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Copies of all three are available on the Investors page of our website.
With us for Q&A, we have Matt Sharpe on Business Development and Distribution; Mark Desrochers on P&C, Tyson Sanders on Supplemental, and Mike Weckenbrock on Life and Retirement, with Ryan Greenier available on investments.
Actual results may differ materially due to a variety of factors, which are described in our news release and SEC filings.
Reconciliations of these measures to the most comparable GAAP measures are available in our news release.
Last night, we reported second quarter core earnings of $1.02, our highest second quarter result ever.
We benefited from particularly strong investment income in our alternatives portfolio and lower than guided catastrophe losses.
As previously announced, this led us to raise our full-year core earnings per share guidance to a range of $3.50 to $3.70 with an expected return on equity above 10%.
We saw strong earnings growth in each segment in the second quarter and solid sales momentum in the retirement line.
Annuity contract deposits increased by double digits over the prior year.
Bret will go over the quarterly results in more detail later in the call.
I want to focus on our progress toward our long-term objectives of a sustainable double-digit ROE and significant expansion in the education market.
Over the past year and a half, through unprecedented disruption in all aspects of our day-to-day life, Horace Mann has continued to be successful.
I attribute this success to two factors.
First, our unwavering dedication to the deserving education market.
We know our customers, we know them well and we respond to the issues they face.
Second, our multiline model, we have the premium and earnings risk diversification that enables us to remain focused on our long-term objectives throughout occurrences of weather volatility, market volatility and mortality and morbidity trend changes.
While the COVID-19 pandemic added an extra year to the transformational stage of our growth journey, it also gave us time to analyze and improve the ways we can fulfill our value proposition for the education market.
Examples of the outcomes of this focus include an accelerated integration of NTA agents, initiating key improvements and infrastructure, and expansion of our student loan solutions program nationwide.
It also set the stage for the entry into the employer paid benefits market with the planned acquisition of Madison National Life Insurance Company.
This acquisition brings together two educator-centric companies with complementary strength in product distribution and infrastructure.
Horace Mann's most established channel for serving educators has always been individual products sold through our agency force of local, trusted advisors.
In recent years, we invested in upgrading our section 125 benefits administration program, which enable school districts to offer voluntary worksite plans, benefits including our individual supplemental products are provided or introduced through the school district, but paid for by individual educators.
In some cases, educators can fund these purchases with pre-tax dollars.
Madison national represents a new third way for us to serve educators.
In line with emerging workplace trends, school districts are increasingly adding and enhancing employee benefits to attract and retain educators for hard-to-fill positions.
Madison National's employer paid and sponsor group products will enable us to provide educators with solutions like short and long-term disability, while helping school districts improve recruiting and retention efforts.
Districts generally work with independent benefit brokers to purchase Madison National's group products and educator staff are automatically enrolled.
With this addition, Horace Mann will now have complementary distribution capabilities in each of the ways the country's $6.5 million public K-12 educators receive insurance solutions, dramatically increasing our addressable market.
In terms of scope, Horace Mann has at least one educator household located in 75% of the roughly 12,000 K-12 school districts in our market footprint.
When we bought NTA, we added approximately 120,000 educator households.
With the acquisition of Madison National, we gain a solid base in this growth segment as they serve 1200 districts that provide employer paid and sponsored products to about 350,000 educators.
There's some overlap between Horace Mann's presence and those of NTA and Madison National, but each of the transactions has clearly added to our market share and with the Madison National transaction, our total addressable market expands to include a portion of the $160 billion that school districts spend annually on employer paid benefits, a market sector that has grown more than 30% over the past five years.
As we look at ways in which Maddison National aligns with our business strategy from a product perspective, Madison National bring 60 years of experience designing and underwriting a portfolio of group products.
These products can offer educators peace of mind that their families will be able to respond to unexpected events without depleting their savings.
From a distribution perspective, independent brokers are key in the complex public sector benefit space, where districts, particularly large ones rely on their assistance to design plans and offerings that are typically offered to every employee in the district.
Working with independent brokers is completely complementary to our established distribution through local trusted advisors.
We have already signed a long-term distribution agreement with National Insurance Services, an employee benefit brokerage subsidiary of Assured Partners that has been a key distribution partner for Madison National for nearly 40 years.
It will take effect concurrently with the acquisition, giving us immediate access to the employer paid and sponsored portion of the market.
After the transaction closes, we will be complementing Madison National's current group offerings, which includes supplemental products with enhanced offerings.
Our product development team has been leveraging and NTA's 50 plus years of success in supplemental market to accelerate filings for group products customized for educators such as cancer and hospitalization.
These will allow us to work with Madison National and NIS to provide a comprehensive group product suite.
In terms of infrastructure, Madison National brings an exceptional experienced team focused on delivering great educator customer experiences supported by modern and scalable infrastructure.
They're ready to add scale and we're the right partner to help them do so.
In 2022, we expect Madison national to add 50 basis points of ROE with upside potential in future years.
We remain focused on three additional drivers of higher ROE across the entire business.
First, driving higher net investment income by increasing the allocation to alternative investments.
While our alternative portfolio returns can be volatile, recent performance clearly illustrates the value this asset class brings.
We continue to realize savings from actions such as the full integration of the supplemental segment in 2020, as well as benefits from continued infrastructure improvements.
Third, market share expansion through cross-sell and new sales through each of our distribution channels.
We bring the ability to combine the new virtual marketing approaches we tested and refined over the past year and a half with our traditional in-person activities.
We look to build on the sales momentum we established in the first half of the year and are seeing a lot of optimism in the agency force around scheduling meetings and events in their schools this fall.
The 2021, 2022 school year will certainly be more normal than the previous one.
However, there is concern about new COVID-19 variants.
We believe most schools will avoid a return to a hybrid or remote environment, notably, nearly 90% of educators are vaccinated against COVID-19, a far higher rate than the general population.
Further, educators have overwhelmingly made the case that the best educational environment for students is in-person.
At Horace Mann, this past year and a half has provided us an ever growing list of reasons and reminders of why we do what we do.
It is an honor to serve the educators who have gone above and beyond to reach every student through the COVID-19 pandemic.
Their dedication and selflessness to our country's children continues to inspire us to do more and this year we will.
And with that, I'll ask Brett to take you through the results.
Second quarter core earnings per share was $1.02, up 52% over last year and our third consecutive record quarter.
Six-month core earnings per share was $2.12, more than halfway to the increased full year earnings per share guidance of $3.50 to $3.70.
As we said last quarter, our outlook has always presumed a gradual recovery from the effects of the COVID-19 pandemic on results and that's largely what we've seen so far this year.
In that context, we're encouraged by the signs of momentum we are seeing with the vaccine rollout and continued strong performance across the business.
As a result, on July 1, we brought guidance to a level that aligned with the strong second quarter net investment income returns in the lower than historical average level of second quarter catastrophe losses.
As I talk through the segments, I will address the changes we've made to align full year segment outlooks with the updated guidance.
I'll finish up with a recap of how we continue to think about allocating capital to maximize value for our shareholders.
When we raised earnings per share guidance, we also raised our expectation for 2021 core return on equity to greater than 10% for the year.
Core return on equity for the second quarter was 11.7% and it was 12.1% for the 12 months up from 9% for the prior 12 months.
Although the pandemic and other unusual factors continue to contribute to the improvement, our strategic initiatives are equally as important and we remain on track to our long-term target of a sustainable double-digit ROE.
And as we look ahead, the Madison National transaction will be a strategic use of capital to accelerate our shareholder value creation.
In addition to the strong fit of Madison National, this is another business with predictable and stable underwriting profitability, as well as strong capital generation that serves to further diversify our business profile.
In 2020, Madison National had net premiums of approximately $108 million and statutory income of approximately $14 million.
Madison National's premium have grown in the mid-single digits over the past five years with the trailing five-year loss ratio below 50%.
The transaction is expected to be accretive by mid-single digits to Horace Mann's earnings from the level we would anticipate for 2022, taking into account a normal cat load.
We'll see that benefit even though amortization of intangibles related to purchase accounting means that GAAP earnings will be somewhat lower than statutory income.
The transaction also will deliver about 50 points of ROE improvement in the first 12 months after closing.
We expect that contribution to grow over time as we leverage the new opportunities that Madison National and it's independent distribution bring to Horace Mann.
Turning to segment results for the quarter.
In Property Casualty, core earnings for the quarter were up about $8 million or 70.8% due to the strong contribution from net investment income, which was driven by the returns in the alternatives portfolio.
Due to a higher underlying loss ratio, underwriting income was down by about $6 million despite significantly lower catastrophe losses and an improved expense ratio that reflected our continued focus on expense optimization.
Premiums for the quarter were $156 million with new business volume remaining below historical levels as we work through the impact of the pandemic on sales.
Auto average premiums were down slightly in the quarter, while property average premiums are starting to rise.
In line with our July 1 announcement, cat losses for the quarter were $17.5 million, contributing 11.3 points to the combined ratio, significantly below last year and below what we anticipated when the year started.
The 17 events designated as cat in the second quarter were generally less severe and not as widespread as the 20 declared cat events in last year's second quarter.
Our revised full-year 2021 guidance reflects our assumption that second half cat losses will be between $20 million and $25 million, which is unchanged from what we guided to at the beginning of the year and is in line with the 10-year average for second half cat losses.
Turning to the underlying loss ratios, our experience in the second quarter and the first half aligns with overall industry trends.
Driving is returning to more normal patterns while inflationary trends in labor and materials are driving costs higher across all businesses.
Let's look first at auto where the loss ratio has been one of the most pandemic-impacted metrics for the entire P&C industry.
Even as miles driven ramps back up, through the first six months of 2021, our underwriting discipline is key to why we are reporting an underlying auto loss ratio below the 70.6% we reported for full year 2019, however, because of the inflationary component of the increase in loss costs over 2020.
We are initiating appropriate rate filings in selected geographies to help keep us at our targeted loss ratio.
We're confident and our agents will remain competitive on the business they quote even as these filings begin to take effect.
For Property, not only is inflation a concern, but similar to others, we are seeing increased frequency of fire and non-weather water losses in our case with several larger claims from those causes.
To address, we're now planning to file for property rate increases in the mid-single digits in many geographies in the second half of the year, a bit above our original rate plan for this year.
We're also making sure the insured values of covered properties remain in line with data on the rising value of homes across the country.
Finally, we released $4.2 million dollars in prior period reserves during the second quarter with approximately $3 million from 2019 in prior auto liability.
With our six-month combined ratio at 92.7%, we are still on track to achieve a full-year combined ratio in line with our longer-term target of 95% to 96%.
Our updated guidance for 2021 core earnings of $66 million to $70 million reflects the strong contribution of net investment income in the first half.
Turning to Supplemental, the segment contributed $31.6 million in premiums and $12 million dollars to core earnings.
Supplemental continues to experience favorable trends in reserves and is still seeing the benefit of changes in policyholder behavior due to the pandemic.
Net investment income on the Supplemental portfolio reflects the solid progress we are making in improving the Supplemental investment yield.
Supplemental sales were $1.2 million in the second quarter, up from both this year's first quarter and the year ago period.
As we've said, the individual Supplemental products that we currently offer have traditionally been sold through a consultative enrollment model that has been among the most impacted by the worksite access limitations of the past year and a half.
As we prepare for a more normal back-to-school season, Horace Mann agents continue to sell our individual Supplemental products with steady sales metrics in more open geographies.
Premium persistency remains above 90%, a testament to the value educators place on these coverages with about 282,000 policies in force.
Our revised outlook for Supplemental's 2021 core earnings of $41 to $43 million reflects a higher contribution from net investment income.
We are also seeing the return to historical policyholder claims behavior occur more slowly than we had anticipated in this business.
We now expect a full year 2021 pre-tax profit margin better than our longer-term target of mid 20%.
In the Life segment.
June was the highest month for Life sales since the pandemic began.
Annualized sales for the second quarter were ahead of first quarter with retention steady.
We also saw an increase in single premium Life sales.
These sales tend to be lumpy, but they are a reflection of improving access as these are more consultative sales, typically requiring multiple contacts with the customer.
Core earnings more than doubled from last year to $5 million as mortality costs returned to within actuarial expectations, total benefits and expenses returned to targeted levels and net investment income rose 26.9% Nevertheless, because of the higher mortality costs in the first quarter, we've modestly lowered our outlook for full year 2021 Life segment core earnings to the range of $14 million to $16 million.
For the Retirement segment, second quarter core earnings ex-DAC unlocking were up 88.3% reflecting the strong net interest margin.
DAC unlocking was favorable by about $200,000 compared with $3.7 million in last year's second quarter.
The net interest spread improved 79 basis points over last year's second quarter to 265 bps in part due to strong returns on the alternatives portfolio.
This is above our threshold to achieve a double-digit ROE in this business.
Our solutions for augmenting retirement savings remain a core need for educators.
Annuity contract deposits were ahead of last year's second quarter by 15.6% with the June beating out March, the previous record as the highest month for deposit for several years.
Our educator customers continue to see annuities as an important way to achieve their financial objectives and these products are complemented by our suite of fee-based products.
Based on the strong results through the first half, we increased our full-year 2021 outlook for Retirement core earnings ex-DAC unlocking to the range of $43 to $45 million.
Turning to investments, total net investment income on the managed portfolio was up almost 50% to $84.1 million with total net investment income up 35.8%.
The increase in NII, on the managed portfolio, was largely because our alternatives portfolio generated outsized returns in the second quarter.
As we've said, driving higher investment income through increasing our allocations to the alternative investments portfolio will be a strategic driver of a sustained double-digit return on equity.
Year-to-date, private equity returns have been quite strong given the relative strength of the equity markets and the active IPO window.
As a result, second quarter alternative results were significantly above expectations.
In addition to the private equity returns, our other alternative strategies, such as private credit, infrastructure and commercial mortgage loan funds posted solid performance in the quarter.
We expect to reach our targeted 15% allocation to alternative investments within the next two years and expect this diversified portfolio to generate high single-digit annual returns on average over time.
The fixed income portfolio had a yield of 4.3% in the second quarter compared with 4.39% a year ago.
Second quarter purchase activity was largely opportunistic and focused on BBB corporate and high yield securities with attractive relative yields.
The core new money rate was 3.35% in the second quarter and based on current market conditions, we continue to anticipate a core new money rate of about 3% for the year.
Our updated guidance reflects the higher assumption for total net investment income of $385 million to $405 million including approximately $100 million of accreted investment income on the deposit asset on reinsurance.
This expectation for investment income is captured in the segment by segment outlook I've summarized and in our core earnings per share guidance range of $3.50 to $3.70.
In closing, we are very pleased with our business progress through the first half of 2021 and excited about the potential of this year's back to school, as well as the progress we anticipate in 2022 and beyond.
As we stated last quarter, our top priority for the use of excess capital remains growing our business at returns that meet or exceed our ROE targets.
The acquisition of Madison National is an ideal use of capital to accelerate our path for sustained double-digit ROE.
Further, after the transaction, Horace Mann should generate more than $50 million in excess capital annually, assuming normalized property and casualty results.
We're committed to prudently using that capital to create additional value for shareholders.
Beyond growth initiatives, our capital generation provides scope for repurchase, as well as maintaining our track record of annual increases in our cash dividend, which is currently generating yield slightly above 3%.
| compname reports second-quarter 2021 net income of $1.11 per share and record core earnings* of $1.02 per share.
reaffirming updated 2021 core earnings per share guidance of $3.50 to $3.70, with roe above 10%.
|
The slides that accompany today's call are also available on our website.
We'll refer to those slides by number throughout the call today.
This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission.
We also have other company representatives available for a Q&A session after Lisa and Steve provide updates.
Slide four shows our quarterly financial results.
IDACORP's 2021 third quarter earnings per diluted share were $1.93, a decrease of $0.09 per share from last year's third quarter.
Earnings per diluted share over the first nine months of 2021 were $4.20, which were $0.25 above the same period last year.
The year-to-date earnings are the highest in the history of the company over the first 9 months of the year.
Today, we also tightened our full year 2021 IDACORP earnings guidance estimate upward to be in the range of $4.80 to $4.90 per diluted share, with our expectation that Idaho Power will not need to utilize in 2021 any of the additional tax credits that are available to support earnings under its Idaho regulatory settlement stipulation.
These are our estimates as of today, and they assume normal weather conditions and a continued return to more normal economic conditions over the balance of 2021.
I will begin by addressing the robust economic growth we continue to experience in Idaho Power service area.
You'll see on slide five that customer growth has increased 2.9% since September 2020.
We believe that quality of life, a business-friendly environment and reliable affordable energy from Idaho Power continue to attract a steady influx of business and residential customers, to the benefit of both our company and the local economy.
And while the impacts of the COVID-19 pandemic linger, we continue to see a return to normal operations for most of our commercial and industrial customers.
As of the end of September, unemployment in our service area was 2.6% compared to the current rate of 4.8% nationally.
Total employment in our service area has increased 3.3% over the past 12 months.
Moody's forecasted GDP now calls for economic growth of 6.1% in 2021 and 4.2% in 2022.
We are encouraged by this growth trend and forecast, especially considering the challenges we have all faced over the past 18 months.
At the local level, we are grateful to see businesses continue to bounce back from the various impacts of the pandemic.
Idaho Power continues to experience a strong volume of potential customers interested in expanding in our service area.
Many prospective projects are expressing a need for rapid speed to market and are seeking existing buildings versus greenfield construction.
This demand is fueling significant industrial spec development to construct shell buildings ranging from 50,000 to 250,000 square feet.
While a number of local developers are building out industrial parks, several nationally recognized developers are making large investments in anticipation of ongoing growth in Idaho's industrial sector.
As you may know, Idaho Power serves a large dairy industry and the state of Idaho ranks as the third largest dairy producing state in the U.S. We've recently received a number of inquiries for dairy waste to energy projects that use electricity as part of the process to produce renewable natural gas that is placed into pipelines.
One such project announced this month by Shell Oil Products U.S. will construct a waste to energy natural gas facility at a large dairy operation in Southern Idaho.
The plan is for the gas to be shipped by pipeline from Idaho to California.
You'll recall that this summer brought extreme high temperatures to our region, which combined with customer growth led to record energy demand.
Idaho Power hit a new all-time peak load of 3,751 megawatts on June 30, and exceeded the previous peak load more than 60 separate hours during June and July, as the weather remained hot and dry over most of the summer.
This led to strong sales across most customer classes.
The benefits of those sales were offset somewhat by Idaho Power's portion of the associated higher power supply costs, in part, because energy was at a premium across much of the West, due to the persistent hot dry conditions.
It was a challenging summer, and we learned some valuable lessons, and I am so pleased to see that both our people and our grid were up to the task.
We anticipate sustained growth in the demand for electricity, a challenge that is amplified by constraints in the transmission system impacting our ability to import energy into Idaho Power system, especially during peak load period.
As a result, we will need new resources to serve customers and maintain system reliability.
Last quarter, I mentioned, Idaho Power had issued a request for proposal to add 80 megawatts of new resources by summer 2023 and expects to issue an additional RFP in late 2021 or early 2022 to meet anticipated needs beyond 2023.
Based on our efforts to address the 2023 projected load deficits, you'll see on slide six that we now could potentially add approximately $100 million in additional capital expenditures related to the 80-megawatt project during the current 5-year forecast window.
These new resources will be in addition to the 120-megawatt solar project scheduled to come online at the end of next year, and the Boardman to Hemingway 500-KV transmission line that will enable an increased import of energy from across the Pacific Northwest as soon as 2026.
Our 2021 integrated resource planning efforts are focused on ensuring we continue to deliver reliable affordable clean energy for our growing customer base from diverse resources.
On the regulatory front, I would like to provide an update on our recent request to accelerate depreciation for the Jim Bridger coal-fired power plant.
Last quarter, I mentioned our filing with the Idaho Commission to increase rates $30.8 million in December of this year.
In September, PacifiCorp, our co-owner and operator of the Jim Bridger plant, submitted an IRP to the Idaho Commission that contemplates ceasing coal-fired generation in units 1 and 2 in 2023, and converting those units to natural gas generation by 2024.
At a public meeting this week, the Idaho Commission approved a joint motion to suspend the Idaho power's rate request, while the parties assess this option and environmental compliance requirements for the plant.
We expect to resolve the uncertainties in this case before the end of 2021.
I'd also like to share a brief update on the Boardman to Hemingway transmission line project.
In July, Idaho Power awarded contracts for detailed design, geotechnical investigation, land surveying and right-of-way option acquisition for B2H.
That work commenced during the third quarter.
Given the status of ongoing permitting activities and the construction period, Idaho Power expects the in-service date for the transmission line will be no earlier than 2026.
I have also mentioned on previous calls at Idaho Power and our co-participants are exploring several scenarios of ownership, asset and service arrangements aimed at maximizing the value of the project for each of the co-participants customers.
Any changes regarding the ownership structure would be addressed through amended or new agreements for future phases of the project.
We hope to be able to share more detailed updates in the near-term.
Given the expected increase in capital spending along with the current growth projection and other factors, Idaho Power could file a general rate case in Idaho and Oregon within the next couple of years.
Steady customer growth, constructive regulatory outcomes, effective cost management, and economic conditions, all play significant roles as we refine the need and timing of a future general rate case.
Slide seven shows a recent outlook of precipitation and weather from the National Oceanic and Atmospheric Administration.
Current weather projections for November through January show a 33% to 40% chance for both above normal precipitation and above normal temperatures in much of Idaho Power service area.
If these mild and wet conditions materialize, it could provide a needed boost to our regional snowpack, as well as our forecast for the clean low cost hydro generation that has traditionally been our single largest generation resource.
We will be praying for snow certainly.
And with the storms of this week, we are off to a great start.
Let's now move to slide eight, where you'll see our third quarter 2021 financial results as compared to the same period in 2020.
While this year's third quarter was a bit lower than last year's related to the timing of irrigation sales in both years, IDACORP has achieved the highest first 9 months of earnings ever recorded.
We had a very good quarter, and with continued benefits from higher sales to new customers, and higher sale in most customer classes, as well as positive impacts from transmission revenues.
We also saw lower sales to irrigation customers after strong irrigation loads in the second quarter, and a return to more typical operating and maintenance expenses compared to the same period last year.
On the table of quarter-over-quarter changes, you'll see our continuing customer growth added $5.1 million to operating income.
Increased usage per customer drove operating income higher by $22.9 million.
Cooling degree days were 14% higher than last year's third quarter, and the hot and dry conditions lead to 3% higher residential per customer usage, while more normal operating conditions lead to a respective 3% and 1% higher usage per commercial and industrial customers.
The timing of precipitation, which was higher than last year's dry third quarter, and the early start of the irrigation season that was reflected in our second quarter's results, along with some limitations on water in the third quarter all led to a 4% decline in irrigation per customer usage.
You'll note on the table that the combined usage changes lead to a $0.2 million increase to operating income.
A higher usage for residential and small general service customers was partially offset by $1.4 million of lower revenues from the FCA mechanism next on the table.
Further down, you'll see a decrease in operating income of $3 million that relates to the change in the per megawatt hour revenue, net of power supply costs, and power cost adjustment impacts quarter-to-quarter.
The primary driver of this decrease relates to the decrease in annual customer rates reflecting the full depreciation of all Boardman power plant investments after ceasing coal-fired operations at that plant last year.
In addition, the balance of the decrease relates to the amount of net power supply expenses that were not deferred to Idaho Power's power cost adjustment mechanisms.
Recall that Idaho customers generally bear 95% of power supply cost fluctuations and those costs were higher as the summer heat wave impacted wholesale energy prices; at a time of increased energy usage by our customers.
The heat wave also affected transmission wheeling-related revenues, which increased operating income by $4.7 million.
Wheeling volumes increased as utilities work to serve high demand by moving energy across our system throughout the region during the quarter, combined with 2 new long-term wheeling agreements that also increased transmission within related revenues this quarter and run through March of 2024.
Wheeling customers also paid 10% more for Idaho Power's out-rate ph that increased in October of 2020 to reflect higher transmission costs.
That out-rate ph increased an additional 4% on October 1, 2021, to further reflect higher costs going forward.
Next on the table, other operating and maintenance expenses increased by $4.9 million, primarily due to a return to more normal levels of purchase services and maintenance costs, compared with the previous year's third quarter, which was more negatively impacted by the COVID-19 pandemic.
While some economic effects of the pandemic continue, much business activity has returned to more normal levels.
You'll note that we continue to expect our full year O&M to be within our previously guided range.
Finally, income tax expense increased $3.4 million this quarter due mostly to plant related income tax return adjustments, which were positive last year and slightly negative in 2021.
These are generally recorded during the third quarter of each year upon completion of the prior year tax return.
The changes collectively resulted in a net decrease to IDACORP's net income of $4.1 million or $0.09 per share.
Earnings per diluted share over the first 9 months of 2021 are well above the same period last year by $0.25.
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 distribute dividends to shareholders.
IDACORP's operating cash flows along with our liquidity positions as of the end of September 2021 are included on slide nine.
Cash flows from operations were about $19 million higher than the first 9 months of last year.
The increase was mostly related to the timing of net collections of regulatory assets and liabilities, and working capital fluctuations, partially offset by changes in deferred taxes and taxes accrued.
The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the middle of slide nine.
At this time, we still do not anticipate raising any equity capital in 2021 or 2022.
Our combined liquidity along with expected regulatory support from our annual adjustment mechanisms is a substantial backstop to our expected capital and operating needs.
Slide 10 shows this year's revised full year earnings guidance and our current key financial and operating metrics estimates.
Given the results year-to-date, we have listed the bottom end of our range and now expect IDACORP's 2021 earnings to be in the range of $4.80 to $4.90 per diluted share.
This guidance assumes normal weather and operating conditions for the balance of the year.
Our guidance still assumes Idaho Power will use no additional tax credits in 2021.
And while we do not currently expect to record sharing of excess revenues with Idaho customers this year, the upper end of our range is near that level.
Recall that above a 10% return on equity in the Idaho jurisdiction, Idaho customers would receive 80% of any excess earnings.
Our expected full-year O&M expense guidance remains in the range of $345 million to $355 million.
It's fair to say this goal to keep O&M relatively flat for the 9th straight year continues to be challenged by the level of customers and load growth we're experiencing.
We also reaffirm our capex forecast for this year in the range of $320 million to $330 million.
Our expectation for hydro-generation was tightened within the range of 5.4 to 5.7 megawatt hours.
| compname reports q3 earnings per share $1.93.
sees fy earnings per share $4.80 to $4.90.
q3 earnings per share $1.93.
sees 2021 earnings per share $4.80 - $4.90.
|
I'm Larry Mendelson, Chairman and CEO of HEICO Corporation.
Now before reviewing our fourth quarter and full fiscal year results, I'd like to take a few moments to discuss the impact on HEICO's operating results from the COVID-19 global pandemic.
The results of operations in fiscal '20 were significantly affected by COVID-19 global pandemic.
The effects of the pandemic and related actions by governments around the world to mitigate its spread have impacted our employees, customers, suppliers and manufacturers.
Since the beginning of the pandemic in March 2020, we have implemented health and safety measures at our facilities in accordance with the CDC guidelines to protect team members and mitigate the spread of in COVID-19.
Most of our facilities are considered essential businesses and have remained operational during the pandemic.
The Board of Directors and management of HEICO are truly humbled by the dedication of our team members to their company during these unprecedented times.
Currently, we believe the recent vaccine progress will most notably result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal '21 as demand for air travel slowly recovers, we remained very confident in our ability to offer cost saving solutions and robust product development programs that we expect to increase our market share and allow us to have even a stronger presence within the commercial aviation market.
I'd like to take a few moments to summarize the highlights of our full fiscal '20 and fourth quarter results.
Despite, the many challenges faced in fiscal '20, HEICO has continued to generate excellent cash flow.
Our cash flow provided by operating activities was very strong at $409 million and $437.4 million in fiscal '20 and '19, respectively.
Cash flow provided by operating activities totaled $110.2 million, or 177% of reported net income in the fourth quarter of fiscal '20, as compared to $124 million in the fourth quarter of fiscal '19.
As all of you know, HEICO's most important metric is cash flow, and I think that the results of 2020 operations, particularly the fourth quarter are clearly indicative of this success.
We are encouraged by the sequential improvements in our fiscal '20 consolidated fourth quarter operating results over the third quarter of fiscal '20.
And during the fourth quarter, we experienced increases in consolidated operating income, net income, and net sales of 30%, 15% and 10%, respectively.
In fact, despite the continued impact from the pandemic on demand for our commercial aerospace parts and services, the Flight Support Group's operating income and net sales in the fourth quarter of fiscal '20 improved sequentially by 78% and 9%, respectively, as compared to the third quarter of fiscal '20, a significant improvement.
The Electronic Technologies Group and from now on I will call it ETG, set all-time quarterly net sales and operating income records in the fourth quarter of fiscal '20 improving 8% and 14%, respectively, over the fourth quarter of fiscal '19.
These increases principally reflect the excellent operating performance of our fiscal '20 acquisitions, as well as continued disciplined cost management on the part of our operating teams.
We recently entered into an amendment to extend the maturity date of our revolving credit agreement by one year to November 23 and to increase the committed capital to $1.5 billion.
In addition, our credit facility continues to include a feature that will allow the company to increase the capacity by $350 million to become a $1.85 billion facility through increased commitments from existing vendors or the addition of new lenders and can be extended for an additional one-year period.
Their loyalty to HEICO is demonstrated by this credit facility amendment, further offers us the financial flexibility to pursue our disciplined strategy of acquiring high-quality businesses at fair prices.
Our net debt, which we define as total debt less cash and cash equivalents of $333 million, compared to shareholders equity ratio improved to 16.6% as of October 31 '20, and this was down from 29.8% as of October 31 '19.
Our net debt to EBITDA ratio improved to 0.71 times as of October 31 '20, down from 0.93 times as of October 31 '19.
Keep in mind this is after making six acquisitions during the year.
During fiscal '20, we successfully completed six acquisitions, four of which were completed since the pandemic start.
We have no significant debt maturities until fiscal '24, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes and accelerate growth to maximize shareholder returns.
As we reported yesterday, we declared an $0.08 per share regular semi-annual cash dividend on both classes of common stock, payable January 21, 2021 to shareholders of record as of January 7, 2021.
This cash dividend will be our 85th consecutive semi-annual cash dividend since 1979.
HEICO's strength in the face of challenging business conditions, coupled with our optimism of the future, gave our Board of Directors the confidence to continue paying our normal cash dividend.
While this is very important to all of our shareholders, it is especially important to our team members, the vast majority of whom are fellow HEICO shareholders through the personal holdings in their 401(k) plan.
Let's talk about some of the new fourth quarter acquisitions.
As I discussed during the third quarter teleconference, we completed three acquisitions in August through our ETG Group.
First, we acquired a 75% of the equity interest in Transformational Security and Intelligent Devices.
These two companies design and develop and manufacture state-of-the-art technical surveillance countermeasures equipment.
Next, we acquired approximately 90% of the equity interest of Connect Tech.
Connect Tech designs and manufactures rugged small form factor embedded computing solutions used in rugged commercial and industrial, aerospace and defense, transportation and smart energy applications.
These acquisitions are expected to be accretive to earnings within the first 12 months following closing.
The Flight Support Group's net sales were $924.8 million in fiscal year '20, as compared to $1,240.2 million in fiscal year '19.
The Flight Support Group's net sales were $193.6 million in the fourth quarter of fiscal '20, as compared to $324.7 million in the fourth quarter of fiscal '19.
The net sales decreases are principally organic and reflect lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March 2020, due to the pandemic.
Net sales in fiscal '20 follows the 13% and 12% organic growth reported in the year and fourth quarter of fiscal '19, respectively.
The Flight Support Group's operating income was $143.1 million in fiscal '20, as compared to $242 million in the fiscal year '19.
The Flight Support Group's operating income was $21.5 million in the fourth quarter of fiscal '20, as compared to $62.2 million in the fourth quarter of fiscal '19.
The operating income decreases principally reflects the previously mentioned decrease in net sales, a lower gross profit margin, and an increase in bad debt expense, due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal '20 as a result of the pandemic's financial impact, partially offset by a decrease in performance-based compensation expense.
The lower gross profit margin principally reflects an increase in inventory obsolescence expense, mainly resulting from the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers, due to the pandemic's financial impact.
Additionally, the lower gross profit margin reflects the impact from lower net sales within our repair and overhaul; parts and services and aftermarket replacement parts product lines.
The Flight Support Group's operating margin was 15.5% in fiscal '20, as compared to 19.5% in fiscal '19.
The Flight Support Group's operating margin was 11.1% in the fourth quarter of fiscal '20, as compared to 19.2% in the fourth quarter of fiscal '19.
The decrease -- the operating margin decreases principally reflect the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned higher bad debt expense and fixed cost efficiencies loss resulting from the pandemic's impact, partially offset by lower performance-based compensation expense.
The Electronic Technologies Group's net sales increased 5% to a record $875 million in fiscal '20, up from $834.5 million in fiscal '19.
The increase in fiscal '20 is attributable to the favorable impact from our fiscal '20 and '19 acquisitions, partially offset by an organic net sales decrease of 1%.
The organic net sales decrease is principally due to lower sales of commercial aerospace and medical products, largely attributable to the pandemic, partially offset by increased sales of defense and space products.
The ETG's net sales increased 8% to a record $236.7 million in the fourth quarter of fiscal '20, up from $219.5 million in the fourth quarter of fiscal '19.
The increase in the fourth quarter of fiscal '20 is attributable to the favorable impact from our fiscal '20 acquisitions and the anticipated increase in commercial space revenues.
The Electronic Technologies Group's operating income increased 5% to a record $258.8 million in fiscal '20 up from $245.7 million in fiscal '19.
The increase in fiscal '20 partially -- principally reflects the previously mentioned net sales growth, lower performance-based compensation expense and a decrease in acquisition-related expenses, partially offset by a lower gross profit margin.
The lower gross profit margin is mainly due to a decrease in net sales and less favorable product mix of certain commercial aerospace and medical products, partially offset by increased net sales of certain defense products.
The ETG's operating income increased 14% to a record $73.9 million in the fourth quarter of fiscal '20, up from $64.6 million in the fourth quarter of fiscal '19.
The increase in the fourth quarter of fiscal '20 principally reflects the previously mentioned net sales growth and improved gross profit margin.
The improved gross profit margin principally reflects a more favorable product mix and increased net sales of certain space and defense products, partially offset by a decrease in net sales of certain commercial and aerospace products.
The Electronic Technologies Group's operating margin improved to 29.6% in fiscal '20, up from 29.4% in fiscal '19.
The ETG's operating margin improved to 31.2% in the fourth quarter of fiscal '20, up from 29.4% in the fourth quarter of fiscal '19.
The increase in the fourth quarter of fiscal '20 mainly reflects efficiencies gained from the previously mentioned net sales growth, and the improved gross profit margin.
Moving on to diluted earnings per share, consolidated net income per diluted share decreased 4% to $2.29 in fiscal '20, as compared to $2.39 in fiscal '19.
Consolidated net income per diluted share decreased 27% to $0.45 in the fourth quarter of fiscal '20, as compared to $0.62 in the fourth quarter of fiscal '19.
Those decreases principally reflect the previously mentioned lower operating income of Flight Support, partially offset by lower income tax expense, less net income attributable to non-controlling interest, as well as lower interest expense.
Depreciation and amortization expense totaled $88.6 million in the fiscal '20, up from $83.5 million in fiscal '19 and totaled $23.3 million in the fourth quarter of fiscal '20, up from $21.8 million in the fourth quarter of fiscal '19.
The increase in the fiscal year and fourth quarter of fiscal '20, principally reflects the incremental impact from our fiscal '20 and '19 acquisitions.
Research and development -- significant ongoing new product development efforts are continuing at both ETG and Flight Support.
R&D expense was $65.6 million in fiscal '20 or about 3.7% of net sales and that compared to $66.6 million in fiscal '19%, or 3.2% of net sales.
R&D expense was $16.6 million in the fourth quarter of fiscal '20, or 3.9% of net sales, and that compared to $17.9 million in the fourth quarter of fiscal '19 and that was 3.3% of net sales.
SG&A expenses consolidated decreased by 14% to $305.5 million in fiscal '20, and that was down from $356.7 in fiscal '19.
The decrease in consolidated SG&A expense in fiscal '20 reflects a decrease in performance-based compensation expense, a reduction in other G&A expenses, and a reduction in other selling expenses, including outside sales commissions, marketing and travel.
These decreases were partially offset by the impact of our fiscal '19 and '20 acquisitions, as well as the previously mentioned increase in bad debt expense, and that was due to collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal '20 as a result of the financial impact of the pandemic.
Consolidated SG&A expense decreased by 18% to $72.6 million in the fourth quarter of fiscal '20, down from $88.8 million in the fourth quarter of fiscal '19.
The decrease in consolidated SG&A expense in the fourth quarter of fiscal '20 reflects a reduction in other general and administrative expense, decrease in performance-based compensation expense, and a reduction in other selling expenses including outside sales commissions, marketing and travel.
The decreases were partially offset by the impact of our fiscal '20 and '19 acquisitions, as well as the increase in bad debt expense.
Consolidated SG&A expense as a percentage of net sales dropped to 17.1% in fiscal '20, and that was down slightly from 17.4% in fiscal '19.
The decrease in consolidated SG&A expense as a percentage of net sales in fiscal '20, again is due to lower performance-based compensation expense and a decrease in other selling expenses, partially offset by the impacts of higher other G&A expense as a percentage of net sales and an increase in bad debt expense.
Consolidated SG&A expense as a percentage of net sales increased to 14% -- I'm sorry, 17% in the fourth quarter of fiscal '20, and that was up slightly from 16.4% in the fourth quarter of fiscal '19.
The increase in consolidated SG&A expense as a percentage of net sales in the fourth quarter of fiscal '20, reflects higher other general and administrative expense as a percentage of net sales, due to the decreased sales volume and the aforementioned increase in bad debt expense, partially offset by a decrease in lower performance-based compensation expense, and a decrease in other selling expenses.
Interest expense decreased to $13.2 million of fiscal '20 and that was down significantly from $21.7 million of fiscal '19 and it decreased to $2.5 million in the fourth quarter of fiscal '20, down from $5.2 million in the fourth quarter of fiscal '19.
The decreases are principally due to a lower weighted average interest rate on borrowings outstanding under our credit facility.
Our effective tax rate in fiscal '20 was 7.9%, as compared to 17.8% in fiscal '19.
The decrease in fiscal '20 is mainly attributable to a larger tax benefit recognized in fiscal '20 from stock option exercises, compared to fiscal '19, and that resulted from more stock options being exercised, as well as the strong appreciation in HEICO's stock price during the optionees' holding period.
Our effective tax rate in the fourth quarter of fiscal '20 was 22.3% and that compared to 19.8% in the fourth quarter of fiscal '19.
Net income attributable to non-controlling interest was $21.9 million in fiscal '20, and that compared to $31.8 million in fiscal '19.
The decrease in fiscal '20, principally reflects a decrease in operating results of certain subsidiaries of Flight Support, in which non-controlling interests are held, as well as the impact of a dividend paid by HEICO Aerospace in June '19 -- 2019, that is -- that effectively resulted in the transfer of 20% non-controlling interest held by Lufthansa Technik in eight of our existing subsidiaries and that was transferred back to our Flight Support Group.
Net income attributable to non-controlling interest was $5.3 million in the fourth quarter of fiscal '20, and that compared to $6.9 million in the fourth quarter of fiscal '19.
The decrease in the fourth quarter of fiscal '20, principally reflects a decrease in the operating results of certain subsidiaries of the Flight Support Group in which non-controlling interests are held.
For the full fiscal year '21 at the present time, we anticipate a combined tax and non-controlling interest rate of approximately 23% to 24%.
Moving onto the balance sheet and cash flow, as you all know, our financial position and forecasted cash flow remain very strong.
Previously, I mentioned cash flow provided by operating activities was consistently strong at $409.1 million and $437.4 million in fiscal '20 and '19, respectively.
Cash flow provided by operating activities totaled $110.2 million, or 177% of net income in the fourth quarter of fiscal '20 and that compared to $124 million in the fourth quarter of fiscal '19.
We currently anticipate capital expenditures of approximately $40 million in fiscal '21, and that would be up from the $22.9 million spent in fiscal '20.
Our working capital ratio, which is, of course, current assets divided by current liabilities, improved to 4.8 as of October 31, '20, as compared to 2.8 as of October 31, '19.
Days sales outstanding, DSOs of accounts receivable approved -- improved to 45 days as of October 31, '20 and that compared favorably to the 47 days as of October 31, '19.
We continue to closely monitor all receivable collection efforts in order to limit our credit exposure.
No one customer accounted for more than 10% of sales, and our top five customers represented approximately 24% and 20% of consolidated net sales in fiscal '20 and '19, respectively.
Our inventory turnover rate increased to 153 days for the year ended October 31, '20, as compared to 124 days for the year ended October 31, '19.
That increase in turnover rate principally reflects certain long-term and non-cancelable inventory purchase commitments, which were based on pre-pandemic net sales expectations and also to support the backlog of certain of our business.
As we look ahead to fiscal '21, the pandemic will likely continue to negatively impact commercial, aerospace industry, as well as HEICO.
Given this uncertainty, HEICO cannot provide fiscal '21 net sales and earnings guidance at this time.
However, we do believe our ongoing fiscal conservative policies, healthy balance sheet, increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers.
In addition, our time-tested strategy of maintaining low debt and acquiring -- operating high cash-generating businesses across a diverse base of industries, besides commercial aerospace and these industries are defense-based and other high-end markets; including electronics and medical, puts us in good financial position to weather this uncertain economic period.
We are cautiously optimistic that the recent vaccine progress should generate increased commercial air travel and will result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal '21.
Their dedication to HEICO's customers and to the safety of their fellow team members has been exemplary.
I am confident that our future is bright and we will exit this COVID-19 period as a stronger and more competitive company.
| compname reports q4 earnings per share of $0.45.
q4 earnings per share $0.45.
will not provide fiscal 2021 guidance at this time.
believe ongoing fiscal conservative policies, balance sheet, increased liquidity will permit us to invest in new research, development.
|
My name is Nestor Makarigakis.
Participating on the call for Mistras will be Dennis Bertolotti the company's President and Chief Executive Officer; Ed Prajzner Senior Vice President Chief Financial Officer and Treasurer; Dr. Sotirios Vahaviolos Founder and Executive Chairman; and Jon Wolk Senior Executive Vice President and Chief Operating Officer.
The company's actual results could differ materially from those projected.
The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP.
I will now turn the conference over to Dennis Bertolotti.
During today's call we will provide an update on Mistras' business performance.
Our financial results for the third quarter and first nine months of 2019 as well as discuss our lower outlook for the remainder of the year.
Third quarter results continue to reflect the progress being achieved toward our long-term strategic initiatives.
Revenues were up margins expanded and earnings increased on a year-over-year basis.
We also generated strong cash flow a hallmark of Mistras.
Let me note some key highlights for the quarter.
Gross margin increased across all 3 segments.
SG&A decreased by 100 basis points as a percentage of revenue generated strong cash from operations of $19.4 million and free cash flow of $13.4 million.
On a per share basis free cash flow was $0.46 for the third quarter.
Additional highlights for the first nine months of the year.
Consolidated gross margin increased 160 basis points.
Cash from operations of $40.5 million with free cash flow of $22.5 million.
Debt paydown of $23.3 million exclusive of the $4.8 million paid for New Century Software our latest acquisition.
Revenue and operating earnings were ahead of fiscal 2018 on a year-to-date basis through the first nine months indicators of a robust business.
However our strong momentum developed over the past 2 quarters encountered some headwinds coming into the fourth quarter of 2019.
In particular a note of caution unexpectedly rose among our oil and gas customers attributable primarily to increased macroeconomic uncertainty.
Although our long-term outlook remains intact.
These factors are clearly influencing current activity in the oil and gas market with pushouts in demand.
Most of our oil and gas exposure is predominantly in the up and downstream sectors.
The downstream being driven by capital spend including turnarounds and modestly in the run and maintain opex spend.
Consequently we feel well positioned with our strategy focused on growing our run and maintain revenue a sector of the market that we dominate.
I feel very good about where we are in our look for the long term of this unexpected pause and the oil gas in markets has created some immediate challenges that will affect our performance through the end of 2019 and may drag into the first quarter of next year.
Consequently, you can understand why our full year with is not lower than originally anticipated.
And why we are accordingly lowering our guidance for 2019.
We view this as a timing issue.
As we expect most of the work will return to the market over the next couple quarters.
And we'll walk you through a detailed update in a few minutes.
But looking out into 2020 and beyond, our underlying oil and gas business remains strong.
And our plans and strategies to grow profitably over a long term are unaffected.
Based on what we are seeing and hearing underground we believe we are gaining market share and except for a few locations we have retained a vast majority of the customers served by our close to 90 labs across the U.S. Canada and Europe.
Each of these locations remain staffed with our experienced professionals so that we are well positioned to serve customers and capitalize on current opportunities as well as to continue to grow our market share in 2020 and beyond.
Even by conservative estimates we serve a $14 billion industry within the NDT spend of the business not counting the greater spend generated in the data and mechanical sectors in which we participate.
These markets are growing at healthy rates and support our growth aspirations.
Our product line expansions into adjacent markets such as mechanical and pipeline inspection that increase that opportunity.
And are quickly evolving MISTRAS Digital platform is providing us even greater opportunity.
Though quite large it is a highly fragmented industry.
And many of our smaller competitors simply can't match the depth of our resources or the breadth of our services and valuable experience.
This builds strong relationships with our customers because we save them unnecessary spend.
We are also utilizing our resources to create new products and services, and to make strategic acquisitions, all of which help diversify or in markets provide additional stability to our results in further distance ourselves from the competition.
Before turning the call over to Ed let me offer a few comments on some of the key developments in the quarter.
Performance at Onstream continues to reflect a strong U.S. growth but a relatively weak Canadian market.
The recent commercialization of their 20-inch tool and the impending introduction of their larger 24-inch tool slowly increased their contribution.
And with the geospatial technology from the New Century acquisition providing an excellent complement to Onstream's Stream data view analytics we believe there are strong synergies that will open up new possibilities in the future as well as benefit our complementary PCMS software.
We see this acquisition as a strong strategic fit in one of our stated pillars for growth that being the midstream sector of the energy market.
We view this as a growth market driven by increased regulatory oversight and rising customer demand due to more vigilant mechanical integrity programs all needs Mistras is uniquely qualified to deliver.
West Penn has good momentum and should outperform the fourth quarter as of last year.
We expect them to continue to ramp up utilization at a second facility.
In aerospace we also continue to benefit from the strength of our French operations.
Overall aerospace remains a key corporate growth pillar where the outlook for the industry over the next few years continues to be strong.
Data management is also one of our strategic objectives and MISTRAS Digital is a discrete way to integrate our vast data capabilities.
Onstream Streamview PCMS software our ruggedized MISTRAS Digital field tablets sensing and monitoring capabilities and now the New Century Software are just some of the various ways that are weaving -- that we are weaving together our data management capabilities to establish a leading position as the asset-protection market enters the age of the industrial Internet of Things.
As the market gets more sophisticated we want to be the leader in the market for more data and predictive analytics which we think are the industry big growth drivers.
An exciting endorsement of our strategy has been the rapid adoption of our MISTRAS Digital tablet rollout that we've been piloting at a growing number of refineries.
These customers value this technology so much so that they are asking us to open up the app to let other on-site vendors piggyback on the software hence we are reviewing the monetization of this application to other third parties.
We expect to continue to roll out our MISTRAS Digital tablet to other customers in an accelerating rate to more of our locations throughout the fourth quarter and especially in 2020.
This quarter we acquired New Century Software which forms another element of MISTRAS Digital.
More importantly this acquisition is another example of forward thinking about the direction of the midstream sector and the opportunity to leverage technology to grow.
New Century is a leading provider of pipeline integrity management software and services to energy transportation companies.
New Century provides software solutions data management expertise and extensive pipeline experience to enable a global network of customers in the oil and gas industry to manage pipeline integrity meet regulatory compliance requirements and maximize safety and reliability.
This acquisition aligns with MISTRAS' mission of delivering value-added integrated smart data solutions to its customers.
Looking at results for the third quarter consolidated revenues were up 5.5% to $192 million.
Organic growth was 2.1% with acquisitions contributing 4.4% offset by a 1% decline due to unfavorable currency translation.
Consolidated gross profit for the quarter was $57.8 million a 10% increase over the year ago quarter.
Consolidated gross profit margins improved significantly to 30.1% for the third quarter compared with 28.7% in the prior year quarter an increase of 140 basis points.
The ongoing expansion of our gross profit margin is indicative of the success of our underlying strategy focusing on more profitable opportunities in our core operations shedding less profitable businesses and making strategic acquisitions that help to improve margins.
We believe that our year-to-date gross margin in 2019 can be maintained into 2020 even with short-term volatility in revenue volumes.
Operating income improved for the third quarter to $10.8 million compared with $3 million in the comparable period last year.
On a non-GAAP basis adjusted operating income was $11.2 million compared to $10.1 million last year an increase of 10%.
Net income for the third quarter was $3.1 million compared with a net loss of $1 million for the same period last year.
Adjusted EBITDA was up 7% to $22.4 million for the third quarter of 2019.
As a percentage of revenue adjusted EBITDA improved to 11.6% for the third quarter compared to 11.4% in the same period last year.
The improvement in adjusted EBITDA is reflective of the success being achieved by focusing on higher-value operations and better leveraging our global infrastructure.
As Dennis mentioned earlier the company is a strong cash generator.
We stated last quarter that we had anticipated a continued strengthening of our cash flow generation coming into the back half of the year and we achieved that with third quarter cash from operations of $19.4 million and free cash flow of $13.4 million.
On a per share basis free cash flow was $0.46 for the third quarter this was consistently strong on a sequential basis over the second quarter and a significant improvement over the prior period last year.
Strong cash flow this year has benefited in part from our commitment to improved working capital management.
Now looking more closely at our segments.
Services revenue increased by almost 8% in the third quarter.
Organic revenue grew a little over 2%.
And acquisitions primarily Onstream incrementally added nearly 6% to revenue growth.
The Services segment generated a gross profit margin of 28.4% for the quarter an improvement of 90 basis points compared to the year ago period of 27.5%.
Margin expansion is a key corporate strategy and we are pleased to see our margins continue to expand in our largest segment driven by pruning low-margin operations and growing higher margin operations including acquisitions such as West Penn and Onstream.
We have a strong operating leverage in this segment with significant contribution margins on incremental revenue.
International revenues in the third quarter were up 5.4% organically offset by 4.4% unfavorable currency rates for a 1% nominal increase.
The growth organically is noteworthy in that it was achieved despite the previously disclosed run-off of the low-margin German staff leasing business.
For the third quarter International reported a 31.6% gross profit margin compared to 29.7% a year ago which represents a 190 basis point improvement.
We attribute that improvement largely to higher labor utilization which is a result of increased visibility and visibility that was a key focus in this past year.
Products and Systems revenue decreased slightly in the third quarter to $5.5 million due to the sale of a subsidiary that was divested in 2018.
Gross profit margin increased for this segment to 49.6% compared with 45.6% in the prior year due to a favorable product sales mix.
We had another prudent quarter in maintaining strong cost control with a below inflation increase of 1% in SG&A year-over-year.
As a percentage of revenue SG&A was down 22% from 23% in the same period last year a decrease of 1 full percentage point once again reflecting our focus on improving operating leverage.
Considering expenses this year contain those assumed in the inclusion of the Onstream acquisition the ongoing investment we are making in sales and marketing as well as with developing and launching MISTRAS Digital we believe our efforts are beginning to reflect the many efficiency initiatives under way at MISTRAS.
Spending in the quarter was consistent with our expectation that the first half 2019 levels represented what we felt would be the run rate for the full year.
We continually review and rationalize our companywide overheads for savings to make sure we maintain a flexible and efficient footprint to support and invest in our growing business.
The company's net debt defined as total debt less cash and cash equivalents was $252.9 million as of September 30 2019 compared to $265.1 million at December 31 2018.
The company has paid down over $23 million of total debt during the first nine months of this year.
The company additionally paid a total of $7.7 million for acquisitions and income taxes related to the net settlement of share-based awards during the nine months ended September 30 2019.
As defined in our credit agreement our leverage ratio was approximately 3.6x as of September 30 2019.
Our goal is to reduce this ratio to below 3x by no later than the end of fiscal 2020.
Given our cash flow annual interest expense and net debt we believe our balance sheet is strong and will support the funding of both our organic growth objectives as well as any selective tuck-in acquisitions such as New Century Software.
Our effective tax rate was approximately 61% for the third quarter of 2019 including a $1.4 million or $0.05 per share write-off of certain deferred tax assets.
As Dennis mentioned earlier we are seeing a weak oil and gas market coming into the fourth quarter and we experienced an overall fall season that ended much sooner than anticipated.
In particular the oil and gas turnaround sector slowed attributed to factors such as supply buildups early in the year as well as refinery shifting resources to prepare for IMO 2020.
The note of caution that unexpectedly arose among oil and gas customers toward the middle of September 2019 into October 2019 is attributable primarily to increased macroeconomic uncertainty.
It is the same note of caution that is being heard in various sectors stemming from many factors including trade tensions negative European interest rates and the slowdown of domestic GDP growth.
Although the long-term outlook remains intact these factors are clearly influencing current activity in the oil and gas market resulting pushouts of demand.
Consequently the company's full year outlook is now lower than originally anticipated for the fourth quarter and accordingly the company is lowering its guidance for full year 2019 as follows: total revenues are expected to be between $740 million to $750 million; adjusted EBITDA is expected to be between $70 million to $75 million; capital expenditures are expected to be under $25 million; and free cash flow is expected to be between $28 million to $32 million.
We are still developing our full year 2020 budget but preliminarily we anticipate modest single-digit top line growth while maintaining year-to-date 2019 gross profit operating margins and cash flow levels.
There are also a number of additional growth opportunities all of which will be incremental to our current expectations.
We will provide our outlook for full year 2020 on our next scheduled call.
We are confident in our sustainable business model which has proven to be nimble in responding to sudden and severe cyclical changes in the oil and gas sector.
We remain firmly committed to diversifying our end markets over the long term while at the same time embracing our current end markets with an evolving differentiated solution.
As we implement our long-term strategy we recognize there may be some bumps along the road.
However these distractions are not a hindrance to achieving our ultimate objective of becoming the partner of choice in the NDT market and its adjacencies.
We continue to steadily transform Mistras with our basic principles always at the forefront that being delivering value meeting our promises innovating to drive productivity for our customers and developing industry-leading productivity tools.
I am confident and continue to see signs that our customers' operations see value in the span with us as a true ROI.
The enthusiastic reception of our MISTRAS Digital tablet initiative further illustrates the partnerships we are forming with our clients.
I also believe that we do this better than our competition and this will be evidenced by our relatively stronger performance than our market as we exit 2019 and head into 2020.
We are keenly focused on differentiating ourselves in the market particularly through our expanding service lines which solve for customers' needs of reduced overall labor to accomplish a given project involving digital solutions as I mentioned earlier.
We also remain firmly committed to maintaining our position at the forefront of leading the development of advanced inspection tools utilizing proprietary technology.
We add value and this enables us to price at market and generate solid operating profit with predictable attractive cash flow.
In the process we serve our customers with an exceptional return on their investment by delivering top-quality results with superior economic value.
I am confident that we are on the right path executing on our strategy and creating value over the short mid and long-term for Mistras shareholders.
Brian please open up the phone line.
| sees fy 2019 revenue $740 million to $750 million.
compname says fy 2019 adjusted ebitda is expected to be between $70 million and $75 million.
|
CNA performed extremely well in the third quarter with core income up 23% year-over-year despite the elevated catastrophe activity.
In the third quarter, core income was $237 million or $0.87 per share, driven by improved underlying underwriting performance and favorable Life & Group results.
Net income for the quarter was $256 million or $0.94 per share.
Gross written premium, excluding our captive business grew by 10% this quarter, fueled by excellent new business growth and continued strong price increases.
And importantly, momentum continued to build throughout the quarter.
As we expected, the transactional capability limitation that we mentioned last quarter, following the cyber security incident are now behind us.
Earned rate was 11% in the quarter, and written rate was 8%, which remains well above loss cost trends and which we believe portends continued progress toward building margin as the written premium earns in over a third renewal cycle in 2022.
Additionally, the tighter terms and conditions we have been able to secure during the hard market persists with no early signs of pressure to relax them.
I'll have more to say about production performance in a moment.
The all-in combined ratio was 100% this quarter, about a point lower than the third quarter of 2020, which included elevated catastrophes in both periods.
In the third quarter of 2021, pre-tax catastrophe losses were $178 million or 9.2 points of the combined ratio, which included $114 million for Hurricane Ida.
The P&C underlying combined ratio was 91.1%, a 1.5 point improvement over last year's third quarter results.
This is a record low for the third consecutive quarter.
After adjusting for the impacts of COVID in last year's third quarter, the improvement in our underlying combined ratio is actually 2.1 points.
The underlying loss ratio in the third quarter of 2021 was 60.2%, which is down 0.3 points compared to the third quarter of 2020.
Excluding the impacts of COVID in the prior year quarter, the underlying loss ratio improved by 0.9 points, and the decrease reflects our prudent acknowledgment of margin improvement.
As I've mentioned before, we increased our loss cost trends about 2 points over the last couple of years and classes impacted by social inflation.
This quarter, we increased our loss cost trends in property lines about 2 points because of the supply chain shortages, which have increased the cost of material and labor and don't look like they will revert back lower anytime soon.
This change pushed up our overall P&C loss cost trends marginally, and are now above 5%.
During the third quarter, earned rates are running close to 11%.
So, earned rate is exceeding loss cost trend by about 6 points.
Applying that to a 60% loss ratio should portend about 3 points of improvement in the quarter.
We have reflected about 1 point of improvement in the underlying loss ratio in the third quarter.
We are going to continue to be prudent in terms of acknowledging margins since the courts are just starting to open up and the dockets are only starting to clear.
The underlying combined ratio for Specialty was 89.6%, a 0.9 point improvement compared to last year, entirely from an improvement in the underlying loss ratio, while the expense ratio was comparable to the third quarter of 2020.
The all-in combined ratio was 88.2%, a 1.3 point improvement compared to the third quarter of 2020.
The all-in combined ratio for Commercial was 111.6% including 18.6 points of Cat compared to 111.3% in last year's third quarter including 17 points of Cat.
The underlying combined ratio for Commercial was 92.5%, which is the lowest on record and it's 1.2 points lower compared to last year and 2.3 points lower, excluding the COVID frequency impacts that reduced the loss ratio in 2020.
The underlying loss ratio improved by 0.4 points, excluding the COVID frequency impacts last year, while the expense ratio improved by 2 points.
Incidentally, compared to the second quarter of 2021, the underlying loss ratio is higher simply because of the resulting mix change between property and casualty net earned premium due to the new property quota share treaty we purchased in June.
In ceding [Phonetic] an annual estimate of property earned premium to the reinsurers in June, it altered the underlying loss ratio with a higher casualty mix going forward.
The underlying combined ratio for international improved by four full points to a record low of 91%.
This reflects at 2.8 point improvement in the expense ratio and a 1.2 point improvement in the underlying loss ratio, which was 58.9% in the quarter.
Importantly, as our reunderwriting has largely been completed in international, we've continued to see that benefit in the underlying loss ratio as well as a more modest catastrophe ratio from the meaningful reduction in our P&L exposures.
The all-in combined ratio of 95.5% compared to 98.1% in the third quarter of 2020, reflects the success of our reunderwriting strategy.
Now, turning back to production statistics.
As indicated earlier, our P&C operations had 10% growth in gross written premiums ex-captive which was 2 points above what we achieved in the first half of 2021 and 1 point above full year 2020.
Our growth in the quarter was fueled by strong new business growth of 24% and written rate of 8%, while retention was stable at 81%.
Net written premium growth for P&C was plus 5% for the quarter, up 4 points over the first half of the year.
Our specialty gross written premium growth ex-captive was plus 10%, driven by excellent new business growth of 40%, concentrated in affinity programs and management liability in continued strong rate of 9%.
This is our fifth consecutive quarter of double-digit growth in specialty notwithstanding that our retention in the third quarter was down about 5 points to 80%.
In the quarter, we continued our reunderwriting of the healthcare portfolio and we non-renewed a portion of our hospital medical malpractice business, because we could not achieve our required returns even after the rate increases we secured to-date.
Non-renewing this segment also lowered the rate increase for specialty this quarter, because it was the segment achieving some of our highest rate increases in recent quarters.
But improving our profitability is always our first priority and walking away from this business was the right action to take.
In Commercial, our gross written premiums ex-captives grew 10% in the quarter, representing an 8 point improvement over the second quarter's growth.
As we mentioned last quarter, commercial was disproportionately impacted by the cyber incident, as the majority of the underwriters in the branches are in the commercial business unit.
And so we expected to see the biggest rebound in commercial, now that it's behind us.
And we did indeed see that this quarter.
Commercial new business growth grew by 21% in the quarter with all segments contributing and retention increased 3 points to 83% compared to last quarter and rates increased 6%.
Although rates moderated in certain segments like national accounts, where rate increases were lower by 3 points, we still achieved a very strong 13% increase in the quarter, which is well above loss cost trends.
Our middle market rates were lower by 1 point this quarter, but we had a 7 point increase in retention to 84%.
We also achieved 2 points of exposure increase in Commercial in the quarter from higher payroll and sales compared to the third quarter of 2020.
Our international gross written premium growth was 16% for the quarter or 11% excluding currency fluctuation.
As we mentioned, with the reunderwriting actions behind us, we are focusing on growing the portfolio.
We continue to achieve strong rate in International at 13%, consistent with the second quarter.
Retentions have improved each quarter this year and stand at 79% in the quarter, up from 77% last quarter and 74% in the first quarter.
For P&C overall, prior period development was favorable by 0.3 points on the combined ratio.
Turning to Life & Group, we conducted our Annual Gross Premium valuation or GPV analysis on our active life reserves as well as a claim reserve review on our disabled life reserves.
There was no result in unlocking of the assumptions, which we believe is due to our continued prudent management of this run-off book and we now have $72 million of GAAP margin on the active life reserves.
The claim reserve review resulted in favorable development of $40 million on a pre-tax basis and Larry will have more detail on the Life & Group reserve analysis and our P&C prior period development.
Larry, of course, is no stranger to CNA.
He retired as CNA's Chief Actuary in August of last year after serving over a decade at CNA's Chief Actuary, during which time he worked hand-in-hand with the finance function.
Larry's willingness to come out of retirement has afforded us the time to accomplish a thorough search for this vital role which is going well and we expect to complete it soon.
Larry will also help facilitate a smooth transition with the incoming CFO.
I must say, it has been both a professional and personal pleasure working with the CNA executive team once again these past two months.
As Dino highlighted, the 23% increase in core income for the third quarter produced a core ROE of 7.7%.
Before providing more information on the financials, I will first discuss Life & Group.
As you know, each quarter -- each year in the third quarter, we complete our annual reserve reviews for Life & Group.
These reviews include our long-term care active life reserves, which we refer to as gross premium valuation or GPV as well as our long-term care and structured settlements claim reserves.
Slide 12 contains key demographic information about both our individual and group long-term care blocks.
As a reminder, both blocks are closed with no new policies issued for individual since 2004, and no new group certificates since 2016.
As a result, the average attained age for the individual block is 80 years old and the group block is 67.
While, the group block is less mature in age, you can see from the table on the top right of Slide 12 that the benefit features on average for the group block are less rich.
As we have discussed on past calls, we have proactively reduced risk in both blocks, while obtaining meaningful rate increases and using a prudent approach to setting assumptions in our reserve analysis, both for active life and claim reserves.
One clear result of our efforts is the 35% reduction in policy count since 2015, which is shown on the bottom left graph on Slide 12.
As we continue to push for needed rate, we also offer benefit reduction options to our policyholders as a means to avoid or mitigate rate increases.
This reduces the cost of future claims, while providing a viable option for our policyholders.
Also worth noting on Slide 12, our claim counts are down significantly over the past two years as can be seen in the graph on the bottom right.
Starting with the GPV analysis, the results of which are shown on Slide 13.
Our efforts involved a thorough review of all of our reserving assumptions, including critical factors related to morbidity, persistency, rate increases and discount rate.
The key result is that we did not have an unlocking event, and we now have margin in our GAAP carried reserves of $72 million.
Starting with the discount rate.
Recall, that last year we moved meaningfully on our assumption by lowering the normative risk free rate of 2.75% and increasing the gradient period for the risk free rate to rise to that level to ten years.
For the first three years of that 10-year period, as you might recall from last year's analysis, we used the forward curve.
We followed the same approach this year and the current forward curve has interest rates that are higher than the assumptions we locked in last year creating margin.
Given the higher rate interest rate environment, we also reviewed our estimates around the cost of care assumptions, and determined a small increase was warranted, which decreased margin.
Taken together, the changes resulted in creating the $65 million of margin disclosed in the table.
Turning next to Morbidity.
We refined our claim severity assumptions, specifically those related to utilization rates in our group block, expected recovery rates and claim side as mixed, which together drove margin improvement of $205 million.
Importantly, we did not include our favorable experience in 2020 due to COVID-19 as part of the datasets that are analyzed to update the long-term assumptions.
Not including the 2020 experience is further evidence of the prudent approach we take with our reserving assumptions.
With respect to persistency, the key assumption change was a decrease in healthy life mortality.
While, this result may seem counterintuitive as the pandemic caused elevated mortality, we excluded the impacts from the pandemic when setting our long-term GPV assumptions as we do not believe this recent elevated mortality will persist over the duration of our liabilities.
Rather, the assumption change is from a periodic review of past policy terminations to better determine our attribution between mortality and lapse.
For this year's review, we used external data sources to obtain data at a more granular level to examine the terminations over multiple past years.
The result of that effort was a slightly lower level of mortality than we had used in the 2020 assumptions.
Of course, even a slight change in mortality rate applied against the entire tail of the portfolio will have a leveraged effect and these assumption changes resulted in margin deterioration of $233 million.
We will continue to monitor active life mortality, relative to our revised assumptions to see how our approach plays out.
Regarding future premium rate increases, our actual rate achievement over the past year exceeded our assumption in last year's analysis, contributing $27 million to the favorable margin increase.
As you may recall, our prudent approach is to include rate increases that have been approved; filed, but not yet approved, or that we plan to file as part of a current rate increase program.
As a result, the weighted average duration of future rate increase approvals assumed in reserves is less than two years.
As you can see on Slide 13, the cumulative impact of these changes, including a slight margin improvement of $8 million from lowered operating expenses, resulted in a reserve margin of $72 million in our carried reserves, while continuing to use a prudent set of reserve assumptions.
As a result, there is no need to have an unlocking event and we feel good about the reserves.
In addition to the GPV, we concluded our annual long-term care claims reserve review, which is a review of the sufficiency of our reserves for current claims.
The impact from this review was favorable, driven by lower than expected claims severity.
Specifically, we observed higher claim closure rates, most notably driven by mortalities.
The favorability, which flows through to our bottom line was a pre-tax benefit of $41 million -- $40 million or $31 million on an after-tax basis.
Turning to Slide 14.
Our overall Life & Group segment produced core income of $41 million in the third quarter, which compares to a third quarter 2020 loss of $35 million.
In addition to the $31 million favorable impact from the annual long-term -- long-term care claims review that I just discussed, activity in the quarter contributed another $10 million to core income, as we had strong net investment income performance predominantly from our alternative investments portfolio.
Returning now to financial results, our third quarter 2021 pre-tax underlying underwriting profits increased 28% on a year-over-year basis, driven by the 6% growth in net written premium and a record low underlying combined ratio.
A key component of the combined ratio improvement is the expense ratio.
The third quarter 2021 expense ratio of 30.7% was 1.1 points lower than last year's third quarter.
Our Commercial and International segments drove the overall improvement, as commercial improved 1.9 points to 30.4% and International improved 2.8 points to 32.1%.
Our focus on expense discipline as we grow the Company has driven meaningful expense improvement.
And this quarter's result reinforces the success of our strategy.
Of course, as we have mentioned before, the improvement will not be a straight line down because, we continue to make investments in talent, technology and analytics, which in any one period can materially vary.
As this quarter's expense ratio reflected somewhat less investment, we believe a more appropriate expectation on run rate is 31%.
For the third quarter, overall P&C net prior period development impact on the combined ratio was 0.3 points favorable, compared to 0.4 points favorable in the prior year quarter.
Favorable development was driven by surety in the specialty segment, somewhat offset by amortization of workers' comp tabular reserves in the commercial segment.
In terms of our COVID reserves, we made no changes to our COVID catastrophe loss estimate following an in-depth review during the quarter, and our loss estimate is still virtually all in IBNR.
Total pre-tax net investment income was $513 million in the third quarter compared with $517 million in the prior year quarter.
The results included income of $77 million from our limited partnership in common stock portfolios as compared to $71 million on these investments from the prior year quarter.
The strong LP returns for the quarter across both the P&C and Life and Group segments were significantly driven by private equity investments and reflected the lag reporting results from the second quarter.
As a reminder, our private equity funds primarily report results on a three-month lag basis, whereas our hedge funds primarily report results on a real-time basis.
Our fixed income portfolio continues to provide consistent net investment income, stable relative to the last few quarters and modestly down relative to the prior year quarter.
The year-over-year decrease reflects lower reinvestment yields due to the ongoing low interest rate environment with pre-tax effective yields on our fixed income holdings of 4.3% during the third quarter of 2021, compared to 4.5% during the third quarter of 2020.
However, our strong operating cash flows have fueled the higher investment base with the book value of the fixed income portfolio growing by $1.5 billion over the past year.
From a balance sheet perspective, the unrealized gain position of our fixed income portfolio was $4.8 billion at quarter-end, down from $5.1 billion at the end of the second quarter, reflecting a slightly higher interest rate environment.
Fixed income invested assets that support our P&C liabilities and Life & Group liabilities had effective duration of 5.1 years and 9.3 years respectively at quarter-end.
Our balance sheet continues to be very solid.
At quarter-end, shareholders' equity was $12.7 billion or $46.67 per share.
Shareholders' equity excluding accumulated other comprehensive income was $12.3 billion or $45.39 per share, an increase of 8% from year-end 2020 adjusting for dividends.
We have a conservative capital structure with a leverage ratio of 18% and continue to maintain capital above target levels in support of our ratings.
In the third quarter, operating cash flow was strong once again at $669 million.
In our P&C segments, the paid to incurred ratio was 0.75%, consistent with the last two quarters.
Contributors to this include our growth, which increases the incurred losses while paid losses lagged, especially for casualty lines, as well as the ongoing impact of slowed court dockets.
Certainly, the occurrence of catastrophe events in a given quarter and the payout over subsequent quarters impact this ratio as well.
In addition to strong operating cash flow, we continue to maintain liquidity in the form of cash and short-term investments and together they provide ample liquidity to meet obligations and withstand significant business variability.
Finally, we are pleased to announce our regular quarterly dividend of $0.38 per share.
Before opening the call for the Q&A session, I'd like to offer a few comments about how we see the marketplace that we compete in evolving.
Most importantly, we see the market remaining very favorable throughout 2022.
We continue to build momentum in new business growth and retention, and rate increases should remain above long-run loss cost trends for most of 2022 in light of the headwinds of social inflation, elevated Cat activity, low interest rates and the additional headwind of economic inflation emanating from the protracted supply chain dynamics.
Although rates have moderated from the high watermark of the fourth quarter of last year, it is premature to assume it will continue down on a straight line due to the uncertainty of the strength of the headwinds.
In the third quarter, we saw pricing inflections as a response to pressure on those headwinds.
As an example, momentum on cat exposed property pricing picked up immediately after Hurricane Ida.
And the supply chain issues creating higher cost of labor and materials are partially offsetting the benefit of the price increases, leading to a greater awareness that additional rate is required in property for a longer period of time.
Similarly, notices of seemingly outsized jury awards in the industry reminds us that social inflation was merely obfuscated during the pandemic, and by no means extinguished, which should allow continued strong pricing in most casualty lines.
Indeed, we are seeing similar strength in our price increases early in the fourth quarter.
Bottom line, we believe written rate increases will persist above loss cost trends in 2022 leading to earned rates above loss cost trends for a third year in a row, which portends well for margin build all else equal.
And we remain very bullish about our ability to increasingly take advantage of the opportunities this continuing favorable marketplace affords us.
| compname announces third quarter 2021 net income of $0.94 per share and core income of $0.87 per share.
q3 core earnings per share $0.87.
q3 earnings per share $0.94.
qtrly book value per share of $46.67.
qtrly book value per share excluding aoci of $45.39.
|
We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Brian Dickman, our Chief Financial Officer.
I will lead off today's call by providing an overview of our performance for the third quarter of 2021 and highlight the company's investment and capital markets activities.
And then I'll pass the call to Mark and Brian to discuss our portfolio and financial results in more detail.
The net result of our well-positioned in-place portfolio and the continued execution of our active and accretive investment program was a 5.8% increase in total revenues, a 13.2% increase in adjusted funds from operations, and a 6.4% increase in AFFO per share.
The company benefited from the stability of its portfolio of convenience and automotive retail assets, which continued to perform well, meaning that we had another quarter of full rent collections, including all amounts owed to us as a result of our 2020 COVID-related rent deferments.
The success of our investment strategies year-to-date has been a key contributor to our earnings growth.
We invested $61.1 million in 25 properties during the quarter, and another $8.8 million just after quarter-end, bringing our year-to-date total investment activity to more than $144 million.
This accelerated pace of investment activity was highlighted by our ability to bring new high-quality tenants into our portfolio, including Flash Market with sites located across the Southeastern U.S. and Splash Carwash, whose footprint spans the Northeast.
We also continue to successfully execute on our multiple investment strategies, which include [Indecipherable] leasebacks, accretive acquisitions of net leased properties, and development funding for new industry assets.
In addition, rent commenced on three redevelopment projects during the quarter including our second and third projects, with 7-Eleven for remodeled C&G locations in the Baltimore and Dallas-Fort Worth MSAs, bringing our completed projects to 22 since the inception of our redevelopment program.
We also announced yesterday that we successfully amended and extended our $300 million credit agreement, which now will mature in October 2021.
The improved terms of our facility further validate the company's platform and strong performance over the last several years.
When combined with our active ATM program, which we've used to raise more than $50 million this year, and our strong balance sheet, we continue to have access to capital and the right credit profile to support our growth objectives.
Given our performance year-to-date, I am pleased that our Board approved an increase of 5.1% in our recurring quarterly dividend to $0.41 per share.
This represents the eighth straight year with a dividend increase.
Our Board believes this annual increase is appropriate, as it maintains a stable payout ratio and is tied to the company's growth over the past year.
Furthermore, we are again pleased that our year-to-date accretive investment activity has positioned the company to raise its 2021 AFFO per share guidance.
I want to reiterate our commitment to effectively executing on both new investment activity and the active asset management of our portfolio.
Our teams continue to work diligently to source and underwrite new opportunities to invest across our target asset classes including convenience stores, car washes, automotive-related retail properties in strong metropolitan markets across the country as well as to unlock embedded value through selective redevelopments.
We believe our success year-to-date demonstrates our ability to source opportunities that align with our investment strategies, and that will continue to drive additional shareholder value.
As of the end of the third quarter, our portfolio includes 1,011 net lease properties, five active redevelopment sites, and five vacant properties.
Our weighted average lease term was approximately 8.8 years, and our overall occupancy, excluding active redevelopments, remains constant at 99.5%.
Our portfolio spans 36 states across the country plus Washington, D.C., and our annualized base rents, 63% of which come from the top 50 MSAs in the U.S., continue to be well covered by our trailing 12-month tenant rent coverage ratio of 2.6 times.
In terms of our investment activities, we had a highly successful quarter in which we invested $61.1 million in 25 properties.
Subsequent to the quarter-end, we acquired two additional properties for $8.8 million, bringing our year-to-date investment activity to $144.5 million across 82 properties.
We completed two transactions in the convenience and gas sector during the quarter.
The first was a 15 property sale-leaseback with Flash Market, a subsidiary of Transit Energy Group.
In this transaction, we invested $35.1 million to acquire the properties, which are located throughout the Southeast United States with a concentration around the Raleigh-Durham, North Carolina MSA.
Properties acquired have an average store size of 3,600 square feet and an average property size of 1.7 acres.
In addition, 53% of the properties have sub-tenancies with either quick-serve restaurants or auto service operators.
We also completed our first development funding project with Refuel in the Charleston, South Carolina MSA.
Our total investment in the project was $4.5 million, including our final investment of $1.1 million during the third quarter.
As per the terms of our development funding transactions, we acquired the property upon completion of development in conjunction with our final funding payment and simultaneously entered into a long-term triple net lease.
In the carwash sector, we completed three transactions in the quarter.
We acquired two newly constructed properties from WhiteWater Express carwash in Michigan for $7 million.
These properties were added to our existing unitary lease with WhiteWater.
We also acquired two additional properties for an aggregate purchase price of $8 million, which are leased to Go Car Wash in San Antonio, Texas, and Las Vegas, Nevada MSAs.
Additionally, we acquired our first property with Splash car wash, which is located in New Haven, Connecticut MSA.
Our purchase price was $4 million for the property.
In the auto service sector, we acquired our first Mavis Tire property.
We invested $4.6 million to acquire the properties in the Chicago, Illinois MSA.
Getty also advanced $1.2 million of development funding from three new industry convenience stores with Refuel in the Charleston, South Carolina MSA, bringing the total amount funded by Getty for these projects to $8.9 million at quarter-end.
As part of this transaction, we will accrue interest on our investment during the construction phase of the project, and we will expect to acquire the properties via sale-leaseback transaction upon completion and final funding.
The weighted average initial lease term of our completed transactions for the quarter was 14.6 years, and our aggregate initial cash yield on our third quarter acquisitions was 6.7%.
Subsequent to quarter-end, we acquired two properties in the Boyington, Vermont MSA from Splash Carwash.
Purchase price was $8.8 million, and the cap rate was consistent with our year-to-date acquisition activity.
We ended the quarter with a strong investment pipeline and remain highly committed to continuing to grow our portfolio of convenience and automotive retail real estate, and we expect to pursue that growth through continued sourcing of direct sale-leaseback, acquisitions of net lease properties, and development funding for new-to-industry assets.
Moving to our redevelopment platform.
During the quarter, we invested approximately $331,000 in both completed projects and sites, which remain in our pipeline.
In addition, rent commenced on three redevelopment projects during the quarter, including two 7-Eleven convenience stores and one property leased to BJ's Wholesale Club, which is adjacent to one of our newly constructed superstores.
In aggregate, we invested $0.5 million in these three projects and generate a return on investment capital of 43%.
At quarter-end, we had eight signed leases or letters of intent, which includes five active projects and three projects at properties, which are currently subject to triple net leases and have not yet been recaptured from the current tenants.
The company expects rent to commence at two additional development sites during the fourth quarter of 2021.
In total, we have invested approximately $1.9 million in eight redevelopment projects in our pipeline and estimate that these projects will require a total investment by Getty of $7.4 million.
We project these redevelopments will generate incremental returns to the company in excess of where we can invest these funds in the acquisition market today.
Turning to our asset management activities for the quarter.
We sold one property during the quarter, realizing $2.3 million in gross proceeds, and exited five lease properties.
We expect the total net impact of these activities will have de minimis impact on our financial results.
As we look ahead, we will continue to selectively dispose the properties that we determine are no longer competitive in their current format or do not have compelling redevelopment potential.
Let me start with a recap of earnings.
AFFO, which we believe best reflects the company's core operating performance, was $0.50 per share for the third quarter, representing a year-over-year increase of 6.4%.
FFO was $0.48 per share for the quarter.
Our total revenues were $40.1 million, representing a year-over-year increase of 5.8%.
Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables was 7.5% to $34.3 million.
Strong acquisition activity over the last 12 months and recurring rent escalators in our leases were the primary drivers of the increase, with additional contribution from rent commencements at completed redevelopment projects.
On the expense side, G&A costs increased in the quarter, primarily due to employee-related expenses, including noncash and stock-based compensation.
Property costs decreased marginally due to reductions in real estate tax expense and environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments, increased in the quarter due to certain legal fees and changes in net remediation costs and estimates.
We turn to the balance sheet and our capital markets activities.
We ended the quarter with $567.5 million of total debt outstanding, including $525 million of long-term fixed-rate unsecured notes and $42.5 million outstanding on our $300 million revolving credit facility.
Our weighted average borrowing cost was 4% and the weighted average maturity of our debt was 6.3 years.
In addition, our total debt to total market capitalization was 29%.
Our total debt to total asset value was 37%, and our net debt-to-EBITDA was 5.1 times.
Each of these leverage metrics are calculated according to the definitions in our loan agreements.
As Chris mentioned, yesterday, we announced the amendment and extension of our $300 million revolving credit facility, which is now set to mature in October 2025, with two 6-month extensions, where we have the option to extend to October 2026.
In addition to extending the term, we were able to reduce the interest rate by 20 to 50 basis points, depending on where we are in the leverage-based pricing grid, and amend certain covenant provisions to align with those generally applicable to investment-grade rated REITs.
We also amended each of our outstanding unsecured notes to conform to the new credit facility covenant provisions.
All in all, this is a good transaction for Getty.
We reduced our cost of capital, improved some terms, and importantly, demonstrated the continued support of our bank group and unsecured noteholders.
With the credit facility extended, our nearest debt maturity is now the $75 million of senior unsecured notes that come due in June of 2023.
Moving to ATM activity.
We continue to be selective with our equity issuance during the quarter, raising $19.8 million at an average price of $31.12 per share.
Year-to-date, we raised a total of $50.1 million through the ATM.
We think about our future capital needs more broadly, we remain committed to maintaining a strong credit profile with meaningful liquidity and access to capital, low-to-moderate leverage, and a well-laddered and flexible balance sheet.
With respect to our environmental liability, we ended the quarter at $47.8 million, which was a decrease of approximately $300,000 from the end of 2020.
For the quarter, net environmental remediation spending was approximately $1.3 million.
And finally, as a result of our investment in capital markets activities in the first nine months of the year, we are raising our 2021 AFFO per share guidance to a range of $1.93 to $1.94 from our previous range of $1.89 to $1.91.
Our guidance includes transaction activity completed year-to-date but does not otherwise assume potential acquisitions or capital markets activities for the remainder of 2021.
Factors which may impact our guidance include variability with respect to certain operating costs and our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses, including certain property demolition costs and transaction costs for deals that are ultimately not completed.
| q3 adjusted ffo per share $0.50.
q3 ffo per share $0.48.
increasing its 2021 affo guidance to a range of $1.93 to $1.94 per diluted share.
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Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
In the fourth quarter, net income of $25.7 million drove earnings per share of $0.27, beating the consensus estimate of $0.23 per share.
Core ROAA and the core efficiency ratio were 1.14% and 56%, respectively.
Our core pre-tax pre-provision ROAA was 1.76%, due to an increase in the core net interest margin to 3.29% and continued strength in non-interest income driven by mortgage, interchange income, wealth management and SBA.
Fourth quarter loan volumes and commercial C&I lending were soft due to lower utilization of lines of credit and some payoffs.
This masked [Phonetic] the strength we saw in the consumer businesses and resulted in a contraction in the overall loan portfolio ex-PPP.
Expenses for the quarter were up due to higher salaries and benefits, particularly hospitalization expense.
Provision expense of $7.7 million included a pass-through item of $3.2 million in unfunded commitment expense.
It's important to note that we adopted the CECL methodology for the allowance for credit losses in the fourth quarter.
Shifting gears, as we think about the future, we think a lot about our customers' change in behavior.
This is why we continue to make significant investments in next-generation technology in 2020 with the new online mobile platform, a new treasury management system, 100% issuance of a contactless debit and credit cards and new P2P solutions like Zelle and real-time payments, and we refreshed our digital account opening, customer experience with the new mobile responsive design.
In a year challenged by a global pandemic, these digital tools enabled our customers to bank when, where and how they want it.
Here is a sampling of some of the growth and changes we've seen.
Debit card interchange income was up 11% or over $2.3 million year-over-year, driven by robust increase in transactions and dollar volume.
New digital deposit account openings were up 189%.
Digital customer conversations are up 233% from 2019.
This interactive conversation feature available through our new online mobile platform lets customers start conversations with us anytime, day or night.
Mobile remote deposit capture users increased 45%.
Image deposits at ATMs increased 84%.
Virtual meeting collaboration increased 175% to over 2,600 a month.
Our leaders are finding ways to keep our employees engaged with each other and with customers.
And then there is our favorable Apple Store rating of 4.8 on our FC Mobile Banking app.
Our customers are telling us what we're doing wrong and what we're doing right with our mobile app and we listen.
We're proud of our progress with our digital strategy over the last several years and particularly in 2019 and 2020.
However, we must continue to improve our user experience in digital new account openings across consumer and business banking.
Just a few more reflections before I hand it over to Jim Reske, our CFO.
On the credit side, we proactively marked our credit early and often while reaching out to our clients in the midst of the pandemic.
During 2020, and per Page 10 in our supplemental deck, we quickly built our loan loss reserve using qualitative overlays.
It now stands at 1.61% of total loans ex-PPP and covers fourth quarter non-performing loans of $54.1 million by 187%, the highest coverage figure for the year.
NPLs or non-performing loans, as a percentage of loans, was 0.80% or 80 basis points and net charge-offs in 2020 were 27 basis points for the year.
On Page 13, the increase stems almost entirely from expanding deferrals to a handful of hospitality credits totaling $76 million or 29.6% of that particular portfolio.
These types of deferrals are constructive and will enable a handful of our developers through the late innings of this pandemic.
These deferrals also tend to come with a quid pro quo to include increased recourse or another -- and credit enhancement on a loan.
Here again, we feel well-positioned with credit in 2021.
During 2020, we grew our top line some $7 million while our expenses grew only $2 million, net of some restructuring charges.
This is yet another year despite formidable interest rate headwinds of positive operating leverage.
Our full-year core efficiency ratio fell from 56.97% in 2019 to 56.28% in 2020, indicative of the result of the management team.
We wielded an internal initiative dubbed Project Thrive to spur revenue growth, improve efficiency, protect margin and optimize capital.
Among dozens of initiatives here, we consolidated some 20% of our branches before year-end after starting the process in late March.
We also nimbly used the remainder of a previously authorized buyback to purchase 2 million shares at a weighted average of $7.84 per share in the fourth quarter.
In 2020, we also had a record year with $94 million in non-interest income, as interchange, mortgage, wealth management and SBA all had record years as well.
Non-interest income for the fourth quarter was 28% of revenues and was 26% for the entire year.
Ex-PPP, total loans grew $111 million or 2% in 2020 on the backs of strong consumer and mortgage lending and modest growth in small business.
This momentum was more than offset by a slight downdraft in CRE lending and a palpable decrease in our C&I portfolio in 2020.
Once again, however, our newer Ohio markets found the path for broad-based growth and they now account for 34% of total loans.
We are optimistic about our pipelines in early 2021 and our ability to grow meaningfully in 2021.
In 2020, we became virtually -- better in virtually every aspect of our business to include each revenue-producing line of business, each geographic region of our Company, our fee businesses, our expense focus, our credit and enterprise risk culture and, lastly, our digital strategy.
We are genuinely excited about our prospects for growth in 2021.
Let me highlight a few things from our fourth quarter financial results before offering some guidance for 2021.
First, fee income was strong in the fourth quarter.
We anticipated but did not see a seasonal slowdown in mortgage originations in the fourth quarter.
Fee income was actually suppressed by $1.2 million due to the mark-to-market on a single derivative.
Despite this, fee income still came in at near-record levels.
We talk a lot about mortgage, but we're very pleased to see our wealth businesses coming along nicely compared to where they were a year ago as well.
Second, the net interest margin expanded from 3.11% last quarter to 3.28%[Phonetic] this quarter, in part due to our intentional efforts to reduce excess customer cash levels.
Core NIM expanded by 1 basis point in the quarter from 3.28% last quarter to 3.29% as the cost of deposits continued to come down.
Third, core non-interest expense was up from last quarter as strong mortgage originations and other activity drove increased incentive expense, while at the same time reduced loan originations in other areas resulted in a slowdown of 1091 [Phonetic] expense deferrals.
Hospitalization expense was up by $600,000 from last quarter and we had a $400,000 expense in the fourth quarter related to the annual true-up of our BOLI liability.
So those two items alone accounted for $1 million of the increase in expense from last quarter.
Now, let's talk about guidance for 2021.
Note that our assumptions do not yet include another round of PPP and any government stimulus because it's way too early to understand their impact.
While concrete guidance is elusive, hopefully we can provide some helpful thoughts as to what we believe may influence our financial performance in 2021.
Let's start with loan growth and fee income.
We expect fairly robust loan growth next year.
For years, our guidance for loan growth has been mid-single digits.
We believe that we can be at the higher end of that range this year.
We expect that fee income will remain strong through at least the first half of 2021, in particular because we had expected to see some softening of the mortgage refi boom by now, but mortgage originations remain strong.
Fee income in the second half will largely depend upon the extent to which the mortgage refi boom continues.
Now, for our net interest margin and non-interest expense.
As far as we can tell right now, we believe that our core NIM will be approximately 5 basis points on either side of 3.20% in 2021, but many factors could change that number and we'll update you as the year progresses.
The NIM is expected to be profoundly affected in 2021 by PPP forgiveness and further stimulus, both of which could leave us with a lot of excess cash to reinvest and PPP round two, which will add more low-margin assets to the books.
All of that would suppress the NIM.
There are however three "arrows in our quiver" that may work to offset some of these NIM pressures.
First, we expect a phenomenon of negative loan replacement yields to soon run its course.
Our expectation had been that we'd reach neutrality in asset yield in mid-2021, but in the fourth quarter negative replacement yields only brought down the loan portfolio yield by 2 basis points, so we're almost there.
Second, on the liability side, we see continued runway for reductions in deposit costs.
We have $471.2 million in CDs maturing in 2021 with $289.9 million yielding 1.21% maturing in the first half.
And we also have $129.4 million in money market savings deposits that currently yield 1.22% that will reprice in the first half of 2021.
Third, and most importantly, our balance sheet remains asset-sensitive.
The blended Moody's rate forecast that we use call for a modest steepening of the yield curve this year and more next year, even while short-term rates remain at zero.
Our NIM would benefit from that scenario.
Turning now to non-interest expense, we believe core NIE should come in at between $52 million to $53 million per quarter.
That's up from $206.4 million in 2020 and from our previous guidance.
Part of the increase was due to a $2 million to $3 million expected increase in collection and repo expense, but that remains quite unclear, especially if foreclosure, moratoriums and unemployment insurance are extended.
One other potential tailwind to expected costs could be the next round of PPP, which will allow us to defer origination expense, potentially lowering non-interest expense.
The rest of the increase is more straightforward.
We are not hesitating to invest in loan growth talents, including commercial lenders and consumer lending teams, as well as credit and treasury management personnel because we sense growth opportunity as the crisis abates.
Furthermore, we believe that the work-from-home environment will wind down and corporate travel and client entertainment will resume at some point in the latter half of this year.
Finally, on a more exciting note, share repurchases will continue.
As we announced yesterday, our Board has approved an additional $25 million share repurchase program.
We expect repurchase activity to play out relatively slowly over the course of 2021, especially in response to dips in our stock price.
I'll walk you through some prepared credit comments and then we'll go to Q&A.
Our strong fourth quarter results underscore the effectiveness of our portfolio management practices, risk management strategies and disciplined credit culture.
Over the past few years, we tapped the brakes on certain higher risk factors.
We selectively reduced certain segments, such as energy, we've adjusted our corporate and consumer loan guidelines to achieve a more moderate risk profile, we improved our portfolio risk through geographic and industry diversification, and we've reduced our concentrations of credit by limiting single transaction exposures.
Our consumer delinquencies at year-end continue to be very low and were only 2 basis points, I'm sorry our commercial delinquencies.
Our consumer delinquencies kicked up a bit at year-end to 45 basis points, due to seasonality.
We were pleased to see that our investments in the collections team resulted in a favorable comparison to pre-COVID-19, 12/31/19, consumer delinquencies at 54 basis points.
Criticized loans increased by approximately $114 million, largely due to downgrades in the hospitality portfolio.
Non-performing loans at year-end totaled $54.1 million, an increase of $4.3 million from the prior quarter.
We had a number of smaller credits that we moved to accrual and one hospitality relationship with the balance of approximately $7 million that was moved to non-accrual.
The net increase was $4 million in non-performing loans.
Non-performing loans as a percentage of total loans, excluding PPP, was 0.86% and our allowance for credit losses as a percentage of non-performing loans increased to a healthy 187%.
Non-performing assets as a percentage of total assets increased from 0.55% in Q3 to 0.62% in Q4.
Net charge-offs for the fourth quarter came in at $4.8 million.
Net charge-offs as a percentage of average loans, excluding PPP, was 0.30%.
Given the economic conditions, they were generally in line with our internal targets.
Now, let me provide some color regarding reserves.
First, you should note that we adopted CECL at 12/31/2020 and booked a transition amount of $13.4 million.
We utilized certain Moody's models to support our estimates of key economic indicators, including GDP and unemployment.
As the economic models -- as the economic uncertainties play out and conditions improve, we might see some tailwinds toward the back half of 2021.
Provision for Q4 was $7.7 million, including $3.2 million related to the unfunded commitments.
The provision reflects our strong credit metrics and improving economic indicators.
As noted on Page 10 of the supplemental slide deck, the total qualitative reserve factors increased by a net $8.3 million quarter-over-quarter.
Specific to the identified COVID-19-related high risk portfolios, the qualitative reserve is applied for the quarter of $9.1 million.
Credit carefully considered the five high risk portfolios as outlined on Page 13 of the slide deck.
These five portfolios will be evaluated quarterly and reserves will be adjusted accordingly.
The reserve build slide in the deck provides a bridge from a 12/31/19 balance of $51.6 million to the year-end reserve of $101.3 million.
This is exclusive of the $3.2 million of provision for unfunded commitments.
Reserves to total loans grew to 1.50% of total loans and 1.61% of total loans net PPP loans.
Overall, we've been conservative in our approach and have solid reserve coverage ratios.
| q4 earnings per share $0.27.
|
This is the Diebold fourth-quarter earnings call for 2019.
For your benefit, we posted slides which will accompany our discussion today.
And our slides are available on the investor relations page of dieboldnixdorf.com.
In the supplemental schedules of our slides, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric.
Additional information on these factors can be found in company's SEC filings.
And now, I'll pass the mic to Gerrard.
2019 was a good year for the company as we executed on our DN Now transformation initiatives and delivered financial results which were in line or better than our expectations.
To set the stage a bit, I want to reflect for a moment on where we were one year ago.
We were in the early stages of streamlining our operating model and simplifying our portfolio and we have clear goals for strengthening our balance sheet.
Fast forward to today, after year 1 of DN Now and we have met or exceeded on every commitment we made and are on track for future targets.
As shown on Slide 3, we reported total revenue of just over $4.4 billion which was within our initial range, and our results also included substantial currency headwinds of approximately $150 million.
We delivered adjusted EBITDA of $401 million which was within our initial outlook from February of 2019, and which represents a 25% increase over 2018.
And also included a foreign exchange impact of approximately $7 million.
Most importantly, we exceeded our free cash flow target, generating $93 million versus our initial expectation of breakeven.
In line with our focus, these results demonstrate meaningful improvements in profitability and cash flow.
We increased our non-GAAP gross margin by 280 basis points to 25.2% with strong margin expansion in all three segments and business lines.
Our progress enabled DN to boost its adjusted EBITDA margin by 210 basis points to 9.1%.
Free cash flow increased by $256 million.
And unlevered free cash flow jumped by $315 million reflecting our companywide focus on driving both operating and net working capital efficiencies while delivering these against the backdrop of significantly stronger customer satisfaction levels.
Our progress reduced our leverage ratio by more than a full turn, ending 2019 at 4.4 times.
With this progress, our core business has a stronger foundation yielding a more focused and efficient company.
I'm extremely pleased with how the entire team at DN focused on our shared goals.
It is because of our people that we are executing in line with our plan.
On Slide 4, you'll see a list of operating achievements for 2019.
For our banking customers, we enhanced our differentiation by launching our next-generation platform called DN Series, the most IoT-enabled platform on the market.
We also introduced a new cloud-based analytics platform called the AllConnect data engine, through which we will further differentiate our services capabilities.
During the fourth quarter, key wins included a multimillion dollar global agreement for dynamic software and DN Series ATMs with Citibank.
In Belgium, we won a multiyear ATM-as-a-Service agreement to update and maintain approximately 1,560 ATMs with a joint venture called JoFiCo.
Our end-to-end solution features our DN series units, a common DN dynamic software stack and cloud-based analytics from our AllConnect DataEngine.
Banking product orders in Q4 declined year over year as we're up against a strong result from the fourth quarter of 2018 especially in Latin America.
As we enter 2020, we expect some easing of demand from large North American banks as they complete their upgrade efforts.
In the retail segment, we increased our retail self-checkout shipments by more than 50% in 2019.
More recently, a leading market research firm in our space, retail Banking Research, recognized Diebold Nixdorf as the largest self-service kiosk provider in the world.
