beyond.
Several of these new products came about from a pivot that we made when it became apparent that the COVID-19 pathogen was largely transmitted through the air as an aerosol.
Even with enhanced access protocols for our labs and test chambers, our team brought to market at record speed the 24/7 Defend portfolio to address the need for healthier, safer spaces and to specifically improve indoor air quality.
In November, we launched the AirAssure family of ceiling tiles.
AirAssure is a gasketed ceiling solution that forms a tight seal to the grid system.
It's designed to reduce air leaks through the ceiling plane by up to four times over standard ceilings.
Reducing air leaks can significantly increase the effectiveness of HVAC systems by forcing more air to flow through return air vents, where it can be filtered and purified, therefore, enabling better air quality.
In addition to allowing more filtering and cleaning of air, AirAssure can also reduce the risk of pathogens traveling from space-to-space in a building.
And by doing so, again AirAssure can protect a greater number of people.
Also in November, we paired the patented VidaShield ultraviolet air purification system with Armstrong Ceiling panels to provide cleaner, safer air in pretty much any commercial space.
This system, concealed in the ceiling plane, draws air into a chamber integrated into the ceiling tile, exposes the air to UV light to neutralize the harmful pathogens and then returns the cleaner air to the room.
VidaShield can be used with our ceilings as a stand-alone solution.
Or even better, it can be integrated with AirAssure panels.
These two new products are just the beginning of a robust pipeline of Healthy Space solutions, which represents a multiyear renovation opportunity for Armstrong.
The big picture of Healthy Spaces is critically important.
As you likely know, we spend 90% of our time indoors.
So it stands to reason that these spaces where we live our lives ought to be a safe, healthy and sustainable as possible.
They should be deliberately and holistically planned, designed and built to be protective, reassuring and comfortable.
In my view, this has always been true, but the pandemic has redefined what we mean and what we want in our healthy and well spaces.
And the need for solutions in this area is more pressing than ever.
The way we think about the performance of spaces we inhabit has changed and expanded forever.
As a CEO, I think a lot about my employees and how they're doing and how this is impacting their lives in a myriad of ways.
When we return to the office, I want them to feel safe and secure so that we can focus on doing our best work.
I know that we are at our best and most creative when we are together.
We're excited that Armstrong can play a crucial part of bringing Healthy Spaces to people.
To help us learn more and bring healthier spaces to life faster, we are installing our 24/7 Defend solutions in our own facilities, and we are retrofitting one of the existing buildings on our corporate campus to be a Healthy Spaces living lab.
This Healthy Space pilot will showcase what we've learned so far about ceiling systems and will provide a space for us to collaborate, innovate with other leading interior component manufacturers.
By working together, we will be able to better design integrated, holistic and effective Healthy Spaces solutions.
Healthy Spaces remains the dominant topic in the 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.
As you all know, Armstrong has always had a strong presence in the A&D community.
And its presence is strengthening as we are at the forefront of these conversations on how to create healthy spaces.
Today, I'll be reviewing our fourth quarter and full year 2020 results and provide guidance for 2021.
But before I begin, as a friendly reminder, I'll be referring to the slides available on our website.
Beginning on slide four for our overall fourth quarter results.
Sales of $239 million were down 3% versus prior year, a continued sequential improvement from the third quarter, when year-over-year sales were down 11%.
Adjusted EBITDA fell 19% and margins contracted 580 basis points.
Adjusted diluted earnings per share of $0.77 fell 31% as our 2019 fourth quarter tax rate benefited from stock-based compensation deductions.
Adjusted free cash flow declined by $3 million versus the prior year.
Our cash balance at quarter end was $137 million and, coupled with $275 million of availability on our revolving credit facility, positions us with $412 million of available liquidity, down $42 million from last quarter as we completed the Arktura acquisition during this past quarter and down $18 million from the fourth quarter of 2019.
Net debt of $578 million is $12 million higher than last year as a result of our acquisitions, partially offset by cash earnings.
As of the quarter end, our net debt-to-EBITDA ratio is 1.8 times versus 1.5 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 repurchased a 126,523 shares for $10 million for an average price of $79.04 per share.
Since the inception of our repurchase program, we have bought back 9.7 million shares at a cost of $606 million for an average price of $62.35.
We currently have $594 million remaining under our share repurchase program, which expires in December 2023.
slide five illustrates our Mineral Fiber segment results.
In the quarter, sales were down 7% versus prior year but improved sequentially from the third quarter, when year-over-year sales were down 14%.
COVID-19-driven volume declines continued at a reduced rate.
And AUV was a headwind as relative strength in the big-box channel and, to a lesser degree, territory mix put pressure on sales and adjusted EBITDA in the quarter.
Positive like-for-like pricing and favorable product mix continued their year-long positive trend.
Adjusted EBITDA was down $15 million or 19% as the volume decline in channel-driven AUV weakness fell through to the bottom line.
This table also clearly illustrates the quarterly progression of volume trends, which while still negative, have improved sequentially.
In the quarter, continued manufacturing productivity, our cost reduction initiatives and lower raw material and energy costs aided profitability.
SG&A was a headwind as we ramped up investment in growth initiatives that Vic mentioned.
WAVE equity earnings were down due to lower sales volume.
Moving to Architectural Specialties or AS segment on slide six.
Sales were up $6 million or 13% as the 2020 acquisitions of Turf, Moz and just recently, Arktura, contributed $11 million in the quarter and offset COVID-driven organic sales decline of 9%.
AS organic sales also improved sequentially from the third quarter when year-over-year sales were down 14%.
Despite flat sales, direct margins expanded significantly, driven by the higher margins of Turf, Moz and Arktura acquisitions relative to our base AS business and ongoing productivity in the network, particularly at acquired facilities.
Manufacturing costs and SG&A were up, driven by the cost of Turf, Moz and Arktura and higher overhead allocations.
Our AS business continues to win significant projects to build a strong pipeline.
Among others, in the fourth quarter, we were awarded the Virgin Voyages port of Miami Terminal V project.
This job includes metal, glass, reinforced gypsum, wood and mineral fiber products, a comprehensive solution that demonstrates Armstrong's competitive strengths.
This multimillion-dollar project is scheduled to begin shipping late this year but will primarily benefit 2022 sales.
slide seven shows drivers of our consolidated adjusted EBITDA results for the quarter.
We've enhanced this page to break out the impact of our 2020 acquisitions.
Sales from our 2020 acquisitions offset organic volume declines.
Mix, organic SG&A investments and WAVE equity earnings were only partially offset by positive like-for-like pricing, deflation and manufacturing productivity.
Our 2020 acquisitions added a net $3 million adjusted EBITDA benefit and delivered a 27% adjusted EBITDA margin.
slide eight shows our adjusted free cash flow performance in the quarter versus fourth quarter of 2019.
Cash flow from operations was down $8 million on lower sales and partially offset by lower capital expenditures of $5 million.
As referenced in the footnotes and detailed in the appendix, adjusted free cash flow excludes two significant and largely offsetting adjustments.
First, we received $13 million related to environmental insurance recoveries in the quarter.
Second, we made a $10 million one-time endowment-level contribution to the Armstrong World Industries Foundation with funds earmarked from a portion of the $22 million of proceeds from the sale of our Qingpu, China facility that we received earlier in the year.
These items are excluded from adjusted free cash flow as they are unrelated to our core quarterly performance.
slide nine shows our full year results.
Versus prior year, sales were down 10% and adjusted EBITDA was down 18%.
Adjusted earnings per share was down 24%, driven by a lower 2019 base period tax rate due primarily to deferred state tax adjustments and, to a lesser degree, the stock-based compensation deduction that impacted Q4 in 2019.
slide 10 is the full year adjusted EBITDA bridge.
Again, COVID-related volume declines are the main driver as they impacted EBITDA by $65 million and were partially offset by volume-driven contributions of $14 million from our 2020 acquisitions.
COVID volume declines also drove the WAVE results.
Mix headwinds from the territory and channel drivers we have called out impacted the AUV fall-through to adjusted EBITDA.
As Vic mentioned, product mix and like-for-like pricing were both positive in 2020.
Input cost deflation and the savings we are driving in manufacturing and SG&A, despite our acquisitions and growth investments, helped mitigate the sales fall-through to EBITDA.
slide 11 reflects full year adjusted free cash flow of $212 million.
As with the quarter, operating cash flow and dividends from WAVE were lower.
Capital expenditures reflect the delaying action we took to prioritize and conserve cash in 2020.
Interest expense is lower as a result of our refinancing in September 2019.
In a year significantly impacted by the pandemic, we delivered a 23% adjusted free cash flow margin.
slide 12 is our guidance for 2021.
Against a backdrop of a recovering economy.
We anticipate revenue in the range of $1.03 billion to $1.06 billion, or up 10% to 13% versus prior year.
Driving this growth is a return to positive mix starting in the second quarter, continuation of like-for-like pricing with the backdrop of rising inflation, which will result in the resumption of our historic 4% to 6% AUV growth rate.
In addition, our digital growth initiative, kanopi, that Vic will discuss in a moment, will support Mineral Fiber growth.
Healthy Spaces product sales will contribute to both volume and mix gains.
The Architectural Specialties segment will benefit from the full year impact of our 2020 acquisitions as well as a resumption of organic sales growth.
We expect adjusted EBITDA to grow 9% to 13% as the benefits of sales growth falls through and we continue to drive productivity in our plants and benefit from improved results at WAVE.
We will continue to invest in our growth initiatives and, as previously communicated, reinstate some of the 2020 temporary cuts in SG&A in 2021.
At the midpoint, our EBITDA margin of 35% is slightly down in 2021, driven by the impact of 2020 acquisitions on a full year basis.
Adjusted free cash flow will be 19% of sales as we resume our historic levels of capital spending and as working capital expands to support sales growth.
We expect to return to our greater than 20% historical average in the short term.
page 13 is not something we typically share as our seasonality across the quarters is usually very consistent year-to-year.
However, given the disruption experienced in 2020, the seasonal pattern of our year-on-year sales will be unusual in 2021.
So we've included this page to assist you with your modeling.
Sales in Q1 will still be impacted by the pandemic and one less shipping day but will sequentially improve versus Q4 of 2020.
We expect Q2 sales to improve as we wrap the significant decline in Q2 of 2020 in the benefit of our 2020 acquisitions.
In conclusion, I'm excited about the outlook of 2021.
With an improving health and economic backdrop, an evolving portfolio of Healthy Spaces products and a new digital tools and capabilities, Armstrong is well positioned to advance our value creation model in 2021.
2020 was a busy and, by any measure, a productive year.
We took care of our people first, and we built out our capabilities and capacity for future growth.
We took care of our customers.
We didn't shut them down.
We stayed connected with them digitally and kept them supplied.
We launched 35 new products, many industry-leading, to serve today's most pressing needs for improving indoor air quality, including our AirAssure and VidaShield products.
We established a dedicated Healthy Spaces team for a holistic approach to lead the industry forward in the new normal.
We completed three strategic acquisitions, again a record level of activity for us.
And we advanced our digitalization initiative, just to name a few.
And there's more to come in 2021 with digitalization remaining front and center.
I mentioned earlier and Brian mentioned our new digital platform, kanopi, which is focused on identifying and cost effectively serving more of the renovation and smaller new construction marketplace.
I want to provide a little more history here and perspective as to what this is and what opportunities this provides for Armstrong.
For the past several years, we have been talking to you about our digital initiatives, and we've shared a number of them with you, initiatives to make our customer experience frictionless, to better enable design collaboration, to improve our service levels, to increase reliability and quality in our manufacturing operations.
During 2020, we took steps to increase the intensity and the pace of these efforts.
And the result is kanopi, a solution we have never discussed publicly before and a critical enhancement to our existing business model.
kanopi by Armstrong, spelled with a lower case K, is online and I invite you to visit the website at kanopibyarmstrong.com, to explore its capabilities.
Utilizing artificial intelligence and machine learning, kanopi provides early access and enhanced visibility to a large part of the market opportunity we were previously unable to efficiently track.
This technology allows us to influence an Armstrong solution and makes follow-through easier.
kanopi offers facility owners and managers an end-to-end solution, including diagnostic tools, consulting and precertified installation services.
Online, consumer-friendly and fulfilled by our existing best-in-class distribution network, kanopi will tap into pent-up renovation demand in smaller-scale commercial spaces.
We are investing in the sales and technical resources to roll kanopi out on a national level throughout 2021.
The Projectworks and kanopi represent an unrivaled set of digital platforms in the ceiling space, providing access and solutions to previously inaccessible opportunities.
We are using digital capabilities and Healthy Spaces solutions to drive Mineral Fiber volume growth, irrespective of the underlying market.
As Brian mentioned, this will help 2021 as the projects ramp up.
But I'm really excited about what these initiatives can deliver in the medium and long term.
Another area of focus you will see from us in 2021 is around ESG.
Armstrong has always been a company with a strong sense of community, purpose and responsibility.
Those of you who have spent time with us know of our commitment to safety, sustainability and ethical behavior.
We have a long history of community involvement and support.
We strive to be good stewards of the planet.
We were the first to develop a closed-loop recycling program for ceiling tiles and to remove Red List chemicals from our ceilings.
We've instituted effective wastewater management and minimized carbon emissions from our ovens.
We are passionate about developing products that make indoor spaces healthier and more sustainable, higher-performing and more aesthetically appealing, as demonstrated by our recent AirAssure and VidaShield product launches.
In the past 18 months, there's been a good deal of effort behind the scenes on ESG-related matters.
We've hired experienced professionals, Helen Sahi, as our Director of Sustainability; and Salena Coachman, to lead our diversity and inclusion initiatives.
We've appointed Mark Hershey, our General Counsel, to head up this effort from a management perspective, ensuring it has a champion on my leadership team.
And our Board's Nominating and Governance Committee has become the Nominating, Governance and Social Responsibility Committee to demonstrate the complete alignment in these critical areas.
We will be launching an enhanced sustainability website this spring and publishing a full sustainability report this summer.
This will transparently document our efforts but also publicly challenge us to get better.
These disclosures will convey our program goals and our targets, align our reporting to leading standards and frameworks and reflect our commitment across our three pillars of focus: people, planet and products.
I've always believed that Armstrong is a good corporate citizen.
And that said, I also believe we can improve.
And I want to challenge the organization and make ourselves accountable for getting even better.
Finally, regarding ESG initiatives, Brian mentioned we recently made a contribution to the Armstrong World Industries Foundation that will ensure that the foundation can increase and sustain its support for the communities, where Armstrong employees live and work for many years to come.
Armstrong is a clear leader in the commercial construction market.
And we have been for many, many years.
We've most recently demonstrated this with AirAssure and VidaShield, two exciting new solutions that demonstrate Armstrong's product leadership.
We have strengths on multiple fronts, which will allow a market leader like Armstrong to return to the top and bottom line growth trajectories we've established before the pandemic hit.
Together with our industry-leading position, our digitalization investments, our Healthy Spaces platform and our commitment to ESG, Armstrong is well positioned for the near term and the long term.
The Healthy Spaces revolution is only just beginning.
And I believe it will be a powerful catalyst driving renovation activity for years to come.
A catalyst turbocharged by a health crisis and backed by a newfound awareness as to how fundamental our health and the health of the built environment is to the strength of our economies and our communities.
We are both ready for and excited about the opportunities ahead.
This is all aligned with our commitment to continue to deliver strong results for our shareholders, making a positive difference by creating healthier spaces where we live, work, learn, feel and play.
| q4 sales fell 3 percent.
continues to expect sequential improvements in our end markets.
expects to grow sales 10% to 13% in 2021.
sees adjusted ebitda growth of 9% to 13% in 2021.
|
And I'm going to start my discussion on Pages four through six.
I don't have to recount all the areas of uncertainty and turmoil we faced last year, not only at EMCOR, but our country and world writ large.
However at EMCOR, we were able to point to our values of mission first, people always.
And they held us together and allowed us to perform at a very high level.
These values served as our touch point to have a focus first on the health and safety of our employees.
At the same time, we knew we also had to continue to serve our customers as we provided essential services across a range of projects and service calls.
As demonstrated by our first quarter results, we continue to deliver strong performance by executing well for our customers while focusing on the well-being and safety of our employees.
The first quarter of 2021 was an outstanding quarter by any measure.
We earned $1.54 per diluted share versus $1.35 in the year-ago period on revenues of $2.3 billion with operating income margins of 5.1%.
We had strong revenue growth in Mechanical Construction segment, up 8.4%.
We had strong growth in our U.S. Building Services segment, up 10.3% and had strong growth in our U.K. Building Services segment, up 12.8%.
That was aided somewhat by FX.
We were essentially flat in our Electrical Construction segment.
And as expected, we had a significant decline in revenues of over 35.3% in our Industrial Services segment, which was impacted not only by industry conditions but also the Texas Freeze, which in many cases, pushed out our turnaround schedule into the second quarter of 2021.
And the work we did in connection with the freeze could not make up for the shortfall caused by that freeze.
We also had a TRIR or a recordable incident rate of under one at 0.92, which was exceptional performance and again, shows our focus on safety and well-being throughout the pandemic, but really that's everyday at EMCOR because it's one of our core values.
These results, again, show the diversity of EMCOR's business with our ability to pivot to more resilient and stronger markets when some markets like the current downstream refining and petrochemical, oil and gas markets are weakened as a result of reduced demand.
As we analyze our first quarter performance, we continue to earn strong operating income margins in our Electrical and Mechanical Construction segments.
At 8.8% in our Electrical Construction segment and 7.2% in our Mechanical construction segment, these operating income margins show that we are earning very good conversion on the work that we win, and we are executing well on our contracts, which are largely fixed-price contracts.
I intentionally use the word earned in describing these operating income margins.
We have tough and demanding customers, who drive a very competitive bidding and selection process.
The more complex the work, the more we compete not only on price but also on capability.
We have to invest for productivity, not only through tools like BIM or Building Information Modeling prefab, but also better personal protective equipment and hand tools and individual work practices.
But we also invest in training and best practice sharing so that we are always learning from each others to employ the best means and methods for our work.
We also must work collaboratively with our supply chain partners, and that is more important than ever as the economy starts back up to make sure that we have the right products at the right place, at the right price across our geography and portfolio of projects.
This is especially important on large, complex projects with accelerated time schedules.
Our subsidiary and segment leadership teams work hard to perform for our customers every day, and they are among the most skilled teams in our industry.
Our U.S. Building Services team had an exceptional quarter, earning 5% operating income margins on 10.3% revenue growth.
We had strong performance from mechanical services and both our government and commercial site-based businesses.
We continue to have strong demand for mechanical retrofit projects and IAQ or indoor air quality solutions.
Our site-based businesses continue to see increased demand for small project work from our total facility management customers.
Our leadership from our subsidiaries to the business units to the segments are working well with our customers as they return to more in-office or on-site work.
We are a trusted partner as they prepare and operate their facilities to keep their employees safe and improve their employee safety and peace of mind as they return to the workplace in a more significant way.
And we do expect that to accelerate in the next few months.
Our U.K. team is performing well and has experienced the same demand drivers and business context as our U.S. Building Services team.
At 7.4% operating income margins and revenue growth of 4.5% without the impact of foreign exchange, we are doing very well.
We continue to perform well in serving our customers, which have some of the most complex facility services needs in the U.K.
We also continue to execute well on our project work in the U.K.
We have a very good team, who are laser-focused on serving their customers well and have earned their customers' trust.
Our Industrial Services segment had a tough quarter as expected.
We earned positive EBITDA but we're slightly negative on an operating income basis.
We have likely made positive operating income in this segment but for the impact of the Texas Freeze, which pushed out the turnaround schedule.
We leave the quarter with increased remaining performance obligations or RPOs at $4.77 billion, up from $4.59 billion at year-end 2020, an increase from the year ago level of $4.42 billion.
We will discuss our remaining performance obligation trends more later in my remarks.
We exit the quarter with a pristine balance sheet.
And we are putting that balance sheet to work to build our business and to return cash to our shareholders.
With my opening complete, I'll now turn over the conversation to Mark, who will discuss his favorite quarter as he only has to comment on the quarterly performance.
So let's expand our review of EMCOR's first quarter performance.
Consolidated revenues of $2.3 billion are up a modest $4.2 million or 20 basis points over quarter one 2020.
Our first quarter results include $29.1 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's first quarter.
Acquisition revenues positively impacted each of our United States Electrical Construction, United States Mechanical Construction and United States Building Services segments.
Excluding the impact of businesses acquired, first quarter consolidated revenues declined $24.8 million or 1.1% organically.
Before reviewing the operating results of our individual reportable segments, I should point out that such results reflect certain reclassifications of prior year amounts due to changes in our internal reporting structure aimed at realigning our service offerings.
Most notably, we have transferred our Ardent and Rabalais subsidiaries from our United States Electrical Construction segment to our United States Industrial Services segment.
With that being said, I will now review the results of each of our reportable segments, starting with our revenue performance during the quarter.
With the exception of United States Industrial Services and United States Electrical Construction, all of EMCOR's reportable segments experienced first quarter revenue growth.
United States Electrical Construction quarter one revenues of $456.2 million decreased $5.6 million or 1.2% from 2020's comparable quarter.
Excluding acquisition revenues of $6.5 million, this segment's revenues declined 2.6% organically as revenue reductions within the manufacturing and transportation market sectors were only partially offset by increased project activities within the commercial and institutional market sectors.
United States Mechanical Construction revenues of $903.9 million increased $69.8 million or 8.4% from quarter one of 2020.
Revenue growth was primarily attributable to an increase in commercial, healthcare and transportation market sector activities due to continued strong demand for our services, partially offset by revenue declines within the manufacturing and institutional market sectors.
This substantial quarterly revenue growth was despite a reduction in short-duration project volumes as a consequence of the continuing impact of the COVID-19 pandemic and represents a new first quarter revenue record for this segment.
EMCOR's total domestic construction business first quarter revenues of $1.36 billion increased $64.2 million or 5% and reflects a strong start to the year.
United States Building Services record quarterly revenues of $581.8 million increased $54.2 million or 10.3%.
Excluding acquisition revenue contribution of $22.6 million, this segment's revenues increased to $31.6 million or 6% organically.
Revenue gains within their commercial site-based services division due to an increase in event-driven snow removal as well as a resumption in project volume as certain customer facilities begin to reopen were the primary drivers in quarter-over-quarter revenue improvement.
The segment's mobile mechanical services division additionally experienced stronger project and retrofit demand with an emphasis on services aimed at improving indoor air quality.
United States Industrial Services revenues of $235.4 million decreased $128.5 million or 35.3% as this segment continues to be impacted by the negative macroeconomic conditions and uncertainty within the markets in which it operates.
Additionally, and as Tony mentioned, the Industrial Services segment was negatively impacted by normal weather conditions and related power outages within the Gulf Coast region, which resulted in the delay of active projects and the deferral of previously planned maintenance and turnaround activities with certain of their customers.
Although we were able to assist some of our customers with emergency repairs resulting from the February storm, this unplanned work was not enough to offset the lost quarterly revenue caused by these deferrals and delays.
United Kingdom Building Services segment revenues of $126.7 million increased $14.3 million or 12.8% due to growth in project activities across the portfolio as customers began to release projects which were previously on hold due to the COVID -- due to COVID-19.
This segment's results additionally benefited by $9.5 million as a result of the strengthening of the pound sterling, given the lifting of uncertainty around the terms of the United Kingdom's trade deal with the European Union that became effective on January 1, 2021.
Selling, general and administrative expenses of $224.1 million represent 9.7% of first quarter revenues and reflect a decrease of $2.9 million from 2020.
SGandA for the first quarter includes approximately $2.4 million of incremental expenses from businesses acquired inclusive of intangible asset amortization expense, resulting in an organic quarter-over-quarter decline in SGandA of $5.4 million.
This organic reduction is primarily attributable to lower employment costs as a result of reduced headcount due to various cost-control measures enacted during 2020 as well as a period-over-period decline in travel and entertainment expenses due to a combination of cost-avoidance measures as well as restricted company travel protocols.
These decreases were partially offset by an increase in incentive compensation expense, predominantly within our United States Mechanical Construction segment, due to higher projected annual operating results than what was anticipated during the same prior year period.
Reported operating income for the quarter of $117 million compares to $106 million in 2020's first quarter and represents an increase of $11 million or 10.4%.
Operating margin of 5.1% has expanded by 50 basis points from the prior year's 4.6% operating margin.
This performance reflects a new first quarter operating income and operating margin record for EMCOR.
Our United States Electrical Construction segment's operating income of $40.3 million is consistent with 2020's quarter one performance.
Reported operating margin of 8.8% represents a 10 basis point improvement over last year's first quarter as a result of a modest increase in this segment's gross profit margin.
First quarter operating income of our U.S. Mechanical Construction segment of $65 million increased nearly $20 million from the comparable 2020 period, and operating margin of 7.2% represents a 180 basis point expansion year-over-year.
This improved performance is primarily due to greater gross profit across most of the market sectors we serve as a result of both the volume increases previously referenced and a slight improvement in revenue mix as compared to the year-ago period.
This segment's operating margin additionally benefited from a reduction in the ratio of selling, general and administrative expenses to revenues as a result of strong quarterly revenue growth without a commensurate increase in this segment's overhead cost structure.
Consistent with the commentary during my revenue discussion, this performance has established a new first quarter record in terms of both operating income and operating margin for our United States Mechanical Construction segment.
Our total U.S. construction business is reporting $105.2 million of operating income and a 7.7% operating margin.
This performance has improved quarter-over-quarter by $19.7 million or 23.1%.
Operating income for our U.S. Building Services segment of $29.3 million is an $8.1 million increase from last year's first quarter, while operating margin of 5% represents a 100 basis point improvement.
An increase in gross profit resulting from greater snow removal activities with customers that are contracted on a per snow event basis within the segment's commercial site-based services division and an increase in gross profit from project building controls and repair activities within the segment's mobile mechanical services division were the primary drivers of the quarterly increase in operating income.
In addition, the segment's operating income and operating margin benefited from a reduction in SGandA expenses as compared to the prior year due to the various cost-reduction actions instituted subsequent to the first quarter of 2020.
This operating income and operating margin performance represents a new first quarter record for this segment.
Our U.S. Industrial Services segment operating loss of $2.4 million represents a decline of $17.9 million when compared to operating income of $15.4 million in last year's first quarter.
The reduction in period-over-period operating results is due to the previously referenced adverse market conditions, which this segment continues to face as well as the impact of February's extreme winter weather event.
In addition, performance of this segment was negatively impacted by lower plant and labor utilization due to significant reduction in revenues.
On a positive note, this segment was able to partially offset these negative headwinds with a nearly 21% reduction in first quarter selling, general and administrative expenses due to certain cost savings initiatives enacted in calendar year 2020.
U.K. Building Services operating income of $9.4 million or 7.4% of revenues represents an improvement of $3.6 million and 230 basis points of operating margin expansion over 2020's first quarter.
This performance represents an all-time quarterly record for operating income and operating margin as we experienced a strong resumption in project work during the quarter as the United Kingdom market approaches the hopeful conclusion of their COVID-19 lockdown mandates.
Additionally, operating income for the quarter benefited from approximately $800,000 of favorable foreign exchange rate movement.
We are now on slide nine.
Additional financial items of significance for the quarter not addressed in my previous slides are as follows.
Quarter one gross profit of $341.1 million represents 14.8% of revenues, which has improved from the comparable 2020 quarter by $8 million and 30 basis points of gross margin.
Both our gross profit and gross profit margin represent new first quarter records for EMCOR despite the significant headwinds we continue to experience within our United States Industrial Services segment.
Diluted earnings per common share in the first quarter is $1.54 as compared to $1.35 per diluted share for the prior year period.
This $0.19 or 14.1% improvement establishes a new quarter one record for the company and also ties the all-time quarterly diluted earnings per share record, which we previously achieved in quarter four of 2019.
We are now on slide 10.
As evident from slide 10, EMCOR's liquidity profile remains strong.
Cash on hand is down from year-end 2020 primarily as a result of cash used in operations due to the funding of 2020's companywide incentive compensation awards as well as the funding of our United Kingdom subsidiaries' VAT deferral from the prior year.
Additionally, we repurchased $13 million of our common stock pursuant to our share repurchase program and utilized nearly $32 million of cash and investing activities, including $24 million to fund the two acquisitions that we completed during the first quarter of this year.
Working capital levels have increased modestly primarily due to a reduction in our current liabilities, given a decrease in accounts payable as well as a reduction in accrued payroll and benefits due to the previously mentioned funding of prior year incentive awards, the increase in goodwill as a result of the businesses acquired within our United States Electrical and United States Mechanical Construction segments.
Net identifiable intangible assets have decreased as a result of approximately $15 million of intangible asset amortization expense, partially offset by the impact of additional intangible assets recognized in connection with the previously referenced 2021 acquisitions.
Total debt, exclusive of operating lease liabilities, is virtually unchanged since year-end 2020.
As a result of our consistent outstanding borrowings and the growth in stockholders' equity due to our net income for the quarter, EMCOR's debt-to-capitalization ratio has reduced to 11.5%.
Our balance sheet remains pristine and in conjunction with our available credit allows us to invest in our business, return capital to shareholders and execute against our strategic objectives as we navigate through ever-changing market conditions.
It's all yours, Tony.
I'm going to be on page 11, remaining performance obligations by segment and market sector.
So if I had to sum it up in a lot of ways, in 2020, we had a lot of COVID disruption here in this quarter, the first quarter going to the second.
We have a little bit of that left, but for the most part, first quarter 2021, the demand environment and the project bidding for construction and service projects were continuing to be active.
As I mentioned earlier, total remaining performance obligations or RPOs at the end of the first quarter were just under $4.8 billion, up $351 million or 7.9% when compared to the year-ago level of $4.4 billion.
And RPOs increased $181 million for the first three months of the year from the year-end level of $4.6 billion.
Our domestic construction segments experienced strong project growth in the quarter, with the RPOs increasing $219 million or 6.1% since the year-ago period of March 31, 2020.
All but $15 million of that is organic growth.
The $15 million belongs to a Chicago-based electrical contractor that really focuses on infrastructure that joined us in February.
Building Services segment RPOs increased in the quarter $121 million or 22% from the year ago quarter, a portion of which was the August 2020 acquisition of a Washington D.C. full-service mechanical contractor.
However, more representative of what we are now experiencing in this segment, RPOs grew $60 million or up 10% from December 31.
All of that is organic growth.
And to paraphrase what I said in February, this work is both the resumption of regularly scheduled mechanical systems maintenance.
So we're maintaining -- we're maintaining systems that haven't been running full out, and then small project work as a result is coming back in.
And then there's modifications and improvements around that on efficiency and indoor air quality.
If you go to the right side of that page by market sector, clearly, our largest sector for RPOs continues to be commercial projects.
And we're continuing to see strength, and I'll talk about this on the next page, in the resilient sectors that we've highlighted such as data center.
And I call it supply chain's buildup for e-commerce delivery and fulfillment.
Those -- that commercial segment, which also includes the retrofit activity and new build, is 44% of total RPOs.
For the year-over-year and sequential quarter-over-quarter comparison, commercial RPOs increased $314 million and $216 million, respectively.
The rest of this sector is pretty much netted as in and out as project activity increased a little in some sectors and decreased a little in others.
And that's really just the normal ebb and flow of project activity.
In general, project interest is favorable in most all sectors with the exception of hospitality that continues to be challenged.
As an indication of future market activity, the March ABI came out a week or so ago.
And while I think this is a soft index always, it's worked on a board survey from architects and it's self-reported numbers.
But it's been the same forever, so it's OK.
If it's consistently that way, then you can start to draw trends off of it.
It jumped over 50, which is expansion territory in February and was over 55 in March.
And one of the analysts noted the regional scores, for the most part, were in positive territory, and the general outlook was upbeat.
Now that's clearly true from a year-ago period.
Correspondingly, the March Dodge Momentum Index, which is an index of nonresidential building projects in planning, also posted a pair of strong gauge in February and March.
It's up low double digits at 11% from a year-ago period, pretty much right before the full impact of the pandemic.
Look, I think it's important for me to just take a step back here.
First quarter of last year was a good quarter.
And until the pandemic came, it was probably one of the best economies that, in my business career, I've ever operated in.
So that's the compare that a lot of these numbers are coming off of.
So it's important to know that.
And both of these leading indicators are indicators of potential future activity.
They're moving in tandem, which is what we like to see.
And we do a whole bunch of other analysis, and I'll talk about that later of what we're going to -- what we believe could happen to nonres this year.
I'm now going to jump to page 12, and I'm going to give you a little updated commentary on these resilient sectors that we talk about.
If you look at the first two, I'd like to think about that as the build-out of our data infrastructure and our supply chain infrastructure.
That's still very strong.
It's concentrated in about -- on the data center side, five or six geographic areas.
We're in 60%, 70% of those areas now either electrically or mechanically.
We continue to build our data center maintenance business.
And on the warehousing side, these are the big million square foot-plus warehouses.
For the most part, this is a life safety play for us on the fire protection side.
I would argue we are the best in the business at it.
Not only are we providing a great solution, we do it cost effectively, and we do it time efficiently.
And we got some of the best prefab capability in the industry.
We're also doing targeted electrical work depending on the region of the country on these warehouses.
Industrial and manufacturing, it's down a little bit for us right now, but that's really driven by food process, which we have a pretty good pipeline of potential opportunities.
But we're actually very bullish on manufacturing because of where we play.
We do see supply chain reshoring back to the southeast.
That could be either out of Asia, most notably China, or Mexico as people look for redundant supply.
I don't think we want to go -- people on their high-margin projects want to be caught in a situation like they were at the beginning of the pandemic, or I do think we're in a decoupling mode versus China as far as supply to the U.S. I think the other part is we are in some good secular markets that we expect to continue, most notably, semiconductors.
We are very strong in some of the key markets, whether they be Arizona, which were very strong mechanically.
We have a terrific team in Arizona that does this work superbly.
This is very difficult work and very complex.
And the team we have in Arizona that execute is the best in the business.
We also have electrical capability in Utah, which is the Salt Lake City area, which is another one of the semiconductor hubs.
And we also have electrical capability in the Pacific Northwest, most notably the Portland area, which is also a semiconductor hub.
These are the three major hubs.
We have capability in each, and we have great relationships with both our general contractor customers and construction management customers as well as the OEMs and end users.
Health care, we continue to see strength.
We've made the right acquisitions.
You look at the work we'll be doing down in the Georgia market with BKI.
You look at the work we'll do in the Houston market with Gowan.
You look at the work we'll do -- continue to do in the Midwest with Shambaugh and a combination of companies.
And you look at the work we'll continue to do in California.
The healthcare market continues to be very strong for us.
And I just gave you a couple of markets.
We really do this work, broadly speaking, across the country.
And we do it both in a retrofit basis, which we expect more and more mechanical and electrical retrofits.
And we also see new build coming back in healthcare.
Again, this is both a construction opportunity for us and a maintenance opportunity for us.
I think one thing people appreciated when they were an EMCOR customer through the pandemic is we can help them make their facilities more flexible when they needed to, to handle patient surges or different kinds of healthcare they needed to deliver.
Water and wastewater continues to be a good market for us, especially in Florida.
These projects can be lumpy in how they get delivered.
We've got one of the best teams in the industry down in Florida, and we're very proud of them.
I'll get to the last two, mechanical services, indoor air quality.
We're the best in the business at this.
The OEMs develop solutions, but they need a company like EMCOR to be able to deliver those solutions.
And we deliver these solutions as good or better, and I would say better on a consistent basis than anybody in the industry.
That's both the mechanical services, to fix things; indoor air quality, as their whole well building concept becomes more prevalent; and then finally, on efficiency.
And we've been the best efficiency people for a long, long time.
I would add another sector that sort of overlays this.
We will participate in any energy transition.
People ask us about that.
And clearly, when you have the best pipe fitters and electricians in the business and the people that know how to supervise them, you're going to be part of that.
We already are part of it on small-scale solar in a more significant way out in California.
The way I think about small-scale solar is the way I thought about distributed generation and cogeneration.
That's really what it is in 20 megawatts or less.
As you get to the bigger things, we are building capability, especially in Texas right now.
We'll see how that goes.
I think it's going to go well, and we'll continue to build that capability and anything that the refiners do along the line of carbon capture, it's pipe.
And I'm very happy that Exxon and people like Valero are talking more about renewables, renewable diesel and carbon capture.
We'll be there to help them do that.
So we feel good about these resilient markets.
We don't chase fads at EMCOR.
We build capability, and we execute.
And we can pivot around these markets, and we've done that over a long period of time.
I'm going to finish now on page 13 and 14.
As we entered 2021, let's think about what the context of it was.
Vaccinations were just starting to get rolled out.
We were in a world of COVID surges in parts of the country.
And as February started to come, we gave guidance, but that was our backdrop.
But we continued to perform.
Our folks are resilient, and they're really good at what they do.
In that initial guidance, we gave you about eight -- seven, eight weeks ago, we expected to earn $6.20 to $6.70 in earnings per diluted share.
And if you look at that midpoint, that would be another record year, Mark, after how many, 7?
And we expected to do that on $9.2 billion to $9.4 billion in revenue.
And so we clearly thought that the revenue was going to accelerate as the year went on.
And think about the tough compare we're having here in the first quarter with industrial.
Up until the third week of March of last year, industrial was having a very good first quarter.
So we went back.
We thought about it and we said, "Okay, we had a better first quarter than we expected.
And so with that, we're going to raise the low end of our guidance range to $6.35".
That's a $0.15 movement from the $6.20.
And we're going to take the top end of the range up about a $0.05 or $6.75 per diluted share.
We're going to keep revenue guidance where it is, and we'll certainly know more about that when we get out of the second quarter.
And as we said in February 2021, we did expect 2021 to be another year of outstanding performance.
But let's think about this.
We have to execute every day.
We're doing this across 4,000 projects of size of $250,000 or more.
But if you added up all our projects, we're doing this now over about 12,000 projects and service events.
And if you take service calls, it's multiples of that.
And we have to do that against the backdrop of record operating income margins in our Electrical and Mechanical Construction segments in 2020.
And we do expect those increased revenues to help us mitigate some of that challenge.
So when we gave you our guidance, we laid out some assumptions.
And what I'm going to do now is talk about what that assumption was and what the update on that assumption is now eight weeks later with first quarter in the books.
So the first assumption was our Industrial Services segment, as many of you know, primarily serve the downstream petrochemical and refining markets.
We didn't think it would materially improve until the fourth quarter and that it would gain momentum going into 2022 as demand for refined products will continue to be challenged early in 2021, especially through the end of the second quarter.
Demand is picking up.
So let's talk about what that view is now.
We still believe as far as performance in the segment, that's the accurate view of the market.
Some trends are clearly positive now.
Crack spreads are very good in high teens.
The renewable diesel market is a market we're helping our customers get ready for and serve through upgrades and adaptation of their facilities.
And refinery utilization has moved into the low 80s, trending toward the mid-80s.
We fully expect that to be in the high 80s by early June.
It's going to be driven by really aviation fuel at this point.
So we had an assumption at the beginning of the year also that the nonresidential market would decline modestly.
What do we think now?
We think that market potentially could be flat for the year.
And the second quarter trends will provide more insight as we may see accelerating demand through the year.
This market now could have either breakeven performance or modest growth in 2021.
We also said that we would continue to execute well on our more resilient market sectors to include manufacturing, commercial driven by data center and logistics warehousing, water and wastewater and all the things I just mentioned on the previous page.
We still think that's true and even more true today.
And we do expect as the year to go on that manufacturing gains strength, and we'll see it first in our backlog.
We did talk about the COVID environment.
We did not expect -- did not expect a more restrictive COVID environment than what we were operating in as we gave guidance in February.
We did expect a more normal operating environment as the year progressed.
We talked about that we were operating near 100% capability.
We don't use the word capacity because we always look -- we can add tradespeople.
We've learned how to work under these COVID precautions.
It does require a lot more planning, and we have to be much more precise in our execution.
But you know what?
That's sort of how we operate anyway.
And it's nothing new for us to keep our employees' safety first.
It's one of our core values, and quite frankly, people would not want to work for us if it was not.
So what's my updated view on that?
I believe that as we enter third quarter, move through third quarter into fourth quarter, more of our job sites will start to be -- look more normal in conditions in most of the states that we operate in because we continue to see positive trends in those states.
And we will see that in the U.K., too.
I think that might happen here as our vaccinations continue to pick up.
We do expect -- we said we expect to continue to help our customers with IAQ, energy efficiency replacement projects, optimizing their systems and helping bring their employees back to work.
I would say that's going as expected.
So then you say, "How do we go from where we are at the low end of the range, the midpoint of the range to the top end of the range"?
I'd say that each one of those trends or mix of those trends get better.
So maybe the nonres market's better than we thought it was, especially for projects that can be completed in the year.
And that's especially true as things normalize and work normalizes and people start to spend more capital.
Our refining and petrochemical customers begin to gain more comfort with improved demand for refined products.
And they say, "Look, instead of trying to bunch all that work into '22, we start to pull some of that work forward into '21".
That would be a logical thing to do.
They do worry about manpower in tight -- when they have a bunch of work scheduled.
We may be able to have some of those discussions.
Momentum in IAQ and efficiency accelerates.
That could happen, especially on the efficiency side as folks realize that all the investment in IAQ actually hurts efficiency.
And their customers will be demanding them to make their facilities more efficient.
And look, we've got to keep our productivity strong as we transition.
We want to keep some of those gains we've made with scheduling.
We want to keep the emphasis we've had on prefab even on smaller jobs as we transition.
I think -- I sort of know we will.
But we have to keep that first and foremost in our minds, and of course, we're not going to open the floodgates on travel.
Mark talked a little bit about the organic SG and A. That's more positive than you think it is because he had a sentence in there that was pretty key.
Think about the outlook we were taking on incentive compensation last year versus this year.
We told you we expected to have organic reduction of around $15 million, $20 million.
We're at the high end of that right now on a run rate basis.
And if we have increased incentive long term, that's a good thing in our field operations because that means we're doing better.
The other thing that I know you ask about, and I'll just get in front of it now a little bit is on stimulus.
The thing that will impact us this year, the government spending that will impact us this year is all related to these COVID emergency packages.
We will benefit from that because of the money that went to the states and municipalities to make their budgets more flushed to allow them to complete some of their smaller capital projects and get some of the transit systems moving again.
It will help them think through that and start that.
We'll also benefit from some of the spending that's going to go on institutions and schools.
Again, go back to this IAQ efficiency and building wellness theme.
We're seeing that already.
That's what will impact 2021.
If this larger infrastructure package of about 50% of the money, give or take, is stuff we could participate in or projects we could potentially participate in, that for the most part is a late '22, early '23, likely late '23, early '24 event for us.
You think about everything that has to happen with a project to get it going.
And I think let's all recall late 2008, early 2009.
For large-scale infrastructure projects, yes, there's concepts that people want to execute.
People don't do detailed design on concept.
And so as we learned back then, there's no such thing as a shovel-ready project.
There isn't here either.
But one of the things that could be quicker is if we get energy efficiency dollars right and figure out how to flow that out, which, in my mind, would be through the utilities in their programs.
The other thing you'll ask about is labor.
Look, we're sort of at the top end of that food chain.
That's not something that we had issues with.
I do think I'm glad I'm not a painter or a roofer or a cleaner right now because there is headwinds about hiring labor at the low end, especially with the enhanced employment benefit -- unemployment benefit.
It requires us -- also on the factory side, we're lucky to be who we are because we can, like I said earlier, work closely with our supply chain partners and work real hard to mitigate the impact because they're also having difficulty ramping up.
And you probably heard that on all the calls with the manufacturers.
I'm sure you did.
When we get to capital allocation, we had a lot of detail on that in our year-end discussions.
Our guidance contemplates that we will continue to be disciplined capital allocators.
And we'll do that between organic growth, which we love to fund; acquisitions; share repurchases; and dividends.
We're on track to meeting -- toward meeting that goal this year.
This year, we've already done three acquisitions.
We have a very good pipeline.
Those may be moving a little slower as we try to understand the impact of pandemic on operations, but we'll get through that.
And we feel very good about our pipeline right now.
| q1 earnings per share $1.54.
q1 revenue rose 0.2 percent to $2.3 billion.
raises fy earnings per share view to $6.35 to $6.75.
sees fy revenue $9.2 billion to $9.4 billion.
|
Joining me are our President and Acting Chief Executive Officer, Joe Harvey; our Chief Financial Officer, Matt Stadler; and our Chief Investment Officer, Jon Cheigh.
Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
These non-GAAP financial measures should be read in conjunction with our GAAP results.
Before we go through our regular agenda, I'd like to provide an update on Bob Steers who as we announced in February is currently on medical leave.
Bob's recovery has been remarkable and he is doing well.
He is available to provide input on business decisions and we expect him to resume active duties as CEO by the end of the second quarter.
In the meantime, our executive committee and broader leadership group continue to perform at a high level.
I'll return later to summarize the quarter after Matt and Jon provide the reports.
Next up is Matt, who will review our financial results for the quarter.
Yesterday, we reported record earnings of $0.79 per share, compared with $0.61 in the prior year's quarter and $0.76 sequentially.
Revenue was a record $125.8 million for the quarter, compared with $105.8 million in the prior year's quarter and $116.6 million sequentially.
The increase in revenue from the fourth quarter was primarily attributable to higher average assets under management across all three investment vehicles, partially offset by two fewer days in the quarter.
Our implied effective fee rate was 57.3 basis points in the first quarter, compared with 57 basis points in the fourth quarter.
Excluding performance fees our fourth quarter implied effective fee rate would have been 56.3 basis points.
No performance fees were recorded in the first quarter.
Operating income was a record $53.2 million in the quarter, compared with $40.4 million in the prior year's quarter and $49.4 million sequentially.
Our operating margin decreased slightly to 42.3% from 42.4% last quarter.
The fourth quarter included a cumulative adjustment that reduced compensation and benefits to reflect actual incentive compensation that was paid, which increased our fourth quarter operating margin by 153 basis points.
Expenses increased to 8% compared with the fourth quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A.
The compensation to revenue ratio for the first quarter was 35.5%, consistent with the guidance provided on our last call.
The increase in distribution and service fee expense was primarily due to higher average assets under management in US open-end funds.
And the increase in G&A was primarily due to higher professional and recruiting fees.
Our effective tax rate was 27.25% for the first quarter, in line with the guidance provided on last quarter's call.
Our firm liquidity totaled $118.8 million at quarter end, compared with $143 million last quarter.
Firm liquidity as of March 31 reflected the payment of bonuses as well as the firm's customary funding of payroll tax obligations, arising from the vesting and delivery of restricted stock units on behalf of participating employees.
We remain debt free.
Total assets under management was a record $87 billion at March 31, an increase of $7.1 billion or 9% from December 31.
The increase was due to net flows of $3.8 billion and market appreciation of $4 billion, partially offset by distributions of $690 million.
Advisory accounts which ended the quarter with a record $20.3 billion of assets under management, had record net inflows of $1.7 billion during the quarter.
$1.1 billion, of which were included in last quarter's pipeline.
We recorded $968 million of inflows from five new mandates and $799 million of inflows into existing accounts.
These inflows were evenly a portion between US real estate, global real estate, preferred and global listed infrastructure portfolios.
Joe Harvey, will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan subadvisory had net outflows of $204 million during the quarter, compared with net inflows of $83 million during the fourth quarter.
We believe the outflows were largely attributable to a distribution rate cut made by the Japanese advisor to one of the funds we sub-advise in January 2021.
The last time the Japanese Advisor made a distribution rate cut to one of the funds we sub-advise was in the second quarter of 2019, which coincided with the last time Japanese Subadvisory had net outflows.
Encouragingly the annualized organic decay rate for the two months since January 2021 distribution rate cut was considerably less than what we experienced in 2019.
Subadvisory excluding Japan had net inflows of $97 million, primarily from the new Taiwanese mandate into a blended next-gen REIT digital infrastructure portfolio.
Open-end funds, which ended the quarter with a record $38.6 billion of assets under management had record net inflows of $2.2 billion during the quarter, primarily to US real estate and preferred funds.
Distributions totaled $238 million, $193 million of which was reinvested.
Let me briefly discuss a few items to consider for the second quarter and remainder of the year.
With respect to compensation and benefits, which includes the cost of our newly formed private real estate group that we announced earlier this week, we expect that our compensation to revenue ratio will remain at 35.5%.
We expect G&A to increase by about 9% from the $42.6 million we recorded in 2020, which is higher than where we guided to on our last call.
In addition to incremental investments in technology and global marketing, we expect an increase in recruitment costs associated with the hiring of certain key investment and distribution personnel in addition to the new private real estate group.
We expect that our effective tax rate will remain at 27.25%.
And finally, you will recall that on our last call, Bob Steers mentioned the termination of an institutional global real estate account of approximately $900 million that was expected to be withdrawn in the next quarter or two.
This account, which has a lower than average fee is still being managed and while we expect it to terminate this year, we have no visibility as to timing.
Today, I plan to review the investment environment, our performance and then provide some deeper perspective on our larger asset classes and their outlook.
So markets continued their strength in the first quarter as evidenced by US and global equities being up 6.2% and 4.7% respectively.
But beyond the noise, there were three noteworthy economic and market trend that stood out.
First, strong upward global growth revisions driven primarily by the US.
Second, underneath the surface, the market has increasingly taken on a reflationary tone as reflected by repricing of medium-term inflation prospects and a strong performance in our more inflation sensitive investment areas, such as commodities, which were up 6.9% for the quarter and are now up 35% over the last 12 months.
Last, with a higher growth and higher inflation as the context, we saw a repricing of Fed policy expectations, which partially drove the meaningful rise in the US 10-year treasury yield, ending the quarter at around 1.7%.
So given those three dominant trends of higher growth, inflation and rates, the high level summary of our asset class absolute performance is that listed real assets generally outperformed US and global equities.
This was led by MLPs, natural resource equities, and US REITs.
This performance was consistent with our expectations given deeply depressed relative valuations and that fundamentals for these asset classes were held disproportionately back in 2020 by the recession, but also some unique aspects from social distancing.
On the other side of the ledger, preferred securities were very modestly negative in the quarter.
Compression of preferred credit spreads could only partially offset the headwinds of the steep rise in yields.
That said, this flattish performance still far outpaced traditional fixed income in both income rate and total return with the Barclays Global Ag down 4.5%.
So turning to our performance scorecard.
In the first quarter six of nine core strategies outperformed their benchmark, but for the last 12 months seven of nine core strategies outperformed.
As measured by AUM, 93% of our portfolios are outperforming on a one-year basis, an improvement from 84% last quarter, mostly due to our preferred portfolios.
On a three and five year basis 99% and 100% respectively are outperforming, which is marginally better than last quarter.
By most medium and long-term measures, our investment performance continues to be strong and have high breadth.
That said the regime has shifted, particularly since the November of vaccine announcements.
We expect the market, which has been quite factor dominated to exhibit more idiosyncratic behavior over time, typically a more bottom up environment has allowed our specialist teams to achieve even higher performance batting averages.
So digging deeper into some of our major asset classes.
US and global real estate returned 8.3% and 5.8% respectively in the first quarter, both outpacing their respective equity indices.
Leadership has been in the Retail, Gaming, Lodging and residential areas in anticipation of significant pent-up demand supported by high global savings rates, driving multi-year recoveries in those areas.
The early phase -- the early cycle phase, excuse me, of an economy tends to be the strongest phase for listed real estate.
This is when economic recoveries are the strongest and where tightening is still several years away.
We continue to educate our clients by producing thought leadership demonstrating the historically higher growth and inflation expectations, triumps higher interest rates when it comes to reperformance.
Q1 absolute performance is a perfect reflection of that.
While we outperformed in our US and European strategies, our performance was weaker in Asia.
In general, while we have adopted a more value and reflationary repositioning in the US given stronger growth in vaccination success, we had been positioned more secularly in Asia given different growth dynamics.
Despite these different growth dynamics, Asia like the US has seen the value versus growth momentum reversal.
Preferred securities returned minus 0.6% in the first quarter and we outperformed in both our core and low duration preferred strategies.
After one quarter of underperformance last year, our highly experienced and accomplished team has now outperformed the last four quarters and 10 of the last 13 quarters.
We have also been communicating to our clients for the last three to six months that interest rates were more likely to move up over time, while the 10-year has trickled down since quarter-end, our expectation is that the 10-year will move more toward 2% by the end of 2021 and 2.25% by the end of 2022.
Importantly, in contrast to the start of the year, most market participants have already socialized the idea that rates will likely be higher over time, which in our view, reduces the odds of a tantrum or a disorderly unwind [Phonetic].
Given our rate view, we continue to suggest that investors consider our low duration preferred strategy when building portfolios.
Credit fundamentals of preferred issuers continues to improve with the economic recovery.
Take for instance US banks, who are the largest issuers of preferreds.
Banks have just come off an earning season in the US where they announced their releasing nearly $10 billion in loan loss reserves, as the pandemic-related losses they had accounted for have not been realized.
In addition their capital levels remain far in excess of their regulatory capital requirements.
The first quarter returned 3.5%, which slightly lagged global equities.
Returns in the quarter were led by economically sensitive businesses such as marine ports and freight railways and sustained higher energy prices provided a tailwind for midstream energy companies.
An important catalyst for the asset in the future will be infrastructure focused, fiscal stimulus packages around the world.
President Biden recently proposed over $2 trillion in spending and tax credits, which we see as a clear positive for listed infrastructure, tying into key themes we've highlighted over the past year.
Specifically, we see direct benefits for renewable energy developers in electric utilities, primarily through tax incentives.
We see the potential for new revenue opportunities for cell tower and data center companies, due to a larger addressable market for wireless carriers.
And last, we see broader support for the most economically sensitive segments of listed infrastructure, such as freight railways and marine ports.
Related, we continue to see increased adoption of infrastructure allocations with asset consultants and institutions, and we see growing interest from wealth advisors, as evidenced by record flows into our infrastructure open-end mutual fund and the NAV premium at which our infrastructure closed-end fund, UTF, continues to trade.
Disappointingly, we underperformed our benchmark during Q1 and while our three-year excess return is still attractive, we have underperformed over the last 12 months, so improving our performance here is a key focus area.
I also want to mention that our real assets multi-strategy portfolio was up 6.6% in the quarter, outpacing US and global equities.
We had very good relative performance of plus 100 basis points, with strong alpha contribution from asset allocation and natural resource equities.
We now have good relative performance over the last one, three and five years.
Over a full cycle, this portfolio is designed to provide equity like returns with inflation protection and with diversification versus stocks and bonds.
As a reminder, we launched this multi-strategy offering now more than nine years ago.
And in the last deflationary secular stagnation regime, it's fair to say, there wasn't much interest in diversified real assets.
Fast forward to today, it's clear that inflation is top of mind, while economic forecast always have wide confidence intervals, we expect that there is a very reasonable probability that inflation isn't just a short-term story, but it is more likely to be elevated for the long-term.
As a result, we expect that this is very good nine-year track record may be a hidden asset as we look out over the next three or five years.
And it's something we will speak about more on future calls.
We know that there is a fantastic opportunity to leverage the performance DNA in intellectual capital of our listed real estate team.
One with Jim's team, we are going to be able to create high performing stand-alone private strategies as well as integrated listed and private strategies that dynamically allocate over time to optimize for the best investment opportunities.
The start to 2021 couldn't have been more different than the start to 2020, as we begin to see the pathway out of the pandemic and toward economic recovery, rather than face the sea of uncertainty that the pandemic unleashed one year ago.
We're off to a good start in 2021.
Record fiscal and monetary stimulus combined with the continued rollout of vaccine distribution in the US have set the stage for reopening of our society and economy.
We expect this will be a gradual process and should result in a vigorous extended economic recovery.
Last year we achieved industry leading organic growth despite depreciation and share prices for REITs and infrastructure.
This year to date, we've had some catch-up appreciation, which has provided momentum to our results on top of our continued organic growth.
To set the stage for discussion of our fundamental trends, I'd like to share some thoughts on the big picture for our business and strategy.
Allocations to most of our asset classes are rising because of what I call the asset allocation dilemma.
That is fixed income yields cannot meet investors return targets, which places a significant ask on the equities portion of portfolios.
This creates a need for alternatives including real assets, which can provide equity like returns as well as diversification benefits.
This allocation dynamic combined with our strong investment performance has helped fuel our organic growth.
The current macro environment further supports the demand for our strategies.
Recently, Michael Hartnett, the Chief Investment Strategist at Bank of America, released a report citing five reasons to own real assets.
Number one, they're cheap and at the lowest valuations versus financial assets since 1925.
Number two, there are a hedge for inflation, infrastructure spending and the war against any quality.
Number three, they diversify portfolios.
Number four, they are under-owned and number five, they are scarce and more valuable in the coming digital currency era.
I believe that Hartnett's case for real assets only adds to the demand for our asset classes.
Turning to our fundamental results.
As Jon reviewed, we had an OK quarter in investment performance with six of nine core strategies outperforming as some portfolio managers didn't rotate strongly enough to value in cyclicality as the reopening rally unfolded.
We are confident in our investment teams ongoing portfolio adjustments.
Importantly with 93% and 99% of our AUM outperforming over one and three years respectively, we are in a terrific position to retain assets and compete for new allocations which continue at a good pace.
Our AUM set a record $87 billion at quarter-end with all three of our investment vehicles setting firm records.
Starting from a record $7.5 billion of gross inflows in the first quarter, firmwide net inflows were $3.8 billion and annualized growth rate of 19%.
Open-end funds led the way on net inflows with a record $2.2 billion, driven primarily by US REITs and secondarily by preferreds.
We were awarded $460 million asset allocation model placement in US REITs from a wealth advisory firm.
We also had multiple allocations from small to mid-sized institutions into our institutional US refund, in part driven by several new consultant recommendations.
Notwithstanding rising treasury yields, we had inflows into both our core and low duration preferred strategies, albeit with an anticipated shift and flow momentum to the low duration strategy.
Another notable open-end fund trend was a pickup inflows into our infrastructure fund.
We believe this increased interest has been driven in part by President Biden's infrastructure proposal as Jon mentioned.
In our major asset classes of Global real estate, US real estate, preferreds and infrastructure, we gained market share, measured against both active and passive fund vehicles combined, attribute to both our consistent performance and the strength of our distribution.
Institutional advisory had record net inflows of $1.7 billion.
We believe that the record results are partially attributable to attractive relative valuations and allocation entry points for real estate and infrastructure as well as the strong execution by our distribution team in the Middle East where we've seen growing demand for real estate and infrastructure strategies.
Subadvisory ex-Japan had net inflows of $97 million, relatively quiet, but importantly included a mandate combining two of our recently developed strategies.
Japan subadvisory was our only channel with net outflows, primarily due to one funds distribution reduction that Matt explained.
For perspective, Japan subadvisory peaked in the third quarter of 2011 at 33% of our AUM, but is now just 11% of our AUM as assets have declined by 34% in Japan, while the firm's AUM and other channels has grown by 69%.
Our current won unfunded pipeline stands at $1.4 billion.
Working from last quarter's $1.8 billion pipeline, we had $1.1 billion of fundings in the quarter and won $940 million in seven new mandates and account top-ups across global real estate, infrastructure and a multi-strategy blend of US REITs and preferreds.
Three of the seven new mandates were in our focus strategies, which have higher active share and where performance has been very strong.
We continue to see growing interest for these differentiated, high-performing strategies.
Turning to corporate strategy.
We are confident and continuing to invest in the business.
We believe the next several years will be good allocation entry points for both real estate and infrastructure, providing additional support for resource allocation.
Priorities always start with alpha generation, so we will continue to invest in people, process, data and strategy development.
On that front, we continue to allocate resources to next-generation strategies, focused portfolios, multi-strategy allocation capabilities, ESG integration, and as we announced earlier this week, expanding our real estate capabilities.
Our strategic rationale is to create another growth driver through private investment in the $15 trillion universe of real estate in the US that is not owned by listed REITs.
Leading the group is Jim Corl, who previously worked with us from 1997 to 2008, in his last four years as Chief Investment Officer of our listed real estate team.
Jim spent the last 11 years at Siguler Guff & Company, where he helped build and led an opportunistic real estate investment business.
We're excited about the team that Jim has built to execute our private business, which is a testament to Jim and to our platform.
Without distractions from legacy assets, this team will be able to focus on the best investment opportunities available today.
Our goal is to excel in private real estate as a stand-alone as we haven't listed -- but more importantly, to innovate in combining listed and private to create more alpha levers.
Investors have become more interested and agile in allocating between the two markets.
Moreover, many institutions have real estate allocations that are heavily weighted in legacy property types such as office and retail.
As a result, they need new solutions, and we believe we are well positioned to provide advice on how to rebalance using the listed markets or segments of the private market.
These dynamics will position us to gain a greater share of real estate allocations, where private typically has the greatest share.
We have a product plan that includes strategies and vehicles for both the institutional and wealth channels.
Bob Steers's and my collective vision is to have both private and listed capabilities in real estate and infrastructure, enabling us to provide stand-alone strategies and bespoke solutions that include both markets.
We will work closely with Greg Bottjer, who heads Product Strategy, as well as our Executive Committee to build this foundation for our next phase of growth.