In the fourth quarter, we won a new $6 million contract at the U.S. value retailer for kiosks and dynamic software.
Continued growth in self-checkout orders and the easing of point-of-sale orders were in line with expectations in the quarter.
As the market for point-of-sale solutions evolves, D&S responding with introduction of an all in one point-of-sale system that brings together the latest technology in the stylish space saving design.
Important wins in the quarter included a $15 million contract with the Swiss gaming cooperative for 5,000 point-of-sale terminals, and a new 3-year $14 million agreement with a European do-it-yourself retailer to refresh the end-to-end customer checkout experience at several hundred stores spanning 12 countries.
When I reflect on 2019, the greatest accomplishments are those which require coordination across large sections of the company.
For example, we're very encouraged by the broad-based success of our services modernization plan which includes proactively upgrading hardware of software on more than 140,000 terminals and implementing standard practices globally.
Similarly, we have substantially increased our product gross margins by streamlining our manufacturing footprint, improving product pricing strategies and optimizing the number of ATM models.
In addition, we dramatically improved the efficiency of our inventory levels, collections and payables which added $110 million to our cash flow and our improving performance led to a successful extension of nearly $800 million of credit in August.
With these accomplishments in the books, we enter the second year of our DNA transformation with momentum across our efforts and confidence in our strategic direction.
Slide 5 summarizes our key DN Now initiatives which are positively impacting both the quality of revenue and the efficiency of operations.
Our execution momentum gives us confidence to increase our targeted gross savings from $400 million to $440 million through 2021.
I'll comment briefly on several initiatives that have been in place for several quarters.
First, the transition to our new operating model is complete and about $100 million of savings have been realized in 2019.
Next, we'll continue to simplify our product portfolio and further optimize our manufacturing footprint.
Heading into 2020, our focus is squarely on realizing the benefits from our next-generation banking solution, the DN Series.
Earlier in the call, I spoke about the actions and significant achievements of our services modernization plan.
While we're pleased with our progress, we believe there is further room to improve service delivery and operating efficiency.
In addition, we launched a new series of actions called software excellence aimed at improving our software operations and gross margins.
We are enhancing professional services delivery by optimizing our resources and improved presales scoping.
Within our software products, we're simplifying our offerings and placing a greater emphasis on software development effectiveness.
Our efforts to reduce general and administrative expenses picked up steam in Q4, and are expected to deliver meaningful savings in 2020 as we build a fit-for-purpose support structure for our business.
I've already mentioned our 2019 success on net working capital, and we are continuing to pursue efficiencies on this important metric.
The final initiative on this slide is divesting non-core assets, enabling us to focus on businesses that meet our return hurdles, creating value for shareholders.
In 2019, we divested or shut down a half a dozen businesses which generated about 2% of revenue.
During Jeff's remarks, he will discuss our focus on revenue quality in greater detail, including two additional transactions which further simplify the company's business operations, enhance liquidity and reduce risk.
On Slide 6, I'll discuss the progress we're making to simplify our product portfolio.
We successfully reduced the number of ATM terminals by about 30% in 2019, and we have solidified plans to further reduce legacy terminals by about 45% in 2020.
When coupled with changes to our manufacturing footprint and better rigor on contract bids, we expanded our non-GAAP product gross margin by 310 basis points in the quarter to 22% which is a multi-year high for the company.
Going forward, we expect to build on our success with the rollout of DN Series.
Early field performance results are confirming substantially higher performance levels than our already strong field performance from prior models.
Customer reactions have remained very positive.
And they see a compelling value proposition, including a more modular and upgradable design which includes our next-generation cash recycling technology, advanced sensor technology and connectivity to the DN AllConnect Data Engine which will increase uptime and offer a better customer experience, greater load capacity, improved reliability and industry-leading security features in a smaller footprint.
And increased options for personalization and branding.
We have initiated the certification process for DN Series with 240 customers across 35 countries.
Our sales pipeline is growing nicely and we fully expect to ramp production as many certification processes are completed in the next few months.
Slide 7 contains key performance metrics for our services modernization plan.
Our service renewal rate continue to exceed 95% during the fourth quarter while our contract base of ATMs remained stable at 582,000.
This chart shows our revised contract based figures which exclude about 35,000 units in China, following our reduction in ownership, the strategic alliance as part of our non-core asset divestiture actions.
As minority owners, services revenues from these units will be deconsolidated going forward.
The recent trend in contract base units reflects our focus on making the business more profitable.
We have completed much of this important work.
And as a result, we expect the services contract base to expand modestly to 590,000 by year-end 2020.
In addition, evolving customer demands have created a growing opportunity for managed services, and we're excited about the potential for securing these contracts.
Our gross services margin increased 330 basis points versus the prior year to 28.2% in the fourth quarter.
Once again, both retail and banking contributed to these gains.
This is the sixth quarter since we launched the program, and we have consistently delivered strong year-on-year gross margin expansion.
Our momentum underpins our confidence in achieving full-year gross margins of 28% to 29% by 2021.
Looking forward to 2020, our service priorities include continuing our modernization program across both banking and retail, growing our services contract base of ATMs and self-checkout terminals and leveraging our AllConnect Data Engine across more of our estate.
On Slide 8, I'll cover our initiatives to further reduce general and administrative expenses.
This is a key opportunity for DN in 2020 to further improve our effectiveness and efficiency.
Within the finance organization, we are executing on centralizing our accounting processes, making greater use of shared services and increasing automation.
In Q4, we built meaningful momentum.
And Jeff will provide more details about our plans to realize substantial savings from these actions over the next few quarters.
During 2019, we reduced our IT spend by consolidating data centers, ramping down spend on legacy platforms and by proactively improving the resiliency and utility of our systems.
In 2020, we are shifting our focus to digitally enabling more capabilities across the company.
So while we continue to rationalize our legacy systems, our greater focus.
We are implementing new tools to support our digital transformation.
We also continue with our procurement rigor and are proactively managing external spend.
Looking forward, we see incremental benefits to be realized.
With respect to our real estate footprint, we reduced our office square footage by about 10% by closing or rightsizing more than 40 locations.
For 2020, our goal is to reduce office space by another 10%, while also implementing more agile workforce practices.
In the fourth quarter, we were pleased to drive non-GAAP SG&A expense to $169 million, our low point for the year.
Looking forward, we expect our initiatives will harvest further efficiencies from functional G&A costs in 2020.
Before I hand over to Jeff, I want to address what we're seeing with respect to the coronavirus situation.
Our first priority focuses on the safety of our employees, customers and suppliers, and we're closely monitoring all developments.
We are also playing close attention to the impact that this developing situation may have on our supply chain, production and logistics.
As you're aware, many Chinese companies resumed production only yesterday, and with partial capacity and the situation, therefore, remains fluid.
Our current view is that we may incur higher freight costs and could experience potential delays from our suppliers as they work to return to normalcy in a way that ensures worker safety.
We're being proactive in developing alternative supplier strategies and have initiated efforts with other technology providers in exploring potential broader solutions to mitigate any supply chain disruptions.
At this stage, the situation remains dynamic, and any near-term impact should not change our long-term trajectory.
Now, over to Jeff for a discussion of our financial performance before I rejoin with a few concluding remarks.
2019 was a very strong year as we took major steps forward in our journey to value creation and are looking forward to building on that success in 2020.
Slide 9 contains our fourth-quarter financial highlights which are squarely in line with the company's outlook.
Excluding the impact from foreign currency headwinds and our divestitures, revenue declined 8.1% to $1.15 billion for the quarter.
Many of you should recall that we reported exceptional strength in our product revenue in the fourth quarter of 2018 which was approximately $50 million more than we would typically expect, resulting in an unfavorable comparison.
In the fourth quarter and throughout 2019, we have focused on higher-quality revenue.
And that have been proactively reducing our exposure to lower-margin business which had a fourth-quarter revenue impact of approximately $40 million.
As a result, the year-over-year comps for the fourth quarter are not indicative of our 2020 revenue expectations.
These efforts, coupled with our DN Now progress, are producing tangible and sustainable gains to gross profit, operating margin and adjusted EBITDA margin.
We increased gross margins by 300 basis points to 26.3% which translates to higher gross profit of $3 million.
Higher gross profit, coupled with lower operating expenses, enabled the company to boost operating profit by 20% from $83 million to $100 million.
Correspondingly, our operating margin increased by 230 basis points to 8.7%, while the adjusted EBITDA margin improved 180 basis points to 11.4%.
Return on invested capital was approximately 10% in 2019, much better than our mid-single-digit result in 2018.
Going forward, we will continue to be selective about how we go-to-market and build on this momentum which you will see reflected in our 2020 outlook.
We believe this will set us up nicely to execute on our growth initiatives for 2021 and beyond.
Slides 10 through 12 contain segment financials for the fourth quarter and full year.
On Slide 10, we disclose highlights for Eurasia Banking which were in line with our expectations.
Excluding currency and divestiture, revenue declined 8.8%.
The year-on-year variance was primarily due to our proactive efforts to address low margin business.
These actions include our service contract renewal discussions, higher margin thresholds on new deals as well as decline in certain non-core businesses which are in the process of being divested.
Operating profit through Eurasia Banking was impacted by revenue volume as well as a higher mix of professional services which has a lower software gross margin.
On the plus side, we continue to drive higher gross service margins for this segment from our DN Now initiatives.
For the full year, revenue declined 2.4% adjusted for currency, divestitures and other actions.
This decline was primarily due to our actions to harvest low margin business.
Partially offsetting these trends, we delivered product revenue growth from customers in EMEA.
Operating profit increased by $19 million or 13% to $169 million, and includes foreign currency headwinds of approximately $10 million.
Our operating profit gains reflect DN Now's success in driving higher service and product gross margins as well as lower operating expenses.
Slide 11 provides financial highlights for Americas Banking.
Fourth-quarter revenue declined 1.5% after adjusting for currency headwinds and divestitures.
During the quarter, we experienced lower product volume in Latin America, partially offset by product and software growth in North America.
Operating profit nearly tripled in the quarter from $14 million to $40 million when compared with the prior-year period.
Again, execution of our DN Now initiatives resulted in a 630 basis point expansion of the profit margin to 9.5%.
For the full year, revenue increased 7% excluding the impact of currency divestitures and related actions.
ATM upgrades, the adoption of cash recyclers and increased software activity fueled these revenue gains.
In our services businesses, we exited certain contracts which did not align with our gross margin hurdle rates.
Operating profit increased by more than $100 million to $120 million primarily due to our DN Now initiatives and revenue growth.
This is, by far, the best performance in Americas Banking's operating profit and margins since the combination.
Moving to Slide 12.
retail results were in line with expectations.
Revenue decreased 15% after factoring in currency headwinds and divestitures due primarily to a challenging comparison.
Our fourth-quarter 2018 retail revenue was approximately $50 million or 15% above our quarterly average as we delivered on a number of large POS refresh contracts.
Within this segment, we continue to grow self-checkout product revenue as we experienced lower POS sales versus the prior year.
Another factor is our strategic decision to reduce our exposure to low-margin business such as shuttering our consulting business and discontinuing the reselling of certain low margin hardware from third-party suppliers.
Higher quality revenue and better cost structure from the DN Now initiatives, increased operating profit by 62% to $21 million.
For the full year, retail revenue decreased 2.5%, again, excluding the impact of currency divestitures and related actions.
Operating profit increased by 23% to $58 million as we benefited from a more favorable mix of self-checkout products, higher services gross margins attributable to our services modernization plans and lower operating expenses.
Referencing Slide 13, I am pleased with our team's ability to generate $93 million of free cash flow for the full year of 2019.
On a year-on-year improvement of $256 million demonstrates the broad-based commitment to financial discipline across the company.
The DN Now initiatives were the key to our success as we increase adjusted EBITDA to $401 million and harvested $110 million of net working capital.
To put a finer point on our improvements, the company reduced net working capital as a percentage of revenue by 440 basis points from 18.3% to 13.9%.
Our free cash flow progress is even more impressive, considering that we offset $60 million of incremental interest payments.
Unlevered free cash flow was $275 million, an improvement of $315 million.
For the fourth quarter, the company generated free cash flow of $116 million and unlevered free cash flow of $168 million.
While these metrics are squarely in line with our expectation, they do represent a quarter-over-quarter decline as we have focused on working capital management throughout the year versus the fourth-quarter push in 2018.
A summary of our liquidity, leverage and capital structure can be found on Slide 14.
The company has sufficient liquidity to meet its seasonal cash flow needs, invest in R&D and fund our DN Now transformation program.
Total liquidity of approximately $770 million includes nearly $388 million of cash plus available credit.
Company ended the year with gross debt of $2.1 billion and net debt of $1.76 billion.
Our leverage ratio continues to improve declining to approximately 4.4 times at year-end.
Over the next few weeks, for our credit agreements, we will use approximately $50 million of our free cash flow to pay down secured debt reducing 2020 interest cost.
To the right side of this slide, we provide our debt maturity schedule.
While there are no meaningful maturities in 2020 and 2021, we continue to develop strategies to reduce our weighted average cost of capital through the optimization of our capital structure, reduction of interest rates and extension of maturities.
Today, we launched a process to obtain an amendment with our secured lenders which will allow us to -- greater flexibility to issue additional sources of long-term secured or unsecured debt.
On Slide 15, we outlined our finance transformation actions and savings targets.
Our finance and accounting transformation is a good example of the opportunities to harvest efficiencies from our G&A functions.
We are replacing our legacy structure, enforcing standard processes and leveraging new tools to automate tasks.
At a high level, DN will follow in the footsteps of many other global companies in centralizing back office resources and regionalizing compliance activities.
Our workforce streamlined finance, personnel and processes which should lead to incremental G&A savings of $30 million in 2020 and another $20 million in 2021.
Subsequent to the quarter, the company made significant progress in divesting non-core businesses.
First, the company finalized the transaction to consolidate its joint venture operations in China with the Inspur Group.
As a result, DN will repatriate approximately $25 million of cash and become a minority shareholder in the combined operations.
Moving from approximately 55% ownership to approximately 48% ownership.
Due to our minority ownership status in the consolidated JV, we will report pro rata profit or loss on the P&L as equity and earnings of unconsolidated subsidiaries, deconsolidating approximately $50 million of future revenue.
We believe this transaction is important step in strengthening our partnership with Inspur while reducing our risk and exposure to challenging ATM market conditions in China.
In a separate transaction, the company signed a definitive agreement to sell its 68% ownership stake in Portalis to Data Group.
This non-core business provides application management and IT infrastructure, outsourcing solutions to certain financial institutions in Germany.
The transaction is expected to close by the end of the first quarter of 2020, and is subject to customary closing conditions.
DN will harvest approximately $10 million in cash for 68% interest and will receive relief from future liabilities, including capital and pension obligations while maintaining good relationships with common customers.
During 2019, this business generated revenue of approximately $60 million.
On Slide 16, we discuss our 2020 outlook.
We are expecting revenue will be relatively flat excluding approximately $110 million impact from our recent divestitures and reflecting expected currency fluctuations.
Adjusted EBITDA is expected to be in the range of $430 million to $470 million reflecting approximately $130 million of DN Now savings, plus $25 million for growth initiatives, $10 million of nonrecurring profit from our divestitures, and typical inflation headwinds and other items.
When compared with 2019, we expect 2020 results will be slightly more weighted to the second half of the year.
Specifically, we expect to generate approximately 45% of our annual revenue and approximately one-third of adjusted EBITDA during the first half of the year.
This reflects the timing of our product backlog, our DN Now initiatives and the priorities of our services business.
Additionally, as Gerrard mentioned, we are working with 240 customers and certifying our DN Series, so it follows the production activity or ramp in the second half of the year.
From a free cash flow perspective, we expect to generate between $100 million and $130 million for 2020, including the following components, an EBITDA midpoint of $450 million and net working capital benefits of approximately $30 million.
Net interest payments of approximately $170 million.
Restructuring cash outflows of approximately $80 million.
Capital expenditure is approximately $70 million which includes certain investments in our internal systems supporting our digital transformation.
And cash taxes and other payments of approximately $45 million.
And now, I will hand the call back to Gerrard for closing remarks.
In closing, following a successful year of execution in 2019, we entered the new year in a stronger financial position with solid execution momentum and a more efficient core operation.
We will advance our strategy as we expand our differentiation with DN Series, the AllConnect Data Engine, more sophisticated self-checkout solutions and the strength of our services organization.
Secondly, by laying the groundwork for future revenue growth opportunities by making targeted investments in services and software.
And thirdly, by continuing to streamline the business, embrace standard processes and operate as efficiently as possible.
And fourthly, by continually strengthening our balance sheet.
This is our path forward toward long-term sustainable value creation.
To learn more about Diebold Nixdorf and our plans for value creation, I'd like to invite investors to join the management team for a discussion of our strategy, market opportunities and financials on Thursday, May 21st in New York.
Please mark your calendars and be on the lookout for registration information from Steve Virostek.
| diebold nixdorf inc - qtrly total sales $1,151.6 million versus $1,289.8 million.
diebold nixdorf inc sees 2020 free cash flow of $100 million - $130 million.
diebold nixdorf inc - increasing savings target from $400 million to $440 million through 2021.
diebold nixdorf inc - company's 2020 outlook includes the impact of deconsolidating two joint ventures in china.
diebold nixdorf inc sees fy2020 capital expenditures about $70 million.
|
So we're going to have a robust Q&A session.
So let's move to page three.
The business challenge moving into Q1 was twofold for Dover.
First, we exited 2020 with a healthy backlog of business, which we needed to operationally deliver against.
Second, we had to work closely with our distributors and customers to seize opportunities in the marketplace despite a complex set of challenges with raw materials, components, logistics and labor availability.
We are pleased with our first quarter performance on both counts, which is reflected in a robust revenue growth and the increase in our order backlog as we move into Q2.
Let's take a look at the metrics.
Total revenue was up 13%, 9% organic to the comparable period.
Clearly, the quarter benefited from a good order backlog position and the willingness of the channels to receive product deliveries as market demand accelerated, resulting in the highest volume quarter since 2014 and the largest first quarter volume since 2012 for the company.
This performance clear indication that our product portfolio was attractive and often under-appreciated growth avenues and that the work that we have done on operational excellence is gaining traction.
Order rates outpaced revenue in the quarter, posting bookings of $2.3 billion, a 27% comparable organic increase.
The growth was broad-based with all five segments contributing to the increase.
This resulted in the seasonally high backlog of $2.2 billion, an increase of 39%.
Since our earnings are issued among the first in the industrial sector, I suppose it is upon it's -- it's on us to explain the drivers of growth and their impact on seasonality and full-year demand.
I'm going to try to be careful with my choice of terms and comments not to cast unwarranted shade on a clearly positive market demand environment.
There are several factors driving healthy customer activity, including pent-up demand from last year as a result of low starting channel inventories in certain sectors.
Importantly, before we get all wound up trying to quantify the impact of channel inventory stocking in inflationary pre-buy, and how it impacts quarterly demand, let's not lose sight of the fact that total marketplace demand is robust, which is reflected in our backlog and which also leads us to revise our revenue growth guidance upward for the full year to 10% to 12%.
So put succinctly, it's not pre-buy if we don't remove it from the full-year revenue estimates.
Still early in the year and we will continue to produce to meet customer demand and watch our backlog and order patterns carefully [Phonetic].
We'll have more color on the drivers of demand and our revenue performance, including contribution of market share gains, as we progress through the year.
For now, we are focused on executing operationally in demanding conditions to win in the marketplace.
But we clearly believe that favorable demand conditions remain durable through the year.
Let's move to profitability.
Q1 was solid with consolidated adjusted segment margin of 19.1%, 320 basis points higher versus the comparable quarter.
This was supported by strong volumes, favorable mix of products delivered positive pricing [Phonetic] and continued operational discipline and efficiency initiatives, which more than offset input cost headwinds.
Strong profitability and continued focus on working capital management resulted in seasonally strong free cash flow, which was up $110 million compared to last year's first quarter or the comparable period.
With a solid Q1 under our belt, we look at the remainder of 2020 with constructive optimism.
Strong order trends and a record backlog portend a robust topline outlook and we have confidence in our team's ability to navigate the supply chain challenges.
With that, we are raising our guidance for the year to 10% to 12% all in revenue growth and adjusted earnings per share of $6.75 to $6.85 per share, a substantial step up compared to our prior guidance.
I will skip slide four, which provides a more detailed overview of our results for the first quarter.
So let's move to slide five.
Engineered Products revenue was up 2% organically as demand conditions improved modestly through a comparable period.
Vehicle services entered the year with a strong order book and faced solid demand across all geographies and product lines.
Industrial automation grew on automotive recovery and channel restocking, and aerospace and defense shipments were solid.
The business remains booked well into the second half of the year.
As expected, waste hauling was down year-over-year given a lower starting backlog entering Q1, which was further impacted by component availability issues that constrained shipments in the quarter.
We have forecasted this business to be levered toward H2 and order trends and backlog reflect that.
Same dynamic for industrial winches with revenue down in the quarter.
But recovery in order rates, we expect a continued gradual recovery in this business over the year.
Margin performance in the quarter was flat year-over-year as volume leverage and pricing offset the negative fixed cost absorption in the capital goods portion of the portfolio.
And Fueling Solutions was up 3% organically in the quarter on the strength of North American retail fueling as well as our software and systems business in Europe.
Activity in China remains subdued.
Order backlogs are up 13%, and we expect our hanging hardware, vehicle wash and compliance driven underground product offerings to contribute positively due to an increase in miles driven and construction seasonality as we make our way through the year.
The segment posted another quarter of strong margin performance on higher volumes, productivity actions of mix, which is a continuation of the trajectory that we exited in 2020.
Sales in Imaging & Identification improved 4% organically.
The core marking and coding business grew well on strong printer and services demand in North America and Asia, but was partially offset by a decline in consumables against the comparable quarter where customers stocked up on inks at the onset of the pandemic.
We also saw a nice pickup in serialization software sales.
Textile printer sales remained soft as global apparel and retail remains impacted by COVID.
Ink consumable volumes were up as we significantly improved ink attachment rates, and we saw encouraging improvement in the pipeline in new printer sales as the quarter progressed.
Margins improved slightly in the segment on higher volumes and we were able to offset material cost inflation with strategic pricing during the quarter.
Pumps & Process Solutions posted 18% organic growth in the quarter on improved volumes across all businesses except precision components.
Order rates and shipments for biopharma connectors and pumps continued to be strong.
Industrial pumps had a solid quarter, driven by improved end market conditions and distributor demand.
And polymer processing shipments grew year-over-year on robust demand in Asia and the U.S. Precision components was down in the quarter though demand conditions stabilized in hydrodynamic bearings and compression parts as well as broadly in China through new OEM builds remains impacted.
Adjusted operating margin in the quarter expanded by 890 basis points on strong volume, favorable mix and pricing.
This team has moved the segment to best-in-class topline and bottom line metrics through a dedication to operational excellence, robust product development and innovation management and proactive and purposeful inorganic actions.
It's a world-class collection of assets that we will continue to invest behind.
Refrigeration & Food Equipment continued its solid momentum from the second half of last year posting 18% organic growth.
Revenue on new orders in beverage can making more than doubled year-over-year.
Food retail saw broad-based increases across its product lines as key retailers resumed capital investment in product programs plus we've seen good demand for some of our new product introductions and customer wins.
Our natural refrigerant systems business in particular experienced robust demand in Europe and in the US as customers are adopting more environmentally friendly solutions.
The heat exchanger business grew on robust demand in Asia and Europe across all end markets.
Foodservice equipment was down in the quarter but saw a stabilization in chain restaurant demand.
Despite operational challenges in food retail due to availability issues with installation raw materials, adjusted margin performance improved by 450 basis points, supported by stronger volumes, productivity initiatives and cost actions we took in the middle of 2020, partially offset by input cost inflation.
I'll pass it to Brad from here.
I'm on slide six.
On the top is the revenue bridge.
Our topline benefited from organic growth across all five segments, with particular strength in Pumps & Process Solutions and Refrigeration & Food Equipment segments.
FX benefited topline by 3% or $51 million.
Acquisitions more than offset dispositions in the quarter by $15 million.
We expect this number to grow in subsequent quarters.
The revenue breakdown by geography reflects strong growth in North America, Europe and Asia.
Our three largest geographic regions.
The U.S., our largest market posted 7% organic growth in the quarter on solid order rates and retail fueling, marking and coding, biopharma connectors, food retail and can making among others and was partially offset by delayed shipments in waste hauling.
Europe grew by 13% in the quarter on strong shipments in vehicle aftermarket, biopharma, industrial pumps and heat exchangers.
All of Asia returned to growth and was up 20% organically driven by China, which was up 60% against the COVID impacted comparable quarter in the prior year.
Moving to the bottom of the page.
Bookings were up 27% organically reflecting the continued broad-based momentum we are seeing across the portfolio.
In the quarter, we saw organic bookings growth across all five segments.
Overall, our backlog is currently up $626 million or 39% versus this time last year, positioning us well for the remainder of the year.
Let's go to the earnings bridges on slide seven.
On the top of the chart, adjusted segment EBIT was up nearly $100 million.
On margin improvement -- but margin improved several hundred basis points as improved volumes continued productivity initiatives and strategic pricing offset input cost inflation.
Going to the bottom of the chart.
The adjusted net earnings improved by $60 million, as higher segment EBIT more than offset higher taxes as well as higher corporate expenses, primarily related to compensation accruals and deal expenses.
The effective tax rate excluding discrete tax benefits was approximately 21.7% [Phonetic] for the quarter compared to 21.5% [Phonetic] in the prior year.
Discrete tax benefits were $6 million in the quarter or approximately $3 million lower than in 2020.
Rightsizing and other costs were $4 million in the quarter or $3 million after tax.
Now on slide eight.
We are pleased with the cash flow performance in the first quarter with free cash flow of $146 million or $110 million increase over last year.
Free cash flow conversion stands at 8% of revenue in the first quarter, which is historically our lowest cash flow quarter due to seasonality of our production.
Let's go to slide nine.
We expect demand in Engineered Products to improve sequentially through the remainder of the year, which is supported by a robust backlog.
We continue to see strong result with strong bookings trends in vehicle services and industrial automation.
Aerospace and defense have significant revenue visibility through its government programs and is booked well into the second half of the year.
Order rates and waste handling improved significantly during the first quarter, though the shipment schedule will be levered toward the second half and we are watching the supply chain here closely, which is a stabilizer we expect a gradual recovery through the second half of the year.
As communicated at our Investor Meeting in November, we expect Fueling Solutions to post modern organic growth for the year.
There was a known headwind from EMV roll-off in the U.S. but order trends support a number of positives offsetting it, including growth in systems and software recovery in underground businesses and growth in vehicle wash.
We also expect that Asia, particularly -- China in particular should stabilize and become a net positive for us in the second half.
The ICS acquisition, which we closed at the end of last year is off to a very good start as vehicle wash market is recovering healthily.
Imaging & ID is expected to perform well this year.
Our core marking and coding business stalwart in 2020 is expected to continue to deliver low to mid single-digit growth with services and serialization products positively impacting performance.
Digital textile printing remains slow, although we saw a year-over-year improvement in ink tonnage sales in Q1, as we continue executing our strategy to attach consumables to machine sales.
We expect recovery here in the second half.
Pumps & Process Solutions should have another solid year.
Demand for biopharma and hygienic applications remains robust and trading conditions in industrial pumps rebounded quickly in the first quarter and momentum should continue.
Our recent investments in biopharma capacity were prescient, and we are well positioned to continue capitalizing on the secular growth story.
Plastics and polymers is expected to deliver steady performance as a global shortage of plastic and rubber, as well as petrochemical investments are driving increased investment in processing plants.
Precision components are stabilized and we expect it to contribute to year-over-year growth beginning in the second half of the year.
And with its large backlog and high order rates, Refrigeration & Food Equipment is expected to have a strong year.
New orders in the core food retail businesses have been healthy in the last few quarters, as retailers that had paused their remodel programs last year amid the pandemic are restarting these strategic initiatives.
Additionally, we are capitalizing on our leadership position in natural refrigerant systems both in Europe and also in the U.S. where we believe the recent mandate in California will foretell a trend among the other 49 states to mandate the transition to more environmentally friendly solutions.
We also see good growth in our specialty product line and small format customer segment.
Belvac continues to work through a record backlog and had another significant bookings quarter in Q1 they're booked for the year.
Our heat exchanger business is seeing strong order rates across all verticals and geographies.
We are investing in capacity and new capabilities in these two businesses and are well positioned to capture growth.
Demand is stabilized in foodservice equipment at restaurant chains.
And we expect the institutional business to recover in the second half as students return to schools and traffic improves at stadiums and hotels.
Our revised annual guidance is on page 10, we covered the most pertinent of these items in the slides and we summarized here for your reference.
Finally, on slide 11, puts expected 2021 performance in a multi-year perspective.
2020 was proof of lower topline cyclicality in a demanding environment and our ability to protect profitability.
Operational excellence and operating margin expansion has been our priority over the last couple of years and we are on track to deliver more than 100 basis points of average margin expansion over that period.
And we have the playbook and tools for this to continue.
Dover is positioned to deliver attractive double-digit earnings per share growth in line with our long-term corporate targets communicated in 2019.
So, Andrey, we can open it up for Q&A.
| sees fy adjusted earnings per share $6.75 to $6.85.
compname says guidance for full year 2021 revenue growth was raised to 10% to 12%.
|
Certain risk factors inherent in our business are set forth in filings with the SEC, including our most recent 10-K and subsequent filings.
We caution you not to place undue reliance on these statements.
Some of the comments made refer to non-GAAP financial measures, such as adjusted net revenue, adjusted operating margin and adjusted earnings per share, which we believe are more reflective of our ongoing performance.
Joining me on the call are Jeff Sloan, CEO; Cameron Bready, President and COO; and Paul Todd, Senior Executive Vice President and CFO.
We delivered fourth quarter and full year results that exceeded our expectations, because of our focus on technology enablement, coupled with ongoing excellence in execution.
Our fourth quarter results demonstrated continued sequential improvement, despite the impact of a more challenging macroeconomic environment in a number of our markets for much of the period.
We are very pleased to have delivered substantial margin improvement for the fourth quarter, while also setting aside funds to pay partial cash bonuses to our non-executive team members.
Because of the actions we took early in the pandemic and our consistency in execution, we were able to deliver double-digit earnings-per-share growth in the fourth quarter, positioning us well heading into 2021.
We believe that we exited 2020 in a better position than we entered.
We also accomplished a great deal over the last 12 months.
Specifically, we signed Truist Financial Corporation, the sixth largest commercial bank in the United States, a competitive win twice over [Phonetic]; entered a new collaboration with AWS, our preferred provider of issuer cloud services to launch a unique go-to-market distribution strategy coupled with transformative cloud-native technologies; expanded and extended our partnership with CaixaBank by increasing ownership of our joint venture and executing a new referral agreement through 2040; renewed agreements with a number of the most complex and sophisticated financial institutions globally, including TD Bank in North America, HSBC in Europe and CIBC in Canada; assisted in a rapid distribution of more than $2.5 billion in stimulus funds for our net spend customers' days faster than other financial technology participants; and announced today a new partnership with Google to deliver innovative and seamless digital services to all manner of merchants worldwide.
Our collaboration with Google substantially advances our merchant business by driving incremental revenue and lowering operating costs to a worldwide go-to-market distribution relationship and co-innovation agreement focused on transformative cloud-native technologies.
Together, we will bring new best-in-class digital products to market on a global basis more quickly, and we will further catalyze our culture of market-leading innovation.
Cameron will provide more detail on Google in a minute, but it's worth noting that in the six last months, we have struck significant and unique distribution relationships with two of the world's largest and most respected technology companies with a combined market capitalization of nearly $3 trillion.
This is a first for the payments technology industry and we did this in the midst of a once in a century pandemic, while delivering adjusted earnings-per-share growth and gaining market share.
These collaborations also are consistent with our long-held distinctive strategies to drive digital penetration.
Our business is a combination of two halves: distinctive distribution and cutting-edge technologies.
AWS and Google enhanced both parts of the equation.
Together, we will leapfrog legacy analog means of distribution and redefine how payment solutions and services are sold and consumed in the digital age for our issuing and merchant businesses.
We already have reached the threshold of 60% of our business coming from technology enablement, a goal we set in March 2018 for year-end 2020 and achieved early last July.
And roughly 25% of our business is now related to our e-commerce and omni-channel initiatives.
But together with AWS and Google, we expect to do more by driving further technology enablement and omni-channel penetration as legs of the stool for future growth.
I cannot think of two better partners to catalyze further migration of our issuing and merchant businesses to cloud-native technologies and expand our competitive moat.
These partnerships provide proof points at the momentum we have entering 2021 and will accelerate the transformation of our businesses for years to come.
Just a reminder of the composition of the business is driving our growth.
Starting with our merchant business, which is two-thirds of our Company.
Our technology enabled portfolio consists of three roughly equally sized channels.
Our omni-channel partnered software and own software vertical markets businesses collectively represent nearly 60% of merchant adjusted net revenue.
Our relationship-led businesses make up the remaining portion and continue to differentiate themselves in the markets we serve based on the strength of our technologies.
Our omni-channel businesses delivered accelerated sequential growth for the fourth quarter of 2020, again excluding travel and entertainment.
As we said at the beginning of the pandemic, we continue to see and expect ongoing sustained share shifts toward omni-channel acceptance brought forward three to five years by COVID-19.
We launched our Unified Commerce or UCP cloud POS solution this quarter, which connects an e-commerce software to a wireless payment terminal through our API, to help merchants more easily unify their in-person and online payment experiences.
Our Citi partnership also continues to expand worldwide, and we expect new Citi customers on UCP to include one of the leading global food companies, one of the pre-eminent global beverage brands and one of the largest multi-national auto manufacturing companies across multiple continents.
And of course with today's announcement, we also expect Google to become a UCP partner.
Additionally, we signed an agreement with Texas Instruments across Taiwan, the Philippines and India.
And we expect to expand our relationships to additional geographies later this year.
We also reached an agreement with Wolverine to consolidate their U.K. and European acquiring across 32 countries.
And we have now successfully launched with both Uber Ride and Uber Eats in our Asia Pacific region.
Moving to Global Payments Integrated, which drives another nearly 20% of our merchant adjusted net revenue.
We generated growth for the fourth quarter and for the full year because of the unrivaled breadth of our partnership portfolio in the most attractive vertical markets.
The strength of our combined integrated offerings allowed us to exceed our budgeted new sales forecast for calendar 2020, with new partner production increasing 171% versus 2019.
Our own software businesses represent the remaining roughly 20% of our merchant-adjusted net revenue.
And our leading SaaS solutions in healthcare, higher education and quick service restaurants or QSRs have been more resilient in the current environment.
To that end, our AdvancedMD business delivered a record performance in 2020 achieving double-digit revenue and bookings growth.
And our higher education business produced one of its finest years to date.
Lastly, our enterprise QSR business continued its success with Xenial's Cloud POS [Phonetic] and omni solutions, nearly over 100 million transactions and $1.5 billion in sales for the year.
In addition to serving 26 of the Top 50 QSR brands, we are also pleased to announce the signing of Xenial for cloud-based SaaS solutions, extending our addressable market to the fast casual category.
Today, we lead with technology and innovative solutions across all of our merchant businesses.
This includes our relationship-led channels where we continue to see strong new sales performance, fueled by our suite of differentiated products and solutions.
For example, our U.S. business is seeing significant uptake of its SaaS point-of-sale solutions with adjusted net revenue and new sales both exceeding 20% growth in 2020.
One recent notable win is with the Milwaukee Bucks, where we will be deploying our cloud-based POS solution across merchandise stores and outlets in the arena.
Issuer is the next largest segment of our business.
In August 2020, we announced the transformational go-to-market collaboration with AWS to provide an industry-leading cloud-based issuer processing platform for customers regardless of size, location or processing preference.
We currently have one LOI and three other mid to late-stage opportunities together with AWS that we are actively working, and we now believe that the win in Asia and a similar large market from a legacy competitor that we have already secured with AWS will likely expand in several markets across Asia over time.
We continue to capitalize on the broad and deep pipeline.
We have the good fortune to have in our issuer business.
We currently have 11 letters of intent with financial institutions worldwide, six of which are competitive takeaways.
In the last 18 months, we have had 36 competitive wins across North America and international markets.
And our customers continue to win in the marketplace, a key element of our issuer strategy to align with market leaders.
During the first quarter of 2021, we will complete the first phase of the conversion of over 4 million accounts from a competitor for one of our largest customers.
In Germany, we have successfully expanded our long-standing and successful partnership with Deutsche Bank, our largest client in the DACH region.
We are pleased to announce that TSYS has been selected in a competitive process as Deutsche Bank's partner of choice for their scheme branded card portfolios across all brands, including Deutsche Bank and Postbank.
We are also proud to have signed a new multi-year agreement with Marlette Funding, owner and operator of the Best Egg lending platform for the processing of a consumer credit card product, which will launch in the second quarter of this year.
We are pleased to secure long-term extensions in multiple geographies with President's Choice, a subsidiary of Loblaw's and Canadian Tire Financial Services, both large retailers in Canada; Scotiabank in Central America; Bank of Ireland; and Banco Invex in Mexico.
Finally, our business and consumer segment delivered another quarter of solid growth, as we continue to pivot our strategic focus to digitization, international expansion and business to business opportunities.
That shift is under way without any compromise in execution, as we also achieved adjusted net revenue in excess of $200 million for the first time in the fourth quarter.
The move toward cashless solutions is benefiting the portfolio with customers remaining active longer and utilizing our products more online.
I am proud that Netspend has once again facilitated a rapid distribution stimulus funds to customers and play an important role during this most challenging period.
Since late December, we have processed more than 1 million deposits, accounting for just over $1 billion in stimulus payments to American consumers dispersed by the IRS.
And this was done days in advance of many of our traditional financial institution and financial technology peers.
In combination with the 2020 stimulus payments, we will have disbursed more than $2.5 billion in aid to customers through the first quarter of 2021.
I think it's fair to ask how our business has been able to deliver results that are orders of magnitude better in our markets.
Our strategic focus on the diversity of our business mix has enabled us to gain share.
We are diverse across channels, geographies, software ownership and partnership, vertical markets and new and durable partnerships.
We are diverse by design.
We coupled that diversity with a long track record of execution consistency, years of sustained technology investment and the unmatched global experience of our long-tenured team.
We are delighted to announce today our new multi-year strategic partnership with Google that we expect will meaningfully enhance our ability to deliver new innovative cloud-based products and capabilities, advance our technology-enabled distribution strategy, and deliver significant operational efficiencies, while improving speed to market and the scalability of our merchant solutions business.
This exciting partnership has a number of assets that collectively serve to further distinguish our digital capabilities worldwide.
First, together, we will collaborate on product development and innovation to enhance and differentiate the suite of cloud-based solutions available to our merchant customers.
These distinctive solutions will create stickier and longer-term customer relationships, building on our competitive advantages.
As just one example of the types of enhanced capabilities we will offer together, Google's business services including Google My Business, Workspace and Ads, will be integrated with Global Payments' leading value-added software and payments ecosystem, creating a single destination and seamless digital experience for the full spectrum of solutions that merchants need to run and grow their businesses globally.
Merchant customers will be able to digitally access the industry's most robust value stack of SaaS offerings, including point of sale omni-channel ordering and integrated payments, advertising data and analytics, email marketing, online presence and reputation management and loyalty and gift card solutions, as well as capital access in payroll and human capital management solutions.
These products will be delivered through Global Payments' cloud-native operating environment, driving better customer engagement and ease of use.
Second, our joint go-to-market efforts will drive significant referral and new customer acquisition opportunities for businesses of all sizes across our combined customer bases worldwide on an omni-channel basis.
Specifically, Google Workspace serves as the cloud-native operating backbone for small and medium-sized businesses as well as many of the most sophisticated enterprise organizations globally, while Global Payments provides payments technology solutions to roughly 3.5 million merchant locations, in addition to some of the most complex multi-national corporations across 60 countries.
By leveraging our complementary customer bases, we will create attractive cross-selling opportunities for our digital solutions and meaningfully expand our addressable market.
Further, together, we will be able to connect consumers with merchants by a surge in new and innovative ways driving commerce and growth in a differentiated way for our customers.
And of course, our ability to secure net new customers will be significantly enhanced through the strength of this partnership with Google.
Third, Global Payments is pleased to be selected as the preferred payment provider for Google.
Today, Google executes approximately 3 billion transactions annually and Global Payments is well positioned to meet the complex payment needs of one of the world's largest and most sophisticated technology companies by leveraging our Unified Commerce Platform.
We are humbled by the confidence our partners at Google have placed in us.
Lastly, in addition to our commercial partnership, Google will become our preferred cloud provider for our merchant payment technologies.
Over the next several years, we will migrate the vast majority of our merchant technology workloads to Google Cloud, significantly reducing our data center footprint and streamlining our operating environment to enhance performance and drive meaningful cost efficiencies.
By moving our acquiring applications and to the Google Cloud, we will maintain the highest level of scalability, reliability, and security, while increasing our speed of innovation and ability to seamlessly deploy products and services on demand anywhere in the world.
We are thrilled to have established this partnership with Google.
Together, we are on a transformational journey that will further enhance our industry-leading merchant solutions ecosystem with a digital scale, reach and speed-to-market to seamlessly deliver new innovative digital technologies to customers worldwide.
Our performance in the fourth quarter and for the full-year 2020 exceeded our post COVID-19 expectations and highlights our outstanding execution and the resiliency of our business model.
For the full year, we delivered adjusted net revenue of $6.75 billion, down 5% compared to 2019 on a combined basis.
Importantly, our adjusted operating margin increased 210 basis points on a combined basis to 39.7%, as we benefited from the broad expense actions we implemented to address the impact of the pandemic and the realization of cost synergies related to the merger, which continue to track ahead of plan.
It is worth highlighting that our full year adjusted operating margin performance was largely consistent with the guidance we gave at the start of 2020 and prior to the pandemic.
The net result with adjusted earnings per share of $6.40, an increase of 3% over 2019.
We are extremely pleased that we were able to grow our bottom line in 2020, enabled by continued execution on our differentiated strategy and our unwavering focus on all things within our control despite the impact of COVID-19 on the worldwide economy.
Moving to the fourth quarter, adjusted net revenue was $1.75 billion, a 3% decline relative to 2019 as underlying trends in our business continued to recover from third quarter levels.
Adjusted operating margin was 41.5%, a 320 basis point improvement from the fourth quarter of 2019.
Adjusted earnings per share was $1.80 for the quarter, an increase of 11% compared to the prior year period, an impressive outcome that highlights the durability of our model and momentum we have heading into 2021.
Taking a closer look at our performance by segment.
Merchant solutions achieved adjusted net revenue of $1.1 billion for the fourth quarter, a 4% decline from the prior year, which marked a 200 basis point improvement from the third quarter.
Notably, we delivered an adjusted operating margin of 47.5% in this segment, an increase of 250 basis points from 2019, as our cost initiatives, expense synergies and the underlying strength of our business mix more than offset topline headwinds from the macro environment.
Our technology-enabled portfolio continues to prove relatively resilient with several of our businesses delivering year-over-year growth again this quarter.
Specifically, worldwide omni-channel volume growth, excluding T&E, accelerated to the high teen as our value proposition, including our Unified Commerce Platform or UCP continues to resonate with customers.
Additionally, Global Payments Integrated delivered adjusted net revenue growth for a second consecutive quarter.
The leading scale and scope of our integrated ecosystem across more vertical markets and more geographies than our peers also enabled another record year for new partner production.
As for our own software portfolio, AdvancedMD remained a bright spot, and once again produced strong double-digit adjusted net revenue growth for the quarter and achieved a record bookings year in 2020.
Indeed booking trends across our vertical markets portfolio remained solid, providing us with a positive tailwind heading into 2021.
We are also pleased that our U.S. relationship-led business saw adjusted net revenue return to slight growth for the fourth quarter, enabled by the innovative technology and software solutions we are delivering in this channel.
And despite a more challenging macroeconomic environment in several of our international markets this period, demand for our differentiated capabilities outside of the U.S. remains strong as our solutions are well aligned with shifting customer needs coming out of the pandemic.
Moving to issuer solutions, we delivered $457 million in adjusted net revenue for the fourth quarter, which was essentially flat to the prior year period.
Transaction volumes recovered further, while traditional accounts on file continue to grow, setting a new record.
Additionally, our bundled pricing model, including value-added products and services, also benefited performance.
Excluding our commercial card business, which represents approximately 20% of our issuer portfolio and is being impacted by the slow recovery in corporate travel, this segment delivered low single-digit growth for the quarter.
Notably, this business achieved record adjusted operating income and adjusted segment operating margin expanded 450 basis points from the prior year, also reaching a new record of 44.7% as we continue to benefit from our efforts to drive efficiencies and the business.
As Jeff highlighted, our issuer team successfully signed five long-term contract extension and one new contract in the quarter.
Finally, our business and consumer solutions segment delivered adjusted net revenue of $205 million, a record fourth quarter result, representing growth of 3% from the prior year.
Gross dollar volume increased more than 5% for the quarter, a result including little impact from the late December incremental stimulus, which we expect to primarily benefit us in Q1.
We are particularly pleased with trends with our DDA products, which includes an acceleration in active account growth of 29% compared to the prior year.
Adjusted operating margin for this segment improved 260 basis points to 24.1%, as we benefited from our efforts to drive greater operational efficiencies, as well as favorable revenue mix dynamics toward higher margin channels.
The solid performance we delivered across our segments highlights the powerful combination of Global Payments and TSYS, which has provided us with multiple levers to mitigate the headwinds we have faced from the pandemic.
We made great progress on our integration during the crisis, which I mentioned continues to track ahead of plan.
As a result, we are pleased to again raise our estimate for annual run rate expense synergies from the merger to at least $400 million within three years, up from the previous estimate of $375 million.
This marks the fourth time we have increased our cost synergy expectations.
Additionally, our early success in leveraging our complementary products and capabilities worldwide also gives us the confidence to increase our expectation for annual run rate synergies again to $150 million, up from our previous forecast of $125 million.
From a cash flow standpoint, we generated adjusted free cash flow of roughly $780 million for the quarter and approximately $2 billion for the year.
These are both records for us.
This is after reinvesting $107 million of capex for the quarter and $436 million for the year.
As you may recall, we indicated we expected to invest between $400 million and $500 million of capex back into the business following the onset of the pandemic.
Consistent with our announcement on our last call, we are also pleased to have now returned to our traditional capital allocation priorities, and during the quarter, repurchased 1.2 million of our shares for approximately $230 million.
Our balance sheet is extremely healthy, and we ended 2020 with roughly $3 billion of liquidity and a leverage position of roughly 2.6 times on a net debt basis.
Further, our Board of Directors has again approved an increase to our share repurchase authorization to $1.5 billion.
As part of this program, we intend to execute an accelerated share repurchase program for $500 million in the coming days.
Turning to our outlook for 2021.
Based on our current expectations for continued recovery from the COVID-19 pandemic worldwide, we expect adjusted net revenue to range from $7.5 billion to $7.6 billion, reflecting growth at 11% to 13% over 2020.
This outlook is consistent with the high end of our long-term target of high single-digit to low double-digit growth and it also reflects the benefit of the year-on-year comparisons due to the pandemic.
Considering this topline forecast, we would expect to deliver normalized adjusted operating margin expansion of up to 450 basis points, given the natural operating leverage in our business and expense synergy actions related to the TSYS merger.
However, this will be partially offset by the reinstatement of certain expenses that were temporarily reduced at the onset of the COVID-19 pandemic for most of 2020.
Therefore, we are currently forecasting adjusted operating margin expansion of up to 250 basis points compared to 2020 levels on a net basis.
To provide some color at the segment level, we expect adjusted net revenue growth for our merchant solutions segment to be in the mid to high teens, which assumes the current pace of recovery continues worldwide.
We expect underlying trends in our issuing business to be in the mid to high single-digit growth range and above our mid-single digit growth target.
But these trends should be normalized for two distinct and relatively equal size headwinds.
First, we are not anticipating a recovery in our commercial card business as we expect corporate travel to remain depressed throughout 2021.
Second, we will be absorbing the impact of a portfolio sale by one of our customers, which will impact us for the remainder of the year.
Taking these two items into account, we are forecasting our issuing business to deliver adjusted net revenue growth in the low single-digit range for the full year.
Lastly, we expect underlying trends in our business and consumer segment to be consistent with our long-term expectations of mid to high single-digit growth.
This outlook reflects the expected benefits of the recent stimulus announced at the end of December, but it does not assume any additional stimulus.
Adjusting for the impact of the larger 2020 CARES Act stimulus on comparative results for 2021, we are forecasting adjusted net revenue growth to be in the mid-single digits for this segment.
Regarding segment margins, we expect up to 250 basis points of adjusted operating margin improvement for the total Company to be driven largely by merchant solutions, while we expect issuer and business and consumer to deliver normalized margin expansion consistent with the underlying leverage profile of these businesses.
This follows the 500 basis points and 400 basis points of adjusted operating margin expansion, delivered by issuer and business and consumer respectively in 2020.
Lastly, I would highlight that from a quarterly phasing perspective, we will not lap the initial impact of the pandemic until mid-March.
Therefore, we will have pandemic affected first quarter comparisons resulting in more muted growth characteristics early in 2021, with the opposite effect occurring in the second quarter before returning to more normalized rates of growth in the back half of the year.
Our outlook is for adjusted net revenue growth, adjusted operating margin expansion and adjusted earnings-per-share growth for each quarter of 2021.
Moving to a couple of non-operating items.
We currently expect net interest expense to be slightly lower in 2021 relative to 2020, while we anticipate our adjusted effective tax rate to be relatively consistent with last year and expect our capital expenditures for 2021 to be in the $500 million to $600 million range.
Putting it all together, we expect adjusted earnings per share for the full year in a range of $7.75 to $8.05, reflecting growth of 21% to 26% over 2020.
This is consistent with the adjusted earnings per share target of roughly $8.00 that we provided on our third quarter call, despite the incremental adverse impact of additional lockdowns and social distancing protocols in a number of our markets since late October.
In summary, our 2021 guidance assumes an improving economy for the first half of the year and a stronger second half of the year with continued progress toward normalization.
We are pleased with how well we are positioned as we enter 2021.
I am very proud of all that we accomplished in 2020.
This would have been a remarkable year of milestones regardless of the macroeconomic environment, but it's all the more notable in the face of a 100-year pandemic.
Competitively, 2020 was a year of firing in all cylinders for our Company.
Across our businesses, we took meaningful market share and advanceable further down the fuel despite all the challenges thrown at us.
We don't need to wait to see a more benign macro to grow.
We didn't spend the past year waiting for a better day.
Our resilience is self-evident.
The technology investments we made over the last seven-plus years, our distinctive strategy and execution consistency has served us well and we significantly expanded our competitive moat as a result during the crisis.
While hurdles undoubtedly remain, we were not trade positions with anyone heading into 2021.
Before we begin our question-and-answer session, I'd like to ask everyone to limit your question to one with one follow-up to accommodate everyone in the queue.
Operator, we will now go to questions.
| compname posts q4 adjusted earnings per share $1.80.
q4 adjusted earnings per share $1.80.
compname announces plan for $500 million accelerated share repurchase.
compname announces plan for $500 million accelerated share repurchase.
expect 2021 adjusted earnings per share to be in a range of $7.75 to $8.05.
|
We will be referring to that slide deck throughout today's call, and a recording of the call will be available for replay through June 5.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer; Damon Audia, Vice President and Chief Financial Officer; Patrick Watson, Vice President, Finance and Corporate Controller; Alexander Broetz, President, Widia Business segment; Franklin Cardenas, President, Infrastructure business segment; Pete Dragich, President, Industrial business segment; and Ron Port, Vice President and Chief Commercial Officer.
These risks factors and uncertainties are detailed in Kennametal's SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today.
Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.
Despite the many headwinds we faced this quarter, we posted solid results.
As you recall, even before COVID-19, we were experiencing industrial downturn across all our end markets and had taken cost control actions accordingly.
Well, with the onset of COVID-19, we quickly instituted additional cost control actions during the quarter, being careful to maintain operational capability and execute our strategic initiatives, such as simplification/modernization that are fundamental to driving long-term shareholder value.
Slide two details our approach during this period of uncertainty created by the COVID-19 pandemic.
As you heard me say before, it is important to stay focused on the things we can control, and that is particularly important in a crisis environment.
First and foremost, our approach has been to protect the health and safety of our employees while continuing to serve customers as an essential business.
Early in the crisis, we instituted protocols at our facilities to ensure the safety of our workforce, including social distancing, increased cleaning protocols, self-quarantine and other preventative measures such as work from home where possible.
We also established a global task force to react quickly to the evolving challenges and share best practices and solutions in real time.
And as a result, we were able to continue to operate with minimal disruption.
The only exceptions have been when there was a government-mandated lockdown in a region where we have a customer-serving facility, such as in China and India.
As with many other manufacturers, our China operations were disrupted in the early part of Q3, but were operational before the end of the quarter.
And our Bangalore, India plant, which was closed on March 26, is reopening this week.
Continuing to operate during the crisis well positions us for the eventual recovery.
We've already learned how to operate safely in a world with COVID-19.
Our production and distribution employees are acclimated to the new protocols and ramping up production of operational plants when the markets recover will be much easier than restarting plants that have been shut down.
In addition, we've supported our customers so they can continue to operate, and that includes some customers that are on the front line of the COVID-19 battle.
In fact, we are assisting with products and solutions for some customers that are converting their manufacturing lines to critical need products like ventilator components made from high-strength aluminum.
And of course, we continue to support other medical applications for customers within general engineering.
Now given the lack of visibility into the length and depth of the COVID-19 challenge, maintaining our strong liquidity position is, of course, a key focus.
This quarter, we decreased our operating expenses by 18% year-over-year in dollar terms, maintaining our operating expense at a target of 20% despite substantially reduced sales.
This was achieved by early and aggressive cost control actions, such as furloughs in the U.S. and similar actions around the world, reduced discretionary spending and extensive travel restrictions.
These actions, along with production furloughs aligned with volume decreases and reduced variable compensation, supported our margins and helped maintain our strong liquidity position at quarter end.
This not only allows us to continue to manage through these uncertain times, but also to continue with our simplification/modernization program.
Furthermore, these types of cost control actions allow us to manage our costs while minimizing the effect on our ability to react quickly once markets recover.
Using furloughs and similar actions globally allow us to keep employees in place as much as possible.
Looking ahead, it's our expectation that Q4 will be even more challenging than Q3.
With that in mind, these kind of cost control actions will continue and may potentially need to increase depending on how long the economic environment and end markets remain depressed.
Also, in keeping with our cautious approach in this environment, we pre-emptively drew on our revolver after quarter end and now have those funds available in cash.
We took this precautionary measure to mitigate the potential increased uncertainty in capital markets due to COVID-19, consistent with our conservative philosophy to maintain our strong liquidity position.
Together, these actions help enable us to continue our simplification modernization program, which I will talk in more detail about later.
Now I'll move on to slide three to review our quarterly results.
Organic sales declined by 17% in the quarter versus 3% growth in the third quarter last year.
This is the third consecutive quarter of double-digit organic declines, which speaks to the severity of the downturn we are experiencing and weakened state of our end markets.
The energy end market continued to be challenged with a year-over-year percentage decline in the mid-20s again this quarter.
Our expectation is that it will be tested further in Q4, given the recent extreme drop in oil price and the related effect on rig counts and the sector in general.
Transportation weakened sequentially in Q3 from Q2 and posted a percentage decline year-over-year in the high teens with several auto plant closures across the globe.
General engineering and aerospace also saw year-over-year percentage declines in the high teens this quarter as well and sequential declines from Q2, with the 737 MAX production challenges continuing and lower demand expectations worldwide due to COVID-19.
Finally, earthworks was negative year-over-year this quarter, but mixed, reflecting slight improvement in seasonal U.S. construction activity and pockets of growth in mining.
By region, all posted double-digit declines this quarter and higher year-over-year declines compared to Q2.
Although Asia Pacific experienced the smallest year-over-year decline, reflecting easier comps, it was the most affected mainly in China by COVID-19 in the quarter.
By quarter end, we were seeing some signs of stabilization in China at low levels.
EMEA and the Americas were less affected by COVID-19 this quarter, but our expectation is the effect will be amplified in Q4.
Adjusted EBITDA margin decreased 80 basis points year-over-year to 18.6% on revenues that were down almost 20%.
And sequentially, the margin improved by 720 basis points on lower sales.
The year-over-year decline in margin was primarily driven by lower volume and associated under absorption.
This was partially offset by positive raw materials, which contributed 280 basis points year-over-year as well as increased simplification/modernization benefits, lower variable compensation and the previously discussed cost control actions.
Adjusted earnings per share decreased year-over-year to $0.46 versus $0.77 in the prior year quarter, but increased sequentially by $0.31.
Given the uncertainty created by COVID-19, we are withdrawing our annual outlook.
We do understand, however, the need for transparency and therefore, want to provide some color around our expectations for Q4.
Preliminary April sales were down approximately 35% year-over-year, which speaks to the severity of the market headwinds.
Now to put April in perspective within the quarter, it's important to consider that this is essentially the first month we are seeing the significant effects of COVID-19 outside of China.
Therefore, April may not reflect the full effect that we can expect to see on sales in Q4.
Considering these trends, our strong cost control actions will continue.
Additionally, we expect the effect of raw materials to remain positive in Q4, but lower than the Q3 benefit and be roughly neutral for the full year.
To help you gauge profitability, assuming the April sales decline turns out to be indicative of the full quarter, we would expect to deliver a modest adjusted operating profit despite the significant decline in sales, and would expect free cash flow to improve sequentially from Q3.
This would be driven by continued strong cost control actions as well as simplification/modernization benefits and implies decremental margins within our expected range.
However, as we discussed, the biggest source of uncertainty is the effect of COVID-19 on volume, which of course, remains to be seen.
That being said, I am confident in the actions we are taking to manage the company through this period of uncertainty and in our ability to position the company for growth when markets recover.
As I mentioned, using production furloughs and similar actions to adjust operational capacity enables us to keep employees connected so we can quickly ramp up when markets recover.
Furthermore, we are able to continue with our strategic initiatives, such as launching new products like the HARVI I TE end mill.
This is a new product for metal milling components for aircraft, automobiles and other applications in general engineering.
It sets a new performance standard by enabling machinists to use a single tool to mill many types of metals faster and more efficiently than the previous standard, which required multiple tools.
And we were honored that the product was recognized recently as a gold medal winner by the prestigious Edison Awards.
Even in the current market conditions, our sales for this product have exceeded expectations, which shows the power of innovation and the importance of continuing to focus on our strategic initiatives.
So let me take a minute to update you on our strategic simplification/modernization program.
Overall, we are pleased, having achieved an incremental $34 million savings fiscal year-to-date, and we still expect full year savings this fiscal year to be modestly higher than the $40 million achieved last year despite lower volumes.
On our last earnings call, we indicated that our expectation was that approximately 90% of the incremental capital spend associated with simplification/modernization will be complete by this fiscal year-end, and the remaining 10%, as we previously discussed, will be reserved for future volume needs.
So really, not much change in our schedule, and we remain confident in delivering our adjusted EBITDA targets once markets recover such that we can achieve sales in the range of $2.5 billion to $2.6 billion.
I will begin on slide five with a review of our operating results on both a reported and adjusted basis.
As Chris mentioned, demand trends remained soft in Q3 and deteriorated significantly at the end of March, driven by the effects of COVID-19.
Sales declined 19% year-over-year or negative 17% on an organic basis to $483 million.
Foreign currency had a negative effect of 1% and our divestiture contributed another negative 1%.
Adjusted gross profit margin of 33.3% was down 170 basis points year-over-year, though up sequentially from 26.8% in the second quarter.
The year-over-year performance was largely the result of the effect of lower volumes, partially offset by the positive effect of raw materials in the amount of approximately 280 basis points and increasing benefits from simplification/modernization.
It should be noted that we still expect the effects of raw materials to be neutral for the full year.
As Chris mentioned, adjusted operating expenses of $99 million were down 18% year-over-year and increased only 30 basis points to 20.4% on significantly lower sales.
Although much of this decrease is temporary, it is reflective of our aggressive approach to managing costs as our markets have been weakening prior to the global onset of COVID-19.
Taken together, adjusted operating margin of 12.2% was down 210 basis points year-over-year, though improved 740 basis points sequentially.
Reported earnings per share was $0.03 versus $0.82 in the prior period.
On an adjusted basis, earnings per share was $0.46 per share versus $0.77 per share in the previous year.
The main drivers of our adjusted earnings per share performance are highlighted on the bridge on Slide six.
The effect of operations this quarter amounted to negative $0.39.
This compares to negative $0.02 in the prior year period and negative $0.62 in the second quarter.
The largest factors contributing to the $0.39 was the effect of significantly lower volumes and associated under absorption.
This was partially offset by positive raw materials of $0.16 and lower variable compensation.
Simplification/modernization contributed $0.15 in the quarter, on top of the $0.11 in the prior year quarter and up from the $0.10 last quarter.
This brings our year-to-date simplification/modernization savings of $0.32.
As Chris mentioned, our expectation for this fiscal year is that these simplification/modernization benefits will be modestly higher than the $0.40 we achieved last year.
The savings from our FY 2020 restructuring actions are now expected to deliver $30 million to $35 million in run rate annualized savings by the end of FY 2020.
The slight decrease of $5 million is due to the significantly lower volume assumption in the fourth quarter.
We remain on track with our FY 2021 restructuring actions that are expected to contribute an additional $25 million to $30 million of annualized run rate savings by the end of FY 2021.
Slides seven through nine detail the performance of our segments this quarter.
Industrial sales in Q3 declined 17% organically compared to 1% growth in the prior year.
All regions posted year-over-year sales decreases with the largest decline in EMEA at negative 19%, followed by the Americas at 16% and Asia Pacific at 12%.
The decline in Asia Pacific was partially affected by the lower demand associated with the early onset of COVID-19 in China and continued lower end market demand in India.
From an end market perspective, the weakness in demand remains broad-based, with the biggest declines in transportation and general engineering, down 17% and 18%, respectively.
This was primarily driven by continued decelerating global manufacturing and auto production activity as well as the early effect of COVID-19 outside of China.
Sales in aerospace experienced a significant decline, both year-over-year and sequentially, driven by the 737 MAX production halt and corresponding effect on the supply chain as well as demand declines associated with COVID-19.
Adjusted operating margin came in at 13.1% compared to 18.3% in the prior year.
This decrease was primarily driven by the decline in volume, partially offset by increased simplification/modernization benefits and a 90 basis point benefit from raw materials.
On a sequential basis, the adjusted operating margin increased approximately 240 basis points despite lower sales.
The improvement was primarily driven by incremental simplification/modernization benefits, lower raw materials, lower variable compensation and aggressive cost control actions.
Turning to slide eight for Widia.
Sales declined 16% organically against positive 3% in the prior year period.
Widia faced similar macro challenges as the Industrial segment during the quarter.
Regionally, the largest decline this quarter was in Asia Pacific, down 25%, EMEA down 14% and the Americas down 10%.
The decline in Asia Pacific was primarily due to the continued transportation downturn in India, which is also affecting the general engineering market.
This decline was further amplified in March when India initiated its countrywide COVID-19 shutdown.
Adjusted operating margin for the quarter was 4.9%, and an increase year-over-year due to increased simplification/modernization benefits, a raw material benefit of 240 basis points and lower variable compensation, partially offset by volume declines.
Turning to Infrastructure on slide nine.
Organic sales declined 17% versus positive 6% in the prior year period.
Regionally, the largest decline was in the Americas at 21%, then Asia Pacific at 16% and EMEA at 6%.
By end market, these results were primarily driven by energy, which was down 29% year-over-year, given the extreme drop in oil prices and the corresponding significant decline in the U.S. land-only rig count.
General engineering and earthworks were down 17% and 6%, respectively.
These end markets reflected the general economic downturn.
However, there were some bright spots, such as seasonal U.S. construction in earthworks, which was up year-over-year and which has continued into early Q4.
Adjusted operating margin of 13% improved 130 basis points from the prior year margin of 11.7%.
This improvement was mainly driven by favorable raw materials that contribute 550 basis points, coupled with simplification/modernization benefits and aggressive cost actions, partially offset by significantly lower volumes.
Now turning to slide 10 to review our balance sheet and free operating cash flow.
Before I review the numbers, I would like to emphasize that we view liquidity as extremely important, particularly in such uncertain times.
Even in a normal macro environment, we operate in highly cyclical end markets and therefore, know that a strong focus on cash flows, scenario analysis and contingency planning are all part of the required skill set to navigate the uncertainty we deal with.
This has become even more important now.
Our current debt maturity profile is made up of two $300 million notes maturing in February 2022 and June 2028 as well as a USD700 million revolver that matures in June of 2023.
As of March 31, we had combined cash and revolver availability of approximately $750 million.
As Chris mentioned, in April, in an abundance of caution, we pre-emptively drew $500 million on our revolver.
This action was taken due to our conservative approach to liquidity, coupled with the unprecedented environment we are dealing with as well as an uncertainty that COVID-19 could potentially bring in the capital markets.
At quarter end, we were well within our covenants.
We have two financial covenants in our revolver, which is our net debt-to-EBITDA ratio of 3.5 times and an EBITDA to interest ratio of 3.5 times.
Primary working capital decreased both sequentially and year-over-year to $656 million.
On a percentage of sales basis, it increased to 33.4%, a reflection of the decline in sales in the quarter.
Net capital expenditures were $57 million, the same level as the prior year.
As Chris mentioned, we are pleased with the progress we have made in simplification/modernization.
Under the current demand environment, we are taking a cautious stance toward capital expenditures in the short-term while continuing to advance our simplification/modernization strategy.
We now expect capital expenditures for the fiscal year to be approximately $240 million, which is at the low end of our original outlook.
Our third quarter free operating cash flow was $2 million and represents a year-over-year decline of $37 million, reflecting lower income due to volume and increased cash restructuring costs.
We expect to deliver increased free operating cash flow in the fourth quarter compared to the third quarter, but given the current market environment, we expect free operating cash flow for the full year to be slightly negative given the $240 million of capital expenditures and cash restructuring charges.
Overall, I remain confident in the strength of our balance sheet even in the face of the current macro uncertainty.
Our strong liquidity position, coupled with our debt maturity profile and overfunded U.S. pension plan limit the significant near-term cash obligations and allow us to stay committed to our simplification/modernization initiatives.
And as Chris said, we are nearing the end of the capital investment required for this program, which will significantly lower the capital spend in FY 2021.
We remain conservative to ensure the company has ample liquidity to weather the current environment as well as continue to execute our strategy.
Dividends were approximately flat year-over-year at $17 million.
In this time of uncertainty, we reviewed our dividend program and believe that the current level is still appropriate given our strong liquidity position.
Should demand trends deteriorate more significantly than we currently anticipate, we know our dividend program, like other cash flow and cost control actions, is a lever that could be used to preserve cash and liquidity.
The full balance sheet can be found on slide 14 in the appendix.
As discussed, we are focused on managing through this crisis with an eye to strengthening the company and being prepared for the recovery.
We have a solid plan to navigate through these challenging times by aligning costs with volumes through aggressive but measured cost control actions to position us for when markets recover.
We feel good about our liquidity position and have the wherewithal to continue with our strategic initiatives like simplification/modernization to drive improved customer service and profitability with more than half of the benefits yet to be realized.
Furthermore, we are approaching the end of the incremental capex for the program, significantly lowering the overall capital spend in FY 2021.
I have confidence that we will not only navigate through this environment successfully, we will also be in a better position for improved profitability coming out of it.
| q3 sales $483 million versus refinitiv ibes estimate of $515.9 million.
q3 earnings per share $0.03.
excluding china, effect of covid-19 on q3 was minimal from a revenue standpoint.
all but one production facility is operating, and this facility is expected to reopen mid-may.
company is taking other aggressive cost-control measures to offset market headwinds.
cost cutting measures include, reductions in all discretionary spending, furloughs, extensive travel restrictions.
company is withdrawing its previously announced outlook for fiscal year 2020.
kennametal - has adequate liquidity & access to credit to meet cash flow requirements & expects to remain in compliance with relevant debt covenants.
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We are pleased to be here today to provide an update on our progress after the fourth quarter of 2020.
Hopefully, everyone has had a chance to review the news release we issued earlier today.
These risks include those related to the impact of the COVID-19 pandemic and measures taken by governmental or regulatory authorities to combat the pandemic on our business and operations, as well as the business and operations of the consumer, our customers, suppliers, business partners and labor force.
These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases.
The use of the term PPE relates to our personal protection garment business including face masks, face coverings and gowns.
Also, please note that unless otherwise stated all prior-year comparisons are to 2019 results that have been rebased to reflect the exited C9 program at Target and the DKNY intimates license.
With me on the call today are Steve Bratspies, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer.
It's hard to believe that it has been a year since the pandemic began.
I hope you and your families are staying safe and healthy.
I'm extremely proud of how much the team has accomplished over the past year especially under such challenging circumstances.
I'm excited to speak with you today to provide an update on the progress we've made since our last call.
We're going to center the conversation on two main topics.
First, our execution and the financial results in the fourth quarter that drove a strong finish to the year.
Second, is the launch of our multi-year growth strategy, which we're calling our full potential plan that's being developed as a strategic assessment I outlined last quarter.
First, in terms of the fourth quarter, we delivered solid results as revenue, operating profit, earnings per share and operating cash flow all came in above our expectations despite the increasingly unpredictable environment.
We experienced strong consumer demand for our brands and products around the world, which drove market share gains in a number of categories including US basics and US intimates.
We also saw revenue momentum continues to build across our three largest businesses.
US Innerwear, we delivered another quarter of above category growth.
The sales excluding PPE increasing 16% over prior year.
We're also pleased with the global performance of our Champion brand during the quarter.
On a constant currency basis, global Champion sales increased 11% over prior year.
And outside of the COVID challenge, sports and college licensing business, global sales were up 18% in the quarter.
In international along with Champion strong performance, constant currency sales in our Australian Innerwear business increased 8% over prior year.
Now turning to the second topic, we've made significant progress on our growth strategy.
Since our last call, we've defined our growth drivers, we've identified the strategic initiatives needed to unlock growth and improve productivity and we began the early implementation of our full potential plan.
It was clear from our analysis of the business that simplification is critical to our future growth.
It will make us faster, it will lower costs and it will focus resources.
Specific actions that we've initiated over the past few months as we began to implement our full potential plan include portfolio streamlining and SKU rationalization.
I'd like to briefly touch on both of these.
First, we're streamlining our portfolio to increase our business focus and improve future returns.
Specifically, we are exploring strategic alternatives for our European Innerwear business.
While we are in the very early stages, we're committed to be transparent and we'll provide updates as we move through the process.
We're also moving on from PPE.
It's encouraging to see that COVID vaccines are rolling out around the world.
As a result, this rollout along with slowing retail orders and a flood of competitive offerings have dramatically reduced our future sales opportunities.
Therefore, we do not view PPE as a future growth opportunity for the company.
The second action we've taken to simplify our business is rationalizing our SKUs.
Based on the inventory review that we discussed on our last call, we are removing 20% of our SKUs.
We're also implementing a formal product life cycle management process.
This will heighten our product design and consumer focus as well as streamline our product offerings, which in turn should lower costs, improve in stocks and drive sales at higher volume, higher margin SKUs.
As a result of these actions, we've made the difficult but important decision to writedown our entire PPE inventory-related balance, as well as the inventory tied to our SKU rationalization.
Scott will provide more detail on this during his review of our financial results.
As I mentioned last quarter, our goal is to become a consumer-centric growth company, one that generates higher and more consistent revenue growth while also delivering higher levels of profitability over time.
Our full potential plan is the footprint [Phonetic] to accomplish this goal.
As you can see, we are moving forward with purpose and with urgency.
We've already taken action and we're focused on executing our full potential plan.
Overall, HanesBrands delivered solid fourth quarter results.
On an adjusted basis, we exceeded the high end of our expectations across all of our key metrics driven by continued top line momentum.
Looking at the details of our fourth quarter results, sales increased 8% over prior year to $1.8 billion.
Excluding PPE, sales increased nearly 7% as we experienced continued sequential improvement in our Innerwear, Activewear and international segments.
For the quarter, FX in the 53rd week contributed 190 and 290 basis points of growth respectively.
Adjusted gross margin of 41% was above our expectations for the quarter due to higher sales and product mix.
As compared to last year, gross margin declined 80 basis points due to the expected negative manufacturing variances, which were partially offset by higher sales and favorable product mix.
Adjusted operating margin declined 250 basis points over prior year to 12% as a gross margin declined along with the expected higher cost caused by COVID and our full potential plan more than offset the benefits from higher sales and mix.
Pre-tax restructuring and other related charges were $661 million in the quarter, of which 96% were non-cash.
The vast majority of these costs, approximately $611 million were inventory related charges tied with the business simplification action Steve mentioned as we began implementing our full potential plan.
Breaking this down, $400 million is related to the entire PPE inventory-related balance that we referred to on last quarter's call.
The other $211 million is related to our SKU reduction initiative and representative approximately 12% of our non-PPE inventory balance at the end of the year.
The remaining $50 million of charges in the fourth quarter reflect $25 million for a COVID-related goodwill impairment of our US hosiery business, $17 million from a write-off of a discrete tax asset tied to our Bras N Things acquisition and $8 million for business accelerated [Phonetic] actions as well as the previously disclosed supply chain restructuring.
Our adjusted tax rate which excludes $67 million of one-time tax benefits was 19%.
This was above our expectations due to the higher than expected profit in the quarter.
And adjusted earnings per share were $0.38, while on a GAAP basis, we had a loss of $0.95 per share.
Now, let me take you through our segment performance.
For the quarter, US Innerwear sales increased 20% over prior year driven by an 18% increase in Basics, an 8% increase intimates and the inclusion of $22 million of PPE revenue.
Excluding PPE, US Innerwear sales increased 16% over prior year.
Some of our strong consumer demand at point of sale, space gains in kids underwear, continued inventory restocking by retailers and the contribution from a 53rd week.
In our Basics business, we experienced growth in each product category.
And within our intimates business, gross sales increased at a double-digit rate, which more than offset the COVID-driven decline in shapewear sales.
For the quarter, Innerwear's operating margin declined 60 basis points over prior year to 24.1% driven primarily by higher distribution costs, which were partially offset by the benefits from higher sales in mix.
Turning to US Activewear, revenue increased 7% compared to last year, driven by growth in the online, wholesale and distributor channels.
While our sports and college licensing business declined over prior year due to continued campus closures and limited attendance to sporting events, we saw sequential improvement in this year-over-year revenue trend in the fourth quarter.
Looking at the Champion brand across all the channels in our Activewear reporting segment, Champion sales increased 11% over last year.
Activewear's operating margin was 8.9% in the fourth quarter.
As expected Activewear's margin declined compared to prior year due to the expected negative manufacturing variances, which were partially offset by the benefits from higher sales in mix.
Putting to our international segment, revenue increased 2% compared to last year.
Excluding the $6 million of PPE sales, international revenue increased 1% and with respect to the Champion brand within our international reporting segment, sales increased 6%.
On a constant currency basis, international sales declined 3% over prior year.
We experienced growth in Australia driven by our Bonds and Bras N Things brands across the retail, wholesale and online channels.
We also saw growth in Canada and Latin America.
However, this growth was more than offset by COVID-driven declines in Asia and Europe.
For the quarter, the international segment's operating margin declined 160 basis points over prior year to 14.3% [Phonetic] due to the expected negative manufacturing variances, COVID expenses in mix.
Turning to cash flow, we generated $217 million of operating cash flow in the quarter, which exceeded our guidance and $448 million for the full year.
Looking at the balance sheet, excluding the actions and writedowns previously discussed, inventory declined approximately 4% sequentially and leverage at the end of the quarter was 3.3 times on a net debt to adjusted EBITDA basis which compares to 2.9 times at the end of last year.
And now turning to guidance.
At this time, we are providing guidance for the first quarter.
We plan to provide a full-year 2021 outlook as well as three-year financial targets as part of the detailed review or full potential plan at our upcoming Investor Day in May.
With respect to the first quarter, we expect the uncertainty created by the COVID-19 pandemic to continue to impact the global consumer environment and we have reflected this on our outlook.
At the midpoint, we expect total sales growth of 14% over the prior year.
Adjusting for $50 million of foreign currency benefit, the midpoint of our sales guidance implies 10% growth on a constant currency basis.
We expect adjusted operating profit of $150 million to $160 million, which at the midpoint implies an operating margin of 10.3%.
Expected year-over-year margin expansion is due to higher sales, positive manufacturing variances and the anniversary of last year's COVID-driven volume deleverage.
We expect interest and other expense of approximately $48 million and a tax rate of 16% and our guidance for both adjusted and GAAP earnings per share is $0.24 to $0.27.
So in closing, we delivered strong fourth quarter results and with the momentum we are seeing across our business, we believe we are well positioned to deliver continued growth in the first quarter of 2021.
We're excited about our future and we're confident in our ability to build on our business momentum in 2021 while also positioning the company for long-term success.
And now I'd like to spend a few minutes providing some additional details on our full potential plan.
Through the plan, we have defined our four pillars of growth and identify the initiatives to unlock this growth and create a more efficient and productive business model.
My confidence in the strengths of HanesBrands that I outlined on last quarter's call have only been reinforced as we've developed our growth strategy.
We have iconic brands, we have global breadth and supply chain scale, we have a solid balance sheet, we have a long-standing commitment to sustainability and we have a dedicated passionate team with a genuine appetite and readiness for change.
This is a strong foundation to leverage and capturing opportunities for growth and driving shareholder value.
With respect to our four growth pillars of our full potential plan, they are grow Champion globally, drive Innerwear growth with products and brands that appeal to younger consumers, build e-com excellence across channels and streamline our global portfolio.
Touching briefly on each of these.
First, with Champion, we're making rapid progress developing our global brand strategy that defines our consumer segments, geographies, product offerings and channels of distribution.
We have solid momentum in this business and we're being thoughtful in how we position the brand going forward.
We see significant opportunity to grow Champion over the next three to four years.
We're engaging directly with the consumer through digital platforms, we're leveraging our global design centers to deliver innovative products, we're driving category expansion including a greater focus on women's and kids as well as layered outerwear and casual athletic footwear and we're expanding in China with our partners to an integrated front-end strategy stand-alone stores and online.
Our second growth pillar is to get younger in Innerwear.
In Australia, we'll build our momentum by fueling the growth of our Bonds and Bras N Things brands, particularly through our D2C channels.
In the US, our plan is to build on our recent Innerwear growth by shifting our portfolio younger while defending our core, we must maintain our strength with our current consumers while adding the growing base of younger US consumers.
We are well positioned to capture this growth opportunity by targeting our incredible brand portfolio of Hanes, Maidenform, Bali and more to reach unique consumer groups.
We plan to invest to meet changing lifestyles targeted in innovative products.
Third, we're building e-com excellence across all online channels.
Consumers are rapidly adapting digital tools as a way to connect with our brands and buy our great products.
To be successful over time, we must build our e-comm capabilities to serve consumers however they shop.
We're leveraging data analytics to get to know our consumers better and build long-term loyalty, we're improving performance marketing so consumers can find our products online and we're developing a frictionless shopping experience to help consumers easily buy and receive our products, whether it's on our own sites or our retail partner sites.
Finally, we're streamlining our portfolio and positioning for global growth.
This will allow us to focus our resources and efforts on higher growth, higher margin businesses.
As I mentioned earlier, we're moving on from PPE and we are exploring strategic alternatives for European Innerwear.
With that overview of our growth opportunities, let me turn to the other key components of our plan, setting the strategic initiatives and making investments to unlock growth and create a more efficient and productive business model.
We've already begun executing on a number of these including a multi-year cost savings program intended to substantially self-fund our investments.
We've identified 20 strategic initiatives, each with its own leader, tactical team, KPIs and deliverable schedule.
While I'm not going to run through all these initiatives today, let me provide some high level thoughts.
We'll be coming more consumer and product focus.
We will lead with product design and innovation.
We'll elevate the discipline of brand and channel management and we'll extend our sustainability heritage beyond our supply chain and into our brands and consumer marketing.
We're optimizing data and modernizing our technology.
Data and technology are key enablers for a number of our initiatives in our full potential plan.
We're making data a tool through standardization and accessibility across the global organization and we're investing in technology to make us more efficient, both in terms of revenue optimization and cost management.
We're segmenting our supply chain so we can better serve our customers.
Our supply chain is a competitive advantage, and it's been a long-standing strength of the company.
Given our broad diversified portfolio of products, we're enhancing our capabilities to adapt to the changing environment and needs of the digital consumer.
Segmenting our supply chain allows us to efficiently meet growth opportunities, deliver innovation and be quicker to market for our respective Innerwear and Activewear businesses and over time, this should provide greater revenue opportunities while also lowering cost.
And we're transforming our organization to speed up decision making, align ourselves to deliver future growth and to build a winning culture.
We're designing a flatter and more responsive organization around the global Innerwear and global Activewear structure.
This will help us to leverage innovation, improve supply chain service and efficiency and build powerhouse brands that meet the changing demands of our consumers and customers around the world.
We're bringing in new capabilities and leadership.
We've added outstanding new leaders including our CHRO, our Chief Consumer Officer and most recently, our President of Global Innerwear.
We've also restructured and reorganized a number of existing goals to drive alignment and to focus expertise on critical components of our full potential plan particularly within supply chain and IT functions, all of which designed to leverage and unleash the knowledge and expertise of our long-tenured talent base.
So to sum up, we're excited about the progress we made in the quarter.
Revenue momentum continues to build across our business, which was evident in our strong fourth quarter performance and we've begun implementing our full potential plan to drive growth and higher long-term profitability.
This gives us confidence that we can build on our business momentum in 2021 while also positioning the company for long-term success.
We're looking forward to a more in-depth discussion about our growth strategy at our May Investor Day.
| q4 adjusted earnings per share $0.38.
q4 gaap loss per share $0.95.
sees q1 adjusted earnings per share $0.24 to $0.27.
q4 sales $1.8 billion versus refinitiv ibes estimate of $1.64 billion.
exploring strategic alternatives for european innerwear business.
|
Please advance to Slide 3.
In order to provide improved transparency into the operating results of our business, we provided non-GAAP measures, adjusted net earnings, adjusted earnings per share and adjusted segment earnings that exclude the severance and restructuring charges related to aligning our business to current market conditions.
Also as a courtesy to others in the question queue, please limit yourself to one question and one follow-up question per turn.
If you have multiple questions, please rejoin the queue.
Before we begin discussing our results and outlook, I want to send my deepest gratitude to the thousands of A. O. Smith employees who've been working under less than ideal conditions and we continue to keep our operations running, offices open and customers in hot and treated water.
To recap 2020, better than expected fourth quarter results drove our 2020 performance above our expectations.
North America water treatment grew 14% organically, driven by continued consumer demand for products promoting a safe home.
The direct-to-consumer channels with our Aquasana brand, retail outlets with their A.O Smith brand and the dealer channel all contributed to solid 2020 growth.
We believe industry shipments of U.S. residential water heaters, including tankless surge to a record, exceeding 10 million units or 8% growth over the prior year.
This assessment is based on our strong December shipments.
We believe the overall positive tone to new residential and safe at home remodel construction activity, including an increase in proactive replacement demand and channel inventories stocking related to extended lead times resulted in above trend growth in 2020.
Due to construction project delays and postponements in North America as well as pandemic-related weakness in restaurant and hospitality, new construction and replacement demand, we saw commercial water heater and boiler industry volumes declined by 8% to 10%.
We maintained our market share in both of these categories.
Progressive year-over-year improvement in consumer demand for our products in China continued in the fourth quarter.
As a result of higher volumes and diligent efforts by our team to reduce cost and reorganize, high single-digit margins were achieved in the second half of the year.
In North America, aside from the voluntary closure of our Mexican facility for several weeks in the second quarter, we remained operational throughout 2020 with no significant disruptions within our plants and our supply chain.
Pandemic-related safety protocols have been in place in our facilities and our offices.
Due to strong residential water heater demand coupled with soft quarantine-related absenteeism, our lead times remained above normal.
We continue to use temporary workers, swing shifts and expedited logistics in some cases to take care of our customers.
I would now like to turn the conference over to your host, Ms. Patricia Ackerman, Senior Vice President, Investor Relations, CRS and Treasurer.
You may begin again.
I believe you heard the introduction that I gave.
This may be redundant, but we think it's important to start from the beginning.
Before we begin discussing our results and outlook, I want to send my deepest gratitude to thousands of A.O. Smith employees who have been working under less than ideal conditions and we continue to keep our operations running, offices open and customers in hot and treated water.
To recap 2020, better than expected fourth quarter results drove our 2020 performance above our expectations.
North America water treatment grew 14% organically, driven by continued consumer demand for products promoting a safe home.
The direct-to-consumer channel with our Aquasana brand, retail outlets with our A.O. Smith brand and the dealer channel all contributed to solid 2020 growth.
We believe industry shipments of U.S. residential water heaters, including tankless, surge to a record, exceeding 10 million units or 8% growth over the prior year.
This assessment is based on our strong December shipments.
We believe the overall positive tone to new residential and safe at home remodel construction activity, including an increase in proactive replacement demand in channel inventory stocking related to extended industry lead times resulted in above trend growth in 2020.
Due to construction project delays and postponements in North America as well as pandemic-related weakness in restaurant and hospitality, new construction and replacement demand, we saw commercial water heater and boiler industry volumes declined by 8% to 10%.
We maintained our market share in both of these categories.
Progressive year-over-year improvement in consumer demand for our products in China continued in the fourth quarter.
As a result of higher volumes and diligent efforts by our team to reduce costs and reorganize, high single-digit margins were achieved in the second half of the year.
In North America, aside from the voluntary closure of our Mexican facility for several weeks in the second quarter, we remained operational throughout 2020 with no significant disruptions within our plants and our supply chain.
Pandemic-related to safety protocols remain in place in our facilities and offices.
Due to strong residential water heater demand coupled with self quarantine-related absenteeism, our lead times remain above normal.
We continue to use temporary workers, swing shifts and expedite logistics in some cases to take care of our customers.
All of these efforts result in inefficiencies and incremental costs.
To align our business with current global market conditions, we reduced headcount and incurred other restructuring costs, totaling approximately $6 million after tax in 2020.
The majority of these actions took place in China.
We published our second Corporate Responsibility and Sustainability Report in January and great proud of our accomplishments since our first report, particularly in employee engagement, safety, research reduction in our facilities and a product portfolio that both some of the most efficient products in their respective categories.
We introduced our first ever public greenhouse gas emission goal.
We strive to reduce GHG emissions by 10% by 2025.
Full year sales of $2.9 billion declined 3% compared with 2019, largely due to significant weakness in the China business in the first half of 2020.
As a result of lower sales, adjusted earnings declined 3% to $351 million or $2.16 per share compared with $370 million or $2.22 per share in 2019.
Sales in our North America segment of $2.1 billion increased 2% compared with 2019.
Higher residential water heater volumes, growth in water treatment as well as full year of Water-Right sales were partially offset by lower U.S. commercial water heater volumes, lower boiler sales and our water heater sales mix composed of more electric models, which have a lower selling price.
Rest of the world segment sales of $800 million declined 14% from 2019.
Pandemic-related lock downs and weak end market demand primarily in China in the first half of the year and a higher mix of mid-priced products resulted in lower sales.
Currency translation of China sales favorably impacted sales by approximately $9 million.
Indian sales were also negatively impacted by the pandemic-related economic disruption and declined to $31 million compared with $39 million in 2019.
On Slide 7, North America segment adjusted earnings of $506 million increased 4% compared to 2019.
The increase in earnings was driven by favorable impact to earnings from higher residential water heater volumes, growth in water treatment sales, full year of Water-Right sales and lower material costs.
The impact to earnings from lower volumes of boilers and commercial water heaters and the mix skew to electric water heaters partially offset these factors.
Adjusted segment earnings exclude $2.7 million in pre-tax severance costs.
As a result, adjusted operating margin of 23% is slightly higher than in 2019.
Rest of the world adjusted segment earnings of $5 million declined significantly compared with 2019.
In China, the unfavorable impact from lower sales and the higher mix of mid-priced products which have lower margins than higher-priced products more than offset reductions in SG&A costs and temporary waivers for required social insurance contributions.
As a result of these factors, adjusted segment operating margin of 0.6% decline from 4.3% in 2019.
Our corporate expenses of $52 million were higher than in 2019, primarily driven by lower interest income.
Turning to Slide 8.
Record fourth quarter sales of $835 million increased 11% compared with the fourth quarter of 2019.
The increase in sales was largely due to higher residential water heater volumes in North America and higher sales in China.
As a result of higher sales and cost reduction initiatives earlier this year, fourth quarter earnings of $120 million or $0.74 per share increased significantly compared with 2019.
Please advance to Slide 9.
Record fourth quarter sales in North America segment of $561 million increased 7% compared with the same period in 2019, primarily driven by higher residential water heater volumes.
Rest of the world fourth quarter segment sales of $279 million improved 19% compared with the fourth quarter of 2019.
Currency translation of China sales favorably impacted sales by approximately $14 million.
Constant currency China sales improved 15% driven by mid single-digit growth in end market demand led by water treatment, replacement water treatment filters and gas tankless water heaters and a favorable mix between product categories compared with the fourth quarter of 2019.
On Slide 10, record fourth quarter North America segment earnings of $138 million increased 7% from the same period in 2019.
The increase in earnings was primarily driven by higher residential water heater volumes in North America and lower steel costs.
These factors were partially offset by logistic costs.
As a result, fourth quarter segment margin of 24.6% was slightly higher than 24.5% in 2019.
Rest of the World segment earnings of $31 million improved significantly from $1.5 million in the same quarter in 2019.
In China, higher volumes, reductions in SG&A costs and lower material costs drove higher earnings.
As a result of these factors, fourth quarter segment margin improved to 11.2% compared with 0.6% in 2019.
Our corporate expenses of $16 million in the fourth quarter were higher than the same period of 2019, primarily due to an increase in long-term incentives and lower interest income in the 2020 fourth quarter.
Advancing to Slide 11.
Cash provided by operations of $562 million during 2020 was higher than 2019.
Lower investments in working capital in 2020 were partially offset by lower earnings compared with the prior year.
Our liquidity and balance sheet remained strong.
Our cash balances totaled $690 million at the end of 2020 and our net cash position was $576 million.
At the end of 2020, our leverage ratio was 6% as measured by total debt to total capital.
We are in the process of refinancing our $500 million revolving credit facility, which expires at the end of the year.
We currently have no borrowings on this facility.
We expect to repurchase $400 million worth of share in 2021 through a combination of 10b5-1 program and open market purchases.
Recently, our Board increased the authorized shares on our share repurchase authority by 7 million shares.
Turning to Slide 12.
The midpoint of our range represents an increase of 13% compared with our 2020 results.
Our guidance assumes the conditions of our business environment and that of our suppliers and customers are similar in 2021 to what we have experienced in recent months and does not deteriorate as a result of further restrictions or potential shutdowns due to the COVID-19 pandemic.
We expect cash flow from operations in 2021 to be between $450 million and $475 million compared with $560 million in 2020, primarily due to higher earnings offset by higher investments in working capital than in prior year.
In 2021, capital spending plans are between $85 million and $90 million and our depreciation and amortization expense is expected to be approximately $80 million.
Our corporate and other expenses are expected to be approximately $51 million, slightly lower than in 2020.
Our effective tax rate is assumed to be between 22.5% and 23% in 2021.
Average outstanding diluted shares of 160 million assumes $400 million worth of shares are repurchased in 2021.
Our businesses and the countries in which we do business continue to navigate through pandemic-related challenges, particularly in supply chain and logistics.
Our outlook for 2021 includes the following assumptions.
We project U.S. residential water heater industry volumes will be down 2% or 200,000 units in 2021.
We are encouraged by the positive tone in the new construction market.
Although, we believe some destocking will occur during 2021 as we expect industry lead times to improve throughout the year.
The timing of the destocking is difficult to predict as we have two price increases announced, one effective in February and the second one in April.
Destocking activity could be delayed until mid-year due to the pre-buy orders in advance of the price increases.
Further note on the 2021 price increases.
We have seen inflation our cost of supply chain, particularly steel and logistic costs.
Steel has increased nearly 50% since we announced our February 1 water heater price increase of 5% to 9%.
We announced a second price increase last week on water heaters effective April 1st, also between 5% to 9% depending on the type of water heater.
We expect commercial industry water heater volumes will further decline approximately 4% as pandemic impacted business delay, order for new construction and discretionary replacement installations.
In China, it is encouraging to see consumer demand for our China products progressively improve in 2020 and into January of 2021.
We accomplished much in China in 2020, which will allow us to profitably grow in 2021.
Those accomplishments include closing of 1,000 stores in Tier 1 and 2 cities, while efficiently expanding in Tier 4 through 6 cities, implementing programs to save $30 million in SG&A, which will carry over into 2021.
We've lapped a negative impact to earnings from mid-priced products.
We expect positive mix in 2021 from new products.
And we execute programs to result in a stronger and more nimble distributors.
We expect year-over-year increases in local currency sales between 14% and 15%.
We assume China currency rates remain at current levels, adding approximately $45 million and $3 million to sales and profits over the prior year respectively.
We expect our North America boiler sales will increase by mid single-digits in 2021.
Our expectations are based on several growth drivers.
First, industry growth of 3% to 4%.
We assume some pent-up demand after the industry decline in the low-teens levels in 2020.
The CAGR for commercial condensing boilers, which is over 50% of the boiler revenue, was 5% to 6% prior to 2020.
We believe replacement demand is still 85%.
A potential government stimulus package targeting infrastructure investment may free up some jobs that were postponed or halted in 2020.
The transition to a higher energy efficient boilers will continue, particularly as commercial buildings improve their overall carbon footprint.
In 2020, condensing boilers were 39% of the commercial boiler industry that represents our addressable market, which provides continued opportunity for our leading market share commercial condensing boilers.
New product launches including improvements to our flagship CREST commercial condensing boiler with a market differentiating oxygen sensor which continuing measures and optimizes boiler performance and the introduction of be 1 million BTU light duty commercial night FTXL boiler.
We project 13% to 14% sales growth in our North America water treatment products.
We believe the mega trends of health and safe drinking water as well as a reduction of single use plastic bottles will continue to drive consumer demand for our point of use and our point of entry water treatment systems.
We believe margins in this business could grow by 100 to 200 basis points, higher than the nearly 10% margin achieved in 2020.
And in India, fourth quarter sales were similar to the prior year.
We project 2021 full year sales to increase over 20% compared with 2020 and to incur a small loss of $1 million to $2 million.
Advance to Slide 14.
We project revenue will increase by approximately 10% in 2021 as strong North America water treatment and China sales enhanced by growth in boiler sales more than offset expected weaker North America water heater volumes.
Our 10% growth rate projection includes approximately $45 million of benefit from China currency translation.
We expect North America segment margins to be between 23% and 23.5% and Rest of World segment margins to be between 7% and 8%.
To Slide 15 please.
2020 was a challenging year.
We are pleased with our performance through the pandemic.
Particularly in these uncertain times, we believe A. O. Smith is a compelling investment for numerous reasons.
We have leading share positions in our major product categories.
We estimate replacement demand represents approximately 80% to 85% of U.S. water heater and boiler volumes.
We have a strong premium brand in China, a broad product offering in key product categories, broad distribution, a reputation for quality and innovation in that region.
Over time, we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We are very excited for the opportunity we see in our North America water treatment platform.
We have strong cash flow and balance sheet supporting the ability to continue to invest for the long-term with investments in automation, innovation and new products as well as acquisitions and return cash to shareholders.
| q4 earnings per share $0.74.
remained operational with no significant covid-19-related disruptions within its plants or supply chain in recent quarter.
noted stability in its north america water heater manufacturing lead times in q4.
encouraged by resiliency of our north america water heater replacement demand.
expect tailwinds behind north america water treatment product sales driven by drinking water health and safety concerns.
|
Let me also remind you that CVR Partners completed a 1 for 10 reverse split of its common units on November 23, 2020.
Yesterday, we reported a first quarter consolidated net loss of $55 million and a loss per share of $0.39.
Unplanned downtime and increased operating costs associated with the winter storm negatively impacted our first quarter results by approximately $41 million.
Our earnings for the quarter were further impacted by a noncash mark-to-market on our 2020 RIN obligation of $98 million.
Our Board of Directors did not approve a dividend for the first quarter of 2021.
However, we recognize the absence of any major transactions, we have more cash on the balance sheet currently that we need to operate the business.
We will continue our discussions with the Board around the best uses of our cash and the appropriate level of cash to return to shareholders in and what form.
For our Petroleum segment, the combined throughput for the first quarter of 2021 was approximately 186,000 barrels per day as compared to 157,000 barrels per day for the first quarter of 2020, which was impacted by the planned turnaround at Coffeyville.
We experienced unplanned downtime at both facilities in February as a result of the winter storm, which reduced total throughput for the quarter by approximately 34,000 barrels per day.
Both plants resumed full operations in March and are currently running at max light crude rates.
Benchmark crack spreads have increased since the beginning of the year, however, elevated RIN prices continue to consume much of that increase in the cracks.