In conclusion, while the past year has been unprecedented, we are energized and optimistic about our future.
We look forward to returning to the office and seeing our colleagues and all of you in person.
| qtrly net inflows of $3.8 billion.
qtrly adjusted earnings per share $0.79.
|
On the call today we have Aaron Levie, our CEO; and Dylan Smith, our CFO.
We'll also post the highlights of today's call on Twitter at the handle @boxincir.
The impact of the KKR-led investment in Box and any potential repurchase of our common stock.
These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.
In addition, during today's call we will discuss non-GAAP financial measures.
These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from our GAAP results.
Unless otherwise indicated, all references to financial measures are on a non-GAAP basis.
With that, let me hand it over to Aaron.
I'm incredibly proud of our team at Box and our strong start to FY 2022, delivering a 200 basis point improvement in our revenue growth rate versus the previous quarter, 24% billings growth and 20% growth in RPO year-over-year.
With the strong momentum we're driving, we are confident in our ability to achieve accelerated growth and higher operating margin now and in the years ahead.
As a result, we are raising our revenue guidance for the full year.
Dylan will go over the financial results and guidance in more detail.
But before I hand it over to him, I'd like to talk about our strategy, the value that our Content Cloud brings to our customers and the positive impact we're seeing in the market as a result of our strong execution.
Our strategy is well aligned to three major trends that are driving the future of work.
First, work is being defined by hybrid work environment.
In a recent Gartner study, more than 80% of company leaders surveyed said they plan to allow employees to continue working remotely at least some of the time.
Even as offices open back up, traditional physical boundaries will continue to blur and enterprises will need to empower collaboration both internally among virtual and distributed teams, and externally with partners, customers and suppliers to get work done from anywhere.
Second, we know that the future of business will be cloud and digital first.
Customer and partner interaction will increasingly be executed digitally from the onboarding of employees to automating workflows with partners.
These workflows must function using multiple cloud-based application, access to content in a single unified platform across a multi-cloud environment is critical to ensure productivity and business success.
And finally, data security, compliance and privacy remain more important than ever.
Governments across the world are enacting new data privacy requirements and as recent cyber attacks, such as the SolarWinds and Colonial Pipeline events have shown, cybersecurity threats are affecting all enterprises, and creating significant business disruption.
Content integrity is an absolute requirement.
Content is the lifeblood of a company and any breach that threatens the security of content can cause irreversible damage to the enterprise.
At the heart of the challenges is how companies work with their most valuable content.
Great content is how the best movies get made.
How is that sales pitches are done?
How marketing campaigns drive customer engagement?
And how the next new product breakthrough is ideated and ultimately delivered to market?
Today, enterprise has spend tens and billions of dollars every year just to store and manage content in fragmented legacy systems, like network storage, and document management systems.
There is simply no way enterprises can get the value of the content that they have with these approaches.
That's where Box comes in.
Our platform offers more critical functionality designed for the multi-cloud hybrid work environment in a seamless secure user experience than any other solution in the market today.
We are building the leading Content Cloud for enterprises.
Our strategy is to power, automate and integrate the complete content lifecycle.
From the moment content is created through the entire content workflow in a single platform that enables our customers to thrive in a work from anywhere, digital first, highly insecure world.
Our Content Cloud moves beyond legacy content management systems by automating workflows between cloud-based applications, through integrations with the apps our customers are using to get their work done, like Salesforce and Microsoft Teams.
We're building deep functionality in the key areas of the content lifecycle, such as our advanced workflow solution with Box Relay, and e-signatures with Box Sign.
We have natively built advanced security into the platform, so that our customers' content stays safe and compliant.
And now we're making it easier than ever for our customers to move content in the box with Box Shuttle.
Combined with our cloud-first approach, Box is the only platform that enables customers to work in and across cloud-based applications without fragmented content architectures.
Box provides a seamless, simple and intuitive experience that drives productivity for users every time wherever they are.
Our vision for the Content Cloud is resonating with customers.
More and more our customers are recognizing the strategic importance of consistent content availability and integrity, whether they're collaborating on a project in Zoom, closing a quarter using Salesforce, or building a new product with Autodesk.
This is illustrated in Q1 by the 48% year-over-year growth in enterprise deals over $100,000.
Additionally, our multi-product suite sales are gaining strength, with our customers adopting and leveraging more of our Content Cloud functionality.
As proof of this, we have experienced a record 49% attach rate of our suites this quarter in $100,000 plus deals, and we anticipate the growth of our multi-product plans continuing in the future.
In Q1, we continued to build on our leadership position in cloud content management, and transform how enterprises work.
First, we expanded our product portfolio with the acquisition of SignRequest, a leading cloud-based electronic signature company to develop Box Sign.
Box Sign is expected to be available this summer.
It will be natively embedded in the Box, and included in all Box business subscription plans, with additional levels of functionality being available in our enterprise plans and suites.
This will enable all of our customers to have access to the value of Box Sign, while also enabling us to monetize the higher end e-signature use cases that leverage advanced functionality in API's.
Another exciting announcement we made in Q1 was the availability of the all new Box Shuttle.
For many organizations moving to the cloud has been a priority, but the cost and complexity of content migration has been a major impediment to cloud adoption.
The new Box Shuttle can migrate some of the most complex and large scale content management environments at a lower cost and faster than ever.
We also announced significant updates to our security products this spring.
Box Shield, which helps customers reduce risk and proactively identify potential insider threats or compromised accounts, remains the fastest growing product in Box's history.
We continue to rapidly innovate on Box Shield advanced machine learning technology to help protect our customers most important IP.
Finally, we announced updated partnerships with both Microsoft and Cisco.
We continue to hit enhance our integrations with Microsoft Teams, Office and Microsoft Information Protection suite.
As customers adopt a multi-cloud strategy, they need to access and work with content across a range of applications.
And Box helps bridge content management between Microsoft and other platforms.
Similarly, we've updated our partnership with Cisco Webex to make it even easier for users to create workflows that span our two platforms.
Turning to our customers, we have seen some outstanding examples of how organizations are utilizing Box to run their businesses and drive productivity such as a global leader in the financial sector through embedded Box to deeper into its business with a seven figure expansion in Q1.
For this leading enterprise Box manages its business critical content empowers encrypted document sharing between clients and financial advisors at scale, while adhering to the highest standards of data privacy, protection and security.
And a government agency who selected Box in Q1 to Power Secure collaboration for their hybrid work environment, as well as drive critical processes to the delivery and sharing of public health research.
Over 100,000 customers rely on Box to Power Secure collaboration and its critical business processes across their organizations in Q1.
And we close wins and expansions with leading organizations such as D.A. Davidson Companies, IQVIA, Isuzu Motors and Penguin Random House.
Our strategy is working, as demonstrated by our strong results, including the improvement in our revenue growth this quarter in addition to the very strong billings in RPO growth.
We are committed to our FY 2024 targets of delivering a growth rate of 12% to 16% in operating margin in the range of 23% to 27%.
We are going after one of the largest markets in software attacking a total addressable market of over $55 billion in spend on content management, collaboration, storage and data security annually.
And with the addition of e-signature capabilities, our market is only getting larger.
We're also confident that we have the right team and Board of Directors to take full advantage of this opportunity and drive significant shareholder value going forward.
With the addition of John Park, who brings significant software growth investing experience and the expertise and resources of KKR, we have eight independent directors who are former or current operators of high growth and highly profitable SaaS and enterprise software companies, including three former or current public software CEOs, and two former public CFOs.
Throughout this year, we will continue to build out our industry-leading Content Cloud.
We will expand data migration and workflow automation.
Go deeper with our data security and compliance offerings, enable new ways to collaborate and publish content on Box and enhance insights and analytics, so customers can get the most out of their content.
With over 100,000 customers on our platform, and exciting roadmap and a strategy that is already yielding results.
We are building on our leadership in cloud content management and driving the next phase of growth.
With that, I'll hand it over to Dylan.
In Q1, we are pleased to have exceeded our guidance across all key metrics.
Our acceleration in revenue growth, billings growth, RPO growth, and the operating profit clearly demonstrates the strong trajectory of our business.
As a result, we are raising our full-year revenue guidance.
We delivered revenue of $202 million up 10% year-over-year, a 200 basis points improvement from the 8% growth we delivered in the previous quarter.
Our Content Cloud offerings are increasingly resonating with our customers, as demonstrated by the strong add-on product traction and large deal growth we achieved in Q1.
As Aaron mentioned, we're excited by the early customer response and demand for native e-signature capabilities in Box, and we're on track to make Box Sign generally available this summer.
As our customers are increasingly adopting products with more advanced capabilities, 60% of our revenue is now attributable to customers who have purchased at least one additional product up from 54% a year ago.
In Q1, we closed 59 deals worth more than $100,000 up 48% year-over-year.
Importantly, 49% of these six-figure deals included one of our multi product suite offerings, a new record for us and up significantly from 28% a year ago.
We ended Q1 with remaining performance obligations or RPO of $865 million, up 20% year-over-year, exceeding our revenue growth by 1000 basis points and an acceleration from the prior quarters RPO growth rate.
Q1s RPO growth is comprised of 15% deferred revenue growth, and 23% backlog growth, demonstrating Box's stickiness as we continue to sign longer term agreements to support our customers content strategies.
We expect to recognize more than 60% of our RPO over the next 12 months.
Q1 billings of $159 million were up 24% year-over-year, and a significant improvement from Q4's growth rate.
This result reflects the impact of a few early renewals from customers who had been set to renew in Q2, shifting roughly $5 million in billings from Q2 to Q1.
Our net retention rate at the end of Q1 was 103%, up from 102% in Q4.
This result was driven by strength in customer expansion and a stable annualized full churn rate of 5%.
Based on the strong momentum, we're seeing in customer expansion and retention, we expect to deliver additional improvement in our net retention rate over the course of this year.
Turning to margins, our non-GAAP gross margin came in at 73% in line with the same period a year ago.
Q1 gross profit of $148 million was up 10% year-over-year consistent with our revenue growth.
We expect gross margin to increase over the course of this year and for it to come in at roughly 74% for the full year as we continue to deliver infrastructure efficiencies.
Our ongoing efforts to improve profitability are paying off.
In Q1, we delivered significant bottom-line improvements through our continued focus on profitable growth and disciplined expense management.
Additionally, our investments in building out our Engineering Center of Excellence in Poland will help us drive additional operating leverage and efficiencies over time.
Q1 operating income doubled year-over-year to $34 million, which in turn drove a 760 basis points improvement in Q1 operating margin to 17%.
As a result, in Q1, we delivered $0.18 of non-GAAP earnings per share above the high end of our guidance and a strong 80% improvement from $0.10 a year ago.
I'll now turn to our cash flow and balance sheet.
In Q1, we delivered record cash flow from operations of $95 million, up 53% from the year ago period.
We also generated record free cash flow of $76 million a year-over-year improvement of 91%.
Capital lease payments, which we include in our free cash flow calculation, were $13 million versus $17 million in Q1 of last year.
As a reminder, we expect our capital lease liabilities and payments to continue decreasing steadily in the coming years as we continue to drive infrastructure efficiencies and leverage our public cloud partnerships.
For the full year of FY 2022, we continue to expect CapEx and capital lease payments combined to be roughly 7% of revenue.
Cash from investing in Q1 reflects $57 million in M&A related payments, primarily driven by the acquisition of SignRequest.
As a result, we ended the quarter with $612 million in cash, cash equivalents and short-term investments.
Before I turn the guidance, I'd like to discuss the accounting impact resulting from the preferred stock issuance that we closed earlier this month, combined with our anticipated repurchase of common stock via a self tender offer, which we expect to launch next week.
Due to the required accounting treatment for these transactions based on our current expectations.
This will result in the following earnings per share impacts.
First on a quarterly basis, until conversion of the preferred stock and the common stock are roughly $0.025 reduction due to the non-cash accounting impact related to the preferred stock dividend, which we anticipate settling and shares of common stock.
Second for Q2 and FY 2022 a $0.02 reduction due to a temporarily elevated share count during the period between our recent preferred stock issuance and the completion of our anticipated share repurchase.
Combined, these items will result in a $0.04 reduction to earnings per share in Q2 and a $0.09 reduction to earnings per share for the full year.
This preferred stock dividend will appear below the net income line in our P&L and in the earnings per share note accompanying Box's financial statements.
Note that this will have no impact on net income.
With that, I would like to turn to our guidance for Q2 and fiscal FY 2022.
Based on our strong Q1 results and forecast, we are raising our full year revenue guidance.
Our underlying profitability expectations for FY 2022 are also now higher than our initial expectations.
For the second quarter of fiscal 2022, we anticipate revenue of $211 million to $212 million representing 10% year-over-year growth.
We expect non-GAAP operating margin to be in the range of 18% to 18.5%, representing a 150 basis points sequential improvement at the high end of this range.
Including the $0.04 impact I just discussed.
We expect our non-GAAP earnings per share to be in the range of $0.17 to $0.18 and GAAP earnings per share to be in the range of negative $0.13 to negative $0.12, on approximately 167 million and 160 million shares respectively.
We expect our billings growth rate to be in the mid single-digit range, which includes the $5 million impact from early renewals that I mentioned earlier.
Combined with our strong Q1 billings results, this would result in year-over-year billings growth of roughly 13% for the first half of FY 2022 ahead of revenue growth and an acceleration from our billings growth in the first half of last year.
For the full year, ending January 31, 2022.
We are raising our full year revenue guidance and we now expect our FY 2022 revenue to be in the range of $845 million to $853 million, representing approximately 11% year-over-year growth at the high end of this range.
We expect non-GAAP operating margin to be in the range of 18% to 18.5% above our initial FY 2022 expectations.
The high end of this range represents a 320 basis point improvement from last year's results of 15.3%.
Our stronger business performance drives a $0.04 improvement in our earnings per share expectations for FY 2022 versus our initial guidance.
At the same time, our full year earnings per share guidance incorporates the $0.09 reduction for the preferred stock accounting charges that I mentioned previously.
As a result of these various factors, we now expect our FY 2022 non-GAAP earnings per share to be in the range of $0.71 to $0.76 on approximately 161 million diluted shares.
Our GAAP earnings per share is expected to be in the range of negative $0.50 to negative $0.45 on approximately 154 million shares.
We continue to expect billings growth to be slightly above revenue growth for the full year of FY 2022 and for the back half of FY 2022 our billings growth should be roughly in line with revenue growth.
We expect RPO growth to outpace both revenue and billings growth for the full year of FY 2022.
Q1 was an excellent start to our fiscal year fueled by strong momentum in large deals and suites attach rates.
Our results, most notably accelerated revenue billings and RPO growth, combined with significant operating margin improvements, clearly indicates that our strategy is working as customers are placing more emphasis on the value of their content.
As the leading Content Cloud, Box is uniquely positioned to solve a wide variety of high value use cases for our customers.
As we build on this leadership position, we're very confident in achieving our FY 2024 targets two years from now of a 12% to 16% growth rate and operating margin in the range of 23% to 27%.
| compname reports q1 non-gaap earnings per share of $0.18.
sees q2 non-gaap earnings per share $0.17 to $0.18.
sees q2 gaap loss per share $0.12 to $0.13.
q1 non-gaap earnings per share $0.18.
q1 gaap loss per share $0.09.
sees q2 revenue $211 million to $212 million.
sees fy revenue $845 million to $853 million.
sees fy 2022 non-gaap earnings per share $0.71 to $0.76.
sees fy 2022 gaap loss per share $0.45 to $0.50.
billings for q1 of fiscal year 2022 were $159.4 million, up 24%.
|
During our call today, unless otherwise stated, we're comparing results to the same period in 2020.
Future dividend payments and share repurchases remain subject to the discretion of Altria's board.
Altria reports its financial results in accordance with U.S. generally accepted accounting principles.
Today's call will contain various operating results on both a reported and adjusted basis.
Adjusted results exclude special items that affect comparisons with reported results.
Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment, refer to existing adult tobacco consumers 21 years of age or older.
We're off to a strong start to the year and believe our businesses are on track to deliver against their full-year plans.
Against a challenging comparison, our tobacco businesses performed well in the first quarter and we continue to make progress advancing our noncombustible product portfolio.
We now have full global ownership of on!
oral nicotine pouches as we recently closed transactions to acquire the remaining 20% global interest.
We are excited about the opportunity we have with on!
to convert smokers and we have talented teams supporting the global plans for the brand.
Before discussing our first-quarter results in more detail, we would like to honor the memory of Tom Farrell, our late chairman of the board.
Tom served 13 distinguished years on our board, offered valuable insights and guidance during his tenure, and was a true visionary.
We will miss his leadership, contributions, and friendship.
The board will appoint a new chair at its meeting following our Annual Shareholders Meeting in May.
Let's now turn to our first-quarter results.
Our first-quarter adjusted diluted earnings per share declined 1.8%, primarily driven by unfavorable timing of interest expense and a higher adjusted income tax rate.
In the smokeable products segment, we continue to execute our strategy of maximizing profitability in combustibles while appropriately balancing investments in Marlboro, with funding the growth of noncombustible products.
Segment adjusted OCI margins expanded and Marlboro continued its retail share momentum from the back half of 2020.
For volumes, reported smokeable segment domestic cigarette volume declined 12% in the first quarter, reflecting year-over-year trade inventory movements, one fewer shipping day and other factors.
When adjusted for these factors, cigarette volume declined by an estimated 3.5%.
We believe that in the first quarter of 2020, wholesalers built inventories by approximately 900 million units, driven in part by COVID-19 dynamics, compared with a depletion of approximately 300 million units in the first quarter of 2021.
At the industry level, we estimate that first-quarter adjusted domestic cigarette volume declined 2%.
Looking at smoker retail dynamics, we estimated that total cigarette trips in the first quarter remained below pre-pandemic levels.
Also, estimated expenditures per trip remained elevated when compared to pre-pandemic levels and were steady sequentially.
We are continuing to monitor the impacts from external factors on tobacco consumer purchasing patterns and behavior.
In March, the federal government passed a third stimulus package.
An increasing number of people became vaccinated and consumability improved sharply.
We're keeping a close eye on the tobacco consumer and we will continue to provide our insights on the underlying factors as the year progresses.
Moving to our noncombustible products.
We are pleased to now have full ownership of on!
oral nicotine pouches globally.
We completed transactions in December and April to acquire the remaining 20% of the global on!
business for approximately $250 million.
When we made the initial 80% acquisition in 2019, the oral nicotine pouch category in the U.S. was rapidly growing off of a small base.
Subsequently, oral nicotine pouch growth has exceeded our original estimates.
In the first quarter of 2021, we estimate that retail share for all nicotine pouches was approximately 13% of the total oral tobacco category, double its share in the year ago period.
We expect continued growth from the oral nicotine pouch products and estimate that category volume in the U.S. will grow at a compounded annual growth rate of approximately 25% over the next five years.
Since 2019, Helix, supported by the enterprise, significantly increased on!
manufacturing capacity, broadened retail distribution, grew tobacco consumer awareness, and followed PMTAs for the entire product portfolio.
Helix achieved an annualized manufacturing capacity of 50 million cans by the end of last year, and as of the end of the first quarter, on!
was sold in approximately 93,000 stores.
In the U.S. market, on!
In the first quarter, on!
share of the total oral tobacco category grew significantly to 1.7%.
On a 12-month moving basis, in-store selling and providing point-of-sale data, on!
retail share was 3.1%, an increase of seven-tenth from the 2020 full-year share.
Going forward, we intend to report on!
share of the total U.S. oral tobacco category as Helix expects to be in stores covering 90% of the industry's oral tobacco volume by midyear.
Our primary focus continues to be on increasing on!
growth in the U.S. Internationally, we see potential to strengthen on!
in the Swedish market.
We also see longer-term prospects in Europe to expand on!
and gain consumer feedback on potential noncombustible products for the U.S. To explore these additional opportunities, we have expanded the international on!
presents a compelling noncombustible alternative for smokers and we look forward to supporting their conversion journey.
We estimate that total category volume increased 24% versus the year ago period.
As a reminder, in Q1 2020, the FDA restricted the sales of all flavored e-vapor products among pod systems with the exception of tobacco and menthol.
Sequentially, we estimate that the category volume increased 7% as competitive marketplace activity continued.
As a result of these dynamics, JUUL's first-quarter retail share of the total e-vapor category decreased to 33%.
We continue to believe that a responsible e-vapor category, consisting solely of FDA authorized products can play an important role in tobacco hard reduction.
As for our JUUL investment, the FTC trial is now scheduled for June of this year and we remain committed to vigorously defending our investment.
In heated tobacco, PM USA is continuing to expand IQOS and Marlboro HeatSticks.
Beginning this month, HeatSticks are available in retail stores statewide across Georgia, Virginia, North Carolina, and South Carolina.
Marlboro HeatSticks retail volume and share continued to grow in the first quarter.
In Atlanta stores with distribution, Marlboro HeatSticks retail share of the cigarette category was 1.1%, an increase of two-tenth sequentially and in Charlotte, HeatSticks retail share was 1%, an increase of three-tenth sequentially.
Last month, PM USA began selling the IQOS 3 device, which offers a longer battery life and faster recharging, as compared to the 2.4 version.
The new device is being offered through device and HeatSticks bundles and through the lending program, which has been effective at generating trial and driving purchase.
We're encouraged to see that many consumers are upgrading their 2.4 devices, representing approximately 25% of all IQOS 3 device sales in the first quarter.
Along with geographic expansion, PM USA is increasing the use of its digital platforms like Marlboro.com and getiqos.com to engage with smokers and communicate the benefits of IQOS, including the MRTP claim on the IQOS 2.4 system.
For Marlboro.com, IQOS content is now available nationwide.
Smokers can sign up to receive communications and be notified when IQOS is available in their area.
PM USA is also using its Marlboro's Rewards program to drive IQOS awareness and value delivery.
Smokers can earn Marlboro rewards points by learning about IQOS and can also redeem their points for discounts on the IQOS device.
cigarette volume by year end.
We are making progress in driving awareness and availability of on!
and IQOS while investing in future innovative noncombustible products and we continue to acquire more tobacco consumer insights to inform our strategies to actively transition smokers to our noncombustible portfolio.
Our smokeable products segment continues to support our vision, generating significant cash that can be invested in noncombustible products and return to shareholders.
Turning to our financial outlook.
We reaffirm our 2021 guidance to deliver adjusted diluted earnings per share in a range of $4.49 to $4.62.
This range represents an adjusted diluted earnings per share growth rate of 3% to 6% from a $4.36 base in 2020.
The guidance includes continued investments to support the transition of adult smokers to a noncombustible future.
We will continue to monitor various factors that could impact our guidance.
Our employees continue to drive the success of our businesses.
They've risen to the challenge together to deliver results and are supporting each other and their communities.
Over the past years, the challenges associated with the pandemic have been compounded by the continued social injustice and in equities that black and brown Americans still face every day.
And the Asian American community is hurting as violent and hateful attacks on Asians skyrocketed.
We condemn any form of hatred and discrimination against any person.
Through our Asian, black, and brown employees, we will continue to stand with you and we stand for you.
We recently released our report on supporting our people and communities, which details the many ways we're making progress, enhancing our culture and positively impacting our communities.
It is part of a series of corporate responsibility progress reports that we are issuing this year, and it is available on altria.com.
Moving to our results.
Our tobacco businesses continue to perform well in the first quarter.
The smokeable products segment delivered over $2.3 billion in adjusted OCI and expanded adjusted OCI margins by 2.2 percentage points to 57.5%.
PM USA's revenue growth management framework supported the segment's strong net price realization of 8% for the quarter.
We continue to be pleased with Marlboro's performance and category leadership.
In the first quarter, Marlboro's retail share was 43.1%, an increase of four-tenth versus prior year.
We believe that Marlboro is continuing to benefit from smoker preferences for familiar products during disruptive times and is lapping the year ago comparison quarter where we observed the older consumers coming back to cigarettes from e-vapor.
In the first quarter, Marlboro's price gap to the lowest effective price cigarette increased to 37%, primarily driven by heavy competitive promotional activity in the branded discount segment.
Despite this activity, branded discount share declined by four-tenth in the first quarter as deep discount gained share.
The total discount segment retail share was 25.3%, an increase of one-tenth versus the year ago period.
In cigars, Black & Mild continued its long-standing leadership in the profitable tipped cigar segment.
Middleton's reported cigar shipment volume increased over 11% in the first quarter.
Oral tobacco products segment, adjusted OCI grew by 3.1%, and adjusted OCI margins declined by 0.9 percentage points to 72.1%.
Adjusted OCI results were driven primarily by higher pricing, partially offset by higher investments behind on!
Total reported Oral Tobacco Products segment volume increased 0.6%, driven by on!
When adjusted for trade inventory movements, calendar differences and other factors, segment volume increased by an estimated 0.5%.
First-quarter retail share for the oral tobacco products segment was 48.1%, down 2.3 percentage points due to the continued growth of oral nicotine pouches.
Copenhagen continue to be the leading MST brand and on!
gained traction in the oral nicotine pouches.
Michelle's first-quarter adjusted OCI increased approximately 46% to $19 million, driven primarily by higher pricing and lower costs.
And in beer, we recorded $190 million of adjusted equity earnings in the first quarter, which was unchanged from the year-ago period and represents Altria's share of API fourth-quarter 2020 results.
Moving to our equity investment in Cronos.
We recorded an adjusted loss of $27 million representing Altria's share of Cronos' fourth-quarter 2020 results.
We continue to support our investment in Cronos by advocating for a federally legal, regulated, and responsible U.S. cannabis market.
We joined the recently launched Coalition for Cannabis Policy, Education, and Regulation.
This coalition is comprised of members across diverse industries and public policy experts who plan to inform the development of comprehensive cannabis policy that prevents underage use, advance of science, creates quality and safety standards and addresses social inequity.
And finally, on capital allocation, we paid approximately $1.6 billion in dividends and repurchased approximately 6.9 million shares, totaling $325 million in the first quarter.
We have approximately $1.7 billion remaining under the currently authorized $2 billion share buyback program, which we expect to complete by June 30, 2022.
Our balance sheet remains strong and as of the end of the first quarter, our debt-to-EBITDA ratio was 2.5 times.
In the first quarter, we executed a series of transactions to take advantage of favorable market conditions to adjust our debt maturity profile and extend the weighted average maturity of our debt.
We issued new long-term notes totaling $5.5 billion and repurchased over $5 billion in outstanding long-term notes.
In May, we expect to retire $1.5 billion of notes coming due with available cash.
We've also posted our usual quarterly metrics, which include pricing, inventory and other items.
Let's open the question-and-answer period.
Operator, do we have any questions?
| compname reports 2021 first-quarter results; reaffirms 2021 earnings guidance; acquires remaining 20% of global business.
reaffirms fy adjusted earnings per share view $4.49 to $4.62.
reaffirms guidance for 2021 full-year adjusted diluted earnings per share to be in range of $4.49 to $4.62, representing growth rate of 3% to 6%.
as of march 31, 2021, fair value of altria's juul investment was $1.5 billion.
abi did not provide earnings guidance for 2021 given continued uncertainty.
expects 2021 adjusted diluted earnings per share growth in last three quarters of year.
|
Before we begin, I'd like to review the safe harbor statements.
During the call today, we may also discuss non-GAAP financial measures.
Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call.
We do not undertake and specifically disclaim any obligation to update or revise this information.
I will now turn the conference over to our CEO and chief investment officer, Mohit Marria.
Joining me on the call today are Choudhary Yarlagadda, our president and chief operating officer; Subra Viswanathan, our new chief financial officer; Kelley Kortman, our chief accounting officer; and Vic Falvo, our head of capital markets.
This quarter, we continued to make significant progress toward optimization of our liability structure.
For the six months of 2021, we successfully refinanced 12 legacy CIM securitizations supporting more than $5.6 billion of loans.
The results of these transactions has lowered our overall cost of debt by approximately 245 basis points, and we expect this cost savings to continue to benefit our shareholders in the future.
The National Association of REALTORS recently reported sales of existing homes at 5.9 million annual units, with a median sale price of more than $363,000, up more than 23% from a year ago.
Demand for single-family homes remain strong, while the inventory of homes available for sales persist near record low levels.
According to Black Knight data and analytics, in June, the national delinquency rate hit its lowest level since the onset of the pandemic and is now back below the pre-great recession average.
The 30-plus day delinquency rate was reported at 4.4% of outstanding loans, down 42% on a year-over-year basis.
Strong demand for existing homes, higher home prices, and lower delinquency rates provide strong fundamental support for Chimera's large portfolio of seasoned low-loan balance mortgages.
Interest rates on government bonds experienced a both flattening move in the second quarter.
Over the period, the yield on 10-year treasury notes fell by 27 basis points while the yield on two-year treasury rose by nine basis points.
Interest rates on money market instruments, including overnight repo remained near zero.
Investor demand for higher-yielding fixed income products were strong and spreads on credit products continue to trend tighter.
Accordingly, the Bloomberg Barclays U.S. Corporate High Yield Index ended the quarter at 3.75%, its lowest yield ever.
Tighter credit spreads, coupled with low-absolute interest rates, have presented attractive market opportunities to refinance our existing securitized debt and secured financing at significantly lower costs.
As part of our continued call optimization strategy, this quarter, we called and refinanced six CIM legacy deals, representing more than 1.5 billion of loans.
The new securitization successfully optimized our liabilities through the extraction of capital and lowering cost of debt.
Our April deals, CIM 2021-R3 and NR3 on a combined basis, had a total of 813 million of securitized debt supported by 977 million of loans.
The combined advance rate was 83%, enabling us to extract 125 million of capital while lowering our cost of debt for these loans by 200 basis points to 2.12%.
Chimera retained 164 million of subordinate and IO securities as investments from these deals.
The new securitizations have a calendar call dates.
The R3 financing will be callable beginning April 2024 and the NR3 financing is callable beginning April of 2022.
In June, we issued 546 million CIM 2021-R4.
The deal consisted of 464 million securitized debt, representing an 85% advance rate and a 1.97% cost of debt for these loans.
The R4 freed up 98 million of capital and provided cost savings of approximately 180 basis points.
Chimera retained 82 million of subordinate and IO securities as investments.
The R4 financing has a calendar call date beginning June 2024.
We have provided additional details on Page 8 of our earnings supplement to further assist you in the analysis of this quarter's CIM securitizations.
Securitizations has long been a cost-effective and efficient financing vehicle for Chimera.
In the first half of 2021, Chimera's resecuritization activity enabled us to take out capital, reduce the size, and lower the cost of our outstanding credit financing.
And in conjunction with this year's resecuritizations, we have also refinanced several of our outstanding secured credit facilities.
We have made meaningful improvements with the average cost of our secured financing for residential credit assets in the second quarter at 3.5%, down from 4.9% at year end.
We've always been extremely prudent and diligent when making our long-term investment decisions.
Our Agency CMBS portfolio is constructive with explicit prepay protection.
As interest rates have fallen and maintained near historic lows, we have been active in managing our Agency CMBS to determine the best course of action between long-term hold and gain on sale securitization or reaping benefits through explicit prepay penalties.
This quarter, through the combination of prepay penalties received from our Ginnie Mae project loans and early pay downs of non-agency credit, we generated onetime nonrecurring income of 38 million.
Our prepay penalties we received this year is proof of concept for many of the positive convexity attributes we have regularly discussed over the years.
Now at the midpoint of 2021, I believe we have made a meaningful impact on our balance sheet.
We have resecuritized debt supporting 5.6 billion of loans through seven separate securitizations, lowered our cost of securitized debt by over 245 basis points, lowered the cost of our repo credit facilities by 140 basis points since year end, retired high-cost debt and warrants incurred during the pandemic, issued three jumbo prime securitizations totaling 1.2 billion, purchased more than 200 million of high-yielding fix and flip loans and increased our quarterly dividend by 10% to $0.33.
Securitizations of loans locking stable long-term financing for our loan portfolio.
We have successfully refinanced many of our outstanding legacy deals, and we have an additional five deals with 1 billion of unpaid principal balance that are or will become callable over the next six months.
Looking forward, we continue to seek opportunities to further improve our liability structure.
And as always, stay the course as a patient long-term investor focus on investments to provide our shareholders with stable book value and a sustainable and attractive risk-adjusted dividend.
I'll now review Chimera's financial highlights for the second quarter of 2021.
GAAP book value at the end of the second quarter was $11.45 per common share.
GAAP net income for the second quarter was 145 million or $0.60 per share on a fully diluted basis.
Our core earnings for the second quarter was 130 million or $0.54 per share.
Economic net-interest income for the second quarter was 173 million.
The yield on average interest-earning assets was 7% for the second quarter, while our average cost of funds was 2.6%, resulting in a net-interest rate spread of 4.4%.
Total leverage for the second quarter was 3.3 to one, while our recourse leverage ended the quarter at 1.0 to one.
For the quarter, our economic net-interest return on equity was 19%, and our GAAP return on average equity was 18%.
Expenses for the second quarter, excluding servicing fees and transaction expenses, were 15 million, down approximately 3 million from last quarter.
| q2 gaap earnings per share $0.60.
q2 core earnings per share $0.54.
quarter-end gaap book value of $11.45 per common share.
|
For today's call, Jeff will begin by covering a summary of our fourth quarter results and a summary of initiatives progress in 2020.
Roop will then discuss our detailed fourth quarter and 2020 results, including a cash and balance sheet summary and first quarter 2021 guidance.
Jeff will wrap up with an outlook by market sector and an update on our strategic initiatives for the year 2021, including ESG and sustainability.
We will then conclude the call with Q&A.
We hope all of you are remaining safe and healthy during these times.
In Q4, we delivered revenue of $521 million, which was at the midpoint of our guidance for the quarter.
With improving higher-value sector revenue mix and better operational efficiency, we achieved non-GAAP gross margins of 9.6%, which was above our target of 9%.
Even with slightly higher SG&A expenses in the quarter due to higher variable compensation and higher-than-anticipated COVID-related expenses at $1.6 million or about $0.04 per share, the resulting non-GAAP operating margin was 3.4%, and non-GAAP earnings were $0.34 per share.
Our team's effort to bring down inventory and better manage working capital are bearing fruit with cash conversion cycles coming in at 71 days, which enabled $84 million of free cash flow for the quarter.
We delivered these results in the fourth quarter amid continued challenges, including increasing COVID infection rates in our communities around the world, particularly impacting our North America operations.
Our employees, operations leadership and COVID task force are continuing to do everything possible to provide a safe work environment at our sites around the world.
Our go-to-market team continues to do a great job, and we had another strong quarter of bookings across all business areas of Benchmark.
When I joined the company, we set a goal of consistently achieving over $200 million of new bookings per quarter, and I'm proud to report that even in the face of the global pandemic, we achieved over $800 million in new bookings for the 2020 calendar year.
As I've shared before, many elements contribute to driving revenue growth, such as reducing regrettable losses in our business, which we also made progress on in 2020.
More importantly, this achievement in new bookings bodes well for our future growth when coupled with our high customer satisfaction and progress on our other go-to-market initiatives.
In the medical sector, we were awarded new manufacturing programs for a state-of-the-art DNA sequencing analyzer and surgical device electronics.
We were also awarded design services for a low-temperature pharmaceutical storage freezer for which we expect to compete and win future manufacturing revenue.
In the A&D sector, we were awarded new programs for soldier training systems and flight control electronics.
I want to briefly highlight the flight control system win referenced on this slide.
We competed with the largest companies in our peer group for this program.
We were successful because of our technical depth in aerospace technologies and our innovative approach to solving their most advanced engineering challenges.
Similar to what I've shared previously, we offered the customer a solution that included differentiated product engineering services, coupled with a robust global manufacturing proposal.
Our successful plan to scale with a commitment to a One Benchmark solution provided the winning formula.
In industrials, we were awarded new outsourced programs for power controls, electronics destined for a low-cost manufacturing solution in North America and a full-system box build for a LiDAR control box application.
In computing and telco, we were awarded new fixed broadband products and new programs for our Benchmark solutions technology team.
Similar to last quarter, our new business pipeline continues to be strong across our targeted sectors and subsectors, and we remain very encouraged about the prospect for continued wins where the outsourcing environment for both engineering and manufacturing projects remains favorable.
Despite all the challenges associated with 2020, we made steady progress on our key strategic initiatives that we laid out for the year.
We exited the year with customer satisfaction at an all-time high as a result of our customer focus initiatives.
We also made progress on making it easier to do business with Benchmark, along with improvements in deepening our strategic relationships and growing our position with existing accounts.
Our regrettable loss measure has improved significantly in the last 18 months.
While we have room to improve customer satisfaction further, I'm pleased with the positive trends and the impact this is having on increasing business with our customer base.
This customer-centric approach is an important foundation in growing our business.
As part of our sector strategies, we align processes to invest in technology to increase win rates.
As previously mentioned, we had a record year of new bookings in which we sold the full breadth of services to our customers.
We are focused on ensuring bookings convert to revenue.
To that end, we experienced annual revenue growth of more than 33% in semi-cap and 11% in medical sector.
Turning to enterprise efficiencies, we made solid progress on this initiative in the past year.
We continue working on optimizing our global footprint, including completing previously announced closures in some locations and ramping up new capabilities in others.
We had announced in Q3 of last year our intent to close our aerospace turbine machining facility given the lack of alignment with our long-term strategy and the downturn in the market.
Ultimately, and fortunately, for our customers and employees, we were able to divest of these assets versus shutting down the site, and we transferred the majority of personnel and assets to the acquiring company.
In parallel, we have been working on the Angleton site closure and executing the transition plans, which remains on target.
In addition, we maintained our focus on expense management.
Through improved processes, G&A centralization activities and investment prioritization, we managed our SG&A expense to $122 million for the year, which was lower than forecasted.
Lastly, improving margins and effective working capital management allowed us to exceed our cash flow targets for the year.
Finally, as I will reference in our ESG update later in the call, we have made strides in engaging talent and shifting our culture.
As I shared previously, Benchmark has a great partnership attitude, engages with integrity in all endeavors and a foundation centered on our customers.
We've continued to invest in new, diverse skills and talent across our organization.
Our ongoing commitment to advancing diversity and inclusion efforts at all levels in the company through our ESG processes will make Benchmark a more technically -- technologically rich and innovative organization.
I hope everyone and their families continue to be safe and healthy.
Total Benchmark revenue was $521 million in Q4, which was in line with the midpoint of our Q4 guidance and similar to our Q3 revenue of $526 million.
As expected, increased revenues from stronger demand and new programs in industrial, defense and semi-cap offset declines in medical.
Medical revenues for the fourth quarter were down sequentially from continued lower demand for products involved in COVID-19 therapies, such as ventilators, x-rays and ultrasound devices and overall softer demand related to elective surgeries and trauma devices, which have yet to return to pre-COVID demand levels.
Semi-cap revenues were up 2% in the fourth quarter and up 24% year-over-year from continued strength for wafer fab equipment to support growth in DRAM and logic demand across our semi-cap customers.
A&D revenues for the fourth quarter increased 6% sequentially due to strong revenue from radar communications and land-based vehicle systems.
Conversely, commercial aerospace demand, which was about 25% of 2020 revenues, remained muted and continue to decline on certain platforms during the quarter.
Industrial revenues for the fourth quarter were up due to seasonality from infrastructure and transportation markets and an increase in engineering services.
Demand from customers exposed to the oil and gas market remains soft.
Overall, the higher-value markets represented 81% of our fourth quarter revenue.
Traditional market revenue comprised of computing and telco was flat quarter-over-quarter.
New program ramps in high-performance and secure computing and in broadband network components were offset by lower demand in commercial satellite and data center products.
Our traditional markets represented 19% of fourth quarter revenues.
Our top 10 customers represented 38% of sales in the fourth quarter.
Our GAAP earnings per share for the quarter was $0.21.
Our GAAP results included restructuring and other onetime costs, totaling $4.4 million related to reduction in force and other restructuring activities around our network of sites.
Our Q4 -- for Q4, our non-GAAP gross margin was 9.6%, a 90 basis point sequential increase.
During the quarter, gross margin was positively impacted by overall sector mix, improved absorption and a number of customer recoveries, which represented 30 basis points of the 90 basis point increase.
We estimate that we incurred approximately $1.6 million or approximately $0.04 per share of COVID costs in the quarter versus $1.3 million in Q3.
Our SG&A was $32.4 million, an increase of $2.7 million sequentially and $8.2 million year-over-year.
The sequential increase are primarily due to reinstatement of salaries and benefits and higher variable compensation.
The year-over-year increase is related to higher variable compensation, investments in our IT infrastructure and other expenses.
Non-GAAP operating margin was 3.4%, an increase from 3% in Q3 due to the increased gross margin.
In Q4 2020, our non-GAAP effective tax rate was 17.5%, which was lower as a result of the mix of profits between the U.S. and foreign jurisdictions.
Non-GAAP earnings per share was $0.34 for the quarter, and non-GAAP ROIC was 6.2%.
Our non-GAAP earnings per share improved sequentially, primarily from improved operational performance.
Total Benchmark revenue for 2020 was $2.1 billion, a decrease from $2.3 billion in 2019 from lower demand from pandemic-impacted customers in commercial aerospace, oil and gas and elective medical subsectors.
For the full year, higher-value markets were up 3%, primarily from semi-cap and medical, which increased 33% and 11%, respectively, year-over-year.
Semi-cap's strength was led by increased demand for DRAM and logic tools and increasing market share with existing programs across our customer base.
Overall, the A&D sector declined slightly from 2019 revenues due to the deterioration of the commercial aerospace subsector.
As a reminder, for 2020, the A&D sector was approximately 75% defense and security related and 25% commercial aerospace.
Defense demand remained strong throughout the year with increases across a number of new and existing programs.
Overall, medical revenues grew 11% from new and existing programs.
Industrial revenues were down 18% year-over-year, primarily from softness in the oil and gas industry, with additional impacts from the commercial and building infrastructure markets where investments in many large projects remain delayed.
Overall, the higher-value markets represented 81% of our 2020 revenue compared to 71% in 2019.
Revenues in the traditional markets were down 41% from 2019, primarily from our exit of the legacy computing contract in Q3 2019 and program transitions in telco.
Our traditional markets represented 19% of 2020 revenues compared to 29% in 2019.
Our top 10 customers represented 41% of sales for the full year 2020.
We have one customer, Applied Materials, that was greater than 10% of revenue for the full year.
Our GAAP earnings per share for fiscal year 2020 was $0.38.
Our GAAP results included restructuring and other onetime costs totaling approximately $19 million.
These costs included $13 million of costs related to site consolidation efforts, reduction in workforce activities and other restructuring-type activity around our network, approximately $7 million in asset impairment, offset by $1 million in net insurance proceeds.
Our 2020 non-GAAP gross margin was 8.4%, a 20 basis point sequential increase.
We achieved this increase even with the operational disruptions caused by the COVID-19 pandemic.
We estimate that we incurred approximately $7 million of net COVID costs in 2020.
Our non-GAAP SG&A for 2020 was $122 million, an increase of $3.8 million from 2019.
The increase is primarily due to higher variable compensation and IT infrastructure investments.
Non-GAAP operating margin for the year was 2.5%, a decrease from 3% in 2019, due primarily to the effects of the pandemic on our operational efficiencies and the incurrence of COVID-specific costs.
In 2020, our non-GAAP effective tax rate was 19.4%.
Non-GAAP earnings per share in 2020 was $0.95, and non-GAAP ROIC was 6.2%.
Our cash conversion cycle days were 71 in the fourth quarter, an improvement of 10 days from the third quarter.
Throughout fiscal year 2020, and in general, we continue to be focused on effective working capital management.
This has resulted in inventory and contract assets improving by six days and advanced payments from customers improving five days in Q4.
Turning to slide 12 for an update on cash flow and a summary of our cash and debt balance sheet items.
Our cash balance was $396 million at December 31 with $189 million available in the U.S.
We continue to have a strong capital structure, and our liquidity position provides flexibility to manage our business, invest for the future and return capital to shareholders.
At December 31, 2020, we had $137 million outstanding on our term loan with no borrowings outstanding on our available revolver.
Slide 13 shows our cash generation.
We generated $95 million in cash flow from operations in Q4 and generated $120 million for the full year 2020.
Our free cash flow was $84 million in Q4 and $81 million for the full year 2020.
Slide 14 shows our capital allocation activity.
In Q4, we paid cash dividends of $5.8 million and repurchased shares of $5.9 million.
In fiscal year 2020, we repurchased $25.2 million, which represented approximately one million shares.
As of December 31, 2020, we had approximately $204 million remaining on our share repurchase authorization.
At a minimum, we will continue to repurchase shares to offset our annual equity dilution.
Beyond that, we'll evaluate share repurchases opportunistically while considering market conditions.
From 2018 to 2020, we executed $359 million in share repurchases and paid $67 million in dividends to our shareholders.
Turning to slide 15 for a review of our first quarter 2021 guidance.
We expect revenue to range from $480 million to $520 million, which reflects normal seasonality for some sectors.
We have had a number of inquiries regarding the supply chain environment.
We can confirm that lead times are extending for some components in the supply chain, including semiconductors and certain passes.
We aren't experiencing any near-term impacts beyond our normal expectations, but we will continue to work proactively with our suppliers and customers to secure supply to fulfill future demand.
We expect that our gross margins will be 8.1% to 8.3% for Q1, and SG&A will range between $29 million and $31 million.
The sequential drop in gross margins is expected due to lower revenues and the ramp of new programs.
We do expect that as we continue throughout fiscal year 2021, gross margins will increase, and we expect gross margins for the full year to be at least 9%.
Implied in our guidance is 2.2% to 2.4% 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 Q1 of approximately $1 million to $2 million.
Our non-GAAP diluted earnings per share is expected to be in the range of $0.18 to $0.22 or a midpoint of $0.20.
We estimate that we will generate approximately $60 million to $80 million of cash flow from operations for fiscal year 2021, and capex for the year will be approximately $45 million to $50 million as we prioritize investments to support new customers and expand our production capacity through revenue growth.
Other expenses, net, is expected to be $2.5 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q1, 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 Q1 2021 are $36.3 million.
This 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 due to COVID-19.
And with that, back to you, Jeff.
Following Roop's comments on our guidance for the first quarter, I wanted to provide some additional color on our view of demand by sector for 2021 on slide 17.
For the first quarter, we expect revenue to slightly decline sequentially from some seasonality and sector-specific dynamics.
Strong demand for semi-cap and the new HPC program ramp in computing are offset by continued softness in some of our medical sector products, our industrial sector, oil and gas products and further weakness in our commercial aerospace business.
From this Q1 base, we expect sequential revenue growth throughout the remainder of the year, supported primarily from new programs in industrials, medical and computing.
In the medical sector, we're experiencing revenue -- we're expecting revenue to remain relatively flat in the first half as demand started to slow for COVID-19-related therapy devices in 4Q, and elective surgery products have yet to recover.
However, we are in flight on a large number of new program ramps for diagnostic and ultrasound products that will benefit second half revenues.
With our deep expertise in design and manufacturing for complex medical products and our recent program wins, we have confidence that 2021 will be another growth year for the medical sector.
In semi-cap, demand remains strong for semiconductor capital equipment in Q1, which we expect to continue throughout all of 2021, driven by the deployment of 5G and cloud computing demand created by work-from-home and school-from-home trends as well as growth in e-commerce.
We remain well positioned in this sector with both our advanced precision machining and electronics manufacturing services and now expect revenues to grow greater than 10% over 2020 levels.
Moving to the A&D sector outlook.
We expect sector revenues to be flat to potentially down in 2021.
Expected gains from new programs in our strong defense business are offset by further declines and persistent weakness with our commercial aerospace customers.
Customers in commercial aerospace have not provided visibility into a time line for demand improvements.
Conversely, we are seeing further improvements in military programs, supporting advanced communications, radar applications and ground-based systems.
In industrials, we expect strong year-over-year growth from our new programs that will ramp in first -- second half 2021.
At present, we suspect that our oil and gas business will begin to recover starting in Asia in the back half of the year.
Independent of this recovery, our new sector leader and business development teams have made significant strides in growing both existing and new accounts.
In fact, the industrial sector had the highest value of bookings in 2020.
These new programs support our confidence in full year growth, even against the softer near-term demand outlook.
For the full year, we also expect growth in the traditional markets.
In the telco market, where we remain highly selective in our engagements, we expect overall stable revenue underscored by demand strength in satellite and broadband communication programs.
In computing, we expect strong revenue contribution from high-performance computing projects with expected ramps in late Q1 through midyear 2021.
Now that we're in 2021, we are becoming increasingly bullish on our ability to achieve mid-single-digit growth over 2020.
We are expecting continued growth in the medical and semi-cap markets with incremental contributions from industrials and high-performance computing.
Our higher-value markets are expected to grow for the full year.
We expect the higher-value markets to again represent over 80% of our total annual revenue.
We are targeting gross margins for the full year to be at least 9% as we offset headwinds from continued COVID costs and a number of new program ramps with benefits from our operational excellence programs.
We are also targeting SG&A for the full year to be below 6% from effective expense management and continued progress with shared services consolidation.
We remain committed to growing shareholder value and providing incremental returns to shareholders through quarterly dividends and with our share buyback program.
At present, the five tenets of our ESG strategy are environmental responsibility, our people, our community, governance, and the ongoing COVID-19 response.
Under the oversight of the Board, our internal ESG council is comprised of an enterprisewide, cross-functional team tasked with defining and implementing key projects and investments that will advance these priority initiatives.
We have further supplemented this team by partnering with like-minded customers and by engaging with third-party consultants who have specific ESG experience to further accelerate our strategy.
For your information, we have been monitoring and tracking energy reduction programs for almost 10 years in support of the environment.
On the governance front, we have a diverse corporate Board with 22% of directors represented by women, but we can and will do more.
We have plans in flight to expand racial diversity on our Board of Directors and overall plans in the company to strengthen our diversity and inclusion platform through strategy, training and a focused recruiting plan.
We have conducted a peer analysis and are mapping current material ESG programs to SASB standards, which we will publish this quarter.
We will also provide further updates in the ESG sections of our upcoming annual report and proxy in Q2.
We expect to release a stand-alone sustainability report in 2022.
Future reports from Benchmark will include both qualitative and quantitative measures reflecting updates and improvements as we advance our overall ESG strategy.
I want to wrap up our call today with a summary of our three strategic initiatives for 2021 on slide 21.
Growing revenue is a top priority of Benchmark.
As I referenced earlier, we have spent a considerable amount of time over the past couple of years, optimizing the customer experience through recurring feedback mechanisms and enhancing our strategic relationships.
Our account management processes are improving, and we are focused on increasing the attach rate of design engagements to manufacturing wins through selling the full breadth of services and capabilities to our customers.
Once we successfully win new programs, we are then laser-focused on supporting new program ramps which are forecasted to be at record levels in 2021.
In order to achieve our financial targets, we must also invest in a sustainable infrastructure and talent needed to scale our business.
As I discussed earlier, ESG sustainability initiatives and advancing diversity and inclusion underpin these foundational efforts.
This also involves creating an efficient and scalable infrastructure to streamline the global delivery of our shared services.
We have rationalized our investments in corporate infrastructure, including our HR, IT, finance and other shared services, and centralized these groups to achieve scale while concurrently managing SG&A expense in support of our midterm model which we introduced late last year.
Ultimately, our model reflects that we expect to grow earnings faster than revenue.
Revenue growth in our model enables higher utilization to better leverage our fixed costs, but not all revenue dollars are created equally.
We are targeting a portfolio of customers with the right sector mix that value our advanced technologies and leverages the breadth of our services.
Through these targeted higher-margin customer engagements and ongoing operational excellence efforts, we will expand margins and ROIC through 2021 and into the coming years.
I remain excited about our team's ability to capitalize on the growth opportunities in our diverse end markets where our deal pipeline and win rate is increasing, and we remain focused on executing our ongoing initiatives to increase value for our customers, employees and shareholders.
I look forward to 2021 with optimism, knowing that our strategic investments in the business to drive differentiated value and sustainability have solidified a path to achieve revenue, margin and earnings growth in 2021.
| sees q1 non-gaap earnings per share $0.18 to $0.22 excluding items.
sees q1 revenue $480 million to $520 million.
q4 gaap earnings per share $0.21.
qtrly revenue of $521 million.
qtrly non-gaap diluted earnings per share of $0.34.
|
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 a brief overview of fiscal 2021 as well as the current operating environment.
Rob will provide some details on our fourth quarter results and Bernadette will discuss our fiscal '22 outlook.
Let me start by saying that I'm proud of how the entire Lamb Weston team stepped up this year to navigate through the most challenging operating environment in our company's history.
We took necessary steps across our organization to focus on the health and well-being of our employees while continuing to focus on supporting our customers.
At the same time, we continue to make timely investments to execute on our long-term strategic objectives.
For our larger customers in our Global and Foodservice segments, we work through production and distribution challenges to maintain customer service levels and support them as they manage through near-term volatility in demand and inventories.
We also partnered with several large chain QSRs to broaden our menus with new products and limited time offerings and to position them for a more aggressive set of offerings in a post-pandemic environment.
In our Foodservice segment, despite lower volumes in the near term, we maintained our direct sales force that services independent restaurants.
We believe it was important to continue to invest in these sales capabilities to provide these customers with uninterrupted support as they adapted to capacity restrictions in new operating models.
That investment is now paying off as sales of Lamb Weston branded products have rebounded.
In Retail, the surge in food-at-home consumption during the pandemic provided a strong tailwind to our branded portfolio.
Each of our Alexia, Grown in Idaho and licensed restaurant brands gained share as compared to pre-pandemic levels.
Our branded portfolio market share in aggregate has nearly doubled in the past five years, and we've significantly closed the gap with a leading branded competitor.
Including what we produced for private label retail customers, we are now the clear leader in the category.
In our supply chain, we're making some significant investments to support long-term growth and profitability.
First, we began construction of a new chopped and formed line in our facility in American Falls, Idaho, that will be available in spring 2022.
Second, we announced major capacity expansion projects in China and the U.S.
We expect both lines to be operational in the next couple of years, which will have us well positioned to support market growth.
In addition, through our joint venture in Europe, Lamb-Weston/Meijer, we announced a capacity expansion project in Russia.
These two expansions will be focused on supporting continued growth in their respective primary markets.
Finally, we began to implement our Win As One series of safety, quality and productivity initiatives in our manufacturing facilities and across our procurement, transportation and distribution networks.
This is an ambitious program that adopts and tailors lean manufacturing and other productivity tools that have been successfully used by other world-class manufacturing organizations.
We're excited about how these initiatives will further strengthen our Lamb Weston operating culture of continuous improvement and drive financial benefits that should enhance margins and cash flow over the long term.
We're targeting up to $300 million of gross productivity savings by reducing variable costs and waste, while also increasing potato and asset utilization.
We're also targeting up to GBP300 million of incremental capacity from debottlenecking and other tools to increase throughput on existing assets.
To put that into context, GBP300 million is equivalent to a new production line.
Finally, we're targeting up to a 10% reduction in finished goods inventory, while continuing to target high service levels and case fill rates.
As I mentioned, these are long-term targets.
We expect benefits from the Win As One initiatives to gradually build as they become fully incorporated across the entire supply chain organization.
We completed the initial phase of a new enterprise resource planning system early in the year.
However, we deferred the second phase, which would have had a more direct effect on our manufacturing facilities at a time when those operations were managing through pandemic-related disruptions.
We continue to map out Phase II and expect to begin implementation later this fiscal year.
This project will tie into our Win As One initiatives to provide better data and systems to drive more efficient execution.
So although our results in fiscal 2021 were somewhat choppy due to the pandemic, we focus on the right near-term priorities, while making sure we continue the pursuit of our long-term strategic objectives.
The pandemic showed the resilience of the category and our business model, with demand in most of our Foodservice segment channels largely offset by the performance in QSR and at Retail.
Our operating cash flow and financial liquidity were solid, enabling us to invest in the infrastructure to support growth opportunities.
As a result, I'm confident that we are well positioned to drive sustainable profitable growth and create value for our stakeholders over the long term.
Now turning to the current operating environment.
While the pandemic continues to impact people and economies in the U.S. and around the world, we believe the worst of its direct effect on our business, restaurant traffic in french fry demand is behind us.
We're encouraged by the pace of recovery in restaurant traffic in the U.S. While overall restaurant traffic remains below pre-pandemic levels, it's recovered much of the lost ground and continues trending in the right direction.
In May, QSR traffic was down low single digits versus pre-pandemic levels, which is a modest improvement versus what we saw earlier in the year.
The larger QSR chains have been generally outperforming small and regional ones with chicken-based chains outperforming more burger-oriented chains.
Overall traffic at full-service restaurants in May was still down mid-teens as compared to pre-pandemic levels.
But that's a significant improvement versus down mid-20s that we saw just a few months ago.
This reflects fewer social restrictions and consumer's increased willingness to eat on-premises.
What's helped to offset the effect of lower restaurant traffic during the year has been an increase in fry attachment rate.
Simply put, this is a rate at which consumers order fries when visiting a restaurant.
The increase in fry attachment rate has been largely consistent through most of fiscal 2021, and we believe that rate may have some staying power.
We believe that if fry orders continue at the higher rate as restaurant traffic normalizes, it would lead to a meaningful amount of additional volume demand in the U.S. annually.
The increase in fry attachment rate in part helps to explain how our shipments in most of our key restaurant and food service channels have already reached core or close to pre-pandemic levels on a run rate basis despite restaurant traffic not yet fully recovered it.
Our shipments to large QSR chains essentially reached at level last fall as customers leverage drive-thru and delivery formats.
Shipments to commercial customers in our Foodservice segment have essentially returned in aggregate to pre-pandemic levels in the last few months behind strength in small and regional QSRs as well as independent restaurants.
The recovery shipments to our noncommercial foodservice customers, which include lodging and hospitality, healthcare, schools and universities, sports and entertainment and workplace environment, continues to lag that in restaurants.
However, we expect the rate of improvement will steadily increase through the fall, especially in our education, lodging and entertainment channels.
While restaurant Foodservice demand continues to recover, demand in the Retail channel continues to be strong.
May volumes for the category were 15% to 20% above pre-pandemic levels and our shipment of branded products were in line with those trends.
However, we expect category growth will likely slow as it laps strong prior year results and as consumers step up food away from home purchases.
We have seen these factors already begin to play out in the fourth quarter and in the first couple of months of fiscal 2022.
In short, we feel good about the frozen potato category in the U.S. because of increasing strength in restaurant and Foodservice channels as well as continued solid performance in Retail.
As a result, we remain confident that overall U.S. fry demand will return to pre-pandemic levels on a run rate basis by the end of calendar 2021.
Outside the U.S., it's a more complicated story.
While demand has improved in Europe and our key international markets, the pace of recovery has been much more uneven and generally behind that in the U.S. as a result of slower vaccine availability and rates.
In addition, the spread of COVID variants in many markets has also led governments to delay lifting and, in some cases, reimposing social restrictions which has further increased volatility in demand and stretched out the timing of recovery.
Overall, we expect the pace of recovery outside the U.S. will continue to vary, with Europe and the developed markets in Asia continuing to generate gradual improvement in demand.
We expect the pace of recovery in emerging markets in Asia, Latin America and the Middle East to be more volatile and take a bit longer.
With respect to supply chain in our cost environment, as with the pandemics impact on fry demand, we believe the worst of its effect on our supply chain is also behind us.
We're making progress in stabilizing our manufacturing operations with a number of production days and throughput at most of our plants during the fourth quarter, improving on a year-over-year basis as well as sequentially versus the third quarter.
However, we're not yet consistently operating at targeted levels across our network, and it will take some time as we gradually return to operating and normalized levels.
In the near term, we'll realize incremental costs and inefficiencies incurred during and since the fourth quarter as we sell finished goods inventory in the first half of the year.
Going forward, the lingering effects of the pandemic and the sharp recovery of the broader economy in the U.S. has disrupted supply chain operations across all industries, including ours, which has resulted in increased costs.
As a result, we expect input cost inflation, especially for edible oils, packaging and transportation, to be a significant headwind for fiscal 2022.
Our goal is to offset inflation using a combination of levers, including pricing.
To that end, we just began implementing broad-based price increases in our Foodservice and Retail segments and don't expect to see the most of their benefit until our fiscal third quarter.
First, a few words about the current potato crop.
We have recently begun processing early potato varieties in the Pacific Northwest.
And early indications are that the recent high temperatures in the Pacific Northwest did not have a negative impact on yield or quality.
With respect to the main crop that we harvest in the fall, we expect the recent heat waves may have some negative effect on yield and quality, but it's too early to tell.
We'll provide our usual updates on the crop when we report our first and second quarter earnings.
Second, as you may have seen last week, we announced an expansion of our facility in American Falls, Idaho, which will add about 350 million pounds of french fry capacity.
The total investment of around $450 million over the next couple of years is for a new production line as well as to modernize the infrastructure at the facility.
We anticipate starting up the new line by mid-2023, just as we expect capacity will be needed to support demand growth.
So in summary, while this has been a challenging year, I'm proud of how the team has navigated through the pandemic's impact and remained focused on supporting our customers in the near term, while continuing to execute on our long-term strategic priorities.