The Group 3 2-1-1 crack averaged $16.33 per barrel in the first quarter as compared to $12.21 for the first quarter of 2020.
On a 2020 RVO basis, RIN prices averaged approximately $5.57 per barrel in the first quarter, a 250% increase from the first quarter of 2020.
The Brent-WTI differential averaged $3.18 in the first quarter compared to $5.04 per barrel in the prior year period.
The Midland Cushing differential was $0.87 per barrel over WTI in the quarter compared to $0.06 per barrel under WTI in the first quarter of 2020.
And the WCS to WTI differential was $11.82 per barrel compared to $17.77 for the same period last year.
Light product yield for the quarter was 100% on crude oil processed and current economics dictate maximizing gasoline.
In total, we gathered approximately 112,000 barrels per day of crude oil during the first quarter of 2021 compared to 136,000 barrels per day for the same period last year.
Gathering volumes for the first quarter were negatively impacted by the severe winter weather in the Midwest in February.
With the Oklahoma pipelines we recently acquired, our gathering volumes are trending higher.
We currently forecast our gathering volumes for the second quarter to be in the 125,000 to 130,000 barrel a day range.
In our Fertilizer segment, we experienced some unplanned downtime at Coffeyville doing an outage of the third-party air separation unit in January.
At East Dubuque, we elected to shut in for several days as a result of the severe winter weather in February.
Ammonia utilization for the first quarter was 87% at Coffeyville and 89% at East Dubuque.
Along with a rally in crop prices this year, fertilizer prices have increased significantly, which should be more evident in the Fertilizer segment's second quarter results.
With the USDA estimating corn planning this year of 91 million acres, the 2020 inventory carryout could be at the lowest level since 2014.
This should set up for continued strength in crop prices, which will be a positive for the fertilizer demand and pricing as well.
Our consolidated net loss of $55 million and loss per diluted share of $0.39 includes a mark-to-market gain of $62 million related to our investment in Delek and favorable inventory valuation impact of $66 million.
The effective tax rate for the first quarter 2021 was a benefit of 43% compared to a benefit of 27% for the prior year period, primarily due to state income tax credits.
We continue to anticipate an income tax refund related to the CARES Act of $35 million or $40 million, which we expect to receive in the second half of 2021.
The Petroleum segment's EBITDA for the first quarter of 2021 was negative $61 million, which included an inventory valuation benefit of $66 million.
This compares to EBITDA of negative $77 million in the first quarter of 2020, which included unfavorable inventory valuation impact of $136 million.
Excluding inventory valuation impacts in both periods, our Petroleum segment EBITDA would have been negative $127 million for the first quarter of 2021 compared to positive $59 million in the prior year period.
The year-over-year EBITDA decline was driven primarily by the elevated RINs prices and our open RIN position, unrealized derivative losses and increased operating expenses associated with winter storm Uri.
In the first quarter of 2021, our Petroleum segment's refining margin, excluding inventory impacts, was negative $0.88 per total throughput barrel compared to $11.06 in the same quarter of 2020.
The increase in crude oil and refined product prices through the quarter generated an inventory valuation benefit of $3.93 per barrel, this compares to a $9.54 per barrel unfavorable impact in the same period last year.
Excluding inventory valuation impact, unrealized derivative gains and losses and the mark-to-market impact of our 2020 RIN obligation, the capture rate for the first quarter of 2021 was 46% compared to 86% in the first quarter of 2020.
In addition, RINs expense reduced our capture rate by 65% in the first quarter of 2021, which includes a 36% impact related to the mark-to-market of our 2020 RIN obligation.
Derivative losses for the first quarter of 2021 totaled $32 million, which includes unrealized losses of $43 million, primarily associated with frac spread derivatives, offset by gains on Canadian Crude Oil.
In the first quarter of 2020, we had total derivative gains of $46 million, which included unrealized gains of $12 million.
RINs expense in the first quarter of 2021 was $178 million or $10.62 per barrel of total throughput compared to $19 million or $1.32 per barrel for the same period last year.
Our first quarter RINs expense was inflated by $98 million from the mark-to-market impact related to our 2020 accrued RFS obligation, which was mark-to-market at an average RIN price of $1.39 at quarter end.
Our accrued RFS obligation at the end of the first quarter continues to approximate our 2019 and 2020 obligations at Wynnewood, for which labors have been applied.
We believe Wynnewood's obligation for 2021 should be exempt under the RFS regulation; for the full year 2021, we forecast a net obligation of approximately of 230 million RINs without considering waivers yet inclusive of the RINs we expect to generate from the renewable diesel production in the second half of the year.
The Petroleum segment's direct operating expenses were $5.89 per barrel in the first quarter of 2021 as compared to $5.87 per barrel in the prior year period.
On an absolute basis, operating expenses increased approximately $15 million compared to the first quarter 2020, primarily due to higher natural gas costs that are currently in dispute and additional repair and maintenance expenditures related to winter storm Uri.
For the first quarter of 2021, the Fertilizer segment reported an operating loss of $14 million, a net loss of $25 million or $2.37 per common unit and EBITDA of $5 million.
This is compared to first quarter 2020 operating losses of $5 million, a net loss of $21 million or $1.83 per common unit and EBITDA of $11 million.
The year-over-year decrease in EBITDA was driven by lower sales volumes of UAN and ammonia and lower UAN sales prices.
During the quarter, CVR Partners repurchased just over 24,000 of its common units for $0.5 million.
The partnership did not declare a distribution for the first quarter of 2021.
Total consolidated capital spending for the first quarter of 2021 was $68 million, which included $10 million from the Petroleum segment, $3 million from the Fertilizer segment and $55 million from the Renewables segment.
Environmental and maintenance capital spending comprised $12 million, including $10 million in the Petroleum segment and $2 million in the Fertilizer segment.
We estimate total consolidated capital spending for 2021 to be approximately $235 million to $250 million, of which approximately $106 million to $114 million is expected to be environmental and maintenance capital and $123 million to $128 million is related to the renewable diesel project at Wynnewood.
Our consolidated capital spending plan excludes planned turnaround spending, which we estimate to be approximately $9 million for the year in preparation for the planned turnaround at Wynnewood in 2022 and Coffeyville in 2023.
Cash provided by operations for the first quarter of 2021 was $96 million.
Despite elevated natural gas and utilities cost, increased capital spending and closing on the Oklahoma pipeline acquisition, we generated free cash flow in the quarter of $61 million.
Working capital was a source of approximately $218 million in the quarter due to an increase in our RINs obligation and an increase in lease pre payable.
Turning to the balance sheet.
At March 31, we ended the quarter with approximately $707 million in cash, an increase of $40 million from the end of 2020.
Our consolidated cash balance includes $53 million in the Fertilizer segment.
As of March 31, excluding CVR Partners, we had approximately $1 billion of liquidity, which was comprised of approximately $655 million of cash, securities available for sale of $235 million and availability under the ABL of approximately $364 million less cash included in the borrowing base of $208 million.
Looking ahead to the second quarter of 2021, for our Petroleum segment, we estimate total throughput to be approximately 200,000 to 220,000 barrels per day.
We expect total direct operating expenses to range between $75 million and $85 million and total capital spending to be between $6 million and $12 million.
For the Fertilizer segment, we estimate our ammonia utilization rate to be greater than 95%.
We expect direct operating expenses to be approximately $35 million to $40 million, excluding inventory impacts and total capital spending to be between $4 million and $7 million.
Capital spending in the Renewables segment is expected to range between $65 million and $70 million.
In summary, the first two months of the quarter were challenging as crack spreads were narrow and the winter storm caused unplanned downtime and elevated operating expenses.
We quickly recovered from the storm-related shutdowns.
And with the increase in the Group 3 cracks, we have observed positive EBITDA trends in March, absent the 2020 mark-to-market impact for RINs.
We continue to believe we are well positioned for the eventual upswing in the refining market.
Looking at current market fundamentals, cracks have increased since the beginning of the year and have largely sustained higher levels, although inflated RIN prices have consumed part of that increase.
Vaccine data is encouraging, and we're seeing positive increases in demand for gasoline, diesel and jet fuel.
Refinery shutdowns in February and March helped further clean up domestic inventories, however, fleet utilization is increasing.
In the near term, we remain cautiously optimistic based on the market fundamentals we see.
Starting with crude oil, global inventories are at or near 5-year averages and worldwide demand is projected at 96 million barrels per day for 2021, according to OPEC, a year-over-year increase of 6 million barrels per day.
Shale oil production is up slightly in the Permian Basin, but down everywhere else, and DUCs continue to decline.
E&P companies are currently focused on shareholder return and debt reduction and not on ramping up activities to significantly increase production volumes.
And backwardation is firmly in place, supported by declines in inventories and the action taken by the Saudis.
Moving on to refined products.
Inventories are largely normalized in the US, helped in part by the shutdowns after the winter storm.
US gasoline demand was up significantly in March and held through April.
Refining product demand in PADD II is back to 2019 levels, while PADD II gasoline and diesel inventory levels are both below 5-year averages.
Passenger count and TSA checkpoint check-ins are higher, but still down over 40% compared to pre-pandemic levels and the imports of gasoline and diesel are higher while exports of both products are lower than a year ago.
Looking at the current crack spreads and crude differentials.
Gasoline cracks are strong, but diesel cracks are low due to depressed jet fuel demand.
US refining throughput is down over 1 million barrels per day versus the 5-year average, although EIA reported utilization stats are distorted due to permanent refinement closures and reduced operable capacity.
And RINs remain high, driven by government inaction and regulatory uncertainty.
For the CVR refining system, we continue to run our refineries at max rates on a light crude diet.
Our gathering system rates are increasing with the addition of the Oklahoma pipeline system, which provides more neat barrels to our refineries and reduces our purchases of Cushing common.
We are maximizing the production of premium gasoline and the blending of biofuels, and we do not have any turnaround scheduled for 2021.
For the Fertilizer segment, the USDA is projecting 91 million acres of corn planted this year.
At current yield estimates, the inventory carryout for '21 could be the lowest since 2014.
Crude inventories are already very low, which has driven the prices higher.
The recent winter storm cleaned up excess fertilizer inventories in the Mid-Con as many nitrogen fertilizer plants had to shut in.
The spring run has been strong, and NOLA urea price is around 200 -- excuse me, $385 per ton with UAN at nearly $300 per ton.
Our net debt[Phonetic] prices have dramatically improved for nitrogen fertilizers by about 40% compared to the first quarter of 2021 levels.
We are working hard on 45Q tax credits for the Coffeyville facility, which could provide incremental cash for CVR Partners to delever, and we have a planned turnaround at Coffeyville in October.
Construction is under way at our Wynnewood renewable diesel unit, however, severe weather in February and delays in equipment deliveries, we are now projecting the unit to be online by the end of the third quarter.
Costs are also being affected by weather delays and material escalations.
We currently expect total cost of the project to be $135 million to $140 million.
We have made significant progress and have recently signed agreements for feedstock supply and terminalling, and we are in negotiations on product marketing.
Despite the recent increase in feedstock prices, higher prices for diesel and RINs have partially offset the increase in the renewable diesel feedstocks.
In addition, we now believe we'll be able to run the Wynnewood refinery at higher rates post renewable diesel conversion than we previously expected.
As we work toward the completion of Phase 1, we are close to selecting technology for a potential Phase 2, which would involve adding pretreatment capabilities for lower cost and lower CI feedstocks.
We are also starting a feasibility study for Phase 3 of developing a similar renewable diesel conversion project at Coffeyville and we are exploring the opportunities to add biomasses of feedstock to one or both of our refineries to aid in our sustainability efforts.
Looking at the second quarter of 2021, quarter-to-date metrics are as follows: Group 3 2-1-1 cracks have averaged $19.48 per barrel with RINs averaging $6.92 on a 2020 RVO basis.
The Brent-TI spread has averaged $3.62, with the Midland Cushing differential at $0.36 over WTI and the WTL differential at $0.14 per barrel under WTI, Cushing WTI and a WCS differential of $11.29 per barrel under WTI.
Ammonia prices have increased to over $600 a ton, while UAN prices are over $325 per ton.
As of yesterday, Group 3 2-1-1 cracks were $20.26 per barrel; Brent-TI was $3.07 And WCS was $11.90 under WTI.
On a 2020 RVO basis, RINs were approximately $7.83 per barrel.
The Supreme Court heard arguments in our appeal in the Tenth Circuit ruling last week.
We feel our attorney was very effective in expressing the intent of Congress that no small refinery should go bankrupt from the impact of RFS compliance and the small refineries like ours with a high diesel output, remote location, lack of meaningful retail and wholesale infrastructure are entitled to relief at any time.
We expect to hear a ruling over the next few months, after which EPA might finally provide a renewable volume obligation for 2021.
The EPA has also yet to rule on 2019 and 2020 small refinery exemptions.
The lack of action by EPA regarding these issues has likely contributed to the dramatic increase in RIN prices over the past year.
Fortunately, our consolidated RIN obligation should become much less of a burden with the completion of the Wynnewood renewable diesel unit later this year.
| q1 loss per share $0.39.
petroleum segment also recognized a q1 2021 derivative loss of $32 million, or $1.90 per total throughput barrel.
qtrly combined total throughput was approximately 186,000 barrels per day (bpd), compared to approximately 157,000 bpd.
|
As we begin the final year of The Walt Disney Company's first century, I am pleased to share our results for the first quarter of fiscal 2022, starting with the highlights.
Our adjusted earnings per share of $1.06 is up from $0.32 a year ago.
Our domestic parks and resorts achieved all-time revenue and operating income records despite the Omicron surge.
And our streaming services ended Q1 with 196.4 million total subscriptions after adding 17.4 million in the quarter, including 11.8 million Disney+ subscribers.
I'll share more about those items shortly.
But first, I want to talk about this unique moment in the history of The Walt Disney Company.
It is perhaps fitting that our 100th anniversary comes at a time of significant change for us and our industry.
In the midst of a global pandemic, fast-changing consumer expectations and a leadership transition, we reimagined our parks business, substantially increased our investment in content creation and executed a reorganization that will facilitate our ongoing transformation.
Each of those actions has helped set the stage for our second century.
And as we approach that remarkable milestone, I am filled with optimism.
We have the world's most creative storytelling engine, an unmatched collection of brands and franchises and an ability to tell stories that form deep emotional connections with audiences.
We have a portfolio of distribution platforms, including powerful and growing streaming services.
We have diverse revenue streams that span business models and industries, but which all are interconnected to create entertainment's most powerful synergy machine.
We have the country's top news organization and the most trusted brand for following sports and our theme parks continue to be the most magical places on Earth.
In short, our collection of assets and platforms, creative capabilities, and unique place in the cultural zeitgeist give me great confidence that we will continue to define entertainment for the next 100 years.
To carry through on that promise, we will be guided by three strategic pillars: storytelling excellence, innovation, and audience focus.
Storytelling excellence is, of course, dependent on having excellent storytellers.
I am thrilled to share that our legacy of being home to the most accomplished leaders in the industry will continue, as nearly all of our top creative executives have recently renewed, extended, or signed new contracts.
I could not be more excited to continue working with these creative powerhouses.
The quality content from our teams was recognized just yesterday with a fantastic 23 Oscar nominations, including three of the five best animated feature films: Pixar's Luca; Walt Disney Animation's Raya and the Last Dragon; and our newest franchise, Walt Disney Animation's Encanto, which received three nominations.
Summer of Soul was recognized in the best documentary category, and Nightmare Alley and West Side Story both received best picture nominations.
As you may have seen earlier today, we announced West Side Story will debut in most Disney+ markets on March 2, and we can't wait for our subscribers to see this incredible film.
In Q1, our studios took us deeper into the Marvel Cinematic Universe with Eternals and the Disney+ original series, Hawkeye, and returned us to that galaxy far, far away with another Disney+ original series, The Book of Boba Fett.
Our general entertainment teams also continued to produce programming of the highest quality.
In fact, last year, our general entertainment team produced nearly a quarter of the industry's best-reviewed shows.
And Q1 saw 10 of their shows achieve a 100% critic score on Rotten Tomatoes.
That includes Abbott Elementary, the first freshman broadcast comedy to earn the 100% Certified Fresh score since ABC's own Modern Family in 2009.
Our success in branded storytelling is, of course, no secret.
However, it's often lost that the depth, breadth, and quality of our general entertainment content is also a driving force behind the success of our streaming services.
In fact, six of the 10 most-watched programs across our services are general entertainment titles produced by our own team.
And general entertainment is an increasingly powerful driver of engagement in most of our international markets where such content is already included in our service under the Star brand.
Going forward, integrating more owned general entertainment into our services, especially Disney+, will be a priority.
In fact, just today, we added episodes of Grown-ish, Black-ish, and The Wonder Years to our domestic Disney+ service.
Rounding out our content focus is, of course, sports.
Sporting events continue to be the most powerful draw in television, accounting for 95 of the 100 most-watched live broadcast in 2021.
And ESPN once again set the bar this quarter with live games across each of our four major U.S. sports, including the revolutionary Monday Night with Peyton and Eli.
And I am pleased to announce that we have expanded our agreement with Peyton Manning and his Omaha Productions company to extend our relationship through the 2024 NFL season.
While multiplatform television and streaming will continue to be the foundation of sports coverage for the immediate future, we believe the opportunity for The Walt Disney Company goes well beyond these channels.
It extends to sports betting, gaming, and the metaverse.
In fact, that's what excites us, the opportunity to build a sports machine akin to our franchise flywheel that enables audiences to experience, connect with and become actively engaged with their favorite sporting events, stories, teams, and players.
Turning to distribution results.
The continued growth of our streaming services was certainly a standout.
Our success at Disney+ this quarter was not the result of any one item, but instead a combination of organic growth and powerful new content, our strategic decision to include the Disney bundle with all Hulu Live subscriptions, and new market launches.
The remainder of this fiscal year will feature compelling Disney+ originals from across our brands and franchises, beginning with Pixar's Turning Red and Marvel Studios' Moon Knight in March.
And the back half of FY '22 will feature a truly stunning array of content, including two Star Wars series: Andor and the highly anticipated Obi-Wan Kenobi, which I am excited to announce will premiere on May 25.
We'll debut two Marvel series, Ms. Marvel and She-Hulk; fresh new shorts from Disney Animation and Pixar featuring the worlds of Big Hero 6 and Cars; a live-action reimagining of the Disney classic Pinocchio, starring Tom Hanks as Geppetto; and one of the most anticipated sequels in some time, especially in the Chapek household, Hocus Pocus 2.
As I've said before, we continue to manage our services for the long term and maintain confidence in our guidance of 230 million to 260 million total paid Disney+ subscribers globally by the end of fiscal 2024.
Christine will provide more detail into our theatrical results.
However, I want to reiterate that we continue to see value in the moviegoing experience, especially for big franchise blockbusters.
And given the performance of titles like Spider-Man: No Way Home, we are looking forward to kicking off our summer slate with another Marvel franchise film, Doctor Strange in the Multiverse of Madness.
That said, audiences will be our North Star as we determine how our content is distributed.
And we do not subscribe to the belief that theatrical distribution is the only way to build a Disney franchise.
This quarter, audiences proved us right as Encanto became a phenomenon within days of its arrival on Disney+ after families' continued reluctance to return to theaters resulted in a muted theatrical performance.
With outstanding music from Lin-Manuel Miranda, it became the fastest title to cross 200 million hours viewed on Disney+ and took social media by storm.
People around the world expressed their fandom through their own content and conversation, and the Encanto hashtag has been viewed more than 11 billion times.
The soundtrack, which debuted at No.
197 on the Billboard 200 chart, reached No.
1 shortly after debuting on Disney+.
And eight of the film's songs hit the Hot 100 chart, including We Don't Talk About Bruno, which became the first Disney song to reach No.
1 since Aladdin's A Whole New World in 1993.
At the same time, sales of Encanto merchandise defied traditional post-holiday declines and actually increased following the film's release on Disney+ on Christmas Eve and guests at Disney California Adventure have loved seeing Mirabel in real life.
These results are exactly what you would expect from the launch of a new Disney franchise, and we are thrilled that Disney+ was the catalyst.
We are more confident than ever in this platform as a content service, a franchise engine, and as a venue for the next generation of Disney storytelling.
Finally, I could not be more pleased with the performance of our Parks, Experiences and Products segment, which posted its second best quarter of all time.
Over the last several years, we've transformed the guest experience by investing in new storytelling and groundbreaking technology, and the records at our domestic parks are the direct result of this investment.
From new franchise-based lands and attractions, to craveable food and beverage offerings, to must-have character merchandise, there is more great Disney storytelling infused into every aspect of a visit to our parks than ever before.
At the same time, we're giving guests new tools to personalize their visits and spend less time in line and more time having fun.
While we anticipated these products would be popular, we have been blown away by the reception.
In the quarter, more than a third of domestic park guests purchased either Genie+, Lightning Lane, or both.
That number rose to more than 50% during the holiday period.
While demand was strong throughout the quarter at both domestic sites, our reservation system enabled us to strategically manage attendance.
In fact, their stellar performance was achieved at lower attendance levels than 2019.
As we return to a more normalized environment, we look forward to more fully capitalizing on the extraordinary demand for our parks, along with the already realized yield benefits that took shape this quarter.
And we, of course, will continue to invest in the guest experience.
I am personally looking forward to Star Wars: Galactic Starcruiser at Walt Disney World, a two-night adventure into the most immersive Star Wars story ever created.
Later this summer, we will debut an innovative new roller coaster at Epcot, Guardians of the Galaxy: Cosmic Rewind, and open Avengers Campus at Disneyland Paris, where the iconic Quinjet landed a few weeks ago ahead of the resort's 30th-anniversary celebrations.
Our company is truly extraordinary, and I am honored to work with the most talented team in the industry to create the next generation of Disney stories and experiences through our focus on storytelling excellence, innovation, and our audience.
With that, I'll hand it over to Christine.
Excluding certain items, diluted earnings per share for the quarter were $1.06, an increase of $0.74 from the prior-year quarter.
Fiscal 2022 is off to a good start as evidenced by our first-quarter results and our continued progress toward more normalized operations across our businesses.
At parks, experiences, and products, operating income was up $2.6 billion year over year as all of our parks and resorts around the world were open for the entirety of the fiscal first quarter.
In the prior-year quarter, Walt Disney World Resort and Shanghai Disney Resort were open for the entire quarter, while Hong Kong Disneyland Resort and Disneyland Paris were each open for a limited number of weeks and Disneyland Resort was closed for the entire quarter.
At our domestic parks, we were very pleased with the strong levels of demand we saw from both Walt Disney World and Disneyland.
And as Bob mentioned, our reservation system has allowed us to strategically manage attendance.
Overall, attendance trends at our domestic parks continued to strengthen in the quarter with Walt Disney World and Disneyland Q1 attendance up double digits versus Q4, in part reflecting holiday seasonality.
Per capita spending at our domestic parks was up more than 40% versus fiscal first quarter 2019 driven by a more favorable guest and ticket mix, higher food, beverage and merchandise spending and contributions from Genie+ and Lightning Lane.
Putting these factors together, our domestic parks and resorts delivered Q1 revenue and operating income exceeding pre-pandemic levels even as we continued managing attendance to responsibly address ongoing COVID considerations.
Looking ahead to Q2, our demand pipeline for domestic guests at Walt Disney World and Disneyland remain strong, benefiting from our 50th-anniversary celebration at Walt Disney World and new attractions and experiences at both parks.
At international parks, a profitable first quarter reflected improving trends at Disneyland Paris.
We also saw improved results at Hong Kong Disneyland, although the resort is now temporarily closed in response to a resurgence in COVID cases in the region.
We expect international parks will continue to be impacted by COVID-related volatility for the remainder of Q2.
Moving on to our media and entertainment distribution segment.
First-quarter operating income decreased by more than $600 million versus the prior year as revenue growth across our lines of business was more than offset by higher programming and production costs.
Revenue growth in the quarter was primarily driven by increased subscription fees from our direct-to-consumer services.
We also delivered record advertising revenues for the segment as we continue to see strong advertiser demand for our live sports and streaming and digital businesses.
Turning to our results by line of business.
At linear networks, you may recall that we guided to a decrease in operating income of nearly $500 million for Q1 versus the prior year.
Operating income of $1.5 billion came in better than expected, primarily driven by our international channels, which I'll discuss in a minute.
At our domestic channels, both broadcasting and cable operating income decreased in the first quarter versus the prior year.
Lower results at broadcasting were impacted by an adverse comparison to prior year political advertising revenue at our owned television stations, as we noted in the guidance we gave last quarter.
At cable, the year-over-year decrease in operating income reflected higher programming and production costs and increased marketing spend, partially offset by increases in advertising and affiliate revenue.
Growth in advertising revenue was driven by ESPN as we benefited from the start of a normalized NBA calendar and increased viewership for football.
ESPN advertising revenue in the first quarter was up 14% versus the prior year and second quarter-to-date domestic cash advertising sales at ESPN are currently pacing up.
Total domestic affiliate revenue increased by 2% in the quarter.
This was primarily driven by six points of growth from higher rates, offset by a four-point decline due to a decrease in subscribers.
Operating income at our international channels decreased slightly versus the prior year.
These results came in more than $200 million better than our prior guidance primarily due to lower programming and production costs as well as better-than-expected advertising and affiliate revenues.
At direct-to-consumer, first-quarter operating results decreased by $127 million year over year, driven by higher losses at Disney+ and ESPN+, partially offset by improved results at Hulu.
I'll note that beginning this quarter, we are providing disclosure on our programming and production expenses by service as well as additional detail for Disney+ in our 10-Q.
Operating losses at Disney+ increased versus the prior year as growth in subscription revenue was more than offset by higher programming, technology, and marketing costs.
We ended the quarter with nearly 130 million global paid Disney+ subscribers, reflecting over 11 million net additions from Q4.
Taking a look at subscriber growth by region.
We added 4.1 million paid domestic Disney+ subscribers, including a benefit of approximately 2 million incremental subscribers from our strategic decision to include Disney+ and ESPN+ as part of a Hulu Live subscription.
In international markets, excluding Disney+ Hotstar, we added 5.1 million paid subscribers, primarily driven by growth in Asia Pacific and European markets.
I'll note that growth in Asia included the benefit of new market launches in South Korea, Taiwan, and Hong Kong in the quarter.
Finally, we were able to resume growth in Disney+ Hotstar markets with 2.6 million paid subscriber additions in the quarter.
Overall, we are pleased with Disney+ subscriber growth in the quarter and are looking forward to new market launches and a strong content slate later this year.
As I've previously shared, we don't anticipate that subscriber growth will necessarily be linear from quarter to quarter, and we continue to expect growth in the back half of the fiscal year to exceed growth in the first half.
At ESPN+, we ended the first quarter with over 21 million paid subscribers versus 17 million in Q4.
Results decreased compared to the prior year as growth in subscription revenue was more than offset by higher sports programming costs driven by the NHL and LaLiga.
And at Hulu, higher subscription revenues versus the prior year were partially offset by higher programming and production costs driven by increased affiliate fees for live TV.
Hulu ended the first quarter with 45.3 million paid subscribers, inclusive of 4.3 million subscribers to our Hulu Live digital MVPD service.
Moving on to content sales/licensing and other.
Results decreased in the first quarter versus the prior year to an operating loss of $98 million, driven by lower theatrical results and higher film impairments, partially offset by improved TV SVOD results.
As I noted last quarter, while theaters have generally reopened, we are still experiencing a prolonged recovery to theatrical exhibition, particularly for certain genres of films, including non-branded general entertainment and family focused animation.
This dynamic contributed to increased losses in the quarter as we released more titles in Q1 this year versus the prior year, resulting in lower theatrical results.
This was partially offset by income from our co-production of Spider-Man: No Way Home.
As we look ahead, we would like to give you some context around two items that may impact our second-quarter results.
First, as we continue to increase our investment in content, we expect programming and production costs at DMED to increase versus the prior year, primarily driven by direct-to-consumer and linear networks.
At direct-to-consumer, we expect programming and production expenses to increase by approximately $800 million to $1 billion, including programming fees for Hulu Live.
At linear networks, we expect programming and production expenses to increase by approximately $500 million, reflecting factors including COVID-related timing shifts.
We aired four additional NFL games at the start of the current quarter.
And as a reminder, the Academy Awards will be held in Q2 of this year, while it fell into Q3 of the prior year.
Second, at content sales/licensing and other, a difficult Q2 comparison to prior year TV and SVOD program sales is due in part to our strategic decision to hold more of our owned and produced content for our direct-to-consumer services.
As a result, we expect operating income to be adversely impacted by more than $200 million versus the prior-year quarter.
[Operator instructions] And with that, operator, we're ready for the first question.
| q1 earnings per share $1.06 excluding items.
11.8 million disney+ subscribers added in q1.
saw significant increase in total subscriptions across our streaming portfolio to 196.4 million.
as of quarter-end total hulu paid subscribers were 45.3 million.
at disney media and entertainment segment, our film and television productions have generally resumed.
we have seen disruptions of production activities depending on local circumstances.
in fiscal 2022, domestic parks and experiences are generally operating without significant mandatory covid-19-related restrictions.
qtrly lower results at disney+ reflected higher programming and production, marketing and technology costs.
have incurred, and will continue to incur, costs to address government regulations and safety of employees, guests and talent.
qtrly higher subscription revenue at disney+ was due to subscriber growth and increases in retail pricing.
|
We will also refer to certain non-GAAP measures.
We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance.
At this point, it is my pleasure to turn things over to Philippe Krakowsky.
I hope everyone is keeping well.
As usual, I'll start with a high level view of our performance in the quarter.
Ellen will then provide additional details.
I'll conclude with updates on key developments at our agencies, and then we'll follow that with Q&A.
They are the principal reason we can report such strong results again this quarter.
Our people are delivering insight and execution required for the complex integration of creativity, technology and data at scale as marketers across industry sectors need in order to accelerate their business transformation journeys.
This kind of work is helping set a standard for our industry and further build on IPG's record of industry outperformance and margin expansion.
As we've moved through September and now into October, it's also been rewarding to begin welcoming our people back to office settings and to see many of our teams together again in the places where creativity, collaboration and culture are ultimately rooted and regularly renewed.
Turning to our results in the quarter, our net organic revenue growth in the third quarter was 15%.
That's against the third quarter of 2020 when, as you will all recall, our organic change was negative 3.7% due to the impact of the pandemic.
It's also important to note that our 2-year organic increase was 10.7% relative to the third quarter of 2019, which is a strong result.
Compared to 2020, our growth in the quarter was again broad based by region of the world, discipline as well as client sector.
Organic growth was 14.7% in the U.S. and it ranged between 11% and 20% in international regions.
Both of our operating segments also grew at double-digit rates.
Our IAN segment increased 14.4% organically with all major agencies contributing high single to double-digit percentage increases.
We were led by media, data and technology, R/GA and Huge as well as by MullenLowe, McCann and FCB highlighted by notable contributions from their Healthcare and Advertising disciplines.
At our DXTRA segment, organic growth was 18.6% reflecting double-digit increases across each of our DXTRA agencies and furthering the rebound from the sharp impact of the pandemic last year on our sports and entertainment as well as experiential businesses.
Looking at client sectors, the picture is also one of balanced growth with nearly every one of our major client sectors increasing at a double-digit percentage rate, led by the auto sector and other sector with government and industrials and the tech and telecom retail and healthcare sectors.
Turning to profitability and expenses.
Our results again demonstrate outstanding focus and execution by our operating teams even as we continue to invest to support areas of accelerating growth and to enhance our offerings.
Third quarter net income was $239.9 million as reported.
Our adjusted EBITDA was $369.5 million and our margin of adjusted EBITDA before restructuring was 16.3%, compared with 16.2% a year ago and 14.7% in the third quarter of 2019.
There were several factors worth noting within those comparisons.
We have a solid operating leverage on our expenses for base payroll as we continue to see the structural benefits of the strategic cost actions taken last year.
Those are reflected in our base payroll as well as our occupancy expense.
To-date, our very strong top-line growth is also outpacing the associated hiring and therefore our expense for temporary labor increased from a year ago.
Our travel and related expenses continue to track at low levels but still were somewhat higher than last year.
As we look ahead, T&E expense will pick up over the remainder of the year.
Our expense accrual for employee performance based incentive compensation however increased as a percentage of net revenue which is a direct result of our strong operating performance.
Third quarter diluted earnings per share was $0.60 as reported and was $0.63 as adjusted for the after-tax expense for the amortization of acquired intangibles and other items.
In sum, our quarter as well as our year-to-date speak to strong financial performance across the key metrics of growth, EBITA and earnings per share.
Our growth reflects the cyclical economic recovery as well as the important structural current that favor the kinds of higher order expertise with which we're well resourced.
The work we're doing solves for the increasingly complex world faced by our clients in marketing and media environment that's defined by a very rapid rate of change.
This is a validation of our long-term strategic focus on building offerings that help clients integrate brand experience across all consumer touchpoints, improve their capacity to apply data in the way their business goes to market and capitalize on the benefits of technology and digital channels.
Going back a number of years, we've anticipated transformational opportunities of this type of environment.
Other important drivers of our continued success, our ability to deliver fully integrated solutions through our open architecture model and our emphasis on strong agency brands and best industry talent so as to deliver breakthrough creative ideas and content.
We've also fostered a culture that respects the individual, is transparent with respect to clients and is accountable when it comes to data privacy and media responsibility.
Turning to our outlook, with our seasonally important fourth quarter still ahead, we're pleased to increase our financial performance objectives.
We now expect that we can deliver organic growth for the year of approximately 11% which is ahead of the 9% to 10% range we had previously indicated.
With growth at that higher level and given our strong results through the 9-months, we would therefore expect to achieve adjusted EBITA margin of approximately 16.8% which is an increase of 80 basis points over the level that we had previously shared with you.
Our outlook is based on expectations of a reasonably steady course of public health and global economic recovery.
We begin the fourth quarter well positioned and the strong operating momentum and the tone of the business remains solid, as we had into the year and into holiday season.
As such, we see 2021 as another year of strong value creation for all of our stakeholders.
And on that note, I'll now hand over the call to Ellen for a more in-depth view of our results.
I hope that everyone is safe and healthy.
Adjusted EBITDA before a small restructuring adjustment was $369.5 million and margin was 16.3%.
Diluted earnings per share was $0.60 as reported and $0.63 as adjusted for the after-tax impact of the amortization of acquired intangibles, a small restructuring adjustment and the net gain from the disposition of non-strategic businesses.
On October 1st, following the conclusion of the third quarter, we repaid our $500 million 3.75% senior notes from cash-on-hand further deleveraging our balance sheet.
Turning to Slide 3, you'll see our P&L for the quarter.
I'll cover revenue and operating expenses in detail in the slides that follow.
Turning to the third quarter revenue on Slide 4.
Our net revenue in the quarter was $2.26 billion, an increase of $307.1 million from a year ago.
Compared to Q3 2020, the impact of the change of exchange rates was positive 1.1% with the U.S. dollar weaker than a year ago in all world regions, with the exception of LatAm.
Net divestitures were negative 40 basis points.
Our net organic revenue increase was 15% which brings us to 12% organic growth for the nine months.
At the bottom of this slide, we break out segment revenue in the quarter.
Our IAN segment grew 14.4% organically.
We had notably strong growth across our offerings in media, data and tech, R/GA, Huge, McCann Worldgroup, FCB driven by health and the MullenLowe Group.
At IPG DXTRA, organic growth was 18.6%, which reflects double-digit growth across public relations, experiential, sports and entertainment and branding disciplines.
Moving on to Slide 5, which is a look at our organic revenue change by region.
In the U.S., which was 65% of our net revenue in the quarter, organic growth was 14.7%.
The organic revenue decreased a year ago was 2.4%.
Year-on-year performance was notably strong across both our IAN and DXTRA segments and at almost all of our agencies, led by media, data and tech, FCB, MullenLowe, McCann, Weber and Jack Morton.
International markets were 35% of our net revenue in the quarter and increased 15.4% organically.
You'll recall that the same markets decreased 6% a year ago.
The U.K. increased 13.3% organically, led by our offerings in media, data and tech, DXTRA, McCann and R/GA.
Continental Europe grew 11.8%.
Among our largest national markets, we had notably strong growth in Germany, Spain, Italy and France.
There were a number of operating highlights in the region led by media, data and tech, DXTRA, and R/GA.
Asia-Pac increased 17.4% organically, led by growth across most national markets notably, Australia, Singapore, India, the Philippines, China and Japan.
Our organic growth in LatAm was 20.3% with exceptional results in Brazil, Argentina, Colombia and Chile.
Our Other Markets group, which consists of Canada, the Middle East and Africa grew 17.1% organically, led by notably strong performance in Canada.
Moving on to Slide 6 and operating expenses in the quarter.
Our fully adjusted EBITDA margin was 16.3% compared with 16.2% a year ago and 14.7% in the third quarter of 2019.
We continue to see efficiencies in a number of different expense categories as we had in this year's first half and these were both structural and variable.
In the structural category, we are seeing the benefit of the strategic restructuring actions, which we initiated in the second quarter last year and continue to execute over the back half of 2020.
As we've called up previously, we also had a sharp decrease in certain variable operating expenses from pre-COVID levels.
I would call out specifically travel and related expenses, which while increased from the third quarter of a year ago were still well below their level in 2019.
As you can see on this slide, our ratio of total salaries and related expense as a percentage of net revenue was 66.8% compared with 65% in last year's third quarter.
The increase was due to higher expenses in two categories.
Our approval for performance-based incentive compensation was 5.8% of net revenue and our expense for temporary labor, which was 5% of net revenue in the quarter.
We had strong leverage on our expense for base payroll, benefits and tax, which was 53.9% of third quarter net revenue, which reflects the benefit of our restructuring actions and the fact of the pace of hiring lagged our strong revenue growth, which has been the case in past economic expansions.
At quarter-end, total worldwide head count was approximately 54,600, an 8% increase from a year ago.
We have added net 4500 people year-to-date to support our growth.
Also, on this slide, our office and other direct expense decreased as a percent of net revenue by 250 basis points to 13.3%.
That reflects lower occupancy expense mainly due to the restructuring of our real estate.
The ratio was 5% of net revenue.
We also reduced all other office and other direct expense by 120 basis points compared to last year, which reflects lower expense for bad debt and leverage as a result of our growth.
Our SG&A expense was 1.4% of net revenue with the increase from a year ago due to higher unallocated performance-based incentive expense and increased employee insurance, which was at a very low level last year.
On Slide 7, we present detail on adjustments to our reported third quarter results in order to provide greater clarity and a picture of comparable performance.
This begins on the left hand side of the page with our reported results and steps through to adjusted EBITDA and our adjusted diluted EPS.
Our expense for the amortization of acquired intangibles in the second column was $21.5 million.
The restructuring refinement in the quarter was a benefit of $3.5 million dollars.
To be clear, this is an adjustment to estimates of the 2020 restructuring program.
Below operating expenses in column 4, we had a gain due to the disposition of certain non-strategic businesses, which was $1.7 million in the quarter.
At the front portion of the slide, you can see the after-tax impact per diluted share of these adjustments, was $0.03 per share, which bridges our diluted earnings per share as reported at $0.60 to adjusted earnings of $0.63 per diluted share.
On Slide 8, we turn to cash flow in the quarter.
Cash from operations was $390.2 million compared to $689.3 million a year ago.
We generated $79.6 million from working capital compared to $376.8 million last year, which was unusually strong seasonal result.
Investing activities is $72 million in the quarter, mainly for capex $61.3 million.
Financing activities used $153.3 million mainly for our dividend.
Our net increase in cash for the quarter was a $152.5 million.
Slide 9 is the current portion of our balance sheet.
We ended the quarter with $2.5 billion of cash and equivalents.
Under current liabilities, the current portion of long-term debt refers to our $500 million, 3.75% senior notes, which have matured since the balance sheet date and we repaid with cash on hand.
Slide 10 depicts the maturities of our outstanding debt.
Again, this includes the October 1st maturity.
Our next maturity is $250 million to April 2024 and following that, there is nothing until 2028.
In summary, on Slide 11.
Our teams continue to execute at a high level in an unprecedented environment.
I would like to reiterate our pride in and gratitude for the efforts of our people.
The strength of our balance sheet and liquidity means that we remain well positioned, both financially and commercially.
The combination of our exceptionally talented people and a balanced portfolio of offerings and capabilities continues to set the standard for growth in our industry.
The strategic steps we've taken over the long-term have positioned IPG as a high value business partner to our clients.
We're able to combine the power of creativity and narrative storytelling with the benefits of data and technology in order to deliver growth for marketers across a broad range of sectors.
These strategic steps are evident in our strong results and position us well going forward.
By helping clients to better understand audiences and to engage with them with greater precision and accountability, we can help company succeed the digital economy.
Today, marketers are responsible for increasing business innovation, building new content platforms and e-commerce platforms as well as adopting emerging tech and leveraging data all while complying with an evolving data privacy landscape.
Our clients are also at the forefront for addressing societal issues and corporate purpose on behalf of their companies and brands.
As a partner, we're helping them solve all of these challenges.
With our ability to deliver complex integrations focused on business results and outcomes, our ability to help marketers proactively address these issues is further assisted by our intentional focus on ESG priorities as core business imperatives.
That's why we've been focused in working on ESG for many years at IPG.
We continue to build on a strong industry record in DEI initiatives which are integral to nurturing the highest quality and most representative perspectives, insights and creative voices across our company.
More recently, we've launched our first formal human rights policy and our work with clients around social issues includes campaigns focused on LGBTQ+ rights, mental health awareness, ways in which we can remove implicit bias from core datasets and also use data to increase the health of our planet as well as sustainable consumption models.
With respect to climate, we're now measuring our total greenhouse gas emissions around the world.
We're committed to setting a Science-based target and to reaching net zero carbon across our business by 2040.
We've also agreed to source a 100% renewable electricity by 2030 for our entire portfolio.
Now turning to the highlights of performance from across that portfolio during the quarter, a key sector that continue to show strength for us is healthcare.
As you know, IPG has significant operations in healthcare marketing totaling approximately a quarter of our total revenue.
This includes specialized global healthcare networks as well as significant healthcare activity and client relationships at our media and public relations operations and within some of our U.S. independents.
As health and wellness continue to be a top concern for people companies and governments around the world, we've seen an increased need for sound healthcare information to be delivered at speed in ways that are highly personal, culturally relevant as well as respectful of privacy regulations.
Within the healthcare sector as well as across other client sectors, our ability to deliver open architecture solutions will continue to drive success for our company.
We have deep experience providing customized, integrated client service models to many of our largest client partners and we continue to perform well and winning new business on this sort of work especially in pitches that leverage the IPG data stack as a key part of the strategy.
This past quarter for example, Morgan Stanley and E*Trade named Mediahub as media agency of record following a highly competitive review.
Data strategy was a key component of the brief.
For this reason our customer intelligence company, Acxiom was placed front and center in our winning proposal.
The Mediahub team is leading media strategy, planning and activation in the U.S. leveraging Acxiom's consumer data and expertise to fuel tightly targeted and effective communication solutions.
In media brands, we continue to see a high degree of engagement with many of the world's most sophisticated marketers across our two largest brands, UM and Initiative.
During the quarter, Initiative U.S. won Adweek's prestigious Media Agency Of the Year honor for 2021.
Last year at this time within media brands, we launched Reprise commerce, the global specialty e-commerce offering and since then, e-commerce revenue within that unit has increased significantly as we've held clients build out holistic approaches to e-commerce including e-retail, supply chain and warehousing, marketplaces and direct-to-consumer programs.
There's never been a more important time to connect the e-commerce opportunity with the full power of clients media and marketing investments.
In addition, we can create and deploy consistent cross channel experiences that dynamically adapt to consumer needs and goals in real-time.
With the expertise as a key part of the news last week that the owner of Werther's Original candy business, Storck USA had selected UM as it's media agency of record.
UM takes on all strategy, planning, buying and analytics duties, including the implementation of Storck's Shopper commerce activity.
Our data and technology offerings continue to be key drivers of performance for us as well, featuring an all major open architecture and new business activity of significant scale.
This month marks the third anniversary of Acxiom becoming part of IPG.
During the third quarter, Acxiom continued to post strong performance and to win in the marketplace bringing in major new clients from the media, retail and financial services sector.
Most recently, a top-10 financial services company engaged Acxiom to build their unified enterprise data layer which again shows the strength and depth of Acxiom's technology expertise.
During Q3, Kinesso launched -- we are calling the Kinesso Intelligence Identity product also called as Kii and this is a new identity solution that works across the open web as well as the walled gardens and is already live with clients across a broad range of verticals.
Along with IPG Mediabrands, the Trade Desk is among the first media partners using Kii and the launch comes at a particularly important moment as brands and agencies work to create and bolster privacy first identity solutions that can assure addressability as third-party cookies and mobile ad ideas begin to be phased out.
Kii can match our brands first party CRM data and map it to key identifiers significantly increasing match rates and reducing the need for third-party onboarders.
When it comes to the strength of our brands in the creative advertising space, McCann, FCB and MullenLowe continued to distinguish themselves this quarter.
McCann Worldgroup was named Global Network of the Year at the 2021 Gerety awards which recognizes the best creative communications from the female perspective.
Also notable McCann Worldgroup named a new President and Global Chief Creative Officer who joins us from Nike where he served in senior brand marketing and creative leadership roles for more than 20 years, most recently leading Nike's men's brands globally.
During his tenure at Nike, he was responsible for many of the world's best known and most iconic campaigns across a range of marketing disciplines and channels.
At FCB, the agency at Chicago office was ranked as the top creative agency in North America in the Lion's Creativity Report.
In that same report, FCB was ranked among the top networks in the world and FCB was also named North American Agency of the Year at the 2021 New York Festival Awards.
MullenLowe was named the second most effective agency at the recent U.S. Effie Awards.
And MullenLowe Group was named the number 2 most effective network globally, in both cases punching well above its weight against larger competitors.
During the quarter, the agency won the TJ Maxx creative account and just this week Mediahub won 3 Adweek Media Plan of the Year's awards as well as seeing it's U.K. office when global media duties [Phonetic] for Farfetch which is a luxury fashion e-commerce brand.
R/GA launched what they're calling a direct to avatar capability and that's going to create virtual stories for brands within metaverse platforms and that really stakes out new territory in direct to consumer sales.
On the growth front, R/GA added projects for digital forward partners like Tonal, Slack, CBS and Roku.
Huge also launched a new commerce offering which we call the experienced stack of the future, and that's a tool that consolidates various elements of SaaS into an integrated growth solutions for brands.
I think we're also going to see the agency's newly appointed CEO to further his plans to infuse data into Huge's core offerings.
IPG's DXTRA growth in the quarter was broad based and it benefited from the return of live events.
Jack Morton won new client assignments with Amazon and Twitch and along with Octagon Sports and Entertainment was listed among event marketers ranking of the top 100 event agencies of 2021.
Audio social media app Clubhouse added Golin as its global agency, lead agency.
Weber was named the Supplier of the Year by GM and security software company McAfee also named Weber Shandwick its global agency of record to help redefine the firm as a consumer brand.
Lastly, Weber launched a media security center in partnership with Blackbird AI to address emerging information bridge and this is an offering that's built to offer solutions to what business leaders say is a really leading reputational issue, which is the spread of misinformation and disinformation.
During the quarter, we also saw continued positive momentum at our U.S. independent agencies.
The Martin Agency won Hasbro's Nerf brand of products.
Carmichael Lynch was named Strategy and Creative Lead for H&R Block where he will take on responsibility for strategy, creative and social media as well as public relations and Deutsch LA added energy drinks brand, A SHOC to its roster.
All in, we are in a positive position from a net new business standpoint for the year and our new business pipeline continues to be active.
As it's typical at this time, we don't have full visibility and project work as we head into the fourth quarter which will include the crucial holiday shopping season.
Now in line with the growth we're seeing across much of the portfolio, our companies are adding staff with the requisite contemporary skillsets as well as expertise.
So hiring is yet to fully keep pace with a very strong growth we've seen to date this year.
We began seeing travel restrictions lifted in certain key markets as infection rates decline and we fully continue to use technology and practices developed during the pandemic to reduce travel and other carbon intensive parts of our business where and as appropriate but we believe that some of what we can call standard cost of doing business will return in Q4 and in larger measure in 2022.
Earlier on the call, we shared with you our perspective on the full year and our updated expectation that we will deliver approximately 11% organic growth and adjusted EBITDA margin of approximately 16.8% for the full year 2021.
That view is predicated as we indicated on the assumption that will continue to be a reasonably steady course of macro recovery and we're very proud to have delivered a very strong 9-months thus far this year, on top of the most challenging comps in the industry.
Current performance, combined with the continued execution of our long-term strategy should continue to be significant drivers for sustained value creation for all of our stakeholders.
We're committed to sound financial fundamentals as well as continuing to grow our dividend as we've consistently done, including through the pandemic and returning to our share repurchase program also remains a priority.
As we turn our focus on planning for the upcoming year, we will of course, keep you updated on our progress on that front.
We're confident as well that the investments in talent and capabilities we continue to make, position IPG well for the future.
As Ellen said, this is an unprecedented time, but we have a highly relevant and differentiated set of offerings underpinned by a sound financial foundation and a strong balance sheet.
| compname posts q3 adjusted earnings per share $0.63.
q3 adjusted earnings per share $0.63.
q3 net revenue was $2.26 billion, an increase of 15.7% from a year ago.
q3 diluted earnings per share was $0.60.
interpublic group of companies - upgrades expectation for fy 2021 organic growth of approx 11.0% and adjusted ebita margin of approximately 16.8%.
expect that we can deliver fy organic growth for the year of approximately 11%.
expect to achieve fy adjusted ebita margin of approximately 16.8%.
|
Such risk factors are set forth in the company's SEC filings.
We appreciate you joining us for our fourth quarter and full year 2021 results.
It has been a pleasure getting to know many of you during my time as CFO and COO, and I look forward to our ongoing relationships in my new role.
The theatrical exhibition industry made huge strides in its recovery throughout 2021, culminating in an exceptional fourth quarter, during which North American box office crossed the $2 billion mark for the first time since the onset of the pandemic.
New film releases that led the charge included Venom: Let There Be Carnage; Eternals; Ghostbusters: Afterlife; No Time To Die; and of course, the record-setting Spider-Man: No Way Home that now represents the industry's third highest-grossing film in history.
It's worth noting that all five of these films had an exclusive theatrical window.
Cinemark contributed to these box office results in a big way.
On the release of Venom, we set a record for the largest October opening weekend ever for a single film, pre, and post pandemic.
3 for the industry, Spider-Man has now become our No.
1 highest-grossing film of all time, driven by our sustained outperformance on this title.
The fourth quarter's box office success underscores enduring consumer appetite and demand to experience great films in an immersive, shared cinematic environment.
Over 48 million guests visited our global Cinemark theaters in the fourth quarter, and that consumer enthusiasm translated into strong results.
On a worldwide basis, our fourth quarter attendance grew 57% compared to 3Q '21.
Once again, Cinemark surpassed North American industry box office recovery this past quarter, over-indexing by more than 700 basis points when comparing 4Q '21 box office results against 4Q '19.
Our Latin American admissions also outperformed their corresponding industry results by a similar degree.
These significant global attendance and box office results flowed through to our bottom line.
Adjusted EBITDA in the fourth quarter was positive $140 million, and that sizable 4Q result drove positive adjusted EBITDA of $80 million for the full year.
Moreover, exclusive of one-time benefits, we generated positive cash flow during the fourth quarter in both the U.S. and Latin America, another meaningful milestone in our company's recovery from COVID-19.
I'd like to commend our incredible global team for their outstanding planning, execution, and dedication to deliver these tremendous results.
Our Cinemark team has faced monumental challenges during the pandemic.
And what they have accomplished and what they continue to accomplish through their endless perseverance, resourcefulness, strategic thinking and optimism is nothing short of astounding.
While strong film content was certainly a key component of our fourth quarter success, exceptional operating performance and the ongoing execution of our strategic initiatives were also significant factors.
As we look ahead, our overarching focus remains unchanged, and that is to maximize attendance in box office while actively pursuing ancillary revenue opportunities.
Over the course of 2021, the world made tremendous progress combating the ongoing effects of the pandemic.
Although for the time being, the impact of its lingering presence, particularly on our industry and business, still remains.
As a result, as we move forward in 2022, our priorities will continue to focus on: first, effectively navigating the ongoing pandemic; second, fully reigniting theatrical exhibition; and third, positioning our company for ongoing success in the evolving media landscape.
With regard to our first priority of effectively navigating the pandemic, I'm exceptionally proud of the accomplishments our Cinemark team has achieved over the past two years.
These accomplishments include swift and appropriate actions that were taken to preserve cash, minimize expenses and improve our liquidity profile, as well as refine our operating practices, such as streamlining processes, driving new efficiencies, and strengthening operating hours management.
We defined, implemented, and have consistently executed a wide range of new health and safety protocols to protect our guests, communities, and employees.
Additionally, we effectively reopened our entire global circuit and remained open while dealing with frequent fluctuations in content supply and government restrictions.
Our team also continues to skillfully manage through the challenging labor and supply chain dynamics, just to name a few.
We have provided examples of the meaningful impact these actions have had throughout the pandemic during prior calls, and their benefits clearly continued in the fourth quarter, as demonstrated by our sustained market share advances compared to 2019, guest satisfaction scores averaging 90%, and as I mentioned a moment ago, positive adjusted EBITDA and cash flow.
That said, our work navigating the pandemic is not done yet.
At the end of 2021 and throughout most of the first quarter to date, our industry, alongside many others, was affected by another surging COVID headwind brought upon by the Omicron variant.
Fortunately, however, we are encouraged by the recent decline in new cases around the world, as well as commentary by a growing number of health experts, who believe the virus may be transitioning from a pandemic to an endemic.
with regard to moviegoing, as well as consumer sentiment, which has improved to 75% of moviegoers, indicating they are comfortable returning to theaters today and over 80% within the next month.
Theatrical exhibition's ongoing recovery remains highly contingent on the state of the virus, government restrictions, and consumer sentiment, and all of these factors are now moving in a favorable direction.
At the same time we have been navigating through the challenges of the pandemic, we have also been actively working to reignite theatrical moviegoing, our second key priority.
First and foremost, this effort has included actively collaborating with our studio partners to bring new compelling first-run film content back into our theaters on a steadier release cadence.
While health concerns and availability of content have clearly been two of the largest challenges during the pandemic, so too has been the inconsistent film calendar with large gaps between commercial releases.
While Omicron caused another blip in the return to a more normalized release pattern, we are highly optimistic about the film slate for the rest of the year.
New releases this past weekend, uncharted and dog, both exceeded projections, and we expect industry box office will continue to ramp and accelerate with the release of the Batman next week, followed by a long list of additional highly anticipated titles throughout the year, including Doctor Strange in the Multiverse of Madness; Top Gun: Maverick; Jurassic World Dominion; Lightyear; Minions: The Rise of Gru; Thor: Love and Thunder; Black Adam; Aquaman and the Lost Kingdom; Black Panther: Wakanda Forever; and the long-waited -- awaited next installment of Avatar.
And these are just a handful of examples of the franchise films that are lined up for 2022, not to mention the broad range of additional family, drama, comedy, and other genre films that are interspersed throughout the year, providing varied offerings for all audiences.
Furthermore, I'm pleased to report that the majority of films being released theatrically this year will include an exclusive window, with most larger and commercial titles maintaining a 45-day window.
Demonstrated yet again in the fourth quarter of 2021 and this past weekend, a theatrical window continues to produce bigger events, larger cultural moments, and increased box office results with reduced piracy.
It also continues to provide a platform that establishes stronger emotional connections with content, unlike any other distribution channel.
And those connections lead to more sizable brands, franchises, and promotional value for all other windows.
Great films are an essential part of reigniting theatrical moviegoing, and so too is compelling marketing that increases consumer awareness, sentiment, and ticket sales.
To that end, we will continue to lean heavily into a myriad of digital, social, on-screen, and loyalty strategies throughout 2022 to target a wider range of consumers, increase moviegoing frequency and grow our Cinemark audiences.
Over the past few years, we have significantly enhanced the scale of our digital marketing capabilities and reach.
We are now directly connected to more than 20 million addressable guests across our global circuit.
And by way of these connections and the comprehensive omnichannel network we have built, we are consistently delivering billions of impressions each month via social media engagement, personalized emails, and earned media stories showcasing the benefits of the Cinemark moviegoing experience.
These marketing actions have not only been helping to revive moviegoing, but have also increased loyalty, which we've witnessed in the ongoing strength of our market share results and Movie Club program.
After proactively pausing Movie Club memberships at the onset of the pandemic, we fully reactivated the program in the second half of 2021, and we are thrilled to report that we have already returned to new monthly membership gains.
During the fourth quarter, we added 40,000 new Movie Club members, bringing our membership base to within 1% of its pre-pandemic level at approximately 940,000 members.
We continue to receive tremendous feedback about our unique transaction-based subscription program that allows members to roll over unused monthly credits, share credits with friends and family, and receive a meaningful 20% discount on concessions.
Member feedback has also been resoundingly positive with regard to Movie Club Platinum, a new earned premium tier that we launched in September.
By the end of the year, more than 100,000 members achieved this heightened status, which they will enjoy throughout the entirety of 2022.
And that brings us to our third key priority, which is positioning our company for ongoing success in the evolving media landscape.
Examples include our Luxury Lounger recliner seats in over 65% of our U.S. footprint, nearly 300 premium large-format XD and IMAX auditoriums worldwide, immersive D-BOX motion seating across 250 of our theaters, the best sight and sound technology in the industry, and enhanced food and beverage offerings throughout 75% of our global circuit.
Furthermore, we continue to simplify and enhance our transactional processes for tickets and concessions, including our recently deployed Snacks in a Tap online ordering platform that allows guests to purchase food and beverage ahead of time and simply pick up their order upon arrival to our theaters or have it delivered directly to their seats.
These amenities, innovations, and capabilities provide us considerable tailwind as we sort through evolving opportunities and implications driven by the pandemic and near-term shifts in the distribution landscape.
As we concentrate on positioning Cinemark for ongoing success within this dynamic environment, we are focused on five primary strategies.
First is providing our guests an extraordinary experience.
Doing so is fundamental to our business, and Cinemark has a solid reputation and long history of delivering this objective.
That said, we are investing time, energy, and resources to take the experience we provide our guests to the next level.
Our goal is to be top of mind when consumers think about world-class guest service, quality, value, ease, and a premium entertainment destination.
Second is building audiences with an increased focus on attracting a wider range of consumers by expanding the variety of content we offer, as well as utilizing our industry-leading marketing capabilities to drive consumer demand and conversion, as described a moment ago.
Third is growing sources of revenue by creating incremental sales opportunities, such as continuing to expand food and beverage offerings, honing recently implemented e-commerce and theater design initiatives, optimizing pricing, testing new experiential entertainment concepts, and enhancing Cinemark partnerships and brand tie-ins.
Fourth is streamlining processes, which essentially means executing the aforementioned strategies as efficiently as possible, and includes initiatives, such as workforce management, continuous improvement, and utilizing advanced tools, practices, and platforms to free up time spent on administrative tasks and increase focus on our guests, teams, and productivity.
And fifth is optimizing our footprint.
This strategy involves actively assessing our circuit, as well as domestic and international markets, to determine where it is most advantageous to grow, recalibrate and strengthen our circuit to deliver sustained long-term returns.
We believe these areas of focus are best suited to steer us through expected ongoing fluctuations within the media landscape in the near term and position us for continued success over the long haul.
In summary, while our recovery from the pandemic is still ongoing, we are highly encouraged by recent improvements in the state of the virus and associated consumer sentiment.
Fourth quarter attendance demonstrated that consumer enthusiasm for the shared, immersive theatrical moviegoing experience remains strong, and films maintain the ability to become larger than life and generate significant box office results even in the current environment.
As we look ahead, we remain optimistic about the future of theatrical moviegoing and Cinemark.
We are working diligently to position ourselves for ongoing success in the evolving media landscape and to deliver long-term value for our shareholders, guests, communities, and employees.
With that, I will now pass the call to Melissa, who will provide further information about our fourth quarter financial results.
I'm honored to be part of the Cinemark team, and I'm greatly looking forward to meeting the investment community in the near future.
As Sean discussed, we made significant progress in terms of the overall recovery of our industry and our company throughout 2021, and especially in the fourth quarter, which is reflected in our financial results.
Our worldwide attendance was 48.1 million patrons for the fourth quarter.
We delivered $666.7 million of total revenue, $139.4 million of adjusted EBITDA, and $208 million of operating cash flow.
Notably, these worldwide results were driven by robust performance in both our domestic and international segments, with each segment generating positive adjusted EBITDA in the quarter and reporting adjusted EBITDA margins in excess of 20%.
Taking a closer look at our U.S. operations in the fourth quarter, our attendance rebounded to 31.2 million patrons, representing a 45% increase over the third quarter and underscoring the recovery of theatrical moviegoing.
We were able to service these guests with operating hours that were essentially flat to last quarter and approximately 20% below that of pre-COVID, which speaks volumes to the operational efficiencies and technological advances we've achieved since the onset of the pandemic.
Our domestic admissions revenue rebounded to $287.3 million in the fourth quarter on an average ticket price of $9.21.
Our average ticket price continues to be elevated due to three key factors: reduced operating hours resulting in fewer matinee and weekday showtimes; strategic pricing actions; and a higher concentration of premium large-format box office.
box office was generated by our premium large formats.
This is 400 basis points higher compared with the fourth quarter of 2019.
The growth in the average ticket price was partially offset by revenue deferrals related to our loyalty program ramping back up.
concessions revenue was $207.8 million in the fourth quarter and reached 90% of fourth quarter 2019 levels, with an all-time high per cap of $6.66.
Our food and beverage per cap remained above $6 throughout 2021 due to a few factors, including heightened indulgence in food and beverage consumption, particularly within our core concession categories; a mix of moviegoers that tends to skew higher in-purchase incidents; and our operating hours, which, while reduced, remain concentrated in time frames that are more conducive to concession purchases.
Domestic other revenue also benefited from the uptick in attendance and increased more than 50% quarter over quarter to $56.6 million, driven by volume-related increases in screen ads and transaction fees.
Altogether, fourth quarter total domestic revenue was $551.7 million, with positive adjusted EBITDA of $115.9 million and an adjusted EBITDA margin of 21%.
Our international segment also experienced a substantial recovery in the fourth quarter, exceeding our expectations.
All of our theaters were operating throughout the fourth quarter, albeit with certain government-imposed restrictions on operating hours and capacity.
We were able to grow our attendance 84% quarter over quarter to 16.9 million patrons, given a lineup of films that resonated extremely well with the Latin demographics, including Encanto, which is a story based in Colombia; Venom: Let There Be Carnage; Eternals; and of course, the global phenomenon, Spider-Man: No Way Home.
We delivered $115 million of total international revenue in the fourth quarter, including $57.6 million of admissions revenue, $40.4 million in concessions revenue, and $17 million of other revenue.
International adjusted EBITDA was $23.5 million for the fourth quarter, with an adjusted EBITDA margin of 20.4%.
This was our first quarter of positive international adjusted EBITDA since the onset of the pandemic.
Turning to global expenses.
Film rental and advertising expense was 57.5% of admissions revenue, driven primarily by a higher concentration of larger, more successful new film releases with an exclusive theatrical window.
We also increased our investment in marketing to help reignite moviegoing, strengthen loyalty and drive market share, which also flow through this line item.
Concession costs were 17.6% of concession revenue and were up 40 basis points from last quarter.
Supply chain constraints were amplified in the fourth quarter as attendance rebounded.
We experienced product shortages and price increases on certain concession inventory, and we took appropriate actions during the quarter to mitigate much of these impacts.
Fourth quarter global salaries and wages were $83.7 million and increased 24% quarter over quarter as we hired incremental employees to service the expected surge in attendance.
Like most industries, we faced a series of labor challenges, including wage rate inflation and staffing shortages, which we were able to partially offset by streamlining our workforce management processes.
Facility lease expense was $79.2 million and increased 15.1% quarter over quarter.
While largely fixed, lease expense will fluctuate with percentage rent, and common area maintenance increases as volume rebounds.
Worldwide utilities and other expense was $90.8 million and increased 11% quarter over quarter, driven by variable costs, such as credit card fees that grew in line with volumes and higher utility expenses due to expanded operating hours, particularly for our international segment.
Finally, G&A for the quarter was $49.3 million and increased 27.7% quarter over quarter due to investments in cloud-based software and higher consulting costs, legal fees, and stock-based compensation.
Capital expenditures during the quarter were $38.3 million, including $13.9 million for new build projects that had been committed to prior to the pandemic, and $24.4 million for investments to maintain or enhance our existing theaters, such as laser projectors.
And rounding out our fourth quarter results, we generated net income attributable to Cinemark Holdings, Inc. of $5.7 million, resulting in earnings per share of $0.05, another metric that was positive for the first time since the pandemic and represents another milestone in our recovery during the quarter.
As we look forward, we expect 2022 to be a recovery year.
We remain optimistic regarding the full year, particularly with a strong film slate.
That said, our first quarter results will be impacted by the lighter film release calendar due to the Omicron variant, which may lead to negative cash flow during the first quarter.
However, we expect to generate positive cash flow for the full year 2022.
On the cost side, like most other companies in the service industry, we are experiencing inflationary increases due to supply chain constraints and the challenging labor market.
We will continue to mitigate these impacts, wherever possible, in 2022.
Some steps we are taking include implementing incremental labor productivity initiatives, negotiating with an expanded set of vendors, considering alternative concession products, and evaluating strategic price increases.
Turning to our expectations around capital expenditures, while still well below our pre-pandemic ranges, we are beginning to ramp up our investments in our theaters in 2022 and expect to spend approximately $125 million on capital expenditures.
We expect to continue to reap the benefits of our consistent investments in proactively maintaining and enhancing our theaters over the years, which has enabled us to scale back capital expenditures in the near term without hindering our asset quality or guest satisfaction.
In closing, while our recovery from the pandemic is ongoing, we remain highly optimistic regarding the future of theatrical moviegoing and the long-term prospects for our industry, particularly for Cinemark.
We are innovating and evolving in this new operating environment, pursuing what is in the best long-term interest of our key stakeholders to further secure Cinemark's position as an industry leader.
| q4 earnings per share $0.05.
q4 revenue rose 579 percent to $666.7 million.
|
We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Danion Fielding, our Chief Financial Officer.
Similar to prior quarters in 2020, we will provide an update on our business in the context of the ongoing COVID-19 pandemic and also provide our quarterly review of our portfolio and financial statements.
Regarding COVID-19, I am pleased to report that our third quarter results are further evidence of the stability of our triple-net lease rents and growth platform.
Our portfolio of convenience stores, gas stations and other automotive assets produced another strong quarter of rent collections, operating performance and growth at Getty.
I am especially proud of our Company as we achieved our results during a difficult time for the overall US economy and related challenges to many aspects of the retail, real estate sector.
The entire Getty team is working hard to continue what has been a very strong for our Company.
We are proud of our accomplishments year-to-date and expect to continue executing on all of our initiatives for the remainder of 2020.
Turning to our results, we benefited from the stability of our triple-net lease rents and our active an accretive acquisition program.
As a result, our third quarter revenues from rental properties increased by more than 4% to $37.2 million, and our AFFO per share by more than 9% to $0.47 per share.
The success of our acquisition strategy year-to-date has been a key contributor to our earnings growth, including transactions that closed just after the third quarter ended.
Getty has acquired 32 properties for approximately $140 million so far this year.
These high quality assets are located in numerous markets across the country and include portfolios of both convenience and gas assets as well as car washes.
While the COVID-19 pandemic cause disruptions in transaction activity across the commercial real estate sector, Getty has been able to maintain momentum and close on several opportunities which we had underwritten earlier in the year.
In addition, as Mark will mention, we completed our redevelopment project with 7-Eleven and the Dallas-Fort Worth MSA for a remodeled convenience and gas location, bringing our total number of completed projects to 2018, since the inception of our redevelopment.
Let me now share some additional details on Getty's performance during the pandemic.
For the third quarter, the performance of the convenience and gas and other automotive asset classes in general and our portfolio more specifically was strong.
Our collections have continued to improve and in the quarter, we collected 98% of our rent and mortgage payments and agreed to a small number of short-term deferrals for rent and mortgage payments.
Perhaps more importantly, we received substantially all of the deferred rent and mortgage payments, which were due to be repaid during the third quarter.
Looking ahead to the fourth quarter, as of today, our collections rate currently remains at 98% for the month of October and we are continuing to collect substantially all the COVID-related rent and mortgage deferrals that were due to be repaid this month.
Although uncertainty remains regarding the forward impact of COVID-19 to the broader economy, we are encouraged by the strength exhibited by our tenants and assets since the beginning of the pandemic.
We will continue to be vigilant in monitoring the health of our tenants as we believe the severity of the COVID-19 pandemic on the US economy will continue to impact consumer and retail activity generally and therefore could negatively affect Getty's rent collections and financial results.
The operating environment for our tenants remains stressed as many tenants continue to adjust their operations to reflect ongoing health and safety challenges.
Despite these challenges, most of our properties and tenants have performed well during this difficult time.
Nationally, fuel volumes continue to recover and are now down 17% year-over-year compared to the 50% decline we saw at the height of the pandemic impact during the second quarter.
In addition, fuel margins remain elevated on a national basis from comparable periods in 2019, meaning that on average operators are making more money on a cents per gallon basis.
The net impact of fuel gross profit remains highly regional with certain of our tenants experiencing year-over-year declines and others reporting increases in annual fuel gross profit.
The convenience store side of the business has generally performed well across the Board during the pandemic, with the majority of our tenants reporting that results are slightly ahead of the prior year's performance.
To touch on our balance sheet and liquidity position, we ended the quarter with $58 million of cash on hand and $190 million of availability on our revolving credit facility, with some of the cash on hand being used to fund acquisitions we have already closed during the fourth quarter.
We believe we have sufficient access to capital at this point in time to execute on our business plan.
Turning to our dividend, given our performance, I am pleased to report that our Board approved an increase of 5.4% to $0.39 per share in our quarterly dividend.
This represents the seventh straight year with a dividend increase.
Our Board believes this annual increase is appropriate as it maintains a stable payout ratio and is tied to the Company's growth over the past year.
Looking ahead, while the situation remains fluid, we are continuing to effectively navigate this uncertain environment.
We believe that our execution of our strategic objectives over the last several years, the essential nature of our tenants businesses, the net lease structure of our leases and our stable balance sheet all position us well.
Furthermore, we believe there will continue to be opportunities for Getty to grow its business.
We are confident that our targeted investment strategy, which focuses on the largely internet resistant service oriented convenience and gas and other automotive sectors across metropolitan markets in this country will continue to create value for our shareholders over the long term.
We remain committed to an active approach in managing our portfolio of net leased assets, expanding our portfolio through acquisitions and selective redevelopment projects.
We are confident in our ability to continue to successfully execute on our strategic objectives over the long term.
This approach and focus on these critical components should result in driving additional shareholder value as we move through the remainder of 2020 and beyond.
Before turning the call to Mark, let me just address our recently announced executive transition.
Danion Fielding, our CFO, is going to be leaving the Getty team for personal reasons.
Danion led his team and the Company's finances, and was the key part of Getty's success.
We expect that Danion will leave Getty before year end, and we wish his family and him well in his future endeavors.
The search is under way and we anticipate a smooth transition of the CFO role.
In terms of our investment activities, for the third quarter and the first two weeks of October, we are very active in the transaction market.
During the quarter, we invested $36.1 million for the acquisition of nine properties.
Subsequent to the end of the quarter, we invested an additional $36.6 million for the acquisition of eight properties.
The majority of our completed acquisitions during the third quarter come from an acquisition leaseback transaction with a subsidiary of Go Car Wash.
The properties acquired are subject to a unitary triple-net lease with the 15 year based term and multiple renewal options.
These properties are located within San Antonio MSA.
Properties we acquired have an average lot size of 2 acres and an average tunnel length of more than 160 feet, both of which we believe, enhance the quality and diversity of our portfolio.
We invested $28 million at closing and expect to generate a cash yield that is in line with our historic acquisition cap rate range.
Additionally, we closed on the acquisition of two newly constructed car wash locations in North Carolina and Ohio.
The sites are subject to a 15 year triple net lease with Zips Car Wash.
Getty's aggregate initial cash yield on our second quarter acquisitions was 7.2%.
Subsequent to the quarter end, we completed a sale leaseback with Fikes Wholesale, one of the leading independent convenience store operators in the Southern United States.
In the transaction, Getty acquired Fikes [Phonetic] properties for $28.6 million.
The properties acquired are subject to a unitary triple-net lease with a 15 year base term and multiple renewal options.
The properties are located throughout the state of Texas.
The properties we acquired have an average lot size of 2.7 acres and an average store size in excess of 5,300 square feet which reflect that the assets we acquired have all the attributes of today's modern full service convenience stores.
Our initial cash yield is in line with our historical acquisition cap rate range.
We also closed on the acquisition of two car wash locations in the Kansas City and San Antonio MSA.
The sites were added to our 15 year triple net lease with Go Car Wash.
We remain highly committed to growing our portfolio in the convenience and gas sector as well as our other oil-related categories including car washes and automotive service centers.
While the COVID-19 pandemic continues to impact the overall transaction market, business conditions for our target asset classes have stabilized and we are seeing an increase in the transaction activity in the marketplace.
As a result, we expect that we will remain active in the underwriting and acquiring and inquiring assets.
Getty will remain committed to its core principles of acquiring high quality real estate and partnering with strong tenants and our target asset classes.
Moving to our redevelopment platform.
For the quarter, we invested approximately $0.6 million in both completed projects and sites which are in progress.
In the third quarter, we return one redevelopment project back to our net lease portfolio.
Specifically in July, a project was returned to the portfolio in the Dallas-Fort Worth MSA where we leased a site to 7-Eleven for the state-of-the-art convenience and gas location.
Our total investment in this project is $0.8 million and we expect to generate a return on our investment of 18%.
In terms of redevelopment leasing, we ended the quarter with 12 signed leases which includes seven active projects and five signed leases and properties, which are currently subject to triple-net leases, but which have not yet been recaptured from the current tenants.
All these projects are continuing to advance through the redevelopment process.
Again, I note that due to the impact of the COVID-19 pandemic, we continue to experience delays in certain of our projects as contractor suppliers, municipalities deal with restrictions on business and regulatory activities, social distancing requirements and other impediments to normal function.
In total, we have invested approximately $1.5 million in the 12 redevelopment projects in our pipeline.
We expect to have one additional rent commencement in Q4 2020.
From a capital investment perspective, we expect that these 12 projects will require total investment by Getty of $7.9 million and will generate incremental returns to the Company in excess of where we could have invested these funds in the acquisition market today.
We remain committed to optimizing our portfolio and continue to anticipate redevelopment opportunities over the next five years, possibly involving between 5% and 10% of our current portfolio with targeted unlevered -- unlevered redevelopment program yields of greater than 10%.
Turning to dispositions, we sold one non-core property during the third quarter, realizing proceeds of approximately $0.2 million.
We also exited one property, which we previously leased from a third -- of third-party landlord.
As we look ahead, we continue to selectively dispose of properties where we have made the determination that the property is no longer competitive as a C&G location and did not have redevelopment potential.
As a result of our activity, we ended the quarter with 939 net lease properties, seven active redevelopment sites and eight vacant properties.
Our weighted average lease term is approximately 10 years and our overall occupancy excluding active redevelopments increased to 99.2%.
For the third quarter, our total revenues were $37.9 million, an increase of 4% over the prior year's quarter and our rental income, which excludes tenant reimbursement and interest on notes and mortgages receivable also grew 5.3% to $31.9 million.
Our growth and rental income continues to be driven by rent escalated in our leases plus additional rent from recently completed acquisitions and redevelopment projects.
During the third quarter of 2020, we benefited from a reduction in both property costs and environmental expenses offset by an increase in general and administrative expenses due to increases in employee-related expenses and legal and other professional fees.
Our FFO for the quarter was $20.8 million or $0.48 per share as compared to $19.1 million or $0.46 per share for the prior year's quarter.
Our AFFO for the quarter was $20.2 million as compared to $18.1 million in the prior year's quarter.
On a per share basis, our AFFO was $0.47, up 9% from $0.43 in the prior year.
Turning to the balance sheet and capital markets activities.
We ended the third quarter 2020 with $560 million of total borrowings, which includes a $110 million under our credit agreement and $450 million of long-term fixed rate debt.
Our weighted average borrowing cost is 4.3%.
The weighted average maturity of our debt is 4.5 years with 80% of our debt being fixed rate and our earliest debt maturity remains at $100 million Series A which matures in February 2021.
We are in the process of refinancing this upcoming debt maturity and will provide an update at the particular time.
As of today, we have $190 million of undrawn capacity on our revolving credit facility, which can be used to fund operations or for growth over the near to medium term.
At quarter end, our debt to total capitalization stood at 34%.
Our debt to total asset value is 41% and our net debt to EBITDA ratio was 4.9 times.
Additionally, we utilized our ATM program in the quarter and efficiently raised permanent capital.
For the quarter, we raised $27 million at an average price of $29.41 per share, which helped to fund our growth and maintain our low leverage profile.
We still have $40 million available to us to fund under our existing at-the-market program.
As we look ahead and think about our capital needs.
We will remain committed to maintaining a well-laddered and flexible capital structure.
On environmental liability ended the quarter at $49 million, down $1.7 million for the year.
For the quarter, Company's net environmental remediation spending was approximately $1.4 million [Phonetic].
While our tenants in Getty have fared well so far through the COVID-19 pandemic, uncertainties persist with the rest of possible reimplementation of shelter-in-place restrictions and the length and depth of economic impact to the US economy and businesses.
We withdrew our 2020 AFFO per share guidance range in conjunction with our first quarter 2020 results, and given the continued uncertainty related to the COVID-19 pandemic, we are not reinstating guidance at this time.
| getty realty increases quarterly dividend by 5% to $0.39 per common share.
getty realty corp - increases quarterly dividend by 5% to $0.39 per common share.
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I'm here with James Quincey, our chairman and chief executive officer; and John Murphy, our chief financial officer.
Before we begin, please note that we've posted schedules under the Financial Information tab in the Investors section of our company website at www.
You can also find schedules in the same section of our website that provide an analysis of gross and operating margins.
Please limit yourself to one question.
If you have more than one, please ask your most pressing question first and then reenter the queue.
In what remains a highly dynamic environment, our first-quarter results show promising signs that a broader recovery is on the horizon.
We're encouraged by early results in markets where mobility is on the rise.
Then I'll hand over the call to John to discuss the financial details of the quarter and how we'll continue to deliver on our objectives over the course of the year.
In the first quarter, we positioned our business for recovery while executing against our emerging stronger agenda, equipping our system to win.
At the start of the year, pandemic-related lockdowns were still impacting many markets.
We moved quickly as conditions changed, improving along the way, and getting better at managing each wave and its resulting lockdowns.
During the quarter, we saw mobility increase in some parts of the world where lockdowns eased and vaccinations accelerated.
Leveraging our learnings, we drove sequential improvement in our business throughout the quarter.
And while we saw mid-single-digit volume declines through mid-February, trends have improved since then.
We're pleased to say that March marked a return to volume levels seen in March of 2019 prior to the pandemic.
We continue to see ongoing strength in at-home channels, offset by away-from-home trends which have improved sequentially but remain pressured relative to pre-pandemic levels.
We're working with our customers and bottling partners to sustain at-home momentum and capture improving away-from-home demand.
For example, in Latin America, our Prospera program with our bottlers helps the traditional trade thrive through assistance with their marketing efforts, resulting in outperformance in this critical channel.
In Great Britain, we launched Open, a business accelerator program to support pubs, bars, and cafes.
In North America, our use of mail bundles is driving incidents in pickup and delivery transactions with food service customers.
In 2020, we gained underlying share in both at-home and away-from-home channels, offset by negative channel mix.
This continues to be the dynamic affecting our share year to date.
Through our ongoing initiatives and as away-from-home demand improves over the course of the year, we'll seek to build on these wins in 2021.
There are clear opportunities to reaccelerate share positions as the recovery plays out and we'll invest to drive momentum with focus and flexibility.
In market at the forefront of the recovery, we've seen early signs that our actions taken during the pandemic are helping us outpace recovery.
It's important to note that the path to a full recovery remains asynchronous around the world.
Many markets haven't yet turned a corner and are still managing through the restrictions.
Looking around the world, in Asia Pacific, China continues to lead the recovery with volume in the first quarter ahead of 2019 results and foot traffic almost back to pre-pandemic levels.
Strong performance in India and Southwest Asia was driven by effective marketing across brands, affordable solutions, and distribution expansion with 250,000 new outlets and 45% more new coolers.
Despite the unexpected state of emergency earlier in the year, Japan expands its successful RGM initiatives geographically and across brands to help drive improvements later in the quarter.
In EMEA, vaccine rollout in Europe has been slower than anticipated and many countries have been impacted by ongoing lockdowns.
In Eurasia and the Middle East, brand Coke recruited 4.4 million consumers through affordability packages and a focus on at-home occasions.
New marketing campaigns drove improvement in flavored Sparkling soft drinks, and Fuze Tea reached an all-time-high value share in Turkey.
In Africa, mass vaccination is expected to take longer than the developed markets.
And despite ongoing volatility, Africa worked closely with our bottlers to deliver volume growth that by stepped-up execution through cooler placement and affordability packs like returnable glass bottles.
In North America, the year is off to a good start.
Ongoing strength in at-home channels was driven by core brands in our Sparkling portfolio, as well as Simply, fairlife, and Gold Peak all with encouraging results.
Away-from-home began to approve in March as vaccinations and mobility picked up.
In Latin America, we leveraged our core brands, digital initiatives, and refill packages to recover ahead of the economy and our industry despite ongoing restrictions.
While from away-from-home continues to be impacted by lockdowns, we are expanding the at-home consumption opportunity, leveraging consumer dynamics like indulgence of single-serve multi-packs.
Global Ventures continue to be impacted by lockdowns in the U.K.
But as restrictions loosen, we're focusing on driving digital engagement and traffic back to the cost of the stores.
Cost of express machines continue to deliver strong performance.
Turning our transformation, our operating units are up and running and also a very good start in the rollout of our new model.
Across markets, our newly networked organization has us working more collaboratively with the overall enterprise in mind.
Our operating unit and category leadership teams are working together to identify the most promising combinations across the industry based on economic outlook, consumer trends, channel dynamics, and execution imperatives.
We're using more disciplined resource allocation to capture the biggest opportunities, while making ongoing portfolio decisions faster and at scale.
We're focused on our streamlined growth portfolio, actively and thoughtfully transitioning brands to more powerful trademarks using a phased approach to bring the consumer with us on the journey.
And we're maximizing shelf space with new product launches and higher-velocity products to drive higher-quality growth.
As we discussed at CAGNY, we're focusing on what we do best: marketing our loved brands in more efficient and effective ways.
campaign kicked off in markets from Asia to Africa to Latin America, the message is resonating with consumers with impressions, views, and engagement levels above last year, and intent-to-purchase metrics showing promising signs.
This campaign aligns with our transition to a more sustainable clear bottle, which is important in helping us achieve our World Without Waste goals.
Our media and creative agency reviews are progressing and we're also executing more targeted opportunities in addition to the big strategic shifts.
For instance, we've taken a scaled, digitized approach to buying trade materials resulting in up to 15% cost reduction and improved user experience, all while offering more consistent, better quality, and sustainable alternatives.
We've extended this pool buying opportunity to our bottlers, many of whom are already on board to share the benefits systemwide.
Our more disciplined innovation approach is yielding results as we balance big bets with intelligent experimentation.
Using our networked approach, we are scaling our best innovations quickly and effectively, while being disciplined with those that don't get the traction required for further investment.
Local experiments like Aquarius with functional benefits and Ayataka Cafe Matcha Latte in Japan, Fanta's exciting mystery flavor innovation in Europe, and package innovations like the 13.2-ounce recycled PET bottle in North America could all be lifted and shifted globally over time.
It's similar to what we're doing this year with our half-flavored Sparkling water.
Our big bets for 2021 include ongoing work to scale our coffee platform under Costa.
We're expanding ready-to-drink coffee in China and taking a portfolio approach to complement our powerful Georgia coffee brand in Japan.
We're also rolling out an enhanced formula and package designed for Coca-Cola Zero Sugar this month in Europe, in Latin America, and across markets globally later this year.
The improved recipe brings its taste even close to that of the iconic Coca-Cola original taste.
This was influenced by consumer insight and our focus on constant improvement.
And despite this enormous success, Coca-Cola Zero sugar still represents a relatively small percentage of the trademark.
And we continue to respond to consumer desires for lower-sugar options and the rollout will be supported by global, occasion-based marketing campaign.
Finally, it's early days but we're excited to come back and report on our expanded experimentation in flavored alcoholic beverages with Topo Chico hard seltzer in Latin America, Europe, and most recently, the U.S.
We also continue to rapidly digitize our ecosystem.
For example, a champ born in South Africa engages with consumers on social media to increase away-from-home transactions.
In China, we've used digital campaigns to harness consumer data to drive traffic and incidents leading to incremental growth.
We're using machine learning and AI tools to stay on top of a rapidly evolving consumer trends and identify emerging needs.
Our dedicated digital transformation structure is leading to strong online to offline growth.
We've seen e-commerce share gains in a key advanced markets like North America, Japan, and Great Britain.
And in markets like Turkey, where the channel is still developing with more than tripled sales and gained almost 10 points of share versus last year.
As always, we're supporting these initiatives with strong revenue growth management and execution.
Through RGM, we continue to capture at-home occasions with multi-pack options in both premium and affordable segments, while expanding distribution of smaller packaging like our sleek cans in China.
And we have affordability plays like our successful refillables in Latin America, the Philippines, and now Africa.
As part of our new organization, we're dedicating more resources to RGM, continuing to raise the bar to even higher standards.
In many markets, we're working with our bottling partners to optimize cooler placement, driving incremental volume through outstanding customer service, our cooler productivity, and innovation.
Our bottling partners are executing strongly.
And together, we are working on initiatives across the enterprise to identify more efficiencies.
We're operating in a networked way, leveraging our platform services organization to scale our collective data, marketing, digital, and supply chain capabilities.
Our system continues to evolve as shown by the pending combination of Coca-Cola European partners and Coca-Cola Amatil.
I'm especially proud of how we are delivering on our purpose as a company.
Every action is guided by our ambition to create a more sustainable business and better shared future that makes a difference in people's lives, our communities, and the planet.
Throughout the pandemic, we've focused on helping communities through relief funds from the company and the Coca-Cola Foundation.
In this next phase, we are supporting vaccination efforts in regions where distribution has been slower.
For instance, in Brazil, our system has partnered with the country's Ministry of Health to co-create a vaccine awareness campaign.
We're using our network to deliver 700,000 doses with vaccine information to more than 350,000 mom-and-pop stores.
Tomorrow, we'll release our 2020 business and ESG report, where we will highlight last year's progress.
While 2020 was a milestone year in terms of meeting and exceeding some previous goals like women's empowerment and global water replenishment, we continue to work toward an even more ambitious agenda.
This includes our 2025 and 2030 packaging goals, our 2030 climate goal, and our new 2030 water security strategy with more details to come later this year.
In conclusion, we're optimistic about the future and bullish about our ability to continue to deliver on the objectives we laid out at the height of the crisis: more consumers, more share, better system economics, and a positive stakeholder impact.
Today, I will highlight our first-quarter performance and go over our top-line and earnings guidance, which we are reiterating.
Then I'll provide a progress update on working capital, our ability to manage through the current commodity environment, and other factors that may impact our outlook.
2021 is off to a good start, with the quarter showing steady sequential monthly improvement.
We're leveraging our learnings and strategic initiatives from 2020 and leaning into growth in a thoughtful way.
Our Q1 organic revenue was up 6%, driven by concentrate shipments up 5% and price/mix improvement of 1%.
While shipments benefited from certain timing impacts and the five additional days this quarter versus last year, unit case volume was flat versus the toughest quarterly compare of 2020, and March volume was in line with 2019 levels, largely driven by strength in Asia Pacific.
Comparable gross margins, although still down year over year, improved sequentially, driven by less pressure from channel and package mix.
While currency was still somewhat of a drag, it was less of a headwind than prior quarters.
Comparable operating margin expanded through ongoing disciplined cost management.
We continue to reintroduce marketing spend in a targeted way, particularly as we ramp up investments in markets that are seeing recovery.
First-quarter comparable earnings per share of $0.55 is an increase of 8% year over year and was driven by top-line growth, margin improvement, and some contribution from equity income, offset by currency headwinds.
Regarding our ongoing tax case with the IRS, there are no material updates since our last report.
Our decisions and actions from last year certainly were not easy, but we are seeing the results of our efforts start to come through, and our organization is embracing the changes as we move forward into the recovery phase.
We stayed very focused on driving a healthy top line, and we remain on a journey to maximize returns, including strong cash flow generation.
We never relented on our cash flow goals and, indeed, have had an even sharper focus on managing capital spend and working capital.
Since we embarked on a journey toward best-in-class working capital performance, we've made great strides in extending our payment terms, generating a working capital improvement of more than $1 billion over two years.
In the same vein, we are implementing accounts receivables factoring programs, which are rolling out across a number of markets, and also looking at initiatives to better manage inventory days.
At the center of these efforts is a robust digitization and automation agenda.
In addition, and you've heard us talk conceptually about the network model, this is a great example of the network in action.
And when you put the right people from different parts of the organization against key initiatives, it delivers a step-change in performance.
Last quarter, we said that despite a rising commodity environment, we expected a relatively benign impact in 2021 given our hedged positions.
While this continues to be the case, we're closely monitoring upward pressure in some inputs such as high-fructose corn syrup, PET, metals, and other packaging materials as they impact us, as well as our bottling partners.
Given the environment, we'll continue to benefit from revenue growth management initiatives.
Through an intelligently diverse price pack architecture, we can produce a range of options that meet the needs of consumers across the income spectrum while also capturing value for customers.
2020 provided great learnings on how to be more logical and data-driven in our promotions, and we'll continue to be purposeful in our approach, driven by the consumer and the strength of our brands.
We'll also continue to pursue productivity across the supply chain, pushing all levers at our disposal.
And as we noted in our release, we now expect currency to be a tailwind of approximately 1% to 2% to the top line and approximately 2% to 3% to comparable earnings per share in 2021 based on current spot rates and our hedge positions.
For the full year, we now expect an underlying effective tax rate of 19.1%.
Putting it all together, our quarterly performance and the momentum we saw in March give us confidence in our ability to achieve our 2021 guidance.
We expect high single-digit organic revenue growth and high single-digit to low double-digit growth in comparable earnings per share.
We still expect recovery to be asynchronous and to see signs of a return to normal in more markets later in 2021.
We are preparing our end-to-end supply chain for stronger demand and will fuel the momentum in recovering markets as they emerge from the pandemic by accelerating investments in our brands.
There's no doubt that uncertainty remains.
Europe continues to see challenges.
Many countries in regions like Latin America and Africa expect further waves and slower vaccine distribution.
And India is seeing a surge in cases and responding with localized lockdowns.
But as we begin to lap the most difficult periods from last year, we feel good about our position and our ability to navigate the environment as a company and as a system.
Based on the lessons we've learned and the agility provided by our new network organization, we remain confident that our actions and the progress we've made will enable us to deliver 2021 earnings at or above 2019 levels.
With that, operator, we are ready to take questions.
| q1 non-gaap earnings per share $0.55.
qtrly global unit case volume was even.
qtrly net revenues grew 5%.
qtrly organic revenues (non-gaap) grew 6%.
qtrly net revenues grew 5% to $9.0 billion.
for q2, comparable net revenues (non-gaap) are expected to include an approximate 3% to 4% currency tailwind.
remain confident in co's full year guidance.
for q2, comparable earnings per share (non-gaap) is expected to include an approximate 5% to 6% currency tailwind.
through q1, volume trends steadily improved each month, driven by recovery in markets where coronavirus-related uncertainty has abated.
path to recovery remains asynchronous around world.
coca-cola - for fy comparable net revs (non-gaap), sees a 1% to 2% currency tailwind based on current rates and including impact of hedged positions.
march volume was back to 2019 levels, with growth in at-home channels being offset by pressure in away-from-home channels.
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Now, turning to our business.
In reviewing 2020, prior to the pandemic, ACC was off to an excellent start.
After delivering nearly 5% earnings growth in 2019, the Q1 delivered NOI that exceeded our expectations for each of the three months.
Additionally, our velocity for fall 2020 lease-up was over 3% ahead of the prior year with rental rate growth trending well relative to targets.
New supply for fall 2021 was also near decade lows.
The fundamentals in our sector were strong and all facets of our business were exceeding our internal expectations.
With COVID- 19 being declared a pandemic, the student housing sector like most businesses faced unprecedented and unanticipated disruptions.
The U.S. Higher Education System was dramatically impacted by the governmental shelter in-place orders put in place across the country.
Over the last 3 quarters of 2020, we responded by attempting to do the right things on behalf of all of our stakeholders, while continuing to provide a central housing services to students all across America, all the while attempting to mitigate long term negative impacts to our business and providing thought leadership in action to help universities return to a sense of normalcy.
Despite the negative financial impacts to our business in 2020, we were encouraged by students' strong desire to be physically present in their college environment, demonstrating that the desired educational experience is much more than simply attending a classroom lecture.
Ultimately fall 2020 enrollment levels at Tier 1 universities we serve remained relatively consistent with 2019, and most students returned to their college towns for the fall term, regardless of whether their university was holding in-person classes or providing them online.
This was evidenced by the fact that our portfolio achieved approximately 90% occupancy for fall of 2020 with the sector as a whole being over 88% occupied.
As we look forward, 2021 will be a year of transition on the path back to normalcy.
While the virus continues to have a lingering impact on the student housing sector, we are seeing signs of improvement.
During the fourth quarter, we saw an increase in collection rates, a diminished necessity for on-campus rent refunds and a reduction in request for rent relief under our resident hardship program.
We also had strong demand for spring leases signing over 3600 new leases commencing in the spring term, 50% more in the prior year.
While the current transitionary environment causes us to believe there could be softness in our ability to backfill May-ending leases at historical levels and that we may not return our summer camp and conference business to normal levels.
We are cautiously optimistic regarding the 2021-2022 academic year commencing this fall.
In discussions with our university partners, the vast majority are indicating that admission applications are up over the last year and many are projecting strong enrollment growth for fall 2021.
There is also incrementally positive news in terms of universities planning to return to in-person classes for fall of 2021 as exemplified by the recent announcements by both the University of California and Cal State Systems as well as several other major universities who have been fully online in the current academic year.
With regard to their statements, they will be returning to in-person classes.
Also, Arizona State University, our largest university partner recently announced plans for full availability of in-person classes in fall of 2021 and encouraged students to register early and at this time, they expect to reinstate their on-campus housing expectation for first year students.
Although, we cannot yet give you a reasonably accurate estimate of fall 2021 occupancy levels, these are certainly encouraging signs.
As we fully expected and consistent with what has been reported by our private peers and in third party market research, across the industry pre-leasing for the 2021-2022 academic year is tracking behind the traditional historical pace.
We did see accelerating leasing velocity in the weeks after students return from winter break and there will be significant acceleration in April, May and June, which we expect to compare favorably relative to those months last year when leasing activity dramatically dropped off during the height of the pandemic.
Finally, the new supply picture continues to provide tailwind for the sector as a whole as fall 2021 deliveries are flat compared to 2020, which as I mentioned earlier was at the lowest amount of new supply in the past decade.
Turning to our ongoing development at Walt Disney World.
As we discussed last quarter, with the current suspension of the Disney College Program, we did commence in earnest [Phonetic] marketing and leasing of the project at Disney cast members and employees of operating partners in late Q4.
With the holiday season in the start of the New Year, being a slow leasing period for conventional multifamily, we have signed 88 leases to date and anticipate the velocity will accelerate through the remainder of the year as cast members' current leases expire.
The original pre-COVID proforma projected Disney College Program to deliver approximately $14 million in operating income after ground rent in 2021.
However, based on a standard multifamily leasing stabilization trend of 25 to 100 leases per month, we now expect 2021 to have a net operating loss after ground rent between $2.7 million and $5.4 million.
As Disney brings the DCP intern program back online, occupancy will increase more rapidly than the current conventional market leasing velocity.
Disney continues to be fully committed to the full reopening of Walt Disney World as soon as possible, evidenced by their continued investment in the parks and resorts, including the continued construction of Flamingo Village Crossing Town Center, a 200,000 square feet mixed used entertainment center set to open in fall of 2021 across the street from our community.
And as Disney discussed on their recent earnings call, they have significant demand for attendance at the parks and are very pleased with future bookings, and as they stated at this point, it's only a matter of the rate of public vaccination that will allow them to start to see a return to normal levels of operations at the parks with corresponding increases in cast members and ultimately DCP participants.
Although the timing and velocity of the reinstatement of the Disney College Program continues to be influx at this time, we currently expect the completed project to be fully stabilized and pro forma occupancy and rents within 12 to 24 months of the originally anticipated date of May 2023 at its originally targeted stabilized yield of 6.8%.
Now looking to transactional activity in the student housing sector.
As with many sectors, 2020 volumes were down significantly, with CBRE reporting student housing transactions decreasing approximately 20% versus 2019.
While deep interest from capital sources looking to invest in the sector held cap rates in line with pre-COVID levels, pricing has been lower as valuations have been impacted by COVID's disruption to historical revenues and NOIs.
Based on our discussions with the investment community, we expect transaction volume to remain low in the first three quarters of 2021, with potential improvement later in the year, as lease-ups are finalized for the upcoming 2021-2022 academic year.
As it relates to our capital recycling plants for '21, we will continue to monitor the market to assess the optimum timing to maximize our own asset valuations and we'll update the market at the appropriate time.
Turning to on-campus public-private partnership, P3 opportunities, as universities are expecting a return to normalcy in the fall, they are now beginning to refocus their efforts to modernize on-campus housing.
We started to see progress with regard to our projects awarded pre-COVID that are in pre-development as well as a pickup in new pursuits.
We continue to believe that P3 opportunities on-campus may well be greater in a post-COVID environment, given the significant financial impacts universities experienced related to the de-densification and consumer rejection of older community bath residence halls coupled with the funding and budget cuts university space in the post-COVID environment.
As the recognized industry leader, ACC is uniquely positioned to capitalize on this expanding opportunity.
Currently, we are tracking over 60 universities that are evaluating potential on-campus projects.
With respect to guidance, while we believe the student housing sector has exhibited impressive resiliency, despite the significant disruption the pandemic has had on the universities of students we serve, and while we see many encouraging signs of a steady return to normalcy, the range of potential financial results for 2021 is still too wide for us to provide full year earnings guidance, with a reasonable and useful range.
Instead, we'll be providing guidance for each forward quarter until we can provide an estimate further into the future, that we can stand behind.
As such, we're providing Q1 FFOM guidance in the range of $0.54 to $0.56 per share.
As we look beyond Q1, we would encourage everyone to review the normal quarterly seasonality of our business and further take into consideration some of my earlier comments, regarding the fact that the transitionary environment causes us to believe that there may be softness in our ability to backfill May-ending leases at historical levels, and that we will likely not see a return to normal summer camp and conference business in 2021.
We also expect to see significantly higher same-store operating expense growth levels than normal, as 2020 presents a tough comparison year given that operating expenses were approximately 6% below our original 2020 guidance for expenses.
This will be especially notable in Q2 and Q3, as we anticipate more normal expense levels that will be compared to the same periods in 2020, when many expense activities were halted.
This could lead to expense growth in the high-single digits in Q2 and Q3 of this year.
In closing, I'd like to convey our excitement related to the recent appointments of three new outstanding independent directors to the ACC Board.
These three new directors have extensive real estate and capital allocation experience and bring valuable diverse perspectives that will serve the interest of our shareholders well.
Ed has helped oversee our company's transformation from an owner of only 16 student housing properties at IPO to becoming the industry leader, and we'd also like to congratulate Ms. Cydney Donnell, who will be assuming the role of Board Chair up on Ed's departure.
| sees q1 ffo per share $0.56 to $0.58.
|
I'm joined by John Peyton, CEO; Allison Hall, Interim CFO and Controller; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's.
I'll start by saying it's an honor for me to join Dine Brands.
I believe in Dine Brands because I believe in restaurants.
Restaurants are essential to strong communities and human connection and people appreciate that now more than ever before.
I believe we're on the cusp of the restaurant renaissance.
And as we enter what we expect to be the beginning of the end of the pandemic, all restaurants face the common challenge and that's the eating out in America has changed.
Those will win in the new era of restaurants are those who remained resilient and those who invested in new menu and service innovations and new technology during 2020.
And that's the story of Dine Brands.
We have solid fundamentals, two category-leading iconic brands and certainly the most talented team members and franchisees in the industry.
Let me pause and tell you a bit about my story.
As a teen, I worked in my parent's restaurant.
It was called the [Indecipherable] Philadelphia and I was certainly humbled and stunned by the almost 24/7 demands required at my parents'.
After college, I went on to work as a consultant for PwC, I then was at Starwood Hotels and most recently at Realogy.
I joined Dine because I believe in the power and lure of strong brands.
20 years ago, a mentor of mine who was a marketing wizard, taught me that brands win when they're different, better and special.
And our brands are truly different, better and special.
IHOP, for example, is a pancake obsessed breakfast innovator that makes the most important meal of the day, also the most fun.
And Applebee's embodies what it means to be all American and locally relevant.
We call that Eatin' Good in the Neighborhood.
In other words, Applebee's and IHOP are iconic brands that connect in an emotional way with our guests.
And that's important because we know restaurants are essential to the fabric of community and human connections.
I also like our business model.
We're 98% franchise and asset light.
We are a significant generator of cash.
Our franchise model helps buffer us from fluctuations in the market and our model generally requires less significant investments of capital and it allows those who are best operating restaurants or franchisee owners to do so with our support.
My 20-plus years at Starwood and Realogy taught me that successful franchising requires true partnership and that we work hard every day to ensure that our independent franchisees build valuable businesses that create generational wealth.
So over the last two months, I've been on the move.
I've conducted a deep dive across the Company, learning more and more about our brands and Dine's dynamic corporate culture.
So far, I've spoken with 40 franchisees in the U.S. and around the world and they represent 50% of the Applebee's system and more than a third of our IHOP restaurants.
I've also connected with our suppliers and our vendors and our team members.
I visited our restaurants, and our test kitchens.
And I can report that our network is aligned and is desired to grow and to invest and to win.
Now, despite the impact of the pandemic, Dine's fundamentals remain solid.
You may recall that in March of 2020, S&P placed the Company's whole business securitization notes on credit watch-negative as it did with two other whole business securitizations in our industry at that time.
Six months later, S&P removed our notes in credit watch and reaffirmed our BBB rating.
Dine was the only issuer of the series and not have its notes downgraded or remain on credit watch due to the pandemic.
S&P's decision last fall was a greatest achievement for Dine and illustrates that our fundamentals remain strong.
And because we emerged in 2020 on sound financial footing, we plan to repay in full the $220 million drawn from our revolver last March.
We expect to complete the repayment this month, resulting in interest expense savings of approximately $5 million.
In addition to strong fundamentals, we have passionate franchisees who remain in very good standing.
Our collection rate for royalty and marketing fees stands at approximately 99% and the fees we deferred during Q2 of last year are being paid back according to schedule.
And in addition to our fabulous franchisees, importantly, both brands are led by veteran executive team with exceptional experience and industry knowledge.
You'll hear from Jay and John shortly and it's their expertise and collective wisdom that truly paid off via their extraordinary stewardship of the brands in our franchisees throughout the challenge of 2020.
So looking ahead, we're anticipating rebound in the second half of the year, driven primarily by increases in vaccination rates.
Overall weekly sales trends for both brands have also improved since the week ending January 3 of 2021, Applebee's improving by approximately 8 percentage points and IHOP posted gains of about 6 points.
We're also encouraged by our off-premise business.
Both brands maintained off-premise sales of approximately one-third of total sales during the fourth quarter and we view off-premise dining as a new consumer behavior that will live beyond the pandemic.
We're continuing to invest in technology to support our growing off-premise business and we're certainly optimistic about the outlook for Applebee's and IHOP because during times of crisis, guests just like me, and just like you look to brands we trust and if restaurant guests return to indoor dining, guests will trust that our franchisees and restaurant team and IHOP and Applebee's are committed to their health and safety.
So taken collectively, these fundamentals uniquely position Dine Brands to endure the challenges brought on by the pandemic and position us for long-term sustainable growth.
Our team is focused on three objectives over the next 12 months to 24 months.
The first is to navigate what we believe is the beginning of the end of the crisis.
The second is to win the recovery and win the new normal that follows.
And the third is to evaluate long-term growth vehicles.
So allow me to share a bit of my thinking about each of those.
First is to navigate the beginning of the end of the crisis.
Of course, we'll continue to monitor and protect cash and we will also focus on continuous improvement in operational health and safety standards in our restaurants.
We're preparing compelling marketing campaigns and new products to drive the recovery growth and we are working intensely to ensure the financial health of our franchisees.
Second, we'll win the recovery and win the new normal by leveraging our recent investments in business and consumer insights, CRM and digital to reactivate our guests via one-to-one and highly targeted marketing and we'll realign our menu to reflect learnings in the past 12 months and we'll reset the channel mix to reflect those earnings as well.
And third, we'll continue to evaluate long-term growth vehicles both traditional and non-traditional development, which includes everything from new prototypes for both brands, virtual brands and ghost kitchens, both of which we have the efforts under way and we'll take a look at international expansion opportunities in key markets and possibly explore incorporating a third brand at the right time.
So as I wrap up, I want to emphasize the Dine views the crisis as both a threat and an opportunity.
And while we knew it was important to play defense to protect our liquidity and our flexibility, we also played offense so that we would emerge from the crisis in a position to serve more guests both inside and outside of our restaurants.
Because we played offence in 2020, we continue to invest in new digital and CRM products that are coming online early this summer as well as innovative menu items like IHOPPY Hour and Burritos & Bowls at IHOP and Applebee's new virtual brand, Cosmic Wings.
And while we were investing in new technology and menu offerings, our franchisees invested in supporting the local communities by feeding and sheltering frontline workers and those in need.
And so if all of these investments combine, that will pay off as our guests return to indoor dining.
I'll begin with a business update, then review our results for the fourth quarter and the full year.
Lastly, I'll discuss our financial performance guidance for 2021.
During a very challenging year, we took steps to maintain our financial flexibility, including drawing down $220 million in March 2020 from our revolving credit facility, all of which remain outstanding as of December 31.
As John just mentioned, we plan to repay the $220 million during the month of March.
Due to this proactive measure, we continue to have very strong liquidity.
We ended 2020 with total cash and cash equivalents of $456 million, which includes restricted cash of $72.7 million.
Excluding the $220 million drawn from our revolver, cash on the balance sheet was $64 million higher at the end of 2020 compared to year-end 2019.
The increase was primarily due to the temporary suspension of both our quarterly cash dividends and our share repurchase program.
These steps were taken in response to COVID-19 pandemic and the need to maintain financial flexibility.
Additionally, we maintain tight G&A management during the year of austerity and we're able to lower compensation costs following the difficult decision to furlough approximately one-third of our corporate staff for several months during 2020.
Turning to our financial results, I'll begin with the notable changes on our income statement.
For the fourth quarter, adjusted earnings per share of $0.39 compared to $1.78 for the same quarter of 2019.
For 2020, adjusted earnings per share was $1.79 compared to $6.95 in 2019.
The year-over-year decrease was due to a significant decline in customer traffic resulting from governmental capacity restrictions on dining room operations.
This led to declines in domestic comp sales at both brands and a decrease in the number of Applebee's and IHOP effective restaurants and lower gross profit.
The impact of the pandemic on franchise operations resulted in an increase in bad debt.
For 2020, our bad debt was approximately $12.8 million as compared to virtually no bad debt for 2019.
Switching gears to G&A.
Given our asset-light business model, G&A remains an important lever for us.
In 2020, it constituted 30% of our total revenues excluding advertising revenues.
G&A for the fourth quarter of 2020 improved to $39.4 million from $41.7 million for the same quarter last year.
The decline was primarily due to lower travel and compensation costs.
G&A for the fourth quarter was lower than our guidance of approximately $45 million, primarily due to our ability to tighten G&A controls in response to the resurgence of coronavirus cases.
G&A for 2020 was $144.8 million, including $4.3 million related to the company restaurants segment.
This compares to $162.8 million in 2019.
The decline was primarily due to G&A tighter management around that, which included a decrease in compensation and travel-related costs.
Now turning to the cash flow statement.
Cash from operations for 2020 was $96.5 million compared to $155.2 million in 2019.
The change was primarily due to a decrease in total revenue, resulting from the decline in guest traffic at our restaurants as previously discussed.
Our highly franchised model continued to generate strong adjusted free cash flow of $106.6 million in 2020 compared to $148.8 million in the prior year.
The decline was primarily due to the decrease in cash from operations just discuss, primarily offset by lower capex compared to 2019.
We believe that our cash on hand, cash from operations and the steps we've taken to mitigate the effects of the pandemic will allow us to continue to remain with strong liquidity throughout the year as our business continues to improve.
Now regarding capital allocation, we continue to reevaluate our capital allocation strategy as industry conditions continue to improve and normal restaurant operations resume.
As previously discussed, we plan to repay the $220 million drawn last March.
Additionally, we will review reinstating our quarterly cash dividends and resumption of our share repurchase program.
We will also reevaluate investments in our existing brands to enable both -- platforms for both organic and non-organic growth.
Now for an update on our franchisee assistance program.
Dine Brands provide approximately $55.7 million in royalty, advertising fees and rent payment deferrals to our franchisees and continue to provide assistance on a case-by-case basis.
In total, we provided approximately $61 million deferrals to 223 franchisees across both brands, of which 61 have repaid their deferred balances in full.
Overall, a total of approximately $32 million of the original subsequent deferrals have been repaid and repayments are on track.
Regarding adjusted EBITDA, our consolidated adjusted EBITDA for 2020 was $158.7 million compared to $273.5 million for 2019.
The decrease was primarily due to a significant decline in customer traffic resulting from a governmental mandated dine-in capacity restrictions discussed earlier.
This led to decreases in both revenues and gross profit in 2020 compared to 2019.
Because of our asset-light model and low capex requirements, we continue to have very high quality adjusted EBITDA as capex represented only 7% of 2020 adjusted EBITDA.
Lastly, I will review our financial performance guidance for fiscal 2021, which reflects the projected impact over the pandemic on our guidance as of today.
Due to ongoing uncertainty created by COVID-19, we clearly cannot provide a complete business outlook for the year.
As our business conditions continue to improve and dining capacity restrictions are lowered, we will evaluate providing additional performance guidance as necessary.
We're not offering guidance around development comp sales because of the uncertainty of the recovery this year.
However, I can tell you, G&A is expected to range between approximately $160 million and $170 million including non-cash stock-based compensation expense and depreciation of approximately $45 million.
Please note that this range includes approximately $5 million of G&A related to the company restaurants segment and capital expenditures are expected to be approximately $14 million inclusive of approximately $5 million related to the company restaurants segment.
To wrap up, Dine Brands has significant cash on the balance sheet and has maintained strong financial flexibility despite the adverse conditions in 2020.
Comp sales of both brands have improved significantly since the onset of the pandemic.
Although there is a lot of work that's still ahead of us, we believe accomplishments this year have laid a solid foundation for growth.
I'm very proud of what this Applebee's team accomplished in 2020 and remain extremely optimistic about our business prospects here in '21.
In partnership with our franchisees, we fundamentally altered our business model to adapt to this new environment.
Applebee's comp sales progressed from minus 49.4% in Q2 to minus 13.3% in Q3 to minus 1.9% in the month of October when we last spoke.
Almost immediately thereafter, the country experienced a rather abrupt resurgence of COVID directly impacting our Q4 trajectory.
As a result, November comp sales were minus 15% while December came in at minus 30.1%.
Now the good news is that business is now improving as comp sales for January and the first three weeks of February combined were minus 18.1%, rolling over a very strong 3.3% increase from the same timeframe last year.
Additionally, given COVID-related restrictions, we scaled back our media spending in December, January and February.
It's also important to note that not all casual dining brands are impacted equally by these restrictions given each brand's geographic distribution.
Applebee's has a disproportionately heavy penetration of its restaurants in the Northeast and Midwest, two geographies, obviously hardest hit by dining restrictions.
While reflected in these recent results, this will ultimately and disproportionately benefit us as restrictions are eased over the coming months.
For context, at the end of December, 412 of our dining rooms were closed due to government imposed mandates.
In many respects, our current operating environment feels very similar to late summer of last year if you recall when we saw Applebee's sales momentum accelerate as restrictions were eased, including our first positive sales week at the end of September.
And barring unforeseen circumstances, I anticipate a similar dynamic to unfold very soon here in '21.
Now for the month of February, Applebee's sales mix consisted of 63% dine-in, 22% Carside To Go, and 15% delivery.
On the off-premise front, we continue to enhance Carside To Go with the upcoming introduction of a third-party app called FlyBuy that notifies restaurant teams through geofencing the moment our guest arrives on the lot.
Also, our franchise partner in Arkansas recently opened Applebee's first drive- thru window.
In addition to being very well received by team members and guests, this dedicated drive-thru lane eliminates weather challenges, improves throughput and importantly extends our late night to-go operating hours.
From a delivery perspective, our tamper-evident packaging is now fully deployed throughout the brand as another visible point of guest reassurance.
Without question, our off-premise investments over the past year have broadened Applebee's reach and relevance across this important convenience-driven occasion.
Now with respect to Applebee's on-premise business.
I anticipate our 63% sales mix to naturally elevate this year, as indoor dining gradually returns.
And I firmly believe dining room service will be an unmistakable core strength for Applebee's, as guests look for that long overdue escape from home, where they can once again connect with one another over a good meal and perhaps a drink.
Most importantly, these guests will naturally gravitate to brands that have earned their trust and loyalty throughout the pandemic.
On this front, we're confident Applebee's is exceptionally well positioned.
This optimism is supported by our very strong brand affinity and visit intent metrics, which have proven to be reliable leading indicators of brand performance.
And as the year progresses, we'll continue to deploy guest-facing digital technology such as our pay-and-go initiative designed to provide easy mobile payment options without the need for a server.
Now, I'd like to take a moment to discuss our virtual brand evolution.
As you may know, we just launched Cosmic Wings nationally on February 17, introducing a fully differentiated virtual brand, targeting a younger audience around the wings meal occasion.
At the moment, Cosmic Wings remains an online delivery-only concept available via Uber Eats and fulfilled through approximately 1,250 Applebee's kitchens.
In addition to craveable wings, tenders, waffle fries and onion rings, the team has developed a proprietary menu of Cheetos original wings, Cheetos Flamin' Hot wings as well as Cheetos cheese bites.
This innovation work is exclusive to Applebee's and the culmination of our ongoing partnership between our culinary and marketing teams, franchisees, PepsiCo and Frito-Lay.
While it's far too early to draw any conclusions, Cosmic Wings averaged $510 of incremental sales per restaurant last week in its first full week of operation, showing a steady build from day to day.
We're very pleased with these initial results, and we'll certainly be in a better position to quantify the ultimate financial impact of Cosmic Wings on our next call.
We've also been active in piloting our first ghost kitchens in partnership with our franchisees, with two in Philadelphia, one in Los Angeles and another soon to open in Miami.
To clarify, these are low capital investment, small footprint kitchens without a street front presence designed to satisfy online delivery demand for Applebee's, where we currently don't have restaurant penetration.
The business model here appears attractive in the right geographies, where a brick-and-mortar presence may not be feasible.
Now, as I reflect upon this past year, I know our guests genuinely trust Applebee's perhaps now more than ever.
Whether it's in their family rooms or in our dining rooms, there is no more relevant brand positioning for this environment than Eatin' Good in the Neighborhood as John referenced.
To this point, last week, we launched our latest national event, 5 Boneless Wings for $1 with the purchase of any burger, which is resonating extraordinarily well.
In fact, last week, Applebee's achieved our single highest sales volume week since the pandemic outbreak in mid-March of last year, that's 50 weeks ago.
It's also worth noting that we are strategically and tactically aligned with our franchisees around our full-year marketing and innovation plan along with contingencies, given the obvious need for agility in this environment.
In closing, I believe Applebee's is near an inflection point, and that America's pent-up demand for dining out is indeed very real.
We saw this trajectory last year up until the resurgence of the virus, and I'm confident we'll see it again this year very soon.
And when this does occur, our franchise partners are very well positioned to not only return to sustained growth, but to thrive in a post-pandemic environment as they unlock the full potential of the Applebee's brand.
With that, I'll turn it to Jay.
We are very optimistic about the road ahead for IHOP for several reasons.
First, our quarterly comp sales improved meaningfully from a decline of 59.1% for the second quarter to a decline of 30.1% for the fourth quarter, reflecting a net increase of 29 percentage points since the pandemic began.
Second, the brand is well positioned to benefit from pent-up demand when restrictions on the dining room capacity are eased and we have a strategy in place to capture it.
Lastly, our development pipeline remains strong and new opportunities are being pursued.
As we closed out the fourth quarter, IHOP's comp sales declined 30.1%, which is on par with the family dining category.
Our performance, especially the final six weeks, was adversely impacted by the resurgence in coronavirus cases.
We were particularly impacted in California and Texas, which collectively comprised approximately 25% of our domestic restaurants.
Our results for January 2021 improved to minus 26.8%, representing a gain of 10 percentage points from December.
February comp sales through week ending February 21 were down 27.6%.
For the same period, our sales mix consisted of 66% dine-in, 16.9% to-go and 17.1% delivery.
As we continue to navigate the ever-changing environment, we have four strategies to help the brand drive growth.
Number 1, focusing on our PM daypart; Number 2, value; Number 3, maintaining our gains in off-premise sales; and Number 4, development growth.
We believe this new value platform will not only play an important part of the strengthening and expanding our PM business, but also drive off-premise sales in locations where it's available.
IHOPPY Hour is driving incremental sales in the mid to high teens and approximately 20% incremental traffic compared to the rest of the day.
This equates to a low- to mid-single-digit lift in both sales and traffic for the whole week.
IHOPPY Hour is consistently four times more effective at driving traffic than any window we've had during that time.
Our third strategy is growing our strong off-premise business.
As consumer sentiment is shifting and off-premise is becoming more accepted around the country, our mix has remained strong.
For the fourth quarter, off-premise was 33.3% of total sales, compared to 32.4% for the third quarter.
To provide more color, to-go accounted for approximately 17% of sales mix and delivery accounted for approximately 16%.
Off-premise comp sales for the fourth quarter grew by 130%, driven primarily by traffic.
We believe that we can retain a significant amount of this growth even as dining room capacity restrictions are eased over time.
Conducive to this is our -- is the high portability of IHOP's menu and our proprietary off-premise packaging, which keeps our food warm approximately 40 minutes after leaving the restaurant.
Additionally, we implemented curbside to-go quickly at the onset of the pandemic and continue investments in our IHOP and Go platform.
IHOP's latest menu innovation is our all-new signature, Burritos & Bowls, which is introduced this past January.
The six new Burritos & Bowls were designed with creative flavor combinations and easy portability in mind for guests to enjoy wherever they please and appeal to guests across all dayparts.
The results since the launch are very encouraging, with Burritos & Bowls capturing approximately 8% of check at order incidents based on our soft launch without a full media and marketing campaign.
Switching gears to our fourth strategy, development.
As we look at growth heading into 2021 and beyond, we will grow our IHOP brand with four different platforms.
First, traditional development, of which we have a stable pipeline as a result of franchisee obligations that were deferred as part of our assistance during the pandemic.
Second, non-traditional development, which is led by our largest agreement in our 62-year history, with TravelCenters of America for 94 restaurants over five years.
Third, the resumption of work on our Flipped by IHOP concept, which we expect to open our first location this year.
And fourth and finally, we've developed a new small prototype that we intend to test this year.
We expect it to provide new opportunities for franchisee growth with a higher return on investment, allowing us to go into areas we might not have been able to penetrate previously.
For 2021, we expect to continue to reinvigorate our growth that was hindered by the pandemic.
Now, for an update on our domestic restaurants open for business.
As of December 31, 1,174 restaurants or 70% of our domestic system was open for in-restaurant dining with restrictions.
This compares to 1,425 restaurants or 85% as of September 30.
The decline in locations open for in-restaurant service was primarily due to the spike in coronavirus cases discussed earlier.
Turning to the unit guidance for restaurant closures we provided in October.
As a reminder, given the impact of the pandemic on individual restaurant level economics, we evaluated only greatly underperforming restaurants that we determine had a greater chance of not being viable coming out of the pandemic.
These restaurants were generally some of the lowest performing units in the system, based on sales and franchisee profitability.
This program concluded with 41 closures over the last six months, which is well below our initial projection of up to 100 restaurants.
We remain confident that we'll eventually replace these severely underperforming locations and grow our footprint with better performing restaurants that had volumes closer to our pre-COVID AUV of approximately $1.9 million.
To close, we're executing against our four strategies to drive our growth which includes PM daypart expansion, value, maintaining our gains and off-premise sales and development growth.
We've done the heavy lifting to position the brand for long-term success and build an insurmountable lead in family dining.
I'm pleased with what our franchisees and team members have accomplished during a very challenging year and I'm very optimistic about the road ahead.
It's truly because of their leadership, particularly during the pandemic, that Dine and its brands are poised to enjoy significant upside potential in 2021 and beyond.
Understandingly through meaningful change in performance trajectory will not happen immediately, but I am confident in our ability to restore sustainable same restaurant sales momentum in the second half of 2021 as more people are vaccinated and guests [Indecipherable] dine out return to restaurants.
I have absolute faith in our franchisees and our talented team members will lead us into a new restaurant renaissance.
Our strong fundamentals remain intact.
We're positioning Dine for long-term growth and continuing to evolve as a guest-centric data-driven organization.
| compname reports q4 adjusted earnings per share $0.39.
q4 adjusted earnings per share $0.39.
ihop's comparable same-restaurant sales decreased 30.1% for q4 of 2020.
consolidated financial results for 2021 could continue to be materially impacted by global impact from covid-19.
company currently cannot provide a complete business outlook for fiscal 2021.
dine brands - capital expenditures expected to be about $14 million, inclusive of approximately $5 million related to company restaurants segment for fy 2021.
|
Joining the call today are Tom Ferguson, chief executive officer; Philip Schlom, chief financial officer; and David Nark, senior vice president, marketing, communications, and IR.
Those risks and uncertainties include, but are not limited, to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and employees to implement the company's growth strategies.
In addition, AZZ customers and its operations could potentially be adversely impacted by the ongoing COVID pandemic.
We continue to gain momentum in the third quarter and completed our fifth consecutive quarter of solid performance after the disruption from COVID in the first half of last year.
Their perseverance continues to allow us to achieve these kinds of results.
Consolidated sales of almost $232 million improved 2.3% versus the prior year or 4.1% when adjusted for the divestiture of SMS last year.
metal coatings generated another excellent quarter with sales up 15.4% to over $133 million and infrastructure solutions sales down 11% at about $99 million.
We are pleased to have completed another strong quarter of performance.
We continue to generate solid cash flow and returned capital to our shareholders during the third quarter.
We generated net income of over $21 million and earnings per share of $0.85 per diluted share, reflecting the resiliency of our businesses and the dedication of our people.
Our businesses leverage the realignment actions taken last year to improve profitability while maintaining their focus on providing outstanding quality and service to our customers.
We also benefited from lower interest expense and a lower tax rate of 22% for the third quarter.
In line with our strategic commitment to value creation, we repurchased over 148,000 shares for $7.6 million and distributed $4.2 million in dividends.
In metal coatings we achieved 24.5% in operating margins on sales of $133 million.
This resulted in operating income being up over 14% from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity, while realizing improved pricing in the face of rapidly rising zinc, labor and energy costs.
In spite of the ongoing challenges of COVID, our team succeeded in completing the acquisition of Steel Creek Galvanizing in South Carolina.
This site was completed in 2019 and includes a lot of automation, making it the newest and most modern in our fleet.
Our team is excited about the growth opportunity it presents in a region we were not present in.
Our metal coatings team continues to demonstrate their ability to perform and deliver great results while managing labor shortages and the increasing costs.
Our infrastructure solutions segment demonstrated continued profitability improvement in the quarter, leveraging the cost reduction actions that they took last year.
We were down about 8% when considering the impact of the SMS divestiture.
The infrastructure solutions segment delivered operating income of over $9 million, with operating margins improved 140 basis points to 9.3% as compared to the prior year.
The segment did face growing labor constraints and delays in materials due to supply chain disruptions resulting from COVID, including components from customers.
One WSI international project was significantly impacted by COVID outbreak, which was managed well, that resulted in lower profitability.
We remain focused on strategic selling initiatives across both the electrical and industrial platforms and we believe we are well positioned to finish this fiscal year well.
For fiscal year 2022, while COVID continues to generate some uncertainty in many sectors given our strong performance in the first three quarters and due to seeing more opportunities than risks the balance of this year, we are tightening our earnings per share guidance.
We anticipate annual sales to be in the range of $865 million to $925 million and earnings per share at $3 to $3.20 per diluted share.
We do not anticipate any material impact in the fourth quarter from the recently announced acquisition as we're focused on integration these first couple of months.
Metal coatings is continuing to focus on sales growth, including leveraging our spin galvanizing operations at several sites, operational execution and customer service as labor and operating expenses increase due to inflation.
Our infrastructure solutions segment is cautiously optimistic as it enters the fourth quarter with some momentum in bookings activity, particularly in the electrical platform.
Our WSI business is seeing good results from the expanded Poland facility, although internationally, the business continues to experience some intermittent project delays due to COVID outbreaks at some customer sites.
As we noted on the last call, some of the fall season projects will now be completed in the fourth quarter.
We also have some spring projects that look to kick off a little earlier than normal.
The electrical platform is focused on operational execution and growing its e-house and switchgear businesses.
Due to the project extensions from the third quarter, we expect a better-than-normal performance in the fourth quarter.
I will note that our outlook for the spring turnaround season is quite good based upon the level of quotations, but we remain cautious due to the ongoing battles with COVID outbreaks at customer sites.
For the balance of fiscal year 2022, AZZ will continue to execute on our strategic growth initiatives to drive shareholder value while positioning for a strong start to fiscal 2023.
Our commitment to superior customer service is unwavering.
Our ability to generate strong cash flow is based on initiatives that drive operational excellence, tightly manage costs, ensure pricing discipline and emphasis on receivables collection within our operating platforms.
We are confident that our businesses remain vital to improving and sustaining infrastructure, so we continue to drive profitable growth and enhance shareholder value.
Bookings or incoming orders in the third quarter were $248 million, a $53.6 million or 28% increase over the third quarter of the prior year.
Our bookings-to-sale ratio remained consistent with last quarter, 107% and well above the book-to-sales ratio of 0.86 for the same quarter last year.
As Tom had alluded to, we have seen consistently strong markets for our metal coatings segment and continue to experience improving markets in our infrastructure solutions segment.
Third quarter fiscal 2022 sales were $231.7 million, $5.1 million or 2.3% higher than the prior-year third quarter sales of $226.6 million.
Year over year, for the third quarter, metal coatings segment sales were up $17.8 million and were partially offset by lower sales in the infrastructure solutions segment, mostly in the industrial segment where we took significant actions to restructure the business in the middle of last year.
The business generated gross profit of $57 million compared with gross profit of $54.7 million in the third quarter of the prior year.
Our gross margin was 24.6% for the third quarter compared with gross margin of 24.1% in the third quarter of last year as business in both the segments continue to improve.
Operating income for the quarter was $30.1 million compared with $27.9 million in the third quarter of the prior year, a $2.2 million or 8% improvement year over year.
Our earnings per share was $0.85 or $0.09 higher than last year's third quarter reported earnings per share of $0.76 and adjusted earnings per share of $0.80 in the prior-year third quarter.
The prior year was impacted by our loss on the divestiture of southern mechanical services or SMS. Third quarter EBITDA of $39.8 million was flat compared with EBITDA in the third quarter of the prior year.
Year-to-date sales through the third quarter of fiscal 2022 were $678 million, a 5.4% increase from last year's third quarter, year-to-date sales -- from last year's third quarter year-to-date sales of $643 million.
Excluding the impact of SMS divestitures, sales would have increased 8.6% year over year on a pro forma basis.
Fiscal 2022 year-to-date net income of $62.4 million was $38.9 million or 166% above the prior year-to-date reported net income of $23.5 million and $23.1 million or 58.9% above the adjusted net income from the prior year-to-date period, wherein the company had recorded impairment and restructuring charges net of tax of $15.8 million.
EPS on a year-to-date diluted share basis is $2.48 compared with $0.90 reported in the prior year and $1.50 on an adjusted basis.
Current year-to-date earnings per share improved $0.98 or 65.3% over the year-to-date 2021 results.
While we continue to return capital to our shareholders through dividends and share repurchases, our balance sheet remains strong.
The following are capital allocation highlights for the year.
On a gross basis, outstanding debt at the end of the quarter was $192 million, consisting of $150 million on our 7- and 12-year senior notes and $42 million outstanding on our revolving credit facility.
This reflects a $13 million increase in borrowings from the end of the last fiscal year.
Borrowings have increased, primarily as a result of our continued share repurchase activity, higher receivables and higher inventories as the business volumes improve.
Year to date, we have deployed $19.1 million in capital investments and anticipate capital investments of roughly $32 million this year, slightly below our previous estimate of $35 million.
Supply chain constraints have continued to impact and delay the timing of spending on our planned capital expenditures.
We repurchased 7.6 million in outstanding stock during the quarter and year-to-date have repurchased 712,000 shares or $28.9 million.
We declared and continue to make quarterly dividend payments.
Through the nine months ended November 30, 2021, cash flows generated from operations was $49.7 million, down $9.7 million or 16.4% from the same period in the prior year.
Operating cash flows were positively impacted by the higher earnings but were more than offset by higher receivables on increased sales and increased inventories, primarily as a result of higher zinc costs in our metal coatings.
We continue to remain active on the merger and acquisition front and completed the acquisition of the galvanizing operation in South Carolina that will expand our Southeast footprint and should be accretive during the first year of operation, as Tom had noted earlier.
Here are some key indicators that we are paying particular attention to.
For the metal coating segment's Galvanizing business, we are carefully tracking fabrication and construction activity and material and labor cost inflation as well as OSHA's COVID vaccine mandate.
For the surface technologies platform, we are primarily focused on expanding our customer base and benefiting from improved operational performance.
For infrastructure solutions, domestic turnaround and outage activity has returned to a normal level.
The spring season is currently looking to be good, although we remain cautious due to COVID, particularly for international customers.
The electrical platform is benefiting from transmission distribution and utility spending and growing data center and battery energy storage activity.
In regards to the strategic review of infrastructure solutions and stated desire to become predominantly a metal coatings company, we have meaningfully advanced our work on a couple of strategic options that are designed to achieve this commitment.
Unfortunately, due to related NDAs, we are not able to comment further at this time.
We remain committed to our growth strategy around metal coatings and achieving 21% to 23% operating margins with galvanizing performance being quite steady, while we continue to improve Surface Technologies.
We will remain acquisitive, particularly in metal coatings and hope to complete one more acquisition before the end of this fiscal year.
For infrastructure solutions, we are focused on profitability and cash flow.
This segment's business unit should benefit from more normalized turnaround outage seasons and a solid market for renewables, transmission and distribution, utility, battery energy storage, data center e-houses and switchgear.
We did issue our first ESG report this past quarter and we'll continue to pursue improvement in these areas.
And finally, our normal cadence would be to issue guidance for fiscal year 2023 later this month, but we will not be doing so.
While we are committed to providing sales and earnings per share guidance, we may not be in a position to do so until our work on the strategic options can be factored in.
| compname reports results for third quarter of fiscal year 2022 generates earnings per share of $0.85.
compname reports results for third quarter of fiscal year 2022; generates earnings per share of $0.85.
q3 earnings per share $0.85.
q3 sales rose 2.3 percent to $231.7 million.
reaffirms fy earnings per share view $3.00 to $3.20.
sees fy sales $865 million to $925 million.
compname reports results for third quarter of fiscal year 2022; generates earnings per share of $0.85.
azz inc - qtrly sales of $231.7 million, up 2.3% versus last year.
azz inc - reaffirming fiscal year 2022 sales guidance and anticipate annual sales to be in the range of $865 million to $925 million.
azz inc - sees earnings per share to be in the range of $3.00 to $3.20 per diluted share for fiscal year 2022.
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Joining the call today are Tom Ferguson, Chief Executive Officer; Philip Schlom, Chief Financial Officer; and David Nark, Senior Vice President, Marketing Communications and IR.
Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing and availability of experienced management and employees to implement the company's growth strategies.
In addition, AZZ's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic.
We continue to gain momentum in the second quarter and completed our fourth consecutive quarter of solid performance after the disruptions from COVID in the first half of last year.
Their perseverance through the past 19 months of COVID-19 turmoil has allowed AZZ to obtain the results we are now reporting.
Overall sales of $216 million improved 6.4% versus the prior year, or 8% when adjusted for the divestiture of SMS. Metal Coatings turned in another excellent quarter with sales up 10.7%, almost $130 million, and Infrastructure Solutions flat at about $87 million.
Sales were somewhat impacted by labor constraints and COVID-19-related material shortages in some businesses.
I will get into the details of this as we go along.
We are pleased to have completed another strong quarter performance.
We continue to generate strong cash flow during the second quarter, while also returning capital to our shareholders.
We generated net income of $18.9 million and earnings per share of $0.76 per diluted share, reflecting the resiliency of our businesses and the dedication of our people.
Our businesses leverage the realignment actions taken last year to improve profitability while maintaining their focus on providing outstanding quality and service to our customers.
We also benefited from lower interest expense while incurring a 20.4% tax rate for the quarter.
In line with our strategic commitment to value creation, we've repurchased over 290,000 shares for $15 million and distributed $4.2 million in dividends.
In Metal Coatings, which represented 60% of our sales in the second quarter, we achieved 24.4% operating margins on sales of $130 million.
This resulted in operating income being up over 17% from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity, while realizing improved pricing in the face of rising zinc, labor and energy costs.
While we have several active acquisition discussions underway, we were slowed somewhat due to the uptick in COVID Delta variant cases that reduced some travel.
Our Metal Coatings team continues to demonstrate their ability to perform and deliver great results while managing labor shortages and the increasing zinc costs.
Our Infrastructure Solutions segment demonstrated continued profitability improvement through their seasonally slow second quarter.
We were up about 4.3% when considering the impact of the SMS divestiture.
The team delivered operating income of $7 million or 130%, up dramatically versus the prior year.
The segment benefited from its realignment actions from last year but did face some labor constraints and material delays.
We are focused on strategic selling initiatives and are well positioned to deliver a strong fiscal year 2022.
For fiscal year 2022, while COVID continues to generate some uncertainty in many sectors, given our strong performance in the first half and due to seeing more opportunities than risk the balance of this year, we are tightening and raising our guidance.
We anticipate sales to be in the range of $865 million to $925 million and earnings per share at $2.90 to $3.20.
This excludes any acquisitions or divestitures.
Metal Coatings is continuing focus on sales growth, including leveraging our spin galvanizing operations at several sites, operational execution and customer service as labor and operating expenses increased due to inflation.
Our Infrastructure Solutions segment has seen more normalized business levels and entered the third quarter with some momentum in bookings activity, particularly in electrical.
Our WSI business is seeing good results from the expanded Poland facility, although internationally the business continues to experience some intermittent project delays due to COVID outbreaks at certain customer sites.
The electrical platform is focused on operational execution and growing its e-house and switchgear businesses.
We anticipate continuing to benefit from low interest rates.
While we expect solid performance in the third quarter due to the continued COVID impact on our international markets, we do not anticipate quite as strong of a performance as we experienced in this past first quarter.
While the fall turnaround activity is good, we're seeing several projects that are already likely to stretch into the fourth quarter.
I will note that we are already seeing a lot of activity lining up for the spring season.
For fiscal year 2022, AZZ will continue to execute on our strategic growth objectives to drive shareholder value.
Our commitment to superior customer service is unwavering.
Our ability to generate strong cash flow is based on initiatives that drive operational excellence, manage costs, ensure pricing discipline and emphasis on receivables collection within our operating platforms.
We are confident that our businesses remain vital to improving and sustaining infrastructure.
So we are actively working to position our core businesses to provide sustainable profitability and regardless of whether we see any infrastructure legislation.
Bookings or incoming orders in the second quarter were $231.8 million, a $23.2 million or a 11.1% increase over the second quarter of the prior year.
Our bookings to sales ratio increased to 107% as we saw improving market conditions across both the Metal Coatings and Infrastructure Solutions segments.
As Tom previously mentioned, second quarter fiscal year 2022 sales of $216.4 million were $13.1 million or 6.4% higher than the prior year second quarter sales of $203.4 million.
We generated gross profit of $55.1 million compared with gross profit of $46.1 million in the second quarter of the prior year.
Our gross margin was 25.5% for the quarter, which was a 280-basis-point improvement compared with a gross margin of 22.7% in the second quarter of last year, as business in both segments continues to recover from the pandemic lows witnessed this time last year.
Operating income for the quarter was $26.5 million compared with $652,000 in the second quarter of the prior year.
During the prior year second quarter, we recorded restructuring and impairment charges of $18.7 million.
We believe the difficult decisions and actions management took last year are strongly impacting our financial results in both of our segments this fiscal year.
We believe we have established a strong foundation for future growth.
Our earnings per share of $0.76 was $0.26 higher than last year's second quarter adjusted earnings per share of $0.50 and $0.83 above the reported loss of $0.07.
The prior-year second quarter loss was significantly impacted by the impairment and restructuring charges and impacts of the pandemic as previously discussed.
Second quarter EBITDA for fiscal year 2022 was $36.6 million compared with adjusted EBITDA reported in the second quarter of fiscal year 2021 of $30.7 million, an increase of $5.9 million or 19.1%.
Year-to-date sales through the second quarter of fiscal year 2022 were $446.3 million, a 7.1% increase from last year's second quarter year-to-date sales of $416.7 million.
Excluding the impact of the SMS divestiture, sales would have increased 11% year-over-year.
Fiscal year 2022 year-to-date net income of $41.3 million was $22.8 million or 122.8% above the prior year-to-date adjusted net income of $18.5 million.
Prior year-to-date net income as reported was $3.8 million.
Year-to-date earnings per share of $1.64 was 131% higher than the prior year-to-date adjusted earnings per share of $0.71.
Turning to our liquidity and cash flows.
We continue to maintain a strong balance sheet and return capital to our shareholders.
The following are our capital allocation highlights: During the quarter, we renegotiated and renewed our five-year credit facility, retaining our facility at $600 million in borrowing capacity, supported by a strong group of banks.
Gross outstanding debt as of the second quarter is $183 million, $4 million above the $179 million in outstanding debt at the end of the second quarter of the prior year, which reflects increased share purchase activity as we have purchased nearly 70 million in outstanding shares during the last year.
Year-to-date, we have deployed $13.1 million in capital investments and we anticipate to still make capital investments of roughly $35 million this year.
Supply chain constraints have impacted and delayed to some extent the timing and spending of our planned capital expenditures.
As Tom noted, we repurchased $15 million in outstanding stock during the quarter and $21.2 million on a year-to-date basis.
We declared and continued our prior history of making quarterly dividend payments.
For the first half of the year, cash flow from operations was $37.8 million, up $5.6 million or 17.4% from prior year as a result of strong sales and solid net income generated by the business.
Free cash flow was $23.2 million, $10.3 million or 79.8% above the $12.9 million realized in the prior year.
We continue to execute on several merger and acquisition opportunities and expect to make announcements regarding the same before the end of our fiscal year.
Here are some key indicators that we are paying particular attention to.
For the Metal Coatings segment's galvanizing business, we are carefully tracking fabrication and construction activity, material and labor cost inflation and progress of infrastructure legislation.
For the Surface Technologies platform, we are primarily focused on expanding our customer base and benefiting from improved operational performance.
For Infrastructure Solutions, domestic turnaround and outage activity has returned to a normal level.
The fall season is currently looking to be good albeit somewhat muted as noted earlier, due to international customers being impacted by COVID-related issues.
The Electrical platform is benefiting from transmission distribution, utility spending and growing data center and battery energy storage activity.
In regards to the strategic review of Infrastructure Solutions, we have further narrowed the number of options we are pursuing and are increasingly confident that AZZ can and will become predominately a focused metal coatings company.
As we have noted previously, we are having regular meetings with the Board.
But due to the sensitivity of ongoing discussions and confidentiality agreements, we cannot be more specific at this time, but realize we are rapidly approaching one-year anniversary of our announcement.
We remain committed to our growth strategy around Metal Coatings and achieving 21% to 23% operating margins with galvanizing performance being quite steady, while we continue to improve Surface Technologies.
We will remain acquisitive, particularly in Metal Coatings.
For Infrastructure Solutions, we are focused on profitability and cash flow.
Our AIS business units should benefit from more normalized turnaround and outage seasons and a solid market for T&D, utility and data center, e-houses and switchgear.
Our corporate office is actively engaged in several merger and acquisition projects, while continuing to maintain tight accounting controls and providing support to the field for acquiring and retaining talent.
And finally, we will soon be issuing our first ESG report.
So please stay tuned.
| azz inc q2 earnings per share of $0.76.
compname reports results for q2 of fiscal year 2022; generates earnings per share of $0.76 and revises guidance.
q2 sales rose 6.4 percent to $216.4 million.
azz - sees annual sales to be in the range of $865 million to $925 million.
sees earnings per share to be in the range of $2.90 to $3.20 per diluted share for fiscal year 2022.
qtrly sales of $216.4 million, up 6.4%.
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I'm now on Slide 5.
For the third quarter, net income from continuing operations was $0.65 per common share.
Our results reflected a net benefit from our provision for credit losses, which was largely driven by our strong credit metrics and positive economic outlook.
Importantly, we delivered positive operating leverage this quarter.
And as Chris said, we expect to deliver positive operating leverage for the year.
Total revenues were up 8% compared to the same period last year.
We had year-over-year growth in both net interest income and noninterest income.
Our return on tangible common equity for the quarter was 18.6%.
Turning to Slide 6.
There were two major items that impacted loan growth this quarter, PPP loans and the sale of our indirect auto portfolio.
Average PPP loans declined $3.3 billion this quarter as we help clients take advantage of loan forgiveness.
We also sold our indirect auto portfolio last month.
The sale impacted our third-quarter average results by approximately $800 million and $3.3 billion on an ending basis.
Average loans were down from the year-ago period, reflecting the reduction in PPP balances and lower commercial line utilization.
Compared to the prior quarter, average loans were down 0.7%.
Adjusting for the sale of the indirect auto portfolio, our loans were up approximately $100 million on average and up over $1 billion on an ending basis.
Adding to the comments on our core loan growth, adjusting for both the indirect auto loan sale and PPP loans our linked quarter total loan growth would have been 4.3%.
We continued to see strong consumer loan growth driven by Laurel Road and consumer mortgage.
On the commercial side, we were pleased to see a slight uptick in utilization.
Continuing on to Slide 7.
Average deposits totaled $147 billion for the third quarter of 2021, up to $12 billion or 9% compared to the year-ago period and up 2% from the prior quarter.
The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances.
The growth was partially offset by continued and expected decline in time deposits.
Total interest-bearing deposit costs came down one basis point from the second quarter, following a two basis point decline last quarter.
We continue to have a strong, stable core deposit base with consumer deposits accounting for approximately 60% of our total deposit mix.
Turning to Slide 8.
Taxable equivalent net interest income was $1.025 billion for the third quarter of 2021, compared to $1.006 billion a year ago and $1.023 billion from the prior quarter.
Our net interest margin was 2.47% for the third-quarter 2021, compared to 2.62% for the same period last year and 2.52% for the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to a year-ago period.
The larger balance sheet benefited net interest income but reduced net interest margin due to the significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter, net interest income increased $2 million and the margin declined five basis points.
Lower interest-bearing deposit costs and the benefit of the day count were partially offset by lower-earning asset yields and continued elevated liquidity levels.
For the quarter, total loan fees from PPP loans were $45 million, compared to $50 million last quarter.
We've also included in the appendix additional detail on our investment portfolio and our asset-liability positioning.
In the third quarter, our sensitivity to rising rates moved higher and we ended the period with over $25 billion in cash and short-term investments.
Moving on to Slide 9.
We continue to see strong growth in our fee-based businesses, which have benefited from our ongoing investments.
Noninterest income was $797 million for the third quarter of 2021, compared to $681 million for the year-ago period and $750 million in the second quarter.
Compared to the year-ago period, noninterest income increased 17%.
We had a record third quarter for investment banking and debt placement fees, which reached $235 million driven by broad-based growth across the platform, including strong M&A fees.
Additionally, corporate services income increased $18 million and commercial mortgage fees increased to $16 million.
Offsetting this growth was lower consumer mortgage fees due to a lower gain on sale margin.
Compared to the second quarter, noninterest income increased by $47 million.
The largest driver of this quarterly increase was the record third-quarter investment banking and debt placement fees.
I'm now on Slide 10.
We total noninterest expense for the quarter was $1.112 billion, compared to $1.037 billion last year and $1.076 billion in the prior quarter.
Our expense levels reflect higher production-related incentives and the investments we have made to drive future growth.
The increase from the year-ago period primarily reflects higher incentive and stock-based compensation attributed to our higher fee production and Keys increased stock price.
The quarter-over-quarter increase in expenses was primarily driven by two areas: the first, personnel expense related to one additional day of salary expense in the quarter and slightly higher employee benefits; the second was an increase in other expense of $18 million, largely related pension settlement charge and higher charitable contributions.
Now moving to Slide 11.
Overall credit quality continues to outperform expectations.
For the third quarter, net charge-offs were $29 million or 11 basis points of average loans.
Net charge-offs in the current quarter included $22 million related to the sale of the indirect auto loan portfolio.
Our provision for credit losses was a net benefit of $107 million.
This was determined based on our continued strong credit metrics as well as our outlook for the overall economy and loan production.
Nonperforming loans were $554 million this quarter or 56 basis points of period-end loans, a decline of $140 million or 20% from the prior quarter.
Now on to Slide 12.
We ended the third quarter with a common equity tier one ratio of 9.6%, which places us above our targeted range of nine to 9.5%.
This provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, we continue to return capital to our shareholders in accordance with our capital priorities.
We repurchased $593 million of common shares during the quarter our board of directors approved a third-quarter dividend at $0.185 per common share.
Of the 593 million in common share repurchases, $468 million were related to the initial settlement of our accelerated share repurchase program, representing 80% of the $585 million authorization.
The remaining $125 million were purchased in the open market.
The remaining 20% of the ASR will be settled in the fourth quarter.
On Slide 13, similar to prior years, we provided guidance for the fourth quarter relative to our third-quarter results.
Guidance ranges are listed at the bottom of the slide.
Importantly, using midpoints of this outlook would buy PPNR is at or above our full-year 2021 outlook provided last quarter.
We have adjusted our guidance to reflect our strong third-quarter performance especially in our fee-based businesses as well as the continued strength in our credit quality.
Average loans will be up low single digits, excluding the impact of the sale of our indirect auto portfolio.
We expect continued growth in both our core commercial and consumer balances.
Average deposits should remain relatively stable in the fourth quarter.
Net interest income is expected to be down low single digits, reflecting lower PPP forgiveness in the fourth quarter and the impact of the auto loan sale.
Noninterest come should be relatively stable off our record third-quarter performance with momentum in most of our fee-based businesses through year-end.
We will also benefit from what we expect to be another record year for our investment banking business.
We expect noninterest expense to be down low single digits in the fourth quarter.
Moving on to credit quality.
We expect our net charge-offs to be below 20 basis points for the fourth quarter.
Credit trends were strong in the third quarter, and we expect a strong finish to the year.
And our guidance for our GAAP tax rate has remained unchanged at 20%.
Finally, shown at the bottom of the slide are our long-term targets, which remain unchanged.
We expect to continue to make progress on these targets by maintaining our moderate risk profile in improving our productivity and efficiency, which will drive returns.
Overall, it was another strong quarter, and we remain confident in our ability to deliver on our commitments to all of our stakeholders.
| compname reports third quarter 2021 net income of $616 million, or $0.65 per diluted common share.
net loan charge-offs for q3 of 2021 totaled $29 million, or 0.11% of average total loans.
q3 provision for credit losses was net benefit of $107 million, including a $136 million reserve release for q3 versus an expense of $160 million in q3 2020.
credit quality remained strong this quarter.
qtrly total revenue $1,822 million, up 8%.
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Earlier today, we published our results for the first quarter of 2021.
This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, stock-based compensation expense and other income and expense items.
These statements and any projections as to the company's future performance represent management's estimates for future results and speak only as of today, May 6, 2021.
In addition, certain financial measures we may be using during the call such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on equity are non-GAAP measures.
This release can be found in both the Investors and Press section of our website at www.
Unauthorized recording of this conference call is not permitted.
More than a year has passed since the state -- start of the COVID-19 pandemic, and we are beginning to see recovery in sight.
We're optimistic that as vaccine rates rise, travel restrictions are eased and as countries work independently and collectively to develop initiatives to enable free movement, we will see a further resurgence of air travel.
With that said, most of our airline customers are still grappling with the strain and limitations resulting from the ongoing pandemic.
Today in our comments, I hope it will be clear how we are growing and further differentiating our platform, while also supporting our airlines and how we see that benefiting us as we move forward.
For the first quarter of 2021, we are reporting $475 million in total revenues and diluted earnings per share of $0.70 a share, down 7% and 40%, respectively, compared to the prior year's prepandemic first quarter.
Our results this quarter were impacted by approximately $86 million of rental revenues we did not recognize in the quarter due to cash versus accrual basis revenue recognition and lease restructurings.
Greg will walk you through more specifics in his remarks.
We took delivery of approximately $600 million in new aircraft in the quarter, which is $200 million more than we originally anticipated.
87% of these deliveries by dollar value occurred in the last seven business days of March, providing minimal rental contribution for the quarter, but providing long-term rental contributions thereafter.
Our cash collections and lease utilization rate remained solid in the first quarter at 84% and 99.6%, respectively, albeit both slightly lower than what we saw in Q4.
To date, we have agreed to accommodations with approximately 63% of our lessees, with deferrals totaling approximately $243 million.
Importantly, however, our total deferrals, net of those that have already been repaid continues to improve.
As of today, our net deferrals stand at $131 million as compared to $144 million as of our last call in February, and almost half of all the deferrals we have granted to date have been repaid.
Our net deferrals represent less than 2% of our available liquidity at the end of the first quarter.
Furthermore, our overall cash flow from operations actually increased slightly this quarter compared to last year's prepandemic first quarter.
The pace of request for rent deferrals and lease restructuring from our airline lessees has slowed meaningfully.
We remain fully committed to helping our airline customers get through this pandemic, and our customer relationships are growing even stronger because of our help and commitment.
So in spite of short-term headwinds impacting our first quarter results, we remain long-term partners to the airlines, and our business is positioned to benefit.
In many cases, airlines have differentiated ALC from peers by choosing to continue operating Air Lease aircraft while, at the same time, rejecting leases of other lessors and returning their aircraft.
Other airline customers have chosen to defer their own orders and instead opt to lease aircraft from ALC, which remain -- will remain core to the airline's long-term fleet strategy for years to come.
As such, our lease placements remain strong at 95% of our order book placed on long-term leases for aircraft delivery through 2022 and 80% through 2023.
So looking ahead, we technically have OEM-contracted commitments to take delivery of 64 aircraft in the remainder of 2021.
But given continued OEM and pandemic delays, we currently expect to deliver approximately 44 aircraft, and that number could change.
We expect a range of approximately $3 billion to $4.3 billion in aircraft investments for the full year 2021.
As of today, we are anticipating approximately $1.2 billion of these deliveries to occur in the second quarter.
We continue to evaluate supplemental aircraft investment opportunities outside of our order book that are profitable and makes sense for ALC over the long term.
We're pleased that 787 deliveries have resumed.
And in the first quarter, we delivered one 787 to Air Premia in South Korea.
And more recently, we delivered two 787s to China Southern in April.
As you saw from our quarterly fact sheet release, we also delivered four 737-8MAX aircraft this quarter.
As it relates to the recent grounding notice issued regarding the electrical power system on the 737 MAX aircraft, we did have six aircraft delivered to our customers, subject to this order.
Boeing is working with the FAA to conclude the process required for operators to return the aircraft to service.
The actual work involved to accomplish the mandated service bolt-ons is expected to take just a few days per aircraft.
Until this process with the FAA is concluded, we may experience further delivery delays of the 787.
Despite these recent developments, we do have several customers who have expressed a desire to reactivate taking delivery of several MAX aircraft that we previously canceled with Boeing pursuant to our cancellation rights.
We're working with Boeing and those airline customers to reactivate those specific deliveries under favorable pricing and delivery terms.
As to aircraft sales in our management business, we do anticipate a resumption of our aircraft sales program targeting the second half of the year.
However, we anticipate our overall sales in 2021 will not reach prepandemic level.
As always, we are taking a disciplined approach to sales, analyzing the aircraft portfolio sales environment and the contemplated gains on those sales as against keeping these good earning assets for a bit longer as they approach six to eight years of age.
And as we advised last quarter, we are growing our aircraft management business nicely.
In fact, in just a 100-day period, we sourced in the secondary market over $600 million of aircraft suited specifically for Blackbird Capital II, of which two delivered in the first quarter and the remaining aircraft will deliver over future quarters.
Furthermore, we have entered into another management platform agreement with one of the previous investors in Thunderbolt to acquire aircraft and have sourced seven new aircraft for that investor through airline sale-leaseback transactions for forward deliveries.
This is an additional attractive and growing management platform that dovetails exactly what we told you last quarter in mirroring or coupling sale-leaseback transactions with direct placements from ALC's order book.
Most recent example of this was the placement of four new A320neos with Volaris in Mexico, two from ALC's order book and two from sale-leasebacks, a transaction we announced on April 26.
And finally, as we look around the world, we are mindful of our social and environmental responsibilities, and we are taking active steps on these fronts.
The scope and magnitude simply defy description.
As such, I'm proud to announce that ALC is donating $100,000 to the relief efforts in India.
We are expanding such initiatives.
In fact, our ESG committee has several projects and efforts under consideration that we believe will further aid our planet and the human condition.
Over the last decade, Air Lease has focused on growing our company organically to now over $25 billion in assets, and our fleet and order book are comprised of the aircraft we personally selected.
There's been a lot of attention in recent weeks to size and scale and to interplay that with our ability to deal and negotiate with the manufacturers and airlines.
There is not one right answer for what is the right size for an aircraft lessor.
But what has been validated during the pandemic is that ALC has the asset strategy that aligns to the industry needs and desires.
And that our existing fleet size and order book, together with our deep knowledge of the assets and fleet planning expertise and the relationships that we've built over multiple decades, makes us a valued partner to our customers and the OEMs. And this gives us tremendous confidence in our future.
Looking at the airline landscape.
As you can take away from the daily headlines at recent public reporting from us and many other companies, the current operating environment is very dynamic.
While deferrals and restructuring agreements are not ideal in any environment, we are pleased to say that it is clear from our conversations that airlines want to keep our aircraft as the backbone of their fleets.
And as such, we are working together to come to commercial arrangements on how to proceed.
Not every leasing company is in the same advantageous position as ALC in this regard, and it is an important differentiator in this type of environment.
We remain very focused in the coming months and years as the outlook for the return of air travel driving airline decisions today.
Even though many countries are still trying to gain control of the pandemic, we are moving in the right direction in comparison to where we were a year ago.
For us here in North America, there's no better example than what we're seeing on the heels of increased vaccination rates.
In the United States last year, at this time, TSA was seeing below 200,000 passengers a day.
And as of this last Sunday, the TSA had over 1.6 million passengers pass through their security checkpoints.
And this is with very limited international and business travel.
We believe that this will be further propelled if vaccinated Americans can travel to the EU this summer, as was mentioned by the President of the European Commission a few days ago.
Outside of this broader announcement, while certain parts of Europe are still under vast restrictions, we are beginning to see individual countries change course selectively and carefully, announcing dates for reopening subject to negative test results prior to entry, in some cases, vaccination and other criteria.
For example, Greece recently announced that it is reopening its doors to COVID-free tourists from more than 30 countries as they take the so-called baby steps back to normalcy.
We recently heard from our friends at United, Delta and American that they will be introducing flights to capture the pent-up demand for travel to many of these destinations that are opening up.
We've seen similar announcements from countries like Iceland, allowing tours from certain countries and Croatia, allowing vaccinated travelers that are incoming.
Outside of Europe, places like Israel and selected countries in Asia have also announced that they will allow limited groups to start arriving at the end of May and early June, subject to certain requirements.
Countries are also working bilaterally to find ways to allow the flow of air travel despite of the pandemic.
For example, in mid-April, Australia and New Zealand opened a quarantine-free travel corridor.
And you're hearing similar agreements being discussed by other countries.
For instance, the United Kingdom and Israel have mentioned a possible green travel corridor, while similar talks are now in process between the U.S. and the United Kingdom.
In addition, countries are exploring ways to digitize and simplify proof of COVID-19 vaccination or negative test results or both, sometimes referred to as a vaccine passport.
This scheme would allow travelers to satisfy entry requirements more easily.
We believe that these initiatives and others will be vital to restoring intercontinental leisure travel and gradually business travel as the year progresses.
Importantly, as the world emerges from the pandemic and people can travel more freely, many millions will have the means to do so.
It was recently reported that consumers around the world had accumulated an extra $5.4 trillion of savings since the pandemic has begun, and we've heard executives across a broad spectrum of industry discussing pent-up demand that they believe exists.
Since our last call alone, we have delivered a number of aircraft customers around the world who are modernizing their fleets and rightsizing their fleet composition in anticipation that air travel will recover over the coming several quarters.
For example, John mentioned the two 787-9 aircraft that we recently delivered to China Southern and Air Premia in Korea took another 787-9s.
In addition, we delivered the first of what will be five new 737 aircraft to Belavia, the national carrier of Belarus.
These aircraft will replace the airlines aging Boeing 737-300 and 737-500 aircraft.
We also delivered our third 737-8 to Cayman Airways in the Caribbean, the national flag carrier of Cayman Islands, which is retiring its last 737-300 aircraft and replacing it with our new 737-8 model, and the first of which, 10 737-8 aircraft that we just delivered to Blue Air in Romania.
Blue Air is a ULCC carrier in Eastern Europe, which is also accelerating the retirement of their classic fleet of 737-300s and 500s in favor of more environmentally friendly and economic narrow-body aircraft.
On the Airbus side of the equation, we delivered one new A321neo LR aircraft to Air Astana, the flag carrier of the Republic of Kazakhstan.
This is the airline's fifth new A321LR on lease from ALC.
In addition, we delivered one new A321neo LR also to Air Arabia, which is now operating six A321-200neo LRs on lease from ALC.
These illustrate examples to show a broad range of customers taking delivery of our aircraft and how they are utilizing these aircraft to adjust and modernize their fleets.
Looking forward, we're also starting to see an uptick in lease rentals on certain desirable aircraft types, particularly the A321neo, of which ALC is the largest order book of any aircraft lessor.
The A321neo and its longer-range variants, the A321LR and soon to enter service, the XLR, are taking place of smaller twin-aisle aircraft on transatlantic and intercontinental medium-haul routes, in addition to expanding basic route networks of many LCC and ULCC operators.
We have also placed our first 15 Airbus A220-300 aircraft from our 50 aircraft per motor of that type.
Our A220 deliveries will commence in the second quarter of 2022.
While wide-body aircraft remains somewhat challenged, let me emphasize what I said at the beginning of my remarks.
Specifically, that our young, fuel-efficient aircraft have a definitive advantage and that a number of airlines have kept our wide-body aircraft as the backbone of their wide-body fleet at the expense of other lessors.
Recent examples include Aeromexico, Malaysian Airlines and Virgin Atlantic.
Our forward placements and deliveries of wide-bodies are proceeding on track with airlines such as Delta and a number of international carriers.
In fact, ALC only has one unplaced A330neo from our order book and a very small number of A350s and 787s, which are now in process for future placement.
On the used aircraft side, our young fleet of 777-300ERs and A330-200s and 300s remain well placed with our customers, with only a modest number of lease expirations in the next 12 to 24 months, all of which are manageable.
We've also successfully extended the leases on a number of our 777-300 aircraft in the last six months.
Finally, let me add one additional comment to John on the 737 MAX program.
The recertification of the MAX by China and Russia is still pending.
China, in particular, is a very large marketplace for the 737 family and the MAX.
Russia is also an important customer in this regard.
Recovery of the Boeing 737 program will not be complete until these countries certify and can obtain clearances to operate the 737 MAX in their country and for overflights.
ALC has several 737s on future delivery where our lessees require Russian and/or Chinese certification.
ALC remains fully committed to the 737 program, but I do feel compelled to point out that these remaining obstacles, including the very frustrating current grounding, need to be overcome by Boeing with haste.
The progress of U.S.A. and European summer traffic growth will also play a role in the pace of new 737 absorption by airlines for the remainder of 2021.
The U.S.A. looks well positioned for domestic summer travel recovery, while the extent of Europe aircraft and traffic recovery over the summer remains less certain.
But in the next coming weeks, we will have more visibility on that.
I know it's been a long year and that the longevity of this pandemic has exceeded all expectations.
However, I'd like to point out that I firmly believe that like other downturns in our industry, which has been experienced, recovery will recur and, in fact, is occurring in phases by domestic and international travel, by country and by region.
We at Air Lease Corporation have not underestimated the impact of the pandemic, and you are seeing that in how we are managing our business and dealing with our trusted airline customers.
But at the same time, we're also not losing sight of what lies ahead and how we best position our business for the months and years to come.
Let me expand a bit on the details underlying our financial results for the first quarter.
I'd like to remind everyone that for comparison purposes, the first quarter of 2020 was relatively unaffected by the COVID-19 pandemic.
As you would expect, the following COVID-related factors have continued to impact our performance in the first quarter of 2021.
As John mentioned, revenues were impacted by $86 million from the lease restructuring agreements and cash basis accounting, of which $49 million came in from lessees on a cash basis, where the lease receivables exceeded the lease security package and collection was not reasonably assured.
This compares to $25 million in the third quarter and $21 million in the fourth quarter of last year.
In total, our cash basis lessees represented 15.3% of our fleet by net book value as of March 31, as compared to 7.8% as of December 31.
The increase in rental revenue not recognized for the first quarter was primarily driven by a few customers with whom we are working forward -- working toward reaching a resolution.
Although we will not be going into details on these specific customers, it is important to note that one of our larger customers in this group has committed that they will repay our receivable balance.
I want to reiterate the fact that we are receiving cash payments from all of our cash basis lessees and that a majority of them are in some form of restructuring, and have expressed that they desire to keep our aircraft.
We remain hopeful that the remaining lessees will emerge from their restructurings in the not-too-distant future and that we can return to recognizing revenue on an accrual basis.
It remains very difficult to predict the cash collections from these customers.
And notably, the first quarter was more challenging than we expected.
However, we continue to believe that this recovery will be closely tied to improving passenger traffic and rising ticket sales.
The remaining $37 million is from lease restructuring agreements, the majority of which went into effect in 2020.
Our lease restructurings are focused on situations where we believe the merits of the restructurings, including lease extensions and other considerations, outweigh these associated adjustments being made.
Our total deferrals, net of repayments to date, is approximately $131 million, of which is down 9% from $144 million as of our last call in February.
Since our last call, repayment activity has continued, with total repayments of $112 million or 46% of the gross deferrals granted and is reflected in our operating cash flow.
I also want to reiterate that we believe our accommodations remain manageable and relative to our liquidity position.
A final note regarding aircraft sales was that we sold new aircraft in the first quarter of this year as compared to three aircraft that we sold in the prior year as part of our Thunderbolt III transaction.
As John indicated, we anticipate that the resumption of our sales program is at a reduced scale during the second half of the year.
Interest expense increased year-over-year, primarily due to the rise in our average debt balances, driven by the growth of our fleet and an increase in our liquidity position, partially offset by a decline in our composite cost of funds.
Our composite rate decreased to 3% from 3.2% in the first quarter of 2020.
Depreciation continues to track the growth of our fleet, while SG&A remained relatively low compared to last year, down 5%, representing 5.7% of total revenues.
The primary driver here is the continued low operating and transactional-related expenses, which continue to remain constrained in the current environment.
While this quarter's results continue to be impacted by the pandemic, we do see light at the end of the tunnel.
Despite the current stresses in the marketplace, we continue to generate positive margins and returns on equity, which should improve as our customers come off cash basis as the world continues to recover from the pandemic.
Turning to capital allocation.
We have maintained our dividend policy and our Board has extended our share buyback authorization of $100 million through the end of December 2021.
Although we have not repurchased any shares to date, we continue to look at the best opportunities to generate long-term results for our shareholders by evaluating all of our capital deployment options.
Lastly, I want to touch on financing, which continues to provide us a significant edge over our competition.
We are dedicated to maintaining an investment-grade balance sheet.
Utilizing unsecured debt is our primary form of financing and have $23.7 billion in unencumbered assets at quarter end.
And we ended the year with a debt-to-equity ratio of 2.5 times.
In addition to the senior unsecured note issuances we completed in January at a record low of 0.7%, we returned to the preferred market in February for our second raise in the space, issuing $300 million of perpetual preferred stock at a rate of 4.65%.
Preferred equity is attractive as a component of our overall funding mix, offering favorable rates for long-term capital in support of our fleet growth, funding diversification and favorable rating agency treatment.
Finally, as just announced last week, we extended the final maturity of our bank revolver to 2025 and upsized the facility by an additional $200 million, bringing our total revolving unsecured line of credit to $6.4 billion.
We continue to anticipate maintaining elevated levels of liquidity until the broader aviation market recovers, and we are well positioned from an opportunistic aircraft investments as opportunities arise.
As mentioned, ALC continues to have a robust liquidity position with $7.5 billion of available liquidity at the end of the first quarter and continue to access the investment-grade markets.
As we have always commented, our investment-grade credit ratings are sacrosanct to us.
And you have seen our commitment to the investment-grade rating via how conservatively we run our business.
With that in mind, we are pleased to report that in early April, S&P reaffirmed our BBB rating and changed our outlook to stable from negative.
As I shared in the past, our balance sheet was originally designed to support $6 billion in aircraft investments annually, and we are well above what we anticipate taking in 2021, leaving us plenty of dry powder to explore further opportunities.
Before I conclude, I would like to note that we expect to file a new shelf registration statement in the upcoming days to renew our expiring shelf.
To be clear, this upcoming filing is being made to renew our existing shelf that expires under SEC rules next week.
Consistent with previous filings, the new shelf will primarily allow us to continue to make opportunistic bond issuances.
This concludes management's remarks.
| qtrly earnings per share $0.70.
took delivery of 10 aircraft from our orderbook, representing approximately $602 million in aircraft investments in q1.
do not anticipate that aircraft sales activity will return to pre-pandemic levels during 2021.
|
I am Dorian Hare.
Today's call is being recorded.
An archive of the recording will be available later today on the IR Calendar Section of the News & Events tab at our IR website www.
These materials are labeled Q2 2021 earnings conference call.
Certain risk factors that may impact our business are set forth in our filings with the SEC including our 2020 Form 10-K and subsequent filings.
Also, we will be referring to certain non-GAAP financial measures, including adjusted earnings per share attributable to Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance.
Before I address Equifax's strong second quarter results, I want to recognize our 11,000 associates around the globe for their continued hard work and dedication in these challenging times.
Our team members are our most important asset and they play a vital role in helping millions of consumers around the world to get access to credit.
On July one, we opened all of our U.S. offices fully, and rolled out our new Equifax Flex program, a hybrid working environment that gives our team the opportunity to work-from-home one day per week.
Our full one program recognizes our learnings from the past year around remote work during COVID, but maintains the core of our Equifax culture of collaboration and teamwork that is optimized by an in-person work environment.
We've also resumed in-person meetings with our customers, and I've been energized with the conversations that have taken place so far.
It's great to be moving back to a new normal.
We had a very strong second quarter and first half, which built off our strong outperformance in 2020.
Our team has executed extremely well against the critical priorities of our new Equifax 2023 strategy, which has shown on Slide 4.
We are accelerating new product introductions, beginning to leverage our expanding Equifax Cloud capabilities and our highly differentiated data assets.
We continue to expand our differentiated data assets, both organically and through acquisitions and partnerships.
While still in the early days, our new Equifax Cloud Data and Technology capabilities are providing competitive advantages and capabilities that only Equifax can provide.
And our Customer First initiatives are deepening our relationships with customers and delivering new products and solutions along with above-market Equifax growth.
And as always, we remain focused on extending our leadership in security.
Our EFX2023 growth strategy is our compass for the future and drives all of our growth initiatives as we move through the second half and into '22 and beyond.
We expect this focus to drive our top-line and bottom-line in the future.
Turning now to Slide 5.
Equifax's financial performance in the second quarter was very strong and outperformed our underlying markets.
Revenue at $1.235 billion was the highest quarterly revenue in our history, breaking the record from last quarter.
Local currency revenue growth of 23% and organic local currency growth of 20% were both very strong in some of the highest growth rates in our history.
Our U.S. B2B businesses, our Workforce Solutions and USIS, which together represent over 70% of our revenue, again drove our overall growth delivering very strong 25% total and 22% organic revenue growth despite the headwinds from the mortgage market that declined about 5%.
The 5% decline in the mortgage market was about 500 basis points more than our flat expectation we shared with you in April.
U.S. B2B organic non-mortgage growth of 20% accelerated sequentially from the 16% we delivered in the first quarter.
The 20% organic growth is also a record and reflects the underlying strength of Workforce Solutions and USIS has returned to a competitive position.
I'll cover the business performance rather performance in detail in a moment.
But at a high level, Workforce Solutions again led Equifax growth with revenue up a strong 40%.
And as a reminder, this is off growth of 53% in second quarter last year and the mortgage market that declined 5% in the quarter.
USIS delivered another strong quarter with revenue up 11%, driven by non-mortgage total revenue growth of over 20% and strong organic revenue growth of 14%.
International delivered a very strong quarter of COVID recovery with revenue growth of 25% in local currency and importantly all regions internationally delivered growth about 20%.
Slightly better than expected GCS revenue was down 3% in local currency.
However, our consumer-direct revenue delivered 11% growth in the quarter, its second consecutive quarter in double-digits.
Second quarter Equifax adjusted EBITDA totaled $431 million, up 20% with margins of 34.9%.
Margins were down a 160 basis points versus last year due to the inclusion of the cloud technology transformation costs in our adjusted results in 2021, which were excluded last year.
This negatively impacted second quarter adjusted EBITDA margins by 310 basis points.
Adjusting for cloud transformation costs of $38 million in the quarter, our margins would have been up a strong 150 basis points.
We are getting strong leverage out of our above market revenue growth.
Adjusted earnings per share of $1.98 per share was up a strong 21% from last year.
Again, adjusting for the cloud transformation costs, adjusted earnings per share would have been up a very strong 36%, reflecting the strong performance in operating leverage of Equifax.
During the quarter, we continue to make significant progress with the Equifax Cloud Data and Technology transformation, including an additional 7,700 customer migrations to the Cloud in the United States and more than 900 migrations internationally.
We remain on track with our Cloud transformation and are confident in our plan.
We continue to expect the North American transformation to be principally complete in early 2022 with the remaining customer migrations completed by the end of next year.
International transformation will follow North America being principally completed by the end of 2023.
And as you know, last year, we started to ramp-up our focus and resources on new products, leveraging the new Equifax Cloud Data and Capabilities.
In the second quarter, we released 46 new products, which is up almost 2x from the 24 products we released a year ago in the quarter.
These new products are increasingly leveraging the new Equifax Cloud to deliver better data and decisioning for our customers.
Driving NPIs leveraging the new Equifax Cloud is central to our EFX2023 growth strategy.
And we continue to expect our vitality index defined as revenue from new products introduced in the last three years to exceed 8%, a big step-up from the 5% last year and a reflection of the strong product focus across EFX.
Our first half performance exceeded our expectations and we are clearly seeing continued strong momentum as we move into the second half.
Based on our strong first half results and confidence in the future, we increased our full year revenue guidance by a $155 million to a midpoint of $4.78 billion, which is up 400 basis points to 16% growth.
We also increased our full year adjusted earnings per share guidance by $0.45 per share to a midpoint of $7.35 per share which adjusting for the technology transformation costs is up 700 basis points to 19% growth.
This includes our expectation that the U.S. mortgage market as measured by credit inquiries will decline approximately 8% in the year, which is consistent with the guidance we provided in April.
In the second quarter, Equifax core revenue growth, the green section of the bars on Slide 6 accelerated to 29%.
This is up significantly from the 20% core revenue contribution we delivered in the first quarter and 11% in the fourth quarter and well above our historical core growth rates.
While our outperformance in the mortgage market continues to drive significant core growth, the contribution from U.S. non-mortgage in International increased significantly in the quarter, reflecting approximately 50% of core revenue growth in the quarter, excluding acquisitions and FX favorability.
Turning now to Slide 7.
Our strong second quarter results were broad-based and reflect better than expected performance for all four Equifax business units.
Workforce Solutions, our largest business had another exceptional quarter, delivering 40% revenue growth and 58% adjusted EBITDA margins.
Again as a reminder, the 40% revenue growth is on top of 53% growth last year in the second quarter.
EWS is cementing itself is our largest and most valuable business and is powering our results, representing 40% of total Equifax revenue in the quarter.
EWS Verification Services revenue of $395 million was up a strong 57%.
Verification Services mortgage revenue grew 52% in the quarter, despite the 5% decline in the mortgage market from increased records, penetration and new products.
Importantly, Verification Services non-mortgage revenue was up over 60% in the quarter and up over 15% sequentially from the first quarter.
Our government vertical, which provide solutions to federal and state governments in support of assistance programs including food and rental support grew over 10% in the quarter.
Government remains one of our largest non-mortgage segments, representing about a third of non-mortgage verification revenue.
We continue to expand our products and solutions in the government vertical and expect our new Social Security Administration contract to go live this quarter with revenue ramping to a $40 million to $50 million run-rate in 2022.
Talent Solutions, which arise income and employment verifications as well as other information for the hiring and on-boarding process through our EWS Data Hub had another outstanding quarter from customer expansion and NPIs, growing over 200%.
Talent Solutions now represents almost 30% of non-mortgage verification revenue.
Building out the EWS Data Hub that leverages the work history in our TWN database with other unique data elements used in the hiring process is a priority for us.
Over 75 million people changed jobs in the U.S. annually, with the vast majority having some level of screening as a part of that hiring process.
Our non-mortgage consumer business, principally in Banking and Auto showed strong growth of about 50% in the quarter as well, though from deepening penetration with lenders and some recovery in these markets.
Debt management also returned to growth in the quarter.
Employer Services revenue of a $101 million was about flat in the quarter as expected.
Combined, our unemployment claims and employee retention credit businesses had revenue of about $64 million, down over 15% from last year.
Substantial declines in UC revenue in the second quarter were partially offset by new ERC revenue that began in the quarter as we support businesses and obtaining federal employee retention credit payments.
Employer Services non-UC and ERC businesses had revenue up over 50% in the quarter.
Our I-9 business driven by our new I-9 Anywhere product, continue to show very strong growth, up over 50%.
Our I-9 business is now almost half of Employer Services non-UC and ERC revenue.
Reflecting on the growth in I-9 and the return to growth of workforce analytics, we expect Employer Services non-UC and ERC businesses to deliver organic growth of over 20% for the year.
Reflecting the power and uniqueness of between dataset, strong verified revenue growth and operating leverage resulted in adjusted EWS EBITDA margins of 58%, a 160 basis point expansion from last year.
Excluding Technology Transformation expenses, EWS margins would have been up over 240 basis points.
Rudy Ploder and EWS team delivered another outstanding quarter and are position to deliver a very strong 2021.
Workforce Solutions is our most powerful and unique business and is powering Equifax results would grow substantially above the rest of the company.
Turning now to USIS.
They had another strong quarter with revenue up 11%, driven by strong performance across the business.
Total USIS mortgage revenue of a $160 million was down about 2% in the quarter, while mortgage inquiries were down 5%, a little bit flat expectation we shared in April.
John will cover our updated view of the mortgage market shortly.
USIS mortgage revenue outgrew the market by over 300 basis points, driven by growth in marketing and debt monitoring products.
Importantly, non-mortgage revenue performance was up 21% with strong organic growth of 14%.
This performance reflects the commercial focus of Sid Singh and his team and their competitive position in the marketplace.
Importantly, organic non-mortgage revenue also delivered strong sequential growth, acceleration of 250 basis points from the first quarter's 11%, an important indicator of the continued strengthening of the USIS business.
Banking and Insurance both grew over 20% in the quarter.
Auto and Direct-to-Consumer were both up over 10% and Telecom and Commercial were just about flat in the quarter.
Financial Marketing Services revenue, which is broadly speaking, our offline or batch business was $59 million in the quarter and up about 14%.
The strong performance was driven by marketing related revenue, which was up over 20% and ID and fraud revenue growth of over 15% as consumer marketing and originations ramped up coming out of COVID.
In 2021, marketing related revenue is expected to represent about 40% of FMS revenue, identity and fraud about 20% and risk decisioning about 35%.
This strong growth across our non-mortgage business is encouraging as we move into the third quarter and the rest of 2021.
The USIS new deal pipeline remains very strong and comparable to the strong levels we've seen so far in 2021.
We have seen the highest growth in auto, financial services and mortgage.
USIS adjusted EBITDA margins were 40.3% in the quarter, the decline of 380 basis points from second quarter last year was principally due to the costs related with Cloud transformation.
Both the cost of redundant systems and the inclusion in our adjusted results of the technology transformation costs, which were being excluded in 2020.
Sales and marketing expenses also increased in the quarter and sequentially to leverage both the stronger U.S. markets and increased NPI rollouts to drive growth.
Shifting now to International.
Their revenue was up a strong 25% on a local currency basis, which is a third consecutive quarter of growth in our global markets.
Revenue growth was up over 20% in all of our markets in Canada, Asia Pacific, Latin America and Europe.
Asia-Pacific, which is principally our Australia business had a very strong quarter with revenue up $91 million or up about 21% in local currency.
Australia consumer revenue turned positive and was up 23% versus last year and up about 2% sequentially.
Our Commercial business combined online and offline, revenue was up a very strong 26% in the quarter and almost 18%, up almost 18% sequentially.
Fraud and identity was up 30% in the quarter, following 15% growth in the first quarter.
European revenues of $68 million were up 27% in local currency in the quarter.
Our European credit reporting business was up about 20% with strong growth in both the UK and Spain.
In UK, which is our largest European market, we saw growth of over 25% in consumer, data analytics and scores and over 40% growth in commercial.
Our European debt management business revenue increased about 30% in local currency off the lows we saw in the second quarter last year during the COVID recession.
Canada delivered record setting revenue of $47 million in the quarter, up about 26% in local currency.
Consumer online was up about 26% in the quarter, an improvement of 12 percentage points from the first quarter.
Double-digit growth in commercial, analytical and decision solutions and ID and fraud also drove growth in the Canadian revenue in the quarter.
Latin American revenues of $44 million, grew 30% in the quarter in local currency, which was the second consecutive quarter of growth coming out of COVID.
We continue to see the benefits in Latin America of the strong new product introductions, the team has rolled out over the past three years.
International adjusted EBITDA margins of 27.3% were up 540 basis points from last year, driven by leverage on revenue growth and continued very good cost control by the international team.
Excluding the impact of the inclusion of the technology transformation costs in adjusted EBITDA, margins were up over 750 basis points.
Global Consumer Solutions revenue was down 2% on a reported basis and 3% on a local currency basis in the quarter and slightly above our expectations.
We again saw strong double-digit growth in our global consumer direct business, which sells direct-to-consumers through equifax.com and which represents a little over half of GCS revenue.
Direct-to-Consumer revenue was up a strong 11% in the quarter, their fourth consecutive quarter of growth.
The decline in overall GCS revenue in the second quarter was again driven by our U.S. lead generation partner business.
We expect the GCS partner business and GCS business overall to return to growth in the fourth quarter.
GCS adjusted EBITDA margins of 22.5% were up just about a 170 basis points, which was better than our expectations.
Turning now to Slide 8.
Workforce Solutions continues to power Equifax and is clearly our strongest fastest growing and most valuable business.
Workforce Solutions revenue grew a very strong 40% in the quarter, with core revenue growth of 46%.
And again the 40% growth in the quarter was on top of 53% growth in the second quarter last year.
This above market performance is driven by the uniqueness of the TWN income and employment data, the scale of the TWN database and the consistent execution by Rudy and his team.
At the end of the second quarter, TWN reached a 119 million active records, an increase of 13% or 14 million records from a year ago and included 91 million unique records.
At 91 million unique, we now have over 60% of non-farm payrolls, which makes our TWN dataset we're valuable to our customers by delivering higher hit rates.
Beyond focusing on adding the over 50 million non-farm payroll records not in the TWN database yet, we're also focused on adding data records from the 40 million to 50 million gig workers and around 30 million pension recipients in the United States marketplace to further broaden the TWN database.
We have plenty of room to grow.
We are now receiving contributions from 1.2 million companies across the U.S., up from 27,000 employers a short two plus years ago.
And as a reminder, over 60% of our records are contributed directly by employers that EWS provides comprehensive employer services to like unemployment claims, W-2 management, I-9, WOTC, Employee Retention Credit, HSA and other HR in compliance-related solutions.
These relationships have been built up over the past decade by the Workforce Solutions team.
The remaining 35% are contributed through partnerships with payroll providers in HR software companies, most of which are exclusive.
The exclusive arrangement with a major payroll processor that we announced on our February call is still on track to become active later this year.
We have a dedicated team with an active pipeline of record additions to continue to expand our TWN database in the future.
And as you know, as we add records to the dataset, they're monetized almost instantly with our customer system-to-system integrations interacting with our TWN database.
Workforce Solutions continues to grow, penetration in key existing markets while expanding into new markets.
We continue to increase our penetration in the mortgage market.
As of the most recent data available at the end of 2020, Workforce Solutions received an inquiry in almost 60% of completed U.S. mortgages, which is up from 55% in 2019.
This 500 basis point increase shows a continuation of growth in TWN mortgage penetration as well as the substantial opportunity for continued growth at existed mortgage with only 60% of mortgages using TWN data today.
We're also seeing substantial growth in TWN in the non-credit markets of government and Talent Solutions as well as increased TWN usage within the card and auto verticals.
As we discussed in the past, growing system-to-system integrations is a key lever in driving both increased penetration and the increased number of polls per transaction for Workforce Solutions.
During the quarter, about 75% of TWN mortgage transactions were fulfilled system-to-system, which was up 2x from the 32% in 2019.
The Workforce Solutions new product pipeline is also rapidly expanding, as our teams leveraged the power of our new Equifax Cloud infrastructure.
We plan to roll-out new products in mortgage Talent Solutions government and I-9 in the second half of the year.
New product revenue will increase in '21 and '22 as we begin to reap the benefits of our new products introduced in the market by Workforce Solutions in the past 18 months.
Rudy in the Workforce Solutions team had multiple levers for growth in '21, '22 and beyond.
Workforce is clearly our largest and most valuable business and will continue to power our results in the future.
Workforce Solutions growth rates and margins are highly accretive to Equifax now and in the future.
Slide 9 provides perspective on the tremendous growth Workforce has delivered since 2017 and the increasing impact of the business has on Equifax with its highly accretive revenue growth rates and margins.
In 2017, Workforce Solutions revenue and EBITDA made up 23% of Equifax revenue and 27% of business unit EBITDA.
For the first half of '21, Workforce Solutions revenue and EBITDA have increased to 40% of Equifax revenue and over half of Equifax business unit EBITDA.
In a short four years, Workforce Solutions has more than doubled in size and is now almost 50% in the first half versus the same period last year.
It is up almost 50% in the first half versus same period last year.
Our unique TWN employment in income assets and the continued expansion of employment-related assets within the Equifax Data Hub provides opportunities for both ongoing outsized growth in Equifax's traditional financial markets of mortgage, banking, auto as well as a substantial growth in new verticals in government talent solution others to come.
We expect that Workforce Solutions will continue to be an increasingly large part of Equifax and power our top and bottom-line with the above-market growth in margins.
Turning to Slide 10.
This provides a perspective on the return to growth USIS delivered since 2018.
USIS has delivered strong double-digit revenue growth over the past six quarters.
The strong mortgage market has advantage USIS as shown in the bottom left of the slide, USIS has driven consistent sequential improvement in non-mortgage growth in second quarter last year, with the overall growth in USIS being driven by 18% non-mortgage growth in the first half of 2021.
USIS team is also increasingly leveraging the Equifax Cloud to design and implement new NPIs for customers.
The Equifax Cloud new products in our unique data assets are making USIS teams more competitive in the marketplace.
And the USIS team is focused on integrating count in the new Equifax Cloud, we're seeing increased used cases in opportunities with our ID and fraud vertical from the count acquisition.
We expect ID and fraud to play a large role in USIS growth in 2021 and beyond.
Turning to Slide 11.
This highlights the core growth performance in our mortgage for our U.S. B2B businesses, Workforce Solutions and USIS.
Our U.S. B2B businesses delivered a combined 25% revenue growth in mortgage in the second quarter, which was 30 point stronger than the 5% mortgage decline we saw in overall mortgage market.
The strong outperformance was again primarily driven by Workforce Solutions with core mortgage growth of 57%.
Consistent with past quarters, EWS's outperformance was driven by new records, increased market penetration, larger fulfillment rates and new products.
Proof that lenders are increasingly becoming reliant on the unique TWN income and employment data on making credit decisions in the mortgage space.
USIS delivered 4% core mortgage revenue growth in the second quarter, driven primarily by new debt monitoring solutions and further support from marketing.
Our ability to substantially outgrow underlying markets is core to our business model and core to our future growth.
As Mark discussed, our Q2 results were very much stronger than we discussed with you in April, with revenue about $85 million higher than the midpoint of the expectations we shared.
For perspective, all we used performed well relative to the expectations we shared.
Performance in non-mortgage in our U.S. businesses Workforce and USIS was very strong in absolute terms, and relative to the expectations we shared.
Our unemployment claims and employee retention credit businesses in Workforce Solutions declined in the quarter, but much less than expected.
International revenue performance was also very strong, again both in absolute terms, and relative to our expectations.
And although the mortgage market was down 5% versus our expectation of flat, our mortgage revenue principally in Workforce was not impacted to the same degree.
This strong revenue drove the upside in adjusted earnings per share relative to the expectations we shared.
Now, turning to mortgage.
As shown on Slide 12, U.S. mortgage market credit increase declined 5% in 2Q'21, weaker than the about flat we had included in our guidance.
Our financial guidance for 2021 assumes that the trend in mortgage credit increase we saw in late June and July continues in 3Q'21 resulting in a decline of mortgage market credit increase of about 23% in 3Q'21 versus 3Q'20.
Although our second half '21 market credit inquiry assumptions are down significantly from the second half of '20, they remained above the average as we saw prior to 2020.
As shown in the left side of Slide 13, mortgage market indicators remain above the peak seen in previous mortgage cycles.
Despite the substantial refinance activity that has occurred over the past year, the number of U.S. mortgages that could benefit from a refinancing remains at a relatively strong level of about $12 million.
Refinance activity continues to benefit from low and recently declining mortgage rates and a substantial appreciation in home prices over the past year.
Based upon our most recent data from January, mortgage refinancings continue to run just under 1 million per month.
As shown on the right side of Slide 13, the pace of existing home purchases continues at historically very high levels.
The strong new purchase market is expected to continue throughout 2021 and into 2022.
Slide 14 provides our guidance for 3Q'21.
We expect revenue in the range of $1.160 billion to $1.180 billion, reflecting revenue growth of about 9% to 11%, including a 1% benefit from FX.
Acquisitions are positively impacting revenue by 1.8%.
We're expecting adjusted earnings per share in 3Q'21 to be $1.62 to $1.72 per share compared to 3Q'20 adjusted earnings per share of $1.91 per share.
In 3Q'21, technology transformation costs are expected to be around $40 million or $0.25 a share.
Excluding these costs, which were excluded from 3Q'20 adjusted EPS, 3Q'21 adjusted earnings per share would be $1.87 to $1.97 per share.
This performance is being delivered in the context of the U.S. mortgage market, which is expected to be down 23% versus 3Q' 20.
Comparing the midpoint of our 3Q'21 guidance sequentially to our very strong 2Q'21 performance, revenue is down about $65 million.
The drivers of this decline are two main factors.
The largest factor is a decline in mortgage revenue driven by the impact of the expectation we shared regarding the decline in the U.S. mortgage market.
The other significant factor is our expectation that we'll see a significant sequential decline in unemployment claims revenue.
Our guidance for adjusted earnings per share declines about $0.30 per share sequentially.
The bulk of this decline is driven by lower gross profit and the revenue expectation I just discussed.
In addition, we are increasing investment sequentially in sales and marketing, particularly in the U.S. as well as increasing investment in product and technology.
Slide 15 provides the specifics on our 2021 full-year guidance.
We are increasing guidance substantially, reflecting our very strong 2Q'21 performance.
In the second half of 2021, we expect strong growth in our U.S. non-mortgage business and international and a return to growth in GCS.
We also expect our U.S. mortgage business to grow about 15% in 2021 over 20 points faster than we expected approximately 8% decline in the U.S. mortgage market.
2021 revenue of between $4.76 billion and $4.8 billion reflects revenue growth of about 15% to 16% versus 2020, including the 1.5% benefit from FX.
Acquisitions are positively impacting revenue by 1.9%.
EWS is expected to deliver about 30% revenue growth with continued very strong growth in Verification Services.
USIS revenue is expected to be up mid to high single-digits, driven by growth in non-mortgage.
International revenue is expected to deliver constant currency growth of about 10% and GCS revenue is expected to be down mid single-digits in 2021.
3Q'21 revenue is also expected to be down mid single-digits, with 4Q'21 revenue returning to growth.
As a reminder, in 2021, Equifax is including all technology transformation costs in adjusted operating income, adjusted EBITDA and adjusted EPS.
These one-time costs were excluded from adjusted operating income, adjusted EBITDA and adjusted earnings per share in 2017 through 2020.
In 2021, Equifax expects to incur one-time Cloud technology transformation costs of approximately a $155 million, a reduction of over 55% from the $358 million incurred in 2020.
The inclusion in 2021 of this about a $155 million and one-time costs would reduce adjusted earnings per share by about $0.97 per share.
This estimate of one-time technology transformation costs is up $10 million from a $145 million we guided in April.
Given our very strong performance in 2021, we are investing to accelerate our tech transformation globally.
2021 adjusted earnings per share of $7.25 to $7.45 per share which includes these tech transformation costs is up 4% to 7% from 2020.
Excluding the impact of the tech transformation cost of $0.97 per share, adjusted earnings per share in 2021 which show growth of about 18% to 21% versus 2020.
2021 is also negatively impacted by the redundant system costs of $79 million related to 2020.
These redundant system costs are expected to negatively impact adjusted earnings per share by about $0.49 per share and negatively impact adjusted earnings per share growth by about 7 percentage points.
Slide 16 provides a view of Equifax total and core revenue growth that is included in our current guidance.
Core revenue growth excludes the impact of movements in the mortgage market and Equifax revenue as well as the impact of changes in our UC claims and employee retention credit businesses within our Employer Services business.
Employee retention credits are specific U.S. government incentives for companies to retain their employees in response to COVID-19 and the associated revenue is not expected to continue into 2022.
The data shown for 3Q'21 and full year 2021 reflects the midpoint of the guidance ranges we provided.
In 1Q'21 and 2Q'21, we delivered very strong core revenue growth of 20% and 29% respectively.
We continue to deliver strong core revenue growth in 3Q'21 of 17% and 19% for all of 2021 in our expectations.
As Mark mentioned earlier, the composition of our core revenue growth is becoming more balanced, reflecting substantially increasing contributions from U.S. non-mortgage, international and as we enter 4Q'21 GCS.
And we continue to expect our mortgage business to grow at that rates faster than the overall mortgage market.
This very strong performance we believe positions us well entering 2022 and beyond.
And now, I'd like to hand it back to Mark.
Turning now to Slide 17.
As I referenced earlier, pricing in our technology teams continue to make very strong progress on our new Equifax Cloud Data and Technology Transformation, with the North American technology transformation expected to be principally complete in early '22 and the remainder of North America transformation and customer migrations completing by the end of next year.
And our international transformation following North America being principally complete by the end of 2023.
Equifax's transformation to a Cloud native environment delivers a host of capabilities that only Equifax can provide as the only cloud native data and technology company.
The Equifax Cloud will deliver always on stability, accelerate response time and built in industry-leading security.
It will provide our customers with real-time access to data and insights that they can rely on to make decisions.
The Equifax Cloud through our Ignite analytics platform, where our customers and Equifax data scientists to work together utilizing EFX unique data assets and customer proprietary assets to define attributes and models to improve customer outcomes.
And we will continue to accelerate the time from analytics to production to bring new products and solutions to market faster and more efficiently enhancing customer benefits and Equifax revenue.
Already the Equifax Cloud is enabled us to produce new products designed and delivered on our Cloud infrastructure four times faster in the past.
We began to leverage these cloud benefits in 2020, as we more effectively developed new products and delivered them to market leveraging the new EFX cloud, growing new product introductions by 44% last year, in 2020.
These new improvements have been further accelerated in 2021 as we are delivering the highest number of new products in our history and we are realizing higher revenue from new product introductions.
Slide 18 provides an update on NPIs, a key driver of our current and future revenue growth.
As we just discussed, the new cloud transformation is significantly strengthened our NPI capabilities, allowing us to increase both the number of NPIs and the revenue generated from new products.
We continue to expand our product resources and focus on transforming Equifax into a product led organization, leveraging our best-in-class Equifax cloud native data and technology to fuel top-line growth.
As I discussed earlier in the second quarter, we delivered 46 new products, which is up about almost 2x from the 24 we delivered last year.
Year-to-date, we've rolled out 85 new products, which is up 44% from the 59 that we delivered in the first half last year.