We're pleased by the strong recovery in demand in the U.S. and continue to believe that it will be back to pre-pandemic levels on a run rate basis by the end of calendar 2021.
And finally, while our supply chain is not yet operating where we wanted to be, I'm encouraged by the improvement that we're making toward getting back to normalized levels as well as the actions we're taking to offset input cost inflation.
Finally, as we announced a couple of months ago, Rob will be retiring after more than four years with Lamb Weston.
As part of the leadership team, he's been instrumental in setting up Lamb Weston as an independent company and creating a world-class finance and IT organization.
With his past experience in manufacturing companies and capital markets, along with his insights into the business, Rob has been a valuable voice as we drove growth, broaden our global footprint and navigated through the challenges of the pandemic.
As you know, Bernadette will be succeeding Rob as CFO on August six after serving as our controller since just before the spin.
Bernadette has been a key member of the leadership team from the beginning and has had a hand in all our major decisions and initiatives.
This succession has been long planned, so we expect a smooth transition.
I'm grateful to have Bernadette stepping into her new role.
And with that, here's Rob to review our fourth quarter results.
Overall, we delivered solid top line results in the fourth quarter as demand trends improved, while our earnings continue to reflect pandemic's disruptive impact on our supply chain as well as higher inflation.
Specifically in the quarter, sales increased 19% to more than $1 billion, which is a company record for the fourth quarter and within about $10 million of our best quarter ever.
Volume was up 13%, and price/mix up 6%.
Excluding the benefit of the extra selling week last year, net sales increased 28% and volume was up 21%.
The sales volume increase largely reflected the strong recovery in demand in the U.S., especially at full-service restaurants as well as improvement in some of our key international markets.
It also reflected the comparison to soft shipments last year due to the pandemic, which included the impact of customers significantly destocking inventories as they adjusted to the abrupt change in the operating environment.
The increase in price/mix was driven by favorable price and mix in each of our core business segments.
For the year, net sales, exclude benefit of the 53rd week last year, was down 2%, with volume down 6% and price/mix up 4%.
Gross profit in the fourth quarter increased $87 million, driven by higher sales and lower supply chain costs on a per pound basis.
The overall reduction in cost per pound as compared to the prior year was largely driven by lower incremental cost and inefficiencies related to the pandemic's disruptive impact on our manufacturing and distribution operations.
It also includes a $27 million year-over-year benefit from unrealized mark-to-market adjustments as well as the absence of a $14 million write-off of raw potatoes that we incurred last year.
The reduction in per pound cost was partially offset by inflation for key inputs, especially for edible oils and packaging.
Canola oil prices, in particular, have nearly doubled in the last 12 months.
Our transportation costs were also up sharply.
While we've reduced pandemics downstream disruptive effect on our distribution network, we continue to use an unfavorable mix of higher cost trucking versus rail as we took extraordinary steps to maintain customer service levels as demand turned up sharply.
However, the significant increase in our transportation cost was also driven by inflation as rail, trucking, and ocean freight suppliers all struggled to keep up with demand as economic activity surged.
Moving on from cost of sales.
Our SG&A increased $19 million in the quarter.
The increase was largely driven by three factors.
First, it reflects higher incentive compensation expense, which was significantly down in the first quarter -- fourth quarter last year after the pandemic hit.
Second, it reflects investments we're making behind our supply chain productivity, commercial and information technology initiatives that should improve our operations over the long term.
And third, it includes an additional $3 million of advertising and promotional support behind the launch of new branded items in our Retail segment.
Equity method earnings were $10 million.
Excluding the impact of the unrealized mark-to-market adjustments, equity earnings increased $14 million versus the prior year.
Higher sales volumes compared to soft shipments in Europe and the U.S. last year as well as lower manufacturing costs per pound drove the increase.
Diluted earnings per share in the fourth quarter was $0.44 compared to a loss of $0.01 in the prior year.
The increase reflects higher sales, income from operations and equity method earnings.
For the year, adjusted diluted earnings per share was $2.16, down $0.34.
Adjusted EBITDA, including joint ventures, was $166 million, which is up $88 million.
The increase was driven by higher sales, income from operations and equity method earnings.
For the year, adjusted EBITDA, including joint ventures, was $748 million down, $51 million.
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 up 19% in the quarter, with volume up 16% and price/mix up 3%.
Excluding the extra selling week last year, sales increased 28% and volume was up 24%.
The volume increase largely reflected the year-over-year recovery in demand, especially at large chain QSRs and full-service restaurants in the U.S. Shipments to these customers in the aggregate have essentially returned to pre-pandemic levels.
Shipments to customers in our key international markets also increased in the aggregate but remain below pre-pandemic levels as demand recovery continues to lag the U.S. in some of these markets.
In addition, traffic and logistics issues affecting ports along the West Coast hindered our export shipments in the quarter.
The 3% increase in price/mix reflected the benefit of inflation-driven price escalators in our multiyear customer contracts as well as favorable customer mix.
Global's product contribution margin, which is gross profit less A&P expense, increased 68% to $56 million.
Higher sales volumes, favorable price/mix and lower manufacturing and distribution cost per pound drove the increase.
Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American restaurant customers, increased 82% with volume up 64% and price/mix up 18%.
Sales increased 94% and volume rose 74%, excluding the benefit of the extra selling week last year.
The strong increase in sales volumes largely reflected the year-over-year recovery in shipments to small and regional restaurant chains and independently owned restaurants as governments further ease social restrictions.
The increase also reflected a comparison to soft shipments in the prior year quarter as customers significantly destocked inventories.
Our shipments to noncommercial customers increased at a more modest rate and currently remain at about 2/3 of pre-pandemic levels.
As Tom noted, we expect the rate of improvement to steadily increase through the fall as travel and lodging continues to ramp up and as schools and universities return to full capacity.
Overall, shipments by our Foodservice segment exited the quarter at around 95% of pre-pandemic volume.
The increase in the segment's price/mix largely reflected the benefit of favorable mix from higher sales of Lamb Weston branded and premium products.
As you may recall, sales of these products declined sharply in the fourth quarter of fiscal 2020 as customers, which primarily included independent restaurants, destocked inventories or traded down to more value-oriented products during the early days of the pandemic.
Since then, our direct sales force has steadily rebuilt shipments of Lamb Weston branded products close to pre-pandemic levels.
Foodservice's product contribution margin rose 127% to $96 million.
Higher sales volumes, favorable price/mix, lower manufacturing and distribution cost per pound drove the increase.
Sales for our Retail segment declined 28%, with volume down 30% and price/mix up 2%.
Excluding the extra sales week last year, sales declined 22% and volume declined 24%.
We expected this decline as it was against a very strong fourth quarter of fiscal 2020, which included weekly retail sales for the category that were up around 50% on average as consumers switched consumption patterns due to government-imposed stay-at-home orders.
The decline in sales also includes the loss of certain low-margin private label volume, which will continue to be a headwind through fiscal 2022.
With social and on-premise dining restrictions largely lifted in the U.S., consumer consumption patterns have begun to swing back toward restaurants and away-from-home out flex.
Despite this trend, the frozen potato category at retail remains strong.
Overall category sales are currently up about 25% from pre-pandemic levels, and each of our branded equities continued to outperform the category.
The Retail segment's price/mix increased 2%, reflecting favorable mix benefit of our branded business.
Retail's product contribution margin declined 32% to $21 million.
Lower sales volumes and a $3 million increase in A&P expense to support the launch of new products drove the decline.
Moving to our cash flow and liquidity position.
We continued to generate solid cash flow even while the pandemic severely impacted demand.
In fiscal 2021, we generated more than $550 million of cash from operations, which is down about $20 million versus last year due to lower sales and earnings, partially offset by lower working capital.
We spent $161 million in capex, paid $135 million in dividends and bought back nearly $26 million worth of stock at an average price of just over $78 per share.
We continue to be comfortable with our liquidity position.
And at the end of our fiscal year, we had nearly $785 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, including joint ventures ratio, was 2.6 times.
It's been an incredibly rewarding experience, and I know that this team will continue to drive the company's success.
In terms of my successor, I've known and worked with Bernadette for around 20 years on and off.
And I expect that you'll find that she and I approach things in many respects with a similar mindset.
As Tom said, she's been deeply involved in all of the key decisions at Lamb Weston, and that's certainly true in developing the broader finance team and strategy.
I'm excited for Bernadette to step into the role and see the impact that I know she'll deliver.
Now here's Bernadette to review our fiscal 2022 outlook.
For the year, we expect sales growth will be above our long-term target of low to mid-single digits, with the drivers of that growth being somewhat different in the first half versus the second.
For the first half, we expect growth to be largely driven by higher volume, although we also anticipate that overall price/mix will be positive.
The expected volume increase reflects the continuing recovery in demand in the U.S. and our key international markets as well as the comparison to our relatively soft shipments during the first half of fiscal 2021 due to the pandemic.
For the second half of the year, we expect our sales growth will reflect more of a balance of higher volume and improved price/mix.
While the volume drivers should be similar to those in the first half, the benefit of the shipment comparisons will be less pronounced, especially late in the year.
Pricing in the second half will benefit from the broad-based actions in our Foodservice and Retail segments that became effective in mid-July but won't be mostly realized until our fiscal third quarter.
Price in the Global segment in the second half should also benefit from price escalators built into multiyear customer agreements.
In addition, mix should benefit as our shipments continue to steadily recover in some of our noncommercial channels in our Foodservice segment.
And as Tom mentioned, we continue to expect overall U.S. french fry demand will return to pre-pandemic levels on a run rate basis around the end of calendar 2021, which is essentially the beginning of our fiscal third quarter.
With respect to earnings, we expect adjusted EBITDA, including joint ventures and net income to gradually normalize as the year progresses, but it will be pressured during the first half by a step-up in input and transportation cost inflation as well as some residual effects of the pandemic's disruptive impact on our manufacturing and distribution operations.
As we noted earlier, we believe the worst of the pandemic's impact on our operations is behind us.
So we expect these near-term cost pressures will steadily ease as we progress to the second half of the year.
As you may recall, we generally hold about 60 days of finished goods inventory.
So production costs that we incurred within the last couple of months are held on our balance sheet until the inventory is sold.
Accordingly, we already have a good idea about the expected impact on our fiscal first and second quarter results from the disruption in our manufacturing assets in the past few months.
We expect inflation to be a headwind throughout fiscal 2022, especially in the first half of the year.
As Tom noted, we expect volatility in the broader supply chain as the overall economy continues to recover from the pandemic's impact.
We believe this will contribute to significant inflation for key inputs, especially edible oils, transportation and packaging, continuing the trend that we began to see during the latter months of fiscal 2021.
That said, we're pulling a combination of levers, which may collectively offset most of these inflationary pressures.
As we've discussed, we began implementing a round of broad-based price increases in our Foodservice and Retail segments a couple of weeks ago.
These increases generally take three to six months to be mostly realized in the market and will, therefore, lag the impact of inflation by a couple of quarters.
We're also not ruling out the possibility of subsequent rounds of price increases based on the pace and scope of inflation.
In our Global segment, we're in the middle of negotiating contracts for our larger customers, and the results of those discussions, including price, won't be known until later this year.
However, we will continue to benefit from inflation-driven price escalators built into multiyear customer contracts.
As I also mentioned earlier, we expect a continued recovery in shipments to customers and higher-margin foodservice channels.
And third, we expect to steadily drive increased productivity with our Win As One, lean manufacturing initiative.
So while the ongoing impact of the pandemic is uncertain, we expect these levers together may largely offset inflation and allow us a more stable manufacturing and distribution operations will enable us to improve gross profit during the second half of fiscal 2022.
We expect that some of this improvement will be offset by continued investments in our supply chain, commercial and IT operations, especially in the first half of the year.
These investments will increase our operating expenses in the near term but should improve our ability to support growth and margin improvement over the long term.
In addition to our operating targets, we anticipate total interest expense of around $115 million.
We estimate a full year effective tax rate of between 23% and 24% and expect total depreciation and amortization expense will be approximately $190 million.
And finally, we expect capital expenditures of $650 million to $700 million depending on the timing of spending behind our large capital projects.
This capex amount is high relative to our past annual levels and is largely a function of growth capital to complete the construction of our chopped and formed line in Idaho as well as to begin construction of new french fry lines in Idaho and China.
It also includes capital associated with the second phase of our ERP implementation.
So in sum, we expect net sales growth for the year will be above our long-term target of low to mid-single digits, with growth largely driven by volume in the front half and more of a balance of volume and price/mix in the back half.
We expect adjusted EBITDA, including joint ventures, will grow for the year with earnings pressure in the first half and gradual improvements toward more normalized results in the second half as operations stabilize and price/mix improves.
At this time, we're taking a prudent approach by not providing a specific earnings growth target, given the increased volatility of key input and transportation costs as well as the potential impact of the recent heat waves in the Pacific Northwest on potato yield and quality.
Now here's Tom for some closing comments.
We feel good about how well the category has been recovering from the pandemic and believe these positive trends provide a good tailwind for above algorithm sales growth in fiscal 2022.
We're making progress in stabilizing our manufacturing network, and we're pulling the right levers to gradually normalize operations and offset significant inflationary pressures to improve profitability as the year progresses.
With our Win As One productivity initiatives, we're putting in place the lean manufacturing and productivity tools to improve our operations and cost structure so that we can return to or even exceed pre-pandemic margin levels in the coming years.
And finally, I'm confident that we're making the right investments to strategically expand our production capacity so that we can deliver sustainable, profitable growth and create value for our stakeholders over the long term.
| compname reports q4 earnings per share of $0.44.
q4 earnings per share $0.44.
sees 2022 net sales growth above long-term target range of low-to-mid single digits.
sees net income and adjusted ebitda including joint ventures for 2022 to be pressured during h1 and normalize in h2.
encouraged by pace of recovery in u.s. restaurant traffic, especially at full-service restaurants.
continue to expect that overall u.s. french fry demand will return to pre-pandemic levels around end of calendar 2021.
lamb weston - anticipates significant inflation for key production inputs, packaging and transportation in 2022 compared to fiscal 2021 levels.
|
First, I'll begin by providing an update on how we are navigating our business through the COVID-19 pandemic, while supporting our employees, customers, communities and shareholders.
Secondly, I'd like to briefly comment on a few points about our first quarter financial performance and finally, I'd like to revisit several key strategic initiatives and programs.
Our company's existing pandemic preparedness plan and ongoing pandemic exercises enabled F.N.B to stay at the front of this escalating crisis.
Dating back to 2018, our management team went through a pandemic simulation and collaborated with our business continuity team to develop a formal pandemic response plan.
During this process, sustainability was thoroughly evaluated and ultimately formed the foundation of the comprehensive plan currently in place.
Additionally, our ongoing commitment to invest in our digital channels and technology played a critical role in our ability to provide convenient banking options for our customers, who were not able to leave their homes.
Our investments in technology also enabled us to build and establish an automated process to handle nearly 15,000 business applications for the SBA Paycheck Protection Program in just one week's time.
Our efforts resulted in approving and processing 75% of those applications in the first round of funding, representing $2.1 billion in loans.
We anticipate processing the remaining applications during the second round of funding.
As I mentioned, when Phase 1 of F.N.B's technology initiative called clicks-to-bricks began, we had previously introduced online appointment setting and we're able to quickly make specialized COVID-19 content and offerings available in our solution centers.
We tapped into the strength of our established communication channels for both customers and employees, keeping both audiences informed of any update.
Our employees' response to this crisis has been exceptional.
Their professional, compassionate, positive, and resilient attitudes have been a bright light in helping each other, our customers and our communities while navigating these unprecedented times.
Protecting the health, safety, and financial well-being of our employees remains critical as we find ways to address any impact to their health or the health of their families.
For example, F.N.B provided our team with up to 15 days paid leave and also expanded our existing paid caregiver leave program.
Additionally, to assist with any possible financial hardships resulting from the coronavirus, F.N.B provided a special assistance payment to essential employees working on the front line and in our operations areas, who ensure that our customers continue to receive vital financial services.
We also leveraged our IT infrastructure by making accommodations to give employees the ability to work remotely where appropriate.
To-date, we have approximately 2,200 colleagues working remotely, which represents about half of our workforce and largely non-retail position.
This capability also speaks to our investment in technology and IT infrastructure.
As we focus on our communities, the F.N.B Foundation committed to provide $1 million in relief in response to COVID-19, benefiting food banks and providing essential medical supplies.
Many of our employees began reaching out to our clients and our communities to provide support.
At our Pittsburgh headquarters, F.N.B's vendor management team has been using our vetting process to assist Allegheny County and quickly researching new vendors, offering medical supplies and services to combat COVID-19.
With respect to our retail branches, we have focused on drive-up services and closed our lobbies, reverting to appointment only practices, which are supported by the appointment setting capability within our clicks-to-bricks platform.
As you can imagine, the monumental commitment of our leadership team and employees to operate in this challenging environment required to sustain 24/7 effort.
I would like to commend our employees for the actions they've taken to execute and abide by our safety measures, while continuing operations.
With these key priorities and actions in place, let me pivot and comment briefly on our first quarter performance.
Given all that's happened in a noisy quarter, our underlying core performance remained solid.
Our philosophy is to maintain our approach to risk management through varying economic cycles and serve as the primary capital provider to our clients.
While F.N.B like many banks will be subject to a difficult economic environment, this philosophy and the actions we have taken to strengthen our balance sheet and reduce risk should position F.N.B well as we move through the current crisis.
Looking at the quarter's result, GAAP earnings per share of $0.14 included $0.15 of bottom line impact from significant items primarily related to COVID-19 and the adoption and implementation of CECL in the corresponding reserve build under these macro economic conditions.
Topline results were solid as revenue increased to more than $300 million, driven by strong loan and deposit growth and positive results across our fee-based businesses.
Average commercial loans grew $225 million or 6% as we saw activity pick-up in late March, particularly in C&I with growth of 17%.
I'll note there was limited impact to average balances from anticipated liquidity draws.
Compared to the first quarter of 2019, average deposits increased 5% with growth in non-interest-bearing deposits of 7%, leading to an improved funding mix.
The net interest margin expanded to 3.14%, supported by strong loan growth, a 7 basis point improvement in total cost of funds and higher accretion levels compared to the prior quarter.
The fundamental trends in non-interest income were strong with capital markets revenues of $11 million, setting another record in the first quarter.
Insurance and mortgage banking income also had strong underlying performance.
Due to the significant shift in the interest rate environment, our non-interest income includes $7.7 million of impairment on mortgage servicing rights.
Excluding changes in MSR valuation, mortgage banking income totaled $6.7 million, up more than 50% from the first quarter of 2019 with significant pipelines moving forward.
On a core basis, expenses remained stable compared to the fourth quarter and disciplined expense management will continue to be a top priority as we move beyond this crisis.
Vincent and Gary will provide more detail on the implementation of CECL and additional details on the financials in their remarks.
We closed out the first quarter of 2020 with our credit portfolio remaining in a satisfactory position in the midst of the current global challenges that have come as a result of COVID-19.
The first quarter also marked the adoption of the CECL accounting standard, which as I communicated last quarter, brings additional changes to the reporting of credit quality metrics.
I will also review the steps we are taking to monitor the books and manage the emerging risks, while continuing to meet the credit needs of our borrowers and the communities in which we operate.
Let's now review our first quarter results.
The level of delinquency at March 31 totaled 1.13%, up 19 basis points over the prior quarter and included a temporary uptick in early stage, a majority of which has already been brought current NPLs and OREO totaled 64 basis points, a 9 basis point increase linked-quarter.
This increase does not reflect credit deterioration, but rather changes non-accrual reporting moving from the former PCI pool accounting to the new CECL standard.
Net charge-offs remained low at $5.7 million for the quarter or 10 basis points annualized.
Provision expense for the quarter totaled $48 million of which $38 million relates to a reserve build for adverse macroeconomic conditions tied to COVID-19.
The ending reserve stands at 1.44%, up 15 basis points compared to our day one CECL reserve of 1.29%, providing NPL coverage of 256% at quarter-end.
It's worth noting that inclusive of unamortized loan discounts, our period ending reserve represents 66% of our 2018 DFAST severely adverse scenario charge-offs.
Our teams have been working tirelessly over the last several weeks, meeting with borrowers, reviewing credits, tracking performance metrics and administering government-backed lending programs as part of our response to the COVID-19 crisis.
We entered the crisis with our credit portfolio in a position of strength due in large part to our core credit philosophies that I have discussed with you before, including consistent underwriting, proactive management of risk, attentive and aggressive work-out, and a balanced asset mix spanning our entire footprint.
We have taken many actions over the last several years to maintain a lower risk profile to position our book to withstand various economic cycles and adverse conditions, similar to those we are currently experiencing.
Over the last four years, we have sold approximately $700 million in loans to proactively de-risk the balance sheet, a large portion of which were higher risk acquired loans that we were able to move off the books at a financial benefit to the company.
We've also historically limited our exposure to highly sensitive industries like travel and leisure, food and accommodation and energy with exposure to these three industries remaining very low, totaling only 3.8% of our loan portfolio.
As it relates to relief programs, we were able to quickly mobilize our credit teams to review and approve payment deferral plans for qualified borrowers, which to-date totals approximately 6% of our loan portfolio.
As an SBA preferred lender, we have also been working diligently to support our small business borrowers in securing PPP financing that is fully backed by the SBA.
The volume and key performance metrics for these relief programs are monitored daily through a specialized set of reports developed in response to COVID-19.
Using our holistic credit systems, we have been tracking daily utilization rates, deferral activity, PPP loan volume and borrower impact assessments, which are broken down further to allow us to monitor our credit portfolio by line of business, loan product, geography, and industry.
In addition to expanded analytics, we have also leveraged our existing allowance and DFAST frameworks to conduct scenario analysis and stress testing including select loan portfolios.
All of the actions taken will help us manage through the challenging conditions faced by the industry today.
Above all, I would like to take a moment to recognize our team of bankers and credit support staff for all of their hard work and dedication to help meet the credit needs of our customers and communities during this challenging time.
We'll continue to draw on the leadership and experience of our credit and banking teams to manage through this challenging environment as we have in past cycles.
Today, I'll cover our results for the first quarter and provide an update on the current environment.
As noted on slide nine, first quarter GAAP earnings per share totaled $0.14, which includes $0.15 of significant items.
The TCE ratio ended March at 7.36%, reflecting 16 basis points of CECL adoption impact and another 15 basis points for the $48 million of after-tax items.
These significant items are listed in the reconciliation tables with the biggest piece being the COVID-19 related reserve build of $38 million during the first quarter.
We used a pandemic driven recessionary scenario in evaluating the macroeconomic projections.
Let's start with the review of the balance sheet on slide 14.
Linked-quarter average loan growth totaled $278 million or 5% annualized, attributable to commercial growth of 6% and consumer growth of 2%.
The average commercial growth includes less than 1 percentage point annualized for COVID-19 related increases in commercial line utilization that occurred in the month of March.
Continuing on the balance sheet slide, on a linked-quarter basis, average deposits were relatively flat as normal seasonal outflows impacted average balances.
On a year-over-year basis, average deposits were up $1.2 billion or 5.2%.
From an overall liquidity standpoint, we are comfortable with our current position, including the benefit of opportunistically accessing the debt capital markets to raise $300 million in holding company liquidity at very attractive spreads on February 20th.
We also executed a portion of our previously announced share repurchase program, buying back 2.4 million shares prior to March 12th, representing 0.7% of our total shares outstanding.
Turning to the income statement on slide 15, net interest income totaled $233 million, up $6.2 million or 2.7% from last quarter.
The net interest margin expanded 7 basis points to 3.14%, driven by solid average loan growth, lower cost of funds, and higher discount accretion levels now that we are in a CECL environment.
During the first quarter, the higher discount accretion offset the pressure on variable rate loan yields, given the significant decline in the short end of the curve.
On the funding side, the total cost of funds decreased 7 points to 1.01% from 1.08%, reflecting lower borrowing costs as well as the shift in funding mix and a 10 basis point reduction in the cost of interest bearing deposits.
Slide 16 and 17 provide details for non-interest income and expense.
There continues to be strong performance in capital markets, mortgage banking, insurance and trust as well as for operating non-interest income as a whole.
As Vince noted earlier, we are consistently receiving positive contributions from our fee-based businesses, which diversifies our revenue base and helps to mitigate the impact of a volatile interest rate environment.
Looking at the first quarter, non-interest income totaled $68.5 million, a 7.4% decrease from last quarter, due mainly to the impact from the $7.7 million MSR impairment, given the moving down in interest rates.
Excluding the impairment, non-interest income increased $2.2 million or 3% with capital markets posting a record of $11.1 million, increasing 29% from the fourth quarter, driven by strong origination volume.
Turning to slide 17, non-interest expense on a run rate basis remained stable compared to fourth quarter levels.
This excludes $2 million of expenses associated with COVID-19, $8.3 million of branch consolidation costs, and $5.6 million of expense related to changes in retirement provisions for new grants under our long-term incentive program that do not affect the total cost of the grants, but do affect the expense recognition timing.
Bank shares and franchise taxes increased $1.7 million, reflecting the recognition of a $1.2 million state tax credit in the prior quarter and higher year-end 2019 bank capital levels while other increases and decreases essentially offset each other.
The efficiency ratio equaled 59% compared to 56% as the other unusual or outsized items increased current quarter's efficiency ratio by over 3 percentage points.
Regarding guidance, the outlook we shared in January is no longer relevant, given the impacts of the COVID-19 pandemic on the overall economy and the uncertainty around the length of time it takes to recover.
However, in the spirit of transparency into our short-term forecasts, we are providing our current directional outlook for the second quarter of 2020 on slide 18 based on what we know today, which is subject to change, given the very fluid situation we are all managing through.
We expect second quarter net interest income to decline mid-single digits from first quarter levels as the net interest margin reflects a full quarter's impact of the current interest rate levels.
We expect average loan balances to be up mid-to-high single-digits, reflecting higher March 31 spot balances and $2.1 billion of PPP loans from the initial phase of the program that are expected to fund during the quarter.
The second phase of the program would be additive to these figures as we strive to accommodate all of our customers that want to participate.
We expect expenses to be flat from the core level of $178 million this quarter.
We expect our core fee trends to continue from solid levels in the first quarter with service charges expected to decline due to COVID-19 impacts on certain products and services.
We expect the effective tax rate to be around 20%.
I'd like to touch on several initiatives that stand out as we move forward.
In January, we launched our new interactive website designed with enhanced functionality that creates a one-stop shopping and interactive digital experience.
Online appointment setting, a streamlined account opening process and deploying interactive teller machines throughout our footprint are just a few of the functionalities that our clicks-to-bricks digital strategy affords us.
Combined with our network of nearly 40 ITMs and 550 ATMs and our robust award winning mobile applications, we are well positioned to continue to provide service to our customers through multiple channels and meet their needs during this time of social distancing and economic challenges.
We've invested heavily in our mobile and online platform, which is critical during a time of limited operations in the physical channels.
Mobile deposits are up more than 40% in the last two weeks of March compared to the year ago period and pre-COVID-19 first quarter levels.
F.N.B will continue to build-out our digital capabilities as previously planned.
To protect our customers and communities from economic disruption, F.N.B was one of the first banks to develop a structured deferral program and announced several measures to support customers who may be enduring financial hardships and were directly impacted by COVID-19.
Furthermore, we instituted an outreach program and activated an outbound calling initiative to contact thousands of customers across all business units during the crisis, ensuring their needs were being met.
We also continue to participate in the previously mentioned Paycheck Protection Program and evaluate other COVID-19 related federal government relief programs to determine their suitability for our customers and communities.
Regarding our outlook, liquidity and overall capital position, we consistently run stress test for a variety of economic situations, including severely adverse scenarios that have economic conditions like current conditions.
Under these scenarios, our regulatory capital ratios remain above the thresholds and we are able to maintain appropriate liquidity levels, demonstrating our ability to continue to support all of our constituencies under stressful financial conditions.
As we gain more clarity on this evolving health pandemic and the resulting challenging economic environment, we will continue to update you on key business drivers and expectations.
In closing, I'd like to express how proud I am of our team's efforts during this very difficult time to identify new and creative ways to connect with those in need.
This is an unprecedented time for our nation and our industry.
Our mission has always been to improve the quality of life in the communities we serve.
Now more than ever, we must work together to support those impacted by this public health crisis.
| compname reports q1 earnings per share $0.14.
q1 earnings per share $0.14.
|
We are so pleased you could join us today as we report our fiscal '22 results and take this opportunity to update our longer-term strategy and our multiyear financial outlook.
Today, we will discuss how our business has evolved and how we are planning to drive value over the next few years.
We're not planning to cover all our initiatives or all our business units.
We've tried to be as succinct as possible to focus on the topics and initiatives that we believe are most important for you to understand about our business, our plans and where we believe we're headed, both for fiscal '23 and for the longer term.
First, let's discuss our fiscal '22 results.
Fiscal '22 was another record year.
In addition to record revenue and earnings, our leaders continue to drive new ways of operating and our employees continue to do amazing things in the face of unprecedented challenge and change to support our customers' technology needs in knowledgeable, fast and convenient ways.
As we discussed when we entered the year, we anchored on three concepts we believe to be permanent and structural implications of the pandemic that were and are shaping our strategic priorities and investments.
One, customer shopping behavior will be permanently changed in a way that is even more digital and puts customers entirely in control to shop how they want.
Our strategy is to embrace that reality and to lead, not follow.
Two, our workforce will need to evolve in a way that meets the needs of customers while still providing more flexible opportunities for our employees.
And three, technology is a need and is playing an even more crucial role in people's lives.
And as a result, our purpose to enrich lives through technology has never been more important.
With these concepts in mind, we piloted numerous store formats to test and learn in the past year.
We advanced our flexible workforce initiative and invested in our employees' wellbeing.
We introduced new technology tools designed to support both our customers and also our employees.
And we also launched a bold new membership program called Best Buy Totaltech, designed to significantly elevate our customer experience and drive incremental sales.
We will be talking more about all these topics today.
All of this was against a constantly evolving backdrop.
During the year, we navigated supply chain and transportation challenges, uncertainty as virus peaks rolled across the country and then most recently, the disruption from the Omicron wave.
Our teams did an amazing job against that backdrop, expertly managing supply chain challenges since the beginning of the pandemic to bring in products our customers needed.
During the year, we continued serving our customers digitally at much higher rates.
Our online revenue was 34% of our domestic revenue, and while it declined versus last year, it was up 115% or $8.8 billion compared to two years ago.
At the same time, we also reached our fastest package delivery speeds ever.
We are an industry leader in fast and convenient product fulfillment for our customers.
In fact, the percent of online orders we delivered in one day was twice as high as pre-pandemic levels despite the significant increase in volume during that same time frame.
These record results are driven by the investment decisions we have made in the last several years in supply chain, store operations, our people and technology, many of which we discussed at our investor updates both in 2017 and 2019.
More importantly, these results are driven by our amazing associates across the company.
Over the past 24 months, they have flexibly dealt with rapidly changing store operations as we responded to impacts of the pandemic.
They created safe environments for our customers, and they worked tirelessly to provide excellent service.
In fact, despite all the changes we went through in the last year, we delivered NPS improvements both online and in our stores.
I am truly grateful for and continue to be impressed by our associates' dedication, resourcefulness and flat-out determination.
From a financial perspective, we delivered record revenue and earnings per share.
Our comparable sales growth was 10.4% on top of a very strong 9.7% last year, growing $8 billion over the past two years.
Our non-GAAP earnings per share was just over $10, up 27% compared to last year.
And compared to two years ago, we expanded our non-GAAP operating income rate by 110 basis points.
Our non-GAAP return on investment improved 840 basis points compared to two years ago, and we drove more than $6.5 billion of free cash flow in the last two years.
In fiscal '22, we returned $4.2 billion of that to shareholders in the form of dividends and share repurchases.
We also continued to deepen our commitment to the community and the environment.
Many of you may have had the opportunity to view the video that was playing before the event started.
We continue to believe that our ESG efforts are directly tied to long-term value creation.
And I am proud of all our initiatives, but we only have time for me to cover a few examples today.
We committed to spend at least $1.2 billion with BIPOC and diverse businesses by 2025.
We also committed to opening 100 Teen Tech Centers by fiscal '25.
During fiscal '22, we opened nine to end the year with a total of 44.
These provide teens in disinvested communities access to the training, tools and mentorship needed to succeed in post-secondary opportunities and careers.
In addition, we're building a diverse talent pipeline for jobs of the future.
In terms of the environment, in fiscal '22, we were a founding member of the Race to Zero initiative, committing to accelerate climate action within the retail industry.
We are also driving sustainability through the unique consumer electronic circular economy.
We help keep devices in use longer and out of landfills by leveraging our customer trade-in program, Geek Squad repair services, responsible recycling and Best Buy outlets.
These are initiatives our customers and vendors value and capabilities no one else has at our scale and breadth, and we are honored to be recognized for our work.
Notably, we have placed in the top five on Barron's Most Sustainable Companies list for the past five years in a row.
This ranking recognizes our strong performance across all aspects of ESG.
In addition, we are on the CDP Climate A List for the fifth year, which recognizes leadership in making a positive impact on the environment.
Now, let's move on to our Q4 results.
I am extremely proud of what we accomplished during the fourth quarter.
Our team showed remarkable execution and dedication to serving our customers throughout the important gift-giving season.
This was evidenced by the fact that we drove improvement in year-over-year customer NPS metrics across almost all areas, particularly for in-store, online and chat experiences.
In fact, we saw our best ever customer satisfaction scores for our in-store pickup experience.
Online sales were almost 40% of domestic revenue compared to 43% last year and 25% in Q4 of fiscal '20.
We reached our fastest holiday delivery times ever, shipping products to customer homes more than 25% faster than last year and two years ago.
We are deliberately investing in our future and furthering our competitive differentiation.
This, as we expected, is temporarily impacting our profitability.
The biggest areas of investment in Q4 were our new membership program, technology and Best Buy Health, all core to our future growth potential.
In the face of unexpected change, I remain inspired by the way our teams across the enterprise remain flexible to ensure our customers were able to find the perfect gift.
We remain well positioned as we head into fiscal '23 as the unique technology provider for the home.
I'll turn the meeting over to Matt to cover more details on our Q4 results and fiscal '23 outlook.
Our Q4 revenue was $16.4 billion.
Our domestic comparable sales declined 2.1%, and our enterprise comp sales declined 2.3%.
Revenue grew 8% versus two years ago.
It was only slightly below the low end of our revenue guidance for the quarter due to a few factors.
The first factor was inventory availability.
We expected to have pockets of inventory constraints as we entered the quarter and called out a few areas, including appliances, gaming and mobile phones.
As the quarter progressed, inventory was more constrained than we anticipated within a few categories and brands.
These constraints included some high-demand holiday items, and the categories most impacted were mobile phones and computing.
The second factor impacting our results was Omicron.
The Omicron wave and the resulting high levels of employee call-outs led to a temporary reduction in our store hours in January and to start fiscal '23.
In mid-February, our staffing levels started to improve, and we increased store operating hours for the majority of our stores.
Excluding these two factors, our revenue would have been comfortably in the guidance range we provided for the quarter.
From a category standpoint, on a weighted basis, the top areas with positive comparable sales growth included appliances, virtual reality, home theater and headphones.
We saw comparable sales declines in gaming, mobile phones, tablets and services.
Turning now to gross profit.
Our non-GAAP gross profit rate decreased 50 basis points to 20.2%.
This was about 20 basis points lower than we expected primarily due to increased promotionality.
When comparing to last year, the largest driver was our services category, primarily driven by Totaltech.
Our product margins were largely flat to last year as the benefit from category sales mix was offset by increased promotions.
Higher profit sharing revenue from our credit card arrangement was a benefit to gross profit rate compared to last year.
Lastly, our International gross profit rate improved 210 basis points to last year, which provided a weighted benefit of approximately 20 basis points to our enterprise results.
Our enterprise non-GAAP SG&A dollars grew 5% versus last year, less than our guide of 8% growth primarily due to lower-than-anticipated incentive compensation.
Within our domestic segment, our SG&A dollars increased $139 million.
The largest drivers were: one, advertising, which included campaigns for both holiday and to drive awareness for our new membership offering.
Three, increased store and call center labor that helped drive the record customer satisfaction scores Corie shared.
And four, Best Buy Health, which includes the impact associated with our acquisition.
Before I discuss the fiscal '23 financial outlook, let me spend some time on our new Totaltech membership program.
Totaltech is a near-term investment to drive long-term value.
The thesis is that over time, we will capture incremental product sales from our members that will lead to higher operating income, but as we discussed in prior earnings calls, it does come with near-term profitability impacts.
First, at $199, the stand-alone membership is profitable.
It just isn't as profitable as legacy service memberships due to the breadth of benefits and the cost to fulfill them.
Second, there's a loss of revenue and profit from existing revenue streams that are now included as benefits in the program.
For example, previously stand-alone services like extended warranties and products installations are now included within our Totaltech membership.
We still offer these services on a stand-alone basis or to nonmembers, but you can imagine there's an aspect of cannibalization as members are no longer paying incrementally for these items.
So what does all this mean?
We expect that the gross profit rate of our services category will reset to a new level going forward that is lower than it was prior to launching Totaltech.
The way to drive more operating income despite these lower services gross profit rate is to add far more members than we thought was possible under our previous membership offerings.
The key to increased profit will be through increased volume through a combination of more recurring membership revenue and incremental product purchases of our members.
The number of memberships grew very nicely in Q4, and our plans for fiscal '23 assume continued growth.
But it will take some time to reach the scale necessary to offset the lower gross profit rate I just described.
Therefore, Totaltech remains a pressure in fiscal '23 but we expect it to be a meaningful driver of both higher sales and operating income dollars in fiscal '25 targets.
Now, let's talk about our overall fiscal '23 outlook.
Our guide is anchored around a comparable sales decline in the range of 1% to 4% and a 5.4% non-GAAP operating income rate.
Our non-GAAP diluted earnings per share outlook is $8.85 to $9.15.
Before we discuss the broader assumptions driving our guide, I want to touch on our expected tax rate.
Our non-GAAP effective tax rate is planned at a more normalized level of 24.5% in fiscal '23 compared to 19% rate in fiscal '22.
As you may recall, our Q2 results this past year included a $0.47 diluted earnings per share benefit from the resolution of certain discrete matters.
Now, I would like to share a few important assumptions underpinning our guidance.
First, we anticipate the traditional CE industry to decline in the low to mid-single digits next year as we lap the high levels of growth in stimulus actions from this past year.
In addition, we anticipate the number of store closures to be in the range of 20 to 30, which is consistent with the trend over the past five years.
As I mentioned, our fiscal '23 guidance assumes non-GAAP operating income rate of approximately 5.4% compared to 6% in fiscal '22.
To be clear, the biggest driver of the lower operating income rate in fiscal '23 is our investment in Totaltech.
As I just described, this near-term pressure will drive long-term value for our shareholders.
There are, of course, other factors that we expect to impact our results that for the most part offset each other in fiscal '23.
We do expect higher levels of promotional activity to pressure our gross profit rate, which is partially offset by the favorable impact of expected growth and our monetization of our advertising business or Best Buy ads.
We expect our full year SG&A expense to be lower than fiscal '22 levels.
The largest year-over-year variance is lower incentive compensation expense as we reset our plans after paying out at higher levels in fiscal '22 due to the overachieving of our performance targets.
We expect a lower incentive comp to be partially offset by a few areas.
The first area is higher technology cost primarily due to annualizing spend in fiscal '22.
The second area is higher depreciation and store remodel expense, as Damien will discuss later.
And lastly, we expect to see higher SG&A dollars in support of our Best Buy Ads business.
Finally, as you may have noticed, we are not providing quarterly guidance, but I would like to provide some insight on the assumed phasing for fiscal '23.
Due to the strong first half comps last year, we expect our full year comparable sales decline to be weighted more heavily in the first half of the year.
In addition, we expect to see significantly more year-over-year operating income rate pressure in the first half of the year compared to the back half.
To summarize, the two largest variables for fiscal '23 financial results are the short-term industry declines as we lap high growth in government stimulus and the investment in our new membership program that will drive long-term value.
As we look to fiscal '25, we expect the CE industry will return to the high levels we saw in fiscal '22 and that Totaltech will drive meaningful growth.
I will now turn the meeting back over to Corie to begin our strategic update.
As I noted closing out my Q4 summary, we remain well positioned as we head into fiscal '23.
I'd like to expand on this a bit as we highlight our strategic positioning.
First, technology is a necessity, and we are the unique tech solutions provider for the home.
Second, we have built an ecosystem of customer-centric assets, delivering experiences no one else can.
And third, we believe our differentiated abilities and ongoing investments in our business will drive compelling financial returns over time.
We believe we have the right strategy to deliver growth and value for all stakeholders, and we are excited to go into more detail about our plans.
But first, let's do some level setting.
Our purpose is unchanged, and more relevant today, this minute than ever, our purpose to enrich lives through technology is enduring.
And we have honed our five-year vision.
We personalize and humanize technology solutions for every stage of life.
Technology is no longer a nice to have, it is a necessity, and it is expanding into all parts of our lives and homes.
Working has forever changed.
Streaming content has exponentially grown.
The metaverse is coming to life.
We can power our homes with connected solar panels.
And we can monitor our health, including connecting with the physician, from our living room.
Every aspect of our lives has changed with technology, and we uniquely know how to make it human in our customers' homes, right for their lives.
For example, we will send a consultant to your home for free to optimize the tech you have or add the tech you want.
We can repair your phone's screen and you can try VR headsets while you wait.
You can meet with a fitness consultant in our virtual store, who will match your fitness goals with our fitness products, or you can use our Lively device to connect with a caring center agent who can help you schedule a lift.
From a financial perspective, we delivered remarkable results over the past two years, and we are far ahead of where we expected to be when we set our long-term financial targets back in 2019.
As I mentioned earlier, in the past two years, we have delivered more than $8 billion of revenue growth and improved our operating income rate by 110 basis points to 6%.
We are in a strong position to drive the business forward and deliver growth.
We do not for one minute believe we hit our peak revenue and margin this past year.
As Matt outlined, we do expect fiscal '23 to look different as the industry cycles the last two years of unusually strong demand and we leverage our position of strength to continue to invest in our future.
But in fiscal '25, we expect to deliver revenue growth and expand our operating income rate beyond what we reported in fiscal '22.
As we have always said, in order to deliver these financial results, it is paramount that we stay focused on our goal to remain a best place to work, and we continue to deepen relationships with our customers.
As you can see, our new fiscal '25 targets are materially higher than what we thought just back in 2019.
We now expect to generate approximately $1 billion more in operating income than our original targets.
Given our margin rate, this is considerable growth in operating income dollars.
So what's changed since 2019?
Well, the CE industry is larger than we expected.
Our online mix has nearly doubled.
We have found ways to make our operating model more flexible and efficient while also investing in wages and benefits.
We are accelerating our category expansion, and we have launched an entirely new membership program.
On the flip side, the financial contribution from Best Buy Health is clearer but also a bit longer term than we had originally modeled.
This is based on primarily two things.
First, demand in the active aging business and product constraints were impacted by the pandemic.
Additionally, based on our internal learnings and insights from consumer behavior changes over the past two years, we tuned our strategy to focus on the growing virtual care opportunity, which Deborah will discuss in more detail later.
As we think about our strategy going forward, it is important to look at how dramatically our business has evolved over the past several years.
Here, we use fiscal '15 to give a longer-term view to what a different business we have become.
Most of these changes were already in motion before the pandemic and then accelerated significantly in the past two years.
Let me expand on a few points here.
I already mentioned our fiscal '22 online business was 34% of our Domestic sales.
That is more than $16 billion in sales compared to just $3.5 billion in fiscal '15.
When you look at how we use our stores for fulfillment, the increase in the sheer number of products customers are picking up in our stores is impressive.
This is even more meaningful when you consider the fact that our delivery speed is industry leading, and we cut delivery speed essentially in half over the past several years.
Clearly, customers value our stores and the convenience and choice they provide.
As Damien is going to discuss, we are increasingly interacting with customers via digital channels like chats and video and in their homes.
And finally, membership is incredibly important, both now and into our future.
And our My Best Buy program now has more than 100 million total members.
So with all of that as background, I'd like to tap back to our first key takeaway.
Technology is a necessity, and we are the unique tech solutions provider for the home.
So let's start with some industry context.
The traditional CE industry is large and growing.
There's no perfect external source that tracks our business, so here, we're showing a historical view based on selected government PCE category data.
Our outlook is based on multiple industry forecasts and internal data.
As you can see on this chart, the industry was growing for several years and then accelerated during the last two years.
As Matt mentioned, we expect it to step back this year as the industry absorbs the very high growth of the past two years.
By fiscal '25, we believe it can be back to fiscal '22 levels, which is materially higher than it was pre pandemic.
In addition, we're expanding our addressable market by entering new categories in areas like health and electric bikes that are being disrupted by technology in a good way, as well as areas where we can really complete solutions for customers like indoor and outdoor living.
Jason will provide a bit more detail on these in a few minutes.
As a reminder, this is also a stable industry.
Contrary to some sentiment, technology is no more volatile or cyclical than other large durable goods categories over time, and the last two years have significantly underscored the importance of technology in day-to-day life.
What historically was seen as a want has become a need.
40% of Americans use digital technology or the Internet in new or different ways compared with before the pandemic, and the use of telemedicine is triple what it was in just Q1 of 2020.
The majority of people who started or increased activities like online fitness, telemedicine, videoconferencing and connecting socially with others virtually say they plan to continue this increased usage even after the pandemic.
Terms like home nesting and virtual care have been invented to describe what all of us know so well, that where we work, entertain, receive healthcare and connect has changed and our homes are now central to our lives more than ever before and they're also more tech connected than they ever had been before.
As a result, there is an overall larger installed base of consumers using technology.
People own more tech devices than ever before.
This combination of more devices and more activities also means customers need their tech to work seamlessly every day.
True tech support when the customer wants it underpins living this way and is our unique asset across all these devices.
And technology is extending into all aspects of our home, and we've all grown to depend on it.
This is not a heat-driven category.
It is an industry that is need-based, stable and has been growing.
We firmly believe people will continue to use technology more and both need and want to replace or upgrade their products.
Billions of dollars of R&D spend by some of the world's largest companies and likely some we haven't even heard of yet means innovation is constant, and that innovation drives interest, upgrades and experimentation into the future.
This is not a static industry.
We continue to lead the tech industry with significant high share in high-consideration categories.
What I mean by a high-consideration category, generally higher ASPs and a longer period of time from when you start to think about purchasing to when you actually purchase.
Continuing to grow our share in these large categories like television and computing will always be a cornerstone of our strategy, but to be truly there for our customers and all their technology needs, we need to accelerate our share across other areas of technology as well and also some new spaces.
This is where Totaltech comes in.
On products with lower ASPs and shorter upgrade and consideration cycles, our share is generally lower.
Totaltech creates a new value proposition that benefits customers when they consolidate their technology shopping at Best Buy.
I want to give three examples of a customer journey that illustrate this point.
Let's start with a customer that actually wants to upgrade their kitchen.
They want to buy an entirely new kitchen suite with three pieces.
That customer that has Totaltech does not have to worry about delivery and install.
It's included in the price.
That could be between a $400 and $500 value.
A little bit later in the year, the same customer hypothetically breaks their phone.
They want to get a new iPhone.
When they purchase that iPhone at Best Buy, AppleCare is included.
Just in the first year, that's just under $120 of value.
Then a little bit later in the year, they want to get a new pair of wireless headphones.
If you purchase those headphones at Best Buy, the warranty is also included if you're a Totaltech member.
That's a $30 value.
Examples like these is where Totaltech benefits come to life for our customers and create a reason to make a considered visit to our app, our website, our store and increases Best Buy share across all of the categories on the slide behind me.
Technology innovation never stops.
And even when you look over the past three years, you can see value of the new technology and what it creates for our customers.
During the pandemic, the majority of the focus was around creating products to meet customer demand.
This was a distraction, but even with that, there was significant innovation and value created by our vendors.
The slide behind me highlights an upgrade over a three-year period of similar price points across laptops and televisions.
While I won't hit on every new feature and advancement that happened, I'll highlight a few.
For televisions, you get a full 10 inches more in screen size, almost no Bezel and the ability to navigate your TV with voice if you'd like to.
On the laptop side, you can log in with your face.
It's faster, thinner, lighter and has significantly longer battery life.
These continued evolutionary innovation cycles are never ending, and they drive growth.
They create reasons to upgrade and unlock new and better experiences for our customers each and every year.
In fact, when we look at our customers' behavior, we're seeing a 7% to 15% reduction in the amount of time it takes a customer to get back into a category.
They're coming back to categories faster because of these innovations by our vendors.
I've highlighted how Totaltech and our vendor innovations will drive growth.
Now, I'd like to highlight some macro trends that will also drive opportunities in our business.
I'll start with 5G and fiber.
The expansion of speed and networks in general are really, really good for customers and technology.
You can download a movie in minutes, collaborate with others instantly, access a video game or video content anywhere you want without latency.
These are things that will drive new experiences and growth for our customers.
The next trend is the metaverse and cloud.
Have virtual experiences, play golf with friends or family members virtually, travel to places that you actually can't and have a full experience in the virtual world.
In addition to that, when you look at the virtual world and cloud, there are new experiences that are created.
Previously, you could just play a game on a gaming system and your television.
Now, you can take that same game seamlessly from the system to your phone to your tablet.
In fact, if some of you have children like I do, you're constantly battling the ability for them to play anywhere they want, anytime they want.
The cloud also solves a significant customer pain points.
Previously, our customers would tell us when they wanted to upgrade a computing product, it would take them 60 minutes to get it the exact way they'd want to that would be moving their icons, their data, just getting it the way the old one was and having the features of the new.
Today, with cloud, you simply put in your credentials and in 10 to 15 minutes, it's actually exactly the way you want.
You get all the benefits of the new technology, and you get all of the placement and all the setup of your old product instantly.
That does drive upgrade and it drives interest in customers in upgrading more frequently.
The next trend I would like to talk about is automation and support.
The connected home has been around for years, and it's now moving into automation and support more specifically.
Single-function devices like robot vacuums today.
Tomorrow, they'll move into security of the entire home, communication and assistance for individuals.
This is very, very important as our population ages and people want to stay in their homes longer.
Automation and support is one of the ways where technology can enable people to just do that and accomplish their goals and solve that pain point.
Next, I'd like to talk about customization and personalization.
Customers have always wanted to express themselves, and technology is not excluded from that.
But there has been significant advancement in manufacturing from appliances to cellphones where customers can express themselves with a touch of color, a family photo or any other type of personal expression that they'd like to integrate into the products.
Sustainability is also a significant trend that's important to customers but also very important to Best Buy.
I'll start with a vendor example.
Samsung televisions that we sell in our stores today have what is called Samsung solar cell technology in their remote controls.
This eliminates the need for batteries, which is obviously very beneficial to the environment.
But it also charges off of not only solar but ambient light in the home, and it means that you're never going to have a remote that's out of power.
That solves a significant customer pain point.
Technology like this will expand to more and more categories and drive upgrade cycles.
In addition to that, we want to make sure that we're supporting customers that want to upgrade more frequently.
Today, you see that come to life with our recycling and trade-in programs which are a very important part of our value proposition to customers.
Over time, that will start to move into new usage models that may actually be upfront conversations about exactly how long a customer wants to use a product and when that next upgrade will happen.
Will it be one year?
Will it be two years?
Or will it be three years as we move forward?
Let's watch a video highlighting many of the areas I've talked about and even some new additional areas that will drive growth.
As we look over the past decade, we've had over $12 billion in sales growth with the vast majority coming from large categories like TVs, computing and appliances and a third coming from new categories like wearables and VR, just to name a few.
As we move forward, that innovation will continue, and there will continue to be new categories that don't even exist today.
We're also looking to accelerate that expansion by entering new categories that are aligned with where our customers want us to be and places where Best Buy can solve real customer pain points.
For the next 12 to 24 months, we'll continue to focus on these five areas of expansion.
I'll go a bit deeper on three of these, fitness and wellness, outdoor living and personal electric transportation, in the next few minutes.
I'll start with fitness and wellness.
This is a $34 billion industry that we are uniquely positioned to compete in with our Blue Shirts but also our large product fulfillment network that was built for televisions and appliances.
Our assortment has grown by 650% in the last 12 months, and we are implementing a larger, more premium experience in 90 stores over the next 18 months with dedicated zones for vendors.
Damien will touch on the virtual store a little bit later, but customers today actually have the ability to have a virtual chat or video consultation with a fitness expert.
The next area I'd like to talk about is personal electric transportation.
This is a $3 billion industry with rapid growth.
We've introduced 250 new products this holiday with 500 additional accessories around those products.
We'll be adding physical assortment to 900 stores and a more premium experience in 90 stores over the next 18 months.
We currently offer assembly, and we're in the pilot stages of service and support and repair for our customers.
The last category I'd like to highlight is outdoor living.
This is over a $30 billion industry, and our acquisition of Yardbird, a leading premium outdoor furniture company, provides the ability for us to accelerate this business across a nationwide network.
That acquisition, combined with our strength in outdoor television and audio and new partnerships with leading brands like Traeger, Weber and Bromic, create a comprehensive solution for our customers.
When we couple that assortment with our home consultants and the physical and digital experiences that we've developed for customers, this is a really, really fast-moving category that has the ability to grow.
You'll start to see Yardbird products as fast as this spring in Southern California market, and we're very excited about that.
To reiterate, we expect growth from Totaltech, consistent innovation from our vendors, macro trends that I've mentioned, new product categories that we don't even know about yet and five new areas of expansion to move our business forward.
I'll hand it back to you, Corie.
Obviously, you are the expert.
Back to our second key takeaway.
We have built a unique ecosystem of customer-centric assets delivering experiences that no one else can.
Consumer electronics is a distinctive industry.
The products are constantly evolving, they're connected to networks that are constantly evolving, they all use different operating systems, and they range from small and powerful to large and breakable, often at high price points.
And customers are more comfortable using tech than they have ever been yet.
They also admit it's likely not doing all it could to make their lives better.
Against that backdrop, we have built a unique ecosystem of assets that all work together to create a stickier and more valuable relationship with the customer.
And we're investing in this ecosystem as we pivot against a backdrop of even higher customer expectations.
So anchoring this ecosystem is our expert advice and service.
Customers are excited about tech and want to be confident in their purchase.
We provide that in ways literally no one else can, from our expertly curated assortment to in-home consultations all the way to tech support when your tech isn't working the way you want or trade in and recycling when you want to upgrade.
And then, building on that strength, our Totaltech membership ties these experiences together and provides unique benefits that customers value and no one else can provide.
We then combine those unique experiences with our strength in omnichannel retailing, industry-leading and seamless shopping experiences and services across all channels, including in home, in store, digitally, remotely and virtually.
And finally, all these interactions provide us rich data and insights across customer experiences to create personalized technology solution tailored to the customer-specific technology and needs.
And all this data fuels our business like Best Buy Ads, matching our partners' marketing to the most appropriate audiences based on our first-party data.
When this ecosystem works together, it provides a unique experience tailored to the customer.
It also reaches beyond our consumers into business partners, suppliers and other strategic relationships that leverage our capabilities.
Whether it's our consultative services highlighted on partners' websites or vendors leveraging our in-store pickup to fulfill from their websites, others value our capabilities.
So let me add some color around the first part of the ecosystem.
As I said, customers are excited about tech and want to be confident with their purchase, particularly when it's part of their daily life at home.
So instead of me trying to describe all the parts and pieces to you, I think this video does an excellent job bringing to life the unique ways we provide expert advice and services seamlessly across all our touch points.
[Commercial break]So again, just to reinforce, there is no one else that can provide this type of immersive experience at scale in a world where more and more of our lives are being lived in a way that requires technology.
And we felt it was important to double down on our unique capabilities with an equally unique membership offer.
This represents literally years of customer research and innovation and truly puts the customer at the center of our investments.
Matt talked earlier about the financial implications of our new membership program.
Now, I get to talk about the fun part.
Fundamentally, Totaltech is designed to provide our customers complete confidence in their technology, buying it, getting it up and running, enjoying it and fixing it if something goes wrong.
Matt and Jason already mentioned some of the benefits, but as a reminder, Totaltech includes product discounts and periodic access to hard-to-get inventory, free delivery and installation, free technical support, extended warranties on products and much more.
Because the membership is so comprehensive, it has broad appeal among our customers.
There is truly something for everyone.
And the benefit that's most appealing can vary based on a customer's unique shopping journey or their stage in life.
So let me share some early examples.
I say early because as a reminder, we literally just rolled this program nationally in mid-October.
The benefits associated with purchasing products like product warranty and member pricing are being leveraged the most.
Younger generations are using these benefits, especially AppleCare, at a higher rate than older generations.
This is exciting and important as extended warranties as a stand-alone business was definitely not a growing part of our business or strategy.
And additionally, it's exciting that our employees have embraced this offer.
Realizing the suite of benefits means there is something in it for every customer.
This makes for a more comfortable and natural sales environment and allows the employees to truly focus on the customers' needs.
The VIP access to phone and chat support and access to Geek Squad support and services in general are used more often by older generations, which our legacy plans over indexed on.
And the access to hard-to-get inventory is resonating with some of our most engaged customers who already interact and spend with us very frequently.
That broad appeal is one of the main reasons we rolled out this program.
We have significantly elevated the customer experience by packaging up unique benefits our customers value that no one else can provide, and by doing so, we believe we have made it inconceivable for them to purchase their tech anywhere else.
From a business perspective, of course, the goal is to increase customer frequency and capture a larger share of CE spend.
As a specialty retailer, our customer frequency has a different profile than mass merchants.
As a result, it is even more crucial that we stay in the consideration set as customers are building out their technology solutions.
I am incredibly happy to say that we are indeed seeing increased interactions with our Totaltech customers to the tune of about 60%.
Also, when we look at NPS surveys specifically from customers who are Totaltech members, they are running about 1,400 basis points higher than nonmembers.
From a spend perspective, it's difficult to calculate with precision given the early stage of the membership and our historical customer frequency, but we currently believe customers who sign up for the membership are spending about 20% more than they would have if they did not have the membership.
We already have 4.6 million members.
Now, to be transparent, we auto converted 3.7 million Totaltech support and other legacy support programs.
We have actively enrolled more than 1 million members since launching nationwide in October, and we see a path to double the number of members by the end of fiscal '25.
This membership program is a vital addition to our customer relationship ecosystem, providing an offer that no one else can and interaction data that is incredibly valuable to all aspects of our business, fueling our growth over time.
And to deliver this offer seamlessly, we leverage another part of our ecosystem: omnichannel retailing strength.
It's great to be here with you today to talk about our accomplishments and our plans for this year and beyond across our omnichannel portfolio.
As Corie mentioned earlier, omnichannel retail is a critical component of our strategic ecosystem.
It's the most direct way to connect our strategy to the needs of our customers and employees.
Let's look at the last two years before we dive into where we're going.
These last two years have challenged our employees in ways we could have never imagined.
Powered by our strategic investments, we were able to serve our customers' needs and grow the business.
There are two areas I want to highlight.
First, the connection between our online sales, which expanded to 34% of our total domestic revenue, and the 150% growth we've seen in our virtual interaction across video, chat and voice.
Today, 84% of Best Buy customers use digital channels throughout their shopping journey.
These virtual opportunities have created new ways for us to offer customers the immediate ability to shop with an expert wherever they are.
Second, and also connected to our customers using digital channels throughout their shopping journey, is we've seen a 72% growth in customers who are using our app while in our stores.
This also creates an opportunity for us to build more digital interactions and technology-related solutions to support their needs.
These numbers are amazing.
We could not be more proud of our teams and how they've delivered.
Just as importantly, it gives us an incredible foundation for continued growth and optimism as we look to the future.
Now, from an omnichannel perspective, we look at the combination of customer experience, loyalty plus operating efficiency.
The two main drivers of that and what I'm going to talk about today are how we optimize our workforce and reimagine our physical presence in ways that serve our customers' needs in an ever-growing digital world.
Our focus is on further developing our teammates to give them the skills to help customers inside and outside of our stores, but more importantly, through any number of digital channels at our customers' fingertips.
At the same time, we will optimize our store portfolio, and as Matt mentioned, we will maintain the trend of closing 20 to 30 stores per year.
However, with online penetration growing so rapidly in the last two years, we're making investments in our stores to provide a better, more seamless shopping experience as customers move from online shopping to visiting our stores to video chatting from their home.
So I'll start with our people.
We have significantly improved efficiency and productivity of our store labor model.
We've seen a more than 100 basis point improvement in store domestic labor expense as a percentage of revenue compared to FY '20.
We've also materially increased store productivity over the past two years.
We've done this by reskilling our teammates and making investments that lean into physical and digital shopping experience.
A few examples include our fulfillment improvements, consultation labor and our virtual store.
This allows us to leverage our employees more effectively inside and outside of our stores.
The great news is that as we've made these adjustments, we've maintained a strong NPS in our stores.
These investments in our people have allowed us to help them learn new skills, grow their careers, gain flexibility and realize their dream by keeping them with us longer.
We've increased our average wage rate 20% in the last two years by raising our minimum wage to $15 an hour and shifting some of our employees into higher-skilled, higher-paying roles.