We're energized as we continue to grow off an NPI record-setting 2020.
We want to highlight some of these products rolled out during the quarter, which we expect to drive revenue growth over the second half and the next few years.
Our new payment Insights products launched by USIS in April was delivered in partnership with Urjanet and uses consumer permission utility in telco data to improve use of customers, consumers' financial picture and help credit invisibles.
The cloud-based solution promotes greater financial inclusion regardless of the consumers' traditional credit score by empowering consumers to show utility in telco payment history with banks or lenders when applying for loans or other services.
The product also allows lenders to seamlessly integrate data into review processes while meeting industry leading standards for protection of consumer data security, confidentiality and integrity.
Workforce Solution launched a new mortgage 36 product in May.
This solution addresses income verification needs by enabling mortgage lenders to pull an extended set of both active and inactive income in employment data for a more complex income mortgage applicants were additional history may be needed in the underwriting process.
EWS also launched a new talent report employment staffing product in April.
This solution provides flexibility on the number of past employers pulled to meet the employment verification needs of the employer.
Staffing agencies leveraged VOE as a reference check was often looking to verify only to employers, which this product helps deliver.
In the United Kingdom, we launched the credit vitality view app.
This Ignite-based app visualizes key credit data trends across the UK versus a company's own performance.
It uses a range of macroeconomic measures and includes filtering capability, so our customers can focus on the performance of their own portfolio and product lines such as mortgages or credit cards.
The app also can illustrate these company and market trends over multiple years.
Lastly, we introduced the Equifax Affordability Solutions in Australia New Zealand.
These solutions deliver automated categorized income and expense verification in a way that delivers meaningful and actionable insights for our customers.
Our customers can easily digest and act on these insights through the delivery of comprehensive consumer affordability reports, which are now required from a regulatory standpoint in these markets.
This new solution will reduce loan application processing timing cost, improve conversion rates and maximize efficiency while fulfilling responsible lending regulatory requirements, delivering overall improvements to the consumer experience.
These are just some examples of the new solutions we launched during the quarter.
We're focused on leveraging our new cloud capabilities to increase NPI rollouts and new product revenue in 2021 and beyond.
Growing NPIs is central to our EFX2023 growth strategy.
And as a reminder, our vitality index is defined as the percentage of revenue delivered by NPIs launched during the past three years.
In April, we increased our vitality index outlook for 2021 from 7% to 8% and we remain confident in this framework for 2021.
As you can see from the left of the slide, our 8% vitality outlook for 2021 is a big step forward from the 5% vitality we delivered last year.
NPIs are a big priority for me and the team as we leverage the Equifax Cloud for innovation new products and growth.
Slide 19 showcases the capabilities we've been building over the past three years that only Equifax can bring to the marketplace.
We have unique market-leading differentiated data at scale that includes our 228 million ACRO credit records, 119 million TWN income and employment records and additional data at scale that comes from our alternative datasets, including Kount and CTUE, PayNet, IXI and others.
Our advanced analytics allow us to build and test attributes faster, leverage artificial intelligence and machine learning, and developing models in days and weeks where used to take months.
Our team of 320 data scientists located around the world are leveraging our advanced analytics in Equifax Cloud native infrastructure to define and deploy cloud native products and solutions.
And our cloud native data fabric is allowing us to key EnLink our unique data asset in ways that we could never do before.
Our data fabric scratches across the globe and we are in the early innings of leveraging its global capabilities.
Only Equifax can provide these capabilities, and we are on offense as we deploy these into the marketplace.
Wrapping up on Slide 20.
Equifax delivered a record-setting second quarter.
We have strong momentum as we move into the second half.
Our 26% overall and 29% core revenue growth in the quarter reflects the strength and breadth of our business model and early benefits from our Equifax Cloud investments and of course it's enhanced focus on new products.
We delivered six consecutive quarters of strong above market double-digit growth.
Our strong performance reflects the execution against our EFX2023 strategic priorities Equifax's on offense.
As we discussed earlier, we're confident in our outlook for 2021 and we raised our full year midpoint revenue guidance to $4.78 billion, increasing our 2021 growth rate by over 370 basis points, almost 16%.
We also raised our midpoint earnings per share guidance to $7.35, increasing the growth rate by over 640 basis points.
As we discussed earlier, Workforce Solutions had another outstanding quarter, delivering 40% revenue growth and 58% EBITDA margins.
EWS is our largest fastest growing and most valuable business.
During the quarter, Workforce Solutions delivered 40% of Equifax revenue and we expect EWS to continue to drive Equifax's operating performance throughout 2021 and beyond, as consumers recognize the value of our growing TWN database.
Rudy and his team remain focused on driving outsized growth by focusing on their key growth drivers of adding new records, rolling out new products, driving penetration, driving their new Talent Solutions Data Hub, expansion in new verticals and leveraging their new EFX cloud capabilities.
USIS also delivered another strong quarter of 11% growth, driven by their 14% non-mortgage organic growth.
We expect USIS non-mortgage growth to continue to be strong due to the economic recovery, the commercial focus of the team, new products and our unique alternative data assets.
Sydney USIS teams are competitive and winning in the marketplace and will continue to deliver in '21 and beyond.
International grew for the third consecutive quarter, accelerating to 25% in local currency in the second quarter as economies reopened and business activity resumes.
Our new international leader Lisa Nelson has high expectations for our team and we expect continued strong growth through the rest of 2021.
We are beginning to realize the benefits of our EFX Cloud Data and Technology transformation as we accelerate new product innovation with products designed and built off of our new EFX Cloud infrastructure.
We spent the last three years building the Equifax Cloud and we're now starting to leverage our new cloud capabilities.
As we move through the rest of the year and into 2022, we'll be increasingly realize the topline, cost and cash benefits from these new cloud capabilities.
Accelerate new products, leveraging our differentiated data and the new EFX cloud capabilities is central to our EFX2023 growth strategy.
We're beginning to see the benefits of our new product focus and resources leveraging the EFX cloud with the 85 NPIs completed in the first half, pacing well ahead of the record 134 we delivered last year.
As we discussed in the past, bolt-on acquisitions that expand our differentiated data assets, strengthening Workforce Solutions and broadening our ID and fraud capabilities are integral to our future growth framework.
We have reinvested our strong cash flow in five bolt-on acquisitions so far this year, that will add a 170 basis points to our revenue in the second half.
We will continue to focus on accretive bolt-on acquisitions that strengthen Workforce Solutions.
I'm more energized now than when I joined Equifax three years ago.
What the future holds as we move from building the cloud through our next chapter of growth, leveraging the new Equifax cloud for innovation, growth and new products.
We have strong momentum across our business as we move into the second half and we're beginning to deliver on the benefits of the significant Cloud Data and Technology investments we made over the past three years.
Equifax's on offense in position to bring new and unique solutions for our customers, then only Equifax can deliver, leveraging our new EFX cloud capabilities.
| equifax q2 adjusted earnings per share $1.98.
q2 adjusted earnings per share $1.98.
q2 revenue rose 26 percent to $1.235 billion.
increasing full-year revenue and earnings per share guidance.
qtrly adjusted earnings per share attributable to equifax was $1.98.
sees fy adjusted earnings per share $7.25 to $7.45.
sees q3 adjusted earnings per share $1.62 - $1.72.
|
Following the prepared comments, the operator will announce that the queue will open for the Q&A session.
This information is not calculated in accordance with GAAP and may be calculated differently than non-GAAP information at other companies.
These statements reflect the best information we have as of today.
All statements about our recovery outlook, new products and acquisitions, and expectations regarding business development and future acquisition are based on that information.
They are not guarantees of future performance and you should not put undue reliance upon them.
Upfront here, I will plan to cover four subjects.
First, I'll provide my take on our Q4 finish.
Second, I'll put a bow on full-year 2020.
Third, I'll share our 2021 outlook, and lastly provide a bit of an update on our transformation plan, which is intended to accelerate the company's growth.
Okay, let me turn to our Q4 results.
So today, we reported revenue of $617 million, that's down 12%, and cash earnings per share of $3.01, that's down 5% versus last year.
These results both better than anticipated, volume recovered a bit more in the quarter than we forecasted and we did manage operating expenses down 14% against the prior year.
Organic revenue growth overall minus 8%.
But most importantly are the trends in Q4, really quite good.
Sales strengthened to over 90% of last year's level.
Same-store sales or client-volume softness improved to minus 6%.
Credit loss is $6 million, although held by a reserve release and retention continued steady at 92%.
We did have a fantastic beyond highlight in Brazil in the quarter.
We added 175,000 new urban or city users in Q4.
That represents 30% of all the new tags we sold in the quarter.
So demonstrates there's real demand among the Non-Toll segment in Brazil for this RFID purchasing network, including fueling, parking, and now even fast food locations.
So look, the conclusion of Q4 is really in the sequential trends of the business.
If you look at Page 7 of our earning supplement, you can see that every Q4 metric is improving from the Q2 low.
Revenue up from $525 million to $617 million, cash earnings per share up $2.28 to $3.01, sales up from 55% to now over 90% of last year's level.
Same-store sales volume getting better from minus 17% to minus 6%, credit losses from $21 million to $6 million, and then lastly retention holding steady at 92%.
So to us, evidence that the business continues to recover from the earlier year lows.
So from a financial perspective, 2020 not our best year.
Revenue finished at approximately $2.4 billion, that's down 10% versus $19 billion, and cash earnings per share finishing at $11.09, down 6% against 2019.
COVID and the shutdowns did manage the vanquish over $400 million of revenue that we planned in 2020, really in three ways.
So first client softness, we had a number of COVID impacted clients that use less of our services.
COVID reset the macro environment in Q2 driving down fuel prices and weakening international currencies.
And then third, for a while, COVID reduced our 2020 new sales, mostly due to the market being distracted.
The good news is despite the fact that COVID is going, that we're still living with COVID is the financial impacts on us appear to be lessening.
So we've now recovered in Q4 about half of the client softness revenue loss that we experienced in Q2.
So half of it back already.
Post the macro reset, we've seen relative stability in fuel prices and FX rates.
And lastly, the demand for our service is clearly recovering as sales reached 90% of prior-year levels.
So despite not having the greatest financial performance in 2020, we did manage to accomplish a few things.
So credit, I'm just delighted with our credit performance in 2020.
Expenses, tough times but we did manage expenses down over 10% in Q2, 3, and 4.
We signed four acquisitions in 2020.
Our guys ran IT exceptionally well, had the best overall system uptime in the history of the company.
And lastly, we were able to replan the business in the second half.
We conducted a replanning exercise in the summer and the actuals came in a smidge better than the replan.
So reminds us again that fleets of business you can plan.
I really do want to give a shoutout to all FLEETCOR people who hung in there and kept the company going through very unsettling times.
Okay, let me make the turn to 2021 and outline our initial guidance for the year, along with the assumptions behind it.
Clearly a higher beta in our 2021 numbers but we'd say that our setup is generally positive.
So first, volume and revenue trends strengthening through 2020.
So with the potential to continue that into '21.
Sales production improving thus the amount we expect to get of end-year revenue from new business, and as I mentioned a bit ago, very solid client retention and credit trends.
We are also hopeful that we'll get additional client-softness recovery in '21, although we're the first to admit that that's hard to forecast.
So in our guidance, we're planning to recover about one-third of our Q4 exit revenue softness that's still outstanding now.
So if we get that, that recovery would provide about 4% to 5% of incremental revenue lift in the second half.
So with that, our guidance for '21 would be as follows.
Revenue of $2,650,000,000 at the midpoint that reflects an 11% increase.
Overall organic revenue in the same range kind of 9% to 13% but I do want to emphasize that assumes 3% to 4% of softness recovery from today's level.
We're anticipating significant sales growth over 30% this year, which would be a record-level sales for the company and profit guide at the midpoint $12.40 of cash earnings per share for the core business.
We are planning about $0.10 of dilution from the Roger acquisition, so that would put our consolidated number at $12.30 at the midpoint.
Lastly, assuming now May 1 close for the AFEX acquisition, accretion could be approximately $0.20 for the year.
So if that happens on time, that could take consolidated cash earnings per share to $12.50.
Chuck will speak further about how the guidance rolls out across the quarters, but I do want to point out that our guidance outlooks Q2, 3, and 4 revenue and profit growth to be back into the high-teens.
Okay, let me transition now to my last subjects, which is the company's transformation plan.
So really our transformation plan is intended to accelerate growth by doing two things.
So first, the portfolio deciding what businesses we want to be in and not be and constantly reworking that to have a more diverse set of faster-growing businesses.
But the second way we transformed the company is through our Beyond strategy, which we do utilize in all four of our major existing businesses.
So in this Beyond strategy, we're really trying to do two things.
First, identify new segments of the market that we can extend the business into.
So we ask who else can we serve, and then second, we identify additional or adjacent services that we can cross-sell back to the client base.
So if you look at Page 11 of our earnings supplement, you'll see the current Beyond initiatives for each of our four businesses.
We do continue to make progress against our Beyond strategy.
Just an example to call out in our Lodging business in 2020.
We now settled 25% of all proprietary hotel payments with our virtual card in which we earn interchange.
So that's up from literally from 0% a few years ago.
But today, we begin implementation of maybe our most exciting Beyond initiative of all with the acquisition of Roger.
So this begins the move of our Corporate Payments' business down market into the SMB space along with the opportunity to offer a full online bill pay to our global SMB fuel card base.
You can see that on Pages 11 and 12 of our supplement.
So this single bill pay initiative has the potential to dramatically accelerate growth rates in both our Corporate Pay and Fuel card businesses.
We feel like it's a pretty unique position that we're in, because of the special set of assets that we have.
So a large global SMB client base numbering in the hundreds of thousands, we've got working SMB sales channels, they historically have acquired 30,000 new clients per quarter.
We've got scaled virtual card processing capability, we generated over $30 billion in annualized spend last year, we've got a very large merchant database that allows us to monetize virtual card, and now we've got some modern cloud software to provide the bill-pay functionality, along with a pretty cool user interface.
So look, in conclusion, today, I'm hoping to provide just a few away.
So Q4 again, not our best quarter from an absolute perspective, but clear evidence of improving trends in the business.
2020, we did manage to perform better as the year went on and certainly learned some new tricks around how to manage credits, expenses, IT, even sales onto remote environments.
'21, again our setup we think looks pretty good.
Only a slightly unfavorable macro to deal with, but improving trends coming into the year and certainly the wildcard that I mentioned of what happens with the incremental softness recovery.
And lastly, transformation, our Beyond strategy now progressing providing some traction but today's online SMB bill pay initiative maybe the biggest of them all.
For the fourth quarter of 2020, we reported revenue of $617 million, down 12%.
GAAP net income down 11% to $210 million, and GAAP net income per diluted share down 6% to $2.44.
The quarter was again affected by COVID-related business slowdowns, although we showed improvement over last quarter in most of our businesses.
Adjusted net income for the fourth quarter of 2020 decreased 10% to $258 million, and adjusted net income per diluted share decreased 5% to $3.01.
We continue to manage expenses in line with revenue performance.
Organic revenue in the quarter was down 8% overall, primarily due to same-store sales being down 6% year-over-year.
Organic revenue neutralizes the impact of year-over-year changes in foreign exchange rates, fuel prices, and fuel spreads and includes pro forma results for acquisitions closed mid-period.
Our fuel category was down organically about 10% versus Q4 last year.
Our domestic Fuel businesses were stable to improving in the quarter, whereas the international Fuel businesses were affected by the renewed COVID related closures, especially in Western Europe.
The corporate payments category was down approximately 6% in the fourth quarter.
Approximately 6 points of decline was again driven by the 100 most-affected customers we discussed last quarter.
Lower spending on our T&E product drove another 2 points of organic drag.
Virtual card volumes were up 12% for the quarter, which was an improvement from flat last quarter as continued political spend and the benefit of new customers offset the drag from the highly affected customers.
Cross-border or FX-related volumes were down 1% as payment volumes are still being affected by lower invoice levels, specifically in manufacturing and wholesale trade.
Full AP continued to perform very well, with volume up 14%.
New sales of Full AP were very strong as full-year 2020 sales were more than double 2019's results.
We continue to invest here and have enabled 10 new ERP integrations in 2020, with plans for another 10 or so in 2021.
Tolls continue to be our most resilient business and grew organically 7% in the fourth quarter, up 4% from last quarter.
Active toll tags were up 6% in the quarter, with urban tags accounting for 25% of all new tags sold during 2020.
The lodging category was down 25% organically in the fourth quarter, with 20 points of drag caused by the inclusion of acquired airline Lodging businesses in the year-ago period.
Our workforce Lodging business has improved with volumes down in the mid-single-digits.
The airline lodging volumes have also improved in-line with flight activity but still remained well below last year's levels.
Looking further down the income statement.
Our total operating expenses were down 14% for the fourth quarter of 2020 to $323 million.
We performed in-line with the high end of our target reduction compared with the fourth quarter of 2019.
The decrease was primarily due to lower volume-related costs, lower employee-related costs, including headcount, sales commissions, bonuses, and stock compensation.
We also saw lower T&E expenses in addition to the impact of foreign exchange rates.
As a percentage of total revenues, operating expenses were approximately 52.4%, or roughly 240 basis point improvement from last quarter.
Bad debt expense in the fourth quarter of 2020 was $6 million or 2 basis points, which includes a reserve release of $5 million.
Bad debt was only 4 basis points excluding the reserve release.
Our bad debt levels continue to be good and our aging roll rates remain very favorable.
There is still uncertainty around the timing, level, and duration of government stimulus and various responses to increaseing COVID cases around the world.
So that's still a consideration on our reserve.
Interest expense decreased 13% to $30.3 million, driven primarily by decreases in LIBOR related to the unhedged portion of our debt.
This was partially offset by the impact of additional borrowing for share buybacks earlier in the year.
Our effective tax rate for the fourth quarter of 2020 was 20.3%, with the reduction from last year, driven primarily by incremental excess tax benefit on stock option exercises.
Now, turning to the balance sheet.
As of December 31, 2020, we have approximately $1.9 billion of total liquidity consisting of available cash on the balance sheet and our un-drawn revolver at quarter-end.
We ended the quarter just shy of $1.5 billion in total cash, of which approximately $542 million is restricted and consists primarily of customer deposits.
We had $3.6 billion outstanding on our credit facilities and $700 million borrowed in our securitization facility.
We remain committed to a consistent program of capital allocation, using our free cash flow for acquisitions and buybacks.
In the quarter, we repurchased roughly 181,000 shares in-connection with employee sales.
In total for 2020, we spent $850 million on share buybacks.
We believe that we have ample liquidity to pursue any near-term M&A opportunities, while still opportunistically buying back shares when it makes sense.
For the quarter, we had approximately $23.4 million of capital expenditures and we finished with a leverage ratio of 2.67 times trailing-12 month EBITDA as of December 31st.
Now, let me share some thoughts on our outlook.
Looking ahead, we're expecting Q1 2020 adjusted net income per share to be between $2.60 and $2.80, which at the midpoint is approximately $0.31 or 10% lower than what we reported in Q4 of 2020.
About half of the difference is attributable to revenue seasonality.
You see, while some of our businesses like Gift have seasonally strong fourth quarters, most of our businesses have seasonally weak first quarters.
Of course, volume-related expenses will slightly offset this revenue seasonality impact.
Roughly a third of the difference is due to the normalization of certain expenses, for example in Q4 of 2020, we released $5 million of our bad debt reserve, which we do not expect to repeat in Q1.
As sales performance has continued to recover throughout 2020, we expect bad debt to gradually increase sequentially as those customers' balances age.
Additionally, when the impact of the COVID-related shutdowns became clear in 2020, we proactively reduced our annual incentive target payouts by 50% and accrued to those lower targets for the remainder of the year.
As our business has recovered meaningfully, we plan to return incentive targets to 2021 to normal levels.
We also expect our effective tax rate in Q1 of 2021 to be about 80 to 100 basis points higher than the rate we reported in Q4 of 2020.
Lastly, the acquisition of Roger and incremental sales and marketing investments are slightly dilutive to the quarter sequentially.
Now, looking beyond Q1 to full-year 2021, we feel it's important to help you understand how we're thinking about the outlook and providing some ranges around possible outcomes even though, those ranges are a bit wider than what they have been in the past.
For 2021, we are guiding revenues to be between $2.6 billion and $2.7 billion and adjusted net income per diluted share to be between $11.90 and $12.70 inclusive of the Roger acquisition.
We're still faced with substantial uncertainty regarding the pace of economic recovery and the impact it will have on our financial performance.
That said, we've developed a 2021 budget, which incorporates everything we know now, including revenue and expense run-rates, current macro-environmental factors, planned sales contributions, and expected attrition impacts.
In addition, our guidance assumes a continued roll-out of the vaccines, that will allow gradual volume and revenue improvement in the first half of the year, with an acceleration in the back half of the year, as client softness and new sales performance improved sequentially.
As I mentioned earlier, we expect several expense lines to normalize higher in 2021 compared with 2020.
As our business recovers, stock and bonus accruals, as well as sales commission expenses will be higher.
T&E will rise as our salespeople get back on the road and volume-related expenses will also rise with increased business activity.
Bad debt expense is expected to normalize as we've reopened credit and our sales performance continues to improve.
We're also making incremental investments in sales, marketing, and IT to support our growth aspirations and to deliver a 2021 sales production plan, that's more than 30% higher than 2020's results.
We're extremely excited with the Roger acquisition and a disproportionate share of our incremental sales and marketing investments will be directed toward that business.
As such, the fully loaded acquisition will be an estimated $0.10 drag to adjusted net income per diluted share in 2021.
As we've demonstrated time and again, we do take a balanced approach on expenses and we'll adjust accordingly if we see revenues begin to deviate from our expectations.
And lastly, we continue to work through the approvals on AFEX, which have been slowed by Brexit and virus-related shutdowns.
While we still expect the deal to be accretive in 2021, we now believe it is more likely to close in Q2 versus our original expectation of Q1.
And just for clarity, AFEX is not included in the guidance ranges I provided earlier.
| fleetcor q4 earnings per share $2.44.
q4 adjusted earnings per share $3.01.
q4 earnings per share $2.44.
sees q1 adjusted earnings per share $2.60 to $2.80.
sees fy 2021 adjusted earnings per share $11.90 to $12.70.
sees fy 2021 revenue $2.6 billion to $2.7 billion.
|
Today, we will discuss non-GAAP basis information.
While we continue to face operational and financial challenges associated with COVID-19, we remain pleased with the performance of our diversified business units.
During the first quarter, we experienced favorable cost trends, which resulted in better-than-expected financial performance.
We also completed the transition of our D. Ray James, Moshannon Valley and Rivers Correctional facilities to an idle status.
As we had previously disclosed, these three facilities had contracts that were not renewed by the Federal Bureau of Prisons and thus closed at the end of January and March, respectively.
Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities.
Our financial guidance assumes that our remaining BOP contracts will also not be renewed, resulting in three additional BOP facilities closing during 2021.
With respect to the U.S. Marshals Service, unlike the Bureau of Prisons, the agency does not own and operated facilities.
The U.S. Marshals contract contractor facilities, which are generally located near federal courthouses, primarily through intergovernmental service agreements and, to a lesser extent, direct contract.
We are cooperating with the U.S. Marshals Service in assessing various alternatives as to how to comply with the executive order.
During the first quarter, we were notified by the U.S. Marshals that it would not renew the contract for the Queens Detention Facility in New York, which expired on March 31.
We currently operate four additional detention facilities that are under direct contracts and eight detention facilities that are under intergovernmental agreements with U.S. Marshals.
The four direct contracts are up for renewal at various times over the next few years, including two in late '21.
Presently, our 2021 guidance reflects only the nonrenewal of our Queens contract, and we will continue to monitor the scope and implementation time line of the president's executive order.
As noted earlier, the executive order applies only to the Department of Justice.
Immigration and Customs Enforcement are not covered by the executive order since ICE is an agency of the Department of Homeland Security.
Our ICE processing centers are highly rated by national accreditation organizations and have provided high-quality and culturally responsive services for over 30 years under both Democratic and Republican administrations.
Our ICE processing centers have been operating at reduced capacity throughout the pandemic as ICE has reduced operational capacity across all facilities to promote social distancing practices.
The federal government has also put in place Title 42 public health restrictions at the Southwest border which result in the immediate removal of single adults apprehended by border patrol.
Notwithstanding these challenges associated with COVID-19, our employees have demonstrated significant strength and dedication.
We have continued to provide humane and compassionate care to all those entrusted to our facilities and programs.
From the beginning of the public health crisis, our company and our staff took steps to mitigate the risks of the novel coronavirus.
These mitigation initiatives have included a focus on increasing testing capabilities, including investing approximately $2 million to acquire 45 Abbott Rapid COVID-19 devices and testing kits.
We also installed bi-polar ionization air purification system at select secure service facilities, representing a company investment of approximately $3.7 million.
We have provided continued access to face masks and personal hygiene products.
We have implemented social distancing pursuant to directives from our government agency partners.
We have been working closely with our government agency partners and local health departments to make COVID-19 vaccinations available at all of our facilities.
We recognize that in addition to the challenges that I've just discussed, there have been concerns regarding our future access to financing.
We have adopted a proactive and multifaceted approach to address these challenges.
We are focused on debt reduction and deleveraging.
In 2020, we reduced our net debt by approximately $100 million.
During the first quarter, we reduced net debt by approximately $57 million and we've set a goal of paying down between $125 million and $150 million in net debt in 2021.
This past month, our board suspended our quarterly dividend with the goal of maximizing our debt reduction, deleveraging and internally funding growth.
While GEO currently intends to maintain our corporate tax structure as a REIT, our board has determined to undertake a review of our current corporate tax structure, which is expected to be completed by the fourth quarter of this year.
We've also implemented ongoing review of assets for potential sale.
In the first quarter, we sold our interest in Talbot Hall, New Jersey reentry center with net proceeds of over $13 million.
In February of 2021, we issued $230 million and 6.5% exchangeable senior notes due 2026 in a private offering.
We used a portion of the net proceeds to redeem the outstanding amount of $194 million of senior notes due 2022 and use the remaining net proceeds to pay related transaction fees and expenses for general corporate purposes.
With the 2022 maturity having been successfully addressed, we also intend to consider alternatives in due course to address our subsequent maturities.
We believe these initiatives are in the best interest of our shareholders and other stakeholders as we work to address our debt maturities, enhance our long-term shareholder value.
Today, we reported first-quarter revenues approximately $576 million and net income attributable to GEO of $50.5 million.
Our first-quarter results include a $13 million pre-tax gain on real estate assets and a $3 million pre-tax gain on the extinguishment of debt.
Excluding these gains, we reported first-quarter adjusted net income of $0.28 per diluted share.
We also reported first-quarter AFFO of $0.60 per diluted share.
Our first-quarter results reflect better-than-expected operating cost trends across our business units, which resulted in better-than-expected performance.
Moving to our outlook, we have updated our full-year 2021 financial guidance to reflect the better-than-expected cost trends in the first quarter of the year and lower expected maintenance capex for the year.
We expect full-year 2021 net income attributable to GEO to be in a range of $141 million to $150 million on a full-year 2021 revenues of approximately $2.23 billion to $2.25 billion.
We expect full-year 2021 adjusted net income to be in a range of $1.02 to $1.10 per diluted share.
We also expect full-year 2021 AFFO to be in a range of $2.23 to $2.31 per diluted share.
We expect full-year 2021 adjusted EBITDA to be in a range of $395 million to $406 million.
Our updated guidance continues to assume a slow recovery from the COVID-19 pandemic throughout this year.
As we had previously guided, our 2021 projections account for the nonrenewal of three additional BOP contracts that have option periods expiring in 2021: the Great Plains Correctional facility in Oklahoma, which expires on May 31 and for which we have already received notice of nonrenewal from the BOP; and the Big Spring and Flight Line correctional facilities in Texas, which are set to expire at the end of November.
Additionally, the BOP has decided to discontinue its contract for the county-owned and managed Reeves County Detention Center 1 and 2 effective this month.
And thus, our management consulting contract with Reeves County for that facility has ended as well.
With respect to the U.S. Marshals, our 2021 guidance reflects only the previously announced nonrenewal of our Queens facility contract on March 31.
We will continue to monitor the scope and implementation time line of the president's executive order.
Marshals facility in Eagle Pass, Texas, which we expect to achieve normalized operations over the course of 2021.
For the second quarter of 2021, we expect net income attributable to GEO to be in a range of $35 million to $38 million on quarterly revenues of $558 million to $563 million.
We expect second quarter 2021 AFFO to be between $0.57 and $0.59 per diluted share.
As a reminder, our second-quarter results reflect lower payroll tax expenses than our first-quarter results because payroll taxes are front-loaded, resulting in higher expenses during the first quarter of each year compared to all subsequent quarters.
Moving to our capital structure.
At the end of the first quarter, we had approximately $290 million in cash on hand.
More recently, we drew down an additional $170 million on our revolving credit facility, resulting in approximately $460 million in cash on hand and leaving approximately $14 million in additional borrowing capacity under our revolver.
As with our prior drawdown, our decision to further draw on our revolver is a prudent and precautionary step to preserve liquidity, maintain financial flexibility and obtain additional funds for general corporate purposes.
We will continue to proactively examine our options to address our funded indebtedness, including our near-term maturities.
As part of this effort, we refinanced the outstanding amount of $194 million of our senior unsecured notes due 2022 earlier this year by issuing $230 million in new 6.5% exchangeable senior unsecured notes due in 2026.
With the 2022 maturity having been successfully addressed, we also intend to consider alternatives in due course to address our subsequent debt maturity.
As a prudent part of this effort, we intend to review various capital structure alternatives and we have engaged Lazard as financial advisors and Skadden Arps as legal advisors to assist in that process alongside our existing corporate counsel, Akerman.
With respect to our capital expenditures, as we had previously announced, we have canceled approximately $35 million in capex previously planned for 2021.
We now expect total capex in 2021 to be $69 million, including $14 million for maintenance capex.
With the goal of maximizing the use of cash flows to pay down debt, deleverage and internally fund growth, our board suspended our quarterly dividend payments last month.
We have been focused on paying down debt and deleveraging for over a year.
In 2020, we paid down approximately $100 million in debt.
During the first quarter of the year, we paid down approximately $57 million in net debt, which represents substantial progress toward our previously articulated objective of reducing net debt by $125 million to $150 million in 2021.
We are also continuing to evaluate potential cost-saving opportunities, as well as the potential sale of several company-owned assets.
During the first quarter, we sold our interest in the Talbot Hall reentry facility in New Jersey, which resulted in net proceeds to GEO of approximately $13 million.
I'd like to provide you a brief update on our GEO secure services business unit.
During the first quarter of 2021, our staff continued to address the challenges associated with the COVID-19 pandemic.
From the start of the pandemic, we have implemented several mitigation initiatives.
We put in place policy and controls consistent with guidance issued by the Centers for Disease Control and Prevention, including practices and procedures related to quarantine, cohorting and medical isolation.
We have continuously exercised paid leave and paid time-off policies to allow our employees to remain home as needed.
We have made face masks and cleaning supplies available at all of our facilities.
We have focused on increasing testing capabilities at all of our secure services facilities, including the deployment of Abbott rapid test devices that allow us to screen new arrivals at intake, so that positive COVID-19 cases can be properly quarantined and isolated.
To date, we have administered over 100,000 COVID tests to those in our care across our secure services facilities.
We have also made a significant company investment to install bi-polar ionization systems at select secure services sites.
These air purification systems can reduce the spread of airborne bacteria and viruses.
More recently, we have been working closely with our government agency partners and local health departments to make vaccinations available at our facilities, allowing each jurisdiction's vaccine guidelines.
To date, over 18,000 vaccinations have been administered at our secure services facilities.
We continuously evaluate our mitigation steps and will make adjustments based on updated guidance by the CDC and other best practices.
Moving to our recent operational activity.
Ray James, Moshannon Valley and Rivers correctional facilities were not renewed by the Federal Bureau of Prisons and ended at the end of January and March, respectively.
Our facility and regional staff worked closely with the BOP during the first quarter to complete the ramp-down and deactivation of these three facilities.
As we have discussed, in January of this year, the president issued an executive order directing the U.S. Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities.
As a result, we have been preparing operationally with the expectation that our remaining contracts with the BOP will not be renewed when their current option periods expire.
We have already received notice from the BOP that the contract for our Great Plains Correctional Facility in Oklahoma will not be renewed when the current option period expires on May 31.
The BOP has also decided to discontinue its contract for the county-owned and managed Reeves County Detention Center 1 and 2, effective this month.
And therefore, our management consulting agreement with Reeves County for that facility has also ended.
Additionally, the current option periods for our Big Spring and Flight Line facilities in Texas expire at the end of November 2021.
And our current expectation is that those two contracts will not be renewed by the BOP.
Marshals do not own and operate their facilities.
The U.S. Marshals contract for bed capacity, which is generally located in areas near federal courthouses to house pre-trial offenders who have been charged with federal crimes.
Marshals contract for these facilities, primarily through intergovernmental service agreements and, to a lesser extent, through direct contracts.
We were notified by the U.S. Marshals that the agency would not renew the contract in our company-owned Queens detention facility in New York, which expired on March 31.
The four direct contracts are up for renewal at various times over the next few years, including two in late 2021.
With respect to our ICE processing centers, the executive order does not cover agencies outside the Department of Justice.
Our ICE processing centers are highly rated by national accreditation organizations and provide high-quality, culturally responsive services in a safe and humane environment.
Typical amenities at our processing centers include flat-screen TVs in the housing units, multipurpose rooms, outdoor covered pavilions and artificial turf soccer fields.
All those entrusted in our care provided culturally sensitive meals approved by registered dietitian, clothing, 24/7 access to healthcare services and full access to telephone and legal services.
Health care staffing at our ICE processing centers is approximately more than double that of our state correctional facilities, which is needed to provide appropriate treatment for individuals who have numerous and diverse health and mental health needs.
We have provided these high-quality professional services for over 30 years under Democratic and Republican administrations.
I'd like to briefly update you on our GEO care business unit.
Consistent with the efforts undertaken by our GEO secure services facilities, our company and our employees have remained focused on implementing COVID-19 mitigation strategies.
All of our residential facilities in GEO reentry and GEO youth services have put in place quarantine and cohorting policies and additional entry screening measures.
We have also focused our efforts on increased sanitation, testing and deploying face masks.
We have allowed our employees to exercise paid leave and paid time off to remain home as needed.
We will continue to evaluate our mitigation steps, and we'll make adjustments as appropriate and necessary based on updated guidance by the CDC and other best practices.
Despite the challenging operational environment, our employees have continued to deliver high-quality rehabilitation and reentry programming to those in our care, often in innovative ways, including through virtual technologies.
We recently published our 2020 GEO continuum of care annual report, which highlights the accomplishments of our employees and our programs.
Among the innovative initiatives implemented by our continuum of care team during the pandemic was the creation of the GEO academy, which allowed us to transition our academic programs to technology-based programming.
We also launched GEO academy career services in an effort to partner with community employers under our vocational programs to increase employment opportunities for our post-release participants.
Our recently released continuum of care annual report also highlights the accreditation that our Florida facilities received in 2020 from the Commission on Accreditation of Rehabilitation Facilities based on the quality and strength of our substance abuse treatment programs.
The continuum of care annual report also emphasizes the importance of our post-release support services.
During 2020, GEO allocated $1.7 million to address basic community needs of post-release participants such as transitional housing, treatment, transportation, clothing, food, education and job placement assistance.
Throughout the year, our post-release support team helped more than 3,600 individuals returning to their communities.
Furthermore, the statistics disclosed in our continuum of care annual report show that released individuals who received our post-release support services experienced significantly lower recidivism rates over one- and two-year periods than those who did not participate in our post-release support program.
Our GEO continuum of care program is part of GEO's contribution to criminal justice reform.
We believe that it provides a proven successful model on how the 2.2 million people in the criminal justice system can be better served and changing how they live their lives.
Our award-winning program is not in competition or in conflict with other national initiatives regarding offender sentence reforms.
In fact, we applaud these efforts.
Our efforts seek to draw national attention to the many still incarcerated in need of a more structured and comprehensive approach to rehabilitation.
We believe that the success of our continuum of care also positions GEO to pursue quality growth opportunities.
During the first quarter of 2021, we were awarded a new contract with the Federal Bureau of Prisons for a 118-bed residential reentry center in the Tampa, Florida area, which we expect to activate in the second half of 2021.
Additionally, during the first quarter, we activated two new day reporting center sites and were awarded a contract for a third additional day reporting center in California, bringing our nationwide total to 80-day reporting centers.
We believe that these important contract wins are representative of the quality of our rehabilitation and reentry services.
While we continue to face operational and financial challenges associated with COVID-19, we remain pleased with the performance of our diversified business units.
We believe our company remains resilient and is supported by real estate assets and contracts entailing essential government services.
We've provided high-quality professional services for over 30 years under both Democratic and Republican administrations and under legislative branches controlled by both parties.
We recognize that there have been concerns regarding our future access to financing and the recent federal policy actions have resulted in the nonrenewal of some of our contracts.
To address these challenges, we've established a focus on debt reduction and our board has suspended our quarterly dividend.
Our board has also begun a review of our current corporate tax structure as a REIT to be completed by the fourth quarter.
We recently completed the refinancing of our senior note due 2022, and we are evaluating the potential sale of company-owned assets.
We believe these initiatives are in the best interest of our shareholders as we work to address our debt maturities and enhance long-term shareholder value.
On May 15, Blake will be succeeded by James Black, who has 23 years of service with GEO.
That completes our remarks, and we'd be glad to take questions.
| sees fy adjusted ffo per share $2.23 to $2.31.
sees q2 adjusted ffo per share $0.57 to $0.59.
sees q2 revenue $558 million to $563 million.
sees fy revenue $2.23 billion to $2.25 billion.
expect that remaining secure services contracts with bop will not be renewed when current contract periods expire.
notified by usms that it would not renew contract for company-owned queens detention facility in new york, which ended on march 31.
focused on debt reduction, deleveraging, and internally funding growth.
board has determined to undertake an evaluation of geo's structure as a reit.
compname reports q1 adjusted ffo per share $0.60.
q1 adjusted ffo per share $0.60 .
|
We continue to be in various remote locations today.
We may have some audio quality issues and we appreciate your patience should we experience a disruption.
A replay of today's call will be available via phone and on our website.
To be fair to everyone, please limit yourself to one question plus one follow-up.
And now, I'd like to turn the discussion over to Phil Snow.
I'm pleased to share our third quarter results headlined by strong top line growth.
This has allowed us to increase our organic ASV plus professional services guidance for this fiscal year.
Building on last quarter's momentum, we grew organic ASV plus professional services by 5.8% this quarter.
The investments made in both content and technology over the past seven quarters have strengthened our product portfolio.
And as a result demand for our solutions is increasing, further supported by our clients' own digital transformation needs.
Our growth this quarter was strongest with wealth managers, banking clients and asset owners.
The acceleration in ASV reflects solid execution from the sales team who increased wallet share with existing accounts and further improve client retention.
Our strategy to build the industry's leading open content and analytics platform continues to make an impact in the market.
We remain on track with our multiyear investment plan.
We continue to build out our content offering with particular focus on deep sector, private markets, ESG and data for wealth managers.
Growth in workstations this quarter was driven by deep sector and private markets data, especially with banks and corporate clients.
The expansion of our StreetAccount coverage in Canada and Asia as well as more fund data collection has generated greater demand from wealth managers.
And clients are using our data management solutions, which include entity mapping and data concordance services to manage their own content.
These offerings are key differentiators often sought by asset management clients.
Our migration to the cloud is progressing as planned, and gives us the opportunity to build new products that support ASV growth.
One example is the advisor dashboard which is being well received by wealth managers as evidenced by new wins and solid pipeline.
Clients are seeking personalized tools like the advisor dashboard that can surface insights, increase efficiency and help users identify the next best action.
In addition, we provide greater flexibility to clients by further opening up our platform.
Our broader API offerings allow clients to leverage core and alternative data sets, tap into our robust portfolio analytics engine, build digital portals and gain access to proprietary signals.
We have seen strong demand for our analytics APIs, as well as fundamental company data APIs for CTS.
We are also seeing more data sales through cloud-based platforms such as Snowflake and having success with CRM integrations.
This growth in our digital solutions can be attributed to our technology investments.
Looking at our regions, I'm pleased to say that our ASV growth rate increased in the Americas and EMEA across the majority of our business lines.
The Americas growth rate increased to 6% with strength across CTS, research and analytics.
Acceleration was driven primarily by strong workstation sales to our banking clients and overall demand for premium and core data feeds.
We benefited from an increase in hiring of middle market and bulge bracket banks due to robust M&A and equity capital markets.
EMEA's growth rate accelerated to 5% improving over the past two quarters.
We experienced stronger results in research and analytics reflected in part by higher retention of our asset management and wealth firms.
In addition, we captured greater international price increases as clients continue to affirm the value of our solutions.
Asia Pac's growth remained at 9% driven largely by research and analytics.
Results include strong cross sales to asset management firms, as well as increases to global banks who are hiring more to accommodate increased capital markets activity.
The region also benefited from higher price increases.
In summary, we enter the end of fiscal '21 with good momentum and have good visibility into our fourth quarter.
We have a strong pipeline weighted most heavily toward institutional asset managers, broker-dealers and wealth managers and are increasing our organic ASV guidance to $85 million to $95 million for this fiscal year.
Overall, we are encouraged by market trends.
Clients are showing more willingness to spend against the backdrop of anticipated economic recovery.
Decisions on more complex deals that had been delayed are now beginning to be reconsidered as clients look to execute on their own digital transformations.
We see increased demand for enterprisewide technology upgrades and data management as CIOs and CTOs look to future proof their technology stacks.
This gives us conviction in the long-term benefit of our multiyear investment plan and our path to higher growth.
This month marks FactSet's 25th year as a public Company.
I'm proud to reflect on our team's strong performance, the culture of continuous innovation we have fostered, and the significant value to shareholders we have created over the years.
We will continue to push ourselves to create smarter, more adaptive and more personalized solutions that make us the trusted enterprise partner for clients.
She will take you through the quarter in more detail.
Our quarterly results also reflect increased year-over-year spending in people and technology, in line with our investment plan as well as anticipated higher ASV performance.
We believe the progress made in our own digital transformation is enhancing our ability to help clients do the same.
I will now share more details on our third quarter performance and provide an update to our annual outlook.
We grew organic ASV plus professional services by 5.8%, reflecting in part the client demand for our solutions driven by their own digital transformation needs.
In addition, our ability to realize higher pricing is a direct reflection of the value our products provide to clients.
To that point, in line with the $14 million captured last quarter with the Americas price increase, we added $8 million from our international price increase this quarter.
Our investments in content technology have further strengthened our product offerings with clients, as reflected in both higher levels of client retention and cross-selling.
Focused execution from our sales team in delivering key workflow solutions also accelerated our growth.
All of these factors underpin our results year-to-date.
For the quarter, GAAP revenue increased by 7% to $400 million.
Organic revenue which excludes any impact from foreign exchange, acquisitions and deferred revenue amortization increased 6% to $397 million.
Growth was driven primarily by our analytics and CTS solutions, which have been the drivers of ASV in prior quarters.
As a reminder, ASV represents the next 12 months of revenue.
So there is a lag between the recording of ASV and the realization of revenue.
For our geographic segments, organic revenue growth for the Americas grew to 6%, EMEA grew to 5% and Asia Pacific to 11%.
All regions primarily benefited from increases in our analytics and CTS solutions.
GAAP operating expenses grew 12% in the third quarter to $282 million, impacted by higher cost of services.
Compared to the previous year, our GAAP operating margin decreased by 300 basis points to 29.5%, and our adjusted operating margin decreased by 390 basis points to 31.6%.
As a percentage of revenue, our cost of services was 570 basis points higher than last year on a GAAP basis and 560 basis points higher on an adjusted basis.
This increase is driven by higher compensation and technology costs.
Compensation growth is comprised of higher salary expenses for existing employees, new hires to support our multiyear investment plan and higher bonus accrual in line with stronger than anticipated ASV performance.
This higher technology spend relates to our planned migration to the public cloud.
We have been experiencing higher cloud usage and costs due to increased client trials, enterprise hosting and new product development.
We anticipate this level of elevated expenses to continue as clients adopt our digital solutions.
SG&A expenses when expressed as a percentage of revenue improved year-over-year by 270 basis points on a GAAP basis and 170 basis points on an adjusted basis.
The primary drivers include reduced facility expenses, lower spend due to office closures and a decrease in professional fees, offset in part by higher compensation costs, reflecting the same factors as noted in the cost of services.
Moving on, our tax rate for the quarter was 12% compared to last year's rate of 15% primarily due to lower operating income this quarter, and a tax benefit related to finalizing prior year's tax returns.
GAAP earnings per share was almost flat to last year at $2.62 this quarter versus $2.63 in the prior year.
Adjusted diluted earnings per share decreased 5% to $2.72.
Both earnings per share figures were largely driven by higher operating expenses, partially offset by higher revenue.
Free cash flow which we define as cash generated from operations, less capital spending was $122 million for the quarter, a decrease of 13% over the same period last year.
This decrease is primarily due to higher capital expenditure from higher investment in internal software and the timing of certain tax items.
For the third quarter, our ASV retention continued to be above 95%, and our client retention improved to 91% which speaks both to the mission criticality of our solutions and the solid efforts and focused execution of our sales teams.
We grew our total number of clients by 7% compared to the prior year to over 6,100 clients, largely due to the addition of more wealth and corporate clients, including private equity and venture capital firms.
And our user count grew 11% year-over-year and crossed the total of 155,000, primarily driven by wealth and corporate users.
For the third quarter, we repurchased over 178,000 shares of our common stock for a total of $58 million, at an average share price of $323.
We also increased our quarterly dividend by 6.5% to $0.82 per share, marking the 22nd consecutive year that we have increased our dividend.
We remain disciplined in our buyback program and committed to returning long-term value to our shareholders.
The impact of our multiyear investment plan is reflected in our results.
The demand for our strong content offerings, digital solutions and open platform is accelerating growth.
Given our strong performance this quarter, and our confidence that we will execute successfully on a healthy pipeline as we close out the fiscal year, we are increasing our full-year organic ASV plus professional services guidance range to $85 million to $95 million.
We are also reaffirming the other metrics in our annual outlook.
Given its timing and nature, an increase in ASP in the fourth quarter will not materially change revenue in fiscal year '21, but would result in a higher bonus accrual.
The related expense would impact our margins by an incremental 60 basis points to 75 basis points.
We believe that we will remain within our stated annual guidance ranges.
In closing, from the vantage point of now overseeing FactSet sales and marketing organization, I can attest to the diligent focus and efforts we have made this year, helping clients leverage our offerings, building a stronger and broader pipeline and converting opportunities to sales.
I have confidence in our ability to continue to execute on all these fronts and grow our market share as we finish the year.
| q3 adjusted earnings per share $2.72.
q3 earnings per share $2.62.
|
We will begin today with comments from Entergy's Chairman and CEO, Leo Denault; and then Drew Marsh, our CFO, will review results.
In an effort to accommodate everyone who has questions, we request that each person ask no more than two questions.
Management will also discuss non-GAAP financial information.
Today, we are reporting quarterly results that keep us firmly on track to meet our financial commitments.
Third quarter adjusted earnings were $2.45 per share.
With good visibility into the rest of the year, we are narrowing our 2021 guidance range and $5.90 through $6.10 per share and expect to achieve 2022 and 2023 results in line with our outlooks.
Further, we are extending our outlooks to include 2024 and see our steady predictable growth of five percent to seven percent continuing through this period.
Additionally, we achieved the milestone of raising our dividend by six percent and aligning with our earnings growth.
This happened on the schedule we previously communicated and represents another commitment met.
We have developed a more resilient business.
And despite $65 million of nonfuel revenue losses in the third quarter due to Hurricane Ida, we are maintaining our financial commitments.
Our resiliency provides stability that is valuable to all of our stakeholders, particularly customers and owners.
The quarter was heavily impacted by Hurricane Ida, which made landfall as a strong category for hurricane bringing powerful destructive wins across New Orleans, Baton Rouge and beyond.
Our coastal communities were particularly hard hit by both strong winds and storm surge.
Ida disrupted the lives and businesses of many of our customers and communities and Entergy was there to help when they needed us.
We gathered a restoration force of 27,000, our largest ever, representing Entergy employees, contractors and mutual assistance crews from 41 states across the country.
Further gratitude goes to our employees who worked restoration despite their own homes being damaged by Ida.
They epitomize what it means to put our customers first.
I never cease to be amazed by the dedication and effectiveness of the many restoration workers who step away from their lives for weeks at a time to help our customers and communities get their lives and livelihoods back up and running again.
Despite Ida's wins creating significant damage and destruction across our power grid with close to one million peak outages, our team restored customers at a rapid pace.
In just over a week, we had roughly half of all customers restored.
Metro areas like New Orleans and Baton Rouge saw restoration essentially completed by day 10.
Within three weeks, more than 98% of all affected customers were restored.
And it's easy to lose sight of the fact that this restoration was successfully accomplished while dealing with the effects of the pandemic.
Entergy also helped our customers and communities throughout the recovery process by developing -- or deploying 165 commercial scale generators to power critical community infrastructure like medical facilities, gas stations, grocery stores, municipal water systems and community cooling centers in advance of power being restored.
In addition to restoration work, Entergy's employees contributed countless hours to their communities and Entergy shareholders committed $1.25 million to help affected communities rebuild and recover.
While power has been restored to customers who can safely take it, our job is not finished.
We are committed to minimizing the effects of Ida on our customers' bills.
We will work with our regulators to seek securitization of Ida storm costs, which is a proven and low-cost means of recovery.
Further, we are coordinating with key officials and stakeholders, including Louisiana Governor Edwards, The City Council of New Orleans, Louisiana Public Service Commission, Louisiana Congressional Delegation and the Biden administration to seek federal support that could offset the cost of our customers for Ida in the 2020 storms.
There is widespread alignment among state and local leaders on the compelling case that Louisiana has to obtain federal support.
We are fully aligned with this perspective.
To be clear, any federal funding that Entergy utilities obtain will reduce the customer obligation dollar for dollar.
We're also committed to mitigating the impacts of future storms.
Entergy has made significant transmission and distribution investments, nearly $10 billion over the last five years, which made our system more resilient.
We've seen those new investments perform well under the most challenging conditions.
Wind damage to our transmission structures, for example, has occurred most almost exclusively to older structures built to prior standards.
It has become clear that major weather events of all types are occurring more frequently and with greater intensity.
Hurricane Laura made landfall as the strongest storm to hit the Louisiana Coast since 1856.
Then exactly 12 months later, Hurricane Ida hit with almost equal force.
Our resilient standards and asset programs have never been static, and we've continued to evolve them.
And as I mentioned, our investments are working as designed.
However, the uptick in severity and frequency of storms is compelling us to take a fresh look at how we can make our system more resilient, including the pace at which we can achieve it.
Even prior to Ida, we are actively deploying multiple options along the resiliency scale, particularly for our service areas south of I-10 and I-12, which has the greatest exposure to hurricane-strength winds and flooding.
Evaluating these resiliency options needs to be done under future climate scenarios.
And we are taking into account important considerations such as customer affordability and sufficiency of materials and skilled labor.
This customer-driven investment will be significant, and we will work collaboratively with our regulators and other stakeholders to determine the optimal path forward.
Coming back to the quarter, I would like to highlight that despite dealing with a major storm, the business continued to run well without missing a beat.
We've made great progress in several open proceedings.
First, Entergy Arkansas filed a unanimous settlement for its formula rate plan, and the Arkansas Commission has agreed to cancel the hearing and take up the settlement based on the filed testimony, which is positive.
New rates in Arkansas will be implemented in January.
In New Orleans, we recently implemented rates at the level that reflected all adjustments proposed by the council's advisors so there are no further proceedings there.
We also are pleased to note that Entergy Arkansas reached a settlement with key customers of its Green Promise tariff filing.
If approved, this tariff will enable us to offer green solutions to meet the growing sustainability demands of our customers.
And we're making progress on other open proceedings.
In Entergy Louisiana, its FRP rates went into effect.
Entergy Arkansas received approval for the West Memphis Solar project.
Entergy Texas reached an unopposed settlement on its 2020 storm cost filing.
And Entergy Texas also filed for approval of the Orange County Advanced Power Station.
And the Louisiana 2020 storm recovery and securitization process remains on track.
We continue to make progress on decarbonizing our fleet.
We've announced five gigawatts of solar in our supply plan through 2030 with a goal of doing more.
And an update to our supply plan and renewables growth will be provided next week at EEI.
In addition to healthy meeting -- in addition to helping meet decarbonization goals, the cost of renewable resources relative to conventional resources continues to trend favorably, and renewable resources provided an important edge against rising and volatile natural gas prices.
We will provide more details around our latest resource plans at EEI.
Last quarter, I discussed ways in which Entergy can help our industrial customers meet their sustainability goals.
While many have expressed long-term goals like net-zero by 2050, even more have developed shorter-term interim goals that will require action by the end of the decade.
Clean electrification is one of several important tools that our industrial customers have as a means to achieve their objectives.
Clean electrification provides a great opportunity for load growth and will require significant capital investment in renewable generation, transmission and distribution.
The load growth that comes with electrification will help pay for incremental customer-centric investments.
We'll have more to discuss regarding the opportunity we have to help our customers meet their sustainability objectives next week at EEI.
While it is important to discuss these longer-term growth opportunities, I want to make sure we don't lose sight of the very solid based investment plan that we have in front of us.
Over the next three years, we have a $12 billion capital plan that is designed to deliver reliability, resilience and improve customer experience and environmental and cost efficiency benefits to our customers.
When paired with our well-defined regulatory constructs, our plan will deliver five percent to seven percent adjusted earnings per share growth for our owners over the next three years.
That's a very solid base plan.
And beyond this strong foundation, these other opportunities in renewable generation, clean electrification and resilience acceleration will serve to extend our runway of growth throughout the rest of the decade.
We look forward to continuing the conversation with you at the EEI Financial Conference.
Now Drew will review the quarterly results.
Today, we are reporting solid results even with the challenges from Hurricane Ida.
Summarized on Slide five, our adjusted earnings per share was $2.45, slightly higher than a year ago.
We continue to execute our strategy, and we are firmly on track to meet our commitments.
In fact, with three quarters of the year behind us, we are narrowing our guidance range to $5.90 to $6.10.
We're also affirming our outlooks and extending the outlook period through 2024, and we recently raised our dividend to align with our adjusted earnings per share growth rate.
Turning to Slide six.
Our investments to improve customer outcomes continue to drive growth.
That includes rate changes to recover those investments as well as associated new operating expenses.
Industrial billed sales were 10% stronger than a year ago.
We saw increases across most segments with the largest increases in primary metals, petrochemicals, transportation, industrial gases and chlor-alkali.
This reaffirms the strength of our industrial customer base.
And in a world with supply chain constraints and higher energy prices, our industrial customers' businesses remain strong and competitive.
These industrial sales were strong despite Hurricane Ida.
Overall, across all classes, we estimate that third quarter revenues were approximately $65 million lower as a result of Ida.
Hurricane Laura's impact on third quarter 2020 was approximately half of that.
Other O&M was higher this quarter as planned.
This is partly due to higher costs for distribution operations, including reliability costs, higher expenses in our power generation function and higher health and benefit costs.
Moving to EWC on Slide Seven.
You'll see results were slightly lower than a year ago.
The key driver was the shutdown and sale of Indian Point.
Operating cash flow for the quarter is shown on Slide Eight.
The quarter's result is about $300 million higher than last year.
The increase is due largely to improved collections from customers, including collections associated with investments to benefit customers and Winter Storm Uri.
This was partially offset by expenditures related to higher natural gas prices.
Slide nine summarizes our credit and liquidity.
We expect to maintain our current credit ratings, and we continue to expect to achieve targeted rating agency credit metrics as storm restoration spending is securitized and we retire storm-related debt.
I'll take a minute to discuss our balance sheet, beginning with a quick update on Hurricane Ida on Slide 10.
Over the past several weeks, we've refined our cost estimates, and we've shaved $100 million off the upper end of the range.
The total cost is now expected to be $2.1 billion to $2.5 billion.
We've also updated our estimate of the nonfuel revenue loss to $75 million to $80 million, the lower half of our previous range.
While our net liquidity, including storm reserves remained strong at $4 billion, we are also working to ensure timely storm cost recovery.
That starts with a successful restoration effort and proceeds through two avenues.
First, Entergy Louisiana amended its 2020 storm filing to request an additional $1 billion to provide early liquidity for Hurricane Ida costs.
And in Texas, we reached a settlement on the 2020 storm cost filing and that is now before the PUCT.
Second, we have improved the efficiency of our storm invoice processing to accelerate our filings and ultimately, cost recovery.
We plan to complete financing for the 2020 storms by early next year and Ida by the end of next year.
And our work isn't over, we'll continue to identify ways to further reduce business risk.
As Leo highlighted, we are looking forward to a conversation with our customers, retail regulators and other stakeholders about how we best accelerate and implement a strong resilience plan.
We have already hardened more than half of our critical transmission and distribution structures along the Gulf Coast to standards implemented after Katrina and Rita, continue to move the bar higher by reevaluating current standards using the latest weather data.
In addition, a comprehensive resilience plan needs to include the strategic placement of assets to allow higher-risk communities to recover more quickly.
For example, MicroGrid's Distributed Energy Resources and the deployment of generators, Leo highlighted to certain critical customers and the aftermath of storms could be very helpful in supporting communities as they recover.
I go into more depth on this in our conversations with EEI.
In addition to physical resilience, our regulators know the importance of a healthy credit at the operating companies to support customers.
And they have put in place time-tested cost recovery mechanisms such as securitization and storm reserves to support that need.
We are fortunate that in looking to recover the 2020 and 2021 storm costs, we are starting with some of the lowest rates in the country.
We have significant electrification growth potential that could help pay for incremental customer-centric investments and future storm costs.
All of these will support our credit as our regulators and key stakeholders aligned with us around a strong, resilient acceleration plan.
In addition, we continue to execute on the exit of EWC, and we're less than a year from completing our plan.
The resulting improvements were recognized by S&P last fall through our improved business risk profile and by Moody's, just this past quarter through changes to our rating thresholds.
Those changes remain in place and our ratings reflect future storm risk.
As a result, we were able to reduce our 2021 to 2024 equity need.
Combined with our ATM transactions, our future equity need is more than 50% lower than the $2.5 billion communicated at Analyst Day last year.
Moving to Slide 11.
We have a clear line of sight on the remainder of the year.
And for the third year in a row, we are narrowing our adjusted earnings per share guidance.
In this case, for 2021 to $5.90 to $6.10.
We are also affirming our longer-term outlooks of five percent to seven percent adjusted earnings per share growth and extending the 2024.
Our confidence in our solid base plan continues to grow, and a key expression of that confidence is the dividend.
For the last several years, we've discussed our goal to align our dividend growth with our adjusted earnings per share growth.
Our Board of Directors recently declared a $0.06 increase in our quarterly common dividend, which is now $1.01 per share.
That's a six percent increase as planned.
We expect to continue this growth trend going forward, obviously, subject to Board approval.
That's good news for our owners to provide the capital needed to meet our customers' evolving needs.
Today, we are executing on key deliverables, and we have a solid base plan to meet or exceed our strategic and financial objectives.
In less than a week, Leo, Rod and I will be imported to meet with many of you in person for the first time in almost two years.
We'll provide our typical updates on considerations for next year's earnings expectations and will provide our preliminary three-year capital plan, including a positive update on our expectation for renewables.
We'll also talk about the significant long-term customer-centric investment beyond our current outlooks from renewables, clean electrification and acceleration of our system resilience.
We're excited about these opportunities ahead and look forward to talking to you about all of it at EEI.
And now the Entergy team is available to answer questions.
| q3 adjusted non-gaap earnings per share $2.45.
narrowed its 2021 adjusted earnings per share guidance to a range of $5.90 to $6.10.
|
These statements are based on management's expectations, plans and estimates of our prospects.
Today's statements may be time sensitive and accurate only as of today's date, Thursday, October 21, 2021.
We assume no obligation to update our statements or the other information we provide.
Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.
Our team continued its strong performance in 2021 by delivering another great quarter, highlighted by increased in-service occupancy, new development leasing and continued strong growth in rental rates on new and renewal leasing.
As importantly, we were also successful in readying land for new development starts and replenishing our pipeline with strategic land acquisitions.
I'll discuss those successes in more detail shortly, but let me first update you on the overall strength of the U.S. industrial market.
Per CBRE EA, net absorption was a healthy 120 million square feet in the third quarter, while completions came in at 79 million square feet.
Through the first three quarters of this year, net absorption was 292 million square feet, significantly outpacing new supply of 193 million.
In our portfolio, we grew occupancy 50 basis points to finish the third quarter at 97.1%.
Cash, same-store NOI increased 6.9% and cash rental rates for new and renewal leases were up 22.8%.
Looking at rental rate growth for the full year.
As of today, we have signed roughly 98% of the 2021 expirations and including new leasing, our overall cash rental rate increase is 15.3%, which puts us on pace to top our previous company record of 13.9% in 2019.
With respect to 2022 expirations, we're off to a great start with 29% of renewals signed and a cash rental rate increase of 19%.
Let me move now to the primary driver of our external growth, our Development program.
As most of you know, as part of our underwriting process and risk management discipline, we operate with a self-imposed speculative leasing cap.
Due to continued robust fundamentals in the industrial market, the strength of our balance sheet and growth in our portfolio and the significant opportunities we have to create shareholder value through new investments, we've increased our speculative leasing cap by $175 million, bringing the total to $800 million.
Now, let me walk you through our recent land acquisitions, as well as three exciting new development starts that will put some of the incremental cap capacity to good use.
During the third quarter, we closed on three development sites, totaling 122 acres for $59 million.
two are in the Inland Empire East and the third is in Denver.
In total, these sites can accommodate up to 2.1 million square feet of new development.
And one of the new Inland Empire East sites, we are starting our First Pioneer Logistics Center, a 461,000 square foot cross-dock facility.
Our total projected investment is $73 million, with a targeted cash yield of 6.8%.
The Inland Empire continues to be one of the strongest logistics real estate markets in the U.S., helped by significant net absorption from activity related to the two largest ports in North America.
Market vacancy in the Inland Empire is sub-2%, and market rents have grown more than 80% since we went under contract on this site in early 2020.
We look forward to adding this prime asset to our Southern California portfolio, which represents approximately 23% of our rental income, as of the end of the third quarter.
Moving to the East Coast.
We are starting another development in South Florida to serve the strong tenant demand, we have experienced there, with our recent leasing successes at First Park Miami and First 95 Distribution Center.
FirstGate Commerce Center will be a 132,000 square foot, Class A distribution facility in the infill Coral Springs submarket.
Market rents in Broward County have grown 15% to 20% since the end of 2019.
Our total estimated investment is $24 million, and our targeted cash yield is 5.5%.
In the fourth quarter, we acquired a site in Bordentown, New Jersey, just off of Exit 7, on the Jersey Turnpike, for $8 million.
We immediately started construction, a First Bordentown Logistics Center, a 208,000 square foot facility.
We look to build upon our past successes in this location, where our two prior developments were leased near-construction completion.
The Central New Jersey market has been exceptionally strong, with asking rents up 34% versus last year, according to a recent market report from CBRE.
Our total projected investment is $33 million, with an estimated cash yield of 5.8%.
In summary, these three planned fourth quarter starts total approximately 800,000 square feet, with an estimated investment of $130 million and a cash yield of 6.3%.
Including these planned starts, our developments in process totaled 6.4 million square feet, with a total investment of approximately $725 million.
At a cash yield of 6%, our expected overall development margin on these projects is approximately 65%.
With development as our primary driver of external growth, we're also focused on replenishing our land holdings.
In the fourth quarter to date, in addition to the New Jersey site, I just discussed, we also acquired a total of 10 acres in the Inland Empire and Northern California for a total of $10 million.
As of today, adjusted for our planned fourth quarter starts and the aforementioned land acquisitions, our balance sheet land can support approximately 12.5 million square feet of new development.
Our share of the Phoenix Camelback joint venture is an additional 3.8 million square feet.
In total, that's north of 16 million square feet and represents approximately $1.7 billion of potential new investment activity.
Now, let me update you on our recent Development leasing successes.
We just leased the entire 548,000 square footer at First Park @ PV303, in Phoenix, at completion, to a leading omnichannel retailer.
As part of this lease, we are also expanding the building, another 254,000 square feet, for a total of 802,000 square feet.
The total estimated investment for the project, including the expansion is $72 million, and the estimated cash yield is 6%.
The tenant is expected to take occupancy of the just-completed space by year-end, with the expansion ready for use in the second quarter of 2020.
We also leased 100% of our 303,000 square foot First Wilson Logistics Center in the Inland Empire that will be completed in the first quarter of 2022.
With a cash yield of 8.7%, we substantially outperformed our underwritten yield.
This lease further showcases the rapid rental rate growth in the Inland Empire that I discussed earlier.
We are pleased that we have land sites in this high-growth market that can support another 2.8 million square feet of development.
As another example of the strength of the Southern California market and our platform, we just leased our Laurel Park redevelopment project in the South Bay.
This property is very well suited for port-centric warehouse distribution users, given its great location and highly sought-after yard for surface use.
Our first year yield is 7.5% on our $21 million investment, which represents a margin of around 150%.
Moving on to sales.
During the quarter, we sold six properties and four units for $14 million.
And in the fourth quarter, we have sold four additional buildings in Detroit, totaling $7 million, bringing our year-to-date total to $126 million.
Given current visibility on our disposition pipeline, we now expect sales for the year to total $175 million to $225 million, a $75 million increase from the prior midpoint of $125 million.
Let me start by summarizing our results and leasing stats for the third quarter.
NAREIT funds from operations were $0.51 per fully diluted share, compared to $0.49 per share in 3Q 2020.
Excluding approximately $0.04 per share of income related to the final settlement of an insurance claim, 3Q 2020 FFO was $0.45 per share.
Our cash basis same-store NOI growth for the quarter, excluding termination fees, was 6.9%, primarily due to higher average occupancy, an increase in rental rates on new and renewal leasing, rental rate bumps and lower bad-debt expense, slightly offset by an increase in free rent.
We commenced approximately 2.4 million square feet of leases.
Of these, 500,000 were new, 1.4 million were renewals and and 500,000 were for developments and acquisitions with lease-up.
Tenant retention by square footage was 85%.
Cash rental rates for the quarter were up 22.8% overall, with renewals up 21% and new leasing up 27.5%.
And on a straight-line basis, overall rental rates were up 36.2%, with renewals increasing 34.9% and new leasing up 39.5%.
Moving on to some capital markets activity.
As previously announced in early July, we closed on two financing transactions.
First, we expanded our line of credit to $750 million and improved our pricing to LIBOR plus 77.5 basis points, a reduction of 32.5 basis points, compared to our prior facility.
The maturity is now pushed out five years, including our two six-month extension options.
We also refinanced our $200 million term loan.
The new term loan matures in July 2026 and has an interest rate of LIBOR plus 85 basis points, a reduction of 65 basis points in the spread, compared to our prior facility.
With our interest rate swaps in place, the new fixed interest rate on the term loan is 1.84%.
On the equity side, through our ATM, we issued 1.1 million common shares, at a weighted average price of $55.35 per share, for total net proceeds of $59 million to help fund the new investments, Peter spoke about.
Our guidance range for NAREIT FFO is now $1.93 to $1.97 per share, which is a $0.02 per share increase at the midpoint, reflecting our third quarter performance and an increase in capitalized interest due to our announced development starts.
Key assumptions for guidance are as follows: in-service occupancy at year-end of 96.75% to 97.75%.
This implies a full year quarter-end average in-service occupancy of 96.5% to 96.8%, an increase of 15 basis points at the midpoint.
Fourth quarter same-store NOI growth, on a cash basis, before termination fees of 6% to 7.5%.
This implies a quarterly, average same-store NOI growth for the full year 2021 of 4.3% to 4.7%, an increase of 25 basis points at the midpoint due to our third quarter performance.
Please note that our full year same-store NOI guidance excludes the impact of approximately $1 million from the gain from an insurance settlement.
Our G&A expense guidance is now $34 million to $35 million, an increase of $1 million at the midpoint, and guidance includes the anticipated 2021 costs related to our completed and under-construction developments at September 30, plus the expected fourth quarter starts of First Pioneer Logistics Center, First Gate Commerce Center, and First Bordentown Logistics Center.
In total, for the full year 2021, we expect to capitalize about $0.08 per share of interest.
We're excited about our growth prospects, as we continue to put into production our landholdings that can currently support more than 16 million square feet of value-creating developments.
We are also focused on replenishing our pipeline with new sites in higher-barrier markets.
We continue to benefit from robust sector fundamentals that are reflected in strong net absorption, high occupancy levels and increasing rents.
| q3 ffo per share $0.51.
increased 2021 ffo guidance by $0.02 at midpoint to $1.95 per share/unit.
|
Sales in the fourth quarter were $123 million, up 7%, compared to the same period in 2019.
Full-year sales were $424 million, compared to $469 million last year impacted by the pandemic in 2020.
Today all of our plants are operational with varying levels of capacity from 85% to 100%.
Fourth quarter gross margin was up 110 basis points to 34.7% from the same period last year.
EBITDA margin of 21.4% was up from 20.3% in the fourth quarter of 2019.
Fourth quarter adjusted earnings per share of $0.43, were up 16% from $0.37 in the fourth quarter of 2019.
Full-year adjusted earnings per share of $1.12 were down from $1.45 last year.
New business wins for the year were $442 million, down from the prior year as several OEMs push that sourcing decisions in 2020.
Operating cash flow for 2020 was $77 million, up 19% and $64 million in 2019.
In the fourth quarter, we acquired Sensor Scientific, a temperature sensing company, primarily serving medical customers.
Ashish Agrawal, our CFO is with me for today's call as usual and he'll take us through the Safe Harbor statement.
To the extent that today's discussion refers to any non-GAAP measures under Regulation G. The required explanations and reconciliations are available in the Investors Section of the CTS website.
I will now turn the discussion back over to our CEO.
In the fourth quarter, our sales increased to $123 million, up 8% sequentially and up 7% from last year.
For full-year 2020 sales were down 10% from 2019, driven lower by the impact of the pandemic.
The quarter's performance was solid.
However, we are operating cautiously as we enter 2021 and monitor for any new pandemic disruptions, semiconductor shortages for our OEM customers and the consistency of the recent robust recovery.
We continue to prioritize safety in our operations, our team's ability to effectively manage through the crisis, their resilience as well as the commitment and strength of the senior leadership team greatly helped us navigate these unprecedented market conditions this past year.
The restructuring plan we announced last year is progressing with small delays due to the impact of COVID-19.
We are still planning to deliver an annualized earnings per share improvement in excess of $0.22 by the second half of 2022.
More importantly, we're focused on returning to growth, building on our performance in the fourth quarter and leveraging the recent acquisition of Sensor Scientific.
Sensor Scientific is a manufacturer of high quality thermistors and temperature sensor assemblies, serving OEMs for applications that require precision and reliability in medical, industrial and defense markets.
Sensor Scientific's products are used in a variety of medical applications; including neonatal equipment, lab freezers, fluid warmers and analytical instruments.
SSI has locations in Turkey and New Jersey and in the Philippines.
The acquisition expands our temperature sensing portfolio has complementary capabilities with our existing platform and expand CTS's presence in medical.
The annualized revenue is in the range of $6 million, the purchase price was slightly less than 2 times revenue.
We remain focused on our strategic growth investments as part of our planning for 2025.
Growing our business and expanding our range of products that Sense, Connect, and Move is the priority.
New business awards were $104 million for the quarter, we added six new customers in the quarter; four in transportation; one in medical and one in telecom.
In Transportation, we were awarded passive safety sensor wins with three OEMs; one of the wins was with a North American customer for electric trucks, a new customer for CTS, this builds momentum on the large passive safety win we recorded last quarter with a Chinese electric vehicle application.
We have accelerated our module wins with several OEMs across China, Europe and North America.
A few of these wins were on plug-in hybrid electric platforms.
We also added the new customer for passive safety sensors in Asia and a new Chinese JV customer for accelerated modules.
We continue to focus on electric vehicle applications and products that are technology-agnostic and are not impacted by the transition from internal combustion engines to EV's.
New electric vehicle applications in current temperature sensing and advanced E-break our innovation projects in our pipeline, as well as next-generation chassis right high sensing.
Total EV wins for the year were in the range of 20% of new business awarded.
In Europe, we continue to leverage our footprint and capabilities in Denmark and the Czech Republic with Tier 1 defense customers and are currently in sample qualification.
In addition, we were awarded funding from a European Agency for the development of next-generation ceramic materials.
We saw softness in the medical market in the fourth quarter.
However, we are making progress in applications and renewed business with three ultrasound customers in the quarter with one for a multi-year period.
We also secured a win for sleep apnea control application and a win for a medical temperature application.
In other electronic components we had wins with application in EMC, as well as a Microactuator application.
In Asia we secured a win for a two-wheeler throttle sensor application.
With temperature sensing, we secured orders in pool and spa applications, which continue to be strong.
We also have temperature wins in industrial for hatchback and a win for a satellite application.
We are gaining momentum with our precision frequency product enabled by our reference design position.
We secured wins for 5G applications linked to large telecom OEMs and shipped the quarter million of samples in the quarter.
More recently in January, our product was designed in for a 5G application selected by India's largest telecom provider.
The low power crystal product is also in sample testing with a new North American customer.
Building and strengthening our M&A pipeline is the priority.
This is more challenging due to the COVID restrictions, we are actively building relationships with companies in line with our strategy.
We seek to expand our range of technologies, products, customers and geographic reach, while we continue to diversify our end-market profile and enhance the future quality of earnings.
Given our strong balance sheet, we seek to gain momentum with the right strategic fit and evaluation.
The focus 2025 initiatives, which we have previously highlighted has an important emphasis on building stronger customer relationships.
As part of this initiative, we continue to focus on our go-to-market capabilities and skills.
We are working to improve the quality of the sales funnel, optimize our target new accounts and align our functional areas to be more responsive and solution-oriented in line with our core values.
As we progressed into the first quarter of 2021, we've seen a positive start and expect a good first quarter given current customer demand.
As I mentioned earlier, we remain cautious for the full-year in case of unexpected pandemic supply chain disruptions and the current semiconductor shortage.
We are monitoring the consistency of demand in this recovery, given there may have been some pull forwarding demand in 2020.
We are all aware of the backdrop of higher unemployment and the potential for depressed economic and consumer confidence.
Though, we are not experiencing it at this time.
We are facing some headwinds on commodity pricing, higher freight charges, increased absenteeism due to the impact of COVID-19 and working diligently to offset these with our continuous improvement projects.
We expect to stay within our targeted gross margin range.
For the US light vehicle transportation market, volume is expected to improve in the 14 million to 16 million unit range.
On-hand days of supply are now at 59 days.
Approximately 9% below the five-year average of 65 days.
We currently see reasonable control of inventory levels, European sales are forecasted in the 18 million to 19 million unit level, though there is some uncertainty given the recent lockdowns throughout the region with some OEMs announcing volume reductions.
Our exposure to the European market is lower.
The Chinese market is expected to remain solid with volumes of 24 million to 26 million unit range this year.
The commercial vehicle market is on an improving trend that started last year.
Larger backlogs and heavy duty are driven by increasing fleet orders.
In the mid range and lower, demand has been driven by the increase in e-commerce deliveries.
The medical end market is expected to remain soft in the first half of 2021, due to lower elective surgeries.
We see good growth in industrial and defense markets.
In terms of guidance for full-year 2021, we expect sales to be in the range of $430 million to $490 million, and adjusted earnings are expected to be in the range of $1.20 to $1.60.
We are closely monitoring the impact of COVID-19 supply chain disruptions and the broader level of economic activity.
We expect to narrow the range as the year progresses.
In this more remote working environment, we continue to place an emphasis on connecting with our customers, monitoring products and development, effectively navigating supply chain improvements, innovations and importantly, our performance and results driven culture.
Our employees globally continue to provide a tremendous support and demonstrate resilience to serve our customers, while operating safely.
We are confident in our strategy and are using this pandemic period to enhance our foundation, strengthen our core business and to advance our technology capabilities.
Our 2025 initiatives is focused on four key areas: 10% annualized profitable growth with active portfolio management; working more closely with our customers, building relationships and aligning our technology and product road maps; number three building the foundation of CTS's operating system to execute globally on a consistent basis, while we enhance our continuous improvement capabilities; and finally, advancing organizational capability to leadership and culture aligned to our customers' needs, our business performance, our core values, supporting our communities and environmental priorities.
At this time Ashish will take us through the financial performance.
Fourth quarter sales were $123 million, up 7%, compared to last year and up 8% sequentially.
Sales to transportation customers increased by 12% versus the fourth quarter of 2019, sequentially we were up 17% in sales to transportation customers.
Sales to other end markets were essentially flat year-over-year.
We saw solid growth in sales to both the industrial and defense end markets and softness continued in the medical end market.
Our gross margin was 37% for the fourth quarter, up 230 basis points, compared to last quarter, and up 110 basis points, compared to last year.
Adjusted EBITDA in the fourth quarter was 21.4%, up 240 basis points sequentially and up 110 basis points from last year.
Fourth quarter 2020 earnings were $0.46 per diluted share, adjusted earnings per diluted share were $0.43, compared to $0.37 last year and $0.34 last quarter.
For full-year 2020, sales were $424 million, down 10% from 2019.
Sales to transportation customers declined 19% and sales to other end markets increased by 7%.
Industrial and aerospace & defense end markets sales experienced double-digit growth.
Medical end market was soft, but sales down 7%.
Our gross margin was 32.8% for the year, down from 33.6% last year.
The major driver was lower volume attributable to COVID-19, which was partially offset by temporary and other cost reductions implemented throughout the year.
Our focus is to drive improvements and move toward the higher end of our target range of 34% to 37% gross margin.
In the second half of 2020, we generated $0.05 of earnings per share and savings from our restructuring program announced in July 2020.
Foreign currency rates impacted gross margin favorably in 2020 by approximately $3 million.
Based on recent exchange rates currency could impact our 2021 gross margin unfavorably by approximately 100 basis points.
SG&A and R&D expenses were $92.1 million or 21.7% of sales for the year.
Consistent with prior communication, we expect 2021 operating expenses to be higher as a result of the reinstatement of temporary cost measures.
Our 2020 tax rate was 23.7%, we anticipate our 2021 tax rate to be in the range of 23% to 25%, excluding the discrete items.
This is subject to change, due to the impact of any changes that may be introduced by the new US administration.
2020 earnings were $1.06 per diluted share, adjusted earnings per diluted share were $1.12, compared to $1.45 last year.
Now I'll discuss the balance sheet and cash flow.
Our controllable working capital as a percentage of sales was 15.5% in the fourth quarter, improved slightly from the third quarter.
We have made progress over the last couple of quarters, but still have more work to do.
We are balancing improvements in working capital with having some safety stock to minimize risk of supply chain disruptions.
Capex was $14.9 million for the full-year, down from $21.7 million in 2019.
We continue to manage capex carefully given the current environment.
In 2021, we are expecting capex to be in the range of 4% to 4.5% of sales.
The primary focus being on growth-related projects.
We finished 2020 with a healthy balance sheet and a strong liquidity position.
Our operating cash flow in the quarter was $26 million, for the full-year operating cash flow was $77 million, compared to $64 million in 2019.
The end of the year with $92 million in cash, compared to $100 million in December 2019.
In the fourth quarter, we reduced our long-term debt balance to $55 million from $106 million at the end of the third quarter.
Our debt to capitalization ratio was at 11.4% at the end of 2020, compared to 19.7% at the end of 2019.
The combination of a strong balance sheet with a net cash position and access to over $240 million through our credit facility gives the flexibility to appropriately deploy capital toward our strategic objectives.
We are progressing on our SAP implementation as we communicated earlier, more than 80% of our revenue comes from sites that are running on SAP.
We expect to complete the implementation in the second half of 2021.
However, COVID-related restrictions could cause some delays.
This concludes our prepared comments.
| compname announces q4 adjusted earnings per share $0.43.
q4 adjusted earnings per share $0.43.
q4 earnings per share $0.46.
q4 sales $123 million versus refinitiv ibes estimate of $117 million.
sees fy 2021 sales $430 million to $490 million.
adjusted earnings per diluted share for 2021 are expected to be in range of $1.20 to $1.60.
aims to narrow guidance range as year progresses.
|
These statements are based on management's expectations, plans and estimates of our prospects.
Today's statements may be time sensitive and accurate only as of today's date, Thursday, July 22, 2021.
We assume no obligation to update our statements or the other information we provide.
Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.
Our team delivered another great quarter, highlighted by strong operating results, robust development leasing and more investment for growth.
Our efforts were supported by the overall economy and the industrial real estate sector continued to gain momentum throughout the second quarter.
Due to strong second quarter performance and the overall strength of the sector, we are increasing our FFO guidance, which Scott will walk you through shortly.
Per CBRE flash report, net absorption was a healthy 85 million square feet in the second quarter, while completions came in at a three year quarterly low of 52 million square feet.
Completions were impacted by reduced construction activity in 2020 as well as the continuing limited availability of readily developable land in highly sought-after locations.
Through the first half of this year, net absorption was 150 million square feet, outpacing new supply of 106 million.
In the second quarter, we were successful in driving occupancy while continuing to increase rental rates on new and renewal leasing.
In-service occupancy at quarter end was 96.6%, an increase of 90 basis points from the end of last quarter.
This increase in occupancy was accompanied by a 15.7% increase in cash rental rates on new and renewal leasing.
The strength and breadth of tenant demand also carried over to our development investments evidenced by 1.2 million square feet of development leases signed in the second quarter and third quarter to date.
We are pleased to announce that our 250,000 square foot building at First Logistics Center at 78/81 in Central Pennsylvania is now 100% leased to a leading consumer products company.
This takes care of the largest vacancy among our completed developments.
Also in Pennsylvania, we successfully leased the 100,000 square foot First Independence Logistics Center to the United States Postal Service.
In Houston, at our First Grand Parkway Commerce Center, we signed two leases totaling 117,000 square feet, bringing the two building 372,000 square foot project there to 55% leased.
In Dallas, we just leased 97,000 square feet at First Park 121 to a logistics provider, bringing the two building 345,000 square foot phase of that park to 64% leased.
This is in addition to the 125,000 square foot pre-lease at the last phase of the park that we started in the second quarter as discussed on our last call.
We also achieved significant new leasing at our developments in process.
In South Florida, we pre-leased 100% of the 259,000 square foot Building two at First Park Miami to a logistics and transportation company.
This building is scheduled for completion in the fourth quarter and the lease is expected to commence in mid-first quarter of 2022.
This same tenant also pre-leased 50% of our next start in that park, which I will discuss shortly.
We also leased 100% of the soon-to-be completed 141,000 square foot First 95 Distribution Center in Pompano.
The lease will commence by October 1.
Given the strong demand and the ability of our team to replenish our pipeline with profitable development opportunities, we're excited to share several new development starts.
In Nashville, we were successful in winning a 692,000 square foot build-to-suit with a leading specialty e-commerce retailer.
Completion is slated for the third quarter of 2022.
Our projected investment is $59 million and with a projected cash yield of 6.4%.
Taking advantage of the tenant demand we are seeing in South Florida, at First Park Miami, we will start a 219,000 square footer known as Building 1.
As I just noted, we inked a lease for 50% of the space in advance of going vertical.
Total estimated investment is $39 million with a targeted cash yield of 5.3%.
We are also well positioned for future growth at that park.
In addition to what's already underway, I remind you that we can develop another 405,000 square feet on land we own today, and we control another 59 acres developable to 1.3 million square feet for a total build-out of up to 2.5 million square feet.
Also in Florida, in the Orlando market, we are starting First Loop Logistics Park.
First Loop is a 4-building project totaling 344,000 square feet with an estimated investment of $45 million and a cash yield of 5.6%.
In Seattle, we've launched First Steele, a 129,000 square footer.
Estimated total investment is $24 million, with a targeted cash yield of 4.7%.
The site can also accommodate a 700,000 square foot building, which is permit-ready.
This location is proximate to major parcel hubs for UPS, FedEx and the U.S. Postal Service, where tenants serve strong East Coast consumption zones.
Our total projected investment for the first building is $125 million with completion targeted for the third quarter of 2022 and an estimated cash yield of 5.1%.
In summary, these newly announced development starts totaled 2.5 million square feet with an estimated investment of approximately $291 million and a cash yield of 5.4%.
Including these planned new development starts, our developments in process totaled 5.7 million square feet with a total investment of $608 million, at a cash yield of 5.8%, our expected overall development margin on these projects is approximately 50%.
We are excited about this robust pipeline and what it means for future cash flow growth.
To further bolster our development pipeline, we acquired the remaining 138 acres at our PV303 joint venture for $21.5 million.
This price reflects a $10.2 million reduction from our share of the gain and are earned promote from the joint venture.
This purchase closes out a very successful JV, which generated a largely unlevered 54% IRR for the partners and gives us another prime landholding to serve tenants' needs in this high-demand logistics corridor.
In addition, just last week, we closed on a 95-acre site in the Inland Empire East submarket of Banning for $27 million that can accommodate up to a 1.4 million square footer.
Vacancy in the Inland Empire East is just around 2%, and there are limited sites that can meet customer requirements in this size range.
In total, our balance sheet land today can support more than 12.5 million square feet of new investments and our share of the Camelback joint venture is around 3.8 million square feet.
So we are very well positioned for future growth.
Second quarter building acquisitions were comprised of an 81,000 square foot distribution facility in Orlando and a 33,000 square foot regional warehouse in Denver.
Total investment was $18.4 million, and the combined stabilized cash yield is 5.6%.
Moving on to sales.
During the quarter, we sold three properties and one unit for $26.2 million at an in-place cap rate of approximately 5.4%.
We also sold one land parcel for $11 million.
In total, we have sold $104 million year-to-date and have reached the low end of our sales guidance range of $100 million to $150 million.
Let me recap our results for the quarter.
NAREIT funds from operations were $0.48 per fully diluted share compared to $0.40 per share in 2Q 2020 and our same-store NOI growth for the quarter on a cash basis, excluding termination fees, was 2.1% helped by an increase in rental rates on new and renewal leasing, rental rate bumps embedded in our leases and lower bad debt expense, slightly offset by a decrease in occupancy and an increase in real estate taxes.
Summarizing our leasing activity during the quarter, we commenced approximately 3.5 million square feet of leases.
Of these, 1.1 million were new, two million were renewals and 400,000 were for developments and acquisitions with lease-up.
Tenant retention by square footage was 71.1%.
Cash rental rates for the quarter were up 15.7% overall, with renewals up 12.1% and new leasing up 22.7%.
And on a straight-line basis, overall rental rates were up 29.5% with renewals increasing 27% and new leasing up 34.4%.
Moving on to the capital side.
As Peter mentioned, we closed on two financing transactions this month for which the pricing demonstrates the strength of our balance sheet.
First, we amended our line of credit which was scheduled to expire this October.
Our new deal is for $750 million and it matures in four years with two six month extension options.
The interest rate is LIBOR plus 77.5 basis points, a pricing reduction of 32.5 basis points from our previous facilities credit spread.
We also financed our $200 million term loan that was due to mature earlier this month.
The new term loan matures in July 2026 and has an interest rate of LIBOR plus 85 basis points.
This is a 65 basis point reduction in the credit spread compared to our previous term loan.
With our interest rate swaps in place, the new fixed interest rate on the term loan is 1.84%.
Given the strength of our credit metrics, the line of credit and term loan provide for pricing at a BBB plus, Baa1 level, which is one notch better than our current credit ratings of BBB flat, Baa2.
This favorable pricing will be maintained as long as our consolidated leverage ratio as defined in the applicable agreements remains less than 32.5%.
Reflective of these two executions, the weighted average maturity of our unsecured notes, term loans and secured financings was 6.5 years with a weighted average interest rate of 3.4%.
At June 30, our net debt plus preferred stock to adjusted EBITDA is 4.9 times.
In the second quarter, we paid off $58 million of mortgage loans at an interest rate of 4.85%, which leaves us with no other maturities for the remainder of the year.
Our guidance range for NAREIT FFO is now $1.89 to $1.97 per share with a midpoint of $1.93, which is a $0.03 per share increase at the midpoint, reflecting our second quarter performance and an increase in capitalized interest due to our announced development starts.
Key assumptions for guidance are as follows: quarter end average in-service occupancy of 96% to 97%, an increase of 25 basis points at the midpoint.
Please note that our occupancy guidance now assumes that the lease-up of the 644,000 square foot former Pier one space will occur next year.
Due to additional leasing in our portfolio, we were able to essentially backfill more than enough space as an offset and raise our occupancy guidance.
Same-store NOI growth on a cash basis before termination fees of 3.75% to 4.75%, an increase of 25 basis points at the midpoint due to our second quarter performance.
Please note that our same-store guidance excludes the impact of approximately $1 million from the gain from an insurance settlement.
Our G&A expense guidance remains unchanged at $33 million to $34 million, and guidance includes the anticipated 2021 costs related to our completed and under construction developments at June 30, plus the expected third quarter groundbreakings of First Park Miami Building 1, First Loop Logistics Park and First Steele.
In total, for the full year 2021, we expect to capitalize about $0.07 per share of interest.
Importantly, our pipeline of future projects is the strongest it's been since the great recession, which positions us well to continue to drive long-term growth and value for shareholders and serve the space requirements of our tenants.
| q2 earnings per share $0.40.
q2 ffo per share $0.48.2021 ffo guidance increased $0.03 at midpoint to $1.93 per share/unit.
|
These materials will be referenced during portions of todays call.
A detailed description of these risks and uncertainties can be found in AFGs filings with the Securities and Exchange Commission, which are also available on our website.
We may include references to core net operating earnings, a non-GAAP financial measure, in our remarks or in responses to questions.
And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.
AFG reported core net operating earnings of $2.39 per share, an impressive 257% increase year-over-year.
The increase was due to substantially higher underwriting profit in our Specialty Property and Casualty insurance operations and higher Property and Casualty net investment income.
Improved results from the companys $1.6 billion of alternative investments were partially offset by lower other property and casualty net investment income, primarily due to lower short-term interest rates.
Annualized core operating return on equity in the second quarter was a strong 14.7%.
Turning to slide four.
Youll see that the second quarter 2021 net earnings per share of $11.70 included after-tax noncore items totaling $9.31 per share.
These noncore items included earnings from our discontinued Annuity operations, inclusive of an after-tax gain on the sale of $8.14 per share.
Second quarter 2021 noncore items also included $0.40 per share in after-tax noncore net realized gains on securities.
Based on results through the first half of the year, we now expect AFGs core net operating earnings in 2021 to be in the range of $8.40 to $9.20, up from our previous range of $7 to $8 per share, an increase of $1.30 per share at the midpoint of our guidance.
As youll see on slide five, this guidance range continues to assume 0 earnings on AFGs $2.2 billion in parent company cash as we continue to consider alternatives for deployment of the remaining proceeds from the sale of the Annuity business.
Were pleased to increase our 2021 core earnings per share guidance in such a meaningful way.
This guidance also excludes other noncore items such as realized gains and losses and other significant items that are not able to be estimated with reasonable precision or that may not be indicative of ongoing operations.
Furthermore, the above guidance reflects a normal crop year and an annualized return of approximately 8% on alternative investments over the remaining two quarters of 2021.
Craig and I will discuss our guidance for each segment of our business in more detail later in the call.
Now Id like to turn our focus to our property and casualty operations.
Results during the quarter were excellent.
Pretax core operating earnings in AFGs Property & Casualty Insurance segment were a record $288 million in the second quarter of 2021, an increase of $172 million from the comparable prior year period.
Im very pleased that all three of our property and casualty groups reported strong double-digit growth in net written premiums, which was primarily the result of the economic recovery, new business opportunities and healthy renewal pricing.
Underwriting margins across our portfolio of businesses were excellent with each property and casualty group reporting a combined ratio in the 80s.
The Specialty Property and Casualty insurance operations generated an underwriting profit of $153 million in the second quarter compared to $54 million in the second quarter of 2020, an increase of 183%.
Each of our Specialty Property and Casualty groups produced higher year-over-year underwriting profit.
The second quarter 2021 combined ratio was a very strong 87.9%, improving 7.3 points from the 95.2% reported in the comparable prior year period.
Second quarter 2021 results included 0.9 points in catastrophe losses and 5.4 points of favorable prior year reserve development.
Catastrophe losses, net of reinsurance and including reinstatement premiums, were $11 million in the second quarter of 2021 compared to $26 million in the prior year period.
Results for the 2021 second quarter include 0.2 points in COVID-19-related losses compared to 7.6 points in the 2020 second quarter.
We continue to carefully monitor claims and loss trends related to the COVID-19 pandemic.
Numerous legislative and regulatory actions as well the specifics of each claim contribute to a highly fluid evolving situation.
AFG recorded $2 million in losses related to COVID-19 in the second quarter of 2021, primarily related to the economic slowdown impacting our trade credit business.
And we recorded favorable reserve development of approximately $4 million related to accident year 2020 COVID-19 reserves based on loss experience.
Given the uncertainty surrounding the ultimate number and scope of claims relating to the pandemic, approximately 66% of the $96 million in AFGs cumulative COVID-19-related losses are held as incurred but not reported reserves at June 30, 2021.
Our claims professionals and those who support them are working tirelessly to review claims with the care and attention each deserves.
Now turning to pricing.
We continue to see strong renewal rate momentum and achieved broad-based pricing increases in the quarter with exceptionally strong renewal pricing in our longer-tailed liability businesses outside of workers comp.
Average renewal pricing across our entire Property and Casualty Group, including comp, was up approximately 9% for the quarter.
Excluding our workers comp business, renewal pricing was up approximately 12% in the second quarter.
With the exception of workers comp, were continuing to achieve strong renewal rate increases in the vast majority of our businesses.
In fact, this quarter marked our 20th consecutive quarter of overall Specialty Property and Casualty rate increases, which continue to be meaningfully in excess of prospective estimated loss ratio trends.
Gross and net written premiums for the second quarter of 2021 were up 26% and 22%, respectively, when compared to the second quarter of 2020.
Excluding workers comp, gross and net written premiums grew by 30% and 26%, respectively, year-over-year.
The drivers of growth vary considerably across the portfolio of our Specialty Property and Casualty businesses.
In the aggregate, year-over-year growth in gross written premium during the first six months of 21, excluding crop, was fairly evenly split with just over half of the overall growth attributable to rate and about half attributable to net growth and change in exposures.
Market conditions continue to be very favorable and are among the best I recall in my 40-plus years in the business.
Property and Transportation Group reported an underwriting profit of $62 million in the second quarter compared to $33 million in the second quarter of last year.
Higher underwriting profit in our crop, property and inland marine, transportation businesses were the drivers of the year-over-year increase.
The businesses in the Property and Transportation Group achieved a very strong 86.6% calendar year combined ratio overall in the second quarter, an improvement of 5.1 points from the comparable period in 2020.
Catastrophe losses in this group, net of reinsurance and inclusive of reinstatement premiums, were $7 million in the second quarter of 2021 compared to $15 million in the comparable 20 period.
Second quarter 2021 gross and net written premiums in this group were 39% and 32% higher, respectively, than the comparable prior year period, with growth reported in all the businesses in this group.
The growth came primarily from our transportation businesses, primarily the result of new accounts, combined with strong renewals and increased exposures in our alternative risk transfer business and our crop insurance business, primarily the result of higher commodity futures pricing and timing differences in the writing of premiums.
Overall renewal rates in this group increased 7% on average for the second quarter, consistent with the results in the first quarter this year.
Im pleased to see this continued rate momentum.
As far as crop, we expect a normal crop year.
Commodity futures for corn and soybeans are approximately 20% and 12% higher, respectively, than spring discovery prices, as I was looking at my monitor today.
Crop conditions vary by geography with industry reports of 62% of corn and 60% of soybean crops in good to excellent condition.
Generally, crops in the eastern Corn Belt are generally in good shape and crop conditions in the Central and Southern Plains and Southeast are above average.
Its the crop conditions in the Pacific Northwest through the Dakotas that are below average right now due to extreme drought conditions.
And corn and soybean national yield estimates are currently at or near their respective trend yields.
So the year seems to be shaping up fine.
Specialty Casualty Group reported an underwriting profit of $71 million in the 2021 second quarter compared to $27 million in the comparable 2020 period.
Higher profitability in our excess and surplus lines, excess liability, targeted markets and executive liability businesses were the key drivers.
Catastrophe losses for this group were approximately $2 million in the second quarter of 2021 compared to $6 million in the comparable prior year period.
Results in the second quarter of last year included $52 million of COVID-19-related losses, primarily in workers comp and executive liability businesses.
This group reported a very strong 87.9% combined ratio for the second quarter, an improvement of seven points from the comparable period in 2020.
Underwriting profitability in our workers comp businesses overall continues to be excellent.
Gross and net written premiums increased 19% and 16%, respectively, when compared to the same prior year period.
And excluding comp, gross and net written premiums grew by 26% and 25%, respectively, year-over-year.
Nearly all the businesses in this group achieved strong renewal pricing and strong premium growth during the second quarter.
Significant renewal rate increases and new business opportunities contributed to higher premiums in our excess liability businesses, which have higher cessions than other businesses in the group.
Higher renewal rates and increased exposures contributed to the premium growth in our excess and surplus lines business.
And our executive liability and mergers and acquisition liability businesses also contributed meaningfully to the year-over-year growth.
Renewal pricing in this group was up 11% for the second quarter.
And excluding workers comp, renewal rates in this group were up a very strong 17%.
Specialty Financial Group reported an underwriting profit of $21 million in the second quarter of 2021 compared to an underwriting loss of less than $1 million in last years second quarter.
Improved results in our trade credit business contributed to the higher year-over-year underwriting profitability.
And results last year included COVID-19-related losses of $30 million primarily related to trade credit insurance.
This group continued to achieve excellent underwriting margins and reported an 86.4% combined ratio for the second quarter of 2021.
And gross and net written premiums increased by 7% and 14%, respectively, in the 2021 second quarter when compared to the prior year period.
New business opportunities within our lender services, surety and fidelity and crime businesses contributed to the increase in the quarter.
Renewal pricing in this group was up 8% for the quarter, consistent with results in the first quarter of 2021.
Based on the results through the first six months, we have strengthened our guidance across the board, indicating higher expected 2021 net written premiums and stronger underwriting profit.
We now expect the 2021 combined ratio for the Specialty Property and Casualty Group overall between 88% and 90%.
Net written premiums are now expected to be 10% to 13% higher than the $5 billion reported in 2020, which is an increase of three percentage points from the midpoint of our previous estimate.
Growth in net written premiums, excluding workers comp, is now expected to be in the range of 12% to 16%, an increase from the range of 9% to 12% estimated previously.
And looking at each segment, we now expect the Property and Transportation Group combined ratio to be in the range of 87% to 90%.
Our guidance assumes a normal level of crop earnings for the year.
We now expect growth in net written premiums for this group to be in the range of 15% to 19%.
Our Specialty Casualty Group is now expected to produce a combined ratio in the range of 87% to 90%.
Our guidance assumes continued strong renewal pricing in our E&S, excess liability and several of our other longer-tail liability businesses.
Weve raised our projection for growth in net written premiums to a range of 5% to 9% higher than 2020 results, a change from the previous estimate of 2% to 5%.
Premium growth will be tempered by rate decreases in our workers comp book, which are a result of favorable experience in this line.
Excluding workers comp, we now expect 2021 premiums in this group to grow in the range of 10% to 14%, an increase of 5% from the midpoint of our previous guidance.
And we now expect the Specialty Financial Group combined ratio to be 84% to 87%.
We now expect growth in net written premiums for this group to be between 10% and 14%, reflecting stronger underwriting results for the first half of the year and projected premium growth in our fidelity and crime and surety businesses.
Based on the results through the end of June, we expect overall property and casualty renewal pricing in 2021 to be up 9% to 11%, an improvement from the range of 8% to 10% estimated previously.
And excluding comp, we expect renewal rate increases to be in the range of 11% to 13% as indicated by the continued pricing momentum we saw through the first half of 2021.
I now turn the discussion over to Craig to review AFGs investment performance and the successful completion of the sale of our Annuity business.
The details surrounding our $16.1 billion investment portfolio are presented on slides nine and 10.
AFG recorded second quarter 2021 net realized gains on securities of $34 million after tax.
Approximately $29 million of the after-tax realized gains pertained to equity securities that AFG continued to own at June 30, 2021.
Pretax unrealized gains on AFGs fixed maturity portfolio were $260 million at the end of the second quarter.
Were especially pleased with the performance of our alternative investments during the quarter.
Earnings from alternative investments may vary from quarter-to-quarter based on the reported results and valuation of the underlying investments and generally are reported on a quarter lag.
The annualized return on alternative investments reported in core operating earnings in the second quarter of 2021 was 21.1%.
The average annual return on these investments over the past five calendar years was approximately 10%.
We view our investments in real estate and real estate-related entities as a core competency.
In addition to our portfolio of directly owned properties and mortgage loans, our real estate-related investments include real estate funds and real estate partnerships accounted for by the equity method.
We found great success in investing in multifamily properties in desirable communities where we continue to achieve very strong occupancy and collection rates.
These properties represented approximately 55% of our alternative investment portfolio at June 30, 2021.
As you can see on slide 10, our investment portfolio continues to be high quality with 88% of our fixed maturity portfolio rated investment grade and 98% of our P&C group fixed maturities portfolio with an NAIC designation of one or 2, its two highest categories.
On May 28, 2021, AFG completed the sale of our Annuity businesses to MassMutual, the highlights of which are included on slide 11.
Initial cash proceeds from the sale based on the preliminary closing balance sheet were $3.5 billion.
AFG recognized an after-tax noncore gain on the sale of $697 million or $8.14 per AFG share upon closing.
Both the proceeds and the gain are subject to post-closing adjustments.
Prior to the completion of the transaction, AFGs Property and Casualty Group acquired approximately $480 million in real estate-related partnerships, and AFG parent acquired approximately $100 million in directly owned real estate from Great American Life Insurance Company.
Carl and I are extremely proud of the contributions the Annuity segment made to AFG over the years.
Over the last 10 years, this business generated an internal rate of return of approximately 16%, as shown on slide 12.
In an industry where reported net earnings often are significantly less than reported core operating earnings, were proud of the fact that our Annuity business has produced strong net earnings that demonstrate the discipline with which we operated this business and helped to generate strong overall returns for AFG.
As you will see on slide 13, for the 10-year period ended December 31, 2020, AFGs Annuity segment net earnings were 108% of Annuity core operating earnings compared to only 74% for the life insurance industry overall.
When we include the five months of Annuity earnings during 2021, Annuity net earnings as a percent of Annuity core operating earnings improved to 110%, demonstrating the quality of our earnings relative to the industry.
Im very grateful to our Annuity segment management team and associates for their efforts to bring this transaction to a successful close and wish them the best as they continue their careers with MassMutual.
The disposition of our Annuity business sharpens our focus exclusively on the specialty P&C market and generated substantial cash and excess capital for AFG.
In connection with the closing of this transaction, the company declared a special onetime cash dividend of $14 per share totaling $1.2 billion, which was paid in mid-June.
Earlier this week, we paid an additional $170 million in connection with an additional $2 per share special dividend declared in July.
Our excess capital remains at a significant level, which affords us the financial flexibility to make opportunistic repurchases, pay additional special dividends, grow our Specialty P&C niche businesses organically and through acquisitions and start-ups that meet our target return thresholds.
I now turn the discussion over to Brian, who will discuss AFGs financial position and share a few comments about AFGs capital and liquidity.
We repurchased $114 million of AFG common stock during the quarter at an average price per share of $116.13 when you adjust it for the special dividend.
Share repurchases, especially when executed at attractive valuations, are an important and effective component of our capital management strategy.
During the quarter, in addition to the share repurchases and the special dividend that Craig mentioned earlier, we returned $42 million to our shareholders through the payment of our regular $0.50 per share quarterly dividend.
Returning excess capital to shareholders in the form of dividends is a key component of AFGs capital management strategy and reflects our strong financial position and our confidence in the companys financial future.
With the gain on the Annuity sale, annualized growth in adjusted book value per share plus dividends was a strong 47% in the first six months of 2021.
Our excess capital is approximately $3.2 billion at the end of June.
This number included parent company cash and investments of approximately $3 billion.
As of June 30, AFG parent had invested approximately $500 million of the proceeds from the Annuity sale in high-quality fixed maturity investments with an average life of less than 0.5 year and a yield of approximately 1.2%.
As a reminder, we define excess capital as the sum of holding company cash and investments, excess capital within our insurance subsidiaries and borrowing capacity up to a debt to total adjusted capital ratio that ensures we maintain our commitments to rating agencies.
While all of AFGs excess capital is available for internal growth or acquisitions, over $700 million of that excess capital can be used for share repurchases and special dividends above and beyond the nearly $1.5 billion distributed to shareholders through the $14 per share special dividend paid in June, the $2 special dividend paid Monday of this week and the $114 million in second quarter share repurchases while still staying within our most restrictive debt to capital guideline.
We expect to continue to have significant excess capital and liquidity throughout 2021 and beyond.
Specifically, our P&C insurance subsidiaries are projected to have capital in excess of the levels expected by rating agencies in order to maintain their high current ratings, and we have no debt maturities before 2026.
We will now open the lines for any questions.
| q2 core operating earnings per share $2.39.
q2 earnings per share $11.70.
full year 2021 core net operating earnings guidance increased to $8.40 - $9.20 per share.
|
This is Matt Eichmann.
I'm joined by Ole Rosgaard, Greif's president and chief executive officer; Larry Hilsheimer, Greif's chief financial officer; and Matt Lady, Greif's vice president of corporate development and investor relations.
We will take questions at the end of today's call.
In accordance with regulation fair disclosure, please ask questions regarding issues you consider important because we're prohibited from discussing material, nonpublic information with you on an individual basis.
Actual results could differ materially from those discussed.
Today is my first quarterly earnings call as Greif's president and chief executive officer.
And I'm excited to be with you.
My plan today is: to review the state of our business; to briefly share our new Build to Last strategy and its key components; to introduce Greif's new executive leadership team; and finally, to engage meaningfully in a Q&A session.
Our fiscal 2022 is off to an outstanding start.
We delivered record financial results in the first quarter despite a challenging operating environment, complicated by the pandemic, supply chain disruptions, and inflationary pressures beyond our control.
We also announced the pending divestiture of our 50% ownership in the flexible products and service business for outstanding value, solidified our net leverage position, and increased our profit expectations for fiscal 2022.
These accomplishments results from disciplined operational execution and the commitment of our global Greif team.
I would like to briefly share our new Build to Last strategy review.
I will summarize the strategy's high points today as we will dive much deeper into it at our investor day on June 23 and review our continued growth plans.
The Build To Last strategy consists of four missions: creating thriving communities, delivering legendary customer service, protecting our future, and ensuring financial stream.
Mission 1, creating thriving communities.
It's about achieving zero-harm environments and creating an even more engaged, diverse, and inclusive workplace in the future.
Thriving communities will help us win in the war for talent.
Our second mission, delivering legendary customer service involves finding ways to serve customers better each day.
This mission includes implementing new technologies that will increase our agility and help us deliver faster and more comprehensive customer solutions.
Legendary customer service, combined with Greif's unmatched global portfolio and product offerings, forms a powerful business competitive advantage.
Mission 3, protecting our future.
It's about embracing a low-carbon world and further enhancing our focus on product circularity.
Greif is already a sustainability leader today, evidenced by our recently awarded fourth consecutive EcoVadis Gold rating.
But we will take additional steps to mitigate risks associated with climate changes and capture opportunities related to product circularity and sustainable solutions for our customers.
Finally, our fourth mission.
Ensuring financial strength entails generating high-margin EBITDA growth to deliver a growing sustainable profit and cash flow stream that enhances shareholder value creation.
The Build to Last strategy is founded upon our bedrock, the Greif Way, which has guided our business for many years and remains the focal point of our culture.
I look forward to sharing more about Build To Last with you at our investor day.
I'm fortunate to be surrounded by an exceptional team charged with helping to activate the Build To Last brand.
These extraordinary service leaders possess extensive industry knowledge and a demonstrated commitment to disciplined operational execution and customer service excellence.
Their rich and diverse set of skills and experiences along with proven records of performance will drive even greater success at Greif in the future.
I hope you will join us at investor day in June to interact with them.
Finally, before jumping into our results, I would like to announce some changes to our investor relations team.
Matt Eichmann, who you know well, has been promoted to chief marketing and sustainability officer effective March 1.
Matt has done an outstanding job representing Greif to the investment community the last six years, and I'm excited to have him take on this exciting leadership opportunity.
Matt Lady, who currently leads our corporate development team, has added the role of Investor Relations to these responsibilities.
Matt Lady has extensive buy-side experiences and has been instrumental in executing Greif's acquisition strategy and portfolio changes since joining our team almost four years ago.
I'm confident that Matt Lady will be a strong leader in the Investor Relations role and will build upon Matt Eichmann's efforts to improve investor communications, share insights on our business and financial condition, and ensure that leaders across Greif understand what our investors and owners expect of us.
Global Industrial Packaging delivered an outstanding first quarter results.
Global large plastic drums and IBC volumes grew by roughly 8% and 11% per day, respectively, versus the prior-year quarter.
Global steel drum volume fell by 4% per day versus the prior year due to customer supply chain and labor issues despite strong underlying demand.
Similar to quarter 4, the biggest volume shortfall was in APAC, reflective of our decision to implement strategic pricing actions and supply chain disruptions that negatively impacted our customers' operations.
Generally speaking, our end markets remain healthy.
Customers report solid order backlogs and strong underlying demand, but continue to face external supply chain disruptions and labor challenges.
We also hear that our customers' customers have depleted inventory levels, which should eventually translate to a tailwind for Greif.
GIP's generally stronger volumes and higher average selling prices resulted in significantly higher segment sales year-over-year.
The business' first quarter adjusted EBITDA rose by roughly $35 million due to higher sales, partially offset by higher raw material costs.
During the quarter, we continued to experience favorable price cost conditions.
Given timing, inventory costs and the structure of our price adjustment mechanisms, we anticipate GIP's price/cost benefit to deteriorate as we move later into the fiscal year.
Finally, we received several questions about our Ukrainian and Russian businesses that I want to address directly.
This is an evolving situation that we continue to monitor and assess continuously with a dedicated task force.
We are appalled by the ruthless aggression we have witnessed in the Ukraine over the last several days.
We operate one flexibles plant in the country that has been temporarily closed.
Our primary focus has been and will continue to be the safety and well-being of our Ukrainian colleagues and assisting them and their families any way we can.
In Russia, we operate nine facilities.
The business predominantly source raw materials locally and service local customers.
It possesses a very minimal cross-border exposure and contributes less than 3% to total company operating profit annually.
We do hedge roughly half of our ruble exposure.
In times of crisis, we lean on our values and use the Greif way to guide our direction, while extremely upset and aghast by the aggressive actions taken by the Russian government.
As with our Ukrainian colleagues, our focus is on all Greif people.
We remain in full support of our Russian colleagues and continue to operate in Russia with also their well-being as our priority.
In January, we announced an agreement to divest our 50% ownership in FPS.
Although we have worked closely with our joint venture partner in the last 12 years, we evolve to have differing views on the future of this business.
The sale of our 50% stake in flexibles will generate net cash proceeds of approximately $123 million, subject to customary closing conditions.
We anticipate the deal closes by the end of March 2022, and have incorporated the divestitures impacts into our financial fiscal '22 guidance.
Until we refine this further, you can assume FPS ballpark annual adjusted EBITDA contribution to be roughly $35 million.
For context, seven years ago when FPS was struggling, we tried to market considering that this position with virtually no interest.
Now we're selling our half of FPS for substantially more than the best offer at that time for the entire business.
The team has driven considerable improvements in the business and demonstrated professionalism throughout.
Paper packaging's first quarter sales rose by roughly $129 million versus the prior year due to stronger volumes and higher published containerboard and boxboard prices.
Adjusted EBITDA rose by roughly $24 million versus the prior year due to higher sales, partially offset by higher raw material, transportation, and utility costs, including a significant $42 million drag from significantly higher OCC costs.
Similar to the fourth quarter, volume demand across the business remains strong.
At quarter end, our combined build backlogs still exceeded eight weeks.
First quarter volumes in our CorrChoice [Inaudible] system were up roughly 0.5% per day versus the prior year.
E-commerce, automotive parts, food, and durables demands all remained very solid.
First quarter [Inaudible] core volumes were up by 4.6% per day versus the prior year, with demand strong across almost all end markets.
I will now turn you over to our CFO, Larry Hilsheimer, on Slide 9.
By my count, this is the 13th consecutive quarter that we have met or exceeded consensus expectations.
First quarter adjusted EBITDA rose by $58 million year-over-year despite an OCC index headwind of $42 million and roughly $33 million of nonvolume-related transportation and manufacturing labor inflation.
Absolute SG&A dollars rose $17 million versus the prior-year quarter, mainly due to higher health, medical, and incentives costs, but fell 200 basis points on a percentage of sales basis.
Below the line, interest expense fell by $8 million versus the prior-year quarter, due primarily to refinancing our 2021 euro notes with a low rate bank debt.
We expect interest expense to fall further as we utilize proceeds from the flexes divestment on debt repayment and also benefit from having refinanced on Tuesday, our 6.5% 2027 senior notes with additional bank debt, utilizing a mix of floating and fixed rates below 3.5%.
Our first quarter non-GAAP tax rate was roughly 31% and significantly higher year-over-year due to increased pre-tax income, with a higher proportion of that income in the U.S., and less positive discrete items than the prior year.
Even with significantly higher tax expense, our first quarter adjusted Class A earnings per share was still more than double to $1.28 per share.
Finally, first quarter adjusted free cash flow was $19 million cash outflow and lower year-over-year, primarily due to higher capex-related maintenance and organic growth investments in IBCs, plastics, and specialty corrugated products.
Our core capital priorities remain unchanged: reinvest in the business to create value and support growth; return excess cash to shareholders via an attractive and growing dividend; and maintain a compliance leverage ratio between 2 times to 2.5 times.
As promised, we're back comfortably within our targeted leverage ratio range and anticipate further downward bias in the near future.
Balance sheet strength provides us with financial flexibility to pursue value-accretive opportunities.
And we are currently finalizing our strategic planning process to determine the focus of growth activities going forward.
We will share more with you at investor day in June.
We are increasing our fiscal 2022 guidance despite eliminating flexibles income for the period of April 1 to October 31, which was present in the guidance we issued at Q4.
We have overcome that headwind and increased the midpoint of our adjusted earnings per share guidance by $0.45 to $6.60 per share for fiscal '22, reflective of solid first quarter performance, announced paper price increases, and lower interest expense.
We have deliberately kept a wider range than normal given uncertainty introduced by the unfortunate events in Europe.
We now anticipate generating between $380 million and $440 million of adjusted free cash flow in fiscal '22.
While our profit expectations have increased since Q4, that improvement isn't fully reflected in free cash flow, primarily due to higher anticipated cash taxes and increased working capital, largely due to announced price increases.
Finally, you will find a slide with key modeling assumptions in the appendix of today's deck for use as needed.
It is important to take a step back from time to time and look at the bigger picture when considering investment opportunities.
At Greif, we don't run our enterprise with a quarter in mind.
Instead, our value creation model is focused on performance over the long term.
As I've just shown on the prior slide, we have a track record of delivering on our guidance expectations.
The execution discipline we've demonstrated to grow profits over the long haul, no matter the circumstance, has fueled sustained outperformance you will see here relative to a broader bucket of industrial companies.
Despite sustained outperformance, we continue to trade at a substantial discount relative to other packaging firms, which mystifies us.
Clearly, I understand that it is investors who determine our value.
However, our opinion is that our equity deserves a much closer look given the substantial discount present in our stock today.
I am very proud of our team's first quarter performance.
As Greif's legendary customer service comes together, with execution discipline and unmatched product portfolio, a proven and disciplined capital allocation strategy, and sustainability leadership to form a value-creation engine that benefits our shareholders and other stakeholders alike.
Looking ahead, we are well-positioned to benefit from ongoing strength and improving trends in our key end markets, and our future is bright.
| q1 earnings per share $1.28 excluding items.
|
This is Allison Lausas, vice president and chief accounting officer for IDEX Corporation.
The format for our call today is as follows: we will begin with Eric providing an overview of the state of IDEX' business, including a recap of our recent performance and our 2022 outlook.
Bill will then discuss our fourth quarter and full year 2021 financial results, and we'll conclude with our outlook for the first quarter and full year 2022.
Lastly, Eric will close with comments around our focus areas for 2022.
Before we begin, a brief reminder.
I'm on Slide 6.
2021 was another record year for IDEX.
We hit all-time highs on most of our key metrics.
Demand for our differentiated technology remains strong.
This underlying momentum, combined with our targeted growth initiatives and ability to capture price, drove a strong rebound from 2020.
Across most of our portfolio, we saw an expansion beyond pre-pandemic revenue levels.
In the fourth quarter, we achieved a record for orders and sales, and our backlog position is very strong as we enter 2022.
We expanded our margins in a highly inflationary environment.
We levered well on the previous investments we made to optimize our cost position and executed on our productivity funnel.
We maintained positive price costs, albeit at a compressed level versus historic performance.
We remain diligent in controlling our discretionary spend and used our 80/20 principles to allocate resources to our most promising opportunities.
Our strategic focus, purposeful resourcing, and strong operating cash flow enabled us to deploy record capital.
We acquired ABEL Pumps and Airtech and made a collaborative investment in a technology company driving advancements in connected products.
We also invested across the portfolio to support growth and productivity.
We optimized our cost position within our fluid and metering technology segment through a consolidation of our Italy facilities and our energy businesses and delivered on operational productivity projects across the segment.
All of this drove a record year in order sales, margins, earnings, and capital deployment.
We've said in the past that we built IDEX to outperform through a cycle, and we continue to find ourselves in a very challenging one, characterized by supply chain disruptions and labor scarcity exacerbated throughout the year by the emergence of new COVID-19 variants.
Our view continues to be that we don't see gradients of bad.
Rather, the supply chain environment is very tough and numerous challenges persist.
As pockets of issues improve, they tend to be replaced by new obstacles.
The agility of our teams adjusting to new issues almost every day has been and continues to be outstanding.
As we look forward to 2022, we do not see any near-term signs of diminishing supply chain-related headwinds, and the impact of COVID-19 remains highly variable.
In the short term, these conditions have and will impact our ability to efficiently ramp production and have created significant pockets of disruption for our customers and suppliers as well.
We expect that these challenges will remain at a high level at least through the first half of 2022.
Regardless of the near-term challenges, our overall IDEX strategy remains focused on the horizon.
The core of what makes IDEX strong, highly engineered specialized products used in mission-critical applications, remains a solid driver for long-term success.
We'll continue to deploy capital and invest in the resources necessary to drive organic growth in order to capitalize on a robust demand environment.
Our balance sheet has ample capacity, and we will leverage its strength to continue to play offense in M&A.
To that end, we expect to close on the acquisition of Nexsight later this quarter.
With that, I'll turn to our outlook for our segments on Page 7.
In our fluid and metering technology segment, we anticipate growth in our industrial day-rate businesses in 2022 with a return of larger projects toward the latter half of the year.
In the short term, large projects continue to lag as our customers have limited capacity to execute larger upgrades or expansions.
Agriculture is expected to perform well due to high crop prices, strong farmer sentiment, and limited availability of new equipment driving aftermarket demand.
Our municipal water business is stable.
We see improved optimism in the market and project planning activities increasing.
We are expecting an uptick in the energy and chemical markets.
The North American mobile truck market is improving due to a strong construction market in home-heating oil prices, and North American pipelines are reporting modest increased capital budgets for 2022.
We see international oil and gas quote activity outpacing domestic demand, an opportunity we are well-positioned to capitalize on.
FMT continues to be in a strong position to realize price, and we expect this to drive improved margins in 2022.
Likewise, the projects we completed last year to optimize our cost position, as well as new operational productivity projects, will yield strong flow-through in 2022, tempered by a discretionary spending rebound and continued resource investment in this segment.
Moving to the health and science technologies segment.
We expect the strongest growth in HST of all our three segments, and we plan to make the largest resource investments in HST to support that growth.
We anticipate margin improvement driven by volume leverage, partly offset by these resource additions.
HST continues to have robust demand across all their major end markets.
Semiconductor, food and pharma, analytical instrumentation, and life sciences are all expected to perform well.
Next-gen sequencing instrument demand is growing with research and clinical applications outpacing COVID detection and surveillance.
Our ability to execute in the current environment continues to distinguish us from our competition and improve our share position.
On the semiconductor side, we continue to capitalize on tailwinds generated from global broadband and satellite communication trends.
In auto, supply chain issues at our customers, especially around semiconductors, mute our growth.
Underlying market demand remains favorable, and we expect our results to improve as supply chain issues ease.
The industrial businesses within the segment faced similar trends to FMT. Finally, we expect that our fire and safety/diversified products segment will be our most challenged next year.
In fire and safety, North American OEMs are experiencing significant supply chain constraints around chassis and component availability, which limit their production.
On the rescue side, we anticipate that larger tenders will lag, compounded by China localization policies that are driving delays.
We do not anticipate near-term easing of these conditions and see the potential for recovery toward the latter part of 2022.
In our BAND-IT business, like in HST, we see auto supply chain issues dampening current demand.
Despite this pressure, our business continues to outperform the broader market due to our content on key vehicle models.
Lastly, in the near term, we expect continued momentum within our dispensing business as customer capital investments are deployed in early 2022.
However, for the year, we will see a non-repeat of North America projects as we reach the end of the replenishment cycle this year as composed to last year.
We anticipate that the unfavorable price cost position we experienced last year will rebound this year as annual contracts are renewed at current pricing.
We see this improvement tempered a bit by some mix pressure as dispensing volumes reduce and we make some targeted investments.
we see favorable conditions across the majority of our end markets.
However, the degree to which our customers and our facilities will be impacted by rolling supply chain and COVID-related disruptions remains highly variable.
We'll continue to monitor conditions and be as prepared as we can be for potential interruptions.
Despite these short-term headwinds, we are optimistic about our growth potential and the trajectory of our end markets.
I'll start with our consolidated financial results on Slide 9.
fourth quarter orders of $795 million were up 17% overall and up 13% organically.
Organic orders increased across each of our segments.
For the year, orders were up 26% overall and up 21% organically.
We experienced a strong rebound in demand for our products across all our segments and steadily built our backlog in each quarter of 2021 totaling $266 million for the year.
Relative to full year 2019, organic orders were up 15%.
Q4 sales of $715 million were up 16% overall and up 11% organically.
We experienced a strong demand rebound from 2020, but our results were tempered by supply chain and COVID production limitations.
full year sales of $2.8 billion were up 18% overall and up 12% organically.
We saw favorable results across all our segments and again, strong performance relative to full year 2019 with organic sales up 4%.
fourth quarter gross margins expanded 20 basis points to 44%.
For the full year, gross margins expanded 60 basis points, and adjusted gross margins expanded 80 basis points to 44.7%, primarily driven by strong volume leverage.
Q4 operating margin was 22.7%, up 10 basis points compared to prior year.
Adjusted operating margin declined 60 basis points, driven by a rebound in discretionary spending, targeted resource investments, and the dilutive impact of acquisition-related intangible amortization, partially offset by volume leverage.
full year operating margin was 23%, up 90 basis points compared to the prior year.
Adjusted operating margin was 23.9%, up 110 basis points compared to prior year.
I'll discuss the drivers of adjusted operating income on the next slide.
Our fourth quarter effective tax rate was 22.5%, relatively flat compared to the prior-year ETR of 22.2%.
Our full year effective tax rate was 22.5% compared to 19.7% in the prior year due to lower tax benefits associated with executive compensation and the nonrepeat of benefits associated with the finalization of the global intangible low-income tax regulations in 2020.
Q4 net income was $119 million, which resulted in earnings per share of $1.55.
Adjusted net income was also $119 million with adjusted earnings per share of $1.55, which was up $0.18 or 13% over prior-year adjusted EPS.
full year net income was $449 million, which resulted in earnings per share of $5.88.
Adjusted net income was $482 million, resulting in an adjusted earnings per share of $6.30, up $1.11 or 21% over prior-year adjusted EPS.
The tax rate movement I mentioned drives a $0.23 differential in earnings per share as compared to the prior year.
Said differently, our earnings per share would have expanded by $1.34 or 26%, had 2021 been taxed at the 2020 rate.
Finally, free cash flow for the quarter was $136 million, 115% of adjusted net income.
For the year, free cash flow was $493 million, down 5% versus last year, and was 102% of adjusted net income.
This result was impacted by a volume-driven working capital build and higher capex, partially offset by our higher earnings.
We spent over $70 million on capital projects this year, an increase of over $20 million versus 2020.
Moving on to Slide 10, which details the drivers of our adjusted operating income.
Adjusted operating income increased $125 million for the year compared to 2020.
Our 12% organic growth contributed approximately $106 million flowing through at our prior year gross margin rate.
We levered well in this volume increase, and our teams drove operational productivity to help mitigate the profit headwinds we experienced from increased supply chain costs and the associated inefficiencies.
Although we have maintained positive price/cost for the year, inflation continues to ramp, and we saw compressed price/cost spread versus historic levels, which pressured our op margin rate and flow-through percentages.
The positive mix is primarily a result of the portfolio and business mix normalizing to pre-pandemic levels that had a negative impact on our results last year.
We reinvested $35 million back into the businesses, taking the form of a partial rebound in discretionary spending to pre-pandemic levels, higher variable compensation expenses, and targeted reinvestment and resources to drive growth.
Despite this incremental spend and a challenging supply chain environment, we achieved a solid 38% organic flow-through for the year.
Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX, getting us to a reported flow-through of 30%.
With that, I'd like to provide an update on our outlook for the first quarter and full year 2022.
I'm on Slide 11.
As a reminder, going forward, we will be adjusting earnings per share for acquisition-related intangible amortization in both our guidance and results.
Our fourth quarter adjusted earnings per share under this definition would have been $1.71 per share, while our full year 2021 adjusted earnings per share would have been $6.87 per share.
Under this new definition, for the first quarter of 2022, we are projecting GAAP earnings per share of $1.57 to $1.60 and adjusted earnings per share to range from $1.73 to $1.76.
We expect organic revenue growth of 6% to 7% for the first quarter and operating margin of approximately 23%.
Q1 expected results incorporate headwinds arising from COVID-driven apps and theism and supply chain production constraints.
The first quarter effective tax rate is expected to be approximately 22.5%.
We expect FX to be unfavorable to our topline by 1% and acquisitions to provide a 4% benefit.
Corporate costs in the first quarter are expected to be around $19 million.
Turning to the full year 2022.
We project GAAP earnings per share of $6.70 to $7 and adjusted earnings per share to range from $7.33 to $7.63.
We expect full year organic revenue growth of 5% to 8% and operating margins to be around 24%.
We expect FX to be unfavorable to our topline by 1% and acquisitions to provide a 2% benefit.
The full year effective tax rate is expected to be around 22.5%.
Capital expenditures are anticipated to be around $90 million, an increase over 2021 as we continue to identify opportunities to reinvest in our core businesses.
Free cash flow is expected to be approximately 105% of adjusted net income, and corporate costs are expected to be approximately $80 million for the year.
Our earnings guidance excludes impacts from future acquisitions and any future restructuring charges.
Nexsight is excluded from the figures above as the transaction has yet to close.
Next, I will provide some additional details regarding our 2022 guidance for the full year.
I'm on Slide 12.
On an operational basis, we expect supply chain constraints to mitigate our output for the first half of the year, muting an otherwise strong demand environment.
Therefore, we are projecting organic revenue for the year to be up 5% to 8%, which translates to an earnings per share impact of $0.60 to $0.95 depending on the topline results.
This range also assumes improving price/cost.
We continue to drive operational productivity across the portfolio and expect to see benefits from our 2021 restructuring actions.
This will drive $0.20 to $0.25 of favorability next year.
We also continue to invest in the resources required to grow in the current year end and beyond.
These investments will reduce earnings per share by $0.20 to $0.25 and are funded by the productivity gains I mentioned previously.
Our discretionary spend partially recovered to pre-pandemic levels in 2021, and we expect this spending to be fully recovered by the end of 2022.
The unfavorability impacts earnings per share by $0.20 to $0.25.
I'll note that we are ramping spend to pre-pandemic levels, but with 20% higher revenues.
ABEL has one partial quarter and Airtech has two-quarters inorganic results included in our guidance.
We expect the acquisitions to contribute $54 million of revenue and $0.08 of EPS.
The incremental amortization that we see in 2022 versus 2021 is largely related to these acquisitions and will provide an additional $0.05 of EPS.
Now let's take a look at a couple of nonoperational items.
First, our guide assumes no impact from tax as our guided rate is flat year over year.
Second, we expect a 1% headwind from FX, providing $0.07 of earnings per share pressure.
So in summary, we are projecting organic revenue growth of 5% to 8% for the year, adjusted earnings per share expectations in the range of $7.33 to $7.63, a 7% to 11% growth over 2021.
Implied in our guidance is mid- to high 20s year-over-year flow-through on the low end and 30% on the high end.
With that, I'll throw it back to Eric for some final thoughts.
I'm on the final slide, Slide 13.
In an environment characterized by uncertainty and disruption, it's important not to lose sight of who we are as a company.
First and foremost, we are a portfolio of great businesses that leverage 80/20 with an obsessive focus to serve our customers.
We refer to that simple model as the IDEX difference.
We're committed to navigating the challenges of the short-term landscape, but remain focused on the longer term.
We must continue to utilize our 80/20 toolkit to create efficient, innovative, value-creating businesses.
In a world with this level of variability, the simpler you are, the more successful you'll be.
We remain committed to investing in the resources needed, so our businesses are poised to take advantage of the growth potential in front of us.
We're a company committed to its core values, and we'll continue to develop top-performing teams as part of an inspiring company culture.
Diversity, equity, and inclusion continues to be an area of focus, creating environments where people feel they belong and are comfortable bringing their true selves to work every day.
Our strong operating cash flow and balance sheet put us in a great position to continue to put capital to work, and we've already identified several high-return organic investment opportunities across the company that will push us past our 2021 capex record levels.
We have invested in new industrial automation that will improve efficiency and expand capacity for growth.
We're supporting focused digitalization efforts across our installed base to solidify our superior positions and expand share of wallet.
Our facility expansions in China and India are well underway, effectively doubling future capacity to support growth across Asia.
Lastly, our M&A opportunity pipeline continues to be strong, and we look forward to deploying additional capital in 2022, welcoming new businesses to the IDEX family.
| idex q4 sales up 16% to $714.8 mln.
q4 sales rose 16 percent to $714.8 million.
sees fy adjusted earnings per share $7.33 to $7.63.
sees q1 adjusted earnings per share $1.73 to $1.76.
sees fy gaap earnings per share $6.70 to $7.00.
sees q1 gaap earnings per share $1.57 to $1.60.
q4 adjusted non-gaap earnings per share $1.55.
|
I'm Ralph Giacobbe, senior vice president of investor relations.
In our remarks today, David and Brian will cover a number of topics, including Cigna's fourth quarter and full year 2021 financial results, as well as our financial outlook for 2022.
We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance.
Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures.
First, as previously disclosed with our Form 8-K filing and investor call on January 24, we announced changes in our segment reporting effective for the fourth quarter of 2021.
These changes were made to align with the company's organizational structure as a result of the pending divestiture of Cigna's international life accident and supplemental benefits businesses in seven Asia Pacific markets.
Effective in the fourth quarter, Cigna's results will be reported through the following three groups: Evernorth, Cigna Healthcare, and corporate and other operations.
The international health business to be retained by Cigna will join our U.S. commercial and U.S. government offerings in a new segment called Cigna Healthcare.
This segment replaces the prior U.S. medical segment.
Second, regarding our results.
In the fourth quarter, we recorded an after-tax special item charge of $119 million or $0.36 per share related to a strategic plan to further leverage the company's ongoing growth to drive operational efficiency through enhancements to organizational structure and increased use of automation and shared services.
We also recorded an after-tax special item charge of $70 million or $0.21 per share for integration and transaction-related costs.
Additionally, please note that when we make prospective comments regarding financial performance, including our full year 2022 outlook, we will do so on a basis that includes the potential impact of future share repurchases and anticipated 2022 dividends.
Also, our full year 2022 outlook assumes that the pending divestiture of Cigna's international life accident and supplemental benefits businesses will close in the second quarter of 2022, but does not assume any impact from other business combinations or divestitures that may occur after today.
Finally, I would like to announce our intention to host an Investor Day in June where we will discuss our long-term strategic growth and value creation story.
We look forward to sharing more details in the coming weeks.
As we step into 2022, our clients, customers, and patients continue to face a rapidly changing landscape with new COVID variants, changing testing and treatment protocols, and pressures on the global economy.
Throughout these challenges, we remain focused on addressing and balancing the evolving needs of all of our stakeholders.
As a result, our 70,000-plus colleagues around the world continue to deliver differentiated value for those we serve and also continue to grow our businesses.
Today, I'll share a perspective around our 2021 performance and the sustained growth opportunities we see for our organization in the year ahead.
And Brian will provide additional details about our 2021 financial results and our 2022 outlook.
With that, let's get started.
In 2021, we grew full-year adjusted revenues to $174 billion, a second consecutive year of growth above our long-term target.
We delivered full-year adjusted earnings-per-share growth of 11% and to $20.47, and we returned over $9 billion to shareholders in dividends and share repurchases.
Additionally, we continue to invest in our capabilities to ensure we are positioned for sustained growth in 2022 and beyond.
Our growth is and will continue to be fueled by our two high-performing platforms: Evernorth, our health services business, including pharmacy, care, benefits, and intelligence services; and Cigna Healthcare, which includes our portfolio of U.S. commercial, U.S. government, and international health businesses.
Our Evernorth and Cigna Healthcare platforms complement each other through the breadth of their capabilities and the ability to serve multiple buyer groups.
Here, we typically lead with either a medical or pharmacy solution and then we build on those relationships by innovating and delivering new services.
We have a proven track record with this approach, a diverse, high-performing portfolio of solutions, and a sustained commitment to continued innovation to expand that portfolio.
Additionally, we are positioned so that accelerated growth in one area can compensate for temporary pressure in another business within our portfolio.
We see this as extremely valuable in a dynamic environment.
Relative to our 2021 performance, it was a very strong year for Evernorth.
We grew adjusted revenues by 14% in 2021 as Evernorth's corporate clients, health plans, governmental agencies, and healthcare delivery system partners increasingly recognized the value of our health services, including in our specialty pharmacy business, which I'll discuss in more detail in just a moment; in our virtual health capabilities, which have been expanded through MDLIVE to include urgent and dermatology care as well as behavioral health services; in our core pharmacy services portfolio, which continues to generate outstanding results for our clients; and we are further broadening our reach through deeper and new partnerships.
government, and international health businesses.
As we previously discussed, we also experienced elevated medical costs.
We had higher claims costs in our commercial insured and stop-loss businesses and continued higher claims from our special enrollment Perry customers within the individual business.
These included the impact of elevated COVID costs for testing treatment of vaccines.
The elevated trend continued throughout the year.
As a result, our medical care ratio for Cigna Healthcare was 84% for full year 2021.
As Brian will discuss in further detail, we took targeted pricing and affordability actions earlier in 2021 for 2022 impact, as we continue to prioritize margin expansion for 2022.
As I highlighted earlier, the breadth and complementary nature of our portfolio enabled us to exceed our revenue and earnings per share outlook and return over $9 billion of capital to our shareholders.
Looking forward to 2022, we expect to continue to capitalize on emerging growth opportunities and achieve sustained attractive performance.
We see additional opportunities to drive growth by leveraging Evernorth capabilities to respond to three forces that we believe are fundamentally reshaping the future of healthcare.
They are pharmacological innovation, the increased recognition of the link between mental and physical health; and third, the growing trend toward alternative sites of care.
I'll start by highlighting how Evernorth will lead the way to capitalize on the first trend, pharmacological innovation.
New drugs represent one of the most promising areas for medical innovation in the coming years.
And we're seeing good dramatic growth in specialty pharmaceuticals, gene therapies, and vaccines.
These potentially life-saving and life-changing advances also bring intensifying pressures on affordability.
This creates significant opportunity for Evernorth to provide customers, patients, and clients with the most innovative new therapies in ways that are accessible, affordable, and predictable.
By 2025, for example, 66 biologic drugs currently in the market will have the patents expire, opening the door for increased biosimilar competition and an increasing opportunity to decrease healthcare spending by an estimated $100 billion.
Importantly, this trend is already unfolding in 2022 and will accelerate further in 2023.
We are positioned to lead and fully intend to capture a large portion of those savings for the benefit of our customers, patients and clients by combining and coordinating capabilities that include our Accredo capability, which provides differentiated specialty pharmacy care for a number of specific conditions.
I'd also highlight that today, specialty pharmacy already drives only one-third of our North revenue, and Accredo is one of the fastest-growing parts of our health service portfolio.
Additionally, leveraging Express Scripts, which draws upon its expertise in delivering improved affordability, leveraging a broad network, supply chain expertise as well as clinical and service capabilities.
Managing biologics and specialty drugs is also a priority focus for our Cigna Healthcare business.
Last year, we launched an innovative program to leverage biosimilars in the medical benefit that included incentives that improve access for integrated clients and customers.
This illustrates just one way we will continue to leverage Evernorth's capabilities to drive greater affordability and value for our Cigna Healthcare clients and customers.
Evernorth will also continue to grow from the significant demand for more mental health services as well as the rapidly changing access to care models.
For example, Evernorth is continuing to expand our virtual care services by leveraging our MDLIVE platform as well as expanding our behavioral care network.
We know how important it is for both patients as well as clients.
Our Evernorth research reinforces that total healthcare costs decrease when people who are diagnosed with behavioral conditions receive coordinated, sustained treatment.
For Cigna Healthcare in 2022, we expect to drive customer growth in each of our U.S. commercial market segments and grow earnings as we continue executing on our affordability and pricing actions throughout 2022.
Additionally, Cigna Healthcare will continue to partner and leverage our Evernorth innovations.
For example, we're continuing to expand digital experiences to help our customers connect with the highest performing and most affordable medical care.
Our recent approach we developed for patients diagnosed with orthopedic and musculoskeletal conditions provide highly personalized and actionable information to guide their choices and support improved healthcare outcomes and affordability.
In the U.S. government business, as we've noted previously, we are operating in a more competitive environment stepping into 2022.
government business for 2022.
For Medicare Advantage, we will start the year with flat membership.
Looking forward to 2023, we are confident in our position to accelerate growth further, as our customer satisfaction metrics are high, our Star's ratings are very strong, and we steadily expanded our addressable market by entering new geographies.
In our individual and family plan business, as noted previously, 2021 customers grew meaningfully in part due to the extended special enrollment period.
We expect a decline in customers in 2022, in part driven by our product and price positioning that will adjust for the special enrollment surge we saw in 2021.
We do continue to view this as an attractive long-term opportunity.
And to support that growth, we continue to enter new markets.
For 2022, we entered three new states and 93 new counties.
With these markets, for example, we have the ability to reach an additional 1.5 million additional customers.
In international health, we are sharpening our focus, and we'll continue developing our services for the globally mobile as well as go deeper into domestic health and health services.
One of the key ways we will do this is with innovative partnerships such as Honeysuckle Health, an analytics-driven health service company establishing our joint venture with the nib Group in Australia.
Now taken as a whole, 2022 will be another year of attractive growth for our company.
Our earnings per share outlook of at least $22.40 and the increase of our quarterly dividend by 12% reinforces the sustained growth and strength of our businesses.
Now before I wrap up, I want to reinforce a key aspect of our sustained performance is our positioning strategically to further expand our reach in addressable markets over time.
Here, we will leverage organic partnerships and targeted inorganic opportunities to further strengthen our proven growth platforms.
We see three areas of continued focus here.
First, in U.S. government, we will seek additional growth opportunities and our ability to win in these markets is further enhanced by our current and expanding Evernorth service capabilities.
Second, we will further expand our Evernorth service portfolio.
This includes, for example, our Evernorth care capabilities, including virtual home and behavioral services.
And third, in international health, our decision to divest our life accident supplemental benefits business in seven markets reinforces our discipline to focus on the health portion of our portfolio.
Now to wrap up.
Looking back at 2021, our business performed in a dynamic environment.
We delivered adjusted earnings per share of $20.47 and returned over $9 billion of capital to our shareholders in dividends and share repurchase.
2022 will be another year of growth across our business, and we will continue to invest in innovation to position us for sustained long-term growth.
Today, I'll review key aspects of Cigna's fourth quarter 2021 results, and I'll provide our outlook for 2022.
Key consolidated financial highlights for full year 2021 include adjusted revenue growth of 9% to $174 billion or growth of 12% when adjusting for the sale of the group disability and life business.
Adjusted earnings of $7 billion after tax and adjusted earnings-per-share growth of 11% to $20.47.
We delivered these results despite an elevated medical care ratio in the quarter partly driven by COVID-19-related claims.
Our enterprise revenue and earnings per share results were slightly better than our expectations, reflecting the resilience and breadth of our portfolio, with particularly strong performance in Evernorth.
Regarding our segments, I'll first comment on Evernorth.
Fourth quarter 2021 adjusted revenues grew 15% to $35.1 billion, while adjusted pre-tax earnings grew to $1.6 billion.
Evernorth's strong results in the quarter were driven by organic growth, including strong volumes in specialty pharmacy and retail, along with ongoing efforts to improve affordability and deepening of existing relationships.
In the quarter, we also continued to increase the level of strategic investments to support ongoing growth of the Evernorth portfolio, such as our Accredo specialty pharmacy, our virtual care platform, and our technology, including digital capabilities.
Overall, Evernorth delivered a strong year, focusing on driving value for clients and customers, while achieving strong revenue and earnings growth above its long-term growth targets.
medical segment plus our retained international health business.
Overall, fourth-quarter adjusted revenues were $11.2 billion, adjusted pre-tax earnings were $472 million and the medical care ratio was 87%.
During the fourth quarter, we experienced elevated medical costs, driven in large part by dynamics related to COVID, including higher testing, treatment, and vaccine costs, specifically the higher-than-expected fourth-quarter costs are attributable to three primary areas: higher stop-loss claims, particularly in policies with lower attachment points that were triggered by the cumulative impact of COVID and non-COVID costs throughout the year; continued pressure on our individual business, particularly the special enrollment period customers who were added in mid-2021; and higher claim costs in our commercial insured book.
The elevated medical costs were partly offset by better-than-expected net investment income and fee-based specialty contributions, neither of which are reflected in the medical care ratio metric.
For full year 2021, we finished with the medical care ratio of 84%.
The unfavorable fourth quarter medical costs informed and sharpened our 2022 assumptions.
We now expect full year 2022 medical costs to run above the corresponding 2022 baseline at a relative level that is consistent with full year 2021.
This 2022 medical cost outlook is now higher than our previous expectations.
In specific to stop-loss, we assume the pressure experienced in the fourth quarter will persist in 2022, and we will take appropriate future pricing action as this book of business renews throughout the year.
Helping to offset these pressures, as we step into 2022, our targeted pricing actions we've taken in our U.S. commercial business as we saw claim costs emerge in 2021, higher U.S. commercial enrollment and retention than previously expected in our fee-based business and incremental affordability actions, which I'll elaborate on in just a few moments.
We ended the year with 17.1 million total medical customers, an increase of approximately 430,000 customers for the full year.
government and international health.
Overall, Cigna Healthcare supported and delivered for our customers, clients, and partners during a challenging year and is well-positioned to both grow membership and expand margins in 2022.
Turning to corporate and other operations.
The fourth-quarter adjusted loss was $115 million and now includes positive earnings contributions from our international life accident and supplemental benefits businesses held-for-sale pending divestiture.
As Ralph noted, during the fourth quarter, we reported a special item charge of $119 million after tax related to actions to improve our organizational efficiency.
These actions will capitalize on our scale and the progress we have made through automation, increased use of digital tools, and continued innovation to better enable us to grow and expand in this dynamic marketplace.
Overall, Cigna's 2021 results reflect our balanced portfolio and our commitment to accretive capital deployment to augment our organic growth.
As we turn to 2022, our affordability initiatives, pricing actions, and focus on operating efficiencies will drive income growth and margin expansion in Cigna Healthcare.
This performance coupled with continued growth in Evernorth and accretive capital deployment, will drive attractive earnings per share growth.
For the full year 2022 outlook, I'd like to first remind you that our outlook assumes the divestiture of our international life accident and supplemental benefits businesses will close in the second quarter of this year.
In total for the company, we expect consolidated adjusted revenues of at least $177 billion, representing growth of approximately 4%, excluding the impact from previously announced divestitures.
We expect full-year consolidated adjusted income from operations to be at least $6.95 billion or at least $22.40 per share, consistent with our prior earnings per share commentary.
We project an expense ratio in the range of 6.9% to 7.3%, further improving upon our operational efficiency and ensuring continued affordable solutions for our clients and customers.
And we expect a consolidated adjusted tax rate in the range of 22% to 22.5%.
I'll now discuss our 2022 outlook for our segments.
For Evernorth, we expect full year 2022 adjusted earnings of approximately $6.1 billion.
This represents growth of about 5% over 2021, within our targeted long-term income growth range, reflecting strong growth in Accredo specialty pharmacy, all while we continue to increase investments in order to drive new innovative solutions to the market.
For Cigna Healthcare, we expect full year 2022 adjusted earnings of approximately $3.9 billion.
This outlook reflects the strength of our value proposition and focused execution in our business, driven by organic customer growth and disciplined pricing in order to expand margin.
Within our U.S. commercial book, organic customer growth is driven by national, middle market and select market segments.
We expect Medicare Advantage customers to be relatively flat compared to 2021, reflecting the competitive backdrop.
And as David shared, we expect a decrease in our individual customers.
We expect the 2022 medical care ratio to be in the range of 82% to 83.5%.
As I noted earlier, this outlook assumes total medical costs will be above baseline in 2022.
Importantly, we are actively managing overall medical costs with a range of affordability actions, including identifying opportunities such as guiding customers to more effective and efficient sites of care.
For example, we focused our Evercore subsidiary on an incorporating site of care review to our existing processes.
These improvements encourage the use of non-hospital settings, which can substantially reduce cost for customers while increasing patient satisfaction.
This action has contributed to results within our commercial book of business, where we are now seeing fewer than 20% of all knee and hip replacements occur in an inpatient hospital setting, down from over 75% in 2019.
We are also continuing to promote preventive care, the targeted use of virtual care through our MDLIVE subsidiary, and access to behavioral services to provide meaningful support to patients and moderate overall medical costs over the longer term.
Through these affordability initiatives and our disciplined pricing actions, we expect to expand margins in 2022, while growing our medical customer base.
Now moving to our capital management position and outlook.
We expect our businesses to continue to drive strong cash flows and returns on capital, even as we increase strategic reinvestment to support long-term growth and innovation.
In 2021, we finished the year with $7.2 billion of cash flow from operations.
Additionally, we returned over $9 billion to shareholders via dividends and share repurchase in 2021, a significant increase from 2020.
And now framing our capital outlook for 2022.
We expect at least $8.25 billion of cash flow from operations, up more than $1 billion from 2021, reflecting the strong capital efficiency of our well-performing business.
This positions us well to continue creating value through accretive capital deployment in line with our strategy and priorities.
We expect to deploy approximately $1.25 billion to capital expenditures, an increase from our 2021 capex levels.
The investments will be heavily focused on technology to drive future growth.
We expect to deploy approximately $1.4 billion to shareholder dividends, reflecting our meaningful quarterly dividend of $1.12 per share, a 12% increase on a per-share basis.
And we expect to use the proceeds from the divestiture of our international life accident and supplemental benefits businesses, primarily for share repurchase.
Our guidance assumes full year 2022 weighted average shares to be in the range of 308 million to 312 million shares.
Year to date, as of February 2, 2022, we have repurchased 2.5 million shares for $581 million.
Our balance sheet and cash flow outlook remains strong, benefiting from our highly efficient service-based orientation that drives strategic flexibility, strong margins and attractive returns on capital.
So now to recap, our full year 2021 consolidated results reflect strong contributions from our focused growth platforms, led by Evernorth.
Our 2022 outlook reflects meaningful contributions from each of our two largest segments, Evernorth and Cigna Healthcare, along with accretive capital deployment.
We are confident in our ability to deliver our 2022 full-year adjusted earnings of at least $22.40 per share, consistent with our prior earnings per share commentary.
Finally, as Ralph noted, we are looking forward to speaking with you in more detail at our upcoming Investor Day in June.
| adjusted income from operations is projected to be at least $6.95 billion in 2022, or at least $22.40 per share.
sees 2022 adjusted revenues at least $177 billion.
sees 2022 medical care ratio 82.0% to 83.5%.
qtrly special items include an after-tax charge of $119 million, or $0.36 per share, related to a strategic plan.
board of directors declared a 12% increase in the quarterly dividend rate, to $1.12 per share.
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On the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, Senior VP.
We had an outstanding first quarter, perhaps the best quarter in company history.
Setting records on many fronts, including new contracts, deliveries, revenues, and pre-tax income.
Housing conditions in all of our markets are very strong.
The robust demand for new housing is being driven by a number of factors including low mortgage rates, historically low inventory levels, a rapidly growing number of millennials joining the ranks of home ownership, and the shift in buyer preference away from renting in favor of single-family homes.
In addition, the quality of buyers is in as good a shape as we've ever seen.
Our average buyer is putting more than 15% down and has a credit score in excess of 740.
Taken together, all of these factors have created an excellent environment for new home sales that has contributed to our record setting performance.
We are proud of our results as we continue to gain market share and improve our profitability throughout every one of our 15 markets.
During the quarter we sold an all-time quarterly record of 3,109 homes, 49% better than a year ago.
Our absorption pace per community improved significantly to 5.3 sales per community compared to 3.1 sales per community a year ago.
And we continue to experience very strong results with our Smart Series, which represents our most affordably priced line of homes.
Smart Series sales comprised nearly 35% of total companywide sales during the quarter compared to 30% a year ago and just 16% in 2019.
We are selling our Smart Series product in all 15 of our divisions and in roughly one-third of our communities.
As we've shared before on average our Smart Series communities are larger with more lots and our Smart Series homes produce better monthly sales pace, higher gross margins, faster cycle time, and overall better returns.
Homes delivered during the quarter increased 35% and were a first quarter record.
Revenues increased 43% and also represented a first quarter record.
Gross margins improved by 420 basis points to 24.4% and our overhead expense ratio improved by 120 basis points.
As a result, our pre-tax income was an all-time quarterly record of $110 million, 167% better than a year ago with a pre-tax income percentage of 13.3% compared to 7.2% last year.
These strong returns resulted in a 25% return on equity improving from the 22% full year return on equity we had in 2020.
Our first quarter results continued our trend of strong growth in both revenues and earnings.
Specifically, since 2013 our revenues have grown at a compounded annual rate of 19% and our pre-tax income has grown at an even more impressive annual rate of 43%.
Companywide, our backlog sales value at the end of the quarter was a record $2.4 billion, 82% better the last year.
And our units in backlog increased by 68% to an all-time record 5,479 homes, with an average price in backlog of $433,000, nearly 10% higher than the average price in backlog last year at this time.
As I indicated earlier, all 15 of our homebuilding divisions contributed significantly to our first quarter performance.
And as you'll soon hear, our financial services, mortgage and title operations also had a record quarter, highlighted by strong income and excellent mortgage capture rate and very solid across the board execution.
Now, I will provide a few brief comments on our markets.
We divide our 15 markets into two regions.
The Northern region consists of six of our markets, namely Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit.
While the Southern region consists of the remaining nine markets, Charlotte and Raleigh, Orlando, Tampa and Sarasota, and Houston, Dallas, Austin and San Antonio.
New contracts in the Southern region increased 46% during the quarter.
In the Northern region, new contracts increased 53% during the quarter.
Our deliveries increased 34% in the Southern region during the quarter to 1,218 deliveries or 60% of the total.
The Northern region contributed the balance 801 deliveries, an increase of 36% over last year.
Our owned and controlled lot position in the Southern region increased by 35% compared to last year and increased by 8% in the Northern region compared to last year.
While we are selling through communities somewhat faster than expected, we are very well positioned to handle the current level of demand.
35% of our owned and controlled lots are in our Northern region, while the balance roughly 65% are located in the Southern region.
We have a strong land position.
Companywide we own approximately 16,800 lots, which is roughly -- slightly less than a two-year supply.
On top of that, we control via option contracts an additional 2500 lots.
So, in total, our owned and controlled lots approximate 42,000 single-family lots, which is just under a five-year supply.
Importantly and worth noting, 60% of those lots of controlled under option contracts, which gives M/I Homes significant flexibility to react to changes in demand or individual or unexpected market conditions.
We had 100 communities in the Southern region at the end of the quarter, which is down from 125 a year ago.
In the Northern region, we had 87 communities at the end of the quarter, which is down 11% from the 98 we had last year at this time.
Clearly, this decline in community count is a result of our accelerated sales pace, but it's also important to recognize that over one-third of our communities are now are offering our Smart Series homes and that these communities often have more lots in total, but they also produce a greater sales pace.
We are managing our sales pace as well as our pricing in our communities to take advantage of the strong demand and to assure delivery of a high return on our investment.
Our financial condition is very strong with $1.4 billion of equity at the end of the quarter and the book value of $46.37 per share.
We ended the first quarter with a cash balance of $293 million and zero borrowings under our $500 million unsecured revolving credit facility.
This resulted in a 32% debt to cap ratio, down from 39% a year ago and a net debt to cap ratio of 21%.
We are very excited about our business.
Our financial condition has never been better.
We have important operating momentum throughout the company.
And the quality of our product along with the quality of our communities and our land position positions us for continued growth, continued gains in market share and strong results.
We fully expect to have an outstanding year in 2021.
As far as our financial results, new contracts for the first quarter increased 49% to 3,109, an all-time quarterly record compared to last year's first quarter 2,089.
Our new contracts were up 68% in January, up 21% in February and up 64% in March and our sales pace was 5.3 for the first quarter compared to last year's 3.1.
And our cancellation rate for the first quarter was 7%.
And as Bob stated, we continue to manage sales pace and returns in our communities closely.
As to our buyer profile, about 56% of our first quarter sales were to first time buyers compared to 53% in the fourth quarter of last year.
In addition, 43% of our first quarter sales were inventory homes, the same as 2020's fourth quarter.
Our community count was 187 at the end of the first quarter compared to 223 at the end of 2020's first quarter.
The breakdown by region is 87 in the Northern region and 100 in the Southern region.
During the quarter, we opened 21 new communities, while closing 36.
And last year's first quarter, we opened 17 new communities.
We delivered a first quarter record of 2,019 homes, delivering 46% of our backlog compared to 56% a year ago.
Production cycle times are being lengthened by supply issues.
Revenue increased 43% in the first quarter, reaching the first quarter record of $829 million and our average closing price for the first quarter was $395,000, a 6% increase when compared to last year's first quarter average closing price of $374,000 and our backlog average sale price is $433,000, up from $399,000 a year ago and our backlog average sales price of our Smart Series is $335,000.
Our first quarter gross margin was 24.4%, up 420 basis points year-over-year.
Our construction and land development costs continue to increase with our biggest impact from lumber.
Our first quarter SG&A expenses were 11% of revenue, improving a 120 basis points compared to 12.2% a year ago, reflecting greater operating leverage.
Interest expense decreased $3.5 million for the quarter compared to the same period last year and interest incurred for the quarter was $10.2 million compared to $11.9 million a year ago and the decrease is due to lower outstanding borrowings in this year's first quarter as well as a lower weighted average borrowing rate.
We are pleased with our improved returns for the first quarter.
Our pre-tax income was 13.3% versus 7.2% a year ago and our return on equity was 25% versus 15% a year ago.
During the quarter, we generated $125 million of EBITDA compared to $59 million in last year's first quarter and we generated $75 million of positive cash flow from operations in the first quarter compared to using $24 million a year ago.
We have $22 million in capitalized interest on our balance sheet, about 1% of our total assets and our effective tax rate was 23% in this year's first quarter, the same as last year's first quarter.
And we estimate our annual effective rate this year to be around 24%.
And our earnings per diluted share for the quarter increased to $2.85 per share from $1.09 per share last year.
Now, Derek Klutch will address our mortgage company results.
Our mortgage and title operations achieved record first quarter results in pre-tax income, revenue and number of loans originated.
Revenue was up 120% to $29.6 million due to a higher volume of loans closed and sold, along with higher pricing margins than we experienced last year.
For the quarter, pre-tax income was $19.7 million, which was up 250% over 2020's first quarter.
The loan to value on our first mortgages for the quarter was 84%, same as 2020's first quarter.
78% of the loans closed in the quarter were conventional and 22% FHA or VA.
This compared to 72% and 28%, respectively, for 2020's first quarter.
Our average mortgage amount increased to $328,000 compared to $306,000 last year.
Loans originated increased to a first quarter record of 1,575 loans, 39% more than last year.
And the volume of loans sold increased by 50%.
Our borrower profile remains solid with an average down payment of over 15% and an average credit score on mortgages originated by M/I Financial of 746, up from 745 last quarter.
Our mortgage operation captured over 84% of our business in the first quarter, which was in line with 85% last year.
We maintain two separate mortgage warehouse facilities with combined availability of $215 million that provide us with funding for our mortgage originations prior to the sale to investors.
At March 31, we had a total of $176 million outstanding under these facilities which expire in May and October of this year.
Both facilities are typical 364-day mortgage warehouse lines that we extend annually.
We have requested an extension of the Warehouse agreement that expires in May and we expect the banks to approve the extension shortly with closing anticipated prior to expiration.
As far as the balance sheet, our total homebuilding inventory at March, 31 was $2 billion, an increase of $138 million from March 31, '20.
Our unsold land investment at March 31 of this year is $742 million compared to $809 million a year ago.
At March 31, we had $426 million of raw land and land under development and $316 million of finished unsold lots.
We owned 4,227 unsold finished lots with an average cost of $75,000 per lot and this average lot cost is 17% of our $433,000 backlog average sale price.
Our goal is to own a two to three-year supply of land.
During this year's first quarter, we spent $92 million on land purchases and $71 million on land development for a total of $163 million, which was up from $138 million in last year's first quarter.
And in the first quarter of this year, we purchased 2,500 lots of which 75% were raw.
In last year's first quarter, we purchased 1,800 lots of which 70% were raw.
In general, most of our Smart Series communities are raw land deals and have above average company pace and margin.
We have a strong land position at March 31, controlling 42,000 lots, up 24% from a year ago, and of the lots controlled, 40% are owned about a five-year supply.
And at the end of the quarter, we had 98 completed inventory homes and 708 total inventory homes and of the total inventory 423 homes are in the Northern region and 285 are in the Southern region.
At March 31 last year, we had 556 completed inventory homes and 1,322 total inventory homes.
We'll now open the call for any questions or comments.
| q1 earnings per share $2.85.
quarterly revenue increased 43% to $828.8 million.
homes in backlog at march 31, 2021 had total sales value of $2.4 billion, 82% increase from a year ago.
|
New factors emerge from time to time and it is simply not possible to predict all such factors.
On our call today Allan will review highlights from the first quarter, explain the basis of our confidence in the new home market, and discuss our improving expectations for fiscal 2021.
He will also describe two significant commitments we recently made as part of our ESG strategy.
I will cover our first quarter results in greater depth, and provide detailed expectations for the second quarter and full year of fiscal 2021.
I will then update our expectation for continued growth in our land position, followed by a wrap up by Allan.
With an acute focus on health and safety, we generated outstanding operational and financial results in the first quarter.
Operationally, orders were up more than 15% year-over-year, driven by a sales pace that was up more than 40%.
In fact, both orders and our sales pace reached their highest first quarter levels in more than a decade, even as we intentionally slowed sales with price increases.
We also expanded our lot supply, creating a path for future growth.
Financially, we delivered big improvements in gross margin, adjusted EBITDA and net income.
The strength in demand for new homes has exceeded our expectation over the past six months.
We have known that pent-up demand was building, based on the disconnect between demographics and strong affordability on the one hand, and anemic housing starts for most of the last decade on the other.
What we did not anticipate was, that a pandemic would be a catalyst for that demand to begin to materialize.
Many consumers are now focused on improving their living situation.
Whether their motivation is more space, better space, outdoor space or an entirely new location, demand for housing has been excellent.
The question on everyone's mind is how long will this strength last?
Well, we believe it's likely to persist for some time.
From a supply perspective, our industry has delivered far fewer homes in the last 10 years, than job growth and household formation would have predicted.
We think this cumulative deficit is conservatively well above 1 million homes, which means that a few good quarters are unlikely to exhaust the need for new homes.
So what about the durability of demand?
Well, to buy a home, perspective homeowners typically need two things, income security in the form of a job, and homes for sale that they can afford.
With vaccines at hand, we are optimistic that economic and job growth may resume as soon as this spring.
In that case the concern about the durability of demand may be better seen as a question about affordability.
Affordability ultimately boils down to mortgage rates and home prices, however the Fed is on record is supporting low rates for an extended period, we know we have to work hard to keep home prices within the reach of most buyers, and that is exactly why our positioning is so important.
We believe we're in the right markets, with the best job growth.
We're targeting the largest buyer segments baby boomers and millennials, and we focus on delivering exceptional value at an affordable price, not competing primarily on price.
Ultimately this positioning gives us confidence that our pivot toward growth will allow us to fully participate in a strong housing market over the next several years.
As we enter this springs' selling season we have an unusually high degree of visibility and therefore confidence in our likely full-year results.
That's because the dollar value of our backlog is up nearly 60% compared to last year.
So today, we are increasing our expectations for each of the objectives we outlined for fiscal 2021.
Dave will provide more precise figures in his comments, but we now expect higher earnings and increased land activity this year, while exceeding earlier debt repayment objectives.
In summary, we're going to make significant progress on our balanced growth strategy, which is designed to grow profitability faster than assets and revenue from a more efficient and less leveraged balance sheet.
Although ESG is receiving increased attention, it isn't something new at Beazer.
We have been addressing all three facets of ESG for years, because we see it as fundamental to fulfilling our purpose statement which we've included on Slide 7.
Today, I'd like to draw your attention to the significant commitment we announced in our most recent proxy statement, that will result in a reduction in greenhouse gas emissions.
In short, we have committed that by the end of 2025, every home we build will be Net Zero Energy Ready.
In numeric terms, it means all of our homes will achieve a Home Energy Rating System or HERS rating of 45 or less, which is an energy conservation standard that is far beyond most existing Building and Energy codes.
At this level our homes will generate as much energy as they consume by attaching a properly sized alternative energy system.
Underscoring this commitment, we're a proud builder partner of the Department of Energy's Zero Energy Ready Homes Program and we're the first national production builder to commit to building 100% of our homes in accordance with the program.
Improving energy efficiency is so important that we've made it a part of our long-term compensation plans as well.
Before turning the call back over to Dave, I want to talk about one more aspect of our ESG strategy, namely our commitment to social responsibility.
We have a long-standing relationship with Fisher House Foundation, an organization that build homes where military and veteran families can stay free of charge, while a loved one is in the hospital.
Our work with Fisher House has had a profound impact on our employees, our customers and our partners and that's caused us to want to do more.
To fund this ambition, last year we started a title insurance agency called Charity Title, that will donate 100% of its profits to charity.
By creating an innovative, dedicated funding source for our philanthropic efforts, we expect to be able to expand both our contribution levels and the number of organizations we can support.
We encourage you to review the ESG materials contained in our proxy statement in 2020 annual report, which are available in the Investor Relations section of our website.
Looking at the first quarter compared to the prior year, new home orders increased 15% to 1,442, despite a lower community count.
Sales pace was up over 40% to 3.5 sales per community per month.
Homebuilding revenue increased about 2% to $424 million on flat closings.
Our gross margin, excluding amortized interest, impairments and abandonments was 22.1%, up approximately 230 basis points.
SG&A was down approximately 60 basis points as a percentage of total revenue to 12.7% driven by controlling overhead expenses.
This led to adjusted EBITDA of $43.6 million in the quarter, up nearly 50% and exceeding 10% of revenue.
Total GAAP interest expense was down about 3%.
Our tax expense for the quarter was about $4.1 million, for an effective tax rate of 25.5%.
As a reminder, on a cash basis, our deferred tax assets offsets substantially all of our tax expense.
Taken together, this led to $12 million of net income from continuing operations or $0.40 per share, up over 3 times versus the same period last year.
Looking at the second quarter, we expect the following versus the prior year.
New home orders should be down slightly.
While we expect sales pace to be up, we do not expect it to fully offset our reduced community count, as we focus on increasing margin and returns.
Closings are likely to be up 10% to 15%.
There are couple of factors impacting our expectation for closings next quarter.
First, given the strength in demand, we have fewer spec homes to sell and close this quarter.
And second, we are balancing cycle time pressures with our commitment to delivering an exceptional customer experience.
Our ASP is expected to be approximately $390,000.
We note that the change in our ASP isn't reflective of our pricing power or margin opportunity, as we are constantly adjusting features and product mix to retain affordability.
In fact, this quarter we had two segments with lower ASPs and substantially higher margins.
As we described last quarter, increases in lumber prices in September and October would create a modest headwind on gross margin for the second quarter.
Despite this, we expect gross margin to be up slightly versus the same quarter last year.
SG&A as a percentage of total revenue should be down at least 50 basis points, reflecting the benefit from top-line leverage.
We expect EBITDA to be up more than 20%.
Interest amortized as a percentage of homebuilding revenue should be in the low 4s.
Our tax rate is expected to be about 25%, and combined, this should drive net income and earnings per share up more than 60%.
At the start of our fiscal year we provide our expectation for our full-year results.
Given our first quarter performance, as well as our positive outlook, we are now able to increase each of those expectations.
First, we previously expected EBITDA to be up slightly versus the prior year.
We now expect EBITDA to grow at a double-digit rate to over $220million, much faster than the growth in assets or revenue.
This improvement is largely driven by increased profitability, as we expect gross margin to be up at least 50 basis points versus the prior year in the second half of fiscal 2021.
Second we targeted double-digit earnings-per-share growth on our last call.
At the low end this would have represented earnings per share of less than $2 per share.
We now expect earnings per share of at least $2.50.
And finally, we committed to reduce debt by more than $50 million last quarter.
We now intend for that to be closer to $75 million.
We expect to end fiscal 2021 with a book value per share in excess of $22.
Our expected level of profitability, our return on average equity for the full year should be approximately 12%, and if you exclude our deferred tax assets, which don't generate profits, our ROE should be over 17%.
During the quarter, we spent $110 million on land acquisition and development and ended with nearly $500 million of liquidity, up more than $200 million versus the prior year.
We expect land spending to accelerate in the remaining quarters of 2021, ultimately exceeding the $600 million we initially anticipated, funded by our cash from this liquidity and cash from operations.
On Slide 12, we depict our expectations for near-term community count, which we still anticipate will likely trough in the 120s later this year.
We expect community count growth will be evident in fiscal 2022, as we benefit from our increased land spending.
Last quarter we said 2021 would be an important inflection here as we allocated more capital to growth and expanded our use of options.
The initial results of this effort were evident in the first quarter as we grew our active lots by about 8% to over 18,000, and importantly, we control 42% of our active lots through options at quarter end, a 7 point sequential increase.
Given our current pipeline of deals, we expect to continue to grow our land position as we move through the remainder of the year.
The first quarter of fiscal 2021 was very productive for Beazer, as we increased our sales pace, grew our backlog and improved both gross margins and SG&A, while expanding our lot position in a highly efficient manner.
Even better, we expect this operational momentum to persist through the fiscal year in the new home market, characterized by healthy demand and constrained supply.
In November, we described fiscal 2021 as an inflection year, where we expected to modestly improve profitability, while investing for future growth.
In fact it is shaping up to be much more than that, allowing us to raise our expectations for profitability investment and debt reduction, ultimately one should demonstrate our opportunity to improve shareholder returns from our balanced growth and ESG strategies.
I'm confident that we have the people, the strategy and the resources to create durable value over the coming years.
| compname reports q1 earnings per share $0.40.
q1 earnings per share $0.40.
net new orders for q1 increased to 1,442, up 15.3% from prior year.
|
My name is Theresa Wang.
I'm a summer intern in our finance department.
You may ask further questions by reinserting yourself into the queue and we will answer as time permits.
As you can see from this quarter's results, several of the trends that we have discussed on past calls are now showing up in our earnings performance.
So today, I'll spend a few minutes discussing how these trends are positively impacting our business and then we'll delve into the details.
First of all, retailer demand continues to accelerate and it continues to broaden.
As we've noticed noted on past calls, while leasing activity was initially weighted to the necessity and Suburban portions of our portfolio, we're now seeing a meaningful pivot from lockdown-oriented necessities to more discretionary spending.
We're also seeing retailers once again focusing on the key street locations in the major markets that we're active, and while we're seeing solid performance throughout our portfolio, one of the key differentiators of our company is our ownership of street retail in key gateway markets, a differentiator that certainly cause legitimate concern during COVID.
So, let me spend a few minutes on the street retail segment of our portfolio.
As you know, roughly 40% of our Core Portfolio NOI consists of street retail and about half of that is in the highest density corridors of the major gateway markets.
During the early days of COVID, this half of our Street retail was hardest hit.
Whether it was Soho in New York, the Gold Coast in Chicago and Street in Georgetown, retailers were facing an existential crisis of unknown duration.
And that's understandably, in the early days of the lockdown, it was the other half of our street retail in the lower density markets such as Greenwich Avenue in Connecticut, our Armitage Avenue in Chicago as well as other necessity and Suburban components of our portfolio that had the most retailer activity.
And while this lower density component continues to perform well, we are seeing a shift in attention by our retailers that to the higher density corridors, and we're seeing this much sooner than we expected.
In the luxury segment for example, many retailers are not only staying in their flat locations, but they are expanding their footprints especially in key must have markets.
This is evidenced by our second-quarter lease with wire sales at our Gold Coast location at Rush and Walton in Chicago, where they are expanding their existing store by over 50% and they entered into a new 10-year lease.
Across the street from us, yours is expanding their space as well, providing further evidence of this sub-markets rebound from 12-months ago.
And this is certainly not just a Gold Coast phenomenon.
This trend is playing out and so how as well as other key markets and it's not just luxury retailers.
Bridge an aspirational retailers are also beginning to show up as well.
For example, in Melrose Place in Los Angeles, after the end of the quarter, we extended a lease with one of our retailers there for another five years at a double-digit lease spread showing the strength of this corridor and retailer confidence in Los Angeles.
Now let me clear, retailers are still being selective on which markets they are choosing to expand into, and it is still a tenants market.
But what recently felt like a decade's worth of vacancy is quickly being absorbed and while retailers and landlords are climbing out of several years of headwinds, headwinds that predated COVID.
Their recovery is encouraging with vacancies being leased up and COVID discounts are heavily structured leases quickly being replaced with real deals that are approaching or in some cases exceeding pre-COVID rents.
That along with luxury retailers, we're seeing the digitally native and other up and coming direct to consumer retailers stepping up.
Retailers influence seems to go far beyond their physical footprint.
Only a few years ago, these retailers debated the need for physical stores.
That debate is over.
Whether it's Warby Parker or Allbirds, the best in class digital retailers are seeing the significant benefit of physical stores.
For instance, on M. Street in Georgetown last quarter, we added digitally native retailer ever linked to our portfolio.
And this is encouraging because Georgetown is still in the early stages of reopening and the fact that tenants such as Albertsons, Ball Mason, my family's favorite Levain bakery are arriving on M. Street.
All of this is further evident of the support for this corridors.
And it's not just retailers hoping to capture a future rebound tenant sales performance, is already confirming the recovery.
For several retailers in our portfolio or in our corridors, they are beginning to post sales performance that is already comping positive to pre-COVID sales.
And, this is before the return of international tourism and before a full reopening.
Even in markets that have been slow to reopen such as San Francisco despite all of the headlines, we're beginning to see positive activity.
And as these key streets continue to activate, we are entering into what is setting up to be a nice multi-year rebound.
Not only are rent significantly below prior peak, but it appears clear now that retailers are committed to connecting directly with our customer both digitally, but also through these important stores.
So whether it's LVMH or Warby Parker, we are seeing the increased recognition of the importance of these locations in an omnichannel world.
As John will discuss, even before taking into account, anticipated additional market rent growth.
We should be able to drive above trend NOI growth at higher levels for the next several years.
For instance in Soho, notwithstanding the huge gut punch over the past 18-months.
We forecast our Soho portfolio NOI to nearly double over the next few years.
And then, assuming that this rebound continues, the growth could be even better in the street retail component of our portfolio, where we have more opportunities to mark to market our leases than in our suburban portion of our portfolio since fair market value resets are much more common in our street portfolio than in our suburban.
Then from a capital markets and investment perspective, while there has been less actionable distress than one might have thought in the early days of the crisis, the interesting and actionable deal flow is increasing.
In terms of our Fund V investing as Amy will discuss, we are seeing a nice increase in acquisition opportunities and this is due to the fact that in the private markets, retail real estate still remains somewhat out of favor.
Now, we expect that this will shift over time given that in the debt markets borrowing cost and debt proceeds have returned to pre-COVID rates and levels and in the public markets we have seen significant compression and implied cap rates over the past year, but for a variety of reasons.
It may take some time for the private markets to catch up and in the interim, we will continue to deploy capital opportunistically.
So with respect to Fund V, we're continuing to selectively buy out of favor properties with unleveraged yields of about 8% than lever them two to one with borrowing costs well below 4% and clip a mid-teens current cash flow.
That it doesn't ignore the fact that the United States is over-retail.
For that, achieving real net effective rental growth is going to take hard work.
It's going to take some work.
But these acquisitions don't require significant growth, they just require stability and if we see cap rate compression, commensurate with the public markets, which certainly seems likely over the next couple of years, the opportunity that asymmetrical upside feels pretty compelling.
Then, with respect to our Core Portfolio investments, our acquisition pipeline is also heating up.
As you know, our focus here has been to selectively acquire assets in the highest barrier entry markets where we can achieve superior long-term growth.
Obviously, COVID and related issues were a real gut punch for many of the Carter's we're active in.
First, rents in many key streets that we're active in are at a cyclical low point.
Second, many of the tenants we do business with have now successfully navigated the so-called retail apocalypse and are in a much stronger position to succeed in an omnichannel world.
And third and finally, the consumer is in very healthy shape and returning to discretionary spending.
Given the amount of disruption, we have seen in the major markets, it's understandable that deal flow initially slowed, but sellers are beginning to return.
And given the roller coaster ride, they went through.
We are seeing sellers being realistic on rental growth and other assumption.
So, while it is still a bit early based on the improving deal flow we are currently involved with, and what we are seeing in the pipeline, we expect to be able to require best-in-class retail properties in the key high barrier to entry corridors where retailers are going to continue to cluster.
And while in the second quarter, we began to put some dollars to work accretively.
We are confident to that as meaningful buying opportunities arise, we will be in a position to capitalize.
And while our strong embedded internal growth, certainly means we can afford to be disciplined and we can afford to be patient.
Are relatively small size means that every $100 million of acquisitions as about 1% to our earnings base.
So to conclude, we are pleased to see our quarterly results reflect the rebound in leasing and operating trends.
It is also encouraging to see retailer stepping up again for the unique must have locations that dominate our portfolio.
And then most importantly, it is exciting to think about the potential opportunities in front of us, especially for management teams like ours with access to multiple types of capital and a proven track record of deploying it.
I'll start off with a discussion of our second quarter results followed by an update on our Core NOI growth expectations and then closing with our balance sheet.
Starting with the quarter, FFO came in above our expectations at $0.30 a share, and this was driven by a combination of 2 items.
First, rent commencement on new street leases, including in Chicago with Veronica Beard on Rush and Walton along with J. Crew and Lincoln Park and in New York City with Watches of Switzerland and Soho and consistent with what we had observed last quarter, we are continuing to see leases commence earlier than we had initially anticipated as retailers expedite their store openings in an effort in an effort to capture the extraordinary consumer demand.
And secondly, we are continuing to see significant improvements in our credit reserves.
The improvements this quarter was driven by increased cash collections.
We collected 96% of our pre-COVID rents during the second quarter and saw continued consistency within our Street Urban and Suburban portfolios.
And that a 96% cash collection rate, our quarterly reserve should trend in the $2 million range or $0.02 or $0.03 a share.
Additionally, during the second quarter, we recognized a one-time benefit of approximately $0.02 from cash collections on past due rents.
The majority of this benefit came from our German theater tenants that represent approximately 4% of our core ABR.
As outlined in our release, given the continued growth and conversion of our pipeline into executed leases along with a significantly improved outlook on our operations, we have once again raised our full-year FFO guidance with an updated expectation of $5 to $14 and this represents a 7% increase at the low end of our original guidance.
And in terms of our FFO outlook for the second half of the year, we are anticipating that our quarterly FFO should trend in the 25% to 27%.
And this is before any possible benefits from cash basis tenants or the sale of Albertsons shares.
As it relates to Albertsons specifically, we have revised our 2021 guidance to reflect an updated range of zero to $7 million or $0.00 to $0.08 a share for potential share sales.
And as a reminder, irrespective as to when the shares are actually sold, given that our cost basis in our Albertsons stock is zero.
It's simply a question of when, not if that this upside shows up in our earnings.
Using today's share price, we have over $20 million of profit representing am excess of $0.20 a share of FFO.
In terms of timing, while a share sale is still possible this year, that decision with our partners is based upon a variety of factors.
And for purposes of modeling 2021 earnings, it may be prudent to push any realized gains into next year.
So not only are we incredibly pleased with the performance of our portfolio this quarter, we are also increasingly optimistic about the much more impactful Core NOI growth that we believe is still in front of us.
This growth is being driven by the recovery in our street and urban portfolio and if our business continues to perform in line with our expectations, this should provide us with meaningful multi-year internal growth, which in summary has us growing our Core NOI between 5% to 10% annually through 2024 with an expectation of more than $25 million of incremental NOI over 2020 that we believe gets us to $150 million in 2024.
So, while it's premature to provide multi-year FFO guidance at this point, given the leasing progress we have made to date, and the acceleration of recovery within our portfolio, not only are we anticipating meaningful FFO growth in 2022, but we are well positioned for strong FFO growth for the next several years.
And that's even before we layer in the impact of any accretive redevelopments, external growth or the profitable transactions that we anticipate should continue to rise from our Fund business.
The three key drivers of this growth include first, profitable lease up of our Core Portfolio.
Second, further stabilization of our credit reserves and lastly contractual rent growth.
Now, I'll provide a bit more granularity on each of these pieces.
First, on the lease-up.
As outlined in our release, we have approximately $14 million of pro rata ABR in our core pipeline with more than half or approximately $7.5 million dollars of that already executed.
And to further highlight the recovery that we see playing out within our street in urban markets, 60% of our executed leases have come from our street and urban portfolio with New York City alone representing nearly 40% on our current pipeline.
In terms of the pipeline itself, you may recall when we initially started discussing it in the second half of last year, it stood at $6 million.
So with the $7.5 million of leases that we have signed to date, not only have we signed 125% of our original pipeline, but we have also more than doubled in a short period of time.
And this is providing us with an increased confidence on both our ability to successfully execute profitable deals and equally important, the strong and increasing demand for our prime street and urban locations.
And these leases that have been executed are starting to meaningfully show up in our metrics.
The spread between our physical and leased occupancy grew over 100 basis points during the quarter to 260 basis points with our New York metro portfolio leading the way with a pro rata physical to lease spread of approximately 700 basis points at June 30.
The $14 million pipeline represents our pro rata share of ABR and is comprised of over 400,000 square feet of space with approximately 70% of the $14 million being incremental to our 2020 NOI.
In terms of the timing as to when we expect that our pipeline will impact earnings, we anticipate that about 2 million this will show up in 2021 as compared to our initial expectation of $800,000 with an incremental $6 to $8 million in 2022 and the balance coming in during 2022.
The second drive of our NOI growth involves our expectation of ongoing stabilization of our credit reserves.
As I mentioned earlier, at a 96% cash collection rate, this translates into quarterly reserves in the $2 million range or $8 million when annualized equating to $0.09 of FFO.
We anticipate that of the $8 million in annualized reserves that approximately 75% or $6 million when annualized will ultimately revert back to full rents with the remaining 25% or $2 million annualized ultimately not making it to the other side, providing our leasing team with the opportunity to profitably retanating space into what we are currently experiencing as a very robust leasing environment.
And the last piece of our growth comes from contractual rent growth.
Driven by the higher contractual rent steps built into our street leases, this blends to about 2% a year across our portfolio and contributes approximately $3 million of incremental annual NOI.
As a reminder, given the impact of straight-lining rents, contractual growth doesn't increase our FFO.
But nonetheless, is an important driver of our NOI and ultimately NAV growth.
As an update on near-term expirations, consistent with the tenant rollover assumptions that we provided on our last call, our NOI forecast continues to assume that we get back approximately $9 million of ABR at various points over the next 18 months from our remaining 2021 and 2022 these expirations.
This $9 million includes approximately $4 million of ex of ABR expiring within the next six months from two tenants located in some of our best locations and we have meaningful traction to profitably retenant these locations with a portion of the space already reflected in our pipeline.
Now, moving onto our balance sheet.
During the second quarter, we successfully closed on a $700 million unsecured credit facility with an accordion feature enabling us to upsize it to $900 million.
This new facility significantly increased our liquidity, along with extending our maturities for five additional years and we saw incredible support on this deal.
The transaction was oversubscribed with all of our existing banks remaining in the facility and we successfully added four additional banks.
The successful execution of this transaction gives us further confidence in our ability to pursue and execute external investment opportunities.
Additionally, through improved operations and deleveraging, we have also brought our core debt-to-EBITDA down to the mid-sixes and are on track to get into the fives in 2022 as we begin to see the meaningful NOI growth show up in our results.
Lastly, as outlined in our release, we raised approximately $46 million through our ATM at an average issuance price of 20 to 37 and we were able to accretively redeploy these proceeds to the funding of investments and repayment of debt.
In summary, we had a strong quarter, we came in ahead of our expectations and have continued optimism as we look forward in the next several years.
And with the additional liquidity that we generated this past quarter, we are well positioned to pursue an aggressive external growth strategy.
Today, I'd like to provide a brief update on each of our four active funds, beginning with Fund V. First, we are pleased to report that fund deal flow is kicking in with our fully discretionary capital finally getting the credit it deserves.
We currently have approximately $170 million of Fund V acquisitions under contract or under agreements in principle.
This includes the $100 million we previously reported as of the first quarter.
Consistent with Fund V existing investments, this committed pipeline is comprised of higher yielding suburban shopping centers.
For stable properties, pricing remains at approximately an 8% unleveraged yield.
In fact, private cap rates for these types of suburban shopping centers have remained at this level since at least 2016 when we began leaning into the strategy with Fund IV.
At this going in cap rate, we have been able to maintain an approximate 400 basis point spread to our borrowing costs, enabling us to equip a mid-teens leveraged yield on our invested equity.
More recently, we are also seeing new acquisition opportunities with some immediate value added releasing, which plays to our strengths as retail operators.
At the beginning of the year, we had allocated 60% of Fund-V $520 million of capital commitments.
Including our committed acquisition pipeline, we are now approximately 75% allocated, and we have until August of 2022 to fully deploy the rest of our dry powder.
Due to our selectivity at acquisition, our existing Fund V assets have navigated the pandemic well with the collections rate that is now in the mid '90s consistent with our Core Portfolio.
And notably, throughout the pandemic, this carefully selected portfolio has delivered a consistent mid-teens leveraged returns.
Over the life of our investments, we expect to generate most of our return from operating cash flow.
That said, there is a tangible opportunity for outsized performance due to cap rate compression.
After all, real estate borrowing costs have returned to their pre-pandemic levels and public market cap rates for retail real estate have also compressed while private market cap rates remain the same.
As a result, we believe that signals are pointing to reversion to the mean in the private markets to over the next few years.
And every 50 basis points of cap rate compression would add 250 to 300 basis points to our projected IRRs.
Given the amount of capital on the sidelines and recovering retail fundamentals, this is also a good time to opportunistically harvest properties.
One area of focus is our grocery anchored properties, which have gotten a pandemic boost and remain in favor in the capital markets.
To that end, during the second quarter, we completed the sale of four grocery anchored properties all located in the State of Maine.
These were part of Fund IV in Northeast grocery portfolio.
At one property, we had recently completed the installation of a new junior anchor and at two others, the supermarket anchors had recently exercised their next five-year options providing enhanced cash flow stability and finance ability for the next buyer and better exit pricing for us.
Finally, turning to Fund II and City Point, we continue to see positive momentum at this iconic property with shopper traffic and tenant sales both continuing to increase.
Recall that City Point is located at the epicenter of a development boom in Downtown Brooklyn, which has resulted in the completion of nearly 16,000 new residential units since 2004, and another 13,000 units either under construction or in the development pipeline.
Among on New York city neighborhoods, Downtown Brooklyn, now ranks 13th for median home price up nearly 80% year-over-year to 1.4 million.
This should all in order to the benefit of our mixed-use project.
On the City point leasing front, we've seen strong interest in the former Century 21 space from both traditional retail users and commercial tenants.
There is also strong interest in the concourse level which is anchored by our decal market hall.
And we're pleased to announce that we recently executed a lease with Sphere physical therapy for a 2000 square feet space fronting Gold Street and the New York City development of a new one acre park.
With all these positive indicators, this is the perfect time for us to go to market to refinance this project over the next 12 months.
So in conclusion, our fund platform remains well positioned with the successful capital allocation strategy and a portfolio of existing investments that continue to march toward stabilization.
| acadia realty trust quarterly ffo before special items $0.30 per share.
|
What we will say today is based on the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
We are pleased to report a strong start to 2021.
Earnings improved substantially but earnings per share of $0.73, compared to $0.48 in the pandemic impacted first quarter of last year.
Our backlog has also strengthened sequentially, and we see good trends in underlying activity levels, especially in our industrial, technology and modular markets.
Overall, we are optimistic about our prospects for the next several quarters.
As Brian said, our results were again very strong.
First quarter revenue was $670 million, a decrease of $30 million, compared to the same quarter last year.
Our same-store revenue declined by $83 million.
However, our recent acquisitions added approximately $53 million in revenue this quarter.
You may recall that last year we had large data center work ongoing in Texas and that created high revenue in the comparable period.
We will continue to face a tough revenue comparison in the second quarter of 2021, but to a lesser extent than this quarter.
Gross profit was $123 million for the first quarter of 2021, an increase of $6 million and gross profit as a percentage of revenue rose to 18.4% in the first quarter of 2021, compared to 16.7% for the first quarter of 2020.
The improvement in gross margin results from stronger margins in electrical.
SG&A expense was $88 million, or 13.2% of revenue for the first quarter of 2021, compared to $93 million, or 13.3% of revenue for the first quarter of 2020.
On a same-store basis, SG&A declined by $6 million -- $11 million.
That decrease included a $6 million reduction in bad debt expense as last year's collectability concerns for retail and other customers are trending better than we predicted.
The remainder of the decline in SG&A was the result of cost discipline.
Our 2021 tax rate was 24.8%, compared to 27.6% in 2020.
Our current year tax rate benefited from permanent differences related to stock-based compensation, and we expect it to trend upwards into our normal range for the full-year.
Overall net income for the first quarter of 2021 was $26 million, or $0.73 per share, as compared to $18 million, or $0.48 per share in 2020.
For our first quarter, EBITDA was $51 million, a 39% improvement over last year and our trailing 12-month EBITDA is a record $264 million.
Free cash flow in the first quarter was $80 million, as compared to $15 million in Q1 2020.
This year's -- this quarter's free cash flow is far higher than we've ever achieved in the first quarter as we received advance payments on large projects that are commencing and our lower same-store revenue led to some temporary harvesting of working capital.
As we execute these projects over the next few quarters, and if organic revenue improves in the second half as expected, we will see some absorption of working capital.
Our free cash flow over the trailing 12-month period is $330 million and that strong performance has returned our leverage to well under 1 times EBITDA despite our many ongoing and recent acquisitions.
That's all I have, Brian.
I'm going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for the remainder of 2021.
Backlog at the end of the first quarter of 2021 was $1.66 billion.
We believe that the effects of the pandemic are beginning to subside as same-store backlog increased sequentially by nearly $150 million, or 10%.
Although we expect some delays in bookings will continue through the second quarter, we remain optimistic about trends for the second half of the year.
Overall, we are very comfortable with the backlog we have across our operating locations.
We are seeing good trends in underlying activity levels, especially in our industrial, technology and modular markets.
Our industrial revenue was 40% of total revenue in the first quarter.
We expect this sector to continue to grow as a majority of the revenues at our newer companies of TAS and TEC are [Phonetic] industrial and industrial is heavily represented the new backlog.
Institutional markets, which include education, healthcare and government were 35% of our revenue and that is roughly consistent with what we saw in 2020.
The commercial sector is now about 25% of our revenue.
For the first quarter of 2021, construction was 77% of our revenue, with 45% from construction projects for new buildings and 32% from construction projects in existing buildings.
Service was 23% of our first quarter 2021 revenue with service projects providing 9% of revenue, and pure service, including hourly work providing 14% of revenue.
Year-over-year service revenue is up approximately 4% with improved profitability.
We are seeing good opportunities in indoor air quality, which has helped many of our service departments return to pre-pandemic volumes.
The high move [Phonetic] interest in IAQ plays to our strength of solving problems for our customers and air quality considerations help us differentiate ourselves in both service and construction.
Our mechanical segment continues to perform extremely well.
Our electrical gross margins improved from 5.5% in the first quarter of 2020 to 14.7% this year.
Our backlog strengthened this quarter and the effects of the pandemic are fading.
We expect some continued organic revenue declines in the second quarter of 2021, but less than we experienced in the current quarter.
We continue to see strong project development and planning activity among our customers, especially in technology and other industrial verticals.
Our large operations are in place where companies continue to invest, such as Texas, North Carolina, Florida and Virginia.
It was one year ago that we reported our first quarter at a time when everyone was adjusting to the risk and uncertainty of the pandemic.
We will continue to work hard to keep our workforce and our community healthy and safe.
We look forward to continued strong profitability and good cash flow in 2021 and our strong pipeline makes us optimistic about activity levels in the second half of this year and into 2022.
We will continue to invest in our workforce and to improve our formidable mechanical and electrical businesses in existing and new geographies.
| q1 earnings per share $0.73.
backlog as of march 31, 2021 was $1.66 billion as compared to $1.51 billion as of december 31.
|
Additionally, transactional activity continues to pick up.
So, before I turn over the call to John and Amy to delve into the details of the progress that we made last quarter, I want to reflect on an interesting inflection point that we find ourselves.
Because after a couple of years of meaningful headwinds for retail real estate.
First, from the so-called retail apocalypse and then from the impact of COVID, we're now at a point where not only are we seeing solid leasing fundamentals that should provide strong internal growth for the next several years, but the other drivers of our business, most notably our external growth engines, both from our on-balance sheet investing as well as through our fund platform are in a position to add important growth as well.
In short, we have the potential to be hitting on all cylinders in a way that we have not seen in a very long time.
So, let me walk through the key drivers of this trajectory.
First, there's internal growth.
NOI growth is poised to be well above trend for the next several years.
Now granted, some of this growth is from the rebound from the short-term setbacks from COVID.
But we positioned ourselves to not just recapture past income, but then to grow nicely past that benchmark.
This growth is going to come from a few key components.
First, we anticipate taking our occupancy back to approximately 95% from the current level of approximately 90%.
Now occupancy for us is a very rough and very imprecise proxy but, however you choose to measure it, the growth associated with the restabilization is going to be impactful and we're seeing this take hold.
Year-to-date, we have signed over $11 million of leases and considering our initial pipeline with $6.5 million this is a pretty good start.
And the growth is coming across the board but notably, it is showing up in our key streets that were boarded up and left for dead a year ago and now they're coming back.
For example, we recently signed a lease with FILA sportswear for the corner of Prince and Broadway in SoHo and notwithstanding the dire predictions as to the future of SoHo.
The economics of this lease provided a positive spread and was largely consistent with our pre-COVID expectations.
Then the next driver of growth is coming from the contractual growth and lease roll in our portfolio.
Now trees never grow to the sky and not all leases roll up, but the green shoots that we are seeing in SoHo are beginning to take hold in other markets as well.
We recently achieved positive lease spreads in Melrose Place in Los Angeles and in Armitage Avenue in Chicago, both at rents that were in excess of our pre-COVID expectations.
And importantly, tenant sales, as John will highlight, are supporting this trend.
Many retailers are already comping positive to pre-COVID sales in many of the corridors that we're active in.
Now this fact is so different from what most of us expected during the early days of the pandemic.
In fact, if COVID has commonly been viewed as an accelerant of trends, what it has really been for retail real estate is a cleansing and a validating mechanism.
Cleansing in that the retailers who have made it through the storm seem to be in a much better position in terms of balance sheet strength and in terms of productivity and then validating in that the importance of the physical store has clearly been validated in the post pandemic omnichannel world that we are in.
And this is true not only for the Target and Walmarts of the world who validated the importance of the store in their omnichannel success.
But it's also true for luxury and bridge apparel, where you are seeing tenants, recognizing the power of their stores as critical in connecting directly with their customer, especially in the must-have streets where we own.
And it's also true for the digitally native retailers, where our tenants like Warby Parker and Alberts are making it clear that the physical store is essential to their growth and essential to their profitability.
And keep in mind, as recently as a year ago, many wondered whether these retailers would even want stores on these streets.
And while everyone was wondering, the retailers doubled down.
Then along with our growth from lease-up, we will add additional internal growth from a series of redevelopments that are actionable and profitable.
It's a bit early to update our progress on this front right now, but we should have some worthwhile updates by our next quarterly call.
Then complementing our internal growth are the multiple components of our external growth engine.
Firstly, we are doing on-balance sheet investing to add to our existing core portfolio accretively.
Deal flow during the pandemic was quiet as most owners hunkered down, and most lenders were highly accommodative.
Distressed opportunities were underwhelming in almost every segment of real estate other than stock prices.