In fact, our average wage for our field employees this year will be over $18 an hour.
Since we've started our flexible workforce initiative in 2020, 80% of our talented associates are now skilled to support multiple jobs inside and outside of our stores, and we're proud of the fact that our field turnover rates remain significantly below retail average and are near our pre-pandemic turnover rates.
Overall, we're in a place we like right now.
We're becoming more efficient without losing sight of delivering amazing experiences for our customers and our employees.
We're going to continue to strike the balance between spend and productivity as we look at the factors that I've just outlined.
Now, an obvious differentiator for our workforce is our Geek Squad team, which continues to deliver an experience that creates repeat customers, builds trust, and drives an incremental spend.
As I showcased earlier, we have nearly 21 million services interactions across in-store and in-home services.
We've significantly expanded our repair capabilities in categories that are important to customers' everyday lives like mobile phone repair.
This work is expanding our customer base.
In fact, 35% of our mobile phone customers are new reengaged with Best Buy.
This is enabled by a technical workforce that has an average tenure of almost nine years and a retention rate at 86%.
No one can match that level of expertise at the scale we can.
That tenure has helped us produce fantastic NPS results in-store, in-home, and through our remote support.
And after we complete the repairs, customers spend 1.7 times more and engage 1.6 times more often across all Geek Squad services.
Geek Squad will be a vital part of our Totaltech initiative, and we'll continue to offer stand-alone services that matter to customers, deepen those relationships and drive frequency.
Now, customers, are also leveraging our expertise through consultations as well, both inside and outside of our stores.
These consultations provide a direct access to customers for our ever-growing set of experts.
Employees who have the skill sets to complete the consultation has grown by 78% last year.
And with each consultation, we can inspire what's possible.
Customers spend 17% more across their lifetime value and they purchase more often when engaged for a consultation.
Customers are loving this experience, and we're seeing strong NPS.
When surveyed 92% of customers say they will likely continue working with their expert.
And when customers engage with one of our consultants or designers, they shop with Best Buy two times more frequently.
So looking ahead, we believe our annual consultations will grow by more than 200% by fiscal '25.
As you saw earlier, we had 45 million virtual interactions across all channels, creating opportunities to engage our customers differently.
We're excited about our virtual store, which just launched last fall.
To date, our virtual store in comparison to historical chat experiences is generating higher close rate, higher sales and a 20% improvement in customer satisfaction.
And that's not all.
Our vendors are extremely excited about it as well.
We started with 17 vendors onboard, and we will end fiscal '23 with over 60 vendors investing in our virtual store.
This is an investment in us and the belief that we're creating a totally differentiating experience.
We're expanding our virtual store and adding more categories like appliances and home theater, and we expect our virtual sales interactions to double by fiscal '25.
So let's talk about ways we're reimagining our store in support of our physical and digital shopping experiences.
We are very excited about the things that we're testing, learning and in some cases, implementing in our stores.
First, let's talk about our experiential store.
In 2020, we launched a test in one of our Houston stores and added two additional locations since then.
Some of the key enhancements include dedicated showcase spaces for some of the new categories Jason mentioned earlier like e-transportation, outdoor living, fitness.
We expanded our Microsoft and Apple shops and dedicated more space to premium experiences like appliances, home theater and audio.
We expanded our Geek Squad presence for more customer interactions and space for repair services.
And we've also enhanced fulfillment capabilities to include exterior lockers, additional space for shipping, packing and fulfilling from our store warehouses.
And we're excited about the performance.
We've seen a 370-basis-point improvement in NPS.
We've seen a steady lift in customer penetration in the retail trade area, as well as overall customer spend.
And we expect to continue to see strong revenue lift in these experiential stores.
And we will remodel 50 locations in fiscal '23 and about 300 locations expected by fiscal '25.
Now, I want to highlight our 16 outlet stores that are sort of open box, clearance, end-of-life, and otherwise distressed large product inventory across major appliances and televisions which might otherwise be liquidated at a significantly lower recovery rate.
These outlets unlock value by alleviating space and capacity from our core stores, and they are an important element of our circular economy strategy by providing a second opportunity for products to be resold instead of ending up in the landfill.
In FY '22, gross liquidation recovery rate is almost two times higher than alternative channels.
These locations are attracting new and reengaged customers.
16% of customers are new and 37% of customers are reengaged.
In FY '23, we will double the amount of outlet stores, and we'll test expanding our assortments by adding computing, gaming and mobile phones.
As we discussed last year, we launched a test in Charlotte of a new holistic market approach.
And as I mentioned earlier, the ways people are shopping today are entirely different than how they shop two years ago, and our stores and the way they operate need to change and adjust accordingly.
This work in Charlotte is a manifestation of the shopping evolution, and this pilot leverages all of our assets in a forward portfolio strategy across stores, fulfillment, services, outlets, consultation labor, and we bring it all together with our digital app.
Within the test, we are looking at how a variety of store formats across 15,000, 25,000 and 35,000-square-feet locations can serve the customer's needs.
And this summer, we will be introducing a 5,000-square-foot store into the marketplace.
When you look at the before and after map of the Charlotte market, you can see we have reduced our overall square footage by 5% and yet, we've increased our customer coverage in the marketplace from 76% to 85%.
We've also added 260 access points where customers can get their gear and employee delivery covers nearly half of the metro.
So looking ahead, we'll be focusing on using this market to learn in fiscal '23 before we make decisions on what to scale or what not do.
Technology enhancements are at the center of many of the changes I just mentioned, from self-checkout to virtual store, technology supporting our teams and customers in new and exciting ways.
Take a look at this video to see what we're doing.
[Commercial break]As you can see, technology brings it all together in support of our optimized workforce and how our physical locations will enhance the shopping experience inside and outside of our stores.
We're excited about this year and our future as we focus on the combination of customer experience, loyalty plus operating efficiency.
Here is the ecosystem slide Corie and Damien shared, and it's a perfect introduction to Best Buy Health as our work is an excellent example of the Best Buy ecosystem and flywheel.
Today, I will share the strategy of health at Best Buy.
But first, let's see it come to life in this video.
[Commercial break]I hope the video begins to answer the question that I hear often: Why in the world is Best Buy in health?
I understand the question because health is complex, it has a longer return on investment and other companies have not succeeded.
So why will Best Buy succeed?
We didn't build this strategy to be like any other company or to change who Best Buy is.
We built our strategy on Best Buy's strengths, our world-class omnichannel, distribution and logistics, strong analytics, presence in the home and our empathetic caring center agents.
Our strategy is supported by the rapid consumerization of health and two significant trends.
First, technology is moving into health.
We recognize an $80 billion market opportunity for health technology and the desire for consumers to use technology to manage their health.
And second, health is moving into the home.
By 2025, an estimated $265 billion in Medicare services will move into the home and 61% of patients say they would choose hospital care at home.
And Best Buy has long proven we're a trusted advisor for technology in the home.
70% of the U.S. population lives within 10 miles of a Best Buy store, able to shop health and wellness products, speak with our expert blue shirts and utilize our distribution hubs to fulfill their health technology needs.
Geek Squad makes 9 million home visits annually, helping consumers set up technology and perhaps more importantly, teaching them how to use it.
And we have the confidence of our customers and partners as we work to help enhance the health industry.
Our strategy is to enable care at home, building on the strengths in three focal areas.
In consumer health, we provide curated health and wellness products.
In active aging, we offer health and safety solutions to enable adults to live and thrive at home.
In virtual care, we connect patients with their physicians and enable care at home.
Our presence in each of these focal areas creates a flywheel where growth in one adds momentum to the other two.
This is the strength of our story.
Now, let us look at the customer journey.
Jason touched on a few areas of consumer health earlier, and our video introduced you to Angela, a 45-year-old mother and caregiver to an aging father.
You saw her purchase a Tyto Care home medical kit when her son was sick, and Angela can find countless other products to support the health of her family, from weighted blankets to exercise equipment to blood pressure cuffs and more.
These products not only support our customers in their day-to-day health but also serve as an entry to our other two focal areas, active aging and virtual care.
Lively supports adults who want to age independently at home.
Our easy-to-use phones and personal emergency response devices feature one-touch access to our caring center and services like urgent response, fall detection and more, providing patients and caregivers with the peace of mind that care is only a call away.
Last year, we launched our new Lively brand and a Lively partnership with Apple to feature our health and safety services on Apple Watch.
And today, I'm happy to announce Lively on Alexa, which will launch this spring.
Our Lively monthly subscription service provides a consistent revenue stream, and last year, we drove 15% year-over-year growth by adding 348,000 new lives served.
Our caring center agents connected with our customers over 9 million times last year, offering a variety of health and safety services.
So let's jump back to Angela's story.
Angela worries about her father living at home alone, so she purchases a Lively smartphone and an Amazon Echo for her dad from Best Buy, along with a monthly Lively health and safety subscription plan.
Jacob uses his Lively Smart to request a Lyft ride to a doctor's office through a caring center agent.
He had a minor fall at home and uses his Amazon Echo to alert the caring center, who can follow protocol to determine if emergency medical services are needed.
And this patient journey is just one example of the many ways Lively supports active aging adults at home.
Now, let's look at virtual care.
Accelerated by the COVID-19 pandemic, perhaps the most exciting opportunity lies within virtual care, where we enable patients to connect with their care teams.
In November, we acquired Current Health.
Current Health is making inroads into care at home through securing strong partnerships with successful programs at Baptist Health, Mount Sinai, AbbVie, the Defense Health Agency and more.
Our acquisition merges Current Health's FDA-cleared at-home platform with Best Buy's scale, expertise and connection to the home.
Together, we create a powerful virtual care experience.
Jacob is in the hospital with sepsis.
The hospital physician identifies and enrolls Jacob into the hospital's hospital at home program.
Best Buy sets up Jacob's home with the technology needed for remote patient monitoring and trains both Jacob and Angela on how to use it.
This ensures the hospital physician can focus on treating patients rather than being a tech consultant.
This is a job that physicians had to play during the pandemic and it overtaxed our health system.
At home, Jacob is monitored by Current Health's platform and a virtual command center.
The hospital physician checks in daily with video visits to ensure he's healing on track.
The command center coordinates Jacob's home medications and notices a lack of data from his monitor.
After discovering that he's improperly wearing the device, the Geek Squad is deployed to a system.
The platform's algorithm alerts the command center that Jacob has a persistent fever and the on-call health system physician prescribes therapeutic, which is delivered by the pharmacy partner.
When Jacob recovers, the hospital physician discharges Jacob, and Jacob continues to be supported by Lively.
A few of the pieces in this patient journey are still in development, the Geek Squad integrated with Current Health, for example, but this is our direction.
And you can see Best Buy is there for the patient with technology, support and connections to enable care at home.
And we're not building this alone.
We're creating an ecosystem to support consumers in their care-at-home journey.
Consumers are at the heart of our strategy, and throughout a lifetime of health needs, Best Buy is there to help enrich and save lives through technology and meaningful connections.
As I mentioned earlier, our health opportunity creates a flywheel, driving growth in all three focal areas.
Our revenue in fiscal year '22 was $525 million.
We're growing 35% to 45% a year, and we are accretive in fiscal year '27 as the health industry has a longer return on investment.
You've heard details from Corie, Jason, Damien and Deborah about some key areas that give us excitement about the opportunity in front of us.
We firmly believe our differentiated capabilities and focused investments will lead to compelling returns over time.
While fiscal '22 was certainly an amazing year, we see a path to even higher revenue and earnings by fiscal '25.
And as we look beyond fiscal '25, we see even more opportunity for revenue growth and operating income rate expansion as the benefits from our initiatives like Totaltech and Best Buy Health grow even further.
Before I share additional details on our fiscal '25 targets, I would like to review a few guiding behaviors that have been our brand for several years.
First, we plan to fund our growth through the cash we generate to return excess cash to shareholders.
Second, we are committed to leveraging cost reductions and efficiencies to help offset investments and pressures in our business.
Our current target set in 2019 is to achieve an additional $1 billion in annualized cost reductions and efficiencies by the end of fiscal '25.
We achieved approximately $200 million during fiscal '22, taking our cumulative total to $700 million toward the $1 billion goal.
Let me take a moment to reflect on our past performance.
We have talked about our record results over the past couple of years, but it is also important to note that we have had very steady growth in the years leading up to the pandemic.
This past year was the eighth straight year of comparable sales growth.
In addition, we have expanded our operating income rate, earnings per share and ROI.
We expect our revenue in fiscal '25 to be in the range of $53.5 billion to $56.5 billion.
This range reflects a three-year compound annual growth rate of approximately 1% to 3%, despite the anticipated decline in sales in fiscal '23.
I would also note that due to expected store closures, our comparable sales CAGR would be approximately 2% to 4%.
There are a few key assumptions underlying the revenue expectations.
First, as Corie shared, we believe the consumer electronics industry will remain significantly higher than it was pre-pandemic, and we expect that fiscal '25 will be back to a level similar to fiscal '22.
Second, we believe we have an opportunity to capture even more market share than we have in the past.
This is due to growth from Totaltech and the store initiatives that Damien talked about.
As it relates to Totaltech, we believe that the combination of membership revenue and incremental purchases by members will add approximately $1.5 billion in revenue by fiscal '25 compared to fiscal '23.
This is a net impact.
So it incorporates the impact of cannibalizing other stand-alone services now part of our membership offering.
Of course, we also expect revenue growth from Best Buy Health and the expansion into additional categories that Jason shared earlier.
As we move to our fiscal '25 operating income rate outlook, we expect to expand our rate to a range of 6.3% to 6.8%.
As we have highlighted, Totaltech is currently pressuring our fiscal '23 operating income rate.
Health has also been an area of investment for us over the past few years.
However, as each of them scales, we expect them both to meaningfully contribute to our fiscal '25 rate outlook.
We also see opportunities to lean in even further on capabilities like our in-house media business, Best Buy ads, which as Corie mentioned earlier, is fueled by our first-party data.
We expect this business will benefit our fiscal '23 operating income with benefits increasing in the out-years.
In addition, we expect to see rate benefits from our continued focus on finding cost efficiencies that benefit both gross profit and SG&A.
Damien highlighted a number of strategies that are part of this effort.
As we've discussed over the past few years, technology will be critical in unlocking many of these opportunities.
Of course, there are areas where we will likely see pressure on our rate in the future.
The first example of this is pricing.
Throughout most of the pandemic, the level of promotions in our categories has been well below levels of fiscal '20.
This has been largely a result of higher demand and more challenged or constrained inventory environment.
We have seen pockets of promotional activity increase over the past two quarters, and our belief is that the promotions will continually progress back to fiscal '20 levels.
A second area I would highlight is increased spend in technology in our store portfolio.
As we have shared over a number of quarters, our technology spend has been increasing in support of our initiatives and overall omnichannel experience.
In addition, we expect more depreciation expense from our capital investments in our stores.
Lastly, there are a few other factors we will continue to assess, but at this point, don't see as being material to our rate in fiscal '25 compared to fiscal '23.
First, from a store labor standpoint, we expect to maintain expenses at a similar rate of revenue.
We will continue to invest in higher pay for our employees, but expect to balance the higher wages to efficiencies, leveraging technology and more flexible workforce.
Second, we do not expect channel mix to have a material impact to our rate.
As Damien shared earlier, our outlook assumes closing 20 to 30 stores per year through fiscal '25.
This assumption reflects our belief that the online channel mix will grow approximately to 40% in fiscal '25.
We will continue to apply a rigorous process for lease renewals to ensure we are comfortable with the financial return and overall customer experience.
Currently, the vast majority of our stores are cash flow positive, and we believe are essential for us to serve our customers.
I'll move next to our cash flow and our capital allocation approach.
To start with, we have been generating healthy levels of free cash flow for several years, which provides us ample room to fund our growth investments.
Our average annual free cash flow over the past five years is more than $2.3 billion.
Our capital allocation strategy has been consistent for several years.
Our first priority is to reinvest in our business to drive growth, highlighted by the strategies you've heard today.
This includes both capital expenditures and operating expense investments.
Next, we may explore additional partnerships and acquisitions if we believe they will accelerate our ability to achieve more profitable growth.
We also plan to continue to be a premium dividend payer and return excess cash through share repurchases.
Let me quickly expand on a few of these areas.
We expect our annual capital expenditures to increase to a range of $1 billion to $1.2 billion over the next three years.
Earlier, Damien outlined a number of changes to our stores to further our strategy.
Consistent with our iterative approach, we will test, learn and deploy once we have vetted anticipated returns of our initiatives.
Technology investments are expected to remain similar to fiscal '23, simply decreasing as a mix of our capital deployment.
Our targeted dividend payout remains in the range of 35% to 45% of prior year's non-GAAP diluted earnings per share.
Lastly, this year marked a record level of share repurchases at $3.5 billion.
In fiscal '23, we plan to spend approximately $1.5 billion on share repurchases.
So with that, let me turn the stage back over to Corie.
Extraordinary ecosystems have formed over the past 20, 30, 40 years as digital has transformed every aspect of how we all do business.
That same transformation is happening in our homes, meaningfully accelerated in the last two years.
And while we started as a music retailer selling fun-to-have products, we're now the only company built around the same extraordinary transformation of technology in our lives and in our homes.
While others sell some of the same products we do, we alone offer the complete technology solution across manufacturers and operating systems.
We are the only company in all channels and at scale that can do everything from design your personalized hardware and software solution in the home, to install and connect all of it, to keep it working when there are any issues from unreliable networks to broken screens.
These assets appeal not only to our customers, but they are also unique and investable for our marketing partners, technology vendors, small business and education relationships and other strategic connections.
As we look to the future, we see technology as a permanent and growing need in the home, constantly evolving as the world's largest companies innovate with new use cases around the metaverse, transportation, green electricity and health, just to name a few.
We have a unique value creation opportunity into the future and are investing now as we have successfully invested ahead of change in our past to ensure we pivot to meet the needs of our customers and retain our exclusive position in our industry.
We are excited to help customers enrich lives through technology in ways no one else can.
And with that, we will break for 10 minutes before beginning our Q&A session.
We are excited to begin the Q&A portion of our event, which we expect to run approximately 45 minutes.
Many of you spent time with Rob Bass and may know that he recently announced that he is stepping away from a life in retail to pursue some other passions as we have been discussing for quite some time.
That incredible work extended to his ability to bring in top-tier talent.
One example of that is Mark Irvin, who came to Best Buy in 2013, specifically to work with and learn from Rob.
Mark has been an instrumental part of the team that has led our supply chain transformation and is ready to use his lifetime of knowledge in the space to continue to advance our industry-leading supply chain efforts.
We are thrilled to have Mark Irvin taking over the reins in supply chain.
And we've invited him to join us for Q&A.
So operator, we are now ready for our first question.
| sees fy non-gaap earnings per share $8.85 to $9.15.
q4 comparable sales decreased 2.3% compared to 12.6% growth in q4 fy21.
|
I'm joined today by Chris Simon, our CEO and Bill Burke, our CFO.
Additionally, we provided a complete P&L, balance sheet, summary statement of cash flows as well as reconciliations of our GAAP to non-GAAP financial results and guidance.
Please note that these measures exclude certain charges and income items.
Today, we reported organic revenue growth of 6% and adjusted earnings per share of $0.50, up $0.04 or 9% compared with the first quarter of the prior year.
We are encouraged by our overall performance despite the impact of the COVID pandemic.
We are trending favorably and anticipate continued improvements in plasma collection volumes, strong procedure recovery is fueling outsized growth in our hospital segments, and the blood center market is resilient.
I want to share some updates about how we are evolving our approach to managing the businesses to meet our growth commitments.
Chad Nikel has been named President, Global Plasma and Blood Center businesses.
Chad is a business builder who has been an integral part of Haemonetics for 12 years.
His vast knowledge of our products and our markets across the globe make him uniquely qualified to lead this business.
Under Chad's leadership, we can leverage our expertise in collection and donor management to achieve a broader global footprint.
Two years ago, we unveiled our operational excellence program to improve quality and service by transforming the way we source, make, and deliver products.
Our goal was to achieve $80 million to $90 million in gross savings by the end of fiscal '23.
I am proud to share that despite the headwinds in the past two years, we are planning to meet our savings target and save an additional $35 million by extending this program through the end of fiscal '25.
This will further strengthen our financial health and help offset losses from the anticipated transition of CSL in fiscal '23, rising inflationary pressures, and the effects of the pandemic.
Expanding the program allows us to take a fresh look at our operations, identify new opportunities, and make new investments in sustainable solutions that will have a positive impact on our daily operations, customer support, and longer-term financial performance.
We look forward to sharing more insight into our long-term plans at our Virtual Investor Day later this year.
Finally, we announced earlier this week, Lloyd Johnson has joined our Board of Directors.
Lloyd brings significant financial management, international operations, and business development insight.
Additionally, Ellen Zane has been elected Chair of our Board.
These updates reflect Haemonetics' ongoing commitment to refreshment, diversity, and augmenting our experienced base.
Now on to the business units.
Plasma revenue increased 6% in the quarter as the pandemic and the associated government subsidies continued to have a pronounced effect on the U.S. source plasma donor pool.
North America disposables revenue increased 3% in the quarter driven by improvement in collections volume partially offset by price adjustments including the expiration of fixed term pricing on a historical PCS2 technology enhancement.
Sequentially, U.S. source plasma collection volumes declined 6% compared with about 6% seasonal improvement historically as additional economic stimulus hindered recovery.
Plasma collections in Europe showed continued recovery in the first quarter specifically in the Czech Republic and Hungary driven by fewer COVID-related restrictions and plasma center growth.
We had double-digit growth in our plasma software revenue in the quarter supported by additional recovery in plasma collection volumes and our Donor 360 app, which enables plasma donors to register at home and streamline the pre-collection process with enhanced safety, efficiency, and convenience.
Software is a strategic lever for our customers and we continue to invest in value-adding innovation to support their recovery and growth.
NexLynk is a key enabler and differentiator for NexSys and we believe our combined technologies offer the most benefit to our plasma customers through improved collection yield, faster and more efficient center operations, improved compliance and donor satisfaction.
As we emerge from the pandemic, the sustained increases in available donors, the operational benefits of NexSys PCS integrated with NexLynk DMS will be a valuable tool to help collection centers accommodate greater donor traffic.
Collection center conversions are on track as we plan to upgrade our customers to the latest version of NexLynk DMS software later this year and complete the transition of our major customers to NexSys PCS devices by mid-fiscal '23.
We've made significant progress with our Persona technology and early adopters are benefiting from an additional 9% to 12% plasma yield per donation.
Their positive feedback and real-world data validate the value proposition of our technology and confirm that there is no impact on repeat donations and donor deferral rates.
We anticipate additional Persona conversions in the second half of our fiscal '22.
The demand for plasma-derived medicines remains strong and our customers continue to take steps to recruit and retain donors.
As the industry recovers from the pandemic, we expect to return to the long-term 8% to 10% growth of U.S. sourced plasma collections and we see potential to grow in excess of that as customers strive to replenish depleted plasma inventories.
As we approach the midpoint of our second quarter, collections have improved 21% compared with the 14% improvement in the first quarter.
This increased growth is consistent with the high-end of our fiscal '22 plasma guidance.
We remain vigilant about potential disruptions caused by new COVID variants and recent reinforcement of the U.S. border policy, but we anticipate strong plasma collection recoveries in the second half of the year and a firm fiscal '22 organic revenue growth of 15% to 25%.
Moving to hospital, revenue grew 26% in the quarter primarily due to continued improvements in hospital procedures driving increased utilization of disposables, strong capital sales in North America, and new business opportunities in Europe.
We saw continued recovery across all of our key markets although recovery trends outside of the U.S. were uneven due to concerns about new COVID variants and slower vaccine distribution.
Hemostasis Management revenue grew 31% in the quarter.
U.S. led the charge with growth in the adoption and utilization of TEG disposables and strong instrument placements.
We also increased market share in Europe including the award of a new tender for the use of our ClotPro technology acquired in fiscal '21.
Cell Salvage revenue was up 27% in the quarter with double-digit growth across all of our key markets.
Growth was supported by continuous recovery in procedure volumes and capital sales as we continue to upgrade our customers to our latest technology.
Transfusion Management grew 11% in the quarter primarily driven by strong growth in SafeTrace Tx as we completed new account installations in the U.S. BloodTrack also showed significant growth in the U.S. with a slight decline in international markets as new COVID concerns delayed implementation.
We affirm our expectation for 15% to 20% organic revenue growth in hospital including Hemostasis Management organic revenue growth in the mid-20s.
This growth rate assumes hospital procedures continue to improve throughout the year and will be fully recovered across all geographies by the end of fiscal 2022.
Our newly acquired VASCADE vascular closure business delivered $22 million in revenue in the first quarter, exceeding our expectations.
Both VASCADE products delivered meaningful results through accelerated penetration into new accounts and increased utilization within existing accounts.
We are enthusiastic about the continued growth of this business supported by greater procedure volumes, higher diagnosis rates, increased hospital efficiency and an overall move to standard of care.
We are also expanding internationally by securing regulatory approvals and developing go-to-market strategies for faster and broader penetration.
We are increasing our fiscal '22 revenue guidance from $65 million to $75 million to $75 million to $85 million as we look to accelerate additional growth through further investments.
Blood center revenue declined 6% in the first quarter.
Apheresis revenue declined 3% in the quarter and was impacted by unfavorable order timing and lost revenue from the previously announced customer loss included in our first quarter fiscal '21 results.
We are encouraged by the resilience of this business and the altruistic nature of blood donors.
Platelet collections in Japan fully recovered although that growth was partially offset by a reduction in plasma collections due to prolonged COVID-related state of emergency.
We also experienced strong market demand for platelets in China driven by our expansion in Tier 2 markets.
Whole blood revenue declined 14% driven by lower collection volumes and discontinued customer contracts in North America.
Our expectations for the blood center business are unchanged and our fiscal '22 revenue guidance is a decline of 6% to 8%.
Chris has already discussed revenue.
So I will start with adjusted gross margin, which was 54.7% in the first quarter, an increase of 750 basis points compared with the first quarter of the prior year.
Our adjusted gross margin benefited from the addition of Vascular Closure devices from the Cardiva Medical acquisition as well as favorable mix from our remaining product portfolio as our businesses continue to recover from the effects of the pandemic.
In manufacturing and supply chain, we had improved operating efficiency due to higher volume and lower expenses related to the pandemic.
We also continued to drive savings from the operational excellence program.
These benefits were partially offset by previous divestitures and price adjustments.
Adjusted operating expenses in the first quarter were $87.1 million, an increase of $23.4 million or 37% when compared with the prior year.
As a percentage of revenue, adjusted operating expenses increased by 550 basis points and were at 38%.
The acquisition of Cardiva had the largest impact on the increase in adjusted operating expenses.
Also affecting the increase were higher variable compensation, spending beginning to return to normal levels, an increase in freight costs, and higher research and development expenses to strengthen our technology.
Our first quarter adjusted operating income was $37.9 million, an increase of $9.4 million or 33% compared with the prior year.
This improvement in adjusted operating income was driven by higher adjusted gross margin partially offset by the increase in adjusted operating expenses.
Our adjusted operating margin was 16.6% in the first quarter, an increase of 200 basis points compared with the same period in fiscal '21.
As our business continues to recover from the pandemic, we continue to generate additional savings through the operational excellence program.
We anticipate increased leverage in adjusted operating margin.
We affirm adjusted operating margin guidance of fiscal '22 to be in the range of 19% to 20%.
Our adjusted income tax rate was 24% in the first quarter compared with 4% in the same period of fiscal '21.
The adjusted income tax rate in the first quarter of fiscal '21 was abnormally low due to the benefit of higher performance share vestings.
We now expect our fiscal '22 adjusted tax rate to be 22%.
First quarter adjusted net income was $25.4 million, up $1.7 million or 7% and adjusted earnings per diluted share was up was $0.50, up 9% when compared to the first quarter of fiscal '21.
The adjusted income tax rate in the first quarter of fiscal '22 had a $0.13 downward impact on adjusted earnings per diluted share when compared with the prior year.
Our Vascular Closure business is exceeding original expectations and we expect this business to be net neutral to adjusted earnings per diluted share in fiscal '22 compared with our original expectation of $0.15 to $0.20 dilution in the first year following the acquisition.
We expect this overperformance will be driven by stronger commercial execution and difference in capital structure when compared with the original deal model and will allow us to generate additional resources to fund growth investments across the company.
Today we announced a revised operational excellence program with total gross savings of $115 million to $125 million that will deliver $80 million to $90 million in gross savings by the end of fiscal '23, which is in line with our original expectations with an additional $35 million in savings by the end of fiscal '25 with the return of volume back to pre-pandemic levels.
We expect the majority of the savings realized to benefit adjusted operating income by the end of fiscal '23 and about half of the total savings passing through by the completion of this program in fiscal '25.
The exact pace of the operational excellence program savings and net impact on adjusted results will be communicated with our guidance for each fiscal year.
Additionally, we expect to incur $95 million to $105 million in restructuring and restructuring related costs over the course of this program.
In addition to updating the total estimated gross savings for this program, we accelerated the pace of these savings in fiscal '22 and now expect this program to deliver gross savings of approximately $33 million, an increase of $11 million or 50% when compared with our previous guidance.
Due to increasing inflationary pressures and investments in manufacturing, we anticipate about 25% of these savings will benefit adjusted operating income in fiscal '22.
We expect fiscal '22 adjusted earnings per diluted share to be in the range of $2.60 to $3.00.
Cash on hand at the end of the first quarter was $173 million, a decrease of $19 million since the beginning of the fiscal year.
Free cash flow before restructuring and turnaround costs was $2 million compared with $11 million in the same quarter of the prior year.
The lower free cash flow before restructuring and turnaround costs in fiscal '22 was due to higher accounts receivable as our revenue continued to recover from the pandemic and higher capital expenses primarily related to the operational excellence program partially offset by lower inventory growth.
We affirm our previous guidance and continue to expect free cash flow before restructuring and turnaround expenses in fiscal '22 to be $135 million to $155 million.
Our capital allocation priorities remain unchanged and we continue to prioritize organic growth followed by inorganic opportunities and share buybacks.
In the short-term, we will focus on investments into core capabilities and technologies that make our products distinctive.
Before we open the call up to Q&A, I want to reiterate the key points that we hope you take away from today's call.
First quarter results show encouraging performance across our business supported by strong procedure recovery in our hospital business, resilience of blood donors in blood centers, and initial rollouts of our Persona technology and plasma.
We believe there are no structural changes in the underlying demand for our products and we continue to anticipate full recovery across all of our businesses by the end of fiscal '22 but the exact pace of the recovery, particularly in plasma remains the biggest variable included within our affirmed guidance.
The recently acquired VASCADE vascular closure technology is exceeding our expectations with strong revenue growth and increased leverage delivering no dilution to adjusted earnings per diluted share one year ahead of the original deal model.
This business strengthens our market position, expands the market opportunity, and further enables our portfolio to capitalize on the market recovery ahead.
We remain committed to delivering value for our customers and our shareholders as we pursue growth strategies to maintain market leadership, to develop innovative products and partnership with our customers, and to drive productivity and efficiency of scale with an expanded operational excellence program.
And lastly, our team has been working diligently on updating our long range plan and we are looking forward to sharing it at our Virtual Investor Day expected at the end of this calendar year.
| qtrly adjusted earnings per diluted share $0.50.
haemonetics - affirmed fiscal 2022 adjusted operating margin, adjusted earnings per share & free cash flow before restructuring & restructuring related costs guidance.
|
References to margins and adjusted operating margins reflect the performance for the Americas and international segments.
We will refer to net service revenue or NSR, which is defined as revenue, excluding pass-through revenue.
As a reminder, we closed on the sale of the Power and Civil Construction businesses in October of 2020 and January 2021, respectively, and the sale of the oil and gas maintenance and turnaround services business in January 2022.
The financial results of these businesses are classified as discontinued operations in our financial statements.
Our results from discontinued operations include the oil and gas sale and adjustments to closing working capital estimates for previously completed transactions.
Lara Poloni, our president, will discuss key operational priorities; and Gaurav Kapoor, our chief financial officer, will review our financial performance and outlook in greater detail.
We will conclude with a question-and-answer session.
We are incredibly pleased with our first quarter performance, and momentum is building across our business and our markets.
Our success is a result of the passion and dedication that our teams bring to their work and clients every day.
This excellence was highlighted last week when Fortune reaffirmed our No.
1 industry ranking on its World's Most Admired Companies list.
The elements for uninterrupted multiyear infrastructure and ESG investment growth are well established.
and the global commitments by our clients to deliver on increasingly well-defined ESG objectives.
A global infrastructure investor renaissance is beginning.
And our strategy, focused on our teams, clients, communities and innovation has us better positioned than ever to win.
Through our expanded services, including advisory and program management, a greater share of a growing market is now addressable by AECOM, and we are working to shape the priorities of our clients and deliver value for our stakeholders.
Turning to our first quarter's results.
We exceeded our expectations on every key financial metric.
NSR increased by 5% with strong growth in both our Americas and international segments.
Importantly, we are winning work at the highest rate in the history of our company.
Wins totaled $3.6 billion with a 1.4 book-to-burn ratio in our Americas design business, and a 1.2 book-to-burn ratio across our global design business.
Our strong book-to-burn is worth emphasizing given our four quarters of consistent organic NSR growth.
We also had key wins in our construction management business, and our pipeline has never been stronger.
The segment adjusted operating margin increased by 60 basis points to 13.7%, reflecting continued investments in organic growth and innovation, the benefits of our highly efficient global delivery capabilities and the high value our teams are delivering for our clients.
Our margins lead our peers, but plenty of opportunity for improvement remains.
Our focus on deploying innovation and digital tools to transform how we deliver for clients against a backdrop of increasing demand for advisory and program management services supports our guidance for this year and our 17% longer-term margin target.
Adjusted EBITDA increased by 10% and adjusted earnings per share increased by 44%.
Our earnings per share is benefiting from the execution of our focused strategy, strong operational performance and accelerating organic growth as well as from share repurchases.
Including $213 million of stock repurchases in the first quarter, we have now repurchased $1.2 billion of stock since September 2020, when we launched our repurchase program, or 14% of our outstanding shares.
This capital allocation benefit to shareholders is driven by our strong conversion of earnings to cash flow.
In fact, cash flow in the quarter was one of the highest in our company's history for a first quarter.
The attributes of our business, including a high returning and low-risk profile and a capital-light business model with a highly variable cost structure, underpin our expectations to consistently deliver strong cash flow and to deliver on our capital allocation priorities.
Reflecting this confidence, we initiated a quarterly dividend program in December and our first dividend payment occurred in January.
It is our intention to increase our per share dividend by a double-digit percentage annually.
This marks a milestone for our company's history and demonstrates our steadfast commitment to use capital allocation tools to maximize total shareholder return.
Please turn to the next slide for a discussion of the trends across our markets.
Beginning in the U.S., our largest market, conditions are strong.
Our federal, state and local clients are gearing up for several years of sustained increases in infrastructure investment, which includes the expected benefits of the $1.2 trillion Bipartisan Infrastructure Law.
This represents a generational investment in U.S. infrastructure and arrives at an opportune time.
Typically, federal support for infrastructure has been inversely correlated to state and local fiscal health.
However, our state and local clients, which account for nearly 25% of our NSR, are reporting record revenues and budget surpluses, which is resulting in a very favorable backdrop.
In addition, our public and private sector clients are increasingly prioritizing investments to advance ESG.
Today, nearly every project proposal has an element of ESG in its scope, and our clients are demanding more holistic thinking and a broader advisory relationship to help them achieve their multi-decade ambitions.
Our momentum and the expansion of our addressable market are apparent in our pipeline growth, which is up by double digits.
This is noteworthy when you consider how strong wins and backlog growth were this quarter.
The pipeline growth we are seeing is especially encouraging, considering the benefits of the Bipartisan Infrastructure Law aren't likely to be material until our fiscal 2023.
International markets are experiencing a very similar positive trajectory.
ESG is front and center in our clients' agendas and we are seeing strong demand for our advisory services and technical expertise.
Our pipeline increased by high single-digit percentage and our backlog increased in each of our largest international markets, highlighted by key transportation and infrastructure frameworks in the U.K., expanded program management roles in the Middle East and high win rates for key clients in the Asia Pacific region.
Looking ahead, the strong foundation we have built and favorable end market trends have positioned us well for sustained multiyear growth.
We spent the last two years narrowing our focus on our higher-margin, lower-risk professional services business and implementing our think and act globally strategy.
The strategy is built on our leading technical capabilities, global expertise, and on bringing new ways of solving our clients' biggest and most complex challenges with innovative digital solutions.
We continue to advance our digital AECOM strategy, and with our success, we are accelerating our investments in this area.
Over the course of the year as the solutions establish a market position, we will announce their launch similar to PlanEngage, which we announced last quarter.
PlanEngage, our digital platform that reinvests the public engagement process for an infrastructure project, is quickly being introduced as the platform for community engagement across our global client base.
As funding from the Bipartisan Infrastructure Act in the U.S. is connected with these projects later in 2023, our PlanEngage tool will become even more valuable.
Across our business, one theme is constant: Our investments will expand our advantage as demand grows and labor constraints challenge the industry.
We are consistently winning our largest and highest priority pursuits, with our win rate at all-time high levels.
For example, our leadership team identified 10 global pursuits that we deem to be a top priority for strategic positioning and for delivering on our accelerating growth expectations.
I'm very pleased to report that we've already won eight of these 10 projects, and two are still pending decisions.
In addition, we've had several other key wins over the past few quarters, including a nine-figure takeaway from a key competitor in an international market, a nine-figure takeaway from a key incumbent on a high-value U.S. federal environment program, and we have been selected for numerous other key pursuits that underpin our confidence.
I can't say enough about how our culture of winning and excellence has expanded and what it means for our future.
Please turn to the next slide.
I couldn't be more pleased with what we have accomplished to date and how well positioned we are for the future.
Against the backdrop of strong client demand and with our foundation for success now in place, we are taking action to fully capitalize on the opportunities ahead.
First, we are fostering a culture that celebrates winning.
This includes prioritizing our time and investments on the best growth opportunities and highest value pursuits.
As leaders in areas including electrification, transit systems, environmental assessment, remediation, water infrastructure, resilience, climate change and new energy, we are poised to benefit from our exposure to rapidly growing markets.
This is giving us the opportunity to also be selective and disciplined about the types of opportunities on which we invest time and capital with a focus on profitable growth and strong returns on capital.
Second, we are continuing to invest in program management and advisory capabilities.
Through these capabilities, we are expanding our addressable market opportunity by adding services that lead to earlier engagement with clients.
We have onboarded key talent to support several large wins over the past year, including the Neom and AlUla programs in Saudi Arabia.
Looking ahead, as the scope and complexity of infrastructure and ESG initiatives expand, high-value program management and advisory will take an even more central role in helping our clients and will distinguish AECOM in the market.
Third, we are investing in digital AECOM to develop and deliver products that extend the capabilities of our teams and transform how we engage with clients.
Our PlanEngage tool and commercialization of DE-FLUORO, our proprietary solution for the destruction of PFAS compounds, are great examples.
In addition, we are advancing the development of key digital solutions in the transportation and facilities market that will offer leading parametric and iterative design tools.
Finally and most importantly, we are investing in and building teams to deliver in a growing market, which will be increasingly important going forward.
We are focused on ensuring AECOM is the best place in our industry to build a career.
At this point, I am pleased to report that the results of our recent employee survey reflects our continued high levels of employee engagement.
Most notably, this included further increases in the percentage of employees that would recommend AECOM as a great place to work.
There is no higher acknowledgment of our commitment to building a great culture than this measure, and this gives us confidence we will remain at an advantage as the overall labor market tightens.
Please turn to the next slide.
We exceeded our expectations on every key financial metric in the first quarter.
We delivered another quarter of positive organic NSR growth, a record first quarter margin, double-digit adjusted EBITDA and earnings per share growth and one of the highest first quarter free cash flows in our company's history.
Tax was a $0.04 benefit to earnings per share compared to our plan due to the timing and quantum of discrete items.
We also delivered on our capital allocation commitments, including ongoing investments in our teams and digital AECOM, more than $200 million of share repurchases and the initiation of a quarterly dividend program.
The dividend is a complement to our share repurchases.
We have a strong balance sheet and highly predictable cash flow, which allows for investments in the business as well as consistently returning all available free cash flow to our shareholders.
Importantly, we are winning work at a high rate.
Our pipeline across the business is up double digits, and we have not yet begun to see material benefit from the Bipartisan Infrastructure Law.
Please turn to the next slide.
In the Americas, NSR increased by 3%, highlighted by growth in both the design and construction management businesses.
Our book-to-burn in the Americas design business was 1.4, and total backlog in design business increased by 5%, which continues to include a near-record level of contracted backlog, which provides for strong revenue visibility.
In addition, we are benefiting from strengthened conditions in our construction management business and believe backlog will increase over the course of the next year.
First quarter adjusted operating margin was 17.7%, a 30-basis-point increase from the prior year.
This result reflects both ongoing investments we are making to support growth and ongoing benefits from the actions taken to operate a more streamlined organization that delivers more efficiently.
Please turn to the next slide.
Turning to the international segment.
NSR increased by 7%, with growth across all of our largest regions.
Our wins were strong and backlog increased by 6%.
We continue to gain share in the U.K. public sector, are building our gains in the Middle East and have been successful on a number of key pursuits in Hong Kong and Australia.
Our adjusted operating margin in the first quarter was 8.2%, a 110-basis-point improvement from the prior year.
We are realizing the benefits of the actions we have taken to eliminate inefficiencies, regain market share and better scale our cost structure, including increasing utilization of our global shared service centers.
Please turn to the next slide.
Turning to cash flow, liquidity and capital allocation.
First quarter operating cash flow was $195 million and free cash flow was $163 million.
This was better than we expected and is consistent with our focus on delivering more consistent phasing throughout the year.
This improves our return on capital and allowed us to execute substantial repurchases earlier in the year as a result.
As Troy noted, our capital allocation policy is focused on returning substantially all free cash flow to investors in order to maximize total shareholder return and returns on capital.
This included the milestone announcement we made during the first quarter of the initiation of a quarterly dividend program and our intent to grow our per share dividend at a double-digit annual percentage.
Our first quarterly dividend payment was made on January 21.
The dividend is a testament to the steps we have taken over the past two years to reduce our financial and operational leverage, which has contributed to consistently strong earnings and cash flow.
As we look ahead, we continue to expect to convert our earnings to cash flow at a high rate, and we continue to expect free cash flow of between $450 million and $650 million in fiscal 2022.
As a reminder, our cash flow is typically weighted more strongly to the second half of the fiscal year, though we expect our first half cash flow to improve from the prior year.
Please turn to the next slide.
We are increasing our fiscal 2022 adjusted earnings per share guidance to between $3.30 and $3.50, which would reflect 21% growth at the midpoint.
This increase reflects operational outperformance we delivered in the first quarter, the benefits of our share repurchases completed in the first quarter and a lower-than-planned tax rate.
As a reminder, our adjusted earnings per share guidance only incorporates the benefit of already executed share repurchases, but we expect to continue to buy back stock as part of our capital allocation program.
We also continue to expect to deliver adjusted EBITDA of between $880 million and $920 million, which would reflect 8% growth at the midpoint of the range.
Based on our strong start to the year, we are also reaffirming our expectation for organic NSR growth of 6%, a segment adjusted operating margin of 14.1% and our long-term 2024 financial targets, including adjusted earnings per share of greater than $4.75 and approximately $700 million in free cash flow.
We expect our full year tax rate to be 25%, which incorporates the impact of our first quarter tax rate and the expectations for approximately 28% for the rest of the year.
Longer term, we expect our tax rate to be in the mid-20s.
| qtrly revenue decreased 1% to $3.3 billion.
sees diluted adjusted earnings per share guidance between $3.30 and $3.50 for fiscal 2022.
|
On the call, today, are Scott Buckhout, CIRCOR's president and CEO, and Abhishek Khandelwal, the company's chief financial officer.
The slides we'll be referring to today are available on CIRCOR's website at www.
These expectations are subject to known, and unknown risks, uncertainties, and other factors.
For a full discussion of these factors, the company advises you to review CIRCOR's Form 10-K, 10-Qs, and other SEC filings.
The company's filings are available on its website at circor.com.
Actual results could differ materially from those anticipated, or implied by today's remarks.
These non-GAAP metrics exclude certain special charges and recoveries.
CIRCOR delivered a strong third-quarter despite unprecedented macro challenges.
The work we've done to transform our portfolio during the last three years has paid off.
We now have a stronger more resilient portfolio of essential products.
Our diversification across geographies, and markets, and products is mitigating the ongoing weakness of the pandemic.
In addition, we've been able to raise prices through the downturn because our product portfolio has strong market positions and differentiated technology.
We're executing well through the downturn.
Our continued focus on productivity and cost resulted in a companywide decremental of 19% in the quarter.
The $45 million cost plan for 2020 that we communicated in May remains on track.
Our pricing initiatives remain on the plan in both Aerospace & Defense and industrial.
The CIRCOR operating system is delivering improved operating performance across most metrics, and we expanded the margin of our aerospace & Defense business by 360-basis-points in the quarter despite the lower volume.
Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery.
With 13 new product launches in Q3, we remain on track to deliver on our commitment to launching 45 new products this year.
We continue to invest in front-end resources and strategic growth initiatives.
We're closely collaborating with suppliers and customers to ensure alignment as markets change.
And finally, we continue to focus on deleveraging the balance sheet.
Now, I'd like to provide some highlights from the third quarter.
Please turn to Page 4.
We booked orders of $167 million, down 19% organically due to the impact of COVID-19 on our Industrial and Commercial Aerospace businesses.
Defense orders relatively low in the quarter due to the timing of large defense programs.
The growth outlook for defense remains strong.
Sales came in as expected at $187 million flat to the prior quarter and down 15% organically.
We continue to believe Q3 is the bottom for sales and orders.
We expect sequential improvement across both businesses in Q4, which we'll talk about in more detail later in the call.
Adjusted operating income was slightly more than $17 million, representing a margin of 9.3%, up 80-basis-points from the prior quarter, and down 130-basis-points from last year driven by lower sales volume in industrial.
The Companywide decremental was 19% in the quarter, which is significantly lower than our contribution margin driven by productivity, aggressive cost actions, and price.
Before I review the outlook for our end market.
Let's begin by reviewing our segment results.
All figures up from continuing operations and exclude divestitures.
Starting with industrial on Slide 5.
In Q3, Industrial segment orders were down 23% organically due to the impact of COVID-19 on most end markets.
Downstream orders were especially impacted in the quarter, due timing of capital projects and maintenance turnaround delays.
Excluding our Downstream business, orders an industrial were down 15% organically.
The benefit of the industrial portfolios regional diversity was evident in the quarter.
We saw sequential improvement in Germany, India, and China with orders increasing in the low double-digit range, partially offsetting pressure in North America.
While oil and capital projects remain depressed, we experienced a sequential improvement in the aftermarket side of the business on a global basis.
As expected, the industrial segment had sales of $124 million flat to the prior quarter, and down 18% organically.
The EOM margin was 7.9% down 210-basis-points sequentially, and a decline of 460-basis-points versus last year.
The margin decline versus the prior year was primarily driven by lower sales volume and the impact on productivity associated with the need to maintain social distancing.
Among other safety protocols on the factory floor, which was partially offset by cost actions and price.
In addition, one of our facilities in North America experienced a COVID-19 outbreak which forced us to idle the factory for most of August, and impacted our EOM by approximately $1.5 million in the quarter.
Adjusted for the $1.5 million of COVID impact, the industrial margin would have been 9.1%, and the decremental would be approximately 30%.
Turning to Slide 6.
In Q3, in our Aerospace & Defense segment, we delivered orders of $59 million, down 9% organically.
Orders were impacted by the timing of large defense programs in the quarter and the continued impact of COVID-19 on Commercial Aerospace.
While the timing of large defense programs resulted in lower orders in the quarter, the business remains strong overall, and we remain confident in the segment's strong growth outlook going forward.
Sales for the Aerospace & Defense were $62 million flat to the prior quarter, and down 9% organically.
Strengthened defense platforms partially offset the impact of COVID-19 on Commercial Aerospace.
The Aerospace & Defense operating margin was 23.7%, up 360-basis-points versus the prior year, and 260-basis-points sequentially.
With $6 million lower revenue, the Aerospace & Defense team delivered $1 million of incremental operating income, driven by price, productivity, and other aggressive cost actions.
Turning to Slide 7.
For Q3, the effective tax rate was approximately 13% lower than the 14.8% in the prior quarter, due to a change in the statutory tax rate where CIRCOR operates.
For Q4, the tax rate is projected to be approximately 15%.
The Company took a non-cash charge of approximately $42 million to create a valuation allowance against its remaining U.S. deferred tax assets.
This non-cash charge was acquired in the GAAP accounting rules, primarily due to recent U.S. tax law changes, and losses in the U.S. from our divested businesses.
This charge does not impact our non-GAAP tax results for the quarter and is not expected to have an impact on our future non-GAAP tax results.
Looking at special items and restructuring charges, we recorded a total pre-tax charge of $13 million in the quarter.
The acquisition-related amortization and depreciation were a charge of $12 million with the remaining million dollars being associated with restructuring activities in the quarter.
Interest expense for the quarter was $8 million, down $4 million, compared to last year.
This was a result of lower debt balances and a favorable interest rate of 25-basis-points.
Other income was a million-dollar charge in the quarter, primarily due to foreign exchange losses, partially offset by pension income.
Corporate costs in the quarter were $7.2 million, in line with previous guidance provided.
Turning to Slide 8.
Our free cash flow from operations was flat in the third quarter.
Right in line with what we guided in our Q1, and Q2 earnings call.
At the end of the third quarter, our net debt was at $468 million.
This represents a year-over-year debt reduction of $120 million dollars.
In Q3, we paid $52 million, and the revolver further reducing our debt balance and interest expense.
We expect to generate strong free cash flow in the fourth quarter and intend to use that cash to continue to pay down debt.
Now I will hand it back over to Scott, to provide some color on our end markets, and outlook.
Now, I'll provide an overview of what we're seeing in our end markets.
Please turn to Page 9.
Let's start with the industrial.
As Abhishek mentioned, the impact of COVID-19 continued through the third-quarter across most major industrial end markets.
For Q3, orders were down 7% on a sequential basis with both for market and aftermarket orders coming in slightly lower than Q2.
Large projects remain weak, due to ongoing delays in capital spending.
Regionally, we saw weakness in North America and most of Europe, offset by strength in Germany, China, and India across most major sectors.
As we mentioned in last quarter's earnings call, we believe that Q3 marks the bottom and we expect industrial segment orders and revenue to improve sequentially in Q4.
Both market and aftermarket orders are expected to increase double digits sequentially.
From an end market perspective, we expect slight sequential improvement in many of our larger end markets.
Power generation is showing early signs of improvement globally.
Downstream Oil & Gas orders are improving as high priority capital projects, and certain maintenance activity moves forward.
Our shorter cycles of chemical processing in markets that are more closely linked to consumer demand are showing slow improvement.
For industrial revenue in Q4, we expect a moderate improvement sequentially with growth ranging from flat to up 10%.
While year-over-year revenue is expected to be down between 5% and 15%.
Most OEM and aftermarket end markets are expected to improve in Q4, compared to Q3.
Downstream Oil & Gas revenue is expected to be up sequentially, due to the timing of project shipments and higher aftermarket activity in the quarter.
Regionally, we're seeing pockets of economic improvement in China, India, and Germany, which we expect to continue.
Commercial Marine and midstream Oil & Gas are expected to remain at low levels, due to depressed activity and shipbuilding, low ship utilization, and ongoing project delays in midstream Oil & Gas.
Overall, we expect Aerospace & Defense orders in Q4 to be in line with Q3 sequentially, and down versus the prior year driven by the timing and defense program orders, and ongoing COVID related headwinds in the Commercial business.
For Aerospace & Defense revenue in Q4, we expect a significant sequential improvement from Q3.
Defense revenue should see sequential growth of 20% to 25%, and year-over-year growth of 15% to 20%.
Growth in the quarter is driven by strong shipments across our Submarine portfolio, our missile portfolio, and for the Joint Strike Fighter.
Commercial revenue is expected to grow sequentially between 15% and 25%, but we'll be down year over year between 40% and 45%.
The sequential improvement is driven by slightly improving shipments across a variety of business jet, regional jet, and other civil platforms, partially offset by lower shipments to Boeing and Airbus.
The outlook for price remains strong with a net 4% increase for Defense and Commercial Aerospace, driven by improved price management.
To summarize, as the pandemic continues to significantly impact the global economy, CIRCOR remains committed to delivering long-term shareholder value.
Our portfolio transformation is largely complete.
We've completely exited upstream Oil & Gas, and the new CIRCOR is diversified across geographies, end markets, and product technologies.
Our portfolio of products has differentiated technology and strong market positions in the niches where they compete.
As a result, we're able to raise prices across the portfolio despite the current market conditions.
We remain focused on execution.
The $45 million cost plan for 2020 is on track.
Our focus on productivity and cost resulted in a companywide decremental of 19% in the quarter, and the CIRCOR operating system is delivering improved operating performance across most metrics.
Finally, we continue to take actions that best positioned CIRCOR to take advantage of a market recovery.
We remain on track to deliver on our commitment to launching a record of 45 new products this year.
We continue to invest in front-end resources and strategic growth initiatives.
We're closely collaborating with suppliers and customers to ensure alignment as markets change, and we continue to focus on deleveraging the balance sheet.
They've been doing an excellent job working every day to ensure that we continue our momentum and meet our customers' needs.
| q3 revenue $187 million versus refinitiv ibes estimate of $186.9 million.
remain on track to achieve $45 million 2020 cost reduction plan.
|
I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss ITW's first quarter financial results and update our guidance for full year 2021.
In Q1, we saw continued improvement in both the breadth and pace of the recovery, with six of our seven segments delivering strong growth in the quarter, with revenue increases at the segment level ranging from 6% to 13%, and that's with one less shipping day in Q1 of this year versus last year.
At the enterprise level, organic growth was plus 6% in Q1 or plus 8% on an equal days basis, and that was despite the fact that our Food Equipment segment was still down 10% in the quarter.
The fundamental strength of our 80/20 front-to-back business system and the skill and dedication of our people around the world, combined with the Win the Recovery actions that we initiated over the course of the past year allowed us to meet our customers' increasing needs while at the same time delivering strong profitability leverage, as evidenced by our 19% earnings growth, 45% incremental margins, and 120 basis points of margin benefits from our enterprise initiatives in the quarter.
Despite rising raw material costs and a tight supply chain environment, we maintained our world-class service levels to our customers while also establishing several all-time Q1 performance records for the company, including earnings per share of $2.11, operating income of $905 million, and an operating margin of 25.5%.
Based on our first quarter results and our normal practice of projecting current demand rates through the balance of the year, we are adjusting our 2021 guidance.
For the full year, we now expect organic growth of 10% to 12%, operating margin in the range of 25% to 26%, and earnings per share of $8.20 to $8.60 per share, which at the $8.40 midpoint represents 27% earnings growth versus last year.
At the midpoint of our revised guidance, 2021 full year revenues would be up 1% versus 2019 and earnings per share would be up 9%.
Now, stating the obvious, there's still a lot of ground to cover between now and the end of the year, and the near-term environment is certainly not without its challenges.
That being said, I have no doubt that we are well positioned to respond to whatever comes our way as we move through the remainder of the year and to continue to deliver differentiated performance in 2021 and beyond.
Solid demand momentum we had coming out of the fourth quarter continued to gain strength across a broad cross-section of our business portfolio in Q1.
Our operating teams around the world responded to our customers' increasing needs, as they always do, and delivered revenue growth of 10%.
Organic growth of 6% was the highest organic growth rate for ITW in almost 10 years.
And as Scott mentioned, Q1 had one less day this year.
And on an equal days basis, organic revenue grew 8%.
Organic growth was positive across all major geographies, with China leading the way with 62%, North America was up 4% and Europe grew 1%.
Relative to Q4, a new trend that emerged in Q1 was a meaningful pickup in demand in our capex-driven equipment businesses, Test & Measurement and Electronics which grew 11%; and Welding, which grew 6%.
GAAP earnings per share of $2.11 was up 19% and an all-time earnings per share record for continuing operations.
Operating leverage was a real highlight this quarter with incremental margins of 45% as operating income grew 19% year-over-year.
Operating margins improved to 25.5% in the quarter, an increase of almost 200 basis points as a result of volume leverage and a continued strong contribution of 120 basis points from our enterprise initiatives, partially offset by the margin impact of price cost.
Excluding the third quarter of 2017, which had the benefit of a one-time legal settlement, operating margin of 25.5% was our highest quarterly margin performance ever.
As you know, supply chains around the world are under significant pressure, and ITW's operating teams certainly had to deal with their fair share of supply challenges and disruptions in the quarter.
By leveraging our produce where we sell supply chain strategy, our proprietary 80/20 front-to-back business system and supported by the fact that we were fully staffed for this uptick in demand due to our Win the Recovery initiative, we were able to maintain our normal service levels to our customers.
And once again, our ability to deal with the impact of some pretty meaningful supply chain challenges and disruptions and still take care of our customers, with strong levels of profitability, speaks to the quality of the execution at ITW.
In the quarter, we experienced raw material cost increases, particularly in categories such as steel, resins and chemicals.
And across the company, our operating teams have already initiated pricing plans and actions that will offset all incurred as well as known but not yet incurred raw material cost increases on a dollar per dollar basis, as per our usual process.
As a result, price cost is expected to be EPS-neutral for the year.
As you know, given our high-margin profile, offsetting cost increases with price on a dollar per dollar basis causes some modest dilution of our operating margin percentage and our incremental margin percentage in the near term.
In Q1, for example, our operating margin was impacted 60 basis points due to price costs.
And our incremental margin would actually have been 52%, not 45% if it wasn't for this impact from price costs.
For the balance of the year and embedded in our guidance are all known raw material increases and the corresponding pricing actions that have either already been implemented or will be, again, EPS-neutral for the full year.
At this early stage in the recovery, our 25.5% operating margins are already exceeding our pre-COVID operating margins.
Four of the seven segments delivered operating margin of around 28% or better in Q1, with one segment, Welding, above 30% in a quarter for the first time ever.
I think it says a lot of our operating teams, that when faced with the challenges of the global pandemic, they stayed focused on our long-term enterprise strategy and continue to make progress toward our long-term margin performance goal of 28% plus.
After-tax return on capital was a record 32.1%, and free cash flow was solid at $541 million with a conversion of 81% of net income, in line with typical seasonality for Q1.
We continue to expect a 100% plus conversion for the full year.
As planned, we repurchased 250 million of our shares this quarter, and the effective tax rate was 22.4%, slightly below prior year.
So in summary, the first quarter was solid for ITW with broad-based organic growth of 6%, strong profitability leverage, 19% earnings growth, 45% incremental profitability and record operating margin and earnings per share performance.
And the information on the left side of the page summarizes the organic revenue growth rate versus prior year by segment for Q1 this year compared to Q4 last year.
And it illustrates the broad-based demand recovery that we're seeing in our businesses.
And obviously, there's a positive impact as the easier comparisons begin on a year-over-year basis.
With the exception of Automotive OEM, every segment had a higher organic growth rate in Q1 than they did in Q4, and six of our seven segments delivered strong organic growth in the quarter, with double-digit growth in Construction Products, and Test & Measurement and Electronics, which were also the most improved segments in this sequential view, going down -- going from down 3% in Q4 to up 11% in Q1.
Welding improved eight percentage points, growing 6% in Q1, providing further evidence that the industrial capex recovery is beginning to take hold as visibility and confidence is coming back.
At the enterprise level, ITW's organic growth rate went from down 1% in Q4 to up 6%.
And I would just highlight that this is 6% organic growth with one of our segments, Food Equipment, while on its way to recovery is still down 10% year-over-year.
As we go through the segment slides, you'll see that this robust organic growth, combined with strong enterprise initiative impact contributed to some pretty strong operating margin performance in our segments.
So let's go into a little more detail for each segment, starting with Automotive OEM.
And the demand recovery in the fourth quarter continued this quarter with organic growth of 8% and total revenue growth of 13%.
North America revenue was down 2% as customers continue to adjust their production schedules in response to the well-publicized shortage of certain components, including semiconductor chips.
We estimate this impacted our Q1 sales by about $25 million, and it is likely to continue to impact our revenues to the tune of about $50 million in Q2 and another $50 million in the second half of the year.
As you can appreciate, the situation is obviously pretty fluid, but as we sit here today, that is our best estimate, and that is also what we embedded in our updated guidance.
Looking past the near-term supply chain issues affecting the auto industry, we're pretty optimistic about the medium-term growth prospects as consumer demand remains strong and dealer inventories are very low by historical standards.
By region, North America being down in Q1 was more than offset by Europe, which was up 4%, and China up 58%.
And finally, the team delivered solid operating margin performance of 24.1%, an improvement of 320 basis points.
So, revenue was down 7%, with organic revenue down 10%, but like I said, much improved versus Q4.