And frankly, we did not have a cost of capital that enabled us to be competitive, but sellers are once again emerging.
And as we look around, there are certainly fewer well capitalized and knowledgeable competitors for our areas of focus.
And we're beginning to see a recovery in the debt and equity markets such that we should have a cost of capital to accretively acquire, and it should be a good period to put dollars to work.
Then along with on-balance sheet investing beginning to heat up, our fund platform is in a position to continue to add to our growth.
We can add to our fund acquisitions, both similar to Fund V or similar to other successful value-add or opportunistic initiatives that we've done in the past.
In terms of Fund V, and as Amy will discuss, we are continuing to buy out of favor [Indecipherable] 10:23 open air retail at substantial discounts to replacement cost with attractive mid-teens yields.
These investments have proven stable through COVID and while I think we may have a couple more years of buying these yields at a discount, we're also seeing signs of cap rate compression.
And if and when cap rates do compress we'll have well over $1 billion of retail in Fund V alone, clipping mid-teens yields, while we wait and keep in mind, buying out of favor existing cash flow is just one of the many ways we have created value in our fund platform over the years, whether it's buying retailers with significant embedded real estate value, such as our investment in Albertsons and the rest of our RCP activity or opportunistic acquisitions where we saw significant rent bumps and then monetized opportunistically as was the case in Lincoln Road and Miami or a variety of redevelopments and value-add projects where tenant demand warrants it.
Our team and our balance sheet are built to do multiples of this volume, and we're starting to see the stars align.
Finally, keep in mind, at our size, roughly every $100 million of new investments, whether core or fund, adds about 1% to our earnings.
So to conclude, as we are climbing out of the horrors of the global pandemic and recognizing that the impact that was felt was especially hard on so many of our assets the rebound is becoming clearer every day.
And it's also becoming clearer that our company, both in size and ability is well positioned for accelerated growth from this recovery.
The combination of strong embedded internal growth and the ability to drive external growth, both on balance sheet and then through our funds, should enable us to maximize value in multiple different ways.
I will start off with a discussion of our third quarter results, followed by an update on our continued progress on the $25 million of anticipated internal core NOI growth and then closing with our balance sheet.
Starting with the quarter.
Our third quarter earnings of $0.27 a share exceeded our expectations, landing us in the upper end of the $0.25 to $0.27 range that we had guided toward on our most recent call.
And this was driven by rent commencement on new leases, continuous improvements in our cash collections, along with some accretion from the approximately $140 million of external investments that we completed during the quarter.
In terms of near-term FFO expectations, we continue to anticipate $0.25 to $0.27 of quarterly FFO, excluding any potential Albertson sales for the next few quarters.
In terms of Albertsons, as I shared on the prior call, although a sale of shares before the end of the year is possible, we continue to believe that it's prudent to assume that the realized gains start showing up in 2022.
And as a reminder, keep in mind that these gains are simply timing.
So whether it's next quarter or next year, using Albertson's most recent share price, a sale of our position would result in a gain in excess of $30 million or in excess of $0.30 a share of FFO.
However, I think it's worth drilling into the components.
As it actually represents a beat in excess of 10% off of our initial midpoint.
As you'll recall, within our initial range of $0.98 to $1.14, we had incorporated $0.05 to $0.13 of core and fund transactional activity, which, as we highlighted, was primarily attributable to the sale of Albertson shares in 2021.
So after adjusting for the $0.05 to $0.13 of transactional income, we had guided toward $0.93 to $1.01 for a midpoint of $0.97.
And given our expectation of near-term FFO of $0.25 to $0.27, this gets us in the [Indecipherable] 15:04 106, 108 in range for 2021, and that's without any Albertson shares, which is more than 10% above the midpoint of our initial range as well as 5% to 7% above the high end of our range.
And as I had updated on our progress throughout the year, this beat was largely driven by approved fundamentals within our core business around lease-up and credit improvements and not onetime accounting adjustments related to reserves taken in prior periods.
In terms of cash collections, we received over 97% of our core billings during the quarter.
And as a reminder, each 1% increase in collections equates to increased earnings of approximately $500,000 per quarter or $2 million, representing over $0.02 of FFO when annualized.
While we are virtually back to pre-pandemic collection rates, the remaining portion of our uncollected billings is largely coming from the small population of quick service restaurants in our portfolio.
I now want to spend a moment on what we are seeing on our tenant sales productivity.
Given the high-quality inventory we have available to lease, we are closely watching the sales productivity of our new tenants, particularly those recently leased street locations as this educates us not only on the level of future tenant demand, but more importantly, the potential upside to drive rents beyond the $25 million of core internal NOI growth that we are anticipating.
Both we and our tenants are incredibly pleased with their performance to date.
In fact, Art Street tenants are seeing sales well in excess of their internal projections.
For example, some of our recent openings in Chicago and New York Metro are already seeing early results trending in the $2,000 a foot range.
And keeping in mind, this is even before the return of international tourism, back to office and the lingering pandemic concerns.
Now moving on to our same-store NOI.
Same-store NOI also came in above our expectations at approximately 7%, and this was driven by improving occupancy and a continued reduction in our credit reserves.
It's also worth highlighting that the 7% is a pretty clean number.
As we had highlighted in our release, the vast majority of prior period adjustments that were recognized this quarter arose from a property that was not included in our same-store pool.
And as Ken mentioned, we are seeing actionable rental rates returning, and in some instances, actually exceeding pre-COVID rents across our market.
In fact, this was evident in our leasing spreads this quarter as we saw a cash increase of approximately 11%, along with a GAAP increase of 19%.
And this was driven by our street leasing during the quarter, including a cash spread in excess of 20% on one of our key street locations on Melrose Place in Los Angeles.
It's worth highlighting that this rent substantially exceeded our initial underwriting for this space, which, as a reminder, we closed on our acquisition of Melrose Place just before the onset of COVID in the fourth quarter of 2019.
Additionally, as Ken mentioned, we are seeing similar trends on Armitage Avenue in Chicago, with recent trends in excess of 30%, which is also well above our initial underwriting.
Now it's also worth mentioning the structural differences between our street and suburban leases and why the point in time lease spreads that are disclosed in our quarterly results are often not really comparable when evaluating deal profitability or more importantly, future growth expectations, given that we tend to reset our street leases to market every five years or so as compared to 10 to 15 years or often much longer on a suburban lease.
Coupled with the fact that street rents contractually increase 3% annually as compared to 1% of suburban lease.
And just to illustrate the difference, if we were to assume that a street lease grows contractually 3% a year and achieves a fairly modest 5% spread every five years.
In order for our 10-year suburban lease that has grown at 1% to achieve an identical CAGR, it would need to achieve a spread of approximately 25%.
I now want to provide an update on the internal core NOI growth that we see playing out over the next few years.
And as a reminder, we anticipate growth of $25 million by year-end 2024, resulting in over $150 million of core NOI.
And as it relates to the short term, we remain on track, if not ahead of our previously announced expectation of achieving our pre-COVID NOI by late 2022 or early 2023.
As a reminder, the three key drivers of our approximately $25 million or 20% increase in our core NOI off of our 2020 NOI include: first, net absorption, which is the profitable lease-up of our core portfolio and is offset by anticipated tenant expirations over this period.
And we are anticipating that this generates us $10 million to $15 million of incremental NOI, representing $0.11 to $0.16 of FFO.
Second piece is further stabilization of our credit reserves, contributing $5 million to $6 million of incremental NOI or $0.05 to $0.06 of FFO; and lastly, contractual rental growth of $8 million to $10 million.
In terms of the most impactful are the $10 million to $15 million of net absorption, I want to provide some insights on how we see it playing out over the next few years.
Given the significant volume and profitability of the new leases signed to date and using our anticipated rent commencement dates on these executed leases, this should largely replace the NOI of the previously discussed tenant expirations at 565 Broadway in SoHo and 555 nine Street in San Francisco for the first half of 2022.
As previously discussed, the impact of these two expirations, which occurs in October 2021 for 555 nine and January 22 for 565 Broadway is approximately $4 million or roughly $4.6 million of annual NOI when factoring in recoveries.
As Ken discussed, we have already profitably leased 565 Broadway several months in advance of the current lease expiration, thus significantly minimizing any downtime with an anticipated rent commencement date in the second half of '22.
So when coupled with the remaining portion of our $16 million lease pipeline coming online, this sets us up for solid NOI growth in the $2 million to $3 million range in the second half of 2022, with the balance of that remaining growth coming from positive absorption split fairly evenly between '23 and '24 as the balance of our pipeline kicks in.
The second driver of our NOI growth expects our ongoing stabilization of credit reserves.
At a 97% cash collection rate, we are continuing to incur charges in the $1.5 to $2 million range or $6 million to $8 million when annualized.
Assuming the continued momentum of reopening and retailer strength, we are optimistic that the majority of this should largely return in the second half of '22.
And the last piece comes from internal growth of contractual rental increases.
We are continuing to see the 3% contractual growth in our street leases.
So when blended across our suburban and urban assets, this averages to about 2% a year, contributing approximately $3 million of incremental annual NOI.
So given the significant progress our team has made this year and accelerated recovery within our portfolio, we are anticipating meaningful NOI and FFO growth for the next several years, and that's before we layer in the impact of any accretive redevelopments, external growth or the profitable transactions that we anticipate will continue to occur within our fund business.
Now moving on to our balance sheet.
We have not issued any equity since our most recent call.
As Ken mentioned, given our size, each $100 million of investments, whether it be core fund, should result in FFO accretion of approximately 1%, and our balance sheet is well positioned to capture this accretion with ample liquidity available in our corporate facilities, along with the cost of capital that we believe enables us to accretively transact on a growing external investment pipeline.
So in summary, we had another strong quarter as the recovery continues to play out across our portfolio, and we are feeling increasingly optimistic on our internal growth outlook as we look forward the next several years.
Today, I'd like to provide a brief update on our fund platform, beginning with Fund V. First, we are pleased to report that fund deal flow is kicking in.
Like the balance of our Fund V portfolio, these two properties were acquired at a substantial discount to replacement cost.
Including land, our blended cost basis for these two centers is approximately $130 per square foot.
In comparison, the cost to construct a new suburban shopping center is approximately $200 to $250 per square foot, and that's excluding land cost.
Additionally, both properties rank number one in their respective markets based on foot traffic, consistent with our best game in town acquisition strategy.
The resiliency of Fund IV stems from our needle in a haystack approach to acquiring these types of centers.
Due to our selectivity at acquisition, we've seen a Fund V collections rate that is now in the high 90s, consistent with our core portfolio and a stable mid-teens leverage return, which we're able to achieve given our use of 2/3 leverage in our fund platform.
Even during the pandemic, our cash-on-cash yields only dipped to approximately 13%.
Looking ahead, we expect to be back to 15% relatively quickly.
Similarly, on an unlevered basis, our 8% yield dipped to approximately 7% during the pandemic and is now on a projected path back to 8%.
Over the life of our investment, we expect to generate most of our return from operating cash flow.
That said, as previously discussed, there is a very tangible opportunity for outsized performance due to cap rate compression and thus property appreciation.
Here are a couple of indicators we're watching.
First, real estate borrowing costs have returned to their pre pandemic levels in the mid-3% range.
Additionally, public market cap rates for the shopping center REITs are approaching a decade low level.
While private market cap rates for the type of product we're targeting have remained flat at approximately 7.5%.
In fact, transactional cap rates in the private market are at a historically widespread to underlying borrowing costs.
As a result, we believe that signals are pointing to a reversion to the mean in the private markets too over the next few years and when that happens, we will have aggregated a $1 billion portfolio, where every 50 basis points of cap rate compression would add 250 to 300 basis points to our projected IRRs, increasing overall fund profitability and in turn, our GP incentive compensation.
In the meantime, we are continuing to clip attractive returns and selectively adding to this portfolio.
To date, we've allocated approximately 75% of our Fund V capital commitments, and we have until August of 2022 to deploy the balance.
Given the amount of capital on the sidelines and recovering retail fundamentals, this is also a good time to opportunistically harvest properties in our older vintage funds.
One area of focus is our grocery-anchored properties, which have gotten a pandemic boost and remain in favor in the capital market.
Last quarter, as previously discussed, we completed the sale of four grocery-anchored properties in Fund IV.
Looking ahead, we anticipate that our disposition volume will be focused on this product type.
Finally, turning to Fund II and City Point.
We continue to see positive momentum at this iconic property with shopper traffic and tenant sales both continuing to increase and the recent opening of BASIS Independent and Elementary School in approximately 60,000 square feet in Phase III.
On the leasing front, we're pleased to report that last week, we executed a lease with an international retailer for 70% of the space formerly occupied by Century 21.
We look forward to sharing more details over the next several weeks, but in the meantime, know that we are excited by this addition, which nicely complements our existing merchandise mix.
The new lease replaces nearly all of Century 21's prior rent obligations with 30% of the space still remaining to be leased.
Construction is anticipated to commence shortly, and the retailer is expected to open in the second half of 2022.
With all these positive indicators, this is an appropriate time for us to go to market to refinance this project over the next several months.
So in conclusion, our fund platform remains well positioned with a successful capital allocation strategy and a portfolio of existing investments that continue to march toward stabilization.
| q3 ffo per share $0.27 excluding items.
|
Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow-up.
We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
I hope you and your families are safe and healthy.
2020 was a challenging year for all of us as the virus started reshaping our lives, our economy, and our business we established 3 priorities to guide us throughout the year.
Number 1, keep our employees safe; 2, meet the needs of our customers; and 3, position Masco to outperform the recovery.
Our employees across our business units did a tremendous job to deliver on all of these priorities.
Our performance in 2020 was a testament to Masco's culture of solving problems, serving customers, and delivering better solutions.
Now, let me provide you some brief comments on our 4th quarter before I turn to our full year results and conclude with our thoughts on 2021.
Turning to slide 4, our top line increased 12% excluding the impact of currency in the 4th quarter.
We saw growth across our entire portfolio, led by strong growth in North American plumbing, international plumbing and our paint business.
Operating profit increased 20% and our operating margin expanded 90 basis points to 16.6% in the quarter as we leveraged our strong volume growth.
Our earnings per share for the quarter increased an outstanding 36%.
Turning to our segments, Plumbing grew 12% excluding currency, with 14% growth in North American plumbing and 8% growth in International plumbing.
North American plumbing was led by Delta faucet company with 18% growth.
Our Spa business also achieved growth in the 4th quarter as we continued to effectively manage covered related restrictions.
Hansgrohe drove strong growth in Germany in China as those markets have recovered nicely from earlier in the year.
In our Decorative Architectural segment, Behr continued its tremendous year with high teens DIY paint growth and mid-single digit propane growth in the 4th quarter.
Our lighting and our Bath & Cabinet Hardware businesses also contributed nicely to growth in the quarter.
In regards to capital allocation, we resumed our share repurchase program by repurchasing 2.3 million shares for $125 million during the quarter.
And we executed 3 bolt-on acquisitions, which we expect to contribute approximately 3% top line growth in 2021.
The largest was the acquisition of Kraus, an online plumbing fixture company focused on modern high quality sinks, faucets, and related products.
Kraus will operate as an affiliate of Delta faucet company.
This leading digitally native brand will complement our online capabilities in the fast growing e-commerce channel.
Also in our plumbing segment, Hansgrohe in January acquired a 70% interest in easy sanitary solutions or ESS, a Netherlands based developer and manufacturer of high-style linear drain solutions.
ESS shares Hansgrohe's focus on innovation, design, and responsibility and will further expand our strong presence in the shower space.
In our Decorative Architectural segment we acquired Work Tools international, a leading manufacturer of high quality precision paint tools and accessories, including brushes rollers, and mini rollers for both DIY and professional painters under the WHIZZ, and Elder & Jenks brand names.
These acquisitions are consistent with our M&A criteria in that they are leaders in their respective categories, have a strong fit with our existing strategy, increase our market share and complementary or adjacent product categories and meet our bolt-on acquisition return criteria, which is to exceed our risk-adjusted cost of capital within a 3-year timeframe.
Now let's review our full year performance.
For the full year, sales grew 7%, led by double-digit growth from Delta faucet, Behr paint and Liberty Hardware.
Delta gained share with double-digit growth across its retail, trade, and e-commerce channels.
Hansgrohe gained share in its two largest markets of Germany and China.
And our Spa business, which was the most impacted by shut down orders and limits on employees in its Mexican facilities, overcame significant obstacles to end the year down only mid single digits and enters 2021 with a record backlog, due to the tremendous demand for its products.
In our Decorative Architectural segment, we were well positioned with our leading brands Behr and Kilz and our strong channel partners to capitalize on the powerful resurgence in DIY paint.
This resulted in full-year growth of over 20% in DIY paint.
Propane demand was soft in Q2 and Q3 but returned to growth in the 4th quarter and is accelerating into 2021.
While total company sales grew 7%, operating profit increased 18% as we leveraged the strong volume growth and enacted significant cost reduction across the organization including hiring and wage freeze for part of the year, significantly lower brand and marketing spend, a freeze on certain growth investments for part of the year, and obviously drastically reduced travel and entertainment expense.
These actions coupled with our strong volume leverage resulted in significant operating margin expansion of 170 basis points in 2020.
Our strong cash generation allowed us to deploy nearly $1.1 billion in capital during the year.
We repurchased $727 million of our stock at an average price of approximately $39 per share.
We returned approximately $145 million in dividends to shareholders.
We completed 4 bolt-on acquisitions for $227 million and we finished the year with over $1.3 billion in cash on hand and net leverage of one-time.
This strong operating profit growth combined with our significant capital deployment resulted in exceptional financial results, 37% earnings-per-share growth to $3.12 per share exceeding our 2019 Investor Day guidance for 2021, a full year earlier than planned.
Free cash flow of over $1 billion with a conversion rate of 118% and a return on invested capital of approximately 42%.
Now turning to '21.
While precise forecasting is a significant challenge in this dynamic environment, I would like to share with you our view of the markets where we compete.
For the North American repair and remodel market, we expect a market growth to be in the low to mid single digit range with strong growth in the first half, followed by difficult comps in the second half.
For the paint market, a subset of the repair and remodel market for us, we expect the DIY paint market to be down low to mid single digits and the propane market to grow mid single digits.
And for our international markets, principally Europe, we expect a low single-digit growth environment.
While the US market will face challenging comps in the back half of '21, leading indicators remain robust.
Home price appreciation was up nearly 30% in December and existing home sales were up over 22% compared to prior year.
Each of these metrics has a strong correlation with our sales on a lag basis.
Based on these assumptions and our expectation that we will continue to gain share and outperform the market, we anticipate Masco's growth to be in the range of 5% to 9% excluding currency for 2021, and 7% to 11% including currency.
This is based on expected organic growth of 2% to 6% excluding currency, growth from our completed acquisitions of approximately 3%, and growth from foreign currency translation of approximately 2%.
We expect margins to be approximately 17% and earnings per share to be in the range of $3.25 to $3.45 for 2021.
Turning to capital allocation.
Our Board announced its intention to increase our annual dividend to $0.94 per share beginning in the second quarter of 2021, a 68% increase.
As we have raised our targeted dividend payout ratio from 20% to 30% based on the strength of our business model and cash generation capabilities.
In addition to announcing its intention to increase our annual dividend, our Board also approved a new $2 billion share repurchase authorization.
Our strategy remains unchanged to deploy our free cash flow after dividends to share repurchase or acquisitions and based on our strong liquidity position of over $1.3 billion in cash at year-end and then our projected free cash flow, we expect to deploy approximately $800 million to share repurchases or acquisitions in 2021.
As Dave mentioned, most of my comments will focus on adjusted performance from continuing operations, excluding the impact of rationalization and other one-time items.
Turning to slide 7, we delivered a strong finish to our record year.
Fourth quarter sales increased a robust 12% excluding currency.
In local currency, North American sales increased 13%.
This outstanding performance was mainly driven by strong volume growth in North America -- North American faucets and showers as well as DIY paint.
In local currency, international sales increased 8%.
Gross margin was 35.6% in the quarter, up 100 basis points as we leveraged increased volume, partially offset by higher rebates and program costs.
Our SG&A as a percentage of sales was 19% in the quarter.
This was primarily due to increases in certain variable costs such as incentive compensation, program costs, advertising, and legal accruals.
We delivered a strong 4th quarter operating profit of $309 million, up $52 million or 20% from last year with operating margins expanding 90 basis points to 16.6%.
Our 4th quarter earnings per share increased 36% to $0.75.
Please note that this performance is based on a normalized tax rate of 25% versus the previously guided 26% tax rate.
Changes to IRS guidance in late 2020 and how certain foreign income is taxed in the US lowered our normalized tax rate to 25%.
As this change was retroactive, restated adjusted earnings per share numbers for 2019 and the first 3 quarters of 2020 can be found in the appendix on slide 28.
Turning to the full year 2020, sales increased 7% excluding currency.
Foreign currency translation favorably impacted the full-year by $13 million.
In local currency, North American sales increased 9% and international sales decreased 1% as many European markets were slower to recover from the impacts of COVID-19.
Our SG&A as a percentage of sales decreased 100 basis points to 17.9% for the full year as a result of our rapid pandemic related cost containment.
For the full year, operating profit increased $196 million or 18% with operating margins expanding 170 basis points to 18.2%.
Lastly, our earnings per share increased 37% to $3.12 for the full year.
Turning to slide 8, Plumbing grew 12% in the quarter, excluding the impact of currency.
North American sales increased 14% in local currency led by Delta's 18% growth in the quarter.
Delta continues to drive robust consumer demand across our wholesale, retail, and e-commerce customers as Keith mentioned Watkins, our Spa business, delivered high single-digit growth in the quarter, as they continued to experience strong demand for their products.
They have a record backlog despite operating at less than 100% capacity due to ongoing government mandated employee limitations in our Mexican facilities.
International plumbing sales in the 4th quarter increased 8% in local currency.
Hansgrohe once again led growth driving double-digit growth in both Germany and China.
Operating profit was $224 million in the quarter, up $44 million or 24% with margins expanding 160 basis points 19.1%.
The strong performance was driven by incremental volume and cost containment initiatives, partially offset by higher year-end program costs, marketing and other increased variable expenses.
Turning to the full year 2020, sales increased 3% excluding currency.
Foreign currency translation favorably impacted full year sales by approximately $15 million.
In local currency, North American plumbing sales grew 6% and international plumbing sales decreased 1%.
Full-year operating profit was $813 million, up $92 million or 13% with margins expanding an outstanding 160 basis points to 19.7%.
Turning to 2021, we expect plumbing segment sales growth to be in the range of 11% to 14% with 47% organic growth, another 4% growth from the recent acquisitions and given current exchange rates foreign currency to favorably benefit plumbing revenue by approximately 3% or $112 million.
We anticipate full year margins will be approximately 18% given that in 2020 we delayed approximately $40 million in costs and investments due to COVID.
We expect a significant portion of this to return in 2021 in the form of investments in our brands, service, innovation to fuel future growth.
We will also have increased amortization expense of approximately $11 million due to purchase accounting.
Segment operating margins will decline by approximately 60 basis points due to this incremental amortization in the 2 recent acquisitions.
Turning to slide 9.
Decorative Architectural grew 12% in the 4th quarter driven by mid-teens growth in our paint business.
Our DIY paid business continued its strong year with high-teens growth and our propane business rebounded nicely in the quarter with mid single-digit growth.
Our builders' hardware and lighting business also benefited from increased consumer demand and each contributed to the segment's results by delivering solid growth.
Operating profit in the quarter increased 9% driven by incremental volume, partially offset by an unfavorable price-cost relationship as well as higher variable compensation and legal accruals of approximately $10 million.
Turning to full year 2020, sales increased 12% driven by the resurgence in DIY paint in the year.
While our Pro business declined slightly over the prior year, we saw solid improvement in demand in the 4th quarter.
Full-year operating income increased $98 million or 20% percent with operating margins expanding 120 basis points to 19.2%.
In 2021, we expect Decorative Architectural segment sales to grow in the range of 2% to 7% with 0% to 5% organic growth and another 1.5% from the acquisition.
We also expect segment operating margins of approximately 19%.
Looking specifically at paint growth for 2021, we currently anticipate our DIY business to be approximately flat with 2020 and our pro business to increase to high single digits.
In addition, the acquisition completed at the end of 2020 will add approximately $3 million of incremental amortization expense due to purchase accounting.
Turning to slide 10, our year-end balance sheet was strong with net debt to EBITDA at 1 times and we ended the year with approximately $2.3 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percentage of sales finished the year at 15.2% excluding acquisitions and an improvement of 50 basis points over prior year.
This performance was excellent.
As we enter 2021, our inventory levels will require some reinvestment to sustain our outstanding delivery performance.
With our strong operating and working capital performance, and lower than normal capex, adjusted free cash flow was extremely strong at $1 billion representing 118% of adjusted net income from continuing operations.
During 2020, we repurchased 18.8 million outstanding shares for approximately $727 million and we increased our annual dividend by 4% to $0.56 per share.
Finally, I'm pleased to report that Moody's recently upgraded our credit rating to Baa2 based on our improved credit metrics and strong financial performance.
We have summarized, our expectations for 2021 on slide 11.
We expect overall sales growth of 7% to 11% with operating margins in the range of approximately 17%.
We currently expect that growth will be more heavily weighted toward the first half of the year as we will obviously face our impressive 2020 comps in the second half of 2021.
One thing to keep in mind is that in 2021, we expect to annuitize in Germany, certain of our US defined benefit plans and as the second or 3rd quarter.
As a result, we will incur a non-cash settlement charge of approximately $450 million when we terminate the plans.
We will adjust out this charge for purposes of our adjusted earnings per share calculation.
Additionally, we will make a final one-time cash pension contribution of approximately $140 million to settle these plans.
This amount will reduce our cash from operations, similar to the approximate $50 million of defined benefit contributions made to these plans in the past several years.
This also means that beginning in 2022 cash from operations will increase by approximately $15 million as compared to prior years improving our already strong free cash flow conversion.
Lastly, as Keith mentioned earlier, our 2021 earnings per share estimate of $3.25 to $3.45 cents represents 7% earnings per share growth at the midpoint of the range.
This assumes a 255 million average diluted share count for the year.
Additional modeling assumptions for 2021 can be found on slide 17 in our earnings deck.
2020 was a disruptive year on many fronts and these uncertain times are far from over.
While there is clearly much focus on these short-term dynamics, let me share with you how we are thinking about Masco for the long term.
The Repair and Remodel industry is attractive with favorable fundamentals.
Growth on average is approximately GDP plus 1% to 2%, and is less cyclical than the new home construction market.
Favorable demographics will help drive repair and remodel demand and we are on the leading edge of the large millennial cohort forming households.
Older homes require more repair and remodel spending and the average age of housing has increased due to significant under-building of homes since the downturn of 2008 and the COVID-19 pandemic has clearly increased the desire for more enjoyable living space, which has led to increased home demand and remodeling expenditures.
Masco has a low-ticket repair and remodel focus business with market leading brands with product and geographic diversification, which provides growth and stability through an economic cycle.
We leverage our customer insights broad channel relationships, scale, diversification, and our Masco operating system to drive innovation and make our businesses better.
With our market leading brands, history of innovation, strong management teams, and focus on serving our customers in this attractive industry combined with our strong free cash flow and capital deployment, our long-term expectation is to grow earnings per share on average by approximately 10% each year.
This is comprised of above market organic growth in the range of 3% to 5% annually.
Growth from acquisitions in the range of 1% to 3%, margin expansion each year through cost productivity and volume leverage and continued capital deployment in the form of share buybacks, which should contribute approximately 2% to 4% earnings per share growth and dividends, which should add approximately 1% to 2% return on top of the earnings per share growth.
While 2020 was an extremely challenging year, we responded exceptionally well and are poised to continue to drive shareholder value creation in the future.
| compname posts q4 adjusted earnings per share $0.75 from continuing operations.
q4 adjusted earnings per share $0.75 from continuing operations.
anticipate 2021 adjusted earnings per share to range from $3.25 to $3.45 per share.
|
In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investor Relations section of our website at investors.
During the Q&A portion of the call, Ray Ritchey, Senior Executive Vice President and our regional management teams will be available to address any questions.
The BXP team is joining you today from our offices all over the country where we're beginning to see renewed signs of life as our cities reopen with increasing activity on the street, in shop and restaurants, on public transportation, and yes, even in office buildings, where building census is picking up and tour activity is accelerating.
U.S. GDP is growing at 4.3%, over 1.6 million jobs were created in the first quarter.
Weekly jobless claims are in decline and unemployment has dropped to 6%, only 2.5 percentage points above pre-pandemic levels of February last year.
Professional service employment has remained healthy, which is important given our tenancy.
U.S. retail sales surged 9.8% in March and air travel, as measured by TSA checkpoints, is up 10 times over a year ago, but still only 50% of pre-pandemic level.
The U.S. and global economic recoveries continue to follow the course of the virus and vaccination rollout.
While new COVID-19 cases have remained sticky at around 60,000 per day since late February, all data, including three million daily vaccinations, 43% of Americans having received at least one shot and the J&J vaccine reinstatement suggest the trajectory for a highly vaccinated population and fewer new COVID infections remains positive.
The U.S. economy will likely continue to surge, given the financial health of most industry sectors, the significant federal fiscal stimulus provided to individuals and small business, accommodative monetary policy and pent-up consumption sparked by the pandemic reopening.
This recovery is starting to bring positive momentum to the office markets and BXP's result.
For the buildings we can track, our census last week was, depending on the city, at or above the post-pandemic peak established last October.
In the first quarter, we completed 592,000 square feet of leasing, 84% of the leasing volume we achieved in the first quarter of last year and 46% of our longer-term first quarter average.
These leases had a weighted average term of 7.6 years.
Our leases that commenced this quarter demonstrated a 15% roll-up of net rent for second-generation space.
We exceeded our FFO per share forecast for the first quarter and the tenant charges we experienced in 2020 largely disappeared.
More broadly, tenant requirements in our target markets in March, based on data provided by VTS, were up 33% versus the prior month and 51% versus the prior year, though we're only down -- though are still down 40% from pre-pandemic levels.
Office markets are lagging other asset classes because very few employers are currently mandating in-person work.
That is now changing rapidly as many large employers, such as Google, Goldman Sachs, JPMorgan, Ernst & Young, Facebook, Amazon, Apple and others have announced return-to-work plans for this summer.
We continue to see Labor Day as a key tipping point for employees returning to the office, with forecast low COVID infection rates, high vaccination levels, the end of summer and schools reopening.
We hear repeatedly from our clients as well as in interviews we have completed with large occupiers that the key to future success and competitiveness is to successfully reintroduce in-person work.
Unlike most recessions, most of our clients are thriving and have not reduced headcount.
In our leasing activity and renewal conversations with clients, we have not seen material reduction in space requirements.
Now moving to private equity market conditions, there were $15 billion of significant office assets sold in the first quarter, though volumes were down 37% from the first quarter of last year.
Assets with limited lease rollover and anything life science related currently receive the best pricing, often better than before the pandemic.
There were again several deals of note completed in our markets, including in San Francisco The Exchange on 16th located in the Mission Bay district sold for $1.1 billion or $1,440 per square foot, a record price per square foot in San Francisco and it represented a 4.9% cap rate.
This 750,000 square foot recently developed building is 100% leased to a tenant trying to sublease the entire building.
The asset was sold to a fund manager, which may attempt a life science conversion.
In Seattle, 300 Pine, the Macy's building sold for $600 million or $779 per square foot and a 4.4% cap rate.
The majority of this 770,000 square foot asset was recently converted to office space, which is 100% leased by Amazon, and the remainder is undergoing further renovation.
The building was purchased by joint venture between a fund manager and a real estate operator.
And in the Washington, D.C. CBD, a 49% interest in Midtown Center was sold to an offshore buyer.
The building comprises 870,000 square feet and is substantially leased to Fannie Mae as its headquarters.
The gross sale price was $980 million, $1,129 a square foot and a 4.7% cap rate.
Moving to BXP investment activities.
Let's start with our growing life science business.
BXP currently has over three million square feet leased to life science clients, approximately two million square feet of current and future office to lab conversion projects, and sites for approximately four million square feet of life science ground-up development, primarily located in among the strongest life science markets in the U.S., namely Cambridge, Waltham and South San Francisco.
We recently received one million square feet of new entitlements at Kendall Center in Cambridge, and our joint venture at Gateway Commons is in discussions with local authorities in San Francisco to increase entitlements by 1.5 million square feet.
We had a very active first quarter launching three new lab developments and redevelopment projects.
180 CityPoint, a 330,000 square foot ground-up development and part of our larger CityPoint campus in Waltham with strong visibility from I-95.
Second, 880 Winter Street is a 224,000 square foot Class A office asset we acquired in 2019 for $270 a square foot, and we'll redevelop into a lab building.
And 751 Gateway, a 229,000 square foot ground-up lab development as part of our Gateway Commons joint venture in which we own a 49% interest.
Though all three projects are being commenced speculatively, we are seeing many new life science requirements in both the Waltham and South San Francisco markets and have made multiple lease proposals to potential tenants.
A large portion of our active development pipeline is now lab and currently comprises 920,000 square feet and $560 million of projected investment for our share with projected cash yield at stabilization approximately 8%.
BXP has a rich history of success serving the life science industry.
We have the land and building inventory in the strongest life science clusters in the U.S. as well as the execution skill and client relationships to make life sciences an even more meaningful component of our overall business.
Moving to the balance of our development pipeline.
We delivered into service this quarter, 159 East 53rd Street with 195,000 square feet of office fully leased to NYU as well as the HU, which will open after Labor Day and serve as a unique culinary amenity for our three building, 53rd in Lexington Campus.
We remain on track to deliver our 100 Causeway development in Boston later this year, which is pre-leased to Verizon, and we have four additional and significant projects slated to deliver in 2022.
This pipeline is 86% pre-leased with aggregate projected cash yield stabilization projected to be approximately 7%.
To maintain our external growth, in addition to adding the three life science projects, we also are investing approximately $182 million into an observatory redevelopment project on the top of the Prudential Tower in Boston.
When complete, the observatory will have three levels, comprise 59,000 square feet and will be a world-class attraction, featuring both indoor and outdoor, 360-degree viewing decks as well as exhibit an amenity spaces.
The project will be the only observatory in Boston, and we expect it will generate strong return to BXP after delivery in the spring of 2023.
Net of all these movements, our active development pipeline currently stands at 10 development and redevelopment projects comprising 4.3 million aggregate square feet and $2.7 billion in total investment for our share.
We expect these projects, along with the lease-up of two residential buildings delivered in 2020 as well as 159 East 53rd Street to contribute 3.5% of annual and external growth to our NOI over the next three years.
We continue to actively pursue value-added acquisitions in our core markets in Seattle.
Despite the impacts of the pandemic, office investment opportunities in our core markets remain highly competitive.
To enhance our financial resources, execution speed and returns, we have reached an agreement with two large-scale sovereign investors to pursue select acquisitions together.
The partners, including BXP, will commit up to $1 billion and we'll have the opportunity to invest 1/3 of the equity in each identified deal at their discretion.
BXP will provide all real estate services and has agreed to commit its acquisition deal flow to the partnership, subject to specific carve-out.
We believe this venture with approximately $2 billion of investment capacity provides us the financial resources and return enhancements to be an even more nimble and competitive participant in the acquisitions market.
We will announce the completion of the partnership, including the participants once documentation is complete, likely in the next month.
We recently completed the sale of our 50% interest in Annapolis Junction, Buildings six and 7, our last two remaining properties in the Fort Meade, Maryland market.
The buildings totaled approximately 247,000 square feet and sold for a gross price of $66 million, which is $267 a square foot.
We have under contract three buildings in our VA 95 Business Park in Springfield, Virginia for a gross sale price of $70 million.
And we also have under letter of intent, the sale of several stabilized suburban buildings for another approximately $190 million.
Additional asset sales are being evaluated, and we believe our gross disposition volume in 2021 will exceed $500 million.
To conclude, BXP is emerging from the COVID-19 pandemic with strength and momentum.
Leasing volumes and requirements are rising, office collections exceed 99%.
Our clients are healthy, if not thriving.
Tenant credit charges have largely disappeared.
Our $30 million per quarter of lost variable revenue is poised to return with offices reopening.
We've launched new life science development.
Our active development pipeline is expected to deliver strong external growth, and we've raised the war chest for new acquisitions to add even further growth.
I remain confident in both our near-term and long-term growth prospects.
I'm going to try and give you my best shot at describing the operating environment that we are seeing in our portfolio as we sit here in late April.
So as Owen said, the office tenants are deep into planning for their return to the physical in-person work environment as we approach the back half of 2021.
And while there are lots of announcements, as Owen said, of relaunches, and our building census is up, we're still pretty low levels.
And I think you can see that most clearly from a financial perspective, when you look at our monthly or daily parking, which was basically flat in the first quarter to where it was in the fourth quarter of 2020.
Although just yesterday, as an example, we had our meeting for our California parking, and we had 67 requests for additional monthly spaces, 42 of them which are hard.
And to give you a perspective, we actually lost more than half of our monthly parking over 800 monthly spaces in Embarcadero Center.
So things are picking up.
When we spoke to you late in January, we said that the first half of '21 was going to have a low level of market leasing activity as defined by executed leases and that statement still holds.
The reports that are published by the commercial brokerage organizations describing broad market conditions and all the calls that are sponsored by the analysts that follow our sector, really didn't have any surprises in them.
Leasing volumes were off their historical pace.
There was modestly more sublet space, which was added to the market, and that translated into some negative absorption and increased availability.
No surprise, no shock.
Last quarter, I described the dynamics around sublet space, particularly opportunistic sublet space.
Again, this is when tenants are listing their entire premises, obviously, at no cost with an expectation that they'll decide what to do if they actually get an offer that they can actionably respond to down the road.
But the reality of transactioning when push comes to shove is that tenants may reoccupy, they may relocate and transact.
And then they may find a way to sublet a portion of their space, but not the whole space.
So giving you a couple of examples.
In Boston, we had a 50,000 square foot tenant, two floors in our CBD portfolio list their entire space.
This successfully relet -- sublet one floor and then they pulled the second floor off and they are reoccupying in July.
We competed actually against the long-term fully furnished sublet space in Mountain View in the Silicon Valley, and the user began to negotiate on a sublease.
But when the prime landlord refused to agree to recognize the lease, the user quickly walked away and took direct space.
So I'm not going to downplay the fact that there is a lot of sublets based on the market, but a large portion of it is not actionable because of short-term unworkable existing conditions or, quite frankly, users' discomfort with the lessors profile.
And when you ask what percentage is, I don't know, but it's meaningful.
And yesterday, JLL came out with a report saying there was about 1.5 million square feet of New York City sublet space that was brought -- pulled from the market by those subtenants.
Now the headwind from the sublet space are going to exist, but they're going to dissipate as companies return to in-person work.
Obviously, we are also confronting the caution that some organizations are facing as they work through how they move beyond having their employees working from their homes and only interacting on video calls that are typically scheduled days in advance.
This may delay decisions to increase space needs, even though companies have hired more staff as Owen said, during this COVID shutdown and now as the economy is reopening.
This backdrop is obviously going to add some more short-term pressure on lease economics in some markets.
It's not going to affect all the markets in the same way, and it's certainly not going to impact all the buildings in the same -- in those markets in the same way either.
The potential impact on pricing of sublet space and work from home makes a really dramatic commentary, but it's not going to be driving Boston Properties' results.
I hope the following analysis will illustrate that point.
So the average gross rent on our expiring office space portfolio in 2021, 2022 and 2023, so the next almost three years, totals about 5.8 million square feet and the average expiring rent is about $65.50 per square foot.
So if you believe that pre-pandemic market rents on that space were $70 a square foot, and I'm just using that as an example but it's close, and you wanted to measure the impact of some kind of a decline.
And this is an example, not a statement of where I think -- what we think is going on with rent, so let's use 10% as an example, then you would get to about a 4% roll down in rent or $2.50 a square foot or approximately $4.8 million per year over three years.
That's the impact of the decline in rents on our portfolio from weak conditions.
And as a point of reference, the change in second-generation gross lease rents this quarter was positive 9.5%.
Now that's sort of deals that started and were signed previous to this quarter.
As I go through my remarks, I'm going to talk about where rents are on spaces that we've physically signed leases on this quarter or that we're working on now and how those rents compare to existing in place rents.
So as I pivot my remarks to the Boston Properties' portfolio, I'm going to describe our level of activity, and I think it's going to be counter to weak macro market conditions that you're hearing about in macro reports.
So let's start with our occupancy.
Our in-service portfolio occupancy includes a 100% of our JVs, ended the quarter 140 basis points down or 640,000 square feet.
Now 50% of that space that was added to our vacancy this quarter provided no revenue over the last 12 months.
That is, it was a space that we were trying to recapture from defaulted tenants.
In other words, much of this drop in occupancy doesn't reflect in any future revenue decline.
This includes the Lord & Taylor Box, that's Prudential Center, where we are in active discussions that we expect will result in a dramatic increase in the revenue from that piece of space.
The office space that was given back by Ascena at Times Square Tower and their Ann Taylor retail outlets at the Prudential Center.
Next quarter, we're going to have another one of these as we take back the ArcLight cinema space since they've officially ceased to operate.
That's a 66,000 square foot lease at the hub on Causeway joint venture.
And again, they never paid rent.
Also this quarter, we took back 62,000 square feet in a recapture, so we could expand a growing tenant that we are negotiating a lease extension on and expansion at Colorado Center.
But that lease hasn't been executed yet to the spaces in vacancy.
We did have one disappointment, which was the 200,000 square foot departure at the Santa Monica Business Park.
We, however, today, as I sit here talking to you, have 640,000 square feet of signed leases that have yet to commence, and they are not included in our occupied in-service portfolio.
Unless we're actually booking revenue, we don't consider it occupied.
On a relative basis, my view of the ranking and the activity in our portfolio.
So this is active lease negotiations, tours, RFPs, is as follows, from top to bottom: Boston Waltham, we don't really have any space in Cambridge, so I don't include that; Midtown Manhattan is second; the San Francisco CBD is third; Northern Virginia is fourth, followed by the Silicon Valley Peninsula, West L.A., Princeton and the D.C. CBD.
All of the transactions I am going to describe to you are post-COVID negotiations having begun in the latter half of 2020 or 2021.
So let's start in Boston, which, by the way, represents over 1/3 of the company's total revenue.
So during the first quarter in the Boston CBD, we did five leases totaling 37,000 square feet.
And in every case, the starting rent represented a gross rent roll-up of between 12% and 25%.
We continue to have additional activity in the CBD portfolio, albeit it's with a preponderance of smaller tenants since we don't have much in the way of blocks available, and we are working on eight leases totaling over 60,000 square feet.
Of the 13 leases we have done this quarter or in the works, none of those customers are contracting and five are expanding and more than doubling their footprint.
In the suburban portfolio, we completed 124,000 square foot of new leasing.
The cash rent on those leases was up by 50%.
We continue to have additional activity in suburban Boston.
In Waltham, we're negotiating six more transactions totaling over 60,000 square feet.
In the suburban portfolio, we have had some existing tenants expand and some contract.
But we will be gaining occupancy with new tenants coming into the BXP portfolio, like our new tenants at 20 CityPoint and 195 West Street in Waltham.
Again, those leases haven't commenced yet.
Life science demand in Waltham continues to accelerate.
We announced our plans to reposition 880 Winter Street in early March and have had significant tour activity and have begun making proposals.
This 220,000 square-foot building will be available for tenant build-out in the second quarter of '22.
In New York, since the beginning of the year, we've had more physical tours than we had in the comparable period in 2020 and in 2019.
We completed three leases during the quarter totaling just 38,000 square feet, including a full floor expansion by a tenant at 399 Park.
In total, the growth rents on this space was about 5% higher than the in-place rents.
Now I said, New York City is our second most active region, and we're negotiating 14 office leases totaling over 170,000 square feet, including a full floor lease at Dock 72 in Brooklyn.
We also have two other active proposals at Dock 72, each in excess of 100,000 square feet.
The majority of these New York City leases will be termed in excess of five years, and more than half of those tenants are new to the portfolio.
We've had one midtown tenant pull their space off the sublet market and another large tenant that is still has its entire space listed, has begun to repopulate.
five of the 14 active deals represent tenants that are negotiating expansions.
Activity at The Street plane of our buildings is also picking up.
We're negotiating leases for food outlets at our 53rd Street, are eagerly anticipating the opening of the HU Culinary Collective at 601 Lex later this year, and we have a new lease negotiation for our vacancy on The Street at -- in Times Square Tower.
In Princeton, during the quarter, we completed four transactions and we executed a fifth at the beginning of April for a total of 28,000 square feet, and we're negotiating leases for another 29,000 square feet, all new tenants.
Activity in the D.C. region was light during the quarter with only 50,000 square feet of office leasing.
But as the calendar moved to April, we signed another 170,000 square feet.
210,000 square feet of this total leasing was completed on currently vacant space and included two large leases at Met Square in the district and an expanding tenant in Reston Town Center.
We have another 68,000 square feet of leases in process in the D.C. region, including 25,000 square feet in Reston from another expanding tenant.
In the Town Center, rents are basically flat to slightly down 1% to 2% since the relet rents have been adjusted by the fact that the current rents have been increasing contractually by 2.5% to 3% for the last five to 10 years.
I would also note that retail activity in Reston has picked up.
We have now opened four new restaurants since November of '20.
We're negotiating leases with new food outlets totaling 27,000 square feet.
They're going to open in '22.
Pedestrian activity in Reston Town Center is active.
California has finally begun to reopen and allowed for higher levels of office occupancy, although it's still way behind the rest of our markets.
During the quarter, at Embarcadero Center, we settled rent arbitration on two multi-floor 5-year extensions and completed another 10-year full-floor renewal.
The markup on these three deals totaling 125,000 square feet was 46%.
Tour activity for small tenants, a floor or under, has picked up and grown about 40% sequentially month-to-month from January to April.
I would characterize half of our San Francisco CBD activity is with expanding tenants and half is with tenants that are contracting.
The uncertain level and the lack of pedestrian activity at The Street plane, particularly in the CBD of San Francisco, has been more severe than anywhere else in our portfolio.
This has affected tenants' appetite for making any decisions.
But large tenants have started to begin to look for space.
There have been a number of tours on the high-quality sublet offerings south the market.
We see the activity and the proposals on the available sublet space we have at 680 Folsom.
In South San Francisco, we signed a lease of 61,000 square feet at 601 Gateway.
That's going to absorb about 50% of the expiration that's going to occur in the second quarter.
We are under way at 751 Gateway, our first lab facility development in South San Francisco and have begun responding to proposals for this early 2023 delivery.
651 Gateway will be taken out of service in the second quarter of '22 when the final tenant vacates, and we will commence a lab conversion of that 293,000 square foot building.
In Mountain View, we continue to see a constant flow of medical device, alternative energy, battery storage, automotive and other R&D users looking for space.
We're in renewal discussions with 24,000 square foot tenant and has commenced lease negotiation with a second tenant for 30,000 square feet on market-ready vacant space, and we have a tenant ready to go on a remaining floor of 18,000 square feet at 2440 El Camino.
There are some large tech tenants in the market down in the valley today looking for expansion space, and we are certainly chasing those tenants if the timing were to match for our potential delivery at Platform 16.
In spite of the challenging COVID conditions in California and Santa Monica, we continue our renewal negotiations with a 260,000 square foot tenant at Colorado Center.
And as I said at the outset, we've recaptured about 60,000 square feet that's going to roll into that tenant's expansion.
We've also signed a lease for 72,000 square feet at Colorado Center with Roku, who's new to the portfolio.
And as you may recall, earlier late last year, we did an expansion with staff at the Santa Monica Business Park.
So to summarize the takeaway from my comments.
It's true that market fundamentals are weaker than they were a year ago.
But what drives our same-store portfolio performance will be occupancy pickup as well as the return of our parking income and the recovery of our retail activity in revenue.
There are tenants in our portfolio that are expanding in every one of our markets.
Conditions are going to vary dramatically by some market.
Rents may or may not decline depending upon the submarket, but we will still have embedded markups in our portfolio.
There will be a flight to quality as better buildings see more tenant demand and tenant value paying less of a premium to being the best assets, and this will improve our occupancy.
Let me turn it to Mike.
We had a very busy quarter, and it impacted our results.
As we guided last quarter, we redeemed the $850 million of our expiring unsecured bonds that had a 4% and 8% coupon using available cash.
But in addition to that and not part of our prior guidance, we issued another $850 million of new 11-year unsecured green bonds at an attractive coupon of 2.55%.
The proceeds were used to repay our $500 million unsecured term loan that was due to expire next year and we redeemed at par an expensive $200 million, 5.25% preferred equity security.
We incurred noncash charges during the quarter of approximately $7 million or $0.04 per share related to writing off unamortized financing costs.
Our next bond expiration is not until early 2023, when we have $1 billion expiring at an above-market interest rate of 3.95%.
In advance of that in early '22, we have a $626 million mortgage expiring on 601 Lexington Avenue in New York City.
This loan also carries an above-market interest rate of 4.75%.
So turning to our earnings results for the quarter.
For the first quarter, we reported FFO of $1.56 per share, that was $0.01 above the midpoint of our guidance range.
The variances to our guidance were comprised of $0.04 per share of higher NOI from the portfolio and $0.01 per share of higher fee income, partially offset by the $0.04 per share noncash charge related to our refinancing activity.
The portfolio NOI outperformance included $0.02 per share of lower operating expenses during the quarter, much of which will be incurred later in the year.
And on the revenue side, we collected delinquent 2020 rent from several of our retail tenants, whose rents are being recognized on a cash basis.
These collections drove a significant portion of our $0.02 revenue beat.
As we described last quarter, we believe the vast majority of our tenant credit charges are behind us.
Our net write-offs this quarter were immaterial, and collections from our office clients continue to be consistent and very strong.
At the midpoint, this is $0.04 per share better sequentially from the first quarter.
The expected improvement emanates from lower seasonal G&A expense and the cessation of preferred dividends from our redemption.
Also the first quarter financing charges are not expected to recur.
Partially offsetting this, we project lower termination income in Q2.
And as Doug explained, our occupancy declined by 140 basis points this quarter, which was expected, but results in a sequential drop in portfolio NOI from the half that was paying rent before.
We expect another drop in occupancy next quarter, followed by a modest improvement in the back half of the year.
Doug described 640,000 square feet of signed leases that have yet to commence occupancy.
460,000 square feet of this will take occupancy later this year, representing over 100 basis points of occupancy pickup.
While we are still not providing full year specific guidance, given the uncertainty and timing of our ancillary revenue streams, we did provide you with a framework for 2021 in our last call.
As you revisit your models for the full year, there are three other changes to consider.
First, our financing activities during the first quarter have a net impact of increasing interest expense by $5 million for the year.
Second, we have a loss of rental revenue from taking 880 Winter Street out of service for redevelopment into a life science facility.
This has a negative impact of about $2 million.
And lastly, the additional $260 million of dispositions that Owen described are expected to result in a loss of about $7 million of NOI.
In aggregate, these items are expected to reduce FFO for the rest of 2021 by approximately $14 million or $0.08 per share.
Looking further ahead to 2022, we've made substantial investments in pre-leased developments that will drive earnings growth.
We anticipate delivering 100 Causeway Street in Boston and 200 West Street in Waltham late in 2021, representing $315 million of investment at our share that is collectively 95% leased.
The contribution from these two development deliveries will not be that significant to 2021, but they will be at a full run rate in 2022.
The bulk of the remaining pipeline is projected to deliver in 2022.
This includes our building for Google in Cambridge; Reston Next for Fannie Mae in Volkswagen; the Marriott Headquarters in 2100 Pennsylvania Avenue.
This represents delivery of $1.7 billion of investment in 2022 at our share and 2.7 million square feet that is currently 85% pre-leased.
This $2 billion of investment in conjunction with the recovery of our ancillary income sources and improved leasing activity post-pandemic sets us up for occupancy improvement in a period of solid future earnings growth.
Before we take questions, there are just the last couple of things here I'd like to mention.
Last week, on Earth Day, we published our 2020 ESG report where we made several important commitments.
And those include, we set a goal to achieve carbon neutral operations by 2025.
In addition, BXP had previously set a carbon emissions reduction goal in line with the most ambitious designation available under the science-based targets initiatives program.
In 2020, BXP was one of six North American real estate companies with this distinction and the only North American office company.
We also established a new board level sustainability committee to among other things, increase the board oversight of an input for our sustainability issues.
And lastly, we launched an internal diversity and inclusion committee last year with the mission of pursuing greater diversity among our workforce and vendors as well as new programs supporting diversity and fairness in our communities.
BXP is proud of its consistent recognition as an industry leader in sustainability and ESG, an area increasingly important to our clients, our communities, capital providers and employees.
And then lastly, there's one important milestone that I want to mention.
This will be Peter Johnston's last earnings call as he's retiring from Boston Properties next month after 33 years of service.
Peter has been an outstanding leader in our Washington, D.C. business, and he will be greatly missed by all of us.
| compname reports q1 earnings per share of $0.59 and ffo per share of $1.56.
compname reports earnings per share of $0.59 and ffo per share of $1.56.
q1 ffo per share $1.56.
sees recent uptick in leasing activity.
|
Unless otherwise stated, all net sales growth numbers are in constant currency and all organic results exclude the impact of acquisitions, divestitures, brand closures, and the impact of currency translation.
As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms.
It also includes estimated sales of our products through Retailer's websites.
I hope you and your families are in good health, and our hearts continue to be with those impacted by COVID-19.
We delivered outstanding performance amid the pandemic in fiscal year 2021, capped with an exceptional fourth quarter and powered by our dynamic multiple engines of growth strategy, as well as the timeless desirability of prestige beauty.
In a year of pain and sorrow, our employees cared for each other, their families, and our company with compassion, creativity, and resolve.
While the challenges of COVID-19 persist, we confidently begin fiscal year 2022 as a stronger company, full of aspiration for the opportunities of tomorrow.
For fiscal year 2021, sales rose 11% as we pivoted our energy resources to the growth engines of skin care, fragrance, Asia Pacific, travel retail in Asia Pacific, and global online.
Impressively, eight brands grew double digits, led by Estee Lauder, La Mer, and Jo Malone London.
Multiple waves and variants of COVID-19 to the extent the center reach were unexpected a year ago drove volatility and variability throughout the year.
We saw reopenings revert to closing, and reopenings in one market meant with renewed lockdowns in other markets.
Despite this, we delivered on the goal we set last August for sales growth to improve sequentially each quarter.
Our sales exceeded $16 billion for the first time ever, up 9% from fiscal year 2019 on a reported basis, fueled by skin care and fragrance.
Adjusted operating margin expanded to 18.9%, which is 140 basis points above fiscal year 2019 as we invested in today's strongest growth engines, managed cost with discipline, and funded long-term growth opportunities.
Adjusted diluted earnings per share rose 21% relative to two years ago.
We delivered these excellent results while pushing our social impact and sustainability goals and commitment.
First and foremost, we remain focused on employee and consumer safety and well-being.
We achieved important milestones for our 2025 sustainability goals, expanded our inclusion, diversity, and equity programs, defined a strategy for women's advancement and gender equality, and advanced work toward our racial equity commitments.
Here are a few among the many areas of our progress.
We achieved net-zero carbon emissions and 100% renewable electricity globally for our own operations.
We also set science-based emissions reduction target, addressing Scope 1 and 2 for our direct operation and certain elements of Scope 3 for our value chain, signaling our new level of ambition for climate actions.
We launched ingredient glossaries for seven additional brands, such that 11 brands now offer this insightful content.
We transformed our traditional inclusion, diversity, and equity week into a blockbuster virtual experience, with 35 events involving thousands of participants from 25 countries.
We also introduced new educational offerings, including four antiracism and inclusive leadership.
We expanded our grassroots-led employee resource groups, which served as a source of support and comfort throughout the tumult of last year.
The women leadership network is our largest group and is now global, with its expansion into Latin America and Asia Pacific.
We created two new leadership programs for women and black employees.
The Open Door women's leadership program is a unique intensive course to develop our next generation of women leaders.
Building on its success, we designed the Open Doors collection, a self-guided program to bring these leadership skills to all our employees around the world.
The form every chair leadership and development program is successfully held to ensure that black employees have equitable access to leadership trainings, mentorships, career development, and advancement opportunity, as well as to build a stronger, more inclusive network of talent across the organization by promoting visibility and facilitating leadership connections points with participants.
Our new partnership with Howard University focused on its alumina-hosted 12 engaging events and launched an accelerator program to help increase the pipeline for black talent with career, coaching, professional training, and self-empowering networking.
Let me now turn to product innovation, which serve as an impactful catalyst for growth in fiscal year 2021.
Innovation represented over 30% of sales, exceeding our expectations.
We combine data analytics with our creative talent and R&D to successfully anticipate scale and set trends across categories.
The Estee Lauder brand achieved its fourth consecutive year of double-digit sales growth in fiscal year 2021, fueled by strength across its many hero franchises in skin care.
Trusted products, along with innovation, were highly sold from Shanghai to New York, Paris, and now Sao Paulo given the brand's well-received launch in Brazil.
Advanced Night Repair newly reformulated serum sparked excellent sales growth.
Revitalizing Supreme's new Supreme+ Bright Moisturizer, further bolstered the accelerating franchise, while Re-Nutriv new eye serum served and created a halo effect on demand.
In makeup, the brand's double wear Futurist and Pure Color franchises produced significant double-digit sales growth in the fourth quarter and exciting early signs of makeup renaissance.
La Mer delivered outstanding double-digit sales growth in the fiscal year as innovation soared and engaging campaigns with iconic ingredient-based narratives drove demand for its hero products.
Clinique skin care excelled in fiscal year 2021.
Sales rose double digits and powered the brands to high single-digit sales growth.
The brand successfully met consumer needs through the launch of Moisture Surge 100 Hour with its unique hydration benefits and target solution for hard-to-solve skin care problem like Even Better Clinical Interrupter.
Clinique showcased its promise for makeup renaissance with stellar double-digit category growth in the fourth quarter with the new Even Better Clinical serum foundation and Even Better concealer capitalizing on its skin care authority.
All told, our robust skin care portfolio from entry prestige to luxury and across subcategories is fulfilling this journey needs around the world.
Dr. Jart+ with its [Inaudible] derma brand positioning and hero products delivered strong double-digit organic sales growth in the second half of fiscal year 2021.
In May, we amplified the strength of our skin care portfolio as we became a majority owner of DECIEM with its coveted ingredient-based brand, The Ordinary, and emerging science-driven NIOD brand as part of its portfolio.
Complementing skin care strength, fragrance delivered striking sequential sales growth acceleration throughout the year.
Each of our luxury and artisanal fragrance brand contributed meaningfully from Jo Malone London to Tom Ford Beauty, Le Labo, Kilian Paris, and Frederic Malle in both established fragrance markets of the West and emerging fragrance market of the East.
Tom Ford Beauty's private blend franchise is both recruiting new consumers and driving strong repeat in markets newly embracing the category, with the brand's drag in sales more than doubling in Mainland China during the year.
The Asia Pacific region was another dynamic growth engine in fiscal year 2021 as annual sales growth accelerated from 18% to 22% led by Mainland China where sales rose strong double digits.
Several smaller markets also contributed to Asia Pacific's strengths.
The region, however, experienced increasing pressure from the pandemic as the year evolves with Japan and many markets in Southeast Asia, particularly impacted from renewed lockdowns in the second half.
Mainland China prospered as we invested in its vibrancy of today, an opportunity of tomorrow.
We entered more cities, reaching 145, expanded our presence in specialty-multi, opened the freestanding doors, and increased our advertising spending.
Skin care and fragrance sales grew strong double digit for the fiscal year.
We are encouraged that the makeup accelerated to double-digit sales growth in the second half.
Our brands delivered excellent results for the key events of Tmall's 11/11 Global Shopping Festival and 6/18 Mid-year Shopping Festival as engaging live streaming generated product discovery for many new consumers.
For the recent 6/18 among Tmall beauty flagship stores, the Estee Lauder brand ranked No.
1 in total beauty, while La Mer ranked first in luxury beauty and Jo Malone London led the fragrance category.
To further capture the market recent online growth opportunity, we are continuing to invest in Tmall and brand.com to expand our capabilities.
Most recently, some brands increased coverage of a different demographic by launching on JD in July.
With international travel largely curtailed, we expanded our investment in the dynamic travel retail development of Hainan highland to serve the Chinese consumers in the best possible way given the island tremendous traffic growth and higher duty-free purchase limits.
Our brands further elevated the in-store and prepaid shopping experiences, delivered ideal merchandising, and leveraged live streaming to drive strong sales growth.
Online strive globally in fiscal year 2021, characterized by strong double-digit sales gain and step change in its power as a growth engine.
We accelerated our consumer-facing digital infrastructure and fulfillment investments.
The challenge is now more than twice as big as it was two years ago and greatly benefit from its diversification as each of brand.com third-party platforms, retail.com and pure-play retailers delivered outstanding performance.
During the year, brand.com came to epitomize the allure of a luxury flagship store for each brands, localized by market and reimagined with our classic high-touch services.
We expanded virtual trainer, live streaming, omnichannel capabilities, and consultations with our expert beauty advisors.
Consumers at all ages explored, replenished, and engaged in an immersive environment of entertainment and community.
Our brands increasingly leveraged the exciting trends in social commerce by integrating with Instagram, WeChat, Snapchat, and others.
Estee Lauder launched on TikTok with the Night Done Right hashtag, driving nearly 12 billion views and the creation of almost 2 million videos.
It challenged use-diverse creators to educate a younger audience on how important is to take care of your skin at night, showcasing Advanced Night Repair.
Clinique zit happens campaigns on TikTok became a viral sensation, highlighting the brand acne solution and spurring the creation of nearly 700,000 videos on the app.
Together, these and other strategic actions delivered exceptional results for brand.com as new consumers, conversion, basket size, repeat, and loyalty members grew considerably.
Beyond the favorable growth rates, the direct relationship we fostered with consumers enabled us to better optimize engagement in-store and online, offering exciting future growth opportunities.
We are investing across all channels of online, collaborating with traditional and pure-play retailers on initiatives to actualize prestige beauty online potential.
We spoke on the last call about having expanded our presence with pure-play retailers, which continued into the fourth quarter, most especially in EMEA.
And as I discussed a few minutes ago, we are expanding our consumer coverage in Mainland China.
For fiscal year 2022, we expect these growth engines of skin care, fragrance, Asia Pacific, travel retail Asia Pacific, and global online to continue to try, owing to our strong repeat purchase rates, sophisticated data analytics, drive consumer acquisitions and retention, high-touch online services, and robust innovation pipeline.
Three compelling skin care innovation recently launched: Estee Lauder new Advanced Night Repair Eye Matrix is focused on lines in every eye zone, while La Mer The Hydrating Infused Emulsion is designed to replenish, strengthen and stabilize skin with healing moisture and has already proven to attract new consumers.
Clinique Smart Clinical Repair Wrinkle Correcting Serum is designed to visibly reduce stubborn lines.
Our Shanghai innovation center is expected to open in the second half of this fiscal year, enriching our capability in product design, formulation, consumer insight, and trend analytics for Chinese and Asian consumers.
Also with the new center, our East to West innovation will benefit, enabling us to create more successes like Estee Lauder Futurist Hydra or Supreme+ Bright and La Mer, The Treatment Lotion.
As the world emerge from the pandemic, we will be the best diversified pure-play in prestige beauty as more engines of growth contribute across categories, geographies, and channels.
Makeup and hair care are poised to gradually reignite as growth engines as our developed markets in the West and brick-and-mortar retail.
Growth in emerging markets is expected to resume over time as vaccination rates increase.
We anticipate the momentum in makeup will build around the world driven by local reopening and increase in socially professional user education, just as we saw in the fourth quarter.
Indeed, makeup started to improve to the end of fiscal year 2021 driven by our hero subcategories of foundation and mascara.
Newness in the category was highly sold, evidenced by the success of MAC Magic Extension mascara, Too Faced lip plumper, Smashbox Halo tinted moisturizer and Bobbi Brown Sheer pressed powder.
Contributing to makeup emerging renaissance, MAC launched MAC The Moment, a campaign linking its makeup products and artists inspire trends to key experiences such as dead night parties, weddings, and back-to-school shopping.
Too Faced expanded into browse in July with a collection that includes an innovative brow gel that add color and texture.
Similar to makeup, hair care is set to benefit from the rise of socially professional user education, as well as salon reopenings.
Aveda, which is now 100% vegan, and Bumble and bumble enter fiscal year 2022 with momentum, owing to desirable innovation and rich consumer engagement from strong online performance globally over the past year.
As makeup and hair care reunite, we expect our engines of growth will gradually diversify by geography and channel, initially driven by developed markets in the West and, over time, by emerging markets.
In the United States, the fourth quarter, we aligned innovation, advertised spending, and in-store activations as consumers returned to stores eager to explore beauty and experience high-touch services.
Across brick-and-mortar from regional and national department stores to specialty-multi and freestanding stores, our business in the United States prospered, most especially in makeup and fragrance, and exceeded our expectations.
As we start our new fiscal year, Bobbi Brown recently debuted in Ulta Beauty.
Several of our brands launched online and in-store with Sephora at Kohl's and Ulta Beauty at Target.
In closing, we leveraged the power of our multiple engines of growth strategy to elevate the company to new heights in fiscal year 2021.
We did this while living our values with the health and well-being of our employees as primary focused and making important progress on our social impact commitment and sustainability goals.
Our success and agility in operating amid the challenges of the past year give us confidence for fiscal year 2022 as we expect volatility and variability from the pandemic to persist for some time to come.
This year, we are celebrating our 75th anniversary as a company and beginning our next 75 years incredibly inspired by the opportunities of tomorrow as the leading global house of prestige beauty with the most talented employees to whom I extend my deepest gratitude.
Navigating through the highly uneven recovery this past year has certainly required greater agility and flexibility, and our teams across the globe rose to the occasion, delivering superb results for the fiscal year while also establishing a stronger foundation for future growth and profitability.
We delivered exceptional net sales growth of 56% in our fourth quarter as we anniversary pandemic-related store closures in the prior-year period.
The inclusion of six weeks of sales from DECIEM added approximately 3 points to growth in the quarter.
Our performance also exceeded the prepandemic levels of the fiscal 2019 fourth quarter by 9% driven by significant sales increases in Mainland China, the skin care and fragrance categories, global online and travel retail in Asia.
All three regions grew and all product categories within each region grew during the quarter.
Net sales in the Americas region rose 86% against the prior-year period with almost no brick-and-mortar retail open.
Throughout the quarter, consumer confidence in the U.S. grew as COVID restrictions abated and people resume shopping in stores again.
Our brands responded with strong programs supporting recovery, new product launches, and animating key brand shopping events like Mother's Day.
Sales in the region remain below fiscal '19 levels for the quarter, reflecting in part the loss of over 900 retail locations that represented nearly $170 million in annual sales.
Additionally, makeup has historically been the largest category in the region, and the category has yet to fully recoup sales lost during the pandemic.
Nevertheless, we are encouraged by the sequential acceleration in North American sales, which has been better than we expected.
Net sales in our Europe, the Middle East, and Africa region increased 65%, with all markets contributing to growth as COVID restrictions eased throughout the quarter.
Global travel retail, which is primarily reported in this region, continued to suffer from a significant drop in international passenger traffic but grew strong double digits in the quarter as comparisons eased and local tourism in China, especially to Hainan, remained robust.
Across developed markets in the region, store traffic has begun to pick up, and retailers have become more comfortable with restocking.
Emerging markets in the region saw strong retail in the quarter driven by locally relevant holiday activation, retailer events, and online performance.
Sales in the region were slightly above fiscal '19 levels for the quarter, primarily due to the resilience of travel retail.
Net sales in the Asia Pacific region rose 30%.
Virtually every country contributed to growth, although the pace of improvement varies widely among the markets, and the resurgence of COVID has slowed a full recovery.
Sales of our products online continued to rise strong double digits in the region driven by the successful 6/18 Shopping Festival Campaign in China and including the continued strength of social e-commerce.
Mainland China continued to experience robust double-digit growth with broad-based improvement across product categories, brands, and channels.
Other markets in the region, including Korea, Hong Kong, and Japan, grew exceptionally against prior-year brick-and-mortar lockdown.
Sales in the region were 50% above 2019 levels, largely reflecting China's rapid emergence from the pandemic last year.
Net sales in all product categories grew sharply this quarter.
And skin care, fragrance, and hair care drove higher sales in fiscal 2019.
Fragrance led growth with net sales rising 150% versus prior year.
Luxury fragrances resonated with consumers looking for self-care and indulgence and among Chinese consumers increasingly attracted to the category.
Home, Bath & Body products have also gained traction during the pandemic and help to attract new consumers.
Jo Malone London saw recovery to prepandemic levels in brick-and-mortar.
And the brand's blossom and brit collections were popular in Asia.
Standouts from Tom Ford Beauty include the recent launch of Tubereuse Nue and the continued strength of Bitter Peach and Rose Prick.
Net sales in makeup jumped 70% against the prior year that reflected the greatest beauty category impact of COVID-19, particularly in Western markets where makeup is the largest category.
The makeup category in prestige beauty has proven to be especially sensitive to brick-and-mortar recovery due to the use of testers and in-store services by consumers.
Estee Lauder saw strong growth of Futurist and double wear foundations in Asia, and MAC liquid lip color and eye products, especially mascara, outperformed.
Hair care net sales grew 52% as salons and stores reopened.
The launch of the Aveda's blonde revival shampoo and conditioner also contributed to category growth, adding to other strong innovation programs over the past several months from Aveda.
Net sales in skin care continued to thrive.
Jart+ brands, particularly in Asia.
Skin care sales growth also benefited from the addition of DECIEM in the quarter by approximately 4 percentage points.
Our gross margin improved 650 basis points compared to the fourth quarter last year.
This favorability reflected significant improvements in obsolescence and manufacturing efficiencies compared to the prior-year impact of COVID-19 on our sales and on our manufacturing locations.
Operating expenses rose 36% driven by the planned increase in advertising and selling costs to support the reopening of retail and the recovery.
Additionally, we sharply curtailed spending last year in response to the onset of the pandemic, and some of these costs were reinstated, primarily compensation.
We delivered operating income of $385 million for the quarter, compared to a $228 million operating loss in the prior-year quarter.
Diluted earnings per share of $0.78 included $0.02 of favorable currency translation and $0.02 dilution from the acquisition of DECIEM.
Our full-year results reflect the benefits of our strategic focus as we leaned into current growth drivers and invested behind future areas of growth while effectively managing both costs and cash.
The sequential acceleration of our business throughout the year culminated in net sales growth of 11%.
The strength of Chinese consumer demand, both at home and in travel retail, the resilience of the skin care and fragrance categories, and the momentum we drove in our online channels all supported our growth.
Our distribution mix continued to evolve even as brick-and-mortar reopened.
Sales of our products through all online channels continue to thrive as they rose 34% for the year and represented 28% of sales.
Despite the continued curtailment of international travel, our business in the travel retail channel grew, ending fiscal 2021 at 29% of sales.
Among brick-and-mortar retail, specialty-multi and perfumeries grew, while department stores and freestanding stores experienced the greatest impact from the ongoing pandemic and declined for the year.
Operating expenses declined 300 basis points to 57.5% of sales.
Selling and store operating costs decreased as high service stores were either closed for part of the year or they reopened with reduced traffic and staffing levels.
Additionally, in-store merchandising costs decreased, while advertising investments, primarily digital media, rose faster than sales to support our brands and the recovery.
We achieved significant savings from our cost initiatives, including Leading Beauty Forward and the preliminary benefits from the post-COVID business acceleration program, and this gave us the flexibility to reinvest in necessary capabilities, absorb some of the inflation in media and logistics costs, as well as support the reinstatement of certain compensation elements that were reduced or frozen due to the onset of the pandemic.
Our full-year operating margin was 18.9%, representing a 420-basis-point improvement over last year and 140 basis points above fiscal 2019.
This year also includes 50 basis points of dilution from the inclusion of Dr. Jart+ and DECIEM.
Our effective tax rate for the year was 18.7%, a decrease of 450 basis points over the prior year, primarily driven by the geographic mix of earnings, which included a favorable one-time adjustment for fiscal years 2019 and 2020 related to recently issued GILTI tax regulations.
Net earnings rose 57% to $2.4 billion and diluted earnings per share increased 57% to $6.45.
Earnings per share includes $0.11 accretion from currency translation and $0.08 dilution from the acquisition of Dr. Jart+ and DECIEM.
In fiscal 2021, we recorded $148 million after tax or $0.40 per share of impairment charges related to our Smashbox and GLAMGLOW brand, as well as certain freestanding retail stores.
Restructuring and other charges related primarily to the post-COVID business acceleration program were $176 million after tax or $0.48 per share.
These charges were more than offset by the one-time gain on our minority interest in DECIEM of $847 million after tax or $2.30 per share.
The Post-COVID Business Acceleration Program is progressing quickly, with projects underway across all regions.
We have closed nearly 500 doors or counters, including about 50 freestanding stores under the program in fiscal 2021.
We also closed approximately 100 additional freestanding stores outside of the program and upon lease expiration, primarily in North America and in Europe.
We realigned our go-to-market organizations to better reflect our evolving channel mix.
We are also winding down certain brands such as BECCA and RODIN.
These actions are expected to continue into fiscal 2022.
For the total program, we continue to expect to take charges of between $400 million and $500 million through fiscal 2022 and generate savings of $300 million to $400 million before tax by fiscal 2023, a portion of which will be reinvested.
We continue to focus on maintaining strong liquidity while also investing for future growth during the year.
Cash generated from operations rose 59% to $3.6 billion, primarily reflecting the higher net earnings.
We utilized $637 million for capital improvement, supporting increased capacity and other supply chain improvements, further e-commerce development, and information technology.
We repaid $750 million of debt outstanding from our revolving credit facility, issued $600 million of new long-term debt, and retired $450 million of debt.
We used $1.1 billion net of cash acquired to increase our ownership interest in DECIEM, and we returned $1.5 billion in cash to stockholders during the year via increased dividends and the reinstatement of share repurchase activity in the second half of the fiscal year.
So looking ahead to fiscal 2022, we are encouraged by the increasing vaccination rates and reopening of markets around the world.
We look forward to the resumption of international travel, increasing foot traffic in brick-and-mortar retail, and the development of our recent acquisitions.
We are still mindful, however, that the recovery has evolved unevenly, and some markets are seeing their third or fourth waves of COVID, including increasing effects of new more contagious strains of the virus hindering a return to normal life.
This has been particularly evident in the U.S. over the past several weeks.
Additionally, increasing climate and geopolitical events make it difficult to predict the corresponding impact on our business.
Nevertheless, given the strength of our programs, we are cautiously optimistic, and therefore, providing a range of sales and earnings per share expectations for the fiscal year, caveated with the following underlying assumptions: progressive recovery in the makeup category as full vaccination rates increase and mask-wearing abates in Western markets during the first half of the fiscal year; beginning of the resumption of international travel in the second half of the fiscal year; the addition of new retail accounts for some of our brands should provide broader access to new consumers, notably through Sephora at Kohl's and Ulta at Target in North America and the addition of JD.com in China online; the inclusion of incremental sales from DECIEM, benefiting sales growth for the fiscal year, primarily in the Americas and EMEA regions and in the skin care category; pricing is expected to add approximately 3 points of growth, helping to offset inflation risk in freight, media, labor and commodities; increased advertising support as markets reopen and further investment behind select capabilities, including data analytics, innovation, technology and sustainability initiatives while maintaining good cost discipline elsewhere.
We forecast increasing benefits from our post-COVID business acceleration program as it ramps up this year.
Approximately $200 million of the cost we cut during the pandemic are expected to be reinstated.
These primarily include hiring, travel and meeting expenses, furloughs, and other leaves of absence and compensation.
In addition to these assumptions, there are a few nonoperating items you should be aware of as you adjust your models.
Our full-year effective tax rate is expected to return to a more normalized level of approximately 23% from 18.7% in fiscal 2021.
Net interest and investment expense is expected to be around $150 million.
The increase is primarily due to the comparison to last year when we recorded the benefit of our minority interest in DECIEM through May 18, 2021.
At that time, we acquired a majority ownership in DECIEM, and we began to fully consolidate the entire business and deduct the portion of the income we don't own as a charge to net earnings attributable to noncontrolling interest.
This charge is expected to be less than $5 million in fiscal 2022.
Net cash flows from operating activities are forecast between $3.2 billion and $3.4 billion.
Capital expenditures are planned at approximately 5% of projected sales as we develop additional manufacturing and distribution capacity, notably for the building of our new facility in Japan.
We also expect to fund more robust research and development capabilities in China and North America, increase investment in technology and support new distribution and e-commerce for our brands.
Our capex plan for the year also includes some spending deferred from last year.
Organic growth adjusts reported sales growth for both currency and changes in structure such as acquisitions, divestitures, and brand closures.
This should help provide a more meaningful understanding of the performance of our comparable business.
Additionally, reflecting the level of volatility still in the environment, we are at this point widening our guidance ranges for the year.
For the full fiscal year, organic net sales are forecasted to grow 9% to 12%.
Based on August 13 spot rates of 1.17 for the euro, 1.381 for the pound, 1,164 for the Korean Won, and 6.479 for the Chinese yuan, we expect currency translation to add 1 point to reported sales growth for the full fiscal year.
As I mentioned earlier, this range excludes approximately 3 points from acquisitions, divestitures, and brand closures, primarily the inclusion of DECIEM.
Diluted earnings per share is expected to range between $7.23 and $7.38 before restructuring and other charges.
This includes approximately $0.19 of accretion from currency translation.
In constant currency, we expect earnings per share to rise by 9% to 12%.
This also includes approximately $0.03 accretion from DECIEM.
At this time, we expect organic sales for our first quarter to rise 11% to 13%.
The incremental sales from acquisitions, divestitures, and brand closures are expected to add about 3 points to reported growth, and currency is expected to be accretive by approximately 3 points.
Operating expenses are expected to rise in the first quarter as we invest in the reopening and recovery of brick-and-mortar retail around the world and some of the temporary cost measures start to ease.
We expect first-quarter earnings per share of $1.55 to $1.65.
Currency is expected to be accretive to earnings per share by $0.05, and DECIEM is forecast to have no impact.
In closing, while we are cautious about the uneven recovery to date, we remain confident about the strategic actions we continue to take to support sustainable, profitable growth post-pandemic and the agility we have demonstrated this past year.
| sees q1 earnings per share $1.55 to $1.65 excluding items.
strong net sales recovery expected to continue in fiscal 2022.
sees fy 2022 earnings per share $7.23 to $7.38 excluding items.
qtrly adjusted earnings per share $0.78.
q1 organic net sales forecasted to increase between 11% and 13%.
fy reported net sales are forecasted to increase between 13% and 16%.
fy organic net sales forecasted to increase between 9% and 12%.
|
Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.
In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings, interests, deprecation and amortization, or EBITDA and adjusted EBITDA.
I will begin with highlights for the quarter, and Dave and Nick will follow up with some additional operating detail.
At the outset, I would like to say, although I am very gratified by the company's results in the first quarter, comparisons to the pandemic year of 2020 are analytically difficult.
The pandemic clearly disrupted the hospice industry.
The U.S. government stepped in to help with the relaxation of sequestration and several other operational modifications.
The net effect of the pandemic and the government's actions was to allow VITAS to report an increase in adjusted net income of 25.7% in 2020.
But VITAS had a patient base and its median length of stay fell to 11 days.
The most complex issue still facing VITAS is the disruptive impact that the pandemic has had on traditional hospice referral sources and low occupancy in senior housing.
This disruption continues to impact our admissions and traditional patient census patterns.
Fortunately, admissions in hospitals have largely normalized and some of our senior housing referral sources are beginning to show improvement in occupancy and related referrals.
I firmly believe senior housing will recover.
However, senior housing is in the early stages of recovery and we do not have enough data points to accurately predict when senior housing referrals will return to pre-pandemic levels.
With that said, VITAS is performing in line with our previous guidance.
Roto-Rooter operating results continue to be exceptional.
Strong residential plumbing and drain cleaning demand has been more than adequate to compensate for the slight weakness we continued to observe with our commercial accounts.
We have now had three consecutive quarters of record demand for our Roto-Rooter residential services.
Residential revenue totaled $144 million in the first quarter of 2021, an increase of 32% when compared to the prior year quarter and a 7.2% sequential growth when compared to the fourth quarter of 2020.
Commercial revenue totaled $46.9 million in the quarter, an 8.4% decline when compared with the first quarter of 2020.
Although our Commercial demand has not yet normalized to pre-pandemic levels, this decline has shown significant improvement when compared to the Commercial unit-for-unit revenue declines of 29.1%, 11.6% and 9.8% in the second, third and fourth quarters of 2020, respectively.
Aggregate Roto-Rooter activity, which includes branch operations, independent contractors, as well as franchise fees and product sales, Roto-Rooter generated consolidated first quarter 2020 revenue of $212 million, an increase of 18.9%.
With that, I would like to turn this teleconference over to David.
Let's turn to VITAS segment first.
VITAS' net revenue was $316 million in the first quarter of 2021, which is a decline of 6.5% when compared to the prior year period.
This revenue decline is comprised primarily of a 7.1% decline in days of care.
Our days of care was negatively impacted 111 basis points by the 2020 leap year.
Our first quarter 2021 revenue included a geographically weighted average Medicare reimbursement rate increase, including the suspension of sequestration on May 1, 2020, of approximately 2.8%, offset by acuity mix shift, which reduced revenue by approximately $9.1 million or 2.7% in the quarter when compared to the prior year revenue and level of care mix.
In addition, the combination of a lower Medicare cap and other counter-revenue changes offset a portion of the revenue decline by approximately 50 basis points.
Our average revenue per patient per day in the first quarter of 2021 was $198.95, which, including acuity mix shift, is basically equal to the prior year period.
Reimbursement for routine home care and high acuity care averaged $170.14 and $991.77, respectively.
During the quarter, high acuity days of care were 3.5% of our total days of care, 71 basis points less than the prior year quarter.
In the first quarter of 2021, VITAS accrued $1.5 million in Medicare Cap billing limitations.
This compares to a $2.5 million Medicare Cap billing limitation we recorded in the first quarter of 2020.
Of VITAS' 30 Medicare provider numbers, 27 of these provider numbers currently have a Medicare Cap cushion of 10% or greater.
One provider number has a cap cushion between 5% and 10%.
One provider number has a cap cushion between 0% and 5%.
And one provider number currently has a fiscal 2021 Medicare cap billing limitation liability.
This is based on actual Medicare revenue and admissions in the first six months of the Medicare Cap fiscal year.
VITAS' first quarter 2021 adjusted EBITDA, excluding Medicare Cap, totaled $58.3 million in the quarter, which is a decrease of 3.3%.
Adjusted EBITDA margin in the quarter, excluding Medicare Cap, was 18.4%, which is a 66 basis point improvement when we compare it to the prior year period.
Now let's turn to Roto-Rooter.
Roto-Rooter generated quarterly revenue of $212 million in the first quarter of 2021, an increase of $33.7 million or 18.9% over the prior year quarter.
As Kevin noted earlier, total Roto-Rooter branch commercial revenue totaled $46.9 million in the quarter, a decrease of 8.4% over the prior year.
This aggregate commercial revenue decline consisted of drain cleaning revenue, declining 5.8%, plumbing revenue, declining 5%, and excavation, declining 19.5%.
Water restoration for commercial increased 8.8%.
Our total Roto-Rooter branch residential revenue in the quarter totaled $144 million, an increase of 32% over the prior year period.
This aggregate residential revenue growth consisted of drain cleaning, increasing 29.5%, plumbing expanding 34.9%, excavation increasing 35.8% and water restoration increasing 28.7%.
In the first quarter, our average daily census was 18,050 patients, a decline of 6.1% over the prior year.
As Kevin discussed earlier, this decline in average daily census is a direct result of the disruptions across the entire healthcare system that impacted traditional admission patterns in the hospice starting in March of 2020.
Our hospital generated emissions have largely normalized to pre-pandemic levels.
However, referrals from senior housing, specifically nursing homes and assisted living facilities, continue to be disrupted.
As Kevin mentioned, we have seen stabilization in pockets of improvement in senior housing admissions.
However, it remains too early to reasonably project the pace and time line for senior housing admissions to return to pre-pandemic levels.
In the first quarter of 2021, total admissions were 18,135.
This is a 2.5% decline when compared to the first quarter of 2020.
However, These 18,135 admissions in the first quarter of 2021 compared favorably to the sequential admissions of 16,822, 17,973 and 17,960 in the second, third and fourth quarters of 2020.
In the first quarter, our home-based preadmit admissions decreased 1.5%.
Hospital directed admissions expanded 2.4%.
Nursing home admits declined 26.2%.
And assisted living facility admissions declined 13.1% when compared to the prior year quarter.
Our average length of stay in the quarter was 94.4 days.
This compares to 90.7 days in the first quarter of 2020 and 97.2 days in the fourth quarter of 2020.
Our median length of stay was 12 days in the quarter, which is two days less than the 14-day median in both the first quarter of 2020 and the fourth quarter of 2020.
I will now open this teleconference to questions.
| anticipates providing updated 2021 earnings guidance in july 2021.
|
Kurt will begin and close the call, and Melinda will speak to the financials midway through.
We'll then open the call to questions.
Although we believe these statements to be reasonable, our actual results could differ materially.
The most significant risk factors that could affect our future results are described in our Annual Report on Form 10-K.
We encourage you to review those risk factors as well as other key information detailed in our SEC filings.
With that, I'll turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer.
Following yesterday's close of market, we reported our fiscal 2021 first quarter results.
While still in the midst of the COVID-19 pandemic, we are pleased with how our business is progressing with strong written order trends.
To put the quarter in context, let me remind you of the pandemic related retail and plant closures and the subsequent ramp up timeline for La-Z-Boy.
As a result of the pandemic, furniture retailers including our La-Z-Boy Furniture Gallery stores were closed for the tail end of March, all of April and most of May with some still closed in June depending on local guidelines.
Relatedly, the majority of our plants closed for four weeks and restarted in late April at reduced capacity.
With our Joybird's Tijuana facility restarting about a month later due to COVID-19 challenges in Mexico.
When we restarted our plants, we initially worked off the pre-pandemic backlog.
We then had to wait for order flow as our retailers open throughout May and June and in concert with that, we increased production accordingly.
But because of the lag from order entry, the written sale to building and delivering the product and recognizing the delivered sale, we essentially lost the majority of the month of May in terms of delivered sales as we expected when we commented last quarter.
We have continued to increase our rate of production -- production weekly and are now operating at about 90% of prior-year levels.
But our lag time is currently running at about double our normal rate given strong demand during the quarter and the challenge of hiring additional workers.
The real good news is that our written order trends across the business are strong.
For the entire La-Z-Boy Furniture Gallery network, which accounts for about half of our wholesale business, written same-store sales increased 14.8% in the first quarter.
And to provide some additional perspective on the quarter, the cadence or written same-store sales by month was a decline of 13% in May, an increases of 30% in June and 32% in July.
So now, it's a matter of catching up on moving higher than expected written orders through our production cycle to deliver sales revenue as we continue to increase production.
Now it's too early to tell for certain, what's driving the strong written sales.
Whether it's pent-up demand which will eventually tail off or sector rotation with consumer shifting discretionary spending to their homes in an environment of no travel and limits on other leisure-related activity or probably a bit of both.
These COVID-19 related closures and reopenings transferred to a 31% sales decline versus a year ago to $285 million for the quarter with GAAP operating income declining to $4 million and non-GAAP operating income to $9 million.
We are still -- we were still however able to generate $106 million in operating cash supported partially by strong customer deposits and end the quarter with a balance sheet that remains strong.
The remainder of my remarks will detail our non-GAAP numbers, and Melinda will cover the non-GAAP adjustments in her remarks.
I will start with our Wholesale segment, which now includes both upholstery and casegoods.
On a sales decline of 30% to $224 million [Phonetic], non-GAAP operating margin was 9.4%, principally the result of the decline in production for the period and the consequent lower absorption of our fixed cost, partially offset by temporary cost reduction actions related to our COVID-19 action plan, which we announced in March.
Written sales for the Wholesale segment were up 2.5% for the quarter with a decline of 38% in May, more than offset by increases of 29% in both June and July, respectively.
Throughout this unusual and unpredictable period, we are managing our marketing investments with fiscal responsibility, but at the same time, we are very mindful of the increased interest in home furnishings in the core and the power of our brand.
In the spring, we did a soft launch of the second wave of the Live Life Comfortably campaign featuring Kristen Bell.
This way, focus is on La-Z-Boy's design and customization capabilities, one of our brand pillars, and we are planning for the TV spots to be more frequent and at more frequent rotation beginning this month as we move into what is typically the stronger fall selling season.
Additionally, we continue to invest in virtual capabilities as we increase our focus on offering consumers an omnichannel experience and providing seamless integration between our website and our stores.
From a product perspective, our modulars, sectionals and our wireless hand remote option on our power products continue to be in high demand.
On the manufacturing side, we continue to hire and train people to meet the unexpected demand surge while following all cohort related safety protocols.
Now let me turn to the Retail segment.
Written same-store sales for the Company-owned stores increased 11% for the quarter, even with the majority of stores closed for the month of May and some and still closed in June.
Again for perspective on how the quarter played out by month, written same-store sales for the Company-owned stores were down 26% in May, but up 29% and 37% in June and July, respectively.
For the quarter, delivered sales declined 36% to $91 million and non-GAAP operating margin for the segment was a loss of 6.8% due primarily to our inability to increase our production fast enough to meet the unexpected momentum in demand.
As we've discussed over the last several quarters, our retail business has become a core competency for the Company and has been performing at a very high level, greatly contributing to the value of the La-Z-Boy enterprise.
The first quarter loss was an anomaly, given the dynamic of store closures and the impact of the written and delayed delivered sales.
Encouragingly, on the temporary decline in traffic, we saw conversion and average ticket improvement as consumers used our website to conduct research before shopping in our stores and our store teams continue to execute at a very high level to close sales.
Additionally, we were pleased to see positive traffic trends in July, after declines in May and June.
In this environment, we are deploying new ways to engage with our store guests, enable safe and healthy shopping experiences.
These range from the ability to book personal shopping appointments, mask wearing by all team members and store capacity management with the queuing system depending on local condition, ordinance and needs.
Feedback has been very positive from our store teams and customers in terms of creating a safe place to shop.
I'll now spend a few minutes on Joybird.
For the quarter, Joybird sales reported in Corporate & Other declined 22% to $13.4 million.
However, written sales increased 38%.
The deliveries expected to catch up in the later part of the second quarter, end of the third, due to the Joybird plant not fully reopening until June due to COVID-19.
Balancing sales growth with bottom line performance, Joybird reduced its quarterly operating loss on a year-over-year and sequential basis.
We expect quarter 2 delivered revenue rate to be restored to more normal levels, but anticipate it will continue to lag the strong written demand due to the short-term labor constraints.
I'll now turn things over to Melinda.
Last year's first quarter non-GAAP results excluded a pre-tax charge of $1.5 million or $0.02 per diluted share related to the Company's supply chain optimization initiatives, which included the closure of our Redlands, California facility and a pre-tax purchase accounting charge of $1.5 million or $0.02 per diluted share.
Additionally, I would point out a revision to our segment reporting beginning this quarter.
Due to similar financial structures and customer channels, we aggregated the former Upholstery segment with the former Casegoods segment to form the newly combined Wholesale segment.
And now on to our results.
My comments from here will focus on our non-GAAP reporting unless specifically stated otherwise.
As noted, on a consolidated basis fiscal '21 first quarter sales declined 31% to $285 million reflecting the continued impact from the COVID-19 pandemic.
Consolidated non-GAAP operating income was $9 million versus $26 million in last year's quarter and consolidated non-GAAP operating margin was 3.1% versus 6.3%.
Non-GAAP earnings per share was $0.18 per diluted share in the current quarter versus $0.42 in last year's first quarter.
Consolidated gross margin for the first quarter increased 30 basis points.
Improved gross margin was driven primarily by targeted cost reduction actions, including the closure of our Redlands, California facility about a year ago, as well as those temporary actions associated with our COVID-19 action plan announced in March.
Gross margin also benefited from improved performance at Joybird.
SG&A as a percent of sales increased 350 basis points reflecting the decline in sales relative to fixed costs.
Partially offsetting the increase in SG&A expense were temporary cost reductions taken as part of our COVID-19 action plan.
On a GAAP basis, our effective tax rate for fiscal '21 first quarter was 19.8% versus 22% in last year's first quarter.
Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes.
Absent discrete adjustments, the effective tax rate for fiscal '21 first quarter would have been 26.1%.
For fiscal year '21, absent discrete items, we continue to estimate our effective tax rate on a GAAP basis, will be in the range of 25% to 26%.
Turning to cash, we generated $106 million in cash from operating activities in the quarter, including a $61 million increase in customer deposits from written orders for the Company's retail segment and Joybird.
We ended the quarter with $337 million in cash, including $50 million in cash proactively drawn on the Company's credit facility to enhance liquidity and response to COVID-19 back in March, compared with $114 million in cash at the end of last year's first quarter.
We also held $16 million in investments to enhance returns on cash, compared with $33 million last year.
During the quarter, we repaid $25 million of the original $75 million drawn against our credit line based on business performance and ongoing liquidity.
Also during the quarter, we invested $10 million in capital, primarily related to machinery and equipment, upgrades to our Dayton manufacturing facility and investments in our retail stores.
We expect capital expenditures to be in the range of $40 million to $45 million for the fiscal year, although spending will be largely dependent on economic conditions, continued business recovery and liquidity trends.
Our spending for the year will prioritize essential maintenance projects already under way, including plant upgrades to our Upholstery manufacturing facilities, technology upgrades and improvements to several retail stores.
As part of our COVID-19 action plan, in an effort to preserve cash in the near term and provides for financial flexibility, we eliminated our expected June dividend and temporarily suspended opportunistic share repurchases.
We are pleased to announce -- we have announced that -- we are pleased to announce that yesterday, our Board of Directors elected to reinstate a regular quarterly dividend to shareholders of $0.07 per share.
This is 50% of the quarterly dividend amount paid prior to the pandemic, as we continue to monitor current business trends and remain vigilant with respect to the ongoing macroeconomic uncertainty.
Over time, we will continue to evaluate our dividend level and management may also at its discretion resume share repurchases based on an assessment of business trends.
There are currently 4.5 million shares of purchase availability under our authorized program.
And finally, before turning the call back to Kurt, let me highlight several important items for fiscal '21.
First, a reminder that our expected non-GAAP adjustments will continue to include purchase accounting adjustments for acquisitions to date, which are estimated to be in the range of $0.04 to $0.05 for the full year.
And we anticipate pre-tax charges of $0.01 to $0.02 per share in the second quarter related to the completion of our recent business realignment, which included the closure of the Newton assembly plant and the 10% reduction in our global workforce.
The total charges for these actions is coming in slightly lighter than anticipated due to lower severance benefits than originally forecast.
And relative to business trends, we are pleased with the progress we've made in Q1 in written sales and restarting our manufacturing facilities.
But we remain cautious on future sales trends, given ongoing economic uncertainty and pandemic risks.
Further, we continue to aggressively manage our cost structure across the business, but our ability to return to or exceed pre-pandemic margins is largely dependent on increasing our production rate.
And if demand continues at the current pace, in an odd twist, our challenge won't be sales velocity, it will be more about how much we can make during this period of time based on our ability to hire to support demand.
And finally a note on tariffs.
The exclusion on tariffs that provided two years of tariff rebates received at the end of fiscal '20 was not renewed.
So we will have that expense going forward similar to most quarters in the last two years.
And now back to Kurt for his concluding remarks.
As noted, we are pleased with our written order trends and believe there is still some pent-up demand in the marketplace, given the long period of time, retailers were closed as well as some shift in discretionary spending with more money going into the home category.
As Melinda noted, because we are mindful that pandemic is still is still upon us, we are cautious in our optimism on demand and our ability to flex our workforce as we move into the fall selling season.
As we manage the business tightly day to day, we are focused on providing great service to our customers and maintaining fiscal conservatism through this uncertain period.
I'm confident, we will emerge a stronger company on the other side of this crisis.
And I'm quite pleased with how well the Company is faring as we move through it.
We will continue to capitalize on the strength of our well-known and trusted brand, our vast distribution network, including the vibrant La-Z-Boy Furniture Gallery store system, our world class supply chain and our strong balance sheet to deliver long-term value to all stakeholders.
And now I will turn things over to Kathy to provide instructions for getting into the queue.
We'll begin the question-and-answer period now.
Jess, please review the instructions for getting into the queue.
| q1 non-gaap earnings per share $0.18.
for entire la-z-boy furniture galleries network, written same-store sales increased 14.8% for fiscal 2021 q1.
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We'll begin with a brief strategic overview from Randy.
Mike will review the Title business.
Chris will review F&G.
And Tony will finish the review of the financial highlights.
There is significant uncertainty about the duration and extent of the impact of this pandemic.
Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.
It will also be available through phone replay beginning at 3:00 p.m. Eastern Time today through Wednesday, November 10.
We are very pleased with our record-setting third quarter results as we increased revenues 31% to $3.9 billion, which resulted in adjusted net earnings growth of 39% to $604 million, both as compared with the 2020 third quarter.
Our Title business continued to deliver record results, while F&G expanded into new institutional channels, which position us well for strong asset growth.
Importantly, we grew our holding company cash balance by 25% to $1.5 billion as compared to $1.2 billion at the end of the second quarter of 2021.
Cash on our balance sheet grew despite our continued activity, returning capital to our shareholders through share buybacks and our quarterly dividend.
As Tony will discuss in more detail, the cash growth was delivered primarily through our organic business results.
During the quarter, we took advantage of exceptional interest rates and issued $450 million of 3.2% senior notes with a 30-year maturity.
We also funded a $400 million intercompany loan with F&G to fund their growth.
Overall, our results this quarter speaks to the dynamic business model that we have created and which we believe positions us for success through varying market cycles.
Turning to our Title results.
We delivered adjusted pre-tax title earnings of $669 million, with an adjusted pre-tax title margin of 21.7% in the 2021 third quarter compared with adjusted pre-tax title earnings of $528 million and an adjusted pre-tax title margin of 21.2% in the 2020 comparable quarter.
Our third quarter margins and earnings were the strongest third quarter results in our company's history, which speaks to our market-leading position combined with outstanding execution by our entire team.
We continue to be very pleased with the results this quarter as we open new channels of distribution and accelerate our sales growth, driving assets under management at the end of the third quarter to nearly $35 billion, an increase of 9% in the quarter.
This growth was driven by strong retail annuity sales and F&G's interest into institutional markets.
Total assets under management have grown 31% since we closed the acquisition, and we are well on our way toward our goal of more than doubling assets under management in five years.
As F&G's assets continue to grow, they provide an increasingly important component of our overall earnings.
Looking forward, we will continue to evaluate our capital allocation strategy as we remain committed to long-term value creation for our shareholders while also focusing on supporting the future growth of our businesses.
Share buybacks are an important component of our strategy, and we were active once again, having purchased 1.3 million shares for $61 million at an average price of $46.29 per share through the third quarter.
In the first week of October, we reached our $500 million share buyback target, which we announced in the fourth quarter of 2020.
Lastly, we announced yesterday a quarterly cash dividend of $0.44 per share, an increase of 10% from our previous quarterly dividend.
This is the second consecutive quarter that we have increased our dividend, given our strong earnings and cash flows through the first three quarters of the year.
As Randy highlighted, our third quarter results were the best third quarter in the company's history.
For the third quarter, we had generated adjusted pre-tax title earnings of $669 million, a 27% increase over the third quarter of 2020.
Our adjusted pre-tax title margin was 21.7%, a 50 basis point increase over the prior year quarter.
The results were driven by a 25% increase in average fee per file, a 9% increase in daily purchase orders closed and a 31% increase in total commercial orders closed, partially offset by a 21% decrease in daily refinance orders closed.
Total commercial revenue was a record $366 million compared with the year-ago quarter of $216 million due to the 31% increase in closed orders and a 28% increase in total commercial fee per file.
For the third quarter, total orders opened averaged 10,800 per day, with July at 11,000, August at 11,000 and September at 10,300.
For October, total orders opened were 9,300 per day, as we saw solid demand and purchase activity, while the refinance market continues to moderate as compared with last year's robust levels.
Daily purchase orders opened were up 1% in the quarter versus the prior year.
And for October, daily purchase orders opened were up 4% versus the prior year.
Refinance orders opened decreased by 33% on a daily basis versus the third quarter of 2020.
For October, daily refinance orders opened were down 38% versus the prior year.
Lastly, total commercial orders opened per day increased by 15% over the third quarter of 2020.
Commercial opened orders per day were just under the record levels we saw in the second quarter.
For October, total commercial opened orders per day were up 15% over October of 2020.
Importantly, commercial opened orders per day have exceeded 1,000 orders each of the last nine months, having consistently been in record territory and will provide momentum as we close out 2021 and begin 2022, given the longer tail for closings in commercial as compared with residential.
Our Title business has performed very well through the third quarter with commercial and purchase volumes more than offsetting the decline in refinance activity.
Looking forward, while refinance volumes may continue to moderate, it is important to note that direct refinance revenue only contributed approximately 19% of total direct revenue in the third quarter compared with 27% in the third quarter of last year.
On a sequential basis, refinance revenue contributed 21% of total direct revenue in the second quarter and 33% in the first quarter of this year.
Additionally, refinance fee per file in the third quarter was approximately $1,000 as compared with nearly $3,400 for purchase, providing a strong counterbalance to declines in refinance revenue.
We will also continue to watch our expenses closely and react to changes in our opened and closed order volumes.
Another critical aspect of our business has been our longer-term focus on integrating and leveraging automation, which has significantly improved our performance, as can be seen by our profitability this cycle.
During the quarter, we reached a significant milestone as more than two million consumers have now been invited to begin their transactions on our digital inHere Experience Platform through Start inHere, and more than 1.3 million have chosen to do so.
As we have discussed, inHere transforms the real estate transaction by improving the safety and simplicity needed to start, track, notarize and close real estate transactions.
We are very pleased with our customers' adoption of our digital platform, as we believe it will not only improve their satisfaction with our service and product, but also improve our efficiency.
Ultimately, we believe the inHere Experience Platform, combined with our scale and our history and expertise in building market-leading technology solutions, positions FNF to grow market share.
At F&G, we're fully executing on our product and channel diversification strategy while leveraging our core capabilities and modernizing our operating platform.
This year has demonstrated our transformation from a previously monoline business into a well-diversified and leading provider of solutions in both retail and institutional markets.
We achieved record sales in the third quarter, surpassing $3 billion in total sales for the quarter and $7 billion in total sales for the first nine months of the year, which in turn have boosted ending assets under management to nearly $35 billion as of September 30, as Randy mentioned previously.
In the third quarter, annuity sales in our retail channel were $1.5 billion, up 43% from the third quarter of 2020 and down slightly from the record sequential quarter.
We see ongoing success with our independent agent distribution and continue to expand our bank and broker-dealer channels.
We are now distributing through a dozen active bank and broker-dealer distribution partners.
We are very pleased that our recent expansion into institutional markets has been exceptionally strong.
Let me provide a few brief details.
F&G has issued $1.2 billion of funding agreement-backed notes in September, following our inaugural $750 million issuance in June.
Both issuances saw extremely strong market demand and attractive pricing.
F&G has also successfully entered the pension risk transfer market, closing $371 million of transactions in the third quarter and securing an additional $564 million of transactions in the fourth quarter.
Based on transactions secured to date, F&G will assume approximately $900 million in pension liabilities and provide annuity benefits to over 22,000 retirees.
Overall, institutional sales were $2.6 billion for the first nine-month period.
And with the additional $500 million pension risk transfer volume secured in the fourth quarter, we're on track to achieve $3 billion of institutional sales in 2021.
With these strong top line results, average assets under management, or AAUM, has reached $32.7 billion, driven by approximately $2.3 billion of net new business flows in the third quarter.
We are focused on generating scale benefits by increasing assets under management while continuing to leverage Blackstone's unique investment management capabilities to deliver consistent spread.
Our results continue to be strong.
Total product net investment spread was 285 basis points in the third quarter and FIA net investment spread was 335 basis points.
Adjusting for favorable notable items, total product spread was 248 basis points and FIA spread was 293 basis points, both in line with our historical trends and consistent with our disciplined approach to pricing.
Let me wrap up with a few thoughts on earnings.
First, F&G's net earnings attributable to common shareholders of $373 million for the third quarter included a $224 million onetime favorable adjustment from an actuarial system conversion, reflecting modeling enhancements and other refinements and represents less than 1% of reserves.
This conversion was a significant milestone in our multiyear effort to deliver a modern, scalable platform, which will provide operating leverage with scale over time.
This onetime favorable adjustment was excluded from adjusted net earnings along with other standard items.
Next, F&G's adjusted net earnings for the third quarter were $101 million.
Strong earnings were driven by record AAUM and strong spread results from disciplined pricing actions on both new business as well as our in-force book.
Net favorable items in the period were $27 million.
Adjusted net earnings, excluding notable items, were $74 million, up from $70 million in the second quarter.
In summary, during the third quarter, we've delivered record sales and strong earnings for F&G.
Our profitable growth strategy is firing on all cylinders, and we have successfully diversified our sources of premiums.
We remain excited about the opportunity to further contribute to the overall FNF strategy in the years ahead.
We generated $3.9 billion in total revenue in the third quarter, with the Title segment producing $2.9 billion, F&G producing $927 million and the Corporate segment generating $44 million.
Third quarter net earnings were $732 million, which includes net recognized losses of $154 million versus net recognized gains of $73 million in the third quarter of 2020.
The net recognized gains and losses in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter or continue to be held in our investment portfolio.
Excluding net recognized gains and losses, our total revenue was $4 billion as compared with $2.9 billion in the third quarter of 2020.
Adjusted net earnings from continuing operations were $604 million or $2.12 per diluted share.
The Title segment contributed $521 million.
F&G contributed $101 million.
And the Corporate segment had an adjusted net loss of $18 million.
Excluding net recognized losses of $169 million, our Title segment generated $3.1 billion in total revenue for the third quarter compared with $2.5 billion in the third quarter of 2020.
Direct premiums increased by 22% versus the third quarter of 2020.
Agency premiums grew by 34%.
And escrow title-related and other fees increased by 14% versus the prior year.
Personnel costs increased by 15%.
And other operating expenses increased by 17%.
All in, the Title business generated a 21.7% adjusted pre-tax title margin, representing a 50 basis point increase versus the third quarter of 2020.
Interest and investment income in the Title and Corporate segments of $27 million declined $4 million as compared with the prior year quarter due to decreases in bond interest, dividends received on preferred stock and a slight decrease in income from our 1031 Exchange business.
In September, we closed an issuance of $450 million of 3.2% senior notes due September of 2051.
We're very pleased with the market's receptivity to our issuance as well as the very attractive rate that we were able to secure.
We also put in place a $400 million intercompany loan to fund F&G's growth and to better optimize their capital structure.
FNF debt outstanding was $3.1 billion on September 30 for a debt-to-total capital ratio of 24.9%.
Our title claims paid of $55 million, were $45 million lower than our provision of $100 million for the third quarter.
The carried reserve for title claim losses is currently $95 million or 5.9% above the actuary's central estimate.
We continue to provide for title claims at 4.5% of total title premiums.
Our title and corporate investment portfolio totaled $6.7 billion at September 30.
Included in the $6.7 billion are fixed maturity and preferred securities of $2.2 billion with an average duration of 2.8 years and an average rating of A2, equity securities of $1.2 billion, short-term and other investments of $500 million and cash of $2.8 billion.
We ended the quarter with $1.5 billion in cash and short-term liquid investments at the holding company level.
Let me end with a few thoughts on capital allocation.
Our capital allocation strategy remains a key focus of the Board.
We're focused on returning capital to shareholders while making strategic investments in our businesses.
Our current level of cash generation supports the following: first, FNF's $500 million annual common dividend; next, our $100 million annual interest expense on F&F debt; third, our $400 million 5.5% senior notes, which are due in September of 2022; and finally, our share repurchases.
We've continued to make share repurchases throughout the third quarter and into the fourth.
During the quarter, we purchased 1.3 million shares at an average purchase price of $46.29 per share.
And in the first week of October, we completed our previously announced $500 million share repurchase plan.
In total, we repurchased 12 million shares at an average price of $41.62 since announcing the plan in October of last year.
With regard to F&G, at the time of the merger last year, we stated that we expected F&G to double assets and earnings over five years through organic growth.
Given current momentum, we foresee that F&G's growth is running about one year ahead of schedule.
For 2021, F&G is on a trajectory to double its annual sales and has materially diversified its business with channel expansion in new retail and institutional markets.
Capital funding for this growth includes $400 million in debt capital from FNF in the third quarter as well as third-party financial reinsurance with an existing partner in the fourth quarter.
Based on current forecasts, we expect to contribute $200 million to $300 million of new equity capital in 2022.
And with F&G's 25% debt-to-capital target, we believe F&G has ample financial flexibility to execute on our growth strategy and capture market opportunities.
Beyond that horizon and subject to ongoing sales momentum, there may be an additional capital investment required in 2023, which could take the form of converting our existing $400 million term loan to equity capital.
But we believe at that point, we will be reaching a level where F&G is self-funding.
Given the compelling growth prospects, it is more attractive to defer any immediate return of capital from F&G in order to support its growing and stable source of earnings and target a return of capital a few years down the line.
FNF has enough capital generation to do all of the above, and we view the marginal return on capital into F&G as attractive and strategically important to our dynamic business model to achieve long-term value creation and attractive shareholder returns.
| compname reports third quarter 2021 diluted earnings per share from continuing operations of $2.58 and adjusted diluted earnings per share from continuing operations of $2.12.
compname reports third quarter 2021 pre-tax title margin of 16.6% and adjusted pre-tax title margin of 21.7%.
q3 adjusted earnings per share $2.12 from continuing operations.
q3 revenue $3.9 billion versus $3.0 billion.
|
Revenue increased 79% to $394 million in the quarter, driven by growth in the number of independent OPTAVIA Coaches coupled with further improvements in coach productivity.
The number of active earning OPTAVIA Coaches reached approximately 59,200 at the end of the second quarter, a record high, that is 62% above the same quarter last year and up nearly 13% sequentially.
Revenue per active earning OPTAVIA Coach was $6,662, another new record, up nearly 14% versus last year and 3% sequentially.
The continued productivity gains we are seeing has been fueled by the development of infrastructure and education to help coaches learn how to support a greater number of clients than has historically been possible.
This field-led training approach leverages social media and communication technology platforms to engage clients and support and train coaches.
We've been investing substantially in technology and digital processes, with an emphasis on creating unique infrastructure and education to help OPTAVIA Coaches leverage their time and talent to efficiently serve clients.
While it's still very early, we can already see the benefits from these efforts based on the strong trends in coach level productivity.
Our digital product teams have been developing two apps.
The first is the OPTAVIA app, which primarily targets clients and features lean and green recipes, self-service options related to OPTAVIA Premier orders and returns and other key information to stay engaged.
The OPTAVIA app went live in April for coaches and in July for clients.
The second is the Connect App, which is for coaches on the go, who need data and insights to help them manage their business efficiently.
The beta version of the Connect app went live in April and is currently being utilized by nearly one-third of coaches with a broader rollout expected over the balance of the year.
In addition, to our proprietary apps, OPTAVIA Coaches continue to refine our social media and other communication platform to manage their business to drive deeper connections to serve existing customers to attract new clients.
It's clear that interest in health and wellness across the board continues to be extremely strong.
A recent study of consumer health priorities and motivators commissioned by Medifast found that 93% of U.S. adults of health and wellness goals and 84% are actively working toward achieving them.
2/3 of Americans say the biggest motivator for staying consistent with health and wellness goals is feeling good mentally and physically, defined by having more energy and reducing stress and anxiety.
OPTAVIA's unique model has proven effectiveness in helping people achieve their individual goals around health and wellness and the resonance of this model has demonstrated clearly results we've announced today.
As we drive further demand through a growing number of coaches, it's important that we continue to develop our supply chain capabilities to be able to meet the needs of the field.
We achieved our $2 billion manufacturing capacity target in the second quarter, six months ahead of the original goal through the expansion of relationships with co-manufacturers.
Given our growth trajectory and outlook for the future, this additional capacity is crucial to meeting the needs of our coaches and clients as well as continuing to deliver strong returns for shareholders.
Scaling our fulfillment capacity to an equivalent level is also in process, with an expected completion date in the third quarter of this year, three months ahead of the original goal.
We added an internally managed fulfillment center in April 2021 and for partnerships with 3PL companies to ensure that we are able to efficiently move everything through our supply chain network.
There were no promotions in the quarter as the strength of our coach-based model and field-led training continue to drive strong engagement and activation.
Importantly, since we were lapping the essential start promotion from last year's second quarter, the absence of promotion provided a nice lift to gross margins, which improved by 210 basis points in the same quarter last year.
This underscores a key differentiator in our model versus other direct selling models.
That is that we focus on empowering coaches to serve clients by educating them on the Habits of Health system, using a holistic community-based approach to help them transform their lives one healthy habit at the time.
Looking at the third quarter, we will repeat our business builder program and expect this to further grow the number of OPTAVIA Coaches helping our business as we move ahead into 2022.
Last week, we concluded our biggest ever annual convention which was held in the new hybrid format and saw more than 15,000 global registrants.
Recall that the 2020 event was modified to be virtual only due to the global pandemic.
While partnering with the Georgia World Congress Center in Atlanta and following statewide COVID-19 safety regulations for the in-person experience, we also offered a live stream component for attendees who participated from home.
Attendants experienced valuable coach-led educational sessions, panel discussions and company updates along with celebrations of their success in transforming lives around the world.
This year's event also placed an increased focus on community engagement and team building following the 2020 virtual event.
We believe OPTAVIA's unique offer complete with the support of a coach community Habits of health transformation system.
And our clinically proven plans and scientifically developed OPTAVIA brand nutritional products provides a holistic solution consumers need to make their health goals a reality.
Before turning the call over to Jim, I want to share some comments on corporate social responsibility.
We continue to join forces with the OPTAVIA community to support our philanthropic initiative, Healthy Habits For all, which empowers generations through education and access to healthy habits.
As part of 2021 convention registration and outside donation opportunities, the OptiView community gave back through the company's philanthropic initiative, Healthy Habits For All.
This coach-led fundraising initiative raised over $100,000 of worthy nonprofits and advance the company's mission of providing children with education and access to resources that support healthy habits.
To date, alongside with our OPTAVIA community, the company has funded up to eight million nutritious mills for children facing hunger.
Medifast's commitment to lifelong transformation is not just the result of the work our OPTAVIA Coaches do but also a result of our active support of the communities in which we live and work.
Revenue in the second quarter of 2021 increased 79.2% to $394.2 million from $220 million in the second quarter of 2020, reflecting continued growth in the number of active earning OPTAVIA Coaches and higher per coach productivity which resulted in more clients participating in our optimal weight five & one Plan.
We achieved another record for active earning OPTAVIA Coaches, ending the quarter with approximately 59,200 and generating sequential growth of 12.8% compared to Q1 and an increase of 62.2% from last year's second quarter.
Average revenue per active earning OPTAVIA Coach for the second quarter was $6,662, setting another record and up 3.2% from the prior high set just last quarter.
Versus a year ago, revenue per active earning of OPTAVIA Coach was up 13.9%.
Gains in productivity per active earning OPTAVIA Coach for the quarter continued to be driven by an increase in both the number of clients supported by each coach as well as an increase in average client spend.
The growth we're seeing in new coaches and in per coach productivity is closely related to our approach that better leverages field-led coach training and social media and communication technology platforms.
Gross profit for the second quarter of 2021 increased 84.4% to $293.7 million compared to $159.3 million in the prior year period.
Gross profit as a percentage of revenue was 74.5%, up 210 basis points compared to 72.4% in the second quarter of 2020.
We did not offer any promotions during the second quarter as we lap the essential start promotion from last year, and that was the primary factor that drove the year-over-year improvement in gross margin.
With the anticipated acceleration in demand of OPTAVIA branded products, we expect pressure on gross profit margin through the remainder of 2021 due to the planned higher level of use of co-manufacturers.
Additionally, we are seeing higher levels of inflation in raw ingredients, freight and labor costs that will add pressure to our gross profit margin for the second half of 2021.
To protect our overall profit margins in the short term, we will continue to focus and manage our costs while investing in supply chain and technology for our long-term growth objectives.
We believe gross profit margin as a percentage of revenue will improve in the longer term as we develop pricing strategies, enhance our distribution network, reduce freight costs by shortening shipping lanes and gain productivity improvements in our supply chain processes as we scale our business.
SG&A for the second quarter of 2021 increased 77% to $232.3 million compared to $131.2 million for the second quarter of 2020.
The increase was primarily due to higher OPTAVIA commissions, increased salary and benefit-related expenses for employees, increased consulting costs related to technology projects and increased credit card fees resulting from higher sales.
SG&A as a percentage of revenue decreased 70 basis points year-over-year to 58.9% versus 59.6% in the second quarter of 2020.
Income from operations increased $33.3 million to $61.4 million from $28.1 million in the prior year period, reflecting significant improvement in gross profit margin coupled with leverage of SG&A expenses.
Income from operations as a percentage of revenue was 15.6% for the quarter, an increase of 280 basis points from the year ago period.
The effective tax rate was 23.4% for the second quarter of 2021 compared to 22.1% in last year's second quarter.
Net income in the second quarter of 2021 was $47 million or $3.96 per diluted share based on approximately 11.9 million shares of common stock outstanding.
This compares to net income of $21.9 million or $1.86 per diluted share based on approximately 11.8 million shares of common stock outstanding in last year's second quarter.
Our balance sheet remains very strong with cash, cash equivalents and investment securities of $197.4 million as of June 30, 2021, compared to $174.5 million at December 31, 2020.
The company remains free of interest-bearing debt and believes it is well positioned to execute its growth strategy.
On the first quarter call, I provided additional detail around our capital allocation priorities and discussed that we expect higher levels of capital expenditures over the next 24 months to expand our technology and supply chain capabilities.
Additionally, we expect that stock repurchase was going to increase relative to our dividend.
To that end, during the second quarter, we repurchased $12.2 million of stock, which is up from $7.5 million of repurchase activity in the first quarter, bringing our year-to-date total to $19.7 million through the first half of 2021.
Given our strong financial condition, expectations for future cash flow growth and the relative valuation of our stock, we anticipate continuing to prioritize buybacks as a means of adding value for shareholders in the foreseeable future.
Finally, in June 2021, our Board of Directors declared a quarterly cash dividend of $16.9 million or $1.42 per share, which is payable on August 6.
Turning to our guidance, which we reinstated last quarter.
For the full year 2021, we expect revenue in the range of $1.425 billion to $1.525 billion and diluted earnings per share to be in the range of $12.70 to $14.17.
Our guidance also assumes a 23.25% to 24.25% effective tax rate.
As discussed, we are expecting pressure on gross profit margin in the second half of 2021 due to the increased levels of use of co-manufacturers in the coming months to meet accelerated demand in OPTAVIA-branded products and due to inflation factors.
In Q3 this year, we successfully returned to an in-person convention that will increase SG&A expenses in Q3.
Finally, in Q3, we will be repeating our business builder program and expect this to further grow the number of independent OPTAVIA Coaches and help our business as we head into 2022.
The business builder program will be recorded in SG&A expenses in Q3.
In closing, second quarter results were strong, and we remain confident in our business model and are well positioned to capitalize on the opportunities that lie ahead.
| q2 earnings per share $3.96.
q2 revenue $394.2 million versus refinitiv ibes estimate of $359.5 million.
sees fy earnings per share $12.70 to $14.17.
sees fy revenue $1.425 billion to $1.525 billion.
total number of active earning optavia coaches increased 62.2% to 59,200 compared to 36,500 for q2 of 2020.
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Earnings for the quarter was $0.79 per share compared to $1.59 in the prior year quarter.
Adjusted earnings per share increased to $2.03 in the quarter compared to $1.96 in 2020.
Net sales in the quarter were up 17% from the prior year, primarily due to the pass through of higher material costs and increased beverage can and transit packaging volumes.
Segment income improved to $379 million in the quarter compared to $367 million in the prior year, primarily due to higher sales unit volumes.
As outlined in the release, we currently estimate fourth quarter 2021 adjusted earnings of between $1.50 and $1.55 per share, and full-year adjusted earnings of $7.50 to $7.55 per share.
Our expected adjusted tax rate for the year is between 23% and 24% consistent with our nine months rate.
Our continued best wishes for the continued health and safety of you and your families.
Before reviewing the third quarter results, we want to again express our sincere appreciation to our global associates for their continued efforts during the ongoing pandemic, with many of us now vaccinated, we're moving in the right direction, but we should expect the next several months to remain challenging as COVID variance make their way through various populations.
Again, we ask all of you to remain vigilant in protecting yourselves, your family members, your associates and your communities.
Demand remained strong across all product lines and geographies with the exception of Vietnam, where hard lockdown measures by the government essentially curtailed all business and consumer activity for much of the third quarter.
We expect Vietnam will slowly reopen during the fourth quarter.
Reported revenues increased 17% during the quarter as higher beverage and transit volumes coupled with the pass through of raw material cost increases offset supply chain challenges.
In the face of these challenges, we continue to grow earnings.
And in July, we discussed with you the step change in earnings that we have experienced beginning with last year's third quarter in which EBITDA over the last five quarters averages approximately $100 million more than the previous six quarters.
Our teams continue to do a great job commercializing new capacity, converting that capacity into income growth and we look forward to more capacity coming online over the next several quarters.
We're also pleased to report that our efforts related to the environment and sustainability have not gone unnoticed.
In September, ESG ratings provider Sustainalytics again ranked Crown in the top position for mitigating ESG risk within the metal and glass packaging sector.
Also during the quarter, the Company joined the Climate Pledge, where we have committed to be net zero carbon by the year 2040.
The sale of the European Tinplate businesses was completed on August 31st, and going forward, our share of net profits will be reflected in equity earnings.
As discussed previously, we continue to experience inflationary pressure across all businesses.
Many of our businesses contractually pass through higher costs, including steel and aluminum, but some businesses will have a timing lag to recovery.
As cost for pass-through revenues will increase, however, percentage margins will decline due to the denominator effect of one-to-one pass-throughs.
Before reviewing the operating segments, we remind you that delivered aluminum here in North America is approximately 75%, 80% higher today than at this time last year.
LME and delivery premiums are contractual pass-throughs, so reported beverage revenues reflect both the volume increase and the higher aluminum cost.
After reading the various analyst reports on magnesium and related aluminum supply, I would say that many of you have a very good understanding of the situation.
The concerns related to magnesium as many of you have noted relate to energy curtailments in China.
China has restarted some production recently, so hopefully that eases some of the concerns recently voiced in Europe.
There is magnesium production here in the United States, so we have less concern on domestic supply.
And in the near term, we do not believe we have any supply concerns over the next six months, although we continue to monitor our suppliers supply.
In Americas beverage, overall unit volumes advanced 4% in the quarter as continued strong demand in North America and Mexico offset a difficult third quarter comparison in Brazil.
Our third quarter 2021 volumes in Brazil were more than 10% higher than the third quarter of 2019.
However, third quarter 2020 volumes were up 30% over the third quarter of '19, as that country rebounded sharply from the second quarter 2020 pandemic lockdowns.
A combination of -- we were never going to have enough cans in our inventories compared to the prior year and a pullback in consumer spending related to inflation concerns led to the lower sales this year.
We have seen consumer slowdowns in the past in Brazil, however, the market has always recovered to even higher levels.
Late in the third quarter, we began commercial shipments from the second line in the Bowling Green, Kentucky plant, with the third line in Olympia, Washington, now operational here in early fourth quarter.
Next month, we will begin operations in the second line in Rio Verde, Brazil, followed by a late first quarter 2022 start-up on the second line in Monterrey, Mexico.
New two-line plants in Uberaba, Brazil; and Martinsville, Virginia will come online late in 2022 followed by the new two-line plant in Mesquite, Nevada scheduled for a mid 2023 start-up.
A lot of activity, but the team is fully committed to continue our growth with a well-balanced customer portfolio.
Unit volumes in European beverage advanced 5% over the prior year with strong volumes across most operations in this segment.
Inflation offset unit volume growth with freight, utilities and labor being most notable and with inflation expected to remain elevated across Europe, we project the income will decline in the European segment in the fourth quarter and during 2022.
In Asia Pacific, unit volumes declined 8% in the quarter owing entirely to a 55% contraction in Vietnam.
Excluding Vietnam, unit volumes grew 20% in the quarter.
The Vietnamese government instituted hard lockdown measures to curb the spread of COVID and its variance.
And for example, a hard lockdown means that you're not allowed to leave your house, and the army will deliver to you all food and essentials.
And while we expect Vietnam will slowly reopen during the fourth quarter, we do expect that from time-to-time we will be subject to various lockdowns or movement control orders as the various countries look to prevent the spread of COVID.
Our new plant in Vung Tau, Vietnam, is now qualified to begin commercial shipments to customers.
As expected, transit packaging had another strong quarter, recording double-digit gains in revenues and segment income, volume growth in steel strap tooling and across protective packaging offset inflationary headwinds, notably freight.
The business continues to navigate supply shortages, transportation delays and inflation, and remains well positioned to continue to grow earnings in the fourth quarter and through next year as these conditions ease over time.
Performance in our North American food and beverage can making equipment businesses remain firm throughout the third quarter, and earlier in the year we commenced operations at a new food can plant in Dubuque, Iowa.
And during the third quarter, we began commercial shipments from a new two-piece food can line in our Hanover, Pennsylvania plant.
These line additions provide much needed capacity to our domestic supply footprint, allowing us to eliminate imports and we expect significant improvement earnings from food in 2022 as these new lines come through their learning curves.
So in summary, a very strong first nine months of 2021 with EBITDA up 26%.
As described earlier, we have several capacity projects recently completed and are underway and are pleased to reconfirm the 2025 EBITDA estimate of $2.5 billion first provided during the May virtual Investor Day.
And near-term, while we may experience inflation and supply chain related headwinds over the next few quarters, we currently expect 2022 will be another strong year of earnings growth with EBITDA estimated to be approximately $2 billion.
In addition to North American food, our beverage can businesses in North America and Brazil and our transit packaging business are all expected to have strong years in 2022, allowing us to earn through the dilution related to the European asset sale and headwinds from a persistent inflationary environment.
Before opening the call to questions, there are a number of you in the queue, so we ask that you please limit yourselves to no more than two questions so that others will have a chance to ask their question.
And with that Annie, I think we're now ready to take questions.
| compname reports q3 earnings per share $0.79.
q3 adjusted earnings per share $2.03.
q3 earnings per share $0.79.
sees q4 adjusted earnings per share $1.50 to $1.55.
sees fy adjusted earnings per share $7.50 to $7.55.
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This has been another strong quarter for Medifast, with positive trends across our business and solid growth in both revenue and earnings.
Compared to the same time period last year, revenue increased 52.3% to $413.4 million in the third quarter, while earnings per diluted share rose 22.3% to $3.56.
As planned, we ran our business dealer promotion in August, consistent with the prior two years.
This promotion focuses on driving coach growth by incentivizing sponsorship at the time when coach leaders are deeply engaged and focused on broadening their reach following our annual convention.
The number of independent active earning OPTAVIA Coaches exceeded 61,000 at the end of the third quarter, with growth of 44.9% from the same period last year and up 3% sequentially.
Both coaches and the company had to adjust to the new scale of the business, and that's caused some to be expected bottlenecks that were manifest in product delivery delays in our supply chain in the second quarter and early into the third quarter, which impacted coaches and client experience.
Consequently, the sequential growth rate in active earning coaches decelerated as existing coaches spend more time supporting the record number of new clients who have entered the OPTAVIA ecosystem rather than onboarding as many new coaches.
As planned, we brought new fulfillment capacity fully online at the beginning of August 2021, and this had a significant positive impact on both coach and client experience in the back half of the quarter and is expected to continue going forward.
Promotional activity directed a client acquisition during the third quarter included the essential start promotion we ran in September.
Last year, this program ran in the April-May time frame, and it was an important catalyst to the sharp acceleration we experienced starting in the summer of 2020.
As this year's event was later in the quarter, the initial revenue benefit is expected to occur more in the fourth quarter, while some of the costs negatively affected the margins in the third quarter.
The key takeaway from our third quarter client acquisition results is that it will put us in a very strong position as we move into the final quarter of the year and moving to next year.
Our coach based model is driven by activation of new clients who then go on to be new coaches.
New client numbers are up about 50% year-over-year in the month of September due to the essential start promotion and the continued strong demand for our coach supported health and wellness plan.
As a result of new client acquisition, productivity hit a record high for the company with revenue per active earning coach reaching $6,773.
This is up 7% from a year ago and up 1.7% from Q2, the prior high.
Coaches are continuing to leverage our infrastructure, advanced digital tools and field-led training to amplify their engagement across social media as well as other technology platforms, enabling them to support a greater number of clients.
Our strategic investments in expanding supply chain and fulfillment capacity have proven invaluable in supporting our growth since 2017 when we decided to double down on the clinically proven coaching model through OPTAVIA.
This was accomplished three to six months in advance of the respective target dates.
Given our expected growth over the next several years, we are continuing to allocate capital and investments to this critical infrastructure and have already started work on an additional distribution center in Fort Worth, Texas in partnership with a leading third-party logistics company.
This comes on the heels of the new warehouse and distribution center in Maryland that came online in Q2 and to which we continue to add capacity through Q3.
Additionally, in October, we held an event with top coach leaders at Sundance, Utah, to reinforce alignment and provide planning and alignment sessions around major initiatives for 2022.
During the meeting, we aligned our plans for the fourth quarter, which supported their field-led training events over the final months of 2021 in preparation for Q1 of next year.
Consistent with last year, we will execute our Holiday Dash program, which will begin in December and carry over into the first week of January.
This promotion rewards coaches to attract new clients during the program period.
We continue investing in our digital lab in Utah to pioneer exciting growth and productivity tools for existing coaches as well as developing additional pathways for attracting new clients and encouraging and engaging new coaches.
Deployment of the two proprietary apps we've been developing is advancing and the early metrics are encouraging.
The OPTAVIA app targets clients and features healthy recipes, self-service options related to the OPTAVIA Premier orders and other key information to stay engaged.
It's broadly available in the U.S., while select users have access now in our Asia markets, where it is on track to go live within the next few weeks.
Through mid-October, there have been over 217,000 unique downloads and daily average usage has averaged approximately 50,000 over the past month.
Our Connect app is designed for OPTAVIA coaches to provide a powerful tool to help them efficiently manage and grow their business with instant access to key data and insights.
And that recently went live with approximately 2,000 business leaders and business coaches and will be rolled out across the broader coach population of 61,000-plus OPTAVIA coaches during the fourth quarter.
For some time now, many people have been looking at their health more holistically with a specific focus on developing healthy habits in every area of their life.
Our latest survey findings revealed that a large majority of U.S. adults have guidance from someone who has had similar experiences in helping them not only to reach their goals, but also to develop healthy habits.
We found that 66% of adults say having support helped them throughout their health and wellness journey and that more than four in five or 81% of U.S. adults believe that they would be more successful in creating healthy habits if they had support from someone who had been in their shoes.
This is true of our clients who are supported by independent OPTAVIA coaches, the majority of whom have undergone their own transformation on program and therefore, understand the clients what the clients are going through.
Coach support continues to be a critical component of the OPTAVIA program and a key differentiator of our unique model.
Our competitive position has never been stronger.
OPTAVIA's unique model and holistic approach incorporating coach and community to support helps people achieve their individual goals around health and wellness.
About 91.9% of our revenue is subscription-based and 100% of our orders are DTC, ships directly to consumers.
We now support over one million clients on an annual basis and the number of people we consider as part of our client community is increasing at a rapid rate.
Investments in technology and infrastructure have made us more efficient and has created a more powerful, scalable platform.
The strong consistent growth in revenue and profits that we have delivered in the third quarter as well as over the past several years is a testament to the strength of our business and continues to reinforce our confidence in the future.
In 2019, I shared the goal with our investment community of Medifast generating $1 billion in revenue by the end of 2021.
In Q3, we are pleased to announce we surpassed that full year revenue goal three months ahead of the original projection, allowing OPTAVIA to join an elite group of brands as it exceeded $1 billion in annual revenue.
According to a study by the Boston Consulting Group, there are around 290 $1 billion FMCG brands with U.S. sales and only around 20 of those brands were introduced after the year 2000.
Less than five years ago, we partnered with our coach community to introduce the lifestyle brand, OPTAVIA.
Today, OPTAVIA joins that select group of $1 billion brands.
It's a rare achievement that only a handful of brands can claim and further demonstrates the power of our unique coach model.
However, our proudest achievement lies in the human aspect.
It's the countless personal stories we hear from our OPTAVIA community each day and the two million lives we have impacted to date that underscores our mission of Lifelong Transformation, One Healthy Habit at a Time.
We remain confident in our ability to continue to drive long-term sustainable growth.
Demand for health and wellness products and services is strong with a particularly high addressable market for approaches that favor healthy habit building over dining or other weight loss approaches.
This achievement is a reflection of the strength of our independent coaches and the team that supports our community on a daily basis.
I'm extremely proud of what we've accomplished, and I look forward to achieving many more growth milestones ahead.
Lastly, I'll close my remarks with an update on our initiatives around corporate social responsibility, which is a key priority for the entire Medifast organization and closely aligned with our overall mission.
Last month, we hosted our third annual Healthy Habits For All week, a week dedicated to helping underserved communities around the globe adopt healthy habits through improved education and expanded access to resources.
The event kicked off near our headquarters in Baltimore, Maryland, where employees assembled back-to-school bags for after-school students at the Living Classrooms Foundation.
We closed the day by distributing those bags to the community and donated Chromebooks to the kids, providing critical access to technology that will allow them to adapt to changing environments throughout the school year.
We concluded the week with a virtual cooking class for our OPTAVIA community benefiting our nonprofit partner, No Kid Hungry.
The class was led by celebrity chef Fabio Viviani and our own OPTAVIA Co-Founder and independent OPTAVIA coach, Dr. Wayne Andersen.
Together, they taught attendees how to create two restaurant-inspired lean and green dishes.
We're proud of the impact we've made through Healthy Habits for All thus far, but we're just getting started.
Our community has a clear passion for making a difference and has demonstrated an impressive commitment to transforming communities around the world.
Revenue in the third quarter of 2021 increased 52.3% to $413.4 million from $271.5 million in the third quarter of 2020, reflecting continued growth in the number of active earning OPTAVIA coaches and higher per coach productivity.
We ended the quarter with over 61,000 active earning OPTAVIA coaches, another new record, up 3% sequentially compared to Q2 and an increase of 44.9% from last year's third quarter.
Average revenue per active earning OPTAVIA Coach for the third quarter was 6,773, also a new record and a 1.7% higher than the previous record set in Q2 of 2021.
Versus a year ago, revenue per active earning OPTAVIA Coach was up 7%.
Gains in productivity per active earning OPTAVIA Coach for the quarter continued to be driven by an increase in both the number of clients supported by each coach as well as an increase in average client spend.
Gross profit for the third quarter of 2021 increased 50.5% to $307.1 million compared to $204 million in the prior year period, primarily as a result of increased revenue, partially offset by increased cost of sales.
Gross profit margin was 74.3%, down 90 basis points compared to 75.2% in the third quarter of 2020.
The primary reason for the year-over-year decline in gross margin was due to the essential start promotional activity and higher product and shipping costs.
We continue to expect pressure on gross profit margin through the remainder of 2021 due to planned higher use of co-manufacturers to keep up with demand along with inflation in raw ingredients, freight and labor costs and investments in supply chain and technology to achieve our growth objectives in 2022 and thereafter.
We believe gross profit as a percentage of revenue will improve in the longer term as we develop pricing strategies, enhance and reduce cost in our distribution network and gain productivity improvements in our procurement and manufacturing processes.
SG&A expenses for the third quarter of 2021 increased 57.9% to $251.9 million compared to $159.5 million for the third quarter of 2020.
SG&A as a percentage of revenue increased 220 basis points year-over-year to 60.9% versus 58.7% in the third quarter of 2020.
The increase was primarily due to higher OPTAVIA commissions expense, increased salaries and benefits related expenses for employees, incremental consulting costs related to information technology, increased credit card fees resulting from higher sales as well as costs associated with our annual convention held at the end of July 2021.
As the OPTAVIA Convention in July 2020 was a virtual event in response to the COVID-19 pandemic, the costs were significantly lower.
Income from operations increased $10.6 million to $55.2 million from $44.6 million in the prior year period, reflecting higher gross profit, partially offset by increased SG&A expenses.
Income from operations as a percentage of revenue was 13.3% for the quarter compared to 16.4% in the same period last year.
The effective tax rate was 23.9% for the third quarter of 2021 compared to 22.8% in last year's third quarter, reflecting higher state income tax rates and limitations on deductibility of officer compensation along with the tax benefit of stock compensation.
Net income in the third quarter of 2021 was $42 million or $3.56 per diluted share based on approximately 11.8 million shares of common stock outstanding.
This compares to net income of $34.5 million or $2.91 per diluted share based on approximately 11.9 million shares of common stock outstanding in last year's third quarter.
With approximately $160 million of cash, cash equivalents and investment securities and no interest-bearing debt, our balance sheet remains strong.
We have substantial capital and liquidity to continue executing our strategy, including prioritizing growth investments focused on technology and capacity expansion.
It's also important to note that we have been steadily increasing our share buyback activity, including repurchasing $26.3 million of stock in the third quarter, bringing the total for the first nine months of 2021 to approximately $46 million.
Given our expected trajectory for revenue and earnings growth over the next several years, we believe share repurchase remains a compelling way to enhance stockholder value.
Finally, in September 2021, our Board of Directors declared a quarterly cash dividend of $16.6 million or $1.42 per share, which is payable on November 8, 2021, to stockholders of record as of September 21, 2021.
Turning to our guidance.
For the full year 2021, we expect revenue to be in the range of $1.51 billion to $1.53 billion and diluted earnings per share to be in the range of $13.27 to $13.96.
Our guidance also assumes a 23.25% to 24.25% effective tax rate.
We have been able to increase our guidance multiple times this year due to the strength of our business.
Our revised earnings guidance from our last earnings call reflects strong revenue gains as well as increased investment in key growth initiatives, focused in supply chain and technology, which support us achieving our long-term objective in 2022 and thereafter.
In closing, third quarter results were strong, and we remain confident in our business model as we move into the fourth quarter and get ready for 2022.
We continue to target 15% top line growth and 15% operating income margin in the long term, and we remain confident in our ability to deliver long-term sustainable growth at those levels.
| q3 earnings per share $3.56.
q3 revenue rose 52.3 percent to $413.4 million.
sees fy earnings per share $13.27 to $13.96.
sees fy revenue $1.51 billion to $1.53 billion.
|
Both documents are available in the Investors section of our website.
The release has further information about these adjustments and reconciliations to comparable GAAP financial measures.
Organic sales were strong of 4% in the quarter and included the impact of pricing actions implemented in the second and third quarters.
In North America Personal Care organic sales were, up 11%, driven by mid single-digit increases in both net selling price and volume.
In D&E markets personal care, organic sales were up 7% organic sales increased double digits in Argentina, Brazil, China, India, Eastern Europe and South Africa.
Our top line performance was strong despite the resurgence of COVID, which impacted growth in ASEAN, Latin American and KC Professional.
Our market positions remain strong and are improving reflecting strong innovation and excellent commercial execution in nearly all key markets.
Our share positions in North America remain solid with good sequential gains in personal care, our share performance in D&E markets remains robust, where we continue to strengthen our diaper leadership positions in key markets including China and Brazil.
We also continue to focus on cost with our teams delivering solid savings of $150 million in the quarter.
In addition, we reduced between the line spending.
Now, clearly our margins and earnings were disappointing, as higher inflation and supply chain disruptions increased our costs well beyond the expectation we established just last quarter.
I'd like to highlight the effect of three areas of volatility that are most impacting our business.
First, as we noted in July and on the basis of external forecast we had expected, commodity prices to ease in the second half of 2021 instead prices for resin and pulp increased further in the third quarter and are now expected to stabilize at a meaningfully higher level than our prior estimate.
Second, a tight US labor market and disruption in domestic and international transportation markets are having an elevated impact on our supply chain as we work to get our products to the shelf and meet consumer demand.
Third, energy cost were up dramatically in Europe, where natural gas prices have risen as high as 6 times year-ago levels.
Energy prices in North America are also up sharply, although not to the same extent.
As a result, our margins are down -- but we're down with declines only partially mitigated by the actions we've taken to-date.
We're not pleased with our results and we're taking further action to mitigate the impact of higher input and labor costs.
These steps include further pricing actions, additional initiatives to ensure we achieve our cost savings goals, and tightening discretionary spending.
At the same time, we remain committed to investing in our brands and commercial capabilities.
While we expect to see some benefit from these actions in 2021, we have further reduced our outlook for the year.
This reflects our third quarter performance and our expectations for the fourth quarter.
And while we're not ready to call our outlook for 2022, I will offer perspective on key variables that will affect our plan next year.
First, we continue to build top line momentum.
In addition, our pricing actions, brand investment and commercial program should provide further benefit in 2022.
Second, some discrete headwinds we faced this year will be behind us.
This includes the US winter storm and presumably consumer tissue destocking.
Third, some headwinds we faced this year may become more persistent, we're now expecting further inflation on several key commodities, we're also expecting continued tightness in the labor and transportation markets, which will continue to impact our global supply chain all the way to our customers.
In addition, the going forward impact of COVID on both demand and supply remains very unpredictable.
We will continue to move decisively and navigate changing market conditions.
We will also continue to invest in our brands and capabilities to maintain brand momentum.
Our strategy is working and we remain confident in our future and are confident in our ability to create long-term shareholder value.
| q3 sales rose 7 percent to $5.0 billion.
updated earnings outlook reflects significantly higher input cost inflation.
kimberly-clark - qtrly earnings negatively impacted by significant inflation & supply chain disruptions that increased costs beyond what we anticipated.
taking further action, including additional pricing and enhanced cost management, to mitigate headwinds.
|
Both documents are available on the Investors section of our website.
The release has further information about these adjustments and reconciliations to comparable GAAP financial measures.
Before we get into the Q&A, I'd like to offer some additional perspective on our performance.
Clearly our results did not turn out as we expected and we knew it was a tough comp given our strong growth and record profitability in the year ago quarter.
Now while we expected volatility this year, the external environment has proven to be even more volatile than our expectation at the beginning of the year and versus our April update.
Since we spoke in April, commodity inflation has spiked higher and our supply chain has been challenged.
These dynamics are impacting us and more broadly the industry.
We're also navigating historic levels of demand volatility in Consumer Tissue.
Last year, we worked really hard to support our consumers and our customers as demand increased at a record pace.
While we expect the category to retract this year that decline has meaningfully outpaced our expectation.
This has been driven by reduced at-home consumption due to increased mobility and destocking of both consumer pantries and retailer inventory.
Consumer Tissue has historically been very stable and we expect demand to normalize over time.
We've taken decisive action to offset the impact of raw material inflation.
We have announced pricing in key markets around the world.
Our pricing actions are on track and we expect to fully offset the effects of input cost inflation over time, as we've done in previous cycles.
We've also taken prudent steps to control and reduce discretionary spend across the business.
We expect this to be reflected in our results as we continue to implement these actions.
We view this level of input cost inflation and the COVID driven demand volatility to be discrete issue.
We will continue to take appropriate action to reduce the impact of volatility over time.
At the same time, we remain confident and committed to our approach to building brands.
Despite near-term challenges, we have plenty of bright spots in our business.
Our strategy to invest in our brands is working.
You can see this in our second quarter results broadly across Personal Care and especially in D&E markets.
Excluding North American Consumer Tissue, our organic sales were up 4%.
Personal Care organic sales were up 6% globally, driven by a 4% volume increase.
In D&E markets, personal care organic sales were up 8% with very strong market share performance, including in China, Brazil throughout Eastern Europe, India, Peru and South Africa.
We have recently captured number one diaper share positions in China and Brazil, which reflects the strength of our brand fundamentals with consumers.
Importantly, we're starting to see green shoots in KC Professional.
The business grew year-over-year and sequentially as we saw strength in international markets and positive trends in washroom products.
As more companies transition back to in-person environments, we expect KCP momentum to improve in the back half.
We're encouraged by our underlying brand performance and have made significant progress in addressing the supply challenges we faced earlier this year in our North American Personal Care business.
Looking forward to the second half, we are expecting better results across the business.
We believe the major factors impacting this quarter do not reflect the fundamental health of our business.
We remain committed to our strategy to deliver balanced and sustainable growth for the long term.
We'll continue to execute KC Strategy 2022 and we'll invest in our business for the future.
This includes investments in innovation, commercial capabilities and technology.
Importantly, I also want to emphasize that we are acutely aware of the impact of this pandemic continues to have on our employees, our consumers and our partners and the world.
We will continue to prioritize the health and safety of our people and all that interact with Kimberly Clark.
| updated earnings outlook reflects significantly higher input cost inflation and lower sales volumes.
q2 reflects continued pandemic-driven volatility.
facing significantly higher input costs and a reversal in consumer tissue volumes from record growth in year ago period.
moved decisively to take pricing actions to mitigate inflationary headwinds and continue to prudently manage costs.
sees 2021 net sales increase 1 to 4 percent.
|
With me on the call are Dr. Jeffrey Graves, our president and executive officer; Jagtar Narula, executive vice president and chief financial officer; and Andrew Johnson, executive vice president and chief legal officer.
Actual results may differ materially.
Given the clear and unacceptable humanitarian implications of Russia's recent actions, we've elected to immediately suspend all sales to Russia.
We're hopeful that the situation will be resolved quickly and peacefully and that the Ukrainian people can move forward as a free country with an elected representative government.
So with that said, let me begin our call today by wishing all of you a happy and healthy new year.
As I'm sure you'll agree, 2021 was a year filled with both optimism and challenges.
Optimism as we saw the rollout of COVID vaccines that were developed, approved, and distributed with astonishing speed, but also significant challenges as new variants emerged, which continue to impact families and businesses alike.
Looking ahead, I'm optimistic that 2022 will be a year of meaningful progress as these effects ultimately recede and we see consistent sustainable economic performance once again.
In spite of these significant challenges that we faced in 2021, it was, by all measures, a tremendous year of renewal for 3D Systems.
What began in May of 2020 as a four-phased plan to refresh, refocus, and transform our company was completed in 2021 with our transition to the final phase, investing for growth.
This 18-month journey comprised reorganization into two business units, healthcare and industrial solutions, restructuring to gain efficiencies, and divesting of noncore assets.
We completed all of these efforts while prioritizing the health of our employees and delivering on a dramatic increase in demand for our products and services.
I couldn't be prouder of our team's performance, which made 2021 one of the most successful years in our company's history.
Let me share with you a few key highlights of what our 3D Systems team accomplished over the last year.
At the outset of 2021, we as a management team decided that given the momentum that we had achieved as we exited the prior year, that in addition to comparing ourselves to 2020, which was a year severely impacted by COVID, we would also use our 2019 pre-pandemic performance as a primary benchmark for comparison.
We set this bar -- this set the bar at a much higher level, one that we felt would be an appropriate challenge for both of our businesses.
As we closed out the year, the results clearly spoke for themselves.
When adjusted for divestitures of noncore assets, our results for 2021 not only dwarfed our 2020 performance, but also significantly surpassed 2019 across all key financial metrics from top line growth to profitability and cash flow.
From a balance sheet perspective, our combination of operating performance and sale of noncore assets allowed us to add over $0.5 billion to the balance sheet by the end of our third quarter.
We then strengthened our cash position further through a convertible bond offering at an opportunistic time in the fourth quarter, details of which Jagtar will elaborate on in a few moments.
This operating performance was delivered in spite of the significant headwinds we experienced from supply chain shortages and logistics issues.
As we completed each quarter in 2021 and our trajectory became more apparent, a question that was increasingly asked was how did all this come together so quickly, particularly in the face of the challenges from COVID?
Well, the answer is very simple, we rallied our team around our singular core belief that if we focused our energies, we could be the best additive manufacturing solutions company in the world.
Everything that distracted us from our singular mission was either stopped, shut down or sold, and we focused our entire efforts on reaching our goal.
This approach resonated strongly with our employees and our customers, and its effectiveness was reflected in our financial results, strong double-digit organic growth, industry-leading profitability, and positive cash performance.
Our shareholders benefited significantly as well as our share price rose by over 100% for the year, greatly outstripping our public company and industry competitors.
By staying committed to this approach and supporting it with a sound investment strategy, I believe this singular passionate focus will continue to serve us very well in the years ahead, creating significant value for all of our stakeholders.
One less obvious, but extremely important benefit to this performance has been our ability to increasingly attract key talent to our organization.
Just as in sports, everyone wants to be part of a winning team and to be recognized for the unique value they bring to the game.
Like the market itself, talented individuals are able to distinguish between companies that offer promises of future success versus those that deliver on their promises each day.
Perhaps the most visible public examples of our organizational success in 2021 was the hiring of a new chief technology officer and a new chief scientist for additive manufacturing, both of whom came with outstanding industry experience and credentials.
However, equally exciting to me has been the influx of outstanding young engineers and other professionals who bring with them talent, unbridled enthusiasm, diversity, and exceptional creativity.
One indicator of this success has been our interim program for college students, which we started at the height of COVID in the summer of 2020.
Since inception, we've averaged over 100 applicants for every internship position we've created, and these numbers continue to rise each year.
The energy and excitement of these young professionals, who represent the future of our business, is absolutely contagious, and their impact is being felt throughout our company.
In these challenging times, never has the need to attract the best talent been more important, and I'm extremely pleased with our progress in this area.
As we completed our divestitures late in the year and continue to gain momentum in the market, we turned our attention increasingly to investing for growth.
We first prioritized our internal investments in R&D and infrastructure, firming up our new product plans and priorities.
Our efforts bore fruit in the fourth quarter with the release of the -- of three new powder bed printing systems, including our SLS 380 polymer-based system as well as our DMP Flex 200, and DMP 350 Dual metal-based printers, the latter of which is a dual-laser version of our top-selling single-laser system.
The increased productivity that our dual-laser system delivers is already expanding our market opportunities, particularly in healthcare business, where productivity benefits to medical device customers has proved compelling.
In addition to these new printing systems, in 2021, we released the largest number of new material offerings in our company's history.
These materials span all of our polymer technology platforms and address key application needs such as those requiring precision surface finishes, fire retardancy, and improved strength and toughness characteristics.
This expertise in polymeric materials technology is a key differentiator for our company in the marketplace and an important sustainable competitive advantage.
Given the exciting lineup we have ahead for all of our product lines and our rapidly growing demand outlook, we've decided to incrementally increase our R&D commitment for 2022 in order to bring these products to market at regular intervals over the next year.
We look forward to sharing highlights of our new product introductions with you in the months ahead.
In addition to our new hardware introductions, customer feedback over the last year made it very clear that software will play an increasingly important role in the move of 3D printing from the laboratory into factory production environments.
While for many years, we've had very strong software offerings to control and optimize the print process itself, production-focused customers have now clearly identified the need for a software system that can control entire fleet of printers regardless of the manufacturer as well as an array of post-print inspection and in-line automation processes spanning from raw material to finished parts.
An additional challenge is the need to be fully compatible with existing enterprise systems such as SAP, Oracle, Microsoft, and Salesforce in order to minimize factory disruption and costly upgrades as production additive workflows are introduced.
In short, in order to be successful at scale in a factory environment, our customers need a cloud-based manufacturing operating system that could optimize and manage the entire workflow, applying native AI and leveraging machine intelligence to maximize component quality and throughput.
To meet this challenge, in 2021, we significantly strengthened our software portfolio with the acquisitions of Additive Works, which brings real-time process simulation to optimize the printing of new components and production; and Oqton, a unique and versatile cloud-based manufacturing operating system that meets all of the key requirements articulated by our customers.
We believe the Oqton system will not only benefit the adoption of our company's solutions, but could dramatically expand the adoption of additive manufacturing for all companies in our industry.
For this reason, we've opened our Oqton software suite, which includes our entire legacy software portfolio as optional add-ons, to the entire additive industry as well as our collective customer base.
We've been pleased to see numerous equipment suppliers have already announced plans to partner with Oqton, and we look forward to the growth we believe it will enable.
In addition to software in 2021, we also expanded in exciting new markets through the acquisition of Volumetric and Allevi in the regenerative medicine space.
These two acquisitions leverage breakthroughs that we've made in the printing of biomaterials as a part of a multiyear development effort with United Therapeutics, the goal of which is to ultimately manufacture an unlimited supply of human organs for transplantation, beginning with the human lung to meet the needs of critically ill patients around the world.
This expansion into 3D printing technology for biologics is an important long-term growth plan for the company that I've spoken about extensively in past quarters, so I'll limit the time today.
But suffice it to say that I'll look forward to updating you on our progress in this incredible area of development in the future.
Altogether, our four acquisitions completed in 2021 supported our strategic focus by adding technologies that complement our core strength in additive manufacturing, bringing these capabilities to new and exciting markets, which we believe will continue fueling our growth and profitability well into the future.
By the end of 2021, with these acquisitions having closed, we exited with roughly $800 million in cash on our balance sheet for the future.
Before we turn to our plan for 2022, I'll take a minute to comment on the unique foundation that creates our leadership position in the additive manufacturing industry.
In short, we're a full solution provider, meaning that we bring together the industry's broadest set of metal and polymer printing technologies, hundreds of unique materials and industry-leading software platforms, using our exceptional applications expertise to deliver production-ready solutions for industrial and healthcare customers around the world.
The effectiveness of this approach has proven itself over time through the installation of hundreds of production printing systems across countless factory sites around the world.
This scale has a tremendous advantage, not only increasing our operating efficiencies, but also in providing critical ongoing customer application support as well as 24/7 service to our customers, no matter where they're located, over the life of their investments.
We're proud to say that our installed base currently prints over 700,000 parts per day, which is more than the rest of the industry combined.
This production experience is invaluable in providing the feedback needed for us to adapt to the ever-changing needs of our customers in this volatile, but exciting time.
And lastly, we continue to innovate, invest and grow our business, all while tightly managing our financial performance.
For customers moving to additive manufacturing is a very strategic decision.
Any customer investing significant capital and fleet of hardware to adopt additive manufacturing at a production scale wants to know that their partner is financially sound and has the scale, capability, and commitment to support them wherever they operate over the immediate and the long term.
Our combination of scale, expertise and financial profile is the best in the industry, inspiring the confidence of our customers as they balance their growth opportunities with the ever-present risks that we all face in this complicated global economy.
Simply put, we're increasingly the partner of choice for companies ready to make significant long-term investments in additive manufacturing.
So where do we go from here?
Well, first and foremost, we continue to run a disciplined business, balancing our short- and long-term performance and making prudent investments for the future.
Given our operating momentum, our demand outlook and our financial strength, we continue to look for investments that will enhance our customers' capability to adopt additive manufacturing, while delivering strong returns for our shareholders.
This has led us to two additional acquisitions, which we announced last week, each of which bring us a new unique technology for our industrial and healthcare businesses.
The companies are called Titan Robotics and Kumovis, and I'd like to spend a few minutes discussing each.
Titan Robotics based in Colorado is the market leader in 3D printing systems using pellet-based extrusion.
This technology addresses critical customer applications requiring large build volumes, superior performance, and improved productivity at significantly lower cost.
Through Titan, we can now provide solutions to new applications in markets such as foundries, consumer goods, service bureaus, transportation and motorsports, and aerospace and defense and general manufacturing.
Like 3D systems, Titan takes a solution-based approach with customers, working to ensure they provide the best product to address the customers' application.
They are the only manufacturer offering hybrid tool head configurations that include any combination of pellet extrusion, filament extrusion, and spindle tool heads for component finishing.
This unique capability gives customers the flexibility to choose the best production printer configuration to meet their specific application needs, with the selective use of pellet-based polymers providing a significant cost advantage over filament-based systems.
With an open system architecture, a Titan printer has available to it hundreds of standard polymer formulations, allowing customers to not only select the ideal material for their application, but also realize potential cost savings of up to 75% versus traditional filament extrusion.
With Titan's technology and our go-to-market reach as well as the combination of Titan's engineers and our applications group, we're confident we can rapidly expand into the extrusion marketplace for our industrial business.
Moving next to Kumovis.
They are a very special engineering company headquartered in Munich, Germany, with a strong focus on the development and commercialization of a unique 3D printing system for use with medical-quality PEEK materials.
PEEK, which stands for polyether ether ketone, is a high-performance polymer material that's approved for use in the human body for orthopedic applications.
It simulates the properties of human bone very effectively.
To date, PEEK has been fabricated for these applications using slow, expensive, and wasteful machining techniques, which have limited its usage in medical implants.
The Kumovis 3D printing technology is unique, allowing high-volume, cost-effective manufacture of custom medical implants.
This acquisition is a perfect fit with our current healthcare business and will allow us to expand from our historical leadership in titanium orthopedic implants to now offer customers a choice between titanium and PEEK polymeric solutions, each of which have their own specific use cases.
Integrating Kumovis into our healthcare business will drive growth in three principal areas.
The first is craniomaxillofacial reconstruction, which has been a cornerstone of 3D Systems healthcare for many years and one in which we're the dominant player for titanium solutions today.
Having the unique Kumovis printing capability will allow us to expand our virtual surgical planning portfolio to include PEEK implants in addition to surgical instrumentation and on anatomical models.
The second application area is spinal cages, where 3D Systems is a leader in the development, production and sale of both implanted titanium components and complete printing systems for in-house OEM medical production.
Kumovis expands the material options for customers in this key product line, enhancing patient experience by allowing us to provide the best solution custom-tailored for each patient.
And third, bone plates for trauma patients.
Kumovis is developing a carbon fiber-reinforced PEEK process for bone plate applications for patients suffering from severe trauma and fractures.
In addition to mass-produced custom patient solutions, Kumovis has also developed a unique self-contained clean room printing system, which opens new opportunities for 3D Systems to expand our point-of-care market segment for trauma patients, where printing capability is provided locally within the hospital or even within the surgical suite itself.
These applications offer perfect complements to the point-of-care work we're doing today with large medical institutions such as the VA hospital system.
We believe the point-of-care printing for customer patient solutions will be an increasingly exciting market in the years ahead and one for which we're a clear leader.
When taken in total, we believe the Kumovis market opportunity is measured in hundreds of millions of dollars, and the synergies with our current offerings and infrastructure are outstanding.
Given the FDA approvals that are already in place for PEEK materials in human applications, we expect regulatory clearance for printed PEEK components to be granted later this year and that this technology will contribute in a meaning way to our healthcare business in the years to follow.
So in summary, with our tremendous progress over the last 18 months, our continued strong momentum, our breadth of technology combined with our clear application leadership, and the benefits of scale as one of the largest pure-play additive manufacturing companies, we entered 2022 with a great deal of optimism.
This optimism is not only for 3D systems, but for the additive manufacturing industry as a whole.
As new production opportunities open each day, we firmly believe that additive manufacturing adoption and production settings will continue to grow at an exciting pace, and we're confident that we will help lead this transformation.
Our value proposition is simple.
We offer the strongest and most complete portfolio of additive manufacturing technologies brought together with the most knowledgeable and creative engineering teams to solve the most valuable application needs of our customers.
We do so by combining a belief in financial discipline with an overlay of strategic perspective to guide our continued investments for the future.
As we look forward, we see a growing industry and a tremendous potential to serve our customers.
For us, 2022 will be a year of exciting growth and investment as we continue to strengthen the company for the future.
Our investments will continue as they have over the last year, including adding industry-specific application expertise, back-office infrastructure, and this is important, the foundational technologies that enable the value we bring to our customers.
Specifically, we'd expect that over the next 18 months, we will refresh our entire lineup of metal and polymer hardware platforms while continuing to release record numbers of new materials and improvements to our software products offered through Oqton.
In partnership with United Therapeutics, we will make substantive progress in our regenerative medicine efforts, creating what we believe will be significant value in the years ahead.
We recognize that bureaucracy is an impediment to growth.
So we're committed to remain a lean and nimble organization that challenges itself to execute flawlessly, introducing new products on an almost continuous basis while reducing manufacturing costs and maintaining industry-leading quality.
Growing adoption of our technology into customer production applications will drive high-margin, post-install recurring revenue streams via consumable materials, software and services.
In the coming years, we're confident that this focused approach and simple business model will result in consistent year over year double-digit organic growth with expanding gross margins, our goal of which is to exceed 50% over time.
With 3D systems at the forefront and driving adoption of additive manufacturing, we'll continue to transform existing industries within healthcare and industrial markets as well as creating entirely new markets such as regenerative medicine.
As Jeff said, 2021 was a tremendous year.
Our teams worked extremely hard and delivered outstanding results, which I'm pleased to share with you today.
I'll begin the discussion with full year 2021 numbers, starting with revenue.
Revenue for 2021 was $615.6 million, an increase of 10.5% compared to the prior year.
This increase occurred despite the divestiture of our portfolio of noncore businesses.
When adjusted for those divestitures, 2021 revenue increased 31.8% as compared to 2020, and versus pre-pandemic 2019, revenue increased 16.9%.
This impressive performance against both 2020 and 2019 validates the transformation efforts we have guided the company through and upon which our team has executed over the past several quarters.
Our strategy of providing additive manufacturing solutions for industrial and healthcare customers, utilizing a broad portfolio of hardware, materials and software solutions, combined with applications expertise, is delivering consistent, strong double-digit revenue growth.
Gross profit margin for 2021 was 42.8%, compared to 40.1% in the prior year.
Non-GAAP gross profit margin was 43%, compared to 42.6% in the prior year.
Gross profit margin increased primarily as a result of prior year nonrecurring write-downs related to equipment and inventory.
Operating expenses for 2021 on a GAAP basis decreased 13.3% to $296.8 million compared to the prior year.
On a non-GAAP basis, operating expenses were $214.7 million, a 9.4% decrease from the prior year.
The lower non-GAAP operating expenses are primarily a result of restructuring efforts done in late 2020 and businesses divested as part of the company's strategic plan.
We had GAAP earnings per share of $2.55 for 2021, compared to a GAAP loss per share of $1.27 in 2020.
The increase was primarily due to the gains recognized on businesses divested during 2021.
Our non-GAAP earnings per share for 2021 was $0.45, compared to non-GAAP loss per share of $0.11 in 2020.
This increase was primarily due to our higher revenue combined with the lower operating expenses talked about earlier.
Now we'll turn to fourth quarter results.
For the fourth quarter, we generated revenue of $150.9 million, a decrease of 12.6% compared to the fourth quarter of 2020.
The decrease is a result of the aforementioned divestitures.
When adjusted for divestitures, we saw strong double-digit growth of 13.1% versus Q4 2020, a 10.4% increase over Q3 2021, and impressively, a 21.9% increase versus pre-pandemic Q4 2019.
We are seeing great demand in both healthcare and industrial segments that are driving this consistent growth in our core business, which I'll speak to in more detail shortly.
In the fourth quarter, we had GAAP loss per share of $0.05, compared to GAAP loss per share of $0.16 in the fourth quarter of 2020.
Non-GAAP earnings per share was $0.09, flat to non-GAAP earnings per share of $0.09 in the fourth quarter of 2020.
As I mentioned earlier, our revenue growth is being driven by strong demand in both healthcare and industrial segments.
On a full year basis, adjusted for divestitures, revenue in 2021 for healthcare increased 40.1% and industrial increased by 24.4% as compared to 2020.
The rebound in Industrial began in Q4 of 2020 and has continued through 2021.
Industrial revenue in the fourth quarter 2021 outpaced Q4 2020 by 22.2% and Q3 2021 by 12.4% after adjusting for divestitures.
In fact, this marks the fourth consecutive quarter of year-over-year organic growth in the industrial segment.
This consistent growth pattern is a result of the strategic investments we have made such as adding crucial application expertise in key industrial subsegments like aerospace and transportation as well as our focus on materials development to provide customer solutions to complex problems.
And perhaps most importantly, we continue to invest in our software platform, which not only enables customers to move from design to successful build faster than ever, but also allows them to literally run their entire manufacturing process with one integrated cloud-based software solution.
This will be a key driver in empowering customers to make the transition from traditional to additive manufacturing at an ever-increasing pace.
And our investment in Titan Robotics, with their extrusion-based technology, opens up even more opportunities for our industrial business to grow as we enter new markets.
Healthcare growth was broad-based in 2021 from dental to personalized healthcare and point-of-care services, with dental enjoying a large tailwind from the sale of materials for aligners, crowns, and dentures.
These subsegments are heavily influenced by patient access to dental and medical offices.
2021 ended with a substantial wave of omicron cases and a similar pattern to the original COVID wave.
Patients were either unable to get appointments or offices were understaffed due to infections, resulting in a reduction in short-term demand for certain elective healthcare procedures during Q4.
As such, we expect material sales to moderate early in 2022 as existing inventory, originally meant for Q4, is consumed during the first half.
But demand should remain strong for Healthcare as the backlog of appointments are filled throughout the year.
In addition, our investment in Kumovis opens up new markets for us, medical devices.
We have a leadership position in this area and are now able to satisfy customer application requests for parts and hardware that require medical-grade polymers like PEEK.
Now we turn to gross profit margin.
GAAP gross profit margin was 43.9% in the fourth quarter 2021, bringing the full year GAAP gross profit margin to 42.8%, as compared to 40.1% for the full year 2020.
Non-GAAP gross profit margin in the fourth quarter was 44.1%, bringing the full year non-GAAP gross profit margin to 43%, compared to 42.6% for the full year 2020.
Gross profit margin and non-GAAP gross profit margin increased in the fourth quarter, primarily as a result of better absorption of supply chain overhead resulting from higher production volumes combined with strong inventory management, resulting in reduced obsolescence.
GAAP operating expenses decreased 2.3% to $70.1 million in the fourth quarter of 2021 compared to the same period a year ago.
On a non-GAAP basis, operating expenses were $54.3 million, a 6.4% decrease from the same period a year ago, driven primarily by lower SG&A expenses due to restructuring efforts and divestitures.
GAAP operating expenses for the full year 2021 decreased 13.3% to $296.8 million compared to the prior year, primarily as a result of a goodwill impairment charge of $48.3 million and cost optimization charges of $20.1 million that both occurred in 2020.
On a non-GAAP basis, operating expenses were $214.7 million in 2021, a 9.4% decrease from the prior year.
The lower non-GAAP operating expenses are primarily a result of restructuring efforts done in late 2020 and businesses divested as part of the company's strategic plan.
Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $74.1 million for full year 2021 or 12% of revenue, compared to $28.7 million for full year 2020 or 5.2% of revenue.
The year-over-year improvement was primarily due to higher revenue in spite of divestitures and lower operating expenses as a result of cost optimization actions and divested businesses.
Now let's turn to the balance sheet.
I will begin by noting that we issued a $460 million five-year convertible bond in the fourth quarter.
We decided to issue this bond after considering the growth potential of our industry and business and the robust investment opportunities that we see going forward.
The marketing of our bond met with a very healthy demand, and we were able to issue our bond at a 0% coupon, providing the company with a significant arsenal for investment with very low carrying costs.
After completing this bond offering and combined with our previous activities of divesting noncore assets, making strategic organic investments and generating $48.1 million of cash from operations, we ended the year with $789.7 million of cash on hand, an increase of $705.3 million from the beginning of 2021.
We believe we are good stewards of investor capital as we manage our cash and evaluate investment options that will drive future growth and profitability.
We were excited to have an early opportunity to invest some of our cash as we expand our hardware technology to include two extrusion-based platforms through the acquisitions of Titan Robotics and Kumovis.
The acquisitions are expected to close in the second quarter.
We are very excited about these investments.
Both of these acquisitions bring unique capabilities and are well positioned for the industrial and healthcare applications that they intend to serve.
We expect that these acquisitions will add a point or more of organic growth and be accretive to earnings in 2023.
Going forward, we believe cash from operations, along with a portion of cash on hand, will fund organic growth opportunities.
And we will continue to explore a robust M&A pipeline to support our strategy of driving recurring revenue growth and greater adoption of additive manufacturing in both the industrial and healthcare segments.
I want to reiterate my view that our revenue growth, strong adjusted EBITDA, cash generation, and cash available for investment, sets us apart from others in our industry.
Beginning last year, we provided guidance on full year non-GAAP gross profit margins.
This year, we are expanding our guidance to include revenue and non-GAAP operating expenses.
We believe these are helpful data points for investors to evaluate our company.
For full year 2022, we expect revenue to be within a range of $570 million and $630 million, non-GAAP gross margins to be between 40 and 44%, and non-GAAP operating expenses to be between 225 million and $250 million.
Our revenue guidance reflects our expectation of an expanding additive manufacturing opportunity that will drive demand and, as a result, our continued revenue growth adjusted for divestitures.
At the same time, we see demand continuing to expand not just in 2022, but in future years as well.
As a result, our operating expense guidance includes our commitment to invest organically in the technology behind our market-leading hardware, materials and software platforms as well as investing in the right talent to continue the successful execution of our strategy.
We believe these investments will position the company to continue to lead the additive manufacturing industry with robust market-leading solutions.
Our guidance does not include the potential for significant additional macroeconomic events that could negatively impact our business such as COVID-19, geopolitical events or other factors that could further impact either demand or disrupt our supply chain.
It will be held in Detroit on May 16 prior to the opening of the RAPID + TCT trade show, a leading additive manufacturing conference.
This will be an in-person event, and we are excited to give attendees more details about our strategic vision, including our plans for new products, services and exciting new applications.
Invitations will be coming soon.
We hope to see you there.
With that, we will open it up to questions.
| q4 non-gaap earnings per share $0.09.
q4 gaap loss per share $0.05.
q4 revenue fell 12.6 percent to $150.9 million.
expects full-year 2022 revenue to be within a range of $570 million and $630 million.
expects full-year 2022 non-gaap gross margins to be between 40% to 44%.
|
I am pleased to report the results for the first quarter of 2021.
Our performance shows the increased demand for our properties.
We continued our record of strong core operations and FFO growth, with an 8.1% growth in normalized FFO per share in the quarter.
New customer growth in both our RV and MH business contributed to the positive results in the quarter.
Our new home sales grew by 24%, contributing to the high quality of occupancy at our MH communities.
We ended the quarter with Core Portfolio occupancy of 95.4%.
Home sale leads from websites increased by 37% in the quarter.
Within our RV platform, we were successful in offsetting some of the loss in seasonal business with significant growth in transient business for the quarter.
We ended the quarter with a 15% increase in transient revenue.
Our subscription-based Thousand Trails Camping Pass showed strength this quarter.
Over 5,000 new members purchased the camp pass, which was an increase of 64% over the first quarter of 2020.
In the quarter, we saw an increased demand for upgrades in the Thousand Trail system.
Our members we're looking for expanded access to our portfolio and we saw an increase of $5 million in sales.
We now have 117,000 members with access to the Thousand Trails footprint.
We are approaching our summer RV season and encouraged by the reservation pace and the feedback we have received from our customers.
We recently completed a customer survey and the results support our view that our customers are looking forward to spending time outdoors and at our properties.
The survey results show that 98% of respondents who were new to camping last year, plan to camp again this year.
The respondents indicated that they chose to camp because it felt like a safe choice and they were able to safely travel with their family and friends.
The survey indicate the plan for increased camping adventures with 65% of those responding indicating an intention to more this year.
The survey also showed that 70% of those responding do not plan to travel by plane this year.
In 2020, to help support the safety of our guests and members, we launched a new online check-in option for our RV guests.
Since launch, over 160,000 guests completed the online checking process, allowing them to get to their site more quickly and with less direct interaction.
In addition, we provided our guests an added way to communicate with our onsite teams during their visit by launching a text message program to reduce the number of in-person interaction.
Our guests reported high satisfaction levels based on the experience provided by our teams at our properties.
Based on the first quarter survey results, guests responded to customer experienced questions with a rating of 4.5 out of 5.
We continue to protect and enhance the environments where we live, work and play, and encourage our residents, members and guests to do the same.
Our annual sustainability report will provide updates on our partnerships with conservation focused organizations.
We have increased our efforts through partnerships with leading organizations focused on water conservation, supporting the reforestation movement and ocean conservation.
Our team members did a wonderful job ensuring the safety and well-being of our snowbird residents and guests.
Our COVID response team has been instrumental in arranging 39 vaccination events at our properties that supplied vaccinations for approximately 8,700 individuals.
Our operating team will now turn their attention toward the summer season properties and will focus on delivering excellent customer service to our residents, members and guests as they explore our properties this summer.
I will provide an overview of our first quarter results and walk through our guidance for second quarter and full year 2021.
I will also discuss our balance sheet before the operator opens the call for Q&A.
For the first quarter, we reported $0.64 normalized FFO per share.
The outperformance to guidance in the quarter resulted from better-than-expected transient performance, membership upgrades, and expense savings.
In addition, our guidance did not assume the net contribution from our southern marinas portfolio acquisition.
Core MH rent growth of 4.7% includes 4.1% rate growth and approximately 60 basis points related to occupancy gains.
Core RV and marina rental income from annuals was in line with expectations for the quarter.
Annual RV rental income represents 90% of the combined RV and marina rental income from annuals, and has increased 3.5% with 3.4% from rate.
Within the core marina portfolio, marina rent from annuals represents approximately 99% of total marina rental income.
Core RV and marina rental income from seasonal and transient customers outperformed our expectations.
Included with our guidance assumptions composed in January, we estimated a $10 million decline from combined seasonal and transient revenues compared to first quarter 2020.
The actual decline was approximately $6 million.
The main factors driving this favorable result were increased customer confidence in travel, given declining COVID case counts and increased vaccine availability, as well as the cold weather pattern in February that increased customer demand for stays in warmer climates.
Transient revenues represented approximately two thirds of the combined outperformance.
First quarter membership subscriptions as well as the net contribution from upgrade sales outperformed our expectations.
The main contributor to outperformance was strong demand for our upgrade products.
Upgrade sales volume increased by 640 units compared to first quarter 2020.
The price of upgrade sold increased approximately 10% compared to last year.
In addition to strong demand for upgrades, our camping pass sales volume increased more than 60% during the quarter.
First quarter core property operating maintenance and real estate tax expenses increased 2.3% compared to prior year.
Utility expense payroll, real estate taxes and repairs and maintenance combined represent more than 80% of our core expenses in the quarter, and the average increase across these categories was 2.3%.
In summary, first quarter core property operating revenues increased 2.8% and core NOI before property management increased 1.9%.
Property operating income from the non-core portfolio, which includes assets acquired in 2020 and during the first quarter 2021, was $3.3 million.
Overall, the acquisition properties performed in line with expectations.
Property management and corporate G&A were $25.9 million, flat to first quarter 2020.
A key contributor to the year-over-year comparison is lower travel expenses in 2021.
Other income and expenses were approximately $3.1 million higher than first quarter 2020, mainly from home sale profits and ancillary income.
Interest and related amortization was $26.3 million, slightly higher than prior year.
The first quarter 2021 results include the interest expense resulting from debt used to fund our acquisition activity, offset by the accretive refinancings we closed in the first and third quarters of 2020.
As I provide some context for the information we've provided, keep in mind, my remarks are intended to provide our current estimate of future results.
A significant factor in our guidance assumptions for the remainder of 2021 is the level of demand for transient stays in our RV communities.
We have developed guidance based on our current customer reservation trends.
While macro indicators suggest we're heading in a favorable direction relative to the impact of COVID on daily life, our experience over the past year has shown that circumstances can change.
We intend to continue to monitor the situation closely and we'll manage our business accordingly.
Our full-year 2021 normalized FFO guidance is $2.38 per share, at the midpoint of our range of $2.33 to $2.43.
Normalized FFO per share at the midpoint represents an estimated 9.7% growth rate compared to 2020.
Core NOI is projected to increase 5.3% at the midpoint of our range of 4.8% to 5.8%.
The core NOI growth rate increase from our prior guidance is mainly the result of our first quarter outperformance.
Our expectation for the second through fourth quarters is consistent with our budget.
As a reminder, our core portfolio changes annually.
Our guidance for the full year and second quarter includes the impact of the acquisition activity we've closed in the first quarter with no assumptions for additional acquisitions during the year.
We've also included the impact of the financing activity we've disclosed, including the recast of our unsecured credit facility, which I'll discuss after highlighting some of our second quarter guidance assumptions.
We expect second quarter normalized FFO at the midpoint of our range of approximately $103.5 million, with a per share range of $0.51 to $0.57.
We expect the second quarter to contribute 22% to 23% of full year normalized FFO.
We project a core NOI growth rate range of 6.9% to 7.5%.
Keep in mind, our second quarter 2020 transient RV business was significantly impacted by COVID-related travel restrictions and shelter-in-place orders.
MH and RV annual rate growth assumptions for the second quarter and full year remain consistent with our prior guidance.
As Marguerite mentioned, we anticipate continued strong demand across our RV platform.
We've built our transient RV revenue assumptions for the second and third quarters using factors, including current reservation pace compared to both 2020 and 2019.
Our guidance for the second quarter assumes a growth rate of approximately 14% compared to 2019.
This represents a core transient RV revenue increase of approximately $8.8 million compared to 2020.
During the quarter, we closed the previously disclosed $270 million 10-year secured loan with a fixed interest rate of 2.4%.
In April, we closed on an amended unsecured credit facility, including a $500 million revolver and a $300 million fully funded term loan.
The term loan proceeds were used to repay an acquisition loan we originated in early February.
The revolver matures in four years and we have two six-month extension options.
The term loan matures in five years and we've executed a fixed rate swap that locks in the interest rate at 1.8% for three years.
Current secured debt terms available for MH and RV assets range from 55% to 75% LTV, with rates from 2.5% to 3% for 10-year maturities.
High quality, age qualified MH assets will command best financing terms.
RV assets with a high percentage of annual occupancy have access to financing from certain life companies as well as CMBS lenders.
Life companies continue to quote competitively on longer term maturities.
We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us.
Our debt to EBITDA is 5.7 times and our interest coverage is 5.2 times.
The weighted average maturity of our outstanding secured debt is almost 13 years.
| q1 adjusted ffo per share $0.64.
|
Our second-quarter numbers for revenue, net income, and EBITDA were all quarterly records.
They clearly demonstrate our operational and commercial success in integrating the two acquisitions into Cleveland-Cliffs as well as a sustainable steel environment, supported by strong and resilient demand for our products.
This being said, our Q2 record numbers: revenue of 5 billion; net income of 795 million; and adjusted EBITDA of 1.4 billion, should not be our all-time records for long.
With the lagged and fixed pricing mechanisms we have in place with our customers, we have enough visibility to be confident that these records should be broken again here in the third quarter.
Drilling down specifically on our adjusted EBITDA, the 1.4 billion performance represented a 165% increase over the past quarter, primarily due to increased steel pricing fixed-price contract improvements, favorable product mix, and higher volumes.
Unlike most of the American steel industry, we have been relatively well shielded from inflationary forces thus far due to our self-sufficiency in raw materials, namely pellets, and HBI.
More specifically, our overall cost per ton barely moved compared to the first quarter.
In the Steelmaking segment, we sold 4.2 million net tons of steel products, which included 33% hot-rolled, 17% cold rolled, and 30% coated, with the remaining 20% consisting of stainless, electrical, plate, slab, and rail.
Due to lighter automotive demand pool related to the chip shortage, we were able to sell more tons of higher-margin material into the spot market.
Direct automotive shipments were about 1.2 million tons during the quarter, about 300,000 tons less than what we anticipated back in March.
This contributed to an inventory build of about $300 million during Q2, which, along with rising receivables due to rising prices, produced another working capital build during the second quarter.
Our free cash flow generation will certainly be further increased in the third quarter.
We expect to generate 1.4 billion in cash from our expected 1.8 billion in adjusted EBITDA for the third quarter.
These numbers result from continued rise in prices on our HRC linked contracts and spot sales, offset by higher employee-related costs and the planned outage at our largest blast furnace, Indiana Harbor No.
Furthermore, we are increasing our full-year adjusted EBITDA guidance to $5.5 billion.
Our free cash flow expectation still includes minimal federal cash tax disbursement as a result of our NOL position.
Given our immense profitability so far this year, we have been able to effectively utilize our sizable NOL balance, and we'll continue to utilize it for the rest of the year.
With these NOLs rapidly being used, we expect to become a federal cash taxpayer again at some point either later this year or early next year.
Our main priority with this free cash flow continues to be the paydown of debt.
The level of free cash flow we are expecting has created a generational opportunity to completely derisk our balance sheet, and we are taking full advantage.
In the second quarter, we made open market bond repurchases and completely redeemed the remaining 400 million of our 2025 unsecured notes, the only bond we had that was callable this year.
Our debt-to-cap ratio is currently at a nine-year low.
And we have already repaid another 455 million in debt during just the first 20 days of July.
As the year progresses and into next year, we will be rapidly and methodically reducing our debt balance, and we expect to reach net debt zero sometime next year.
With that, I'll turn it to Lourenco.
The best way to understand the new Cleveland-Cliffs is by comparing Q2 results with Q1.
Our revenue line increased by $1 billion and our cost of goods sold increased by just $100 million.
The seamless and complete integration of both AK Steel and ArcelorMittal USA into Cleveland-Cliffs has generated a new and very efficient business model, geared toward value creation.
Demand for steel is very strong across all sectors, and strong demand supports strong prices.
Q4 2020 was supposed to be the peak for steel prices, then Q1 2021, and then again in Q2.
Well, we are in Q3, and the reality is demand is relentless.
Most of our customers are experiencing record profits and learning that higher prices are good for pretty much everyone in the supply chain.
Actually, some of the customers who were complaining earlier this year about rising steel prices then turned around and decided to accept the reality.
They cut deals with Cleveland-Cliffs at that time, and are now just plain happy.
Others probably will be unhappy for a long time.
Also, as new electric arc furnace capacity continues to be brought to operation in the United States and abroad, the notion that prime scrap is precious metal will be better understood.
Iron ore fundamentals are strong as well, keeping the price of pig iron imported by the mini views elevated, and also pushing up the pricing of steel offered by foreign sources.
Russia is restricting exports of ferrous materials, including pig iron, of which they are the largest exporter of to the United States.
China continues to say that they want to cut emissions, which they can do by either cutting steel production to reduce sinter usage or using more scrap or both.
With all that, the trend on the price of prime scrap is also upward.
Separately, investments toward decarbonization will need ROI, return on investment, unless you operate in Europe, in Japan, or in Canada.
Steel companies in these countries and continent are being awarded general subsidies and free money, like the grants.
Canadian and European steel producers are so happy to advertise as they get their gifts and handouts from their respective governments.
That's another compelling reason why imports need to be held in check, as other countries take advantage of a totally uneven playing field.
With their much worse environmental performance than ours in major government subsidies that we don't get here in the United States.
China is not our only problem, our so-called friends are bad, too.
While all of our relevant Q2 figures represent company records revenue: net income, adjusted EBITDA, I would add, we haven't reached our full potential yet.
Due to previously agreed upon sales contracts, so far this year, we have sold a significant chunk of our volume well below price levels that would make us comfortable.
Our most important commercial priority through the end of this year will be to improve these contracts.
We know the real value we provide to the clients, including, but not limited to, our ability to manage complex just-in-time requirements in several different highly specified products.
We also know the unique technological capabilities that we have and the limitations of others in the steel industry that cannot match what we do, particularly at the massive scale that we do.
Simply stated, it's time to be awarded a better return on our capital invested to serve these clients, and we are well underway to achieve that.
Being the largest supplier of steel by a lot to the automotive industry, we are obviously affected by the supply chain issues they have experienced, all related to things other than steel.
Nevertheless, our Q2 results were actually better than our guidance, among other reasons, because we were able to take advantage of the reduced demand from these customers and managed to divert automotive volume to spot buyers or to other contract clients willing to pay market-level prices.
When stated like that, it sounds simple.
But reorganizing both the melt schedules and deliveries of these materials was a challenge that our team did a great job overcoming during the quarter.
Even with all the difficulties in finding available rail cars, trucks, and truck drivers during the quarter, we were still able to increase our shipment volume in comparison to Q1.
One thing that should not be holding up anything any longer is COVID-19.
Brilliant scientists have developed not one, but several truly groundbreaking vaccines that would stop the virus and its tracks and any current variants.
But we need enough people taking the vaccines.
With the safety of our workforce always a top priority.
earlier this month, we instituted a companywide vaccination bonus program that offers a cash bonus of $1,500 to each vaccinated employee if the level of vaccination of their working sites achieved 75%.
If the level of vaccination of the site achieves 85%, the cash bonus paid to each employee of the site doubles to $3,000.
Upon announcement of the program, we saw an immediate uptick in vaccination rates.
And some of the locations are already at the first threshold, with two locations already at a second threshold of 85%.
Protection from the virus is just as important as any other safety mandates we have in any of our locations, and we are willing to spend real money to ensure each of our facilities reach herd immunity.
In order to meet current market demand, our assets need to be well staffed, and well maintained.
This process involves preplanned maintenance outages, including the one taking place at Indiana Harbor later in this quarter from September 1st to October 15th.
7 is the largest blast furnace in North America, and for reference, produced 33% more hot metal per day than our two blast furnaces at Cleveland works combined.
The outage includes repair to two BOF converters in the steel shop and a partial reline in several upgrades to the blast furnace.
Some of these upgrades are related to our ongoing work toward decarbonization, such as further enhancements to our ability to use massive amounts of both HPI SP stock and natural gas as supplemental reduction at Indiana Harbor No.
Another success story of the past quarter is our Toledo Direct Reduction plant.
We reached our nominal capacity within six months of start-up.
And thus far in July, we are producing at a 2.1 million tons annualized rate, well above nameplate of 1.9 million tons per year.
Our timing could not be better.
Prime scrap is scarce.
And every day the price of scrap goes up, our cost savings from HBI becomes more significant.
On top of that, we have actually used the vast majority of our internally consumed HBI in our blast furnaces, enhancing hot metal output, and allowing us to capture additional margin on incremental steel tonnage produced and sold to clients.
Along with the productivity benefits, this action alone reduced our implied carbon emissions by 163,000 tons during the quarter.
Direct reduction and degrade pets are critical to the future evolution of a clean and environmentally friendly steel industry.
Cleveland-Cliffs sees decarbonization as part of our license to continue to exist.
As you can see in our recently published sustainability report, we are well on our way to achieving our targets through the combination of natural gas usage, HBI production and internal usage, and carbon capture.
There's a lot of talk about hydrogen as a reduction in Europe, with little recognition that we already use hydrogen in the United States through the use of natural gas.
Natural gas composition is 95% CH4, methane, and 4% C2H6, ethane.
Natural gas is used in our blast furnaces as a partial replacement for coke.
That means we emit good old H20 when we reduce our iron ore.
And CO2 ambitions are cut by more than half when compared to reduction exclusively by coke or coke plus PCI.
Also, our direct reduction plant uses 100% of natural gas as a reduction.
The total amount of natural gas, we currently use in our eight blast furnaces and in our direct reduction plant eliminates the need for 1.5 million tons of coke per year, the equivalent of two coke batteries.
And we continue to explore and increase the use of natural gas throughout the entire footprint.
Actually, our direct reduction plant was designed and built to be able to use up to 70% hydrogen.
But in order to make hydrogen a viable reduction, serious cost improvements and breakthrough technical developments are still needed.
Europe does not have abundant natural gas, other than in Russia.
So they have embraced the hydrogen route, even with the current uncertainty surrounding the economical use of hydrogen.
That might not take them anywhere as far as emissions control, but is actually a great shortcut for free money and more subsidies from government to companies.
And we all know how these things end.
Replacing blast furnaces with AIF is not a solution either.
There are technical reasons.
No major steelmaking nation runs entirely on EAFs.
When producing flat-rolled steels, EAFs need a significant amount of virgin material, like pig iron, prime scrap, DRI, HBI, and even oxygen injection just to try to mimic the blast furnace BOF route.
In reality, even here in the United States, soon to achieve 75 participation of EAFs, we may be near a peak, particularly in further investments in direct reduction are not made.
Just don't count on Cleveland-Cliffs for that.
This ship has sailed when we acquired ArceloMittal USA and AK Steel, and successfully integrated both into a single unit company named Cleveland-Cliffs.
At this point, we are very comfortable using our degrade pellets to exclusively supply our plant in Toledo our blast furnace great pellets to supply our own blast furnaces.
To wrap up, Cleveland-Cliffs is doing well, actually, very well.
As of today, our leverage is already below one-time EBITDA.
And we expect to be at net debt zero sometimes next year.
| expects third-quarter 2021 adjusted ebitda of about $1.8 billion and free cash flow generation of $1.4 billion.
|
Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance.
As such, our actual outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
We'll also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics.
This past fourth fiscal quarter was one of the most challenging in the company's 100-year history.
The destruction of oil demand induced by COVID is well documented.
And in terms of drilling activity, our rig count hit bottom in August.
Despite the challenging quarter, our strong financial position has enabled us to remain focused on our long-term strategies.
Our people are developing new commercial models and innovative drilling and digital technologies that will help to transform the customer experience and shape the future of this business.
These efforts have progressed despite this difficult environment and will serve as the foundation from which the company will build as the market continues to recover.
Our customer-centric approach is one that prioritizes providing customized solutions by employing a combination of people, processes, rigs and automation technology to deliver more value and lower risk for our customers.
This approach is distinctive in the industry, resonates well across our customer base and with further developments on the horizon will be a major driver of growth as activity levels improve.
Excluding our two idle but contracted rigs, our current US FlexRig activity has improved to 80 rigs and we expect our active rig count will exit the first quarter at approximately 90 rigs.
This is almost double the number of rigs turning to the right compared to the lowest level reached in August.
The Permian has led the industry rig count recovery and H&P has earned approximately two-thirds of the incremental work in that basin.
As we anticipated, our rig count growth has exceeded that of our peers coming off of the bottom, allowing us to recoup 4 to 5 points of market share.
We believe that the quality of our field leadership, rig crews, FlexRig fleet and digital technology solutions will continue to advance this trend.
Concurrent with the increase in near-term activity, we are also experiencing increased customer utilization of our performance-based contracts in our rig automation software, AutoSlide.
We expect adoption of both to increase and become more prevalent in the industry.
H&P's touch of a button autonomous drilling approach is designed to optimize drilling of the vertical, curve and the lateral.
These automated solutions include real-time automated geosteering, rotary and sliding execution and improved wellbore quality and placement.
The uniqueness of our automated solutions is backed by a patented economic-driven approach where the software not only makes optimal cost benefit decisions and also directs the rig to execute those decisions without the need of human intervention.
This improves reliability, enhances value and reduces risk for our customers.
Let me give an example of the H&P value proposition autonomous directional drilling provides.
When customers use AutoSlide on our FlexRig, directional drilling personnel are no longer required at the rig site.
This is possible because the directional drilling decisions are being calculated using an algorithm in our patented rig guidance system, which can accurately process through thousands of variables in seconds rather than relying on the manual calculations of the traditional directional driller.
The software-enabled FlexRig allows the curve to be landed more accurately and reliably and the lateral to be placed more precisely in the shale, which results in lower drilling costs, improved production, reduced long-term maintenance costs for our customers and lower environmental impact.
Commercial models that reward performance coupled with rig automation software that enhances value are being adopted across the spectrum of the industry.
Mark will give additional details on performance contracts, but we have been successful in expanding our customer base with a wide range of E&Ps from super majors to small private companies.
Today, H&P owns more than a third of the estimated 635 super-spec rigs in the US market.
With many rig count forecasts ranging from 450 to 550 rigs over the next couple of years, we see significant further super-spec FlexRig market share growth and opportunities for improved pricing.
H&P continues to invest in new and diversified technologies for the long-term sustainability of the company.
Recently, we have made investments in and are supporting the efforts of a few companies driving the evolution of the geothermal industry.
The core of this evolution is a transition from geographically concentrated and naturally occurring hydrothermal resources to enhanced geothermal systems and closed loop systems.
John, could I ask you to pause for just a moment?
I think I'm understanding from my team that we're having a difficulty with their web link not working.
So we're going to pause for just one moment.
Get that online and continue.
Bear with us folks.
It is now my pleasure to turn today's program over to Mark Smith.
Again, our sincere apologies to all those on the phone -- on the telephone.
So, again, we do apologize.
We appreciate your patience and your interest in H&P.
In order to cure the problem, we will be posting the audio recording from this conference call within two hours from the conclusion.
We will be restarting from the top.
We will conduct a full one-hour conference call.
We hope you are available to stick with us and join us as we give you our fourth quarter fiscal '20 results and look ahead to fiscal 2021.
Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance.
As such, our outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
We'll also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics.
This is yet another example that this fourth fiscal quarter is unprecedented in many ways and really challenging during the company's 100-year history.
The destruction of oil demand induced by COVID is well documented.
And in terms of drilling activity, our rig count hit bottom in August.
Despite the challenging quarter, our strong financial position has enabled us to remain focused on our long-term strategies.
Our people are developing new commercial models and innovative drilling and digital technologies that we believe will help transform the customer experience and shape the future of this business.
These efforts have progressed despite this difficult environment and will serve as the foundation from which the company will build as the market continues to recover.
Our customer-centric approach is one that prioritizes providing customized solutions by employing a combination of people, processes, rigs and automation technology to deliver more value and lower risk for our customers.
This approach is distinctive in the industry, it resonates well across our customer base and with further developments on the horizon will be a major driver of growth as activity levels improve.
Excluding our two idle but contracted rigs, our current US FlexRig activity has improved to 80 rigs and we expect our active rig count will exit the first quarter at approximately 90 rigs.
This is almost double the number of rigs turning to the right compared to the lowest level reached in August.
The Permian has led the industry rig count recovery and H&P has earned approximately two-thirds of the incremental work in that basin.
As we anticipated, our rig count growth has exceeded that of our peers coming off of the bottom, allowing us to recoup 4 to 5 points of market share.
We believe that the quality of our field leadership, our rig crews, our FlexRig fleet and our digital solutions will continue to advance this trend.
Concurrent with this increase in near-term activity, we are also experiencing increased customer utilization of our performance-based contracts in our rig automation software, AutoSlide.
We expect