And there are solid signs that demand is beginning to recover, as evidenced by orders picking up and a backlog that is up significantly versus prior year.
Overall, North America was down 6%, with equipment down only 1% as compared to a 22% decline in Q4.
Institutional, which represents about 35% of our North American equipment business was down 7%, with healthcare about flat and education still down about 10%.
Restaurants, which represents 25% of our equipment business was down in the mid-teens, with full-service restaurants down about 30%, but fast casual up low single-digits.
Retail, which is now 25% of the business, was up more than 20% as a result of strong demand and new product rollouts.
International was down 15% and is really a tale of two regions.
As you would expect, Europe was down 22% due to COVID-19-related lockdowns.
And on the other hand, Asia-Pacific was up 44%, with China up 99%.
Overall, equipment sales were down 4% and service down 19%.
Test & Measurement and Electronics delivered revenue growth of 14% with 11% organic growth.
Test & Measurement was up 7% with continued strength in semiconductors and healthcare end markets now supplemented by strengthening demand in the capital equipment businesses as evidenced by the Instron business growing 12%.
The Electronics business grew 16%, with strong demand for clean room technology products, automotive applications, and consumer electronics.
Operating margin of 28.4% was up 330 basis points.
Moving to slide 6, as I mentioned earlier, we saw a strong sequential improvement in Welding as the segment delivered organic growth of 6%, the highest growth rate in almost three years.
The commercial business, which serves smaller businesses and individual users, usually leads the way in a recovery, and Q1 was their third quarter in a row with double-digit growth, up 17% this quarter.
The industrial business continued its sequential improvement trend and was down only 1% with customer capex spend picking up and backlogs building.
Overall, equipment sales were up 10% and consumables were flat versus prior year.
North America was up 7% and international growth of 4% was primarily driven by recovery in China and some early signs of demand picking up in oil and gas.
Solid volume leverage and enterprise initiatives contributed to a record margin performance of 30.3%, which, as I said, marked the first time an ITW segment delivered operating margins above 30%.
Polymers & Fluids delivered organic growth of 9%, with Polymers up 16%, driven by strength in MRO applications, particularly for heavy industries.
The automotive aftermarket business continued to benefit from strong retail sales with organic growth of 9%, while fluids, which has a larger presence in Europe was down 1%.
Operating margin benefited from solid volume leverage and enterprise initiatives to deliver margins of 25.7%.
Moving to slide 7, construction was the fastest-growing segment this quarter with organic growth of 13%.
North America was up 12%, with continued strong demand in residential renovation and in the home center channel.
Commercial construction, which is only about 15% of our U.S. sales was up 3%.
European sales grew 19% with double-digit growth in the UK and Continental Europe.
Australia and New Zealand grew 7% with strength in both residential and commercial markets.
Operating margin of 27.6% was an improvement of 420 basis points.
Specialty revenues were up 10%, with organic revenue of 7% and positive growth in all regions.
North America was up 6%; Europe, up 5%; and Asia Pacific was up 24%.
Demand for consumer packaging remained solid at 6%.
And per our usual process, and with the caveat that we're only one quarter into the New Year and a significant number of uncertainties and challenges are still in front of us, we are raising our guidance on all key performance metrics, including organic growth, operating margin and EPS.
In doing so, we've obviously factored in our solid Q1 results.
And per our usual process, we are projecting current levels of demand exit in Q1, into the future and addressing them for typical seasonality.
And as discussed, we've made an allowance for the estimated impact of semiconductor chip shortages on our Auto OEM customers.
The outcome of that exercise is an organic growth forecast of 10% to 12% at the enterprise level.
This compares to a prior organic growth guidance of 7% to 10%.
Foreign currency at today's exchange rates adds 2 percentage points to revenue for total revenue growth forecast of 12% to 14%.
As you saw, we're off to a strong start on operating leverage and enterprise initiatives, and we are raising our operating margin guidance by 100 basis points to a new range of 25% to 26%, which incorporates all known raw material cost increases and the corresponding pricing actions.
Relative to 2020, our 2021 operating margins of 25% to 26% are 250 basis points higher at the midpoint and they are almost 150 basis points higher than our pre-COVID 2019 operating margins of 24.1%.
As we continue to make progress toward our long-term performance goal of 28% plus, as I mentioned earlier.
Our incremental margins for the full year are expected to be above our typical 35% to 40% range.
Finally, we are raising our GAAP earnings per share guidance by $0.60 and or 8% to a new range of $8.20 to $8.60.
The new midpoint of $8.40 represents an earnings growth rate of 27% versus prior year and a 9% increase relative to pre-COVID 2019 earnings per share of $7.74.
A few final housekeeping items to wrap it up, with no changes to: one, the forecast for free cash flow; two, our plan to repurchase approximately $1 billion of our own shares; and three, our expected tax rate of 23% to 24%.
As per usual process, our guidance is for the core business only and excludes the previously announced acquisition of the MTS Test & Simulation business.
The process to close the acquisition by midyear remains on track.
And once the acquisition closes, we'll provide an update.
As we've said before, we do not expect a material financial impact to earnings in 2021.
So in summary, a quarter of quality execution in a challenging environment, and as a result, we're off to a solid start to the year.
| compname reports q1 earnings per share of $2.11.
q1 gaap earnings per share $2.11.
q1 revenue rose 10 percent to $3.5 billion.
sees fy gaap earnings per share $8.20 to $8.60.
plans to repurchase approximately $1 billion of its shares in 2021 and expects an effective tax rate of 23 to 24 percent.
|
I am joined today by Summit Hotel Properties President and Chief Executive Officer, Jon Stanner; and Executive Vice President and Chief Financial Officer, Trey Conkling.
Overall, we are extremely pleased with the continued acceleration of our improving operating trends in the third quarter, which exceeded our initial expectations and resulted in more than a 25% increase in RevPAR from the second quarter.
Occupancy average daily rate and overall profitability all reached new highs since the onset of the pandemic, and we more than tripled our positive corporate cash flow compared to last quarter.
Demand growth accelerated broadly during the quarter as we sold nearly 7% more room nights in the third quarter than we did in the second quarter, peaking during a historically strong summer travel season in July when occupancy in the portfolio was above 72%.
Although August demand pulled back modestly as expected, we saw a reacceleration in the back half of September when occupancy averaged nearly 70% during the last two weeks of the quarter.
While leisure demand continues to be the primary driver of our operating results, we remain encouraged by improving corporate transient demand trends.
Negotiated room revenue increased approximately 28% in the third quarter over the second quarter.
And while that is admittedly off of a very small base, we're also encouraged by some of the anecdotal signs suggesting a more robust return of corporate travel is forthcoming.
We reported third quarter pro forma RevPAR of $98, which was more than double our RevPAR in the third quarter of last year and was 24% lower than what was achieved in the third quarter of 2019, a significant improvement from the first half of the year when RevPAR was nearly 43% lower in the second quarter and 59% lower in the first quarter than the comparable 2019 periods.
Importantly, the recovery of average rates accelerated meaningfully during the quarter.
As ADR across our portfolio increased 19% compared to the second quarter, and weekday ADR growth outpaced weekend growth by nearly 200 basis points.
Average rates in our urban portfolio increased 24% from the second quarter, and weekday urban ADR grew 27% from the second quarter, which encouragingly reflects some level of rate accretive remixing of our business with corporate travel.
Weekend occupancy was an impressive 80% during the third quarter and averaged 82% in July and September as the recovery continues to clearly be led by exceptionally strong leisure demand.
However, mid-week occupancy also continues to steadily improve, climbing to 64% during the first quarter, a full five percentage points higher than the second quarter and the gap between weekday and weekend occupancy continues to narrow.
Trey will provide some additional color on our operating results later in the call.
During the third quarter, we completed the previously announced acquisition of the newly built 110 guestroom residence in Steamboat Springs for $33 million.
The extended-stay hotel is the newest hotel in Steamboat, one of only six other hotels that have opened in the market since the year 2000, and the first Marriott-branded extended stay product in the market.
Since acquisition, the hotel has performed exceptionally well, generating occupancy and RevPAR of nearly 87% and $161, respectively, and hotel EBITDA margin of 49% for the third quarter.
On an annualized basis, this equates to a 9% net operating income yield and less than three months of ownership, despite the hotel having been open for less than one year.
During the third quarter, we invested approximately $4.2 million in our portfolio on items primarily related to planned maintenance capital.
As we previously mentioned, given our conviction around the long-term improvement in demand trends, we plan to commence several renovations in the fourth quarter of this year and early next year to minimize disruption from these projects.
We expect to spend between $15 million and $20 million in capital expenditures for the year on a consolidated basis.
And between $14 million and $19 million on a pro rata basis.
During the third quarter, our resort and other nonurban hotels continued to show robust sequential improvement with RevPAR growth of 12% relative to the second quarter of this year, and a nominal RevPAR value exceeding $100.
This subset of the portfolio illustrates Summit's diversification and broad exposure to the overall lodging recovery as ADR increased 13% to $135 relative to the second quarter on stable occupancy of 74%.
Transitioning to our urban hotels, we were encouraged by the progress in this subset of the portfolio, which, for the first time since the onset of the pandemic experienced meaningful outsized growth relative to our other location types.
RevPAR at our urban hotels increased 43% from second quarter 2021 to approximately $94, primarily on the strength of rate, which increased 24%.
As an additional point of reference, in third quarter 2020, our urban portfolio posted a RevPAR of $37, further evidence of the strong rebound experienced year-over-year.
Key factors driving growth in the urban portfolio include increased business activity, professional and college sports attendance and group demand.
As a final point on our urban portfolio, we believe business travel is now in the early stages of its recovery as urban midweek occupancy increased 10 percentage points from the second quarter to 57%, and ADR increased more than $30 to $144 or a 27% increase for the quarter.
This translates to a RevPAR growth rate of 54% versus second quarter for the urban portfolio.
To provide a little more insight into the company's overall third quarter portfolio segmentation, growth in demand was driven primarily by the increases in group business and negotiated business segment, as previously mentioned.
Full week group RevPAR for the company's total portfolio increased by 76% relative to second quarter 2021, while weekday group RevPAR increased by 100% during the same time frame.
Similarly, full week negotiated RevPAR increased by 28% relative to second quarter, while weekday negotiated RevPAR increased by 32%.
Increases in negotiated RevPAR were driven primarily by travel from small and medium-sized business transient accounts.
Although booking windows remain short-term in nature and forecasting continues to be a challenge, we've experienced a decline in the percentage of room nights booked near to or on the night of stay.
For example, transient room nights booked within 24 hours this day, declined from 23% of total bookings in the second quarter to 21% of bookings in the third quarter.
But importantly, nights booked more than 30 days out, increased by 19% during that same period.
While the overall booking window remains shortened relative to prepandemic standards, its expansion represents a definitive trend that started earlier in the year and has strengthened throughout the third quarter.
From a cash flow perspective, continued growth in demand, combined with thoughtful expense management, enabled Summit to generate positive corporate cash flow of $18.5 million in Q3, which was more than triple the corporate cash flow of Q2 2021.
Pro forma hotel EBITDA was $38.8 million in the third quarter, exceeding the previous two quarters combined by approximately $5 million.
Operating costs per occupied room declined nearly 10% compared to 2019, which drove third quarter gross operating profit margin and hotel EBITDA margin to an impressive 47% and 35%, respectively.
We continue to operate our hotels utilizing a very lean staffing model, which consists of approximately '19 FTEs on average or slightly more than 55% of free pandemic staffing levels.
Rehiring hourly staff, particularly in the housing housekeeping department has been an ongoing issue across the industry.
Despite these challenges and increasing occupancy levels, our asset management team has done a great job controlling operating expenses, leading to hotel EBITDA retention of 54% when compared to the third quarter of 2019.
Finally, turning to the balance sheet.
Our overall liquidity position continued to strengthen during the quarter as the business made substantial progress generating positive cash flow.
Additionally, we accessed the capital markets in August, taking advantage of a favorable preferred equity market with the issuance of $100 million of five and seven, eight Series A perpetual preferred paper.
Proceeds from this opportunistic offering were used to accretively refinance our $75 million, 6.45% Series B preferred stock and to reduce the outstanding balance on our November 2022 term loan to its current balance of $62 million.
This sub term loan remains the company's only 2022 maturity, and we continue to maintain ample liquidity to repay all maturing debt through 2024 when considering available extension options.
We're thrilled to announce the acquisition of a 27 hotel portfolio from NewcrestImage, which is comprised of approximately 3,700 guest rooms located across 10 high-growth Sunbelt markets in Texas, Oklahoma City and New Orleans.
These hotels are highly complementary to our existing portfolio with premium brand affiliations, excellent locations in strong markets and comprise a relatively new portfolio with approximately 70% of the guest rooms opening since 2015 and more than 1/3 of the guestrooms built in the last three years.
The hotel portfolio's allocated value of $776.5 million equates to approximately $209,000 per key, which reflects a significant discount to replacement costs and results in a stabilized NOI yield of 8% to 8.5%, including underwritten capital expenditures.
Our increased exposure to Sunbelt markets, which will be approximately 60% of our pro forma room count, positions the combined hotel portfolio to benefit from the favorable migration patterns, labor dynamics, corporate relocation activity, return to office trends and general pro business climates in these markets.
In addition to the hotel portfolio, we will be acquiring two parking structures, totaling approximately 1,000 parking spaces that serve two triplex hotel clusters, one in Downtown Dallas and the other in the emerging mixed-use development of Frisco Station, a thriving North Dallas suburb.
The transaction also includes an allocation to several financial incentives that will be assumed upon closing of the transaction.
Our joint venture with GIC will acquire the assets for a total consideration of $822 million, and we will finance the investment with a new $410 million credit facility.
We expect the transaction to be immediately accretive to our earnings and leverage-neutral to our balance sheet.
GIC's 49% equity interest will be a cash contribution totaling approximately $208 million, and our 51% controlling interest will come from a combination of common and preferred op units.
We will issue 15.9 million shares of common op units valued at $160 million.
Based on our common stock's 10-day [Indecipherable] as of Tuesday's closing price equal to $10.09 per share.
NewcrestImage ownership will be approximately 13% of our total shares outstanding.
The preferred op units totaling $50 million will be issued at a standard $25 par value and pay an annual coupon equal to 5.25%.
As part of the transaction, NewcrestImage will have the right to appoint one representative to the company's Board of Directors.
The transaction would increase our combined room count by over 30% and our total enterprise value by approximately 20%.
Acting as a general partner, on behalf of the joint venture, we will continue to earn fees for our asset management services and expect our stabilized fee stream earned through the joint venture will cover approximately 17% of our in-place cash corporate G&A.
The utilization of common and preferred op units for our 51% equity interest will preserve nearly all of our liquidity of $450 million, leaving us ample runway to pursue additional growth opportunities.
While closing remains subject to customary closing conditions and a formal due diligence period, we anticipate closing to occur later this quarter or early in the first quarter of 2022.
We are incredibly excited about the future of our business and believe this transaction, combined with the continued recovery of lodging fundamentals, positions us particularly well to create long-term value for our shareholders.
| entered into a definitive contribution agreement with newcrestimage to acquire a 27-hotel portfolio.
agreement through its existing jv with gic for total consideration of $822 million.
expects to fund 51% equity contribution through issuance of 15.865 million common operating partnership units.
joint venture has secured a $410 million financing commitment from bank of america and wells fargo bank.
gic's estimated equity contribution of $208 million will be funded in cash.
summit hotel properties - deal structured to preserve nearly all of $450 million of existing liquidity, expected to be immediately accretive to earnings.
|
Please keep in mind that our actual results could differ materially from these expectations.
All of these documents are available on our website at brunswick.com.
Our businesses had another outstanding quarter.
We closed the first half of 2021 by delivering record results as a result of continuing strong retail demand, outstanding operational performance and success in mitigating material supply and labor challenges.
All of our businesses delivered exceptional growth during the quarter.
Our Propulsion business continued to realize strong outward market share gains, leveraging the strongest product lineup in the industry.
Our Parts and Accessories businesses continued to benefit from robust aftermarket demand, driven by elevated boating participation.
And our Boat business posted its second consecutive quarter of double-digit adjusted operating margins despite significant supply chain, transportation and labor challenges.
Robust retail demand for our products in the first half of the year has driven field inventory levels to the lowest level in decades at approximately nine weeks on hand.
And we are progressing our efforts to efficiently increase capacity across several of our facilities to satisfy orders from our global customer base and begin to replenish the pipeline.
As many of you know, we've also had a busy few months on the M&A front.
At the end of the quarter, our Advanced Systems Group significantly expanded its product and brand portfolio by announcing the signing of a definitive agreement to purchase Navico, an industry leader in marine electronics.
In addition, we announced in early July that Freedom has expanded into Spain through the acquisition of Fanautic Club.
I'll touch on both these exciting transactions later in our discussion.
Given the unique demand and inventory environment, together with continued strong boat usage through the prime season, which drives P&A sales, we have improved visibility on our ability to deliver against an extremely favorable outlook for the remainder of 2021.
And consequently, we have increased our 2021 guidance.
Before we discuss the results for the quarter, I wanted to share with you some updated demographic insights through the first half of 2021 and comparisons with the favorable trends we experienced in 2020 versus 2019 in the industry.
I'm happy to report that we are not seeing any change in the significant metrics we shared with you during our first quarter earnings call in April.
Brunswick's average boat buyer age continues to be two years younger than the industry average.
Additionally, Brunswick's first-time boat buyers continue to be younger than our overall boat buyer demographic and three years younger than the industry.
First-time boat buyers are trending more female than they did in 2020, and Brunswick over-indexes to the industry by approximately 800 basis points.
In Freedom Boat Club, the average Freedom member continues to be almost three years younger than our typical boat buying customer and female Freedom members make up approximately 35% of our member base.
We continue to outperform the industry in attracting younger and more diverse first-time boat buyers, positioning us for very strong growth in years to come.
These trends are an extremely important validation of our strategy to secure a healthy future for Brunswick and are also favorable for the entire marine industry.
I also wanted to share with you some awards that Brunswick received during the second quarter that provide more strategic proof points.
Brunswick received 6, 2021 boating industry top product awards, including for the Mercury Marine V12 600-horsepower Verado and the Sea Ray 370 Sundancer Outboard we highlighted recently, but also for our Bayliner Element M15 entry-level boat, BEP's Smart Battery Hub, Attwood's Sahara Mk2 automatic bilge pump, and MotorGuide's Xi3 Kayak Trolling Motor.
Brunswick has also been recognized by Forbes for the second year in a row as one of the best employers for women and ranked second overall in the engineering and manufacturing category.
The winners were chosen based on a survey of 50,000 US employees working for companies employing at least 1,000 people in their US operations and only 300 companies made the final list from the thousands of companies that were considered for the honor.
Finally, Brunswick recently had three employees and a Freedom Boat Club franchisee, Bev Rosella, honored with a Women Making Waves Award from Boating Industry Magazine.
We are very proud of these women leaders.
As you know, equal opportunity, inclusion and diversity are cornerstones of our culture.
I'll now provide some second quarter highlights on our segments and the overall marine market.
Our Propulsion business continues to gain significant retail market share in outboard engines, especially in the higher horsepower categories, where we have focused higher levels of investment in recent years.
For the first half of the year, Mercury has gained share in each horsepower category over 75-horsepower, with outsized gains in nodes in excess of 200-horsepower.
I'm also pleased to announce that we began shipping the new 600-horsepower V-12 Verado engine in late June, and as anticipated, demand has been extremely strong.
We're essentially sold out of the V-12 production slots for the remainder of 2021.
And we estimate that just during the back half of 2021, we will sell more outboard engines in this above 500-horsepower class that was sold in the entire prior history of the outboard industry.
Given the surging demand in the current environment and new product launches planned in the coming years, Mercury is accelerating additional capacity investments at its primary manufacturing center in Fond du Lac, Wisconsin, in order to maximize its ability to serve the market and capture further share.
Our Parts and Accessories businesses experienced significant topline and earnings growth and significantly overdrove expectations in the quarter due to outstanding execution, robust aftermarket demand driven by elevated boating participation and favorable weather conditions in many areas.
The Advanced Systems Group, which has a larger OEM component to its business and also serves certain non-marine segments, benefited from prior year comparisons as a result of Q2 2020 customer COVID-related plant shutdowns.
As a result, ASG realized significant growth across all product categories and delivered strong operating margins that were accretive to the overall segment.
Finally, as I mentioned earlier, in late June, our Advanced Systems Group strengthened its product and brand portfolio and significantly expanded its scale and capabilities by announcing the signing of a definitive agreement to purchase Navico.
This action will further accelerate our ACES strategy and will enhance our ability to provide complete innovative digital solutions to our consumers and comprehensive integrated systems offerings to our OEM customers.
We believe this transaction will close in the second half of 2021.
Our Boat segment had another outstanding quarter, posting its second consecutive quarter of double-digit adjusted operating margins despite significant supply chain uncertainty, while delivering output consistent with our production plans for the year.
We ended the second quarter with historically low pipeline inventory levels due to consistent strong retail demand for our products.
Given the continued robust retail demand and our dealers' continued desire to take all available product, our 2021 production slots are now sold out for the calendar year, with five brands completely sold out through the 2022 model year.
In fact, the sum of our wholesale orders for 2022 model year product is already roughly equal to our projected 2021 full year wholesale Boat Group revenue.
We continue to hire additional new production employees at most facilities to maintain production consistent with our stated plan.
We remain on track with our plans to ramp up and staff the Palm Coast facility and expand our operations at Reynosa and Portugal.
Additionally, we've identified capital-efficient investment options to further raise capacity to approximately 50,000 annual production units by 2023, should this volume of product be required.
Freedom Boat Club also continues to exceed our expectations, growing both organically and through acquisition with a young and diverse customer base.
With the recently announced acquisition of Fanautic Club and expansion into Spain, Freedom now has 314 locations and 44,000 memberships networkwide, and is closing in on 4,000 votes in the overall Freedom fleet, with an increasing percentage of Brunswick product.
The outstanding operational and financial performance I've been discussing has not been without some external challenges that our businesses continue to manage and mitigate sometimes on a daily basis.
Our supply chain teams in particular, have performed extremely well.
Winter storms in late first quarter and resulting power outages in Central and Southern United States disrupted the supply of oil-based resin and foam products throughout the second quarter, while tight semiconductor supply, raw material shortages and transportation disruption and resulting cost increases continued to present challenges, which we are actively managing.
As a result, our businesses have implemented price increases that are higher than normal, but we believe are generally at the lower end of those implemented across the industry.
The global reach of our supply network and our unique scale in the marine industry, together with our purposeful vertical integration, have so far enabled us to mitigate these challenges and keep our enabled us to mitigate these challenges and keep our production plans on track for 2021.
Finally, labor conditions remained tight in many locations in which we manufacture product.
But our talent acquisition teams have been working hard and successfully to add manufacturing and other talent to our teams, as we increase production.
Next, I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.
As expected, all regions posted significant sales growth in the quarter versus both, 2020 and 2019.
Domestic sales grew 55%, with international sales up 49%, versus prior year.
We are seeing strong performance across all international regions, with Asia Pacific still growing despite an extremely strong comparison in 2020.
We continue to experience robust demand around the globe, especially for propulsion products.
And we'll be working through backlogs in certain product categories through the remainder of 2021 and into 2022.
This table provides more color on the recent performance of the U.S. marine retail market, comparing the first half of 2021 to same periods in 2020 and 2019.
As is usual for this time of year, there's significant noise in the month-to-month SSI data, but the positive market trends continue.
All boat categories reported retail gains in the first half of 2021 and continuing the momentum from 2020.
Despite more difficult year-over-year comparisons in May and June, the main powerboat segments are still up 17% in the first half of 2021 versus 2020 and up 13% versus 2019.
Brunswick's year-to-date unit retail performance is generally in line with market growth rates with strength in outboard boat categories.
Outboard engine unit registrations were up 5% in the first half of 2021, when compared with the same time period in 2020.
With Mercury's first half growth more than doubling the market growth rate, resulting in significant market share gains, as I discussed earlier.
As we enter the second half of the year, U.S. lead generation, dealer sentiment and other leading indicators all remain very positive.
Approximately 40% of the boats leaving our manufacturing facilities are retail sold, which is approximately three times historical averages.
In addition, five of our brands, including Whaler, have all model year 2022 production slots already sold.
All these factors give us high confidence in the continuing retail strength as we complete the 2021 selling season and move into 2022.
I'm pleased to share with you the results from another fantastic quarter.
To provide perspective in the slides that follow, we have included comparisons in certain places to both the second quarters of 2020 and 2019 in order to highlight the outstanding performance in each of our businesses over the past few years.
When compared with 2020, second quarter net sales were up 57%, while operating earnings on an as-adjusted basis increased by 126%.
Adjusted operating margins were 17.1% and adjusted earnings per share was $2.52, once again setting new all-time highs for any quarter for which we have available records.
Sales and earnings in each segment benefited from strong global demand for marine products, with earnings also positively impacted by favorable factory absorption from increased production and favorable changes in foreign currency exchange rates, partially offset by higher variable compensation costs and increased spending in sales and marketing and ACES and other growth initiatives.
Finally, we had free cash flow of $268 million in the second quarter, with a free cash flow conversion of 135%.
First half comparisons are equally as favorable.
Net sales through the first half of 2021 were up 53% when compared with the first half of 2020, and operating margins of 17% or a 520 basis point improvement from 2020.
This resulted in first half earnings per share of $4.76 and a very robust operating leverage of 27%.
Turning to our segments, revenue in the Propulsion business increased 64% versus the second quarter of 2020 as each product category experienced strong demand and market share gains.
Consistent with the theme from the first quarter, boat manufacturers continue to ramp up production in the second quarter and our increased capacity enabled continued elevated sales to the independent OEM and international channels.
Sales growth was also strong across all product categories when compared to the second quarter of 2019.
Operating margins and operating earnings were up significantly in the quarter, benefiting from the factors positively affecting all of our businesses.
In our Parts and Accessories segment, revenues increased 42% and adjusted operating earnings were 46% up versus the second quarter of 2020, due to strong sales growth across all product categories.
Adjusted operating margins of 23.2% were 60 basis points better than prior year quarter, with significant sales increases driving the robust increase in adjusted operating earnings.
Sales growth was also very strong across all product categories when compared to the second quarter of 2019.
This aftermarket-driven annuity-based business continues to benefit from more boaters on the water, which is being augmented by flexible work schedules allowing for more leisure time, with the OEM component of the business, leveraging investments in technology to take advantage of increased demand from both builders as they continue to increase production.
As anticipated, our Boat segment results benefited the most when compared with the second quarter of 2020 due to last year's COVID-related plant shutdowns and production ramp-up.
Sales were up 80% and operating margins were 10.5% for the quarter, the second straight quarter this segment has delivered double-digit margins.
Each brand had strong operational performance, executed their aggressive production plan and contributed to the overall segment's success in the quarter.
When compared to the second quarter of 2019, sales were up 22%, and operating margins were up 160 basis points, further illustrating the foundational improvements that have been made in this business.
Operating earnings were also positively impacted by the increased sales and the lower retail discount levels versus 2020.
Freedom Boat Club, which is included in business acceleration, contributed approximately 3% of the segment's revenue and a margin profile that continues to be accretive to the segment.
Turning to pipelines, our boat production continues to ramp consistent with our plans to produce approximately 38,000 units during the year.
Despite producing almost 10,000 units in the quarter, which is up 5% from the first quarter, retail outsold wholesale replenishment by more than 7,000 units, bringing dealer inventories to an all-time low of approximately 7,400 units.
Our boat brands ended June with under 10 weeks of boats on hand, measured on a trailing 12-month basis, with units in the field lower by 50% versus same time last year.
Given our view that the industry retail market will be up high single-digit percent for the year, we believe that retail will outpace our production targets resulting in our year-end weeks on hand to be lower than year-end 2020 by several weeks.
We continue to work with our brands to unlock additional near-term capacity through automation, labor and select capital initiatives, including the capacity actions announced earlier in the year related to our Palm Coast, Reynosa and Portugal facilities, which will begin providing benefits by the end of the year.
2021 is shaping up to be another year of robust earnings and shareholder returns, with pronounced margin increases and substantial free cash flow generation resulting from our outstanding operating performance in a healthy marine market.
Given the enhanced clarity on our ability to drive growth in upcoming periods, we are providing the following updated guidance for full year 2021.
Without including the potential benefits from the Navico acquisition, we anticipate the US marine industry retail unit demand to grow high single-digit percent versus 2020; net sales of between $5.65 billion and $5.75 billion; adjusted operating margin growth between 150 and 180 basis points; operating expenses as a percent of sales to remain lower than 2020; free cash flow in excess of $450 million; and adjusted diluted earnings per share of approximately $8.
We're also providing directional guidance regarding the third quarter, where we anticipate revenue growth of mid-teens percent and earnings per share growth of high single-digit percent.
Note that we believe that the Navico transaction, once closed, will be earnings neutral to 2021 as we anticipate Navico's post-closing earnings to offset the incremental interest incurred as a result of the deal.
Next, I'd like to provide some perspective on our 2021 performance against 2020 and 2019 by looking at first half and second half results.
The revenue cadence for 2021 will look more like 2019 and 2018 than it did in 2020.
The first half of every year has additional production days as the second half includes model changeover and holiday shutdowns.
However, first half of 2020 was materially impacted by the COVID-related plant shutdowns.
This resulted in the first half of 2021 comparing very favorably to 2020 in all of our businesses due to higher production volumes, with additional earnings tailwinds from improved absorption, favorable foreign currency comparisons and favorable changes in customer mix in our Propulsion business.
These factors far outweighed the headwinds from supply chain challenges, inflationary pressures and higher variable compensation expenses experienced during the first six months of this year.
Our first half performance this year also exceeded 2019 in every metric.
As we head into the second half of 2021, we will face more difficult comps to 2020 as the company recorded record-high earnings per share over the same period last year, and we will continue to be challenged with supply chain constraints and increasing input and freight costs.
Although, we are taking price increases across our businesses, we also anticipate moderated sales mix with propulsion sales trending more toward core OEM customers, more typical seasonality in the P&A business and a higher percentage of overall growth in the Boat business; increased spending on ACEs and other growth initiatives; smaller benefits from currency and absorption; and a higher tariff impact.
However, despite more challenging second half comparisons, this continues to be a growth story.
We anticipate expanding top-line in the second half by double-digit percent versus the second half of 2020, which will be more than 40% greater than 2019 with higher earnings as well.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of the year.
The only meaningful update relates to our effective tax rate for the year.
Due to some fantastic branch restructuring work by our tax team and business units, we now believe our effective tax rate for 2021 will be approximately 22%, which is slightly lower than our estimate from our April call.
Similarly, and putting aside the financing related to the Navico transaction, our capital strategy assumptions have not materially changed.
In the past few weeks, however, we have taken several steps to strengthen our overall liquidity and shareholder return profile.
We extended and expanded our revolving credit agreement, which is now in effect through July of 2026, which now provides for $500 million of borrowing capacity, an increase of $100 million.
In addition, our Board of Directors increased our share repurchase authorization earlier this month, and we now have over $400 million approved for repurchases, which we plan to systematically deploy consistent with our capital strategy.
These moves follow our substantial 24% dividend increase approved in April as we continue to balance desired increases in shareholder return and investment in growth initiatives.
We now anticipate spending $270 million to $300 million on capital expenditures in the year to support and in some cases, accelerate growth initiatives throughout our organization.
This slightly increased planned spending is primarily related to the Mercury capacity expansion that Dave discussed earlier.
At our April call, we felt that 2021 was setting up to be an outstanding year for all of our businesses.
And the combination of continued robust retail demand during the first half of the year and solid operational execution by our businesses has us squarely on track to deliver against our operating and strategic priorities.
Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in dealer, saltwater, repower and international channels.
We are continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top line and earnings growth far into the future.
And we've also recently taken the decision to accelerate the introduction of incremental capacity.
Our Parts and Accessories segment remains focused on optimizing its global operating model, to leverage its distribution and position of strength in areas of battery technology, digital systems and connected products in support of our ACES strategy.
We look forward to closing the Navico deal and beginning thoughtful integration into the ASG business.
We will continue to focus M&A activity in parts and Accessories, as we look for opportunities to further build out our technology and systems portfolio.
The Boat segment will build on its first half successes, by continuing to focus on operational excellence, improving operating margins, launching new products, executing capacity expansion plans and refilling pipelines, in the very robust retail environment.
In addition to the Navico and Freedom Boat Club transactions, and the start of shipments of the V-12 600-horsepower outboard, which I've already discussed, proof points in the quarter included, the launch of the My Whaler and Sea Ray+ apps for Apple and Android users, which advances the ACES Connectivity strategy by improving the boat ownership experience, reducing friction across the entire ownership journey.
The initial reception of these products is extremely promising, with more than 2,000 accounts created in the first few weeks and a star rating of 4.9 out of five.
And the launch of the Heyday H22 Wake boat, a new leading-edge, wake-surf model, signaling a doubling down on this fast-growing brand appealing to a younger demographic.
This model is already sold out through mid-2022.
We're tracking well against all our Next Wave strategic goals, including the electrification initiatives outlined in May.
Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpace our initial growth and profit expectations.
| brunswick corporation releases second quarter 2021 earnings.
for q2 of 2021, reported consolidated net sales of $1,554.8 million, up $567.0 million from q2 of 2020.
q2 gaap diluted earnings per share of $2.29 and as adjusted diluted earnings per share of $2.52.
sees 2021 net sales between $5.65 billion and $5.75 billion.
sees 2021 free cash flow in excess of $450 million.
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Please keep in mind that our actual results could differ materially from these expectations.
All of these documents are available on our website at brunswick.com.
Our businesses had another outstanding quarter.
We've now delivered our fifth consecutive quarterly record for adjusted operating earnings and earnings per share as a result of our robust operational performance, successful mitigation of supply chain challenges and active management of overall cost inflation throughout the enterprise.
Despite challenging comparisons to last year, retail demand for our products remains extremely healthy.
And we continue to take market share with our Mercury outboard engines in many of our boat brands.
In addition, Freedom Boat Club continues to grow its membership base as we rapidly expand this very successful and synergistic shared access participation model.
Robust retail demand for our products has driven field inventory to the lowest level in decades at just over 10 weeks on hand.
We continue to increase production to meet demand across our businesses though in some cases, supply chain constraints are limiting our ability to overdrive our production plan.
As we close out 2021, we're focused on elevating production levels to meet demand and refill field inventory during the retail off-season, integrating Navico and our other acquisitions, progressing our strategic initiatives and closing the most successful year in Brunswick's history while laying the groundwork for the Next Wave of success in 2022.
Our businesses are focused on closing out another year of robust earnings and shareholder returns with strong margin growth and substantial free cash flow generation, resulting from our outstanding operational performance in a healthy marine market, and we have increased our 2021 guidance accordingly.
Before we discuss the results for the quarter, I wanted to share with you just a few of the awards and award nominations that Brunswick received during the third quarter.
For the second time in three years, Brunswick and Mercury Marine were jointly presented with a Soundings Trade Only Most Innovative Marine Company award at the IBEX trade show in Tampa last month.
The panel of judges praise Brunswick and Mercury for a record setting 2021, filled with multiple industry-changing product launches such as the V-12 600-horsepower Verado outboard engine and the Sea Ray 370 Sundancer among others.
Additionally, Brunswick and Mercury were commended for committing to the health and safety of our employees and for our extraordinary efforts to continue meeting customer demand during the global pandemic.
Brunswick has also been recognized for the second consecutive year by Forbes and Statista as one of the World's Best Employers.
Of the thousands of companies eligible for this recognition, Brunswick was one of only 750 companies selected to receive the award, ranking in the top 10 companies in the world within the engineering and manufacturing category.
Brunswick is also thrilled to be nominated for several other major awards, including a Consumer Electronic Show Best of Innovation Award, five STEP Ahead awards recognizing women in manufacturing, five Dame product design awards from METSTRADE, three international Best of Boats Awards, two European powerboat of the year awards and two IBI Boat Builder awards.
Our commitment to democratizing and diversifying boating and the boating industry is central to our strategy and vital to ensuring our access to talent and to the continued growth of our customer base.
In past quarters, we provided updated demographic trends and insights around first-time and recurring boat buyers as well as demographic changes.
I'm pleased that we are not seeing any pullback in the encouraging trends we experienced during 2020.
We're also continuing to see Freedom leading the way with these demographic shifts.
Since 2019, Freedom has seen notable increases in the ethnic diversity of our members, which grew from around 10% in 2019 to 15% now and the percentage of women making up our total member base, which grew by 130 basis points to 35%.
Also, a particular note, the percentage of Hispanic Freedom members almost doubled to 8.4% in 2021 from 4.7% in 2018.
We're very encouraged by these trends that will help secure a healthy future for Brunswick and the entire marine industry.
I'd also like to share with you some consumer insights gained through the polling of Brunswick's Ripl online boating community, which includes both new and seasoned boaters.
Of those surveyed, approximately 60% worked remotely at least partially, and 44% of those polled have been able to fit boating into their work week this season, with more than 20% actually working from their boat at some time.
Most people who fit boating into their work week during 2021 expect to continue doing so during 2022, which further supports our belief that persistent changes in the way people work will provide more opportunities for people to get out on the water and maintain boat usage at elevated levels versus pre pandemic.
I'll now provide some third quarter highlights on our segments and the overall marine market.
Our Propulsion business delivered another quarter of significant top line and earnings growth, with more favorable customer mix leading to stronger margins than anticipated.
Over the last two years, Mercury has gained an extraordinary 310 basis points of U.S. retail market share with outsized gains in higher horsepower products, where a significant amount of investment has been made in recent years.
Outstanding execution, robust aftermarket demand driven by elevated booking participation and favorable late season weather conditions in many areas resulted in our Parts and Accessories businesses overdriving expectations in the quarter.
In addition, our Advanced Systems Group announced the tuck-in acquisitions of RELiON Battery and SemahTronix during the third quarter to further complement its existing portfolio of lithium-ion batteries and to vertically integrate complex electrical wiring harnesses, respectively.
These acquisitions, along with the closing of the Navico acquisition earlier this month, will further strengthen our enterprisewide ACES strategy and enhance our ability to provide complete innovative digital solutions to consumers and comprehensive integrated systems offerings to our OEM customers.
Finally, our boat business continues to deliver strong top line growth in a disrupted environment.
Despite supply chain challenges, cost inflation and labor tightness at our suppliers and some of our own facilities during the quarter, we anticipate annual unit production of greater than 95% of our original production plan for the year, with shortages and delays primarily constraining additional upside.
By comparison, our Propulsion business is anticipated to produce approximately 110% of its original 2021 production schedule.
Finally, Freedom Boat Club continues to expand rapidly while attracting a young and diverse customer base.
Freedom is now approaching 320 global locations and 47,000 memberships networkwide with more than 4,000 boats in its overall fleet, including an increasing percentage of Brunswick boats and engines.
Next, I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.
As expected, all regions posted significant sales growth in the quarter versus both 2020 and 2019.
Except for Asia Pacific, we saw sales normalize slightly in the third quarter but still up 26% versus the same period in 2019.
Domestic sales grew 14%, with international sales up 17% versus the prior year.
This table provides more color on the recent performance of the U.S. marine retail market, comparing the first nine months of 2021 to the same periods in 2020 and 2019.
The year has played out largely as we expected with easy comparisons through the first portion of the year, primarily due to the impact of COVID in 2020 and more difficult comps beginning in May.
Since our July earnings call, the industry has experienced more pronounced supply chain disruptions than anyone anticipated, which, together with the more direct impact of the Delta variant, has led to a more significantly inventory-constrained retail environment.
The result is a reported 8% decline in main powerboat retail unit sales year-to-date when compared with the same period in 2020 but still 3% greater than the same period in 2019.
Brunswick's year-to-date performance is generally somewhat ahead of the overall market with outsized market share gains in aluminum products.
Outboard engine unit registrations were down 6% through the first nine months of 2021 when compared with the same period in 2020, with Mercury outperforming the industry.
Mercury's outboard engine unit registrations compared with the same period in 2019 are up more than double the industry's market growth rate, resulting in a significant market share gains we've experienced in recent years.
It's important to note that all indications are that retail declines are being driven by product availability and are not a result of declining consumer demand.
U.S. lead generation, dealer sentiment and other leading indicators all remain very positive.
For example, all of our 2022 model year and 80% of our 2022 calendar year production slots are already sold out.
And we continue to see a significant percentage of boats leaving our manufacturing facilities already retail sold.
All these factors give us high confidence in the continuing retail strength as we enter 2022.
This slide provides some perspective on the impact of inflation on our businesses, together with our ability to take price increases to mitigate the net impact.
Based on our early view of price inflation in the third quarter, we implemented higher than normal annual price increases in July to mitigate the anticipated levels of input cost inflation in the back half of the year.
However, input cost inflation has exceeded our estimates, so we've implemented additional price increases during October in both our Propulsion and Boat businesses to ensure that we cover inflation with pricing on a full year basis.
Between direct materials, labor and freight, we anticipate input cost inflation to be in the high single-digit percent range versus 2020 on a run rate basis, with a significant majority of the impact felt in the second half of the year.
Consequently, we may need to take further mid-cycle increases and/or higher-than-normal increases in 2022.
However, we believe the price increases we've implemented to date are generally at the lower end of those implemented across the industry and are not impacting raw demand.
Our businesses delivered another outstanding quarter.
When compared with 2020, third quarter net sales were up 16% with adjusted operating margins of 15.5%.
Operating earnings on an as-adjusted basis increased by 9%, and adjusted earnings per share was $2.07, once again setting new all-time highs for any third quarter for which we have available records.
Sales in each segment benefited from increased volume due to strong global demand for marine products, market share gains and increased pricing with earnings positively impacted by increased sales and favorable changes in foreign currency exchange rates, partially offset by increased input costs and increased spending on sales, marketing and ACES and other growth initiatives.
First nine month comparisons are also very favorable, with 2021 net sales up 39% when compared with the first nine months of 2020 and adjusted operating margins of 16.5%, a 290 basis point improvement from 2020.
This resulted in adjusted earnings per share for the first nine months of $6.82 and a very robust operating leverage of 24%.
We have generated almost $300 million of free cash flow through the first nine months of the year, which is a strong result considering the incremental working capital needed to satisfy increased needs for inventory as we elevate production levels and the $60 million increase in capital spending when compared to the same prior year period.
Turning to our segments.
Revenue in the Propulsion business increased 19% versus the third quarter of 2020 and was up 58% versus Q3 of 2019.
Strong demand for all product categories, together with market share gains, drove higher sales, which continue to be enabled by increased production levels.
Operating margins were flat versus 2020 but up 320 basis points versus Q3 of 2019 as pricing, favorable absorption and benefits from more favorable sales mix were able to offset higher manufacturing costs, primarily caused by material inflation.
In our Parts and Accessories segment, revenues increased 7%, and adjusted operating earnings were up 2% versus the third quarter of 2020.
Adjusted operating margins of 22.2% were down 120 basis points when compared with the prior year quarter and were negatively impacted by the closure of a key manufacturing and distribution location in New Zealand for a significant portion of the quarter due to national COVID lockdowns as well as increased spending on growth-related investments.
Favorable late season weather in many regions is allowing for increased boating participation, which should continue to drive aftermarket sales in Q4 and into 2022.
In our Boat segment, sales were up 22% and adjusted operating margins were down 230 basis points to 6.9% when compared with the third quarter of 2020.
When compared to the third quarter of 2019, sales were up 45%, and adjusted operating margins were up 240 basis points.
Sales increased in all product categories with particular strength in aluminum freshwater, including our pontoon businesses.
Increased sales volume and pricing together with lower retail discount levels versus prior year were offset by material inflation, higher cost due to manufacturing inefficiencies and increased spending on growth initiatives, resulting in slightly lower segment operating earnings.
Freedom Boat Club, which is included in Business Acceleration, contributed approximately 3% of the segment's revenue at a margin profile that continues to be accretive to the segment.
As Dave mentioned earlier, we believe our boat production will reach at least 95% attainment of our original production plan for 2021, a remarkable achievement given the current supply constrained environment we are working in.
Supply chain challenges, including delays in receiving certain components, has resulted in the deferral of shipping certain nearly completed boats to subsequent quarters.
As a result, we wholesale sold approximately 8,200 boats during the third quarter, which was roughly the same number of units sold at retail and 16% greater than the number of units wholesale sold in the third quarter of 2020.
This keeps dealer inventories at an all-time low of approximately 7,400 units.
Our boat brands ended September with just over 10 weeks of boats on hand, measured on a trailing 12-month basis, with units in the field lower by 27% versus the same time last year.
As we head into the fourth quarter, our businesses are focused on closing out another year of robust earnings and shareholder returns with strong margin growth and substantial free cash flow generation resulting from our outstanding operating performance in a healthy marine market.
Although we continue navigating certain headwinds, including elevated supply chain, labor and transportation costs and challenges, we are confident that we can continue to drive growth and innovation as the clear leader in our industry.
Now including the projected benefits from our closed acquisitions, including the acquisition of Navico, we are providing the following updated guidance for full year 2021.
We anticipate the U.S. marine industry retail unit demand for the full year to improve from reported year-to-date levels, ending at close to flat versus 2020, net sales of approximately $5.8 billion, adjusted operating margin growth between 150 and 180 basis points, operating expenses as a percent of sales to remain lower than 2020, free cash flow in excess of $425 million and adjusted diluted earnings per share of approximately $8.15, which represents a 61% increase over 2020.
Note that we believe acquisitions will contribute about 10% of the fourth quarter's revenue growth but will be neutral on earnings per share after including the impact of additional interest costs related to the financing of the Navico transaction.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of the year.
The only meaningful update relates to our effective tax rate for the year due to some favorability related to foreign branch income and certain state tax law changes, we now believe our effective tax rate for 2021 will be approximately 21.5%, which is slightly lower than our estimate from the July call.
We have also updated our guidance associated with working capital and intangible amortization associated with our completed acquisitions.
Similarly, our capital strategy assumptions have not materially changed with the execution of the financing for the Navico transaction, creating a slightly higher interest expense for the year, with approximately $25 million of additional debt retired as a result of the tendering of our 2023 and 2027 notes during the financing process.
We anticipate ending the year with debt leverage of 1.7 times on a gross basis and below 1.5 times on a net basis.
Additionally, our $43 million of share repurchases in the third quarter brings our total share repurchases for the year to just shy of $100 million, and we have adjusted our guidance to show that we anticipate reaching approximately $120 million worth of share repurchases by the end of the year.
Very solid operational execution by our businesses has us squarely on track to deliver an outstanding 2021 as we execute against the operating and strategic priorities we've discussed throughout the year.
Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in dealer, saltwater, repower and international channels.
We're continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top line and earnings growth far into the future.
Our accelerated incremental capacity projects remain on track for completion by the second half of 2022 and we believe will allow us to gain additional customers who have already expressed their interest in being supplied by Mercury.
Our Parts and Accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of strength in areas of battery technology, digital systems and connected products in support of our ACES strategy.
We are keenly focused on our thoughtful acquisition integration activities for Navico, RELiON and SemahTronix.
And we will continue to focus M&A activity in higher technology, systems and Parts and Accessories businesses as we review opportunities to further build out this increasingly large, high-margin recurring revenue portion of our business.
The Boat segment will continue to focus on launching new products, executing significant capital expansion plans, increasing its efforts to become more vertically integrated to help mitigate future supply chain issues and refilling pipelines in a very robust retail environment.
Freedom also continues to expand its footprint with the recent acquisition of the Connecticut territory, which has seven locations and over 600 memberships.
Combined with the purchase of the New York territory earlier this year, we can now take advantage of cost and other synergies in the Northeast U.S. region and can more quickly expand the number of locations.
We've already begun to see positive early returns from the completed Advanced Systems Group deals with RELiON winning new business from significant OEM and retail distribution customers.
In addition to the Connecticut acquisition early in the fourth quarter, Freedom Boat Club continued its international expansion plans with the acquisition of Fanautic Club in Spain during the third quarter.
We believe that our pace in rapidly expanding these future-orientated recurring revenue businesses will further distance us from potential competition.
As most of you are aware, we're also beginning to see the resumption of in-person boat shows like the Fort Lauderdale Boat Show that kicked off yesterday.
And early in September, we participated in the Cannes boat show, one of the most important European events for our brands.
The feedback in Cannes from our channel partners and end consumers on the new V-12 600-horsepower Verado and our new boat models was extremely positive.
Mercury reported double the number of outboard engines at the show than its closest competitor and significantly more outwards on display than all other manufacturers combined.
Sea Ray also reported a 65% increase in its revenue versus the 2019 show, while all other Brunswick brands on display reported strong consumer interest and sales.
We have continued to launch new products at a rapid pace across the enterprise.
On the sustainability front, we also reached another important milestone during the third quarter, with the Land 'N' Sea Kellogg Marine distribution operation becoming the third Brunswick location to achieve a zero waste to landfill designation.
And Mercury won an Association of Energy Engineers award for its newly installed solar array in Wisconsin.
We are working to further expand our sustainability initiatives, and we'll share more on this subject early next year.
Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpaced our initial growth and profit expectations.
| compname reports quarterly adjusted earnings per share of $2.07.
oration releases third quarter 2021 earnings.
qtrly adjusted earnings per share $2.07.
qtrly net sales $1,427.2 million up 15.7%.
brunswick - producing product generally inline with plans for year, with continued component shortages & delays preventing additional upside performance.
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To access it, please go to www.
The world is unanimous about the first half of calendar 2020 being extremely challenging to navigate, especially with regard to the pandemic and its effect on our communities.
These unique circumstances have required our team members to adapt how they work regarding how we serve our customers, how we operate efficiently and simply how we take care of each other.
The focus and successful implementation of these items are certainly reflected in our first fiscal quarter results, results which represent an all-time quarterly high watermark for the company.
Our results this quarter reflect success in both our growth strategy and in our operational execution.
The integration of Kosmos Cement acquisition proceeded on schedule.
I'm proud to say that for the first time in Eagle's history, we sold over 2 million tons of cement during the quarter.
Our cement operations performed well.
Recent strategic investments to extend our capabilities to satisfy customer requirements are paying off.
A good example of this is our expansion of grinding capacity at our Sugar Creek plant.
Cement demand has remained strong across all of our markets.
We are fortunate to operate in states where construction has largely been uninterrupted by COVID.
We're focused on economically resilient and less cyclical U.S. Heartland geographies.
We continue to shape our heavy side portfolio with both strategic sales and acquisitions.
Our sale of Western Aggregates and Mathews Ready Mix northern California reflected in this quarter's results was a strategic decision to divest in an asset outside our network.
This asset was previously replaced through an acquisition in northern Nevada aggregates and ready mix asset located in better proximity to our Nevada Cement operations.
The northern Nevada asset is fully integrated into our system now and is operating very well.
This quarter, our Wallboard business showed that geography matters.
Our Wallboard shipments were up 7% over the same quarter a year ago.
This is in an environment where national shipments were down about 5%.
I want to emphasize this is primarily a reflection of our strategic geographic positioning and long-term attractive markets and our strong operational execution.
Regarding our previously announced Republic Paperboard facility expansion project, the first step of equipment installation and integration is now complete and is giving us increased supply to meet our customer demand.
The major cash investment is now behind us for this project.
As for fac sand, we have fully idled the facilities to minimize the cost impact and preserve value for future use.
As previously announced, we continue to explore alternatives for this business.
In the current market conditions, we recognized there are significant uncertainties about the sustainable level of demand.
COVID is uncertain and public policy is uncertain.
Second wave risks are real, cautioned and certainly warranted.
At Eagle, we keep our eyes on the Verizon as well on the road in front of us and there is every reason to believe this period of uncertainty will pass and give way to a healthy runway for our construction materials business.
I am encouraged that policymakers have reacted aggressively with unprecedented monetary and fiscal measures.
U.S. house prices are increasing, mortgage rates are low, credit spreads are narrowing, commodity prices are advancing, every week there is a chance of more scientific breakthroughs in both therapeutics and vaccines.
When the economic reopening is completed, economic activity could have another bounce, particularly with the lagging response of U.S. monetary stimulus at work.
The bottom line is, I do not know when this period of uncertainty will pass, but I'm confident that it will.
Eagle is prepared to navigate this period of uncertainty regardless of the duration, just as the company did when it profitably navigated through the longest construction recession in U.S. history.
We will continue to be cautiously optimistic, but internally, we will continue to confine capital spending until a clearer picture emerges.
Our resilience as a company is certainly greatly enabled by the strong cash flow characteristics of our businesses.
In this regard, it's worth noting that this quarter, our net leverage declined by $150 million for March 31st and total liquidity improved to over $450 million at June 30th.
Now, let me turn to the topic of our planned separation of the two businesses.
We still have more to executing the separation, which at this moment has been delayed by COVID uncertainties.
I do not have an update today on timing and won't until there is some increased visibility that we are pass the potentially more disruptive effects of this pandemic.
I can say that our conviction about the separation remains intact and we have every intention of completing the separation.
That's all for me as far as introductory remarks.
First quarter revenue was a record $428 million, an increase of 15% from the prior year.
This increase reflects contribution from the Kosmos Cement Business we acquired in March and improved cement and wallboard sales volume.
Excluding the recently acquired businesses and the effects of the business we sold in northern California, revenue improved 2% from the prior year.
First quarter diluted earnings per share were $2.31, an improvement of 146%.
Most notably, this year's first quarter results benefited from a sizable gain on the sale of our northern California businesses.
Both quarters also includes the impact of business development expenses.
Excluding these and other non-routine items, first quarter adjusted earnings per share improved 39%.
Turning now to segment performance.
This next slide highlights the results of our Heavy Materials sector, which includes our Cement, Concrete and Aggregates segments.
Revenue in the sector increased 30%, driven primarily by the contribution from the recently acquired Kosmos Cement Business and a 7% increase in like-for-like cement sales volume.
Operating earnings improved 62%, again reflecting a contribution for Kosmos and improved sales volume as well as lower diesel prices in our concrete operations.
In addition, given the concerns around having contractors onsite during the COVID-19 pandemic, we adjusted the timing extents of our cement maintenance outages and delayed approximately $6 million of maintenance costs from the first quarter into the second and third.
Moving to the Light Materials sector on the next slide.
First quarter revenue in our Wallboard and Paperboard business was up slightly, as improved Wallboard sales volume was partially offset by lower Wallboard prices and lower Paperboard sales volume.
Quarterly operating earnings in this sector declined 8% to $44 million, as improved Wallboard earnings were offset by higher recycled fiber costs and the inefficiencies of starting up the paper mill after the expansion project in March.
The earnings impact from start-up was approximately $2 million and by the end of the quarter, our operating efficiencies at the mill were much improved.
Here in July, the mills has been setting production speed records.
In the Oil and Gas Proppants sector, revenue was down 93% and we had an operating loss of $1 million.
The business came under increasing pressure in this spring and early summer as lower oil prices further reduced drilling and hydraulic fracturing activity.
During the quarter, we significantly curtailed our operations to minimize operating costs and preserve the value of the assets.
This next slide provides summary of cash flow information.
During the first quarter, operating cash flow improved 88% to $95.3 million, reflecting strong earnings and disciplined working capital management.
Total capital spending improved or increased to $26 million, as we completed several projects initiated last year and purchased land in Oklahoma, which will provide our two Wallboard plants with over 20 million tons of additional shifts and reserves.
We continue to expect total capital spending in a range of $60 million to $70 million for fiscal 2021.
Also during the quarter, we received the proceeds from the sale of our northern California businesses on April 17th.
Finally, I'll look at our capital structure.
Given the ongoing pandemic-related uncertainty, we are continuing to fortify our balance sheet and liquidity.
At June 30th, our net debt to cap ratio was 55% and we had a $199 million of the cash on hand.
Our net debt to EBITDA leverage ratio was 2.5 times and total liquidity at the end of the quarter was $459 million and we have no near-term debt maturities.
We received our IRS refund in early July, which has further improved our balance sheet and liquidity post quarter.
We will now move to the question-and-answer session.
| q1 earnings per share $2.31.
q1 revenue $428 million versus refinitiv ibes estimate of $383.4 million.
remain committed to separation, although timing is uncertain.
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I am joined today by Summit Hotel Properties' Chairman, President and Chief Executive Officer, Dan Hansen and Executive Vice President and Chief Financial Officer Jon Stanner.
The third quarter was, again, challenging for our industry, as leisure travel continued to serve as the primary demand source.
However, we were encouraged by the continued sequential demand improvements, which led to operating results that were considerably better than the second quarter.
RevPAR improved each month of the quarter across our portfolio.
And importantly, this trend continued into October, which provided us with some level of reassurance of the sustainability of demand in the weeks following Labor Day, a period of significant uncertainty heading into the quarter.
Occupancy increased each month of the quarter peaking at 47% in September, which led to third quarter RevPAR of $47, a 63.5% decline year-over-year, but that was a significant improvement from the second quarter RevPAR of $23.
Market share gains were substantial, once again, in the third quarter as we finished with 151% RevPAR index, an increase of approximately 39 percentage points compared to the third quarter of last year and an 8 percentage point increase relative to last quarter.
These gains reflected tremendous work done by our in-house asset and revenue management teams, along with the tireless efforts of our management company partners to capture the limited demand that currently exist in the market.
We have clearly been successful capturing our fair share of very short term leisure demand, but our results have been further aided by capitalizing on certain unique piece of the business and small groups that booked during the quarter, some of which were related to the damaging wildfires on the West Coast and the storms in the Gulf of Mexico.
Preliminary October results reflect a modest continuation of the improvements we experienced throughout the third quarter as October RevPAR is expected to finish at $50, with the highest ADR of any month since the onset of the crisis, running nearly $10 higher than the rates achieved in the second quarter.
Occupancy in October was over 47% across the total portfolio, more than 24 percentage points higher than the second quarter occupancy and flat to September, despite the strong Labor Day weekend results.
Excluding the five hotels that were either closed or consolidated into adjacent operations at various times during the quarter, occupancy was more than 50% in October.
The trend of weekend occupancy and RevPAR outperformance continued in the third quarter as leisure travel, particularly in drive-to and non-CBD markets continued to provide the vast majority of demand across the industry.
Weekend occupancy was 56% during the third quarter as the relative outperformance compared to week day results accelerated each month during the quarter.
This led to weekend RevPAR that was 40% higher than our weekday RevPAR, primarily driven by occupancies that ran nearly 20 percentage points higher by the end of the quarter.
Despite lagging weekends on a nominal basis, weekday rate demand in the quarter increased commensurately with weekends on a percentage increase basis, as occupancy and RevPAR nearly doubled from the second quarter.
Weekend occupancy at our hotels located in markets we consider as drive-to was nearly 64% in the third quarter.
Our extended stay hotels which comprise nearly 25% of our total guest rooms were also relative outperformers again during the third quarter, finishing with occupancy of more than 63% and exceeded 60% in each month of the quarter while achieving a 51% RevPAR premium to our overall portfolio.
This trend continued as our preliminary October results indicate our extended stay hotels achieved 65% occupancy for the month.
Our suburban and airport hotels, which comprise more than a third of our portfolio guest rooms were also outperformance during the quarter, posting occupancies of 58% and 56% respectively, both increases of more than 20 percentage points from the second quarter results.
These hotels achieved RevPAR premiums of 27% and 29% respectively to the total portfolio in the quarter.
Urban hotels have continued to lag the industry recovery though occupancy increases for our portfolio during the quarter were in line with all other location types, finishing the quarter 20 percentage points higher than in the second quarter.
RevPAR growth at our urban hotels led the portfolio on a percentage increase basis relative to the second quarter, posting a nominal RevPAR 2.5 times higher than our urban portfolio's second quarter RevPAR.
Our hotels continue to operate with extremely lean staffing models with labor resources being added back on an asset-by-asset basis strictly based on improved hotel demand.
We are currently averaging less than 14 FTEs per hotel compared to approximately 30 FTEs per hotel prior to the pandemic.
Despite this lean staffing model, our team continues to demonstrate a steadfast commitment to prioritizing the health and safety of our guests.
Ever changing health and safety protocols and local ordinances provide unique challenges to our business and we are grateful to our brand and management partners for their constant awareness of and compliance with these dynamic policies.
Optimizing the guest experience has always been a central tenet of our business model and that has never been more important than it is today.
Finally, to preserve liquidity, we have continued to delay most nonessential capital expenditures for the remainder of 2020, along with common dividend distributions, which combined, preserved approximately $30 million in the third quarter and will preserve $30 million of cash for the balance of the year.
I'll let John speak to the specifics of our balance sheet.
But with approximately $255 million of current liquidity and a manageable monthly cash burn rate that has been further reduced as our portfolio operating metrics have improved, we are well positioned to navigate the recovery.
We've been pleased with the continued efforts of our operations team to diligently manage operating costs at our properties in an effort to maximize hotel level profitability and minimize corporate cash burn rates.
In the third quarter, our hotel EBITDA retention across the portfolio was more than 47%, which resulted in hotel level profitability in each month of the quarter, positive adjusted EBITDA for the quarter, and a reduction of our corporate cash burn rate to an average of just over $5 million per month.
Commensurate with increases in RevPAR, our cash burn rate improved sequentially in each month of the third quarter and finished September at just $4.5 million, the lowest of any month since the onset of the pandemic.
This represents a significant improvement from the second quarter when our cash burn averaged $11 million on a monthly basis.
RevPAR and cash burn rates in October generally tracked in line with September, a level at which, if sustained, provides a liquidity runway of nearly five years.
We currently have $225 million available on our revolving credit facility and approximately $30 million of unrestricted cash on hand which combined gives us $255 million of total liquidity.
Today, our weighted average interest rate is approximately 3.5% and weighted average term to maturity is approximately 3.3 years, with no maturities until November of 2022.
While we've been pleased with the gradual improvements in our results, and particularly October metrics, that on a preliminary basis, finished ahead of our pre-Labor Day expectations, our near-term outlook for the business at January remains uncertain.
We continue to operate in a very challenging and limited demand environment and the prospects for a more robust industry recovery are likely linked to fewer governmental and corporate travel restrictions and significant health advancements or the passage of time to mitigate the effects of the pandemic.
Though we remain confident that headwinds of our industry will ultimately abate, the timeline has continued to be pushed out.
And we now expect a more meaningful increase in corporate and group demand to occur in 2021.
Historically, November and December are slower travel months and we would expect modest declines in absolute RevPAR levels from what we achieved in September and October, though year-over-year declines will likely remain fairly stable given the seasonality of last year's results.
As we said last quarter, despite the many near-term challenges we face as an industry, we remain bullish on the long-term prospects for travel related demand.
The uniqueness of this pandemic has forced us all to challenge the pre-crisis status quo in nearly every facet of life and travel, particularly work related travel, in a time of unmatched at home technology is at the precipice of that discussion.
While it's not unreasonable to conclude that the events of the last seven months will ultimately lead to a systemic decline in travel, history would suggest otherwise, emphasizing that this is one of the most resilient industries in our economy and that people's desire to gather in person and travel is innate.
Prior to the crisis, we were witnessing, and fortunately benefiting from, society's undeniable shift in preference away from the collection of material items in favor of experiences and services.
And while the pandemic has created an impediment to this progress, we believe those long-term trends that were significantly driven by a younger demographic will again reemerge as meaningful themes in the new post-COVID normal that has been so heavily speculated about.
Here at Summit, we are blessed with a terrific portfolio that has been recently renovated, continues to capture significant market share despite the difficult environment and is poised to lead through the recovery.
We have an experienced team and a strong balance sheet with considerable liquidity to manage through the crisis, all of which gives us optimism and positions us well for the brighter days ahead.
| anticipates investing a total of approximately $23 million to $25 million in capital improvements on a consolidated basis across its portfolio during 2020.
|
We appreciate your continued interest in our company.
Q3 was another strong quarter for DaVita in the face of a challenging operating environment.
Despite another rise in COVID case counts across the United States and an increasingly challenging labor market, we continue to provide quality care to our patients and execute on our strategic objectives.
I want to begin my remarks by highlighting an exciting milestone, we took past 15% of our patients dialyzing at home.
This means that approximately 30,000 of our patients receive the clinical and lifestyle benefits of home dialysis.
As we've explained before, to be sustainable provider home dialysis, it requires a comprehensive infrastructure, including convenient and easy access to a home center for training sessions, and recurring visits with our care team.
Our current network of centers provides that easy access such that 80% of our dialysis patients live within 10 miles of a DaVita home center.
In addition, we continue to innovate on our platform to help make home dialysis, an easier choice for patients and their physicians and to extend the duration on home dialysis once patients have made that choice.
A few highlights of note.
First, we recently rolled out an enhanced education program along with supporting technology for our new patients to ensure that they receive timely and comprehensive modality education, which is tailored to each patient's individual needs.
We also continue to work on additional enhancements and customization to our education process for different communities, such as black and Hispanic patients to improve their chance of selecting this modality and therefore improve health equity.
Second, we developed a patient portal and telemedicine platform that supports remote monitoring and communications between DaVita caregivers, our nephrologist partners, and our home patients.
Third, we developed a team of industry-leading home physicians to create an expert network, which works closely with practicing physicians and practice leaders to help them understand the benefits of home modalities, troubleshooting complex clinical issues and elevate their home clinical skill.
Last, we're testing out our AI and other technologies to optimize PD prescription, alerting physicians in real time when an update prescription might be needed.
We will discuss the strategic advantage of our platform in greater detail on November 16 on our Virtual Capital Markets Day.
On to our Q3 results.
Our business model continues to prove resilient in face of operating challenges.
Q3 operating income grew approximately 9% year-over-year, and adjusted earnings per share grew by more than 31% over the same period However, the ongoing COVID pandemic continues to take its toll on too many human lives in the world at large, and among our patients.
Across the broad US population, the current surge driven by the Delta variant appears to have peaked in early September, with new case accounts reaching approximately two-thirds of the peak during the past winner.
Fortunately, within our dialysis patient population, the new case count peaked approximately one-third of the winner peak and mortality rates were relatively lower, likely due to the vaccination rates among our patients.
Incremental mortality increased from fewer than 500 in Q2 to approximately 2000 in Q3.
After quarter end, COVID infections continue to decline, with our new case count during the week ending October 16 down by approximately 60%, relative to the recent Delta peak.
Switching to vaccines, approximately 73% of our patients have now been vaccinated.
In addition, we've started the rollout of vaccine boosters for eligible patients in accordance with CDC guidelines.
We're hopeful that any future COVID surges and breakthrough infections will be more limited relative to what we saw in the peak of last winter.
Cost management continued to be strong in the quarter, although we are facing the same competitive dynamics in the market for healthcare workers, as other companies have mentioned.
Despite these challenges, I am pleased with how our frontline leadership team has been responding.
It has long been a key part of our mission to be the employer of choice.
How we live this aspect of our mission has been evident throughout the pandemic, as our team has retained relentless focus on the safety and care of our patients, as well as one another.
As we have discussed in past calls, we continue to offer a safe and fulfilling work environment and have provided incremental pay and benefits to help our frontline caregivers during this challenging time.
These efforts are ongoing.
Given the current environment, we expect to provide our teammates with higher annual compensation increases than in typical years.
This will put additional pressures on our cost structure but we believe this will help us attract and retain the talent needed to achieve our long-term objective.
Just as critical, it aligns with our mission and builds on our history of investing in our people.
Finally, I would like to say a few words about Integrated Kidney Care or IKC.
Last quarter, we shared details on our planned investment in IKS and long-term opportunity this creates for patients, payers and our shareholders.
At the end of Q3, we now have over 22,000 patients in some form of integrated care arrangements, representing 1.7 billion of value-based care contracts.
Next year, we expect to approximately double the size of our IKC business driven primarily by our participation in the federal government's news cheap KCC program.
While it is still early and contingent on successful execution, we believe that investing in IKC represents a new and potentially meaningful earnings opportunity for us in the coming years.
This is another area we plan to discuss in detail at our upcoming Virtual Capital Markets Day.
Despite the operating challenges Javier referenced, we delivered another quarter of strong results.
Operating income was $475 million and earnings per share was $2.36.
Our Q3 results include a net COVID headwind of approximately $55 million, an increase relative to the quarterly impact that we experienced in the first half of the year.
As Javier mentioned, the latest COVID surge resulted in excess mortality in the quarter of approximately 2000 compared to fewer than 500 in Q2.
We're also anticipating the mortality in Q4 to be higher than it was in Q2, although we've seen a decrease in the last few weeks that we hope continues.
Our current view of the OI impact of COVID for the year is worse by approximately $40 million compared to our expectations from last quarter.
For 2021, we now expect a total net COVID impact of approximately $210 million.
Treatments per day were down by 536 or 0.6% in Q3 compared to q2.
The primary headwind was the increase in our estimated excess mortalities and higher mistreatment as a result of the COVID surge.
In addition, the quarter had a higher ratio of Tuesdays, Thursdays and Saturdays, which lowered treatments per day for the quarter by approximately 300.
In light of the current Delta surge, and the compounding impact of mortalities on our year-over-year growth, we believe that the timing of a return to positive nag will now be delayed into 2022.
Revenue per treatment was essentially flat quarter-over-quarter, patient care cost per treatment was up approximately $5 quarter-over-quarter, primarily due to higher teammate compensation and benefit expenses.
This is the result of higher wages, additional training costs associated with an increase in our new hires and seasonality in healthcare benefit expenses, which we expect to continue into Q4.
Our Integrated Kidney Care business saw an improvement in its operating loss in the quarter, which is due primarily to positive prior period development in our special needs plan.
We continue to expect increased costs in Q4, especially in our projected CKCC markets, as we ramp up staffing in preparation for 2022.
DSOs for our US dialysis and lab business increased by approximately three days quarter-over-quarter, primarily due to fluctuations in the timing of billing and collections.
Other loss for the quarter was 7.6 million, primarily due to a $9 million decline in the mark to market of our investment in Miromatrix.
The value of this investment at quarter end was $14 million.
Now turning to some updates for the rest of the year and beyond.
As I mentioned on the Q2 earnings call, we excluded any impact of a significant surge in COVID from the Delta variant in our revised guidance, but noted that a wider range of outcomes was possible depending in part on how a fourth surge would develop.
Now that we've seen the impact of the Delta surge, we are increasing our estimate of COVID impact for the year by $40 million.
Given where we are in the year, we are now incorporating this COVID impact into our revised adjusted OI guidance of $1.76 billion to $1.81 billion.
We are also narrowing our guidance for adjusted earnings per share to $8.80 to $9.15 per share.
And we are maintaining our free cash flow guidance of $1 billion to $1.2 billion, although there is some chance that our free cash flow may fall below the bottom end of the range, depending on the timing of our DSO recovery.
Our revised OI guidance implies a decline in our Q4 financial performance relative to Q3.
This is partially explained by the incremental COVID mortality impact, and by expected higher salaries and wages for existing frontline teammates.
Our guidance anticipates Q4 operating income to be negatively impacted by approximately $75 million of seasonally high or one-time items, including certain compensation expenses, elevated training costs, higher health benefit expenses, and G&A.
Looking ahead to 2022, the three expected headwinds I talked about on the Q2 earnings call remain.
As a reminder, we expect to have added expense related to the greatest portion of the industry effort to counter the ballot initiative in California.
We anticipate a year-over-year incremental investment in the range of $15 million as we continue to grow our ITC business.
And we will also begin depreciating our new clinical IP platform, which we expect to be approximately $40 million.
A few additional things to help you with our thinking about 2022.
COVID remains a big uncertainty.
We are anticipating the end of the temporary sequestration suspension, which would be a $70 million headwind for the full year.
We also expect that some of the costs that spiked during COVID, in particular PPE, may not return as quickly to pre-COVID levels due to the challenges of the global supply chain.
Finally, COVID impact on mortality next year remains a large swing factor.
Another winter surge would negatively impact treatment volume and could delay the timing of achieving positive NAG.
However, if the recent surge proves to be the last significant COVID search, then we would expect a tailwind from lower than typical mortality, which could result in treatment growth higher than pre-COVID level.
In 2022, we expect net labor costs will increase more than in typical years as a result of market pressures.
Our current estimate is a net headwind of $50 million to $75 million.
We expect to offset a significant amount of these incremental costs, with continuing MA penetration growth above historical level, and strong management of non-labor patient care costs.
From an operating income growth perspective, we expect 2022 will be a transition year with some significant but largely temporary headwinds to get through, after which we expect our platform to continue to support strong profit growth.
While the range of potential outcomes for 2022 is broad, a reasonable scenario could result in an OI decline of $150 million from our 2021 guidance.
This includes the impact from the expected ballot initiative, IKC and the increased depreciation.
This scenario also includes a modest headwind from COVID, although there are scenarios where the impact of COVID could be significantly worse.
Looking forward to 2023, we anticipate a reversal of the net impact of these 2022 headwinds, plus incremental operating income growth, such that we expect 2023 operating income to show a low-to-mid single digit CAGR from the midpoint of our updated 2021 guidance, which would be in line with the multi-year outlook we have shared historically.
We expect this to be the result of the lack of ballot initiative-related costs, the recognition of savings in IKC, an improved COVID situation, and continued growth of the core business.
We'll have more to say about long term guidance at our Capital Markets Day in a couple of weeks.
Finally, during the third quarter, we repurchase 2.7 million shares of our stock and in October to date, we repurchased an additional 1.2 million shares.
Operator, please open the call for Q&A.
| compname reports q3 earnings per share of $2.36 from continuing operations.
3rd quarter 2021 results.
q3 earnings per share $2.36 from continuing operations.
sees 2021 adjusted diluted net income from continuing operations per share attributable to davita inc. $8.80 to $9.15.
|
We appreciate your continued interest in our company.
We are excited to talk to you today about our strong Q2 performance.
Our 2021 financial outlook and recent development on our effort to transform kidney care.
First, let me start the conversation with the clinical highlights.
Kidney transplant is the best treatment option for eligible patients with kidney failure.
DaVita has worked hard over the years to help our patients gain access to transplant through education and direct support for patients to get on and stay on the transplantation waitlist.
The cumulative impact is meaningful.
Last December, we announced a milestone of 100,000 DaVita patients who have received transplant since the year 2000.
Further advance the cause of transplantation are collaborating on a yearlong pilot aim at improving health equity in kidney transplantation with a focus on living donors.
Increasing living donor transplant expands access to transplantation by increasing the availability of organ, which has been the limiting factor in the number of transplants performed annually.
This pilot provides high touch and customized information to patients and families seeking a kidney transplantation from a living donor.
We look forward to learning more from this pilot, improving the health equity of kidney transplant and continuing to be the leader in supporting our patients to receive kidney transplant.
Shifting to the latest update on COVID, we have made incredible progress in our efforts to combat the COVID 19 pandemic over the past several months.
New COVID infections among our patients continue to drop significantly through the last week of June down more than 90% from the peak in early January.
However, similar to the rest of the country, we have started to see an uptick over the last few weeks.
As of last week on a rolling seven day average basis new infection, they're still down more than 90% from the peak.
Thus far, mortality continues to remain low on an absolute basis as we believe that are vaccinated patient are more protected from severe cases of COVID.
We continue to educate our patients about the benefits of vaccine to reduce vaccine hesitancy and we remain confident in our policies and procedures designed to keep our patients and our teammates safe while they're in our care.
Now let me turn to our financial performance in the second quarter, we delivered strong results in both operating income and earnings per share, our margin expanded as we continue to manage cost while delivering quality care.
As a result, we delivered 6% year-over-year growth in adjusted operating income and 35% year-over-year growth in our adjusted earnings per share.
Our free cash flow was particularly strong this quarter, we continue to return cash to our shareholders through our stock buyback.
With the first half of the year behind us.
We are now increasing the midpoint of guidance for the full year.
Let me transition to update our progress in our integrated Kidney Care efforts, otherwise known as by IKC.
Value-based care for our patients with kidney disease is gaining momentum and appears to have reached an inflection point.
We have always believed the core name dialysis care with the broader healthcare needs of KB and SKG patients with simultaneously improve outcomes and reduce total healthcare costs.
For years, we've been participating in a variety of small programs and pilots to build our integrated care capability and better understand the economics we believe we are at that point now where we are ready to shift to the next stage of the evolution of integrated care.
You might be wondering why now, the trend toward value-based care is not new either in kidney care or other segments of healthcare so what's changed to make the development of scale business viable today.
There's a couple of reasons.
First with the growth of Medicare Advantage payers are looking for innovative ways to manage the increasing number of ESKs patients choosing MA plans these patients tend to be more complex and most of them MA patient and should benefit from tailored care management.
Second, CMS recently initiated the payment models and kidney modern in kidney care.
We are preparing to partner with nephrologists and up to 12 markets beginning in January of next year to participate in CKCC voluntary program.
Our participation and CKPKC model will also provide us with operational scale in more geographies to enter into other value based arrangements, we've increased our confidence in our capabilities to deliver clinical and economic value at scale and have lean in on our willingness to take risk.
We believe we're well positioned to win an integrated care because of our strong partnership with nephrologists, our regular and consistent interactions with patients, a broad Kidney Care platform that spans various modalities and care setting.
And a clinical data set and analytics that we used to create develop clinical interventions to support our patients holistically.
We have a demonstrated track record of improving patient outcome care, and lowering costs for patients in risk arrangement for example, in our FCOS [Phonetic], we were able to generate non-dialysis cost savings in the high single digits which translated into more than double the average savings rates compared to the rest of the industry over the life of the program.
With our special needs plan we have been able to lower mortality by 23% relative to other patients within the same-center and county.
To give you a better sense of the scale of the business.
As of today, approximately 10% of our US dialysis patients are in value-based care arrangements in which Tervita is responsible for managing the total cost of care.
This represents almost $2 billion of annual medical cost under management.
In addition, we have various other forms of value based care arrangements with payers in.
We have economic incentives for improving quality and lowering costs.
In 2022, we expect our integrated Kidney Care business to double inside both the number of patients in risk arrangement and the dollars under management.
We also expect to see a dramatic increase in the number of CKB Live we have under risk in 2022.
To prepare for this growth.
We are currently scaling up our clinical team and furthering building out our support.
Because of the investment as well as the delays and cost savings impact of our model of care and revenue recognition.
We expect to incur a net operating loss of $120 million in 2021 in our US ancillary segment this outcome is consistent with the OII headwinds from ITC growth, we called out at the beginning of the year and is of course included in our full year guidance.
The doubling of the business next year could result and an incremental operating loss in our ancillary segment of $50 million in 2022.
We expect significant improvement in our financial performance beginning in 2023 as we begin to recognize savings from the new contracts that we entered in 2021 and 2022.
Over the five-plus-year horizon, we believe that our IKC business could become a sustainable driver of significant operating income growth.
Currently we serve approximately 200,000 dialysis patients across the country, we utilize over $12 billion in health services outside of the dialysis facility, including the cost of hospitalization, our patient procedures and physician services.
In addition, we see an opportunity to manage the care of up streams CKD patients who currently do not dialyzed in our centers.
Assuming that we are managing the total cost of care for more than half of our dialysis patients as well as others CKD patients at low-to-single digit margin, we believe that this could be meaningful financial opportunity.
In summary all of healthcare has been talking about value based for years.
We are excited for DaVita to lead the way.
We had a strong quarter despite the continuing operational challenges presented by COVID primarily as a result of strong RPT performance and continued discipline on cost.
For the quarter, operating income was $490 million and earnings per share were $2.64.
Our Q2 results include a net COVID headwind of approximately $35 million similar to what we saw in Q1.
Primarily the impact of excess mortality on volume and elevated PPE costs partially offset by sequestration relief and reduced travel and meeting expenses.
In Q2 treatments per day increased by 0.4% compared to Q1.
Excess mortality declined significantly in Q2 from approximately 3,000 in Q1 to fewer than 500 in Q2.
At this point, we are cautiously optimistic that the worst is behind us.
But we're closely monitoring the potential impact of the delta Varian especially within pockets of the country that have lower vaccination rates.
Longer term, we continue to believe that we will return to pre-pandemic treatment growth levels with an additional tailwind from lower than normal mortality rate.
Our US dialysis revenue per treatment grew sequentially by almost $6 this quarter, primarily due to normal seasonal improvements from patients meeting their co-insurance and deductible obligations.
We also saw favorable changes in government rate and mix including the continued growth in the percentage of patients enrolled in Medicare Advantage.
Patient care costs and G&A expense per treatment in total were relatively flat quarter-over-quarter.
Our patient care costs decreased sequentially primarily due to reductions in labor costs.
Our G&A increased slightly, primarily due to charitable contributions and increases in personnel costs.
As expected, our US dialysis and lab DSO decreased by approximately six days in Q2 versus Q1.
Primarily due to collections on the temporary billing holds related to the winter storms in the first quarter.
The majority of the impact of the storms on DSO and cash flow, we reversed in Q2.
But we may see an ongoing smaller benefit through the balance of the year.
During the second quarter, we generated a gain of approximately $9 million on one of our DaVita Venture Group investments which hit the other income line on our P&L.
We have a small investment in medical that recently went public.
The value of this investment at quarter end was $23 million going forward market-to-market every quarter.
Now turning to some updates on the rest of this year and some initial thoughts on 2022.
As Javier mentioned, we are raising our guidance ranges for 2021 as follows.
Adjusted earnings per share of $8.80 to $9.40.
Adjusted operating income of $1.8 billion to $1.875 billion and free cash flow of $1 billion to $1.2 billion.
Also we now expect our 2021 effective tax rate on income attributable to DaVita to be between 24% and 26% lower than the 26% to 28% range that we had communicated at the beginning of the year.
These new guidance ranges exclude the potential impact of a significant fourth COVID surge later this year.
I'll call out two notable potential headwind during the second half of the year.
First is COVID we continue to expect the impact of excess mortality will be higher in the back half of the year than in the first half of the year due to the compounding impact of mortality through 2021.
We're also expecting an uptick on costs related to testing, vaccinations and teammate support as a result of the delta variant.
As a result, we are increasing the middle of the range of COVID impact for the full year to $170 million from $150 million.
That implies a $30 million headwind from COVID in the second half of the year compared to the first half of the year.
As a reminder, this is the middle of what is a wide range of possible impacts depending on the impact of the delta or other variance and any additional COVID mandate.
Second, we expect to experience losses in our US ancillary segment of approximately $70 million in the second half of the year compared to $50 million in the first half of the year.
This incremental loss is due primarily to new value based care arrangements and start-up costs associated with the CKCC program that launches in 2022.
Looking forward to 2022 we do not expect anything unusual among the primary drivers of the business, including RPT, cost per treatment or capital expenditures.
However we expect pressure on OI growth from the increased spend on growing our IKC business, the possibility of union activity in 2022 that we did not face in 2021 and the first year of depreciation expense associated with our new clinical IT platform that we have been developing for the past several years.
We will provide more specific 2022 guidance on a future earnings call.
| 2nd quarter 2021 results.
q2 earnings per share $2.64 from continuing operations.
sees fy 2021 adjusted diluted net income from continuing operations per share attributable to davita $8.80 - $9.40.
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I'm joined by our; Chairman and CEO, Scott Santi; Vice Chairman, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss ITW's first quarter 2020 financial results as well as the impact of the global pandemic on our business and our strategy for managing through it.
Stating the obvious, a lot has changed relative to the environment we operated in for most of the first quarter.
I will provide some brief commentary on our Q1 performance, and then we will transition to our pandemic strategy.
We talk often about the fact that our decentralized entrepreneurial culture is a key element of ITW's secret sauce.
It is core to who we are as a company, and it is never more valuable than during times of significant and in this case, rapid change.
The proactive teamwork, ingenuity and selflessness of our people and quickly adapting to rapidly changing conditions and tackling new challenges that seemingly arise daily at the moment is ITW at its finest.
The fact that the ITW team has responded exactly as we expected they would doesn't make it any less extraordinary.
Now on to first quarter results, total revenue declined 9% year on year with organic revenue down 6.6%, currency at 1.5% headwind, a negative 1% impact from divestitures and 40 basis points of PLS.
The majority of the organic revenue decline occurred in the last two weeks of March where we saw organic revenue down more than 20%.
By geography, North America was down 5% and Europe was down 7%, China was down 24% for the quarter, but appears to have bottomed in February and was flat year on year in April.
In the face of a challenging demand environment, we continue to execute well on the elements within our control.
Despite a 9% decline in revenues, operating margin was flat at 23.6%, five of our seven segments expanded margins in the quarter due largely to benefits from enterprise initiatives which contributed 120 basis points to operating margin at the enterprise level.
After tax return on invested capital is 27% and free cash flow was $554 million with a conversion rate of 98% of net income.
Now let's shift gears and talk about how we will manage ITW through the global pandemic.
Despite the unusual and in some cases unprecedented challenges of the moment, we continue to execute at a high level and with our usual degree of focus and discipline across the company.
As a result of all the work we have done over the last seven years in executing our enterprise strategy and the progress we have made on the path to our full potential performance, ITW is today in a position of significant strength in dealing with the effects of the global pandemic.
Today's ITW is centered on our powerful and proprietary business model and our people are better trained and more skilled at executing it than ever before in the history of our company.
ITW is 80/20 front to back methodology and the laser light focus that drives on the relative handful of critical performance, difference makers, and every one of our businesses has served the company extremely well in times of both opportunity and challenge for a long time now.
I have no doubt that this unique ITW skill will be a significant asset to us as we work our way through the COVID-19 pandemic and its aftermath.
In addition, as I mentioned earlier, we are very fortunate to have a decentralized operating structure and an entrepreneurial culture that has been developed, nurtured, and protected over many years.
Our people think and act like owners.
They are accountable and they deliver.
They are deeply trained in our business model, our strategy and our values and I assure you that even in an unprecedented times such as these, none of them are waiting around to be told what to do.
In addition, in today's ITW, we have worked hard in shaping our portfolio and driving consistent high quality execution across every business in it, both to position the company to deliver consistent upper tier long term earnings growth, when global conditions are favorable and to build in a margin cushion and level of diversification, that makes us highly resilient during most periods when they are not.
And it follows from there that the robust free cash flow we generate through our strong margin profile, and the unique attributes of our business model, combined with our very, disciplined capital allocation strategy, gives us an extremely strong balance sheet and Tier 1 credit ratings.
So with these elements is our foundation, our strategy for managing through the pandemic and its aftermath is to focus, on the following four priorities.
First, to protect the health and support the well being of our ITW colleagues, second, to continue to serve our customers with excellence, third, to maintain financial strength, liquidity and strategic optionality and fourth, to leverage ITW strengths to position the company to fully participate, in the recovery.
Chris will give you some additional color on priorities one and two.
Michael will cover priority three and I will come back and cover priority four.
This is a challenging time for all of us, as the world continues to grapple with the effects of a global pandemic.
At this point, I'm sure that every one of us has been impacted by this situation, in ways that were unimaginable just a few months ago.
And ITW as a company and the community is certainly being affected.
Having said that, and Scott reference, or divisional leaders think and act like owners, are able to react quickly and take the necessary actions to protect our people and serve our customers, which is a particular advantage of the company, in times of significant challenge.
Let's move to slide six.
The actions were taken to protect the health and support, the well being of our colleagues.
We developed and deployed a number of practices to minimize exposure.
And prevent the spread of COVID-19 and keep our colleagues safe.
We have followed CDC, WHO, and local government guidelines in doing so.
Out ITW colleagues have redesigned production processes to ensure proper social distancing practices, adjusted shift schedules and assignments that have colleagues who have child care needs, due to school closings and implemented aggressive new water and sanitation practices, to minimize infection risk.
We're also providing full compensation to employees, who have been quarantined.
In addition, our strategic sourcing team is heavily engaged in helping our businesses, by coordinating the procurement of personal protective equipment, to ensure all our employees receive the protection they need.
I'm pleased to say, that as a result of our containment efforts, to this point we've largely been able to restrict infections to single cases, in a minority of our locations, which is a testament to the actions our colleagues have taken to implement sound sanitation practices and social distancing and to protect one another, to the best of their abilities.
Turning to slide seven, let's shipped to another important stakeholder group and how we continue to serve our customers with excellence.
To support our customers, our teams have worked diligently to keep our factories open and operating safely.
In areas around the world where governments have issued shelter in place orders, the vast majority of ITW businesses have been designated as critical or essential businesses.
And as such, they're needed to really an open and operational.
In some cases, it's because our products directly impact, the COVID-19 response effort.
For example, our welding equipment is used to manufacture hospital beds or structural products are utilized to build temporary medical facilities, or test and measurement products test medical and laboratory equipment.
Our Polymers & Fluids products sanitize workplaces.
And our food service equipment is used to feed people in hospitals.
In other cases, our businesses are designated as critical, because they play a vital role in serving and supporting industries.
They're essential to the physical and economic health of our communities.
Although, some facilities are subject to mandatory shutdowns, roughly 95% of our global manufacturing capacity is currently available to be deployed to serve our customers.
The same is true for our service networks, particularly in food equipment and test and measurement, which we continue to keep fully available in order to ensure that we can help keep essential businesses and healthcare facilities in operation.
In both cases, across all segments, we continue to maintain best-in-class performance for product and service quality and the availability.
Finally, we're rigorously managing our supplier base to both mitigate near-term supply risk for critical raw materials and components and ensure that we are positioned to win in a wide range recovery scenarios going forward.
Well, that's the primary objective of our enterprise strategy, an important byproduct, if you will, a lot of work done over the last seven years is that ITW is in a position of considerable financial strength to deal with highly disruptive events, such as this global pandemic.
In many ways, ITW was built for times like this.
And through the pandemic, we will manage the company to maintain our financial strength, liquidity and strategic optionality so that we can leverage our strong financial foundation and resilient profitability profile to position the company for maximum participation in the recovery.
ITW has more than enough financial strength and resilient -- resilience to withstand this kind of shock to the system, that the global economy is under experience over the next several months.
We are prepared for it.
We'll get through it.
And we'll come out the other side strongly positioned for the recovery.
As we sit here today, one month into the quarter, we're estimating the Q2 revenues will be down 30% to 40% on a year-over-year basis.
Obviously, there's a fair amount of uncertainty around how May and June actually play out but that is our current view.
As you would expect, given that most of our automotive OEM customers in North America and Western Europe have been essentially shut down since mid-March, and are only beginning to restart production in early to mid-May.
Our automotive OEM business will be the hardest hit with revenues potentially down 60% to 70% year-over-year.
And abrupt decline of this magnitude in the quarter is pretty unprecedented.
As difficult as it may look, if it plays out this way, we expect that ITW will still make operating profit in the $200 million to $400 million range, generate free cash flow of more than $500 million and end the Q2 with cash on hand of about $1.5 billion.
Knowing that we have the financial strength to withstand whatever comes our way over the next few months, our number one priority becomes positioning to play offense in the recovery.
And this is an area where our strong margin profile really helps us.
Whether the pace of recovery is fast or slow, V shaped or U shaped, over the next few quarters, it doesn't really impact us that much.
Under very fast paced recovery, we end up down 15% for the full year, and margins are 19% to 21%.
They're much slower recovery, revenues are down 25%.
Yet, our margins are still a very strong 17% to 19%.
This is against a backdrop, where most of the companies that our divisions compete with came into the pandemic, with margins at half of ours or less.
As a result, a number of them may have to retrench in a major way in order to get through the epidemic, potentially creating some significant share gain opportunities for us in the recovery.
With our margin cushion, we are concerned with how quickly demand is going to recover in Q3 or Q4.
We can be fairly certain that it will be incrementally better than Q2.
But beyond that, it really doesn't affect us a whole lot, which allows us to think long-term and positioned for maximum participation in the recovery, making sure that we are in a strong position to fully support our customers, as their businesses begin to re accelerate, and that we are in an equally strong position to take share from competitors, who can't, is the central imperative of our pandemic response planning for every one of our divisions.
We will, of course, need to manage our businesses smartly across our portfolio and make some meaningful capacity and cost structure adjustments in businesses, where we expect prolonged recovery periods, or maybe even permanent demand impacts from the pandemic.
But as we always do, we will leave those decisions in the hands of our divisional leaders as they are in the best position to assess the pace and slope of the cut of the recovery in each of their respective businesses.
Turning to slide 11.
The financial benefits of our enterprise strategy, combined with the work done to optimize our capital efficiency, capital structure and capital allocation over the years, has put ITW in a very strong position going into this crisis.
At quarter end, we have more than $1.4 billion of cash and cash equivalents on hand.
At the end of Q1 and it's still the case.
As of today, we have essentially no short-term debt.
And we have not issued any commercial paper.
Why you might ask?
Simply put, because we don't need to cash.
We have a $2.5 billion undrawn credit facility available to us, if needed in the future bring our total liquidity to about $4 billion as we sit here today.
Our net leverage is only 1.7 times and our next maturity is pretty small, $350 million and not until September 2021.
High quality of earnings and strong free cash flow are hallmarks of ITW.
As you know, we consistently generate significantly more cash than we need for internal purposes.
And our annual conversion rate from net income is consistently above 100%.
We expect that to continue to be the case, as we manage our way through the pandemic.
As evidenced by Tier 1 credit ratings that are the highest in our peer group, we continue to have excellent access to credit markets in the event that we needed.
During this time of market volatility, it's also worth mentioning that our pension plans, have remained in great shape.
Over the years, we have consistently funded and de risked our plans.
And as we sit here today, our largest U.S. plan is funded at 104%.
Turning to slide 12.
So how do we think about and adjust our capital allocation approach during the pandemic?
First, with regard to the dividend.
We recognize the importance of ITW's dividend to our long term shareholders.
We have a long history, with more than 56 years of growing the dividend.
And we are part of a small group of so-called dividend aristocrats, and one of about 18 companies that has increased its dividend for more than 50 years.
And we view the dividend as a critical component of ITW's total shareholder return model.
Since 2012, we have increased the annualized dividend from $1.52 per share to currently $4.28 per share, a cumulative annual growth rate of 16%.
Simply put, we remain strongly committed to our dividend and as we sit here today, we do not see a scenario where we would have to reduce the dividend.
In terms of strategic optionality, we are clearly in a position of strength, with ample balance sheet capacity.
And we're certainly open to the possibility that opportunities might emerge as a result of the pandemic.
It could be in the form of more reasonable valuation opportunities for assets that we were already interested in, as well as some unique opportunities with quality companies that may not have the financial strength to weather the pandemic.
Given our financial strength and ample capacity, we will be in a strong position to react to any high quality strategic opportunities that may emerge.
We will continue to fully fund all internal investment and capex projects that meet our criteria, like we always have, but the number will likely come down in terms of aggregate spend in the near term, simply due to the fact that we don't need any capacity expansion projects for the next several quarters.
Finally, I think, it comes as no surprise to anyone that we have suspended share repurchases until end markets stabilize and the recovery path becomes clearer.
And as a priority four, which is all about leveraging our strengths to make sure that every one of our businesses are strongly positioned to fully participate in the recovery.
In short, we are going to be there to serve every bit of our customers' needs as their businesses begin to reaccelerate and be well prepared to capture any share gain opportunities that may come our way.
Food equipment had a good quarter with organic growth up 2% year-over-year despite a tough comp of 5% organic growth last year.
The service business was solid up 4% in the quarter.
Equipment growth of 1% reflects double-digit growth in retail and modest decline in institutional and restaurants against tough year-over-year comps for both of those.
Operating margin expanded 90 basis points to 27.5% with enterprise initiatives, the main contributor.
Test and measurement in electronics had a very strong quarter with test and measurement up 6% with 13% growth in our Instron business.
The segment also experienced a meaningful pickup in demand from semiconductor customers.
Electronics was up 2%.
Margin was the highlight as the team expanded operating margins 330 basis points to a record, 28.1% the highest in the company this quarter with strong contributions from enterprise initiatives and volume leverage.
Also in the quarter, we divested in electronics business with 2019 revenues of approximately $60 million.
In the face of an unprecedented demand contraction in Q2, as Michael commented earlier, we will still generate operating income in the hundreds of million dollars and generate over $500 million in free cash flow.
We will manage discretionary expenses prudently, but we don't need to start cutting muscle immediately.
And we certainly want to avoid doing so, before we have some level of indication as to the shape and slope of the recovery in each of our businesses.
With this principle in mind, to this point, we are providing full compensation and benefits support to all ITW colleagues around the world.
And we're going to do our best to sustain that level of support for all of our people through at least the end of Q2.
We are doing it because we are in a position to support our people at a time of great personal and family stress and uncertainty.
And we think that it's the right thing to do.
But we're also doing it to protect the significant investment we have made in training and developing great ITW people and great ITW leaders over the past seven years.
As Michael mentioned, it is likely that we will need to make some staffing adjustments to align with prolonged or permanently lower demand in some of our businesses as a result of the pandemic.
So we are committed to being there for all of our people during the worst of this, and we will take the time to make whatever longer-term adjustments need to be made thoughtfully.
The second principle is that we're going to lean into the upside by remaining invested in structure to capture incremental demand.
Given the profitability of our core businesses in the strength of our financial position, what's the bigger risk for ITW, carrying more cost and it turns out we need for a few months or cutting too much and not being able to fully serve the needs of our customers and take share from our competitors as the recovery accelerates.
Obviously, we believe short sheet and the upside potential of the recovery would be the far bigger mistake for ITW.
And we're going to plan and execute our recovery strategies accordingly.
The third principle is that we're going to leverage the strength of ITW to protect investment in areas of strategic importance to the execution of our long-term strategy.
We're early in our planning around all these areas.
But as one example, prior to the pandemic, we invested two plus years in our strategic sales excellence initiative that included significant investments in new sales and sales leadership talent.
We have the financial capacity to protect these types of long-term strategic investments.
And doing so is worth a lot more over the long-term to the company, there are a few extra detrimental margin points in the short-term.
That being said, decremental margins should likely be in our normal 35% to 40% range in Q4.
Between now and then, we're going to focus on making sure ITW is in a strong position to fully participate in the recovery.
Turning to slide 14, this is just a reminder that our long-term strategic priorities remain unchanged that we are committed to achieving and sustaining ITW potential performance, and continuing on our quest to firmly establish ITW as one of the world's best performing, highest quality, and most respected industrial companies.
Now let's move on to slide 15 to wrap things up.
As of right now, there's no way to know how severe this crisis will be, how long it will last, or how quickly our customers and then markets will recover.
What I do know is that the strength and resilience of ITW's business model and our people put us in about a stronger position as an industrial manufacturing company can be in, to deal with that whatever will unfold over the coming weeks and months.
I have every confidence that ITW will rise to the challenges we always have over the course of our 108-year history.
Our strong financial position and margin profile give us the ability to make strategic moves now to position the company to fully participate across a range of recovery scenarios, and to come out the other side ready to continue on our path to ITW full potential performance.
As a reminder, please see the appendix in today's slide deck for the usual segment detail for the first quarter.
| illinois tool works inc - suspending previously announced annual guidance for 2020.
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abercrombie.com, under the Investors section.
A detailed discussion of these factors and uncertainties is contained in the Company's filings with the Securities and Exchange Commission.
In addition, we will be referring to certain non-GAAP financial measures.
I'm excited to be here today to share our recent results and provide insights into the start of our back-to-school season.
We entered Q2 well positioned to realize ongoing benefits from the work that we had done heading into and during the pandemic.
This included: growing our digital channel, which carries a higher four-wall operating margin in stores; rightsizing our store fleet; expanding our digital and technology teams; adding to our vendor and regional carrier networks; and investing in marketing with an emphasis on digital and social.
Throughout the late spring and summer, our customers took advantage of the warm weather and an increase in social activities.
We were there for all their outfitting needs.
Product acceptance was strong across brands, continuing momentum from the past several quarters.
Once again, we reduced markdowns and promotions, tightly managed inventories, and made strategic investments across marketing, technology and fulfillment to support near- and long-term growth.
Our proven playbook worked and we achieved our best second quarter operating income and operating margin since 2008.
Before I turn to results, just a quick PSA.
As we continue to lap significant impacts from COVID, we will be providing comparisons to both second quarter 2020 and 2019 where applicable.
And due to temporary COVID-driven store closures last year, we do not plan to disclose comparable sales.
Second quarter total sales rose 24% to last year and we were up 3% compared to Q2 2019.
Our largest market, the US, led with sales up 31% on a one-year and 11% on a two-year basis.
Results speak to customer retention and spend and to new customers discovering our brands.
By channel, total global store sales rose 55% from last year and we're down 20% from 2019.
I'm very proud of our stores performance, which was achieved despite permanent closures as well as ongoing restrictions in EMEA.
As a reminder, during fiscal 2020, we proactively closed 137 locations, removing 1.1 million under productive gross square feet from our store base.
We continue to execute against our number one transformation initiative, Global Store Network Optimization, to further align with our customers' shifting shopping behaviors.
Even with aggressive store sales growth, digital did not skip a beat and remained a solid as stores reopened.
Digital sales held steady to 2020 levels and grew 52% from 2019.
Results are further proof of our ongoing evolution into a digital-first global omnichannel retailer and should yield sustainable operating margin benefits.
Our total sales growth has been healthy as evidenced by our significant gross margin expansion.
For the quarter, we achieved our best Q2 gross margin rate since 2009.
Our total Company gross margin rate increased 450 basis points on a one-year and 590 basis points on a two-year basis.
We reduced the depth and breadth of promotions compared to last quarter and last year.
While customer reaction to products has continued to be strong, we have not and will not step away from our inventory discipline.
This is one of the key COVID learnings we will continue to apply going forward.
Reflecting our strong top line and gross margin performance, combined with ongoing tight expense controls, our operating margin rate was over 1,100 basis points compared to last year and 1,800 basis points compared to Q2 2019.
Though we benefited from a good consumer environment, especially in the US, our results also reflect the body of work done by our global teams to dramatically improve our product, voice and experience.
Since I became CEO in 2017, our brands have evolved with our customers and we have focused on being there and supporting them for all their lifestyle needs.
Speaking of those lifestyle needs, let's take a moment to talk about some major fashion wins that applied companywide.
Many have asked me about the current denim cycle.
There is a ton of newness and interest in jeans and it has been great for our brands, especially as it is one of our top three categories on an annual basis and even more important in the back half of the year.
Our teams have done an absolutely amazing job staying on top of current denim trends.
We are viewed as a premier denim destination with newer styles representing over 40% of our jeans volume, up from 25% last year, and our customer is not waiting for sales to get what they want.
In the second quarter, we reduced promotions within this category well below 2020 and 2019 level.
We have [Phonetic] high-rise, wider legs, including mom, dad, straight and flare; skinny is still there, although becoming a smaller part of the total; and there are new and upcoming trends like '90s inspired low-rise; something for everyone.
And lengths are changing too.
Following years of angle, we are starting to see interest in full.
We're encouraged that these changes are not limited to one gender.
Customers are also responding to the wider leg openings in men, which represents another significant opportunity as it's been a long time since we've updated his silhouette.
Of course, our customer needs tops to go with their new jeans.
In Women's, we continue to see customers gravitate to swim and crop tops and oversize and bodysuits, which further reinforces the proportion play in bottoms.
Dresses, skirts, shorts and swim were also popular.
As product acceptance is built, our teams have been meeting our customers where they are in the digital landscape.
We are firmly committed to our test and learn strategy and to new and emerging technology trends and engage in opportunities.
It was certainly a busy and exciting quarter for both technology and engagement and I want to take a moment to discuss some of the highlights.
We introduced an evolved Gilly Hicks brand purpose and positioning; we launched our newest brand Social Tourist; we accelerated investments in testing across influencer, paid media and digital, reaching both core and new audiences; and we hired a Chief Digital and Technology Officer to further evolve and accelerate our digital-first model.
Starting with Gilly Hicks.
On July 15th, we took a huge leap forward in our growth strategy by relaunching the brand globally with an evolved purpose and position to bring our customer to their happy place.
Given our Gen-Z customer is most stress generation, the updated purpose is very important.
In addition, we opened our first stand-alone store Easton Town Center in Columbus, Ohio, and introduced updated side-by-side with an Hollister store experiences.
This included 20 refreshes to existing side-by-side formats in three new locations, all of which incorporate elements from the stand-alone store.
Well, what can I say, what an absolutely phenomenal moment for the Gilly team, we are truly feeling the love.
Customer feedback has been overwhelmingly positive and the brand is resonating with our Gen Z customer and their mindset.
Early results from the brand relaunch and the new store concept have been very encouraging.
Taking a step back, our customers already responding well to the product and the brand, which gave us confidence to make the necessary investments to accelerate this exciting growth vehicle.
In the second quarter, sales rose approximately 30% year-over-year, with growth across digital and store channels.
This is the fifth consecutive quarter of double-digit total sales gains.
Loungelette match backs, sleep, underwear and our active collection Gilly Go continue to resonate with our customer.
Post-launch, our guys [Phonetic] product and matching collections also been well received.
Turning to Social Tourist.
It's hard to believe it's only been three months since we've taken Hollister's successful partnership with TikTok superstars Dixie and Charli D'Amelio, who combined have over 270 million followers across social platforms to the next level with the launch of our fifth brand.
Social Tourist is a great example of how we are approaching our business differently.
Meeting our customer where they are and pushing boundaries of social commerce in new and exciting ways.
Since the launch, the brand has had over 700 million impressions and views, and we continue to build awareness.
For the first collection, we had several Instagram exclusive pieces.
And for the second, we hosted a live TikTok fashion show, featuring the D'Amelios and other social stars, which would be TikTok benchmarks.
With Social Tourist, we have learned so much in a short period of time that up and coming fashion trends, social commerce and the growth of the TikTock platform.
We are optimistic about Social Tourist and its future and have several more exciting events happening throughout the remainder of the year.
Now onto our remaining brands.
Starting with our largest brand, Hollister, which includes Gilly Hicks and Social Tourist, sales rose 20% in the quarter and we achieved our highest Q2 sales in Company history, congrats to the entire Hollister team.
Our focus on voice and experience clearly complements our product, helping to drive higher average transaction values on strong average unit retail growth.
From a marketing perspective, we launched the Hollister Creator Collective, a year long influencer program.
In July, we sponsored the Lago Vista Snapchat series, featuring 21 non-skippable Hollister commercials.
We rounded out our efforts to the new monthly Instagram Live Shopping series with influencers.
Hollister site and app also got a refresh during the quarter, further improving the customer experience.
Gilly Hicks and Social Tourist now have dedicated tab, allowing users to shop between all three brands with a shared checkout.
In addition, Gilly Hicks and Social Tourist launched their own unique app and we also update our membership loyalty program.
So, the customers can earn points, redeem rewards across all three brands.
As we look to the remainder of the back-to-school season, we are focused on continuing to win in jeans.
We have sterling pop-ups in key markets where we have been engaging with local teams and ceding product and thus far has been highly successful.
We will also have influencers and affiliates in the US and EMEA, amplify denim across Instagram and TikTok.
At Abercrombie Adults, our influencer, affiliate and editorial programs remain one of our top priorities.
In the second quarter, we grew associated sales by over 70% year-over-year and increased our already sizable network of digital brand advocates.
We also launched a Capital series with top affiliate creators and took part in Facebook's Live Shopping alpha test, which had fantastic engagement and insights.
During the quarter, we continued to leverage TikTok content.
On a year-over-year basis, we doubled our new-to-file visits, grew new-to-file orders and sales by over 80%, and continued to break TikTok's benchmarks for paid media.
I can't wait to see what the future holds on this important platform.
After all, according to POPSUGAR, Abercrombie is TikTok's favorite fashion brand, and we are proud to hold that title.
All the hard work connecting to our customers certainly paid-off.
On our last earnings call, I said Abercrombie Women's had a breakout moment.
During the second quarter, that momentum built with women's achieving its best Q2 sales since 2012.
In total, Abercrombie, which includes kids, grew sales 30% in the quarter.
Similar to Hollister, Abercrombie registered higher average transaction values and strong average unit retail growth.
Heading into fall, our team is energized.
We recently launched our Denim Your Way campaign, which features Abercrombie customers from Instagram casting call.
We also collaborated with wedding and events experts, The Knot, on a best dress guest collection.
In addition, we teamed up with Zappos as our exclusive domestic third party e-commerce provider for a limited selection of jeans and tops and a footwear collaboration.
At Abercrombie kids, if report cards were given out during summer, I would say, they received an A. We were highly focused on driving customer acquisition through expansion to new platforms and releasing new products and content franchises.
The Ultimate Summer Outfit campaign contributed to sales growth in shorts and swim, which are two important seasonal categories, while the release of the Cool Stuff collection and the launch of our active assortment both had over 70% new-to-file shop rates and average order values that were over 70% above our goal.
A common theme across the Company has been our focus on digital, which is critical for future growth.
As we continue our transformation into a digitally led operating model, we have made investments in technology and talent.
In the second quarter, the US benefited from government stimulus and reopening, as customers resumed many of their activities.
Internationally, the reopening in many countries, including our largest market the UK, lagged the US, reflecting ongoing COVID-related restrictions.
As we think about Q3, while global uncertainties remain, we are cautiously optimistic.
We've been pleased with the US back-to-school season to date, and believe our customers highly engaged and actively looking to refresh their wardrobe.
We are expecting to see an elongated season as many of our larger markets have yet to return.
In EMEA, the environment is improving and we have yet to start the back-to-school season.
Looking ahead, we will continue to execute our proven playbooks.
We will focus on controlling what we can control and remain on offense.
We are proactively managing through industrywide issues around inflation, production and transportation delays.
With our solid foundation and strong balance sheet, as well as our long-standing relationships with our global vendor and supply chain partners, we are well positioned to be winners in the back half and expect to surpass our previously stated 5.8% operating margin goal this year.
As Fran mentioned, we will be providing comparisons to both second quarter 2020 and 2019 where applicable, and will not be disclosing comparable sales.
Turning to our results, in the second quarter, we delivered total net sales of $865 million, up 24% to last year.
On a two-year basis, sales were up 3%.
We ended the quarter with all of our 733 stores open.
This compares to 92% of our base open at the end of the first quarter.
As of yesterday, all stores remain open.
Store sales rose 55% on a one-year basis and were down 20% on a two-year basis.
We recouped a significant amount of lost sales due to COVID-driven store closures last year.
At the same time, total digital sales dollars remained steady compared to last year and grew 52% to Q2 2019, representing 44% of total sales this quarter.
By brand, net sales increased 20% for Hollister, which includes Gilly Hicks and Social Tourist, and 30% for Abercrombie, which includes kids.
As compared to Q2 2019, net sales increased 2% for Hollister and 4% for Abercrombie.
By region, net sales in the US were up 31% and 11% on a one- and two-year basis, respectively, despite having roughly 129 fewer stores and over 22% less square footage in our US store base as compared to Q2 2019.
In EMEA, sales rose 11% on a one-year basis, but were down 5% on a two-year basis.
Customers responded well to localized product, voice and experience, which allowed us to reduce promotions in region.
We were pleased with results in light of permanent store closures and ongoing COVID-related restrictions.
Since Q2 2019, we have closed 17 stores, including eight flagships, as we continue to reposition to a smaller and wider store network focused on local customers.
During the quarter, the region as a whole remained influx as we experienced intermittent temporary closures and reduced operating hours.
As a reminder, in region, our penetration is highest in the UK, while Germany and France are also meaningful.
In APAC, sales were down 1% to last year and down 39% to Q2 2019.
We experienced continued traffic challenges in the region.
In our largest market, China, we are encouraged by customer response to new products, including APAC exclusive collections.
On Tmall, we saw stabilized sales trend and improved profitability, as we continued to reduce promotional activity.
Globally, we continue to see lower store traffic levels relative to Q2 2019, but sequential improvements of Q1.
From an omnichannel perspective, we were pleased with year-over-year improvements in conversion and average transaction values.
Moving on to gross profits.
Our rate of 65.2% was up 450 basis points to last year and 590 basis points to Q2 2019, driven by higher AUR across brands on reduced promotions and markdowns, partially offset by higher AUC, reflecting increased transportation costs.
Inventories control and current ending the quarter down 8% to last year.
Reflecting well documented industry-related challenges, we did see delivery delays increase over the quarter as global shipping congestion continued, and there were renewed COVID restrictions across several of our production countries.
We are managing through delays of one to three weeks on average, by pulling forward deliveries, employing fabric platforming and leveraging air deliveries as necessary.
Also we are working through an extended closure of factories in Southern Vietnam, which have been further delayed, and are now expected to open in the first week of September at the earliest.
We have and will continue to leverage our strong vendor partnerships in a similar playbook already used in other countries to ensure we get product as quickly as possible upon reopening.
I'll cover the rest of our Q2 results in an adjusted non-GAAP basis.
Excluded from our non-GAAP results are approximately $800,000 and $8 million of pre-tax asset impairment charges for this year and last year, respectively.
Operating expense excluding other operating income was up 11% compared to last year, while operating expense as a percentage of sales decreased to 52% from 57.8%.
In Q2, we saw an increase in stores distribution expense of 5% compared to 2020, and a reduction of 13% compared to 2019.
Compared to 2019, store occupancy was down approximately $50 million related to square footage reductions and renegotiated leases and included approximately $9 million of benefits associated with rent abatements and a flagship lease-related item.
These savings were partially offset by increased shipping and fulfillment expenses.
Marketing, general and administrative expense rose 27% from last year and 7% compared to 2019, primarily driven by increased marketing spend and higher performance-based compensation expense.
We delivered operating income of $116 million compared to operating income of $22 million last year.
As Fran noted, this was our best second quarter operating income and operating margin since 2008.
The effective tax rate was approximately negative 6%.
In the quarter, we released approximately $30 million of previously established valuation allowances on certain deferred tax assets, primarily in the United States, Germany and the Netherlands.
Additionally, the quarter reflected a discrete benefit of approximately $4 million for UK rate change enacted in the quarter, which increased the value of deferred taxes in the UK.
Net income per diluted share on adjusted non-GAAP basis was $1.70 compared to $0.23 last year.
The current quarter includes the benefit of approximately $0.53 related to the tax items mentioned.
Our strong financial position continues to enable us to both invest in the business and return excess cash to shareholders.
We ended the quarter with cash and cash equivalents of $922 million and total liquidity of approximately $1.2 billion.
During the quarter, we repurchased approximately $2.4 million shares for $100 million, bringing the year-to-date total share repurchases to about 3.5 million shares and $135 million.
At the end of Q2, we had approximately 6.5 million shares remaining under our previously authorized share repurchase program.
In addition, we spent $47 million to purchase $42 million at par value of our senior secured notes on the open market, as a way to deleverage the balance sheet and deploy excess cash.
Looking ahead, we will continue to focus on returning excess cash to shareholders, primarily through share repurchases, pending market conditions, share price and our ability to accelerate investments.
Looking ahead, we continue to expect fiscal 2021 capex to be approximately $100 million, with about half of that related to digital and technology and the other half related to real estate and maintenance items.
During the quarter, we opened 14 new stores, bringing the total to 18 for the year-to-date period and closed 12 for a total of 20 year-to-date.
In the back half, we expect to open roughly 20 stores, bringing the total for the year to approximately 40.
This year, we have about 240 leases up for renewal.
We look forward to having thoughtful conversations with our landlord partners to find stores that are the right size in the right location at the right economics.
I'll finish up with how we are planning the remainder of the year.
We will stay on offense and leverage a portion of our structural cost savings to support top-line growth, including investments in marketing across brands, the digital experience and growing Gilly Hicks and Social Tourist.
Reflecting ongoing global uncertainty, we will continue to maintain inventory discipline as we managed through supply chain disruptions and the cost and delays associated with it, as well as read reenact the operating environment in each market around the world.
Recently, we have been encouraged by back-to-school results in the US, where we expect to see an extended back-to-school season.
We are excited for some of our largest school districts, including New York to return in the weeks to come.
For the third quarter, we are planning as follows, using 2019 as our comparison period.
Net sales to be up 2% to 4% from 2019 level of approximately $863 million.
We expect the US to continue to outperform EMEA and APAC.
At this point, our plan assumes a modest impact on sales due to supply chain constraints, with the larger impact coming from cost inflation, which I'll cover momentarily.
We will work to manage through disruption using all available tools in our toolkit, including airing inventory and shifting production as necessary, and if possible.
Gross profit rate to be up at least 300 basis points to 2019 level of 60.1%, including an expected negative impact of approximately 300 basis points to 400 basis points of freight cost pressure.
We remain cautiously optimistic in our ability to drive AUR improvements through lower promotions and clearance activity to offset this headwind.
Operating expense excluding other operating income to be up low-single digits to 2019 adjusted non-GAAP level of $494 million.
Lower store expenses will be partially offset by higher fulfillment costs.
We also plan to increase marketing spend compared to 2019 as we look to further drive momentum in social and digital media across brands.
We expect to see benefits from this marketing throughout the back half and into 2022.
And the tax rate to be in the low-20%.
Net sales to be up low to mid single digits to 2019 level of $3.6 billion.
Gross profit rate to be up around 300 basis points to 2019 level of 59.4%.
Operating expense excluding other operating income to be down 3% to 4% to 2019 adjusted non-GAAP level of $2.07 billion.
Assuming we deliver against these expectations, we would expect operating margin at or above 9% for the full year, which is well above our 2018 Investor Day target of 5.8%.
We are excited about the significant progress we have made on our operating model and cost structure.
While plenty of hard work remains, we are optimistic about our future and will provide additional detail on our 2022 assumptions on our year end earnings call.
| q2 sales $865 million versus refinitiv ibes estimate of $879.2 million.
qtrly adjusted earnings per share $1.70.
qtrly digital net sales of $376 million decreased 3% as compared to last year.
have had a strong start to u.s. back-to-school season.
|
abercrombie.com under the Investors section.
A detailed discussion of these factors and uncertainties is contained in the Company's filings with the Securities and Exchange Commission.
In addition, we will be referring to certain non-GAAP financial measures.
We will also be providing financial comparisons to the corresponding periods of fiscal 2020 and 2019 where applicable and due to temporary COVID driven store closures last year, we will not be disclosing comparable sales.
I am excited to share our third quarter results, which benefited from a strong back to school and discuss the fourth quarter which is off to a good start.
Together, we actively navigated factory closures and transportation delays, reduced our promotions and markdowns, manage expenses and made strategic investments across marketing, technology and fulfillment to drive our business forward.
Due to that hard work and our ongoing commitment to delivering against our key strategic pillars, including fleet optimization, digital and omnichannel enhancements, stature [Phonetic] concept to customer life cycle and improved customer engagement.
We delivered our best third quarter operating profit and margin in close to a decade.
Total sales rose 10% to last year and were up 5% to Q3 2019 and we achieved our highest Q3 sales since 2014 despite industry wide supply chain constraints and removal of 1.1 million gross square feet from our store base last year.
Our largest and most established market, the U.S. outperformed with sales up 17% on a one-year and 12% on a two-year basis.
It was wonderful to have more kids return to school and as social activities resume for our kid, teen and millennial customer.
We executed well against the back to school and fall calendar, providing seasonally appropriate newness and outfitting options.
With compelling interpretations of the latest fashion trends including water leg silhouettes, vegan leather and seamless bodysuits, all while maintaining the quality, fit and value that we have become known for.
Our customers were highly engaged as illustrated by our average basket size and lapsed customer rate of return, both of which improved in the double-digit percent range.
In addition, we also acquired roughly 2 million new customers globally, all very positive signs regarding the health of our brands.
By channel, store sales rose 11% from last year and declined 20% from 2019.
Digital, which for us, carries a significantly higher four-wall margin than stores grew 8% on a one-year and 55% on a two-year basis, representing 46% of total sales.
Results speak to higher AUR across brands and channels on reduced markdowns and promotions and improved full price sell-throughs.
Q3 marked the sixth consecutive quarter of AUR improvement as our customers continue to adopt a buy it when you see it attitude.
This represents a major shift in mindset that has been years in the making as we have evolved each brands conditioning, purpose, perception and execution.
Looking ahead, we will build on our solid foundation and believe there's ongoing AUR opportunity at all of our brands.
Third quarter AUR improvements were offset by higher supply chain related costs.
In spite those pressures, we grew our operating margin rate by 80 basis points on a one-year basis and 640 basis points on a two-year basis.
And while we don't talk about it often publicly, we could not have achieved these results without our corporate purpose of being there for you on the journey to being a becoming who you are, which serves as our North Star.
It ensures our associates and partners feel comfortable sharing their thoughts and evolving with us and that we listen and speak to our customers authentically, providing inclusive options for all of their lifestyle needs.
Part of that evolution was the recent hiring of a leader to drive our comprehensive ESG efforts forward.
Simply put, purpose is woven into all that we do, including our critical pillars of product, voice and experience.
Starting with product, during this third quarter we had strong new wins that is hard to name just a few.
Denim, which is one of our most important categories continue to be on fire, posting record breaking Q3 sales.
We received a tremendous amount of positive media headlines and publications that have billions of impressions and thousands organic social media tags across the platform, all devoted to the fit, quality and comfort of our assortment.
Momentum built-in non-skinny and water leg styles including the mom, dad, straight and flare for women, while slim, straight and tapered gained popularity for guys as we continue to refresh his wardrobe.
Importantly, promotions were once again down across brands with higher full price selling.
In addition to denim, other top-performing categories included dresses, shorts, pants and knit tops and bottoms.
We are thrilled with the progress we've made with our products, which goes hand in hand with amplifying our voice and experience.
Our marketing teams are leaders in a rapidly evolving digital space and are embracing new and emerging technology trends and engagement opportunities using voices and platforms that are authentic to each of our brands.
Across the company, we continue to lean into the power of social selling and refining strategies are tailor made for each of our brands and their target customer.
This includes live shopping events on TikTok and Instagram, exclusive social product launches, in-app storefronts across platforms, augmented reality campaign for Snapchat and robust affiliate influencer program and our customer is responding.
Our unrelenting focus on digital is intertwined with providing the best omnichannel experience for our global customers by meeting them whenever, wherever and however they choose to interact with us.
This focus is what inspired us to open our New West Coast DC and introduced same-day delivery.
It is all what drove one of our major internal initiatives to know them better and squall them everywhere, which is about transforming our ways of working to ensure that everything we do is data driven and aligns the moments that are most important to our customer and a world of endless ideas and rapid innovation.
Now, moving onto the brands.
Hollister sales, which includes Gilly Hicks and Social Tourist rose 10% to last year and 1% to 2019.
In the U.S., sales rose 17% on a one-year and 7% on a two-year basis.
I am proud that Hollister global Q3 sales were the strongest since 2013 and that U.S. sales were the strongest since 2012, especially given that Hollister and Gilly saw an outsized impact on inventory receipts due to higher exposure to Vietnam production, importantly sales were healthy with nice AUR growth.
During the quarter, we continue to authentically speak to our Gen Z customer about the topics they care about the most, including our diverse backgrounds and identities, mental wellness and one of their most passionate -- biggest passions gaming.
In September, Hollister formally announced the launch of the Hollister good deeper perspective, a long-term program dedicated to supporting rising Latinx creators from the fashion, music and comedy verticals of TikTok and Instagram and authentically amplifying their voices.
This first of its kind collective is meaningful given Hollister's large Latinx customer base and is a testament to the fundamental shift in how we engage our customers.
The launch, which generated over 20 million PR impressions included the bilingual made for TikTok album produced by the collective music creators.
The following month Hollister named Fortnite World Cup Champion, Bugha, its first chief gaming scout.
The announcement made waves across the gaming new cycles garnering over 125 million PR impressions.
The partnership included a collection with Hollister's highly successful all day gameplay assortment featuring a match including and sweat pants that he co-created with the fans via social.
The collaboration boosted sentiment across our social channels and saw strong sell-throughs.
Looking ahead, Bugha worked with Hollister to scout rising gamers for team Hollister, our new up incoming gamer program.
We are looking forward to a charity livestreaming during GivingTuesday with proceeds going back to the Hollister confidence project, an initiative dedicated to promoting confidence and mental wellness in teams worldwide.
At Gilly Hicks, our updated brand purpose of bringing our customer to their happy place is resonating.
Our recently introduced men's products have been well received, which is exciting giving us a completely new and untapped customer for us.
At the same time, our existing customers continue to come to us for her must haves including Go Active, which grew to over 20% of sales.
Response to our stand-alone in '23 updated side-by-side locations have been encouraging.
We see runway to open additional stand-alone and side-by-sides globally and to refresh the Gilly Hicks experience that lived within Hollister as we embark on our next phase of growth.
In addition to Gilly Hicks, we've also please with results at our newest brand Social Tourist, which we view as another one of our growth vehicles.
As a reminder, Social Tourist was launched in May.
It's a multi-year exclusive apparel partnership with social media super stars Charli and Dixie D'Amelio.
In the third quarter, the D'Amelio series aired on Hulu.
In this show Charli, Dixie and their family wore Social Tourists into their daily lives.
The highly viewed series, which Hollister sponsored, drove meaningful social impressions and engagement, spikes in search demand and major PR buzz.
Hollister also partnered with Hulu on an ad by which drove roughly 90 million ad impressions.
We've also continued to apply learnings in Social Tourists, particularly as it relates to TikTok and social selling to other areas of the company making us even smarter, faster and more creative.
Turning to Abercrombie, which includes kids, Q3 sales rose 12% compared to last year and 10% to 2019, representing our highest sales volume since 2015 and best gross margin since 2013.
In the U.S., sales rose percent on a one-year and 18% on a two-year basis.
It has been absolutely amazing to experience a turnaround of this brand, which is in a remarkably different place than it was just a few short years ago.
At kids, we had a great back-to-school season.
We combined insight driven marketing and paid media, entered the stress and guesswork out of shopping for parents by providing product that shine from both the fashion and a quality perspective.
We also found power and leveraging affiliate parents voices with its first ever many collection, spanning both the adult and kids brands that contain stylish, cool and A&F essentials for fall and was an immediate hit.
At adults, we launched our highly successful denim your way campaign in early August.
This was a combination of work that's first again in January when we put out a call on social media to catch our customers in the campaign.
After receiving thousands of submissions, which was 10 customers and brand fans to help drive fit and design decision and to be predominantly featured in our denim your way marketing.
The campaign and the company assortment receiving glowing reviews as a perfect example of how we are listening to our customer to create product for their lifestyle needs.
Throughout the quarter, we also continue to leverage our relationship with TikTok, a highlight was our women's fall outfitting campaign, flashes of fall, which generated over 140 million impressions.
In addition our Abercrombie influencer team double down their efforts to maintain their leadership in the world at social selling.
Now looking to the fourth quarter.
Our customer is responding well to our assortments, especially our cold weather offerings including cozy and outerwear, as well as occasion dressing and denim.
We have seen some early holiday shopping and also a fair amount of self purchasing, as the weather has become more seasonal and our customer gears up for a turn to holiday activities and events.
With the delays in the supply chain, we expect to deliver newness leading up to the holiday peak, which will be a great learning around future flows and strategies.
On the delays, I'm proud of our season supply chain team for helping us navigate these challenges.
On top of our great products, I'm also excited about the social strategies we have in place.
Our stores and DCs are well staffed and ready to go and I'm confident that our store network and expanded suite of omni capabilities, including same day shipping, will enable our customers to do their shopping whenever, wherever and however they choose.
We are ready to compete and win for holiday and I'm confident in our ability to deliver an operating margin between 9% and 10% this fiscal year, which will be our best annual operating margin since 2008.
Looking beyond holiday, we continue to see significant growth opportunities across our portfolio brands and we look forward to sharing more on our strategic vision of how we will scale our business at our next Investor Day, which we are planning for the first half of fiscal 2022.
Stay tuned as we finalize the details.
In the third quarter, we delivered strong results across brands and across the P&L.
Our profitability continued to benefit from the transformative moves we made in our operating model and expense structure last year as the shift to digital accelerated.
For Q3, total net sales were $905 million, up 10% to last year and up 5% to pre-pandemic levels.
While transportation delays increased during the quarter, our teams were able to maximize the inventory on hand to deliver sales above our expectations.
Store sales rose 11% on a one-year basis and were down 20% on a two-year basis.
At the same time, total digital sales increased 8% compared to last year and grew 55% from 2019, representing 46% of total sales this quarter, compared to 31% in 2019.
By brand, net sales increased 10% for Hollister, which includes Gilly Hicks and Social Tourist and 12% for Abercrombie, which includes Kids.
As compared to Q3 2019, net sales increased 1% for Hollister and 10% for Abercrombie.
By region, we continue to see strong results in the U.S. with net sales up 17% and 12% on a one and two-year basis respectively.
Despite having roughly 140 fewer stores and over 20% less square footage in our U.S. store base as compared to Q3 2019.
In the U.S., Hollister was up 17% to 2020 and up 7% to 2019, while Abercrombie was up 19% and 18% respectively.
Outside of the U.S., we continue to see a slower recovery with EMEA down 6% to last year and 7% to Q3 2019.
Our business was strongest in our largest European market, the U.K., where we experienced sequential sales improvements.
The UK customer has responded well to product and has embraced our latest A&F location on Regent Street, which opened in September and is a fraction of the size and cost of our recently closed flagship.
This was offset by continued COVID driven restrictions and impacts across key Western European countries, including two of our largest markets, Germany and France.
In APAC, sales were down 12% to last year and down 32% to 2019 as we face traffic headwinds due to ongoing COVID cases inside China and Hong Kong and slow vaccination progress in Japan.
Additionally, we believe the China was impacted further by overall geopolitical climate.
We continue to view international as a long-term growth opportunity and are encouraged by the customer response to regional marketing and product distortions in both the EMEA and APAC markets.
Moving on to gross profit.
Our rate of 63.7% was down 30 basis points to last year and up 360 basis points to 2019.
The result exceeded our expectations and included approximately 300 basis points of impacts from higher freight costs and air utilization, which was at the low end of our 300 to 400 basis point expectation.
We continue to see AUR growth across brands compared to 2020 and 2019 on reduced promotions and markdowns, while maintaining initial tickets.
We ended the quarter with inventory approximately flat to last year.
Inventory on hand was lower than plans coming out of Q3 and was offset by higher in-transit due to the extended Vietnam closures and increasing transit times.
Related to Vietnam, all factories are open and operating.
We are using air to catch up on these receipts and are encouraged by recent improvements moving product through the U.S. ports.
I'll cover the rest of our Q3 results on an adjusted non-GAAP basis.
Excluded from our non-GAAP results are approximately $6.7 million and $6.3 million of pre-tax asset impairment charges for this year and last year respectively.
Operating expense excluding other operating income was up 8% compared to last year and up 1% to 2019, coming in at the low end of our expectation of up low-single digits.
As we saw better-than-expected store and distribution expense and shifted a portion of our marketing spend to Q4 to better align with inventory flows.
In Q3, we saw an increase in store and distribution expense of 2% compared to 2020 and a reduction of 7% compared to 2019.
Compared to 2019, store occupancy was down approximately $43 million related to square footage reductions and renegotiated leases.
These savings were partially offset by increased shipping and fulfillment expenses on higher digital sales.
Marketing, general and administrative expenses rose 21% from last year and 28% to Q3 2019, primarily driven by increased marketing investments.
As Fran mentioned, we continue to drive strong customer engagements across our brands and we expect to continue reinvesting a portion of our occupancy savings into digital media in Q4.
We delivered operating income of $79 million compared to operating income of $65 million last year and $27 million in 2019.
This is our best third quarter operating income and operating margin since 2012.
The effective tax rate was approximately 25%.
Net income per diluted share on an adjusted non-GAAP basis was $0.86 compared to $0.76 last year.
As we continue to benefit from the evolved operating model and the resulting higher profitability level, we are in a strong position to both invest in the business and return excess cash to shareholders.
We ended the quarter with cash and cash equivalents of $866 million and funded debt of $308 million.
During the quarter, we repurchased approximately 2.7 million shares for $100 million, bringing year-to-date total share repurchases to about 6.1 million shares and $235 million.
Recently, our Board of Directors approved a new share repurchase authorization of $500 million, replacing the February 2021 share repurchase program.
In the fourth quarter, we expect to repurchase at least $100 million worth of shares pending market conditions and share price.
We continue to expect fiscal 2021 capex to be approximately $100 million, with about half of that related to digital and technology and the other half related to real estate and maintenance items.
During the quarter, we opened five new stores, bringing the total to 23 for the year-to-date period and closed three stores for a total of 23 year-to-date.
For the full year, we expect the store count to remain roughly flat to last year, pending ongoing negotiations with landlords.
I'll finish up with our thoughts on Q4, which we are planning as follows using 2019 as our comparison period: net sales to be up 3% to 5% from 2019 level of approximately $1.185 billion.
We expect the U.S. to continue to outperform EMEA and APAC.
On inventory, we are optimizing AURs on current inventory and our distribution center teams are quickly replenishing as inventory flows in.
While the inventory receipt pattern will be different than the past, we have and we will continue to work diligently to minimize the impact on sales for the quarter.
Gross profit rate to be around flat to the 2019 level of 58.2%, including an expected negative impact of approximately $75 million of freight cost pressure due to rising ocean and air rates as well as higher air deliveries necessary to catch up on the Vietnam factory closures.
Based on early customer response to holiday, we are optimistic in our ability to continue to reduce markdowns and promotions to drive AUR improvements to offset this headwind.
Operating expense excluding other operating income to be up low to mid single digits to 2019 adjusted non-GAAP level of $565 million.
We expect to continue to see lower store expenses, partially offset by higher fulfillment costs.
Similar to Q3, we plan to increase marketing spend compared to 2019 as we look to maximize holiday sales and build momentum heading into 2022.
Finally, we expect the tax rate in the low 20s.
Assuming we deliver against these expectations, we expect the full-year operating margin to be in the 9% to 10% range, our highest since 2008.
In closing, we are excited to have delivered another quarter of profitable growth in Q3 and are laser focused on executing our strategies for holiday and beyond.
We will provide additional detail on our 2022 assumptions in our year-end earnings call.
| q3 sales rose 10 percent to $905 million.
qtrly adjusted earnings per share $0.86.
qtrly digital net sales of $413 million increased 8%.
compname announces board of director's approval of $500 million share repurchase program.
|
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.
CIRCOR delivered another solid quarter, and we're entering the back half of the year with high confidence that we'll achieve our 2021 guidance.
Our Q2 performance was highlighted by 27% organic orders growth in our Industrial business as both short- and long-cycle demand remained strong.
We saw continued recovery across virtually all Industrial regions and end markets with orders exceeding pre-COVID levels.
Book-to-bill in Industrial was 1.2, consistent with the first quarter.
Despite some headwinds from inflation and COVID-related supplier issues, we delivered revenue and earnings in line with guidance.
Our free cash flow conversion was 115%, a sign that our efforts to improve working capital are taking hold.
Based on our strong orders performance in the first half, our $436 million backlog and all the work we've done to streamline our operations, we're well-positioned for a very strong second half.
And finally, we made significant progress on our strategic priorities.
I'll talk more about this later.
I'm excited about the momentum the team is building, especially around growth and margin expansion.
Let's start with the financial highlights on Slide 2.
Organic orders of $210 million in the quarter were up 4% versus prior year.
We saw a strong year-over-year increase of 27% in Industrial driven by improvements in virtually all of our end markets.
As expected, orders were down 31% in Aerospace & Defense due to the timing of large defense orders.
Our backlog remained strong at $436 million, up 4% sequentially.
Our backlog in Industrial is $248 million, up 26% since the end of last year.
Organic revenue was $190 million, down 2% versus prior year and up 5% sequentially.
Revenue came in as expected given the timing of orders and lead times across our portfolio.
Sequentially, Industrial was up 7% as revenue starts to ramp from strong orders in Q1 and Q2.
A&D was in line with prior quarter driven by timing of defense deliveries and a slowly improving commercial market.
Adjusted operating income was $14.6 million, representing a margin of 7.7%, up 80 basis points from previous quarter and down 80 basis points from prior year.
Finally, we delivered $0.35 of adjusted earnings per share and generated free cash flow of $8 million as the team continues to drive working capital improvements across the company.
Moving to Slide 3.
Industrial organic orders were up 27% versus last year and 1% sequentially.
Regionally, order growth was led by North America and Asia, and we saw improved project orders as customers start to increase capex spending.
Our book-to-bill ratio for the quarter and for the first half was 1.2, which will support double-digit second-half revenue growth and represents a revenue inflection point post-COVID.
As expected, Industrial organic revenue was down 1% versus last year and up 7% sequentially.
By region, we saw year-over-year strength in both EMEA and China, partially offset by lower revenue in North America.
Outside of these isolated issues, revenue was in line or better than expectations across our end markets.
Adjusted operating margin was 8%, down 200 basis points versus last year, which reflects the downstream volume and aftermarket mix challenges in the quarter.
Operating leverage, simplification and continued strategic pricing will drive strong second-half margin expansion.
Turning to Slide 4.
Aerospace & Defense orders of $54 million were down 31% versus last year and 26% sequentially.
Orders were lower versus prior year due to a large multiyear defense order for the Virginia class submarine.
Versus prior quarter, the lower orders were driven by the timing of large orders for the Joint Strike Fighter and CVN-80 and 81 aircraft carriers.
Lumpy defense orders were partially offset by a modest sequential and year-over-year improvement in commercial aerospace.
As expected, revenue in the quarter was $61 million, down 5% year over year and up 1% from prior quarter.
Looking to the back half, we're expecting double-digit organic revenue growth as we ramp deliveries on key defense programs.
Finally, operating margin was 19.9% in the quarter, down 120 basis points year over year.
The margin decline was driven by lower aftermarket revenue.
Sequentially, margins expanded 210 basis points due to pricing actions and material productivity.
We remain confident in our ability to expand margins through the remainder of the year with higher defense and aftermarket volume.
Turning to Slide 5.
Free cash flow in the quarter was $8 million, a significant improvement versus prior year.
Working capital was a source of cash primarily driven by improved AR collections through the quarter and the timing of customer down payments.
We paid down $40 million of debt in Q2 with free cash flow and the proceeds from the sale of a noncore industrial product line.
We ended the quarter with $451 million of net debt, and we are on track to improve our leverage by greater than one turn this year.
In the third quarter, we expect revenue to be up 8% to 10% organically.
For Industrial, deliveries will be heavily weighted to Q3 and Q4 as we ship the backlog that we built in the first half.
In A&D, the growth in the back half is driven by the ramp in defense program deliveries and a modest recovery in commercial aerospace.
Scott will cover this in more detail in the upcoming slides.
We're expecting adjusted earnings per share of $0.55 to $0.60 in the third quarter, a 53% to 67% increase versus prior year.
3Q free cash flow conversion is expected to be between 120% and 140%.
Inflation will be a headwind in the third quarter and second half, but we expect material productivity to offset any cost increases.
For the year, we are reaffirming the guidance that we provided during the first-quarter earnings call.
Organic revenue growth is expected to be in the range of 2% to 4%, with adjusted earnings per share of $2.10 to $2.30.
Free cash flow conversion remains at 85% to 95%.
We have high confidence in our second-half margin outlook, and we expect to exit the year with 4Q operating margin of 13% to 15% for the company.
As we head into the back half of the year, we are closely monitoring the impact of COVID-19 variants in our global end markets and operations.
Now I'll hand it back to Scott to discuss our market outlook.
Let's start with our Industrial outlook on Slide 7.
As Abhi mentioned, in the second quarter, we saw continued recovery across virtually all Industrial end markets with orders exceeding pre-COVID levels.
In Q3, we expect double-digit order growth versus prior year with a seasonal sequential decline.
For Q3 Industrial revenue, we expect solid improvement year over year with growth between 7% and 11%.
Improvement across our short-cycle end markets is expected to lead revenue growth as shorter lead time products in our backlog ship in Q3.
Aftermarket remained strong with a double-digit increase expected in the third quarter.
Our longer-cycle end markets are expected to be up 5% to 9%.
In downstream, we're expecting revenue more or less in line with last year.
We're encouraged by the orders and quoting activity we saw through July, and we've addressed the supplier issues that impacted us in Q2.
In Commercial Marine, orders and revenue are increasing as shipbuilding activity picks up from historically low levels.
Finally, pricing is expected to net roughly 1%, consistent with prior quarters.
Moving to Aerospace & Defense.
Orders in the second quarter were down sequentially and versus prior year driven by the timing of large defense program orders.
Q3 orders are expected to be in line with prior year, and we're expecting a significant increase in Q4.
Revenue in the third quarter is expected to be up 12% to 15% versus prior year.
Growth in defense revenue was primarily driven by strong volume on smaller OEM programs such as the Boeing P-8 Poseidon and various missile switch programs.
Revenue from our top OEM programs is expected to be up low to mid-single digits with growth across nearly all of our major platforms.
Year to date, aftermarket revenue has been trending below our expectations driven by delayed government spending.
Looking forward, we expect sequential growth in spares and MRO activity in both Q3 and Q4.
Commercial aerospace is expected to be up between 15% and 20% in the third quarter.
Revenue from commercial air framers will be up roughly 50%, mostly driven by increased A320 volume and favorable comparisons to last year.
Aftermarket is expected to be up roughly 30%, in line with increased aircraft utilization.
In both cases, narrow-body volume continues to lead the recovery.
Finally, pricing is expected to be a net benefit of 3% for defense and 5% for commercial due to price increases secured earlier in the year, a higher level of spot orders and an increase in commercial aftermarket volume.
Our full-year pricing outlook remains in line with last year.
As we did last quarter, I'd like to provide an update on our previously shared strategic priorities.
These priorities continue to guide what our team works on every day.
We're investing in growth.
We launched 21 new products through the first half of the year and remain on track to deliver 45 new products in 2021.
On the Aerospace & Defense side, we launched a new brushless DC motor and brake assembly, which actuates the vertical stabilizers and aileron flight control surfaces on a high-altitude, long-endurance surveillance drone operated by the U.S. Air Force.
On the Industrial side, we introduced a new control valve that was entirely designed, sourced and manufactured in India, the first of its kind for CIRCOR.
This flue gas desulfurization valve is not only compliant with the new clean air regulations for Indian power plants, but also positions CIRCOR as the sole local partner providing a total solution.
Next, our regional expansion strategy is gaining traction.
Our Industrial team recently won a large multiproduct pump order with Daewoo Shipbuilding in Korea.
By providing a complete solution, we were able to secure a position on a long-term submarine program and strengthen our relationship with the Korean Navy.
On margin expansion, we're building on our CIRCOR operating system and simplification program by kicking off 80/20 at three of our largest Industrial businesses.
We're still early in the process, but we're excited about the structured approach to accelerate margin expansion at CIRCOR.
Finally, as Abhi covered earlier, we made progress in reducing our total debt.
We'll continue to use free cash flow to pay down debt for the remainder of 2021.
Before we move to Q&A, I want to highlight a recent customer perception study for our Industrial business.
It was an independent global survey with participation from roughly 70 of our largest customers.
The results confirm that our strategic priorities are aligned with our customers.
Our Net Promoter Score of 67 is exceptional and is a testament to our product quality and technical customer support.
Given the mission-critical nature of our products and the high cost of failure, our customers have a strong preference to buy OEM spare parts, and price is one of the least important buying criteria.
This study illustrates the power of our differentiated product portfolio and confirms that our strengths are aligned with our customers' top priorities.
| circor delivers strong second quarter results and reaffirms 2021 guidance.
q2 adjusted earnings per share $0.35.
q2 revenue $190 million versus refinitiv ibes estimate of $189.2 million.
sees q3 adjusted earnings per share $0.55 to $0.60.
reaffirms fy adjusted earnings per share view $2.10 to $2.30.
sees q3 revenue up 10 to 12 percent.
for full year of 2021, circor reiterated its guidance of organic revenue growth of 2 to 4%.
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More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC.
It's a pleasure to be with you today.
Labcorp is carrying on our mission to improve health and improve lives by harnessing the power of science, technology and innovation.
In doing so, we're able to execute against our strategy, to deliver strong results for stakeholders and to effectively respond to global challenges like the pandemic.
Our company rounded out a historic 2021 with another strong quarter that sets the stage for further success in 2022 and beyond.
In the fourth quarter, revenue totaled $4.1 billion, adjusted earnings per share reached $6.77, and free cash flow was $548 million.
For the full year, revenue was $16.1 billion, adjusted earnings per share totaled $28.52, and free cash flow reached $2.6 billion.
Our base business continued its progress during the quarter, with diagnostics and drug development revenue growing 8.8% and 8.2%, respectively.
In diagnostics, base business organic volume increased as esoteric and routine procedures continued their year-over-year growth.
drug development ended the year with a solid trailing 12-month net book-to-bill of 1.25 and a strong backlog of $15 billion, representing a $579 million increase in the third quarter.
Also decentralized clinical trial awards were up 62% over the prior year.
Moving to the pandemic.
Our ongoing response remains an example of how innovation can drive success.
For nearly two years, Labcorp has dedicated significant resources to stemming the spread of the virus.
We are proud of the progress we've made thus far, though the rise of variants like Omicron and surges in infection rates make it clear that our work is not over.
We continue to leverage Labcorp's comprehensive capabilities to expand testing access, to identify and monitor new variants and to advance vaccine and therapy development.
In the fourth quarter, COVID testing volumes were greater than anticipated.
We have performed over 74 million tests for COVID to date, of which approximately 8.6 million were in the fourth quarter.
This heightened demand continued into the new year, although volume is significantly less now than in December or in January.
Time to results for COVID PCR test remained one to two days on average even during the latest surge.
As we've done throughout the pandemic, we are keeping capacity levels high to quickly respond to spikes and testing needs.
We are continuing to invest in equipment, elevated staffing levels and our supply chain.
In addition, we remain prepared and staffed to support additional drug development work for vaccines including boosters or additional therapies.
The company's COVID-related innovations in the quarter included the rollout of observed self-collection for COVID PCR testing at over 1,000 patient service centers.
And at the start of the fourth quarter, we announced the receipt of FDA Emergency Use Authorization for a combined COVID and flu at-home collection kit.
These offerings are reflective of our work to make COVID testing faster, easier and more accessible.
I'll now turn to our enterprise strategy, where we made significant progress in 2021.
I'll provide a few highlights that will give you a sense of our growth and our forward momentum.
In oncology, we made significant strides in fortifying our position as a leader by expanding diagnostic offerings and clinical trial opportunities.
At the same time, we followed through on our commitment to improve cancer care access.
Last year, we formed our oncology business unit, and we introduced our enterprise oncology offering.
Genomic profiling of tumors is key to identifying the best targeted therapy for oncology patients.
In December, we announced our agreement to acquire Personal Genome diagnostics or PGDx.
The company has a strong portfolio of innovative liquid biopsy and tissue-based products which complement our existing capabilities.
Through PGDx' kitted solutions, we can provide oncologists access to tumor profiling at the hospitals where the patients are treated or centralized to one of our laboratories.
These solutions may also enable us to expand tumor profiling globally to help our pharmaceutical sponsors find the right novel treatment for patients.
We expect the transaction to close in the first quarter of this year.
Other exciting expansions of our oncology test menu included clonoSEQ, the first and only FDA-cleared test for monitoring residual blood cancer; and OmniSeq INSIGHT, a pan-cancer tissue-based sequencing test for people with late-stage solid tumors.
All of these offerings can help physicians make more informed decisions about treatments for their patients and help bring new medicines to market for cancer.
In 2021, we intensified our customer focus and embedded technology and data throughout our business.
This included improvements to the patient experience in our service centers.
These upgrades focused on creating a seamless journey from appointment scheduling to service center visits to easier access to results.
Our acquisition of Ovia Health enhanced our position as an important source of information for women's health which we support through diagnostic, genetic and specialty testing expertise as well as clinical trials.
We will continue to identify opportunities to enhance Ovia Health's innovative platform that provides family planning, pregnancy and parenting support.
Additionally, we began to deploy Labcorp Diagnostic Assistant.
This new tool delivers a detailed view of a patient's lab history along with clinical insights directly to the point of care to inform diagnostic decisions.
We opened an automated kit production line in Belgium in the spring.
And in the fourth quarter, we opened an integrated laboratory in Singapore, which strengthens our bioanalytical services in the Asia Pacific region.
And just this month, we announced the launch of Labcorp OnDemand which builds on the success of Pixel by Labcorp.
This suite of health tests and services offers easy and convenient access to a wide variety of trusted tests.
It's another way that Labcorp is meeting people where they are and offering more options for people to stay healthy.
We pursued numerous opportunities throughout the year that have long-term and high-growth potential.
We did this through tuck-in deals and strategic acquisitions including: OmniSeq, Ovia Health, PGDx, and Myriad Autoimmune's Vectra test which analyzes biomarkers to measure rheumatoid arthritis.
Yesterday, we announced a comprehensive strategic agreement with Ascension, one of the largest health systems in the United States.
Through our new long-term relationship with Ascension, we will manage its hospital-based laboratories in 10 states, and we will purchase select assets of its outreach laboratory business for approximately $400 million.
We expect the first year annualized revenues to be between $550 million and $600 million from the combined hospital business and lab asset acquisition.
While operating margins are expected to be less than segment margins initially, they are expected to improve each year.
The transaction is expected to be accretive to our earnings and cash flow in year 1 and should return its cost of capital by year 2.
This is a notable opportunity for us and one of the most significant deals of its kind in the sector.
It expands our clinical services in several states across the country, and it builds on our strong track record of building similar relationships.
The deal with Ascension also underscores our ability to help health systems manage industrywide shifts.
As part of the collaboration, we will explore clinical trial and oncology opportunities that enhance patient access.
We look forward to this new partnership and ultimately to welcoming new colleagues to Labcorp.
We also reached agreements with other hospitals and hospital systems including Minnesota-based North Memorial Health.
We continue to be excited about our robust M&A pipeline and expect more activity in the coming months.
In 2021, we provided the highest-quality service to customers and patients, and we made meaningful investments in our people.
In fact, Labcorp has consistently been recognized for the impact of our work and for the value we place on our employees.
We were recently named again to Fortune magazine's list of World's Most Admired Companies.
And for the fifth consecutive year, the Human Rights Campaign Foundation designated Labcorp as the best place to work for LGBTQ+ equality.
We were also deemed one of America's most responsible companies for 2022 by Newsweek.
Importantly, in 2021, management and the board of directors, working with outside advisors, thoroughly reviewed our structure and capital allocation.
As part of the comprehensive review of our structure, we had extensive discussions with third parties, and the board considered a wide range of options including significant acquisitions, divestitures, spinning off businesses as well as spinning and merging those businesses with strategic partners.
The board unanimously concluded that the company's existing structure is in the best interest of all stakeholders at this time.
That said, we continue to believe that Labcorp shares are not fully valued in the marketplace.
To that end, we announced several actions designed to further enhance shareholder value.
Among them are the initiation of a dividend starting in the second quarter of 2022 as well as a $2.5 billion share repurchase program, $1 billion of which is being repurchased on an accelerated basis.
We are also implementing a new LaunchPad business process improvement initiative that targets $350 million in savings over the next three years.
And today, in addition to giving 2022 guidance, we will also share a longer-term outlook.
And beginning with first quarter results, we will provide additional business insights through enhanced disclosures.
Moving forward, we are committed to profitable growth through investments in science, innovation and new technology.
As we execute on our strategy, management and board will continue to evaluate all avenues for enhancing shareholder value.
In conclusion, our strong base business performance, coupled with formidable progress against our strategic priorities in 2021, sets us up for long-term success.
This gives us great confidence in our longer-term, growth-oriented, bright outlook which Glenn will take you through, along with our 2022 guidance.
I am proud of what the team at Labcorp accomplished together in 2021, and I am excited for all that's to come this year and into the future as we continue to deliver for all of our stakeholders.
I'm going to start my comments with a review of our fourth quarter results, followed by a discussion of our performance in each segment, our 2022 full year guidance and then conclude with our longer-term outlook through 2024.
Revenue for the quarter was $4.1 billion, a decrease of 9.7% compared to last year due to declines in organic revenue of 10.3% and divestitures of 0.1%, partially offset by acquisitions of 0.6% and favorable foreign currency translation of 10 basis points.
The 10.3% decline in organic revenue was driven by a 15.3% decrease in COVID testing, partially offset by a 5% increase in the company's organic base business.
Operating income for the quarter was $731 million or 18% of revenue.
During the quarter, we had $93 million of amortization and $79 million of restructuring charges and special items.
Excluding these items, adjusted operating income in the quarter was $902 million or 22.2% of revenue compared to $1.4 billion or 31.8% last year.
The decrease in adjusted operating income and margin was due to a reduction in COVID testing.
Excluding COVID testing, the base business compared to the base business last year experienced higher adjusted operating income and margins due to organic growth and LaunchPad savings, partially offset by higher personnel costs.
The tax rate for the quarter was 19.3%.
The adjusted tax rate excluding restructuring charges, special items and amortization, was 24.6% compared to 24.8% last year.
Going forward, we continue to expect the adjusted tax rate to be approximately 25% excluding any impact from potential tax reform.
Net earnings for the quarter were $553 million or $5.75 per diluted share.
Adjusted earnings per share which exclude amortization, restructuring charges and special items, were $6.77 in the quarter, down from $10.56 last year.
Operating cash flow was $698 million in the quarter compared to $775 million a year ago.
The decrease in operating cash flow was due to lower cash earnings, partially offset by favorable working capital.
Capital expenditures totaled $150 million compared to $99 million last year.
And as a result, free cash flow was $548 million in the quarter compared to $675 million last year.
During the quarter, we used $1 billion of our cash flow for our accelerated share repurchase program and invested $171 million on acquisitions.
Now, I'll review our segment performance, beginning with diagnostics.
Revenue for the quarter was $2.6 billion, a decrease of 16.9% compared to last year due to organic revenue being down 17.8%, partially offset by acquisitions of 0.7% and favorable foreign currency translation of 20 basis points.
The decrease in organic revenue was due to a 21.8% reduction from COVID testing partially offset by a 4.1% increase in the base business.
Relative to the fourth quarter of 2019, the compound annual growth rate for the base business revenue was 5% primarily due to organic growth.
Total volume decreased 8.7% compared to last year as organic volume decreased by 8.9% partially offset by acquisition volume of 0.3%.
The decrease in organic volume was due to a 14.6% decline in COVID testing partially offset by a 5.7% increase in the base business.
Price mix decreased 8.2% versus last year due to lower COVID testing of 7.2% and lower base business of 1.6% partially offset by acquisitions of 0.5% and currency of 0.2%.
Diagnostics organic base business revenue growth was 7.2% compared to its base business last year, with 8.1% coming from volume, partially offset by a 1% decline from price mix.
The price mix decline was primarily due to the recovery of our Canadian business which carries a lower average requisition price.
diagnostics adjusted operating income for the quarter was $776 million or 29.6% of revenue compared to $1.2 billion or 39.1% last year.
The decrease in adjusted operating income and margin was due to a reduction in COVID testing.
COVID testing margins were down compared to last year primarily due to a volume decline of approximately 50%, while the company continued to maintain capacity.
base business margins were higher compared to last year due to organic base business growth and LaunchPad savings partially offset by higher personnel costs.
diagnostics achieved its goal to deliver approximately $200 million of net savings from its three-year LaunchPad initiative.
Now, I'll review the performance of drug development.
Revenue for the quarter was $1.5 billion, an increase of 3.9% compared to last year due to organic base business growth of 7.9% and acquisitions of 0.3%, partially offset by lower COVID testing performed through its centralized business of 4% and divestitures of 0.3%.
Relative to the fourth quarter of 2019, the compound annual growth rate for base business revenue was 9.9% primarily driven by organic growth.
Adjusted operating income for the segment was $206 million or 14.2% of revenue compared to $248 million or 17.8% last year.
The decrease in adjusted operating income and margin was primarily due to lower COVID testing.
In the base business, higher personnel and other inflationary costs as well as investments in oncology capabilities were partially offset by organic growth and LaunchPad savings.
We continue to exclude the enterprise component of drug development bonus expense which is reflected in corporate unallocated and totaled $11 million for the quarter.
While margins were down in the quarter, they were up for the full year compared to 2020, and we expect margins to continue to increase in 2022.
For the trailing 12 months, net orders and net book-to-bill remained strong at $7.3 billion and 1.25, respectively.
Backlog at the end of the quarter was $15 billion, an increase of 8.7% compared to last year.
And we expect approximately $5 billion of this backlog to convert into revenue over the next 12 months.
Now, I'll discuss our 2022 guidance which assumes foreign exchange rates effective as of December 31, 2021, for the full year.
In addition, the guidance includes the softness we experienced in January due to Omicron which we expect will rebound through the rest of the quarter.
The enterprise guidance also includes the impact from currently anticipated capital allocation, with free cash flow targeted to acquisitions, share repurchases and dividends which we will initiate in the second quarter.
We expect enterprise revenue to decline one and a half to six and a half percent compared to 2021.
This guidance range includes the expectation that the base business will grow seven and a half to 10%, while COVID testing is expected to decline 60% to 75%.
We expect diagnostics revenue to decline 11 and a half to 17 and a half percent compared to 2021.
This guidance range includes the expectation that the base business will growth three and a half to 6%.
COVID testing revenue is expected to decline 60% to 75%.
At the midpoint of our base business guidance range, the compound annual growth rate compared to 2019 would be 4.4% primarily driven by organic growth in both volume and price mix.
We expect drug development revenue to grow 7% to 9.5% compared to 2021.
This guidance includes the negative impact from foreign currency translation of 40 basis points.
This guidance range also includes the expectation that the base business will grow seven and a half to 10% compared to 2021.
Given the amount of capacity we have within diagnostics, we've assumed that no COVID testing will be performed in drug development central lab business in 2022.
We expect to benefit from broad-based growth in all three businesses, helping drive continued margin improvement in the segment.
At the midpoint of our base business guidance range, the compound annual growth rate compared to 2019 would be 11.3%.
Our adjusted earnings per share guidance is $17.25 to $21.25 compared to 2021 adjusted earnings per share of $28.52.
The adjusted earnings per share guidance reflects the expectation of lower COVID testing in 2022, while the base business continues to profitably grow.
Free cash flow is expected to be between $1.7 billion to $1.9 billion compared to $2.6 billion in 2021.
Now, I'll discuss our longer-term outlook which reflects our current view of the business from 2022 to 2024.
We expect enterprise base business organic revenue to grow at a compound annual growth rate of 4% to 7% compared to 2021.
We also expect revenue growth from acquisitions to represent additional annual growth of 2% to 3%.
We expect diagnostics base business organic revenue to grow at a two and a half to four and a half percent CAGR compared to 2021.
This outlook is higher than historical growth driven by a continued recovery in our base business relative to 2021, broad-based growth including hospitals and health systems and the lower incremental impact of PAMA in the outlook period.
We expect drug development base business organic revenue to grow at a 7% to 10% CAGR compared to 2021.
This outlook is higher than our historical growth, and we have added capacity and inorganic investments in the last few years in our faster-growing early development and late-stage clinical businesses.
As we continue to emphasize profitable growth, we expect enterprise margin expansion of 30 to 50 basis points on average annually through the outlook period compared to 2021 which was approximately 14 and a half percent.
This margin expansion is due in part to the company's LaunchPad initiative which is expected to deliver $350 million of cost savings over the time period to help offset inflationary costs.
And finally, we expect adjusted earnings per share to grow at an 11% to 14% CAGR compared to 2020 -- '19 adjusted earnings per share of $11.32.
We continue to use 2019 as the base year comparison for earnings growth to better reflect the earnings power of the company excluding COVID testing.
The adjusted earnings per share outlook reflects the expectation that both base businesses will continue to profitably grow organically.
In addition, we expect to benefit from capital allocation directed toward accretive acquisitions and share repurchases while keeping within our targeted gross debt leverage of two and a half to three times.
For additional comparison purposes, we've also included in the supplemental deck on our investor relations website a view of 2021 fourth quarter and full year results, 2022 guidance and our longer-term outlook.
In summary, the company had another quarter of strong performance.
We remain focused on performing a critical role in response to the global pandemic while also growing our base business.
For 2022, we expect to drive continued profitable growth in our base business, while COVID testing volumes are expected to decline through the year.
In addition, our longer-term outlook is expected to deliver double-digit adjusted earnings per share growth driven by top-line growth, margin improvement and capital allocation.
Operator, we'll now take questions.
| q4 earnings per share $5.75.
q4 adjusted earnings per share $6.77.
q4 revenue $4.1 billion.
labcorp- full-year 2022 guidance: adjusted earnings per share of $17.25 to $21.25 and free cash flow of $1.7 billion to $1.9 billion.
labcorp - longer-term outlook (2022-2024): base business organic revenue compound annual growth of 4%-7% versus 2021.
labcorp - longer-term outlook (2022-2024) base business average annual margin expansion of 30 bps to 50 bps versus 2021.
labcorp - longer-term outlook (2022-2024) adjusted earnings per share compound annual growth of 11%-14% versus 2019.
labcorp sees fy 2022 total labcorp enterprise revenue down 6.5% to down 1.5%.
labcorp sees fy 2022 total drug development revenue up 7.0% to up 9.5%.
|
There is an inherent risk that actual results and experience could differ materially.
You can find the discussion of our risk factors, which could potentially contribute to such differences, in our 2020 Form 10-K and in our Form 10-Q, which was filed earlier today.
Before we move into operational results, I'd like to start by pointing out some of the more interesting events and notable items our employees are currently involved in.
This quarter, I want to highlight Melvina Stacey, our HSE Deputy Director in Canada.
Two months ago, she started a series on social media where she showcases women in HSE roles at Fluor.
Fluor is committed to our DE and I program in ensuring that everyone could be seen, heard and recognized for their hard work.
Let's begin by providing some perspective on what we're seeing in each of our major end markets, starting with Mission Solutions.
In Mission Solutions, we experienced quite a bit of activity during the quarter.
To begin with, margins for the quarter reflect increased execution activity on U.S. Department of Energy projects, higher-than-forecasted performance-based fees and the release of COVID-19 cost reserves.
This strong performance was somewhat offset by the LOGCAP IV Afghanistan program that was completed in July.
New awards for the quarter were strong at $1.6 billion.
Our largest award in the segment was a $789 million 12-month extension to our management and operations contract for the DOE's Savannah River Site.
This award was under the Air Force Contract Augmentation Program that Fluor has been a part of since 2020.
Specific to this effort, we received a call from the Air Force in late August, and within a week, we had temporary housing, food, medical and other critical humanitarian assistance for 1,000 evacuees, and an increased total capacity a few weeks later to 5,000.
Currently, more than 4,000 men, women and children call this newly created facility home.
Fluor will continue to provide assistance until the operation concludes, likely next spring.
Last week, a joint venture, including Fluor, was awarded the Savannah River Site Integrated Mission Completion Contract.
This indefinite delivery -- indefinite quantity award is valued at up to $21 billion over the next 10 years.
Work will include liquid waste stabilization and disposition, among other requirements.
This is a great award that expands our presence on the Savannah River Site in South Carolina.
Our next major pursuit in Mission Solutions is the Y12/Pantex Management and Operations contract in Tennessee and Texas.
We anticipate hearing about potential selection for this multibillion-dollar award in the next few months.
Now let's turn to our Urban Solutions group on Slide four.
In mining, we booked a copper project in Indonesia with a valued long-term client.
In our conversations with mining clients, we continue to see a disciplined approach to project analysis and final investment decisions.
Mining clients are aware of the critical role they play as the world focuses on energy transition and electrification.
At the same time, they are taking a fresh look at their own portfolio of assets and identifying how they can significantly reduce energy and water consumption with a specific focus on increased use of renewable power.
Our FEED pipeline of future mining work remains steady, and we continue to work on a slate of projects under limited notice to proceed contracts.
Over the next four quarters, we expect to book opportunities to support a broad range of commodities, including copper, nickel, alumina, lithium, steel and phosphates.
In Infrastructure, we booked $316 million in revenue for our share of the I-35E Phase two expansion project in Dallas for TxDOT.
This 6.5 mile long design build project includes full reconstruction and expansion of the existing general purpose lanes as well as the reconstruction of two managed lanes.
Before talking about prospects in this segment, I want to provide a quick update on our legacy Infrastructure portfolio.
During the quarter, we recognized $19 million in forecasted adjustments on a light rail project that has experienced schedule delays and productivity challenges.
The project is approximately 90% complete, and we anticipate project completion next summer.
There are no significant changes in estimated cost to complete the remaining legacy Infrastructure projects.
And as a reminder, we expect to receive the final settlement payment on the Purple Line project next month.
Our Infrastructure clients continue to express interest in the pending infrastructure bill.
While we remain disciplined in our approach, we see some near-term opportunities in roads and bridges as well as project management only prospects.
In advanced technologies and life sciences, we are starting to convert some of our initial enthusiasm around semiconductor manufacturing into new awards.
During the quarter, we won the front-end scope of a large semiconductor project in Arizona.
This is the first of many awards that we were tracking for this facility over the next 12 months.
We're also winning new work to support food packaging clients.
Overall, momentum continues to build in Urban Solutions.
While we expect to see lower new awards in the fourth quarter, we are well positioned to convert our existing FEED pipeline into full EPC contracts next year.
Moving to Energy Solutions on Slide seven.
Results for the quarter were more in line with our expectations, with segment margins of 5.3%.
These positive segment margin results included an $18 million gain recognized on an embedded derivative inside of an equity method investment, which is excluded from our adjusted earnings per share numbers.
New awards in the quarter totaled $644 million compared to $141 million in the third quarter of 2020 and included refining and LNG work in Mexico.
Turning to Slide eight.
Our work on LNG Canada continues to advance positively.
During the third quarter, we crossed the 50% completion mark, and we continue to drive scheduled progress through fabrication and construction activities.
On October 30, we also celebrated a three-year milestone from the receipt of the project's full notice to proceed.
Engineering on the project is essentially complete, and all major procurement has been awarded.
Remaining procurement efforts are centered on top-ups of bulk materials, such as pipe and cables.
Accordingly, the project has mitigated inflation concerns on the equipment and materials for this project.
We are operating in a COVID-restricted environment there.
Last quarter, we announced an agreement with the client for COVID-related delays and costs for engineering and procurement through February 26, 2021.
We continue to monitor our progress on our procurement, fabrication and construction activities and are working with the client to mitigate any additional COVID-related delays and costs.
I'm pleased to say that our first 16 modules have shipped, and we expect to receive them at our marine offloading facility starting next week.
These are the first of 192 modules weighing a total of 256,000 tons that will be fabricated and shipped to the site.
And finally, we began our heavy lift mechanical equipment program with the installation of two precoolers and the main cryogenic heat exchangers for Train one.
This reflects the site moving toward substantial aboveground construction activities, as you can see on Slide eight.
Our efforts to support the energy transition needs of our clients continues to accelerate.
During the quarter, we received work to support renewable biodiesel and lithium production projects.
Interest in our ability to decarbonize existing assets is coming primarily from Europe and the U.S.
This includes Fluor's proprietary carbon capture technologies, renewable-driven e-crackers, electric drive motors and increased demand for hydrogen-based power.
We also see increased activity in battery chemicals to support the expanding needs of the automotive industry.
When you look at our opportunities across the Energy Solutions landscape, we see that our clients have resumed investing in sustaining capital and small capital projects.
Larger projects, other than what we see in chemicals, remain on the drawing board.
Although competition continues to be brisk, we remain disciplined in the projects and clients we pursue.
Now let's turn to NuScale on Slide 10.
As we mentioned last quarter, we received considerable interest in our carbon-free nuclear power solution, with $193 million received in outside investments this year.
We continue to receive positive feedback from Guggenheim Securities, which NuScale retained six months ago to accelerate the funding of its path to commercialization.
During the third quarter, NuScale signed MOUs with entities in Poland and the Ukraine.
They are seeking to move forward with small modular reactor deployments.
NuScale also reached an agreement at COP26 to advance clean energy development in Romania, and Fluor signed an MOU with Bulgarian Energy Holding, as they look for opportunities to convert their existing coal-fired fleet to SMRs.
NuScale also announced the building out of its manufacturing supply chain with a key partner in Canada.
Finally, Fluor received additional work from Utah Associated Municipal Power Systems to develop the NRC combined construction and operating license application and the initial site-specific plant design for the NuScale technology facility to be built at the Idaho National Laboratory.
Since September, Fluor has been working to meet vaccine deadlines on government projects that are covered under President Biden's executive order.
In Mission Solutions, where a majority of our government contracts have received the mandate contract language, we will continue to work toward complying with the vaccine mandate and encourage our employees to meet the corresponding deadlines.
Our nongovernment business lines are also encountering vaccine mandates being issued by a few commercial clients.
We are carefully considering such mandates to ensure they are properly addressed in contract modifications, are implemented in a legally compliant manner and keep our projects productive.
Yesterday, in addition, OSHA released a new emergency temporary standard that will require companies with 100 or more employees to mandate that their staff be fully vaccinated or get weekly testing.
Our teams will be working closely together to ensure we respond accordingly.
On the international front, we are starting to see clients and government signal moves in a similar direction.
On Slide 12, I want to share a few observations as we head into the final quarter of 2021 and provide a look ahead into 2022.
In the near term, we expect to see variability in new awards as clients continue to weigh the timing of capital expenditures against the impacts of supply chain disruptions, labor availability and inflation.
Currently, we are working on or have recently completed several hundred Study and FEED projects, representing over $170 billion in estimated total installed cost.
Looking ahead, we are tracking over 200 Study and FEED prospects in the next 18 months, representing over $150 billion in TIC across the markets we serve.
Overall, I'm very pleased with the speed and the direction we are moving the company.
We are well into creating an organization that aligns with the needs of our clients and the expectations of consistent returns for our stakeholders.
This includes a healthier backlog that is coupled with our efforts to improve our processes and permanently reduce costs throughout the organization.
During the quarter, we finalized our path forward that includes overhead savings of over $150 million annually when fully implemented.
For the third quarter of 2021, we are reporting a diluted adjusted earnings per share amount of $0.23.
We continue to make significant improvements to our capital structure.
Using the proceeds from the convertible preferred offering, we successfully tendered for our notes maturing in 2023 and 2024.
When you include the open market purchases in July, we were able to reduce outstanding debt by $509 million or 30% from the $1.7 billion in total debt outstanding at the end of June.
When we laid out the company's strategic goals in 2024, we included a target debt to total capitalization ratio of 40%.
I'm pleased to report that we were able to accelerate this process, and we are now below that target at 37%, which is a significant improvement from 55% back in January.
Although we are ahead of our three-year plan as it relates to our capital structure, we will continue to look at options for the remaining outstanding indebtedness under the 2023 and 2024 notes in a way that supports a longer-term credit facility.
Our overall segment profit for the quarter was $110 million or 3.5% and included the $18 million gain for embedded derivatives in Energy Solutions and quarterly new scale expenses of $8 million.
Excluding these items, our total segment profit margin is 3.2%, in line with our guidance for the year.
To give more perspective, year-to-date segment profit margin was 3.3% driven by Energy Solutions at 5.8% and Mission Solutions at 5.3%.
Our ending cash and marketable securities balance was $2.2 billion and reflects cash deployed from the convertible offering to reduce outstanding debt.
Despite the incremental cash demands on legacy projects, we've been able to keep our cash balance at these levels for the past three years.
Our operating cash flow for the quarter was an outflow of $66 million.
This outflow was driven by the timing of cash inflows.
We expect full year operating cash flow to be neutral to slightly positive.
Our G and A expense was $42 million compared to $31 million last quarter.
This increase is due primarily to ongoing investigation costs.
At the end of the quarter, our backlog contained $1.1 billion in legacy projects that are in a loss position, $900 million of which is related to the Gordie Howe Project.
We anticipate cash contributions to these loss projects in the fourth quarter to be more than offset by the final settlement payment for Purple Line.
Moving to asset divestitures.
In our last call, we shared that we had a high interest in Stork, with over 50 parties signing an NDA and receiving an information memorandum.
Since then, nonbinding offers have been received.
And due to this high level of interest, the divestiture team worked through two steps of selection since late September.
We are pleased to have down-selected to a few strong bidders who are doing their due diligence and submitting binding offers later this month.
We remain on schedule and are planning to close the sale by end of Q1 2022.
As it relates to AMECO South America reported in discontinued operations, we are holding productive conversations that support our strategy of transacting this business in the next few months as well.
On the P3 front, we are making progress on transacting our interest in a completed infrastructure project in North America.
We expect to receive additional proceeds early next year.
As David mentioned, our cost reduction initiative have started to accelerate.
We now identified over $150 million in annual savings and have started to implement our plan to fully realize this run rate savings by 2024.
As part of Fluor's focus on managing internal costs, the company has implemented a plan to rightsize our global real estate footprint.
When fully realized in 2024, this represents an additional $20 million in annual savings.
Based on current trends, we are raising our adjusted earnings per share guidance from $0.60 to $0.80, up to $0.85 to $1 per diluted share.
We are also adjusting our Q4 segment level guidance and expect margins to be approximately 4% in Energy Solutions, which excludes currency exchange fluctuations and the embedded foreign currency derivative; approximately 4.5% in Urban Solutions; and 3.5% to 4% in Mission Solutions.
Our guidance for the remainder of the year remains modest -- assumes modest revenue increases in Mission and Urban Solutions, full year corporate G and A expenses of $185 million to $195 million and a tax rate of approximately 35%.
Finally, I want to point out a little administrative housekeeping that you will see in our SEC filings over the next few days.
We will be filing an SA to register the Chief Executive Officer equity awards granted in December.
And separately, we will file several amendments to deregister shares under SH related to our 401(k) plans and some of our prior compensation plans that are no longer active.
Operator, we are now ready for our first question.
| sees fy adjusted earnings per share $0.85 to $1.00.
q3 adjusted earnings per share $0.23 from continuing operations.
q3 adjusted earnings per share $0.23.
q3 new awards of $3 billion with ending backlog of $21 billion.
|
During our call, management may discuss certain items which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.
With the rollout of vaccines in full swing and restrictions lifting across the country, our guests' pent-up demand for a dine-in experience is being released as well.
People are finally starting to feel safer to venture out and spend more -- spend some of the money they've been saving over the past year.
We're excited about the positive momentum in our economy and the resurgence in our dining rooms.
When we last talked at the end of January, we were already seeing progress in the business, even as we were navigating a COVID spike that drove another wave of capacity restrictions in our dining rooms.
Just as we started to see numbers of cases come back down, we were hit with the winter storm of the century that impacted our restaurants across Texas and the southeast at levels we haven't experienced before.
But despite the challenges at the start of the third quarter, we ended strong, delivering an adjusted earnings per share of $0.78 with Chili's sales returning to positive territory from an absolute perspective.
And we've seen those sales trends continue into April.
When we look at our more normalized performance of fiscal '19, Chili's sales are up 10%, and nearly three-quarters of our restaurants are generating meaningful positive results, even though we're still social distancing and wearing masks in all of our restaurants and we're still operating under capacity restraints across the country.
We believe, all along, the consumers' increased demand for convenience would continue post-pandemic, and it's playing out that way.
As our dining room traffic increases, our off-premise business continues to hold strong.
We expect that when things normalize, we'll see stronger dining rooms and a takeout and delivery business stronger than it was pre-pandemic.
As you think about Maggiano's in the context of this recovery, upscale casual is playing itself out a little differently.
We're pleased with the significant improvements in the Maggiano's business, especially in their dining rooms.
Now, it's just a matter of how quickly banquets come back.
We know there's significant pent-up demand and we're well-positioned to meet it.
We're already seeing signs of social occasions returning, and we feel good about building our corporate business back in time for the important holiday season.
Staying focused on our strategy throughout the extraordinary events of the past year has served us well as we consistently outperformed the industry.
We have good line of sight to hit the targets we were expecting post-pandemic at both Chili's and Maggiano's.
Navigating the past year taught us we can run this business even more efficiently than in the past, and we're committed to keeping our cost structure in line.
We think our category leadership -- driven by the multiyear investments in our infrastructure and digital capabilities will help us continue to outpace the industry.
We still have a lot of heart for our restructured marketing approach, and we'll continue to leverage our digital expertise to connect with consumers and drive traffic.
The subject of labor is clearly top of mind across our industry.
Today's labor market is one of the toughest ones we've experienced, but we have the tools to navigate through it successfully.
While our performance throughout the pandemic enabled us to keep higher levels of staffing in our restaurants, we are hiring more team members than usual to support our increased volumes.
We're also benefiting from our decision to keep our managers on board throughout the pandemic as they provide the operational leadership to staff our teams and take care of our guests.
We're fortunate to be able to leverage our scale, the digital expertise we built, and our PeopleWorks team to recruit talent in creative ways to keep our cost structure intact and our guests coming back.
We know the best way to maintain profit margins in this business is through volume, so we leaned into virtual brands as a way to leverage our assets and tap unused capacity.
It's Just Wings continues to perform well, and we're on track to hit that $150 million target we set at the beginning of the year.
Almost all of our domestic franchise partners jumped on the opportunity and globally, several of our partners have already picked it up.
Wings is now in nine countries and 160 locations outside the U.S., making it a formidable brand in just its first year.
It's a real testament to our methodical and disciplined virtual brand strategy, how we've executed it and the leverage it brings to our P&L and to our franchise partners' business.
We have the system up and running and we're executing it well, especially during high volumes.
Now, we're focused on building the brand and leveraging the growth opportunities ahead.
We believe takeout holds a lot of potential for us.
And now that we've invested in the technology and infrastructure to support it, we're working to increase awareness levels outside the delivery channel.
We've learned a lot this year with the launch of It's Just Wings that will leverage when we're ready for our next virtual brand.
We're pleased with the current results from the expanded test of Maggiano's classics, and we're working through the timing to ensure we're able to support our operators and deliver a great guest experience.
So this has been an exceptional year of learning for us, not just with virtual brands but in many ways.
We've learned the restaurant industry in general, and specifically, our team is full of unbelievably resilient amazing human beings.
I'm so impressed by how this team has risen to every challenge that's come our way.
We're stronger for it, and we're prepared for the growth opportunities ahead as vaccinations spread across the country and dining rooms fill up.
As we look forward, our ability to navigate through any short-term cost headwinds is solid.
Our scale affords us advantages in terms of forward contracting, keeping our employment base intact, and delivering one of the strongest value propositions in the industry.
Longer term, we see a lot of organic growth potential for Brinker.
Obviously, we'll continue to execute our multiyear virtual brand strategy and protect our improved business model.
And with higher volumes, we'll capture new development opportunities and keep the brand fresh through our remodel program.
I'm proud of our progress on our results, the strength of our brands, and our line of sight to future earnings performance.
While the quarter definitely had its unique issues, I'm most pleased with the momentum we are generating as we move closer to a more normal operating environment, setting up further success both this quarter and next fiscal year.
For the third quarter of fiscal 2021, Brinker reported total revenues of $820 million with consolidated comp sales of negative 3.3%.
Our adjusted diluted earnings per share for the quarter was $0.78.
Chili's recorded flat comp sales and positive 4% traffic for the quarter, with the year-over-year performance improving throughout the quarter.
Regional performance is strong nationwide with a broad range of state markets rebuilding their dining room sales back to higher levels, above 75%, let's say when compared to pre-COVID performance.
We do still have a smaller set of state markets such as California and Illinois, which are important markets for us, that are earlier in their dining room reopening process.
We anticipate they will follow similar growth patterns as we move through the next several months.
A couple of items to note related to the third quarter.
First, we had a holiday flip the first week, with Christmas moving into the quarter, resulting in a negative 1% comp sales impact.
In February, we experienced Uri, a most unique winter storm that hit with historic subzero temperatures and power outages for more than a week, affecting approximately 30% of our restaurants.
The material impact of the storm resulted in an estimated $10.5 million in lost revenues, a negative impact to consolidated comp sales of 1.2%, and reduced adjusted earnings per share of approximately $0.06.
Once things thawed out, our positive progression returned, with average weekly sales volume hitting record highs in March.
As we started to lap the beginning of the pandemic in mid-March, as one would expect, comp sales moved significantly positive and are likely to remain elevated for the foreseeable future.
While pleased with this progression, we believe a two-year comp comparison is a more insightful view of our performance.
In this regard, the consolidated two-year comp results for Brinker for the first four weeks of April was a positive 6.3%, driven by Chili's results of a positive 10.1% for the same time frame.
I would note that Chili's is lapping off of a positive 2.9% in the third quarter of F '19.
Increasing sales volumes also favorably impacted margins, resulting in a consolidated restaurant operating margin for the third quarter of 13.9% compared to 12.8% for the third quarter of fiscal '20.
Again, the winter storms had a negative impact on ROM, reducing the margin by an estimated 30 basis points.
Food and beverage expense as a percent of company sales was 70 basis points favorable to prior year, primarily driven by menu mix as we featured steak on three for $10 in the prior year.
Pricing was slightly favorable, and commodities were flat.
Labor expense, again as a percent of company sales, was favorable 70 basis points as compared to the prior year.
During the quarter, lower dining room capacity year over year resulted in a reduced hourly labor cost.
We do anticipate hourly labor to increase, importantly along with sales volumes as capacity restrictions lift in certain states.
During the quarter, we meaningfully increased our manager bonus payout, impacting margins by approximately 60 basis points as we move to reward this critical leadership level for outstanding performance.
By leveraging our scale, our well-established people, practices, and benefits and utilizing our digital connectivity know-how, we are confident in our ability to effectively manage through the current labor market environment.
Restaurant expense was unfavorable year over year by 30 basis points, a reflection of increased off-premise costs such as packaging and fees, driven by our successful off-premise sales channels.
Advertising expense continues in a favorable year-over-year position as we lean into our digital and loyalty-driven marketing strategy.
Brinker continues to deliver strong operating cash flow.
Year to date, we have generated $268 million in operating cash flow.
During the third quarter, we used a portion of that cash flow to repay $115 million in revolver borrowings, bringing the outstanding balance to under $300 million.
We anticipate further borrowing reduction in the fourth quarter.
Additionally, we are investing significantly into the growth of our brands.
Capital expenditures year-to-date totaled approximately $62 million.
We opened two new Chili's during the third quarter and two additional locations in April, bringing our total for this fiscal year to 10.
We are moving aggressively to further build our development resources and increase the NRO pipeline.
We continue to target expanding new restaurant development to a range of 18 to 22 restaurants a year.
We also are investing in reimages of our existing fleet, with a particular focus on the Midwest restaurants acquired in early fiscal '20.
Brinker has continually proven to be a leader in utilizing technology to enhance the guest experience and improve operational performance.
In fiscal 2021, we will invest approximately $20 million of capital and technology that enhances our digital guest connectivity, supports our virtual brand growth, and improves our in-restaurant dining experience.
Now, turning to our expectations for the final quarter of this fiscal year.
We expect both Chili's and Maggiano's to maintain their current favorable sales trends throughout the quarter, assuming COVID cases continue to decline and state and local restrictions continue to ease.
Let me provide some additional specifics for the fourth quarter.
Total revenue is estimated to be in the $950 million to $1 billion range.
Adjusted earnings per diluted share are estimated in the $1.55 to $1.70 range.
Weighted average diluted shares are estimated to be in the 47 million to 48 million share range.
Also, as we have previously noted, fiscal 2021 includes a 53rd week at the end of this fourth quarter.
As we settle into the last quarter of the fiscal year, we are excited about the momentum we have built from the uncertainty that surrounded the restaurant industry a year ago.
During the past year, the members of our support teams here in Dallas stepped up and provided innovative solutions to any number of issues since the pandemic changed how we all approach our work.
And our frontline team members in the restaurants have continually delivered for our guests in ways none of us would have contemplated not too long ago.
We are grateful to both these groups of team members who combined to lead the casual dining sector throughout this past year.
They are all committed to finishing strong this fiscal year and then carrying the success forward.
| estimated impact of winter storm uri during q3 of fiscal 2021 was a decrease in company sales of $10.5 million.
estimated impact of winter storm uri during q3 was a decrease comparable restaurant sales of 1.2%.
brinker international - estimated impact of winter storm uri during q3 was decrease in net income per diluted share, excluding special items, of $0.06.
q4 2021 revenues are expected to be in range of $950 million to $1.0 billion.
q4 2021 net income per diluted share, excluding special items, is expected to be in range of $1.55 to $1.70.
excluding special items net income per diluted share in q3 of fiscal 2021 was $0.78.
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As usual, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives.
During our call, management may discuss certain items which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.
Q2 was a dynamic quarter, and Joe is going to walk you through the details.
You know, as we think about all the craziness 2020 brought across our industry and our world, we're also appreciative of the invaluable lessons we gained.
We learned we have the right team in the field and here at the restaurant support center.
Our operators are working tirelessly every day to deliver great experiences for our guests and team members as we aggressively pursue opportunities to grow our business organically.
We learned that we can drive our business and increase market share despite the hurdles brought on by a global pandemic and widespread civil and political interest.
In the second quarter, Chili's increased its two-year trend of taking share and leading the category with an 18% beat in sales and a 25% beat in traffic according to KNAPP-TRACK.
We learned that our strategies work.
The ways we leveraged our scale and our ownership model and the investments we continue to make in technology and improving our operational systems, they were working well for us prior to the pandemic and continued to work even more effectively throughout the year.
Leveraging those competitive advantages, open up opportunities for us to grow our business in unique and innovative ways, like elevating our digital guest experience at both brands and leaning into virtual brands.
Those things are hard to execute and even harder to replicate.
So we're taking those lessons into 2021 as we prepare to accelerate organic growth in a post-vaccine environment.
We believe like most others that a widespread vaccine will indeed release pent-up dining room demand, and our operators are excited to return to full capacity and deliver more great guest experiences in person.
But we don't expect a return to the old normal.
2020 fundamentally changed us as consumers.
We were forced to use technology to enjoy our favorite restaurants in new ways like third-party delivery.
Crop side takeout, QR code menus, and mobile payment.
And now that we've experienced greater convenience and control over our experience, we're not likely to give it all back.
The Brinker team knew that convenience was a big opportunity even before the pandemic.
2020 just accelerated our commitment to embrace consumers' gravitation toward digital interaction and meet them where they are.
We believe digital sales and traffic will continue to be a strategic driver of our results in both the near and long term.
So in preparation for fiscal '22, we're dedicating even more time, effort, and capital to accelerate in our competitive advantage as a digital leader in the category and aggressively pursuing opportunities to drive our top and bottom line.
At Chili's, we're testing a fully integrated digital experience that gives our guests control over the pace of their experience and level of interaction with our team, whether they're dining in or off-premise.
It's still early, but the team is making tremendous progress, and the guests and our test restaurants are responding really well.
We anticipate a rollout beginning fourth quarter.
We've also spent a great deal of time and effort systematizing what goes out the side door at both our brands.
We got really good at takeout and delivery during the height of quarantine.
So while our dining rooms are still at limited capacity, we're ensuring we have strong systems in place to support our operators and execute a robust off-premise business even as our dining rooms returned to full capacity.
Delivering a best-in-class off-premise experience also supports virtual brands, which is a key component of our growth strategy.
Our scale and our ownership model, coupled with our ability to mine data and develop systems, is proving very effective in this new world of virtual brands.
It's Just Wings is on track and performing well.
We believe there's significant upside.
So we're focused on building it into a strong, sustainable brand.
Some of the biggest brands in the world right now are virtual.
So we know the model resonates with consumers as long as you deliver a great product.
Right now, we have a one-channel solution.
We're working to optimize that channel through incremental marketing opportunities and expanded consumer touchpoints.
We're also going to grow the brand through additional channels like takeout.
We're ensuring we have the right systems in place that will best support our operator's ability to execute at a high level, especially as dining rooms reopen.
Once we know we're consistently delivering a great guest experience and our operator at -- from our operators at full volumes, we'll move strategically to launch another virtual brand.
I anticipate that by the end of this fiscal year, we'll have a clear line of sight and be able to share more details with you.
Listing 2020 was a crazy year, but through it, we confirm that our strategies are working and that we have an outstanding team in the field and at the restaurant support center.
Every day, they demonstrate their ability to adapt for severe and win.
As vaccines roll out and our country begins to leave their homes once again, I firmly believe we'll continue to win.
Let me finish our prepared comments by providing some detail and context to our second-quarter results, as well as offer a few insights for our January's period's sales performance.
The second-quarter fiscal 2021, Brinker delivered adjusted diluted earnings per share of $0.35.
Brinker's total revenues were $761 million, and consolidated reported net comp sales were negative 12.1%.
A couple of items to note for the quarter.
First, let me highlight impacts to the consolidated quarter resulting from Maggiano's performance, which was highly constrained by COVID restrictions and appropriate consumer reactions to the pandemic.
As a reminder, the second quarter is traditionally their highest performing quarter.
However, this year, COVID eliminated most of their typically robust banquet and corporate catering channels, both of which tend to overdeliver to results for their second quarter.
The brand's operating profit was $22 million below last year, constituting virtually all of the reduction in consolidated operating profit for Brinker.
The impact on consolidated comp sales and restaurant operating margin were also outsized with the brand reporting net comp sales of negative 47% and a restaurant operating margin of 5.5%, down more than 11% from prior year.
With the second quarter now behind us, we expect the impact from Maggiano's to the consolidated performance of Brinker to be more muted as we head into the rest of the fiscal year, particularly as the brand recovers from both an improved operating environment and the implementation of performance driving initiatives.
Now, moving on to Chili's.
The brand continued its relative strong performance, although also impacted by COVID restrictions during the latter half of the quarter.
Operating income for the brand was relatively close to last year and only $1.6 million.
Chili's reported net comp sales for the second quarter of negative 6.3%.
This result does contain a holiday flip, which benefited the brand by approximately 100 basis points as Christmas moved out of Q2 and into Q3.
The brand continues to meaningfully outperform the Casual-Dining sector with our gap strengthening in both sales and traffic through the second quarter.
Traffic gaps in the KNAPP index exceeded 20% throughout the quarter.
Performance relative to the competition was strong throughout the country, with double-digit sales gaps recorded in regions from East to West Coast.
Included in the consolidated adjusted net income for the quarter with a tax benefit of approximately $2.4 million, primarily driven by employment tax credits.
Part of this benefit is a $1.8 million catch-up related to Q1, which was over accrued relative to our current expectations for our annual tax liability.
The consolidated restaurant operating margin for the second quarter was 10.7%.
Most of the variance to prior year is the result of the lower-than-normal contribution from Maggiano's, which impacted the consolidated margin by 130 basis points.
The leverage due to top-line softening in November and December was the secondary influence.
A food and beverage expense was unfavorable year over year by 40 basis points primarily a result of menu mix, some higher costs from items such as cheese and produce.
Labor costs were favorable 10 basis points with savings in hourly expenses, offset by deleverage.
Included in this performance is a consistent level of manager bonus compared to last year's second quarter.
We remain committed to retaining our restaurant leadership teams as they are critical to our success, both in the short term and as the operating environment returns to more normal conditions.
Restaurant expense was unfavorable year over year by 170 basis points, driven by top-line deleverage, increased delivery, and packaging, partially offset by lower advertising and restaurant maintenance expenses.
Even with the volatile operating environment, Brinker has delivered solid cash flow, generating $130 million of operating cash flow year to date.
After capital expenditures of $37 million, our free cash flow for the first six months totaled nearly $93 million.
As I mentioned last quarter, we first used our cash to invest in the business.
Unit expansion is progressing with six new or relocated restaurants opened year to date.
We also continue to invest in restaurant reimages, technology, and equipment to further enhance our guest experience and allow for better execution as our sales volumes, both on and off-premise grow.
Our second priority is to pay down debt.
So far, during this fiscal year, we have retired over $66 million of revolving credit borrowings, and plan for further meaningful reductions as we progress through the second half of the year.
As I've indicated during prior earnings calls, we are strengthening our balance sheet by deleveraging to below 3.5 times lease-adjusted debt, which we anticipate achieving next fiscal year.
From a total liquidity perspective, we ended the quarter with $64 million of cash and total liquidity of just under $658 million.
While we are not providing specific guidance for the third quarter due to the ongoing operational environment, I do want to offer some perspective on January.
While the first week of January was negatively impacted by the holiday flip of Christmas moving to our third quarter, top-line results for Chile's strengthened as we move through the remaining four weeks of the period.
Underlying this performance is improvement in the net comp sales to a range of negative 5% to negative 6% for the last four weeks combined.
These results obviously included the impact of ongoing COVID-related restrictions, particularly dining room closures in our No.
3 and 4 markets of California and Illinois.
Factoring out these two markets, the rest of the brand during the last four weeks of the January period should record net comp sales of approximately positive 2%, again, clearly indicating the brand's ability to perform in a strong positive sales manner with dining rooms open.
Also supporting the January results is the performance of It's Just Wings.
As you might expect, the brand does well in conjunction with sports, and our ability to market on the delivery platform around major events allowed highly incremental sales and set a number of sales records during the period.
Overall, we are hopeful for an improved operating environment as we move through the quarter with the opportunity to return to recovery level performance we delivered in the early fall.
In March, we start to lap at the initial pandemic outbreak, which we anticipate will create meaningful year-over-year positive net comp sales comparisons.
Looking beyond the short-term volatility caused by the ways of COVID restrictions to the solid long-term strategy being executed by our operators, I'm confident as to what this company can deliver for our shareholders.
Our focus and execution will enable our continued performance as a leader for the Casual-Dining sector for the rest of this fiscal year and the years ahead.
| qtrly adjusted earnings per share $0.35.
qtrly brinker company owned comparable restaurant sales down 12.1%.
brinker international qtrly total revenue declined due to capacity limitations,personal safety preferences,partially offset by increased off-premise sales.
qtrly chili's company-owned comparable restaurant sales decreased 6.3%.
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They involve risks, uncertainties and assumptions and there can be no assurance that actual results will not materially different 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 will 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 Phegley; and our COO, Dave Lyle.
I'm pleased to announce that core earnings came in at $0.10 per share for the quarter, exceeding our recently increased dividend of $0.08 per share.
Book value was $3.86 at quarter end, which represents an increase of 11.2% for the quarter.
The combination of the increased dividend and our book value appreciation produced an economic return of 13.5% for the quarter.
The improvement in book value has continued since quarter-end, as we estimate that book value was up approximately 5% through last Friday, with those gains concentrated in January and relatively flat performance so far during February.
During the fourth quarter, financial markets continued to recover as the impact of stimulus programs and optimism around the rollout of vaccinations began to take hold.
Risk assets across fixed income continue to benefit from strong investor interest, agency mortgages in particular had a strong quarter.
Consistent demand for current coupon agency mortgages from the Federal Reserve and commercial banks outweighed elevated issuance, leading to a strong performance for the sector.
At IVR, we have largely completed our reallocation to Agency MBS, ending the year with 98% of our assets in agencies.
We continue to take advantage of the strong demand for credit assets by further reducing our credit book by $336 million, resulting in a credit portfolio of $161 million at quarter end.
Our liquidity position remains strong as we ended December with a $745 million balance in cash and unencumbered assets.
Earlier this month, we successfully completed a common stock offering with net proceeds of approximately $103 million that was deployed into additional agency mortgages.
This will allow us to build upon our success in restoring core earnings, while adding scale and helping to balance our capital structure.
As we look out over the next several quarters, our outlook remains relatively constructive.
We remain positive on agency mortgages, as we expect demand from the Federal Reserve and commercial banks remains strong by the steeper curve and recent underperformance keeps the ROE and new investments attractive.
Funding cost should remain attractive, as well as we expect the Fed to keep short-term interest rates low for the foreseeable future.
Despite the recent widening, agency mortgage valuations remain rich and along with increased levels of prepayments present some potential headwinds for the basis.
However, our focus on active management and security selection purchasing specified pool collateral helps to mitigate these risks.
I'll stop here and let Brian go through the portfolio.
I'll begin on slide four, which details the changes in the US Treasury yield curve over the past 12 months in the upper left hand chart.
Positive developments in regards to the COVID-19 vaccine and an improving economic recovery, led to a bare steepening move in interest rates.
As the short-end remained anchored, while the 10-year and 30-year both increased approximately 20 basis points during the quarter.
The upper right-hand chart indicates the impact monetary policy has had on short-term funding rates, which remain subdued during the quarter and continue to be attractive for borrowers in the short end of the yield curve.
Financial market volatility in the bottom left was also impacted substantially by monetary policy and continued to diminish into year-end, despite a modest uptick as we approach the November elections in the US.
Lastly in the bottom right chart, we detailed the growth in both US Bank and Federal Reserve Holdings of Agency RMBS, which had a significant impact on Agency RMBS valuations, as we entered 2021, despite net issuance close to an all-time record at $210 billion in the quarter.
The combination of the Federal Reserve with the prescribed $120 billion of net purchases and commercial banks with over $200 billion of net demand during the quarter, produced impressive hedged returns in the asset class.
Particularly in lower coupon 30 years, as the primary beneficiary of the demand from both entities.
These totals resulted a net demand for the year of over $600 billion for the Fed and $500 billion from banks, overwhelming the historically high $500 billion of net supply.
Moving on to Slide 5, where we provide more detail on the Agency RMBS market.
You can see the impact, strong supply and demand technicals had on lower coupon valuations during the quarter, driving treasury spread significantly tighter in the upper left hand chart.
Specified pool pay-ups, as shown in the upper right were modestly weaker and lower coupons, as interest rates rose, diminishing the need for prepayment protection, while higher coupon pay-ups stayed well supported as prepayments remained elevated for borrowers that continue to have significant incentive to refinance at current low mortgage rates.
The chart in the lower left shows the significant increase in prepayment speeds for lower coupon mortgages during the year, as historically low mortgage rates and increasingly efficient refinancing drove speeds near all time highs.
Finally, the lower right-hand chart shows the implied financing rate for dollar roll transactions and 30-year, 2%, 2.5% and 3% TBAs.
The implied financing rate is the reinvestment rate for which an investors in different between taking delivery of a mortgage pool or rolling the TBA contract forward one month and investing the cash elsewhere.
As indicated in the chart, volatility in dollar roll attractiveness increased during the quarter, as implied financing rates improved for higher coupon 30 year, 2.5% and 3%'s and were weaker for 30 year 2%'s.
Dollar rolls trading with implied financing rates below 0% indicate a particularly attractive environment for investors and while lower coupon TBAs are not rolling quite as well as they were late in the third and early in the fourth quarters, they still provide investors with improved funding levels for Agency RMBS relative to short-term repo in a highly liquid securities.
Slide 6 provides detail on our Agency RMBS investments.
As indicated in the upper left hand chart, in addition to the 18% allocation to Agency TBA, our Agency RMBS portfolio is well diversified across specified pool collateral types.
We remain focused on lower price collateral stories, mitigating our exposure to elevated payoffs, at historically tight spreads, as our specified pool holdings had a weighted average pay up of 0.8 points as of 12/31.
We purchased $3.1 billion of lower coupon 30 year specified pools during the quarter, while rotating out of $491 million of underperforming pools, underscoring our active management strategy within the portfolio and the superior liquidity of the asset class.
In addition, we added $800 million notional of lower coupon 30 year TBA, increasing our allocation from 14% at the end of the third quarter to 18%, and dollar rolls remain an attractive and highly liquid alternative to holding specified pools in financing them via short-term repo.
Our specified pool holdings paid 3.9% CPR, during the quarter, as our relatively newly issued pools at a weighted average loan age of five months at quarter end.
We anticipate prepayment speeds on our holdings will increase as our holdings to move up the seasoning ramp.
But the increase in speed should be mitigated by the recent move higher in interest rates and wider spreads in Agency RMBS.
We remain focused primarily in 30-year, 2% and 2.5% coupons, and those coupons provide the most attractive combination of lower prepayment speeds and strong support via consistent, Federal Reserve and commercial bank demand.
While we anticipate the elevated net issuance experienced in 2020 to continue into 2021, we expect the Fed demand to absorb the net issuance while bank demand though unlikely to match the total in 2020 should provide sufficient support, as bank deposits continue to outweigh loan growth.
Our remaining credit investments are detailed on Slide 7 with non-Agency CMBS representing nearly 70% of the $161 million portfolio.
As John referenced on Slide 3, we sold $336 million of credit investments during the quarter, a strong demand for our assets provided attractive exit opportunities.
The continued reduction of our credit portfolio allowed us to increase the allocation to Agency RMBS, which increased the earnings power of the company, while increasing the liquidity and reducing the credit risk within the portfolio.
Our $121 million of remaining credit securities are high quality, with 72% 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, given the significant improvements experienced inflows we reached in the second quarter of 2020, we believe these assets are attractive holdings as 100% are held on an unlevered basis and provide attractive unlevered yields.
Lastly, Slide 8 details the growth of our funding and hedge book during the fourth 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 are 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 $7.2 billion as of December 31 and hedges associated with those borrowings also grew during the quarter to $6.3 billion notional of fixed to floating rate interest rate swaps.
We continue to take advantage of low interest rates further out, the yield curve to lock in lower funding costs, via longer maturity hedges with a weighted average life of 6.7 years at year-end.
Given the potential for a steepening yield curve, as the Federal Reserve keeps short-term rates anchored for the foreseeable future.
The modest increase in interest rates on our hedge book represents the growth of our portfolio and the rising interest rate environment experienced in the fourth quarter.
While rates on our repo borrowings continue to drift lower during the quarter and into 2021, with one month repo rates for our Agency RMBS holdings averaging 21 basis points at year-end.
Our economic leverage, when including TBA exposure increased from 5.1 times debt-to-equity on September 30 to 6.6 times debt-to-equity as of December 31, indicating further progress toward the transition to an agency focused strategy.
Economic leverage since year end is modestly higher, estimated 7.1 times as of Friday and deployment of proceeds from our February capital raise into Agency RMBS investments financed via short-term repo, increased company leverage to our current target.
The Agency RMBS market continues to be well supported by the Federal Reserve purchase program, as well as commercial bank demand and robust demand for our credit assets has provided us with opportunities to reallocate equity into Agency RMBS.
While the prepayment environment in Agency RMBS, remains challenging we believe our careful selection of prepayment protection, active management and higher mortgage rates will mitigate the potential for faster prepayments speeds, and their negative impact on yields.
In addition, while Agency RMBS spread appear tight, recent underperformance and bear steepening of the yield curve will benefit reinvestment opportunities.
Lastly, monetary policy remains very supportive and we expect that to continue throughout 2021 at the Federal Reserve communicates a desire to maintain an accommodative stance over the medium term.
| q4 core earnings per share $0.10.
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Actual results may differ materially due to various risks and uncertainties, including those detailed in our SEC filings.
We will also share results related to MonotaRO.
Please remember that MonotaRO is a public company and follows Japanese GAAP, which just differs from U.S. GAAP and is reported in our results one month in arrears.
As a result, the numbers disclosed today will differ somewhat from MonotaRO's public statements.
The Grainger Edge is our framework that defines who we are, why we exist and where we're going while establishing a set of operating principles.
I'm proud of the ways that we use the principles to guide decisions and deliver results.
Things are very challenging on many fronts.
Given the ongoing pandemic and labor and material shortages, nothing in the world seems to be working exactly the way it should.
Our manufacturing partners, transportation partners, Grainger team members, and certainly our customers, are all finding harder than ever to keep the world working.
Grainger is proud to support the hospital staff, government agencies, teachers and many others who continue to do great work in a very challenging environment.
I might say that in spite of these challenges, we performed very well, but in reality, it's partly because of how we are wired that Grainger is doing so well.
We've seen strong demand this quarter, especially in the U.S.
We have product available in our network and have been able to ship it to customers quickly.
Our service to customers has been exceptional given the circumstances.
We are leveraging our scale, demonstrating our agility and gaining share.
Our goal is to always be in an advantaged position to help our customers solve their problems.
As I've been out with customers this past quarter time and again, I hear that Grainger is executing well.
Customers tell me that they are pleased with our performance, and you can see this in our revenue growth.
While the current supply chain environment is volatile and uncertain, we are confident in our current plans and our readiness to respond to any evolving dynamics.
In the face of labor and material shortages throughout the supply chain, we are providing strong relative service and helping our customers avoid disruptions.
We continue to actively leverage our network even if sometimes we have to the orders from less optimal locations at a higher cost.
We are investing in inventory while actively monitoring the freight market and the West Coast ports.
And as it relates to labor, we have made great progress in closing staffing gaps and training team members, which has resulted in improvements, especially in our DC operations.
Our customer research shows that this is driving customer satisfaction.
Turning to our financial highlights.
Demand in the quarter was robust, resulting in strong revenue and gross margin performance and well-managed SG&A.
We achieved organic daily sales growth of 11.9% for the total company on a constant currency basis.
When compared to Q3 2019, the quarter was up 17.3% on a daily organic basis, driven primarily by core non-pandemic product sales, which is a positive indicator of our underlying run rate performance.
Our High-Touch Solutions in North America segment grew 11.6% on a daily constant currency basis.
In the U.S., we drove approximately 100 basis points of share outgrowth versus the prior year and 475 basis points on a two year average.
We remain confident in our ability to grow 300 to 400 basis points faster than the market on an ongoing basis.
Our service to customers, especially the last two years, has contributed to meaningful share gain.
Our Endless Assortment segment finished the quarter with 14.9% daily sales growth on a constant currency basis.
I'd like to note two things that temporarily moderated growth in this segment.
First, Zoro lapped a very strong third quarter in 2020.
For context, we opened up pandemic product supply to Zoro customers in Q3 2020 that was previously reserved mostly for government and healthcare customers.
In the third quarter 2021, Zoro managed to drive 11.9% revenue growth.
And when we compare that to Q3 2019, we are up 30.6%, which is really strong.
Also MonotaRO was impacted by several external factors, including a slow start to vaccinations and a generally slower Japanese economy.
In local days and local currency, sales were up about 17.5% compared to Q3 2020.
And MonotaRO continues to take share, especially as COVID restrictions lift and we grow with our targeted enterprise customers.
And as we look at results versus Q3 2019, MonotaRO sales are up over 37%.
We feel that the comparison to 2019 for both businesses is more indicative of our underlying business strength.
We still expect the segment to close the year with growth at about 20% above prior year.
We saw strong gross margin expansion across all segments, even above our expectations that we discussed last quarter.
High-Touch Solutions North America was up 140 basis points over Q3 of the prior year, and Endless Assortment was up 115 basis points.
Dee will cover the drivers for both segments.
Lastly, we returned $327 million to shareholders through dividends and share repurchases in the third quarter, and we maintained strong return on invested capital of 31.4%.
Turning to our quarterly results for the company.
I've discussed most of what's on this slide but wanted to point out a few additional items.
First, our SG&A was $812 million, right where we thought it would be.
We continue to invest in marketing and labor, primarily through increased variable compensation and gripped wage rates in the DCs.
And like many companies, we're also starting to see increased healthcare costs as team members return to routine medical visits and undergo deferred elective procedures.
And while overall spending is up versus the prior year, we are still gaining significant leverage when compared to 2019.
Our operating earnings were $438 million, up 17.4%.
And our resulting earnings per share is $5.65 for the quarter, which is growth of 25%.
Overall, it was a really strong quarter.
We continue to see a robust recovery with daily sales up 12% compared to the third quarter of 2020 and up 14.5% compared to the third quarter of 2019.
In the U.S., we saw strong growth, especially in our core non-pandemic product categories.
Both large and midsized customers saw significant growth at 10% and 19%, respectively.
Canada continues to be slow as recurring shutdowns in many of the larger provinces kept businesses closed or operating at minimal capacity.
As vaccination rates improve and businesses reopen, we expect more typical purchasing behavior to resume and sales to follow.
Canadian daily sales were up 11.7% or 5.7% in local days and local currency compared to the third quarter of 2020.
For the High-Touch Solutions segment, GP margin finished the quarter at 39.4%, up 140 basis points versus the prior year third quarter.
Our focus and diligence on managing price/cost spread contributed to our GP improvement.
In the quarter, we saw strong price realization to customers both on contract and web pricing.
Our realization was better than anticipated, and as a result, price/cost spread was above neutral.
In addition, consistent with the second quarter, our U.S. pandemic product mix was about 22%, an improvement versus 28% in the third quarter of 2020.
We are confident that our run rate GP remains strong and will finish in line with the expectations we set forth for the fourth quarter.
On slide 20, you'll find a chart with details on the U.S. and Canadian businesses.
This information has been provided to help bridge our prior reportable segments to our new High-Touch Solutions North American segment.
I'd like to give you some advanced notice that we will continue to show daily sales and gross margin by business.
However, as our operating expenses across the segment have become more intertwined, our operating margin by geography will no longer be provided in our 2022 reporting.
On slide 9, taking a deeper dive into High-Touch Solutions for the U.S. The Delta variant and the renewed mask mandates in July reversed the declining trend we were seeing in the second quarter for pandemic products.
As the virus surged, we saw pandemic product demand pick back up, especially for masks.
However, of particular note, our core non-pandemic sales growth was at or above 20% every month in the third quarter.
We are encouraged to see this growth as a sign of more regular business and economic activity.
When comparing core non-pandemic sales to Q3 2019, sales were up 12%, which is quite strong.
In total, our U.S. High-Touch Solutions business is up 12% for the third quarter 2021 and up 16% as compared to 2019.
Looking at market outgrowth on slide 10.
In the third quarter, as expected, we saw our share gain grow as we lap more reasonable yet still inflated Q3 2020 comparisons.
In the quarter, we estimate that the U.S. market grew between 10.5% and 11.5%, resulting in our estimated outgrowth of approximately 100 basis points versus Q3 2020.
To normalize for volatility, we are continuing to show the two year average share gain, which was about 475 basis points over the market for the third quarter of 2021, a really exceptional result.
Given the noise and fluctuations in the market number across industrials, the two year average is a better estimate of our true market outgrowth.
We remain focused on our key initiatives, which give us confidence in our ability to achieve our U.S. share gain goal of growing 300 to 400 basis points faster than the market.
Now let's cover our U.S. GP rate.
We saw a significant lift in the High-Touch U.S. GP performance in the quarter.
Sequentially, we wanted to comment on two of the biggest factors that make up the difference between the second quarter and the third quarter.
First, the biggest contributor, the inventory adjustments are behind us as anticipated.
In addition, we are seeing greater price realization than expected.
I'll note that while we sold some of the pandemic inventory that was previously written down, the impact to GP was immaterial.
We're encouraged by these results and are confident in our ability to achieve our expected 40.1% GP rate in Q4 based on continued pandemic mix improvements, our expected price realization in the fourth quarter and our ability to navigate supply chain challenges.
Moving to our Endless Assortment segment.
Daily sales increased 12.7% or 14.9% on a constant currency basis, driven by continued strength in our new customer acquisition at both Zoro and MonotaRO as well as growth of larger enterprise customers at MonotaRO.
GP expanded 115 basis points year-over-year driven primarily by Zoro U.S.
We took a number of pricing actions based on evolving market conditions, and we deemphasized lower-margin channels.
In addition, we experienced improved freight efficiencies at Zoro, primarily as a result of fewer B2C customers who typically place smaller orders that are more expensive to ship.
Operating margin for the segment finished up 80 basis points over the prior year third quarter due primarily to improved gross profit margin.
I'll go into more detail on the next slide as we provide further transparency on the results for both businesses.
Moving to slide 13.
In local currency and using Japan's local selling days, which occasionally differ from U.S. selling days, MonotaRO daily sales grew 17.5% compared to the third quarter of 2020.
GP margin finished the quarter at 25.8%, 30 basis points below the prior year third quarter, as we continue to grow with enterprise customers.
As a result, operating margin decreased 65 basis points to 12%.
Switching to Zoro U.S. Daily sales grew 11.9% as compared to the strongest sales quarter of 2020.
Zoro GP grew 375 basis points to 33.9% and achieved 325 basis points of operating margin expansion.
In addition to the strong financial performance in the segment, we also continue to execute well on our key initiatives.
First, when it comes to our registered users, we saw continued growth across both businesses, which is an important driver of top line performance.
And on the right, Zoro continues to actively add SKUs to the portfolio.
At the end of the third quarter of 2021, we had a total of eight million SKUs available online, achieving our goal for the year a quarter early, adding nearly two million SKUs in the last nine months.
We remain encouraged by our progress with SKU additions.
Once again, I would like to provide some color commentary as it relates to the fourth quarter and the full year.
For the fourth quarter for revenues, we expect total company daily sales to be between 11.5% and 12.5%.
We anticipate company gross margin will fall between 37.2% and 37.4%.
As discussed before, we expect the U.S. GP rate to exit the year at or above pre-pandemic levels.
And for SG&A, we expect a similar level of spending in the fourth quarter as we saw in the third quarter, between $810 million and $815 million with increased variable compensation, wages and healthcare expenses.
And while it's unclear at this point, we may have some additional risk as it relates to vaccine mandate costs.
Given the strong performance in the quarter, we remain confident in our guidance range.
For the full year, we expect revenue to be at or above the midpoint and all other metrics to be stronger than the low end of the range we discussed at the end of the second quarter, but likely still below the midpoint given the pandemic inventory adjustments taken in the first half.
First, I'm immensely proud of the Grainger team and their commitment.
It's been very challenging, but we continue to demonstrate the strength and resilience of our team and our supply chain.
Second, it was a very good quarter across the board.
The results were above our expectations.
And finally, despite the current market and supply chain uncertainties, we are confident in our ability to deliver solid performance in the fourth quarter and into 2022.
| q3 adjusted earnings per share $5.65.
q3 sales rose 11.7 percent to $3.4 billion.
reaffirming guidance ranges previously provided for 2021.
|
Before we begin, I want to mention that we will 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 third quarter performance.
We have long benefited from a commitment to customer service, interconnected digital and physical assets, and innovative brand partnerships.
However, we need to move faster and more aggressively to better capitalize on those strengths.
While our quarterly results were in line with our stated plans and we are on track to deliver on the financial commitments we made at our investor day in February, when we look across the landscape, we need to deliver more.
We need to grow market share and deliver greater profitability.
And we are acting with a sense of urgency to do so.
We've taken a comprehensive look at opportunities to improve our business, engaging external consultants with function-specific expertise across three key areas: improving Nordstrom Rack performance, increasing profitability, and optimizing our supply chain and inventory flow.
We are not satisfied at all with our Rack business, as clearly, our recovery is lagging what we think it should be.
However, we are encouraged with the clear path to improvement that we see in front of us and have identified clear actions we are taking to improve performance and accelerate profitable growth.
First, Nordstrom Rack has been challenged by low inventory levels in premium brands and key categories such as women's apparel and shoes.
Customers are drawn to Nordstrom Rack to purchase premium brands at a terrific price.
In fact, 90% of the top brands at Nordstrom are also sold at the Rack.
These brands are more highly penetrated in our Rack business than they are at other off-price retailers.
While many retailers are dealing with macro-related supply chain disruptions, Rack faces a unique challenge as off-price procurement of the same top brands we carry at Nordstrom is particularly difficult in an environment with production constraints and lower levels of clearance product.
Rack's top 50 brands represented approximately 50% of sales in 2019.
Year to date, these brands represented only 42% of sales, highlighting the outsized gap in merchandise availability.
In response, we are undertaking a comprehensive set of actions to increase our inventory levels and improve merchandise flow for the Rack.
In particular, we are executing a multilayered plan to both grow our offer of the most coveted brands we carry, as well as source from new vendors to ensure we have the selection our customers want.
To minimize supply gaps, we are increasing our opportunistic use of pack-and-hold inventory, allowing us to buy larger quantities of relevant items when available, then hold a portion of it to deploy in periods with high demand, tight supply, or system constraints.
Given that we expect macro-related supply chain disruptions to continue into next year, we're strategically evaluating our assortment and increasing our use of pack-and-hold inventory by a factor of two to three times.
We expect that action in these areas will not only yield benefits as we deal with macro-related supply chain disruptions but also deliver sustainable benefits that will enhance our long-term performance as well.
While we are in the early days of these efforts, preliminary results show sales responding positively in Rack stores with improving inventory positions.
Second, our mix has skewed too far to lower prices at the Rack, with AURs declining 4% versus 2019.
This sharper than expected decline results from a couple of factors.
First, customers come to the Rack for coveted premium brands at a great value.
This is a strength of ours, as much of this product is scarce in the off-price channel.
However, we haven't had adequate supply of those brands as I just described.
Next, as we adjusted our assortment over the last year to add more product at lower price points, we found that we went too far in certain categories.
We are now rebalancing our assortment to increase the breadth of selection in premium brands, improve average selling price, and better align with customer expectations.
Third, we are acting to strengthen Rack's brand awareness and drive traffic.
As part of this effort, we launched a new More Reasons to Rack marketing campaign in September.
We are encouraged by our early consumer research read, which showed a meaningful increase in future purchase intent.
By improving inventory levels, expanding our selection in top brands, and increasing awareness and traffic, we expect to grow market share and improve profitability at Nordstrom Rack.
With the actions we're taking, we anticipate improvement in Q4, with more significant improvement to follow in the first half of fiscal 2022.
We are committed to delivering significant improvement in merchandise margins and EBIT margin across the business.
We launched a comprehensive study of the factors driving our merchandise margin and found meaningful opportunities for improvement in pricing, category management, and private label brands.
Pete will take you through the detailed plans behind those workstreams in a moment.
Within SG&A, we remain focused on managing fixed expenses.
In 2020, we rebased our overhead cost structure, and we remain committed to sustaining a substantial portion of that reduction.
And while we've seen significant macro-related pressure in fulfillment and labor costs, we're concentrated on mitigating our overall impact from those pressures.
Improving our supply chain and inventory flow is also a priority.
In response to macro-related supply chain challenges, we have identified various ways to improve our internal network and processes by diversifying our carrier capacity, gaining better end-to-end visibility of inventory as it moves through our supply chain, increasing velocity and throughput in our distribution and fulfillment centers, and better positioning our inventory to get it closer to the customer.
We expect that these initiatives will enhance the customer experience and drive top-line growth at both Nordstrom and Nordstrom Rack by increasing delivery speed and expanding the selection for in-store shopping, as well as same-day and next-day pickup while also driving efficiencies in labor and fulfillment.
We expect to see benefits from these actions beginning in the first half of fiscal 2022.
Turning to third quarter performance.
We continued to see improvement in our Nordstrom stores, strong digital growth, and benefits provided by the interconnected capabilities of our market strategy.
Nordstrom banner sales returned to 2019 levels in the third quarter.
In the southern portion of the U.S. where 44% of our stores are located, Nordstrom comparable store sales grew 8% over the third quarter of 2019.
Our geographic footprint has been a source of strength for us historically, with stores located in highly desirable real estate in the country's top markets.
However, urban areas have been disproportionately impacted by the effects of the pandemic.
As a result, our suburban Nordstrom locations outperformed our urban locations by 1,300 basis points in the third quarter.
As discussed at our investor event, winning in our most important markets and increasing our digital velocity are key strategic priorities for us, and we are making progress in these areas.
The convenience and connection delivered by our market strategy continues to be a powerful enabler for the business.
We are leveraging a strong store fleet that positions us physically closer to the customer and drives value across the business.
As a result, we are able to better serve customers and provide greater access to products by linking our assets at the market level.
Our market strategy delivers incredible convenience that provides 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.
This quarter, one-third of next-day nordstrom.com orders were picked up at Rack stores, showing continued evidence of the power of integrating capabilities across our two brands and across our digital and physical platforms.
In our top 20 markets where our market strategy continues to gain traction, order pickup accounted for 12% of digital demand, versus 4% in other markets.
Since we launched order pickup at the Rack last year, we have seen 70% growth in the program.
As we head into the holiday season, we are encouraged to see steady increases in order pickup demand each month, which is evidence that customers are taking advantage of our integrated touchpoints.
This trend is also advantageous because buy online, pickup in store provides our highest satisfaction customer experience, which, in turn, drives more return visits.
It is also our most profitable customer journey.
The value of our interconnected model is evident as customers dramatically increase their spend when engaging across 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.
The quality and convenience of the services we offer such as alterations and personal styling drive connection and engagement, increasing customer spend by a factor of five to seven times versus customers who don't utilize those value-added services.
We also continue to increase our digital velocity across Nordstrom and Nordstrom Rack.
This quarter, digital sales increased 20% over the third quarter of 2019.
Digital sales represented 40% of our business in Q3, and we continued to drive growth over 2019 while store traffic improved sequentially.
Their dedication and efforts in serving our customers and transforming our company drive our optimism about the future of the business.
Nordstrom has a strong foundation and unique competitive differentiators, and we are working diligently to accelerate our strategic transformation and build on our core advantages.
To be clear, we recognize the need to move faster and more aggressively.
We are taking decisive steps to improve Rack performance, increase profitability, transform our supply chain, and create value for our shareholders.
All said, we remain confident in our ability to achieve the top and bottom-line commitments we set forth at our investor event and continue to build capabilities to profitably grow our market share.
As Erik said, we've taken a deep look at our business and identified areas of improvement in pricing, category management, and private label brands that are expected to drive a better customer experience, as well as sales and margin improvements.
Through decades of experience, we've learned that when you make things better for the customer, you make things better for the business overall.
I'd like to first discuss these specific areas of opportunity before getting into our category performance and customer trends in the third quarter, and finally, our plans for the fourth quarter.
First, we are using dynamic pricing analytics to optimize our promotional effectiveness and improve the pace and depth of markdowns to move product profitably at the end of each season.
We expect to see initial benefits from this work beginning in Q4.
Next, we are working to improve our category management process.
We are using a data-driven, customer-centric approach to define the role of each category at Nordstrom and Nordstrom Rack, and then optimize our assortment for the role each category plays.
We benefit by attracting new customers and expanding engagement and share of wallet with existing customers.
We also gain efficiency by focusing on the most productive items, eliminating redundancy, and editing out our poor performers as a result.
As we shared during our investor event earlier this year, we also have a meaningful opportunity with our private label business, Nordstrom Product Group.
We see the significant value that Nordstrom-made brands represent, delivering expanded options and better value for our customers while also giving us more control over our merchandise selection.
Notably, the gross margins of our private label brands are, on average, 500 basis points higher than our third-party brand product.
We recognize the opportunity and need to accelerate our efforts to increase our private label penetration.
We look forward to sharing our progress with you in the coming quarters.
Turning to category performance.
This quarter, we continued to see strength in pandemic-related categories, particularly home and active, where our sales increased 95% and 57% respectively compared to 2019 levels.
Our designer category continues to perform well, with a strong double-digit sales increase over '19, led by strengthened designer shoes, handbags, and designer men's apparel.
We saw signs of travel returning with sunglasses and swimwear posting double-digit increases over 2019.
We are also encouraged with a sequential trend improvement in occasion-based categories during the third quarter, a promising signal that customers are beginning to return to social and work events.
Dresses, men's suiting and dress shirts, dress shoes, and makeup all showed sequential improvement during the third quarter, and we are closing the gap to '19 sales levels.
However, we experienced inventory shortages in the quarter, especially in certain core categories such as women's apparel and shoes, where demand came back stronger and faster than we expected.
We responded by trying to increase supply as quickly as possible but weren't able to land as much product as we needed in certain core categories and missed an opportunity to capture incremental sales as a result.
We are working to better align inventory levels and customer needs and have pulled inventory receipts forward in anticipation of holiday demand.
We are confident that we are in a much-improved position for the holiday season, both in terms of quantity and balance of categories.
As we look at customer trends, our Nordy Club loyalty program remains a powerful engagement driver, and we are encouraged by positive trends within the program.
Q3 loyalty sales grew 5% versus 2019, and loyalty penetration increased 2 percentage points to 65% of sales.
We also saw increases in spend and trips per customer compared to pre-pandemic levels.
As we look to Q4, we are excited about our plans to continue transforming the business.
We are scaling our Nordstrom Media Network, which allows our brand partners to advertise directly to customers on nordstrom.com and nordstromrack.com and drive traffic and sales for their brands.
Having successfully piloted the platform in Q3, we are expanding it in Q4 and expect to see more meaningful financial benefit in '22.
As we evolve our merchandising approach, our alternative partnership models have gained approximately 3 percentage points of total sales share since 2019 to nearly 8% today.
Building on that progress, I'm pleased to announce our new partnership with Fanatics.
Nordstrom.com customers will now have access to Fanatics' industry-leading assortment of high-quality licensed sports products.
This partnership demonstrates our ability to increase choice count quickly and at scale.
With Fanatics, we'll scale to 90,000 new customer choices on nordstrom.com, an increase of over 20% in our total choice count without a corresponding increase in owned inventory or labor.
We're also excited to advance our partnership with ASOS and offer a broader assortment to better meet the needs of 20-something customers.
We launched select ASOS brands on nordstrom.com and in two pilot stores this month.
Though we are in the early days, preliminary reads are very promising.
We'll expand our in-store ASOS offering with a market rollout launch this spring.
Nordstrom stores will be the only physical locations in the world where customers can buy ASOS product, and we are excited about our opportunities to build on this partnership.
As you heard at our investor event in February, we are expanding our choice count to both gain greater wallet share with our existing customers and attract new customers.
We entered Q4 with record-high choice count, and we'll continue to significantly expand our selection using customer insights and enhanced analytics to present a curated, relevant assortment.
For the holiday season, we are excited about our plans to use our integrated network of stores and digital platforms to showcase holiday dressing, decor, and gift offerings and provide festive experiences and convenient services that make shopping easy and enjoyable for our customers.
To drive holiday performance, we're leveraging analytics, as well as learnings from our anniversary sale, where we combined the art of merchandising with data-driven insights to put the right assortment in the right place at the right time.
Through our customer analytics work, we learned that we have a lot of opportunity to expand holiday gifting.
And in response, we've significantly expanded our gifting assortment and featured gift shops both in-store and online.
In closing, we're excited to drive sales and delight customers with our compelling holiday offering and the newness in choice count expansion from innovative partnerships with Fanatics and ASOS.
I'd like to begin with a review of our third quarter results, then take you through our approach to Q4.
Overall, net sales decreased 1% in the quarter compared to the same period in fiscal 2019.
The timing shift of the anniversary sale, with roughly one week falling into the third quarter of 2021, positively impacted third quarter sales by approximately 200 basis points.
Nordstrom banner sales returned to 2019 levels, driven by improving store trends, sequential store traffic improvement, and increasing spend per customer.
Nordstrom Rack sales declined 8% as inventory procurement and flow challenges negatively impacted performance.
And as Erik mentioned, the team is taking specific actions to improve Rack's performance and capture market share in the off-price sector.
On the digital front, we continue to serve our customers' desire for online shopping experiences, with strong digital growth even as Nordstrom store traffic and sales continue to recover.
For the third quarter, digital sales increased 20% over 2019 and 16% after adjusting for the timing of the anniversary sale, reaching $1.4 billion.
Gross profit as a percentage of net sales increased 80 basis points compared with the same period in fiscal 2019, primarily due to leverage in buying and occupancy costs and higher merchandise margins.
Ending inventory increased 13% compared with the same period in fiscal 2019.
In-transit product represented the majority of our inventory increase in the quarter as we pulled receipts forward to address continuing supply chain backlogs and support the anticipated earlier holiday demand.
Entering the fourth quarter, our inventory is current with new, exciting product for the holidays.
Looking ahead, we anticipate elevated inventory levels through the end of the fiscal year as we position product to meet customer demand and invest in pack-and-hold inventory for the Rack.
Total SG&A as a percentage of net sales increased 260 basis points compared to the same period in fiscal 2019 as a result of continued macro-related fulfillment and labor cost pressures, partially offset by continued benefit from resetting the cost structure in 2020.
Now, turning to our outlook for the remainder of the year.
As you've heard today, we're excited about our plans for the fourth quarter, with a great selection of compelling products and experiences to serve holiday demand both in-store and online.
Our outlook for the remainder of the year assumes that economic improvement and increasing mobility will continue to drive consumer spending.
Given third quarter performance in line with our expectations and plans for continued progress in the fourth quarter, we are reaffirming our guidance for fiscal 2021.
We expect revenue growth of more than 35% versus fiscal 2020, and we are still projecting slight sequential top-line improvement from Q3 to Q4.
We expect to deliver EBIT margin of approximately 3% to 3.5% for the full year.
I'd like to provide a bit of color on our fourth quarter forecast compared to 2019.
For the fourth quarter, we are forecasting significant gross margin improvement versus the fourth quarter of 2019, reflecting the benefits of lower promotional activity and higher regular price sell-through this year.
We expect that SG&A pressures primarily related to fulfillment and labor costs will continue in Q4, resulting in SG&A deleverage similar to what we experienced this quarter after excluding an impairment charge that we recorded in the fourth quarter of 2019.
Turning now to capital allocation.
We remain committed to our ongoing priorities, with our first priority being investment in the business.
We're planning capital expenditures at normalized levels of 3% to 4%, with an emphasis on supporting 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 three times by the end of this year and approximately two and a half times by the end of 2022 through a combination of earnings improvement and debt reduction.
Our third priority is returning cash to shareholders, and we continue to expect to be in a position to do so by the end of the year.
As you've heard today, our third quarter results show some pockets of strength, as well as several areas for improvement.
We made progress toward our goals, with strong digital growth and improving trends in our Nordstrom banner stores, and remain on track to deliver our fiscal 2021 targets and the commitments we set forth at our investor event, delivering EBIT margins greater than 6% and annual operating cash flow greater than $1 billion.
As Erik said earlier, we recognize that we need to deliver more, and we are acting with a sense of urgency.
These medium-term targets are a step on the way to delivering greater profitability and cash flow as we grow share, optimize across platforms, and drive scale.
We are confident in our path forward and excited about the future of our business.
Before we get started with Q&A, we ask the participants to limit their responses to one question and one follow-up.
We'll now move to the Q&A session.
| nordstrom - qtrly digital sales decreased 12% compared with same period in fiscal 2020.
nordstrom - continued to see strength in pandemic related categories in quarter, particularly home and active.
nordstrom - qtrly nordstrom banner sales return to 2019 levels.
nordstrom - company remains on pace to achieve fiscal 2021 sales, earnings and cash flow outlook.
nordstrom - 2021 revenue, including retail sales & credit card revenues, expected to grow more than 35% versus 2020.
nordstrom - anticipate elevated inventory levels through the end of the fiscal year.
nordstrom - going forward, focused on improving nordstrom rack performance ,optimizing supply chain & inventory flow, among other things.
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Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings.
Today, I'll provide an overview of our second quarter results and progress toward our goals as the economy recovers.
Before we get into details on the quarter, I'd like to spend a moment highlighting our Grainger Edge framework.
Two years ago, we launched this framework that defines who we are, why we exist and where we're going.
It covers our purpose, aspiration strategy and the principles that drive our actions.
It all starts with our purpose.
We keep the world working.
We shared this with all team members across the company in 2019.
While the concepts weren't new and many were already part of our operational DNA, the framework provided clarity at who we are and what we do as well as the common language for our team members.
The Grainger Edge has guided us through the pandemic, and I'm proud of how the Grainger team has continued to embrace it.
It's also been a strong foundation for how we serve our customers and helped us through the challenges of the last 18 months.
Speaking of challenges, 2021 has provided plenty.
The year has been characterized by strong demand but a very challenging supply chain environment.
Raw material shortages, labor shortages and transportation challenges have been the norm, particularly in the second quarter.
These challenges are industrywide.
And while we're not immune to them, we are uniquely positioned to leverage our scale and navigate through these ongoing difficulties.
Importantly, this year, the supply chain has become a competitive sport.
And while we've had obstacles and things are messier than normal, our customer research suggests we are navigating the obstacles well and providing very strong relative service during this time.
We are actively leveraging our network.
For example, for a customer located in New York, we would typically fulfill their entire order from our Northeast DC.
Due to supply constraints or product delays, now part of the order may only be available in Louisville.
In this case, the order may be fulfilled from Louisville, adding an extra day and incremental cost to the order.
But we are able to leverage our network to provide and protect our great service.
We are also leveraging our branches for more shipping in this environment.
In addition, we have accelerated the ramp of our Louisville DC, which has helped alleviate capacity constraints.
This building is a great asset for Grainger and will continue to ramp capacity through the next 18 months.
The good news is that we still have very high availability in our network even if the product comes from an alternate location.
I've had the opportunity to be in the field quite a bit this past quarter and have been excited to spend time with the customers and hear their feedback.
I'm hearing consistently that while we may be delivering a bit differently than the past, we are serving our customers better than the competition.
We have validated this through feedback on our recent customer surveys, and the vast majority said we were doing better than other distributors right now.
We are also investing in non-pandemic inventory and partnering closely with our suppliers to work through any supply constraints, inbound lead time challenges and any potential cost increases.
Additionally, shortage in the labor market have had a significant impact for all companies this year.
In response, we have increased our wages to attract and retain talent, especially in our distribution centers.
We've implemented robust training programs to onboard new team members and train existing team members to work throughout our buildings.
We have made great progress in closing staffing gaps and will continue to do so over the third quarter.
Finally, transportation has been very challenging.
That is clearly linked to the product and labor shortages.
While we have always prioritized optimal routes and cost efficiencies, over the last few months, we have partnered with our carriers in new ways to ensure we are meeting customer expectations.
We have also added new partners to our carrier mix to handle our volume and provide us flexibility.
It's important to note that the overall freight market is volatile and uncertain.
While we are confident in our current plans to manage these challenges, there are a lot of moving pieces and constraints across all modes, parcel, LTL and ocean freight.
For example, the ocean freight market has been uncertain as the pandemic surges again in Asia and container costs fluctuate.
We are ready to respond to any of these dynamics.
We expect the supply chain challenges to last through the end of the year and likely well into next year.
I have no doubt, as we continue to live the Grainger Edge and follow our principles, we'll not only get through these challenges, but we'll deliver strong results and take market share.
Turning to our financial highlights.
The bottom line is that our performance has been in line with our expectations and what we communicated on our last earnings call.
The only exception to this has been gross profit impacted primarily by the changes in May to the CDC mask guidelines halfway through the quarter.
Heading into the second quarter, all external factors were pointing to a reopening in the U.S. around or sometime after the 4th of July, giving us a full quarter to sell through as much of our remaining pandemic inventory as possible.
Based on our internal scenario planning, we thought that potential adjustments in Q2 would fall somewhere between $45 million and $50 million, while we couldn't predict precisely how far the demand curve would fall or when.
Then, when the CDC mask guidance changed in mid-May, we saw our demand for pandemic products, especially masks, declined rapidly.
As a result of the sudden weakening of demand, we had more pandemic inventory remaining than expected, and we took a $63 million adjustment, about $15 million more than our internal scenario planning.
We believe this completes any material pandemic-related inventory adjustments.
Without this incremental change, GP would have been roughly flat sequentially.
We understand that CDC has just changed guidance again this week.
While the situation is fluid, we do not expect any material change in our outlook as a result of this change.
Shifting to the other financial results.
We achieved strong organic daily sales growth of 15% for the company on a constant currency basis within our guided range.
When compared to 2019, Q2 was up about 14% on a daily organic basis, a positive indicator of our strong performance and recovery beyond the pandemic.
Our High-Touch Solutions North America segment grew 12.7% on a daily constant currency basis.
In the U.S., we lapped the most extreme volatility of 2020.
Looking at the two-year average in the second quarter of 2021, we drove approximately 275 basis points of average market outgrowth.
We remain very confident in our ability to grow 300 to 400 basis points faster than the market on an ongoing basis.
We expect the volatility of 2020 and 2021 to average out and get back to normal heading into 2022.
Our Canadian business drove positive operating earnings growth for the quarter and managed expenses well.
We are seeing continued momentum in targeted end markets, especially heavy manufacturing and higher education as schools prepare to reopen in the fall.
And we continue to diversify the business beyond natural resources.
The Endless Assortment model had another impressive quarter with 23.9% daily sales growth on a constant currency basis, fueled by strong customer acquisition.
Lastly, we generated $269 million in operating cash flow and achieved strong ROIC of 29.2%.
Turning to our quarterly results for the company.
I've discussed most of what's on this slide, but I wanted to point out two additional items.
First, our SG&A was $790 million, in line with the guided range provided on our first quarter call.
As expected, we increased SG&A for the quarter as we continued to invest in marketing and in our people through increased variable compensation and wage rates in the DCs.
This resulted in total company operating margin of 10.4%, down 70 basis points compared to the prior year.
Excluding the impact of the $15 million incremental inventory adjustment, GP would have been roughly flat sequentially and operating margin would have been 10.9%.
The resulting earnings per share would have been around $4.50.
We continue to see a robust recovery with daily sales up 13.7% compared to the second quarter of 2020 and up 9.5% compared to the second quarter of 2019.
In the U.S., we saw strong growth in our non-pandemic product category with product mix returning to more normal levels.
For the segment, GP finished the quarter at 36.9%, down 125 basis points versus the prior year.
I think it's important to note that without the $63 million of inventory adjustment, GP would have been up 125 basis points year-over-year.
This 250 basis point swing demonstrates that our underlying GP rate would have otherwise been a healthy 39.4%.
Coupled with our focus on achieving price/cost neutrality, we are confident that our run rate GP remains strong.
SG&A in the segment ramped as expected to $640 million, lapping the lowest point of SG&A spend in the second quarter of 2020.
Canada continued to make solid progress and expanded operating margin approximately 315 basis points year-over-year.
Consistent with last quarter, we have included a chart with details on the U.S. and the Canadian businesses on the first page of the appendix.
On slide 10, looking at pandemic product trends, I want to highlight two things before we dive into the Q2 numbers.
First, we lapped the extreme growth experienced last year and saw decreased demand for PPE products.
Accordingly, pandemic sales declined approximately 28% versus 2020.
However, that's an impressive 27% increase versus 2019.
We estimate July 2021 will be down about 28% over July 2020, in line with what we saw in the second quarter of this year.
More importantly, we see the trend in our non-dynamic sales as a positive sign of economic recovery.
During the quarter, we grew 31% versus 2020 and up 7% versus 2019.
We're seeing end markets like commercial, which include our severely disrupted customers in hospitality, along with heavy manufacturing, make a significant comeback.
We estimate that for the month of July 2021, non-pandemic sales growth of about 22%.
As it relates to pandemic product mix, while we expected it to taper off to near pre-pandemic levels to about 20% by year-end, we're seeing this happen more quickly now at about 22% of sales.
In total, our U.S. High-Touch Solutions business is up about 12% for the second quarter of 2021 and up 10% over 2019.
Looking at market outgrowth on slide 11, we are lapping the highest concentration of large pandemic purchases of the prior year.
At this time, the market declined between 14% and 15% and we saw outsized share gains of roughly 1,200 basis points.
For Q2 2021, we're seeing the opposite effect.
We estimate the U.S.
MRO market grew between 18.5% and 19.5%.
The U.S. High-Touch business grew 12.4%, about 650 basis points lower than the market.
To normalize for the volatility, we calculated the two-year average share gain to be 275 basis points over the market.
There's some noise in the market number because -- across industrials, given the dynamics and fluctuations over the last two years.
Therefore, the two-year average is a better estimate of what's really going on.
As I previously noted, our U.S. High-Touch business is up 10% over 2019.
As the impact of the pandemic subsides, coupled with our strong progress on key initiatives and our return on investments like marketing, we remain confident in our ability to achieve our share gain goals.
Now let's cover our U.S. GP rate.
As previously discussed, our second quarter GP decline resulted from the $63 million inventory adjustment.
This adjustment lowered U.S. GP by 270 basis points.
Without this, our underlying U.S. GP rate is 39.8% in the second quarter.
As we look to the remainder of 2021, it is important to note we are operating in a very challenging and fluid environment.
We're doing everything within our control to exit the year with a Q4 GP rate at or above the Q1 2020 levels or 40.1%.
We remain confident in our ability to achieve this target for a few reasons.
First, as noted earlier, we anticipate no further material pandemic-related inventory adjustments.
Excluding the inventory impacts, our GP rate is nearing this level already.
As we discussed on slide 10, our pandemic product mix is close to pre-pandemic levels, and we expect this to fully normalize in the second half.
And we've seen evidence that we can continue to maintain price/cost neutrality.
On the cost side, we have a robust process to partner with our suppliers and understand the specific raw material impacts as well as other conditions that may result in increased costs.
As it relates to price, our goal is to continue to maintain competitiveness in the market and pass what is applicable.
In the first half, we were slightly above neutrality and as we expect to take additional price increases in the second half to offset what we're expecting in costs.
Even in this inflationary environment, we are confident we will be able to execute and achieve neutrality through the remainder of the year.
Moving to our Endless Assortment segment.
Daily sales increased 23% or 23.9% on a constant currency basis, driven by continued strength in new customer acquisitions at both Zoro and MonotaRO as well as growth of larger enterprise customers in MonotaRO.
GP expanded 75 basis points year-over-year driven by positive trends at both businesses, and operating margin finished up 95 basis points over the prior year.
I'll go into more detail on the next slide as we provide further transparency on the results of both of these businesses.
Moving to slide 14.
Please remember that MonotaRO is a public company and follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results one month in arrears.
As a result, the numbers we disclose will differ somewhat from MonotaRO's public statements.
In local currency and using Japan's local selling days, which occasionally differ from U.S. selling days, MonotaRO's daily sales grew 16.7% with GP finishing the quarter at 26.4%, 25 basis points above the prior year.
Operating margin decreased 15 basis points to 12% as they continue to ramp up operations at the Ibaraki DC.
Again, another strong quarter for MonotaRO.
Switching to Zoro U.S., daily sales grew 32.6% as it laps its softest quarter of 2020.
Zoro GP grew 95 basis points to 31.5% and achieved 320 basis points of operating margin expansion through substantial SG&A leverage in the quarter.
All in all, very impressive results.
Moving to slide 15.
In addition to the strong financial performance, we're seeing positive results with our key operating metrics.
As you saw in the first quarter, we've listed total registered users for both businesses, an important driver of top line performance.
Both MonotaRO and Zoro have shown progress and are up over 20% over the second quarter last year.
On the right, Zoro continues to actively add SKUs to the portfolio.
At the end of the second quarter of 2021, we had a total of 7.5 million SKUs available online, close to our goal of eight million for the year.
We remain encouraged by our progress with SKU additions beyond traditional MRO.
Now I'll provide commentary as it relates to the upcoming quarter and our expectations for the full year.
For the third quarter, on a total company level, we expect our revenue growth to be between 10% and 11% on a daily organic basis.
We believe any material pandemic-related inventory adjustments are complete, and we expect GP to be up between 100 and 120 basis points year-over-year and to improve sequentially.
SG&A is anticipated to fall between $805 million and $815 million as we continue to invest in marketing and wages in the DCs to remain competitive.
Transitioning to our total company guidance, I'd like to provide some brief commentary on how we're trending so far.
We expect strong sales to continue while GP, operating margin and earnings per share will face pressure as a result of the incremental inventory adjustments and freight costs, along with investments and increased DC wages and marketing.
While we are maintaining our guidance, we expect results will trend toward the low end of our range with the exception of revenue.
We expect revenue to be near the midpoint.
As it relates to our segment operating margins, we think that some of the supply chain challenges as well as the first half inventory adjustment will weigh more heavily on the High-Touch Solutions segment and therefore, High-Touch operating margin may trend at the low end of the range.
At the same time, we believe Endless Assortment, driven by strong performance and improving margins, may end the year at the high end, both helping to support delivery of total company results.
We are not adjusting guidance as we are confident in our ability to deliver results within our guidance ranges.
As we learn more, we'll continue to keep you apprised of any changes.
First, I'm proud to announce that earlier this month, Grainger was certified as a Great Place to Work, a true testament to the exceptional team member experience we've built and an important milestone in advancing the Grainger Edge.
Second, it's our 10th year of publicly reporting our ESG efforts.
I wanted to share highlights from our new corporate responsibility report.
At Grainger, we embrace our obligation to operate sustainably and with a long-term fact-based view of critical issues regarding the environment, society at large and corporate governance.
For example, in 2012, we became the first industrial distributor to publicly disclose our carbon footprint.
In 2013, we became the first in our industry to set a public greenhouse gas emissions reduction target, which we achieved two years early.
We just set a new goal last year to reduce the absolute Scope one and two greenhouse gas emissions by 30% by 2030.
We're also committed to helping our customers achieve their ESG goals through our products and services.
We now offer more than 100,000 environmentally friendly products.
Through this portfolio, we're able to help customers maintain sustainable facilities via efficient energy management, water conservation, waste reduction and improved indoor air quality.
And this year, we formed the ESG Leadership Council, which I chair.
The council is comprised of Grainger leaders who provide strategic direction and oversight on our ESG efforts.
You can find the new report at graingeresg.com.
| sees 2021 net sales $12.7 billion - $13.0 billion.
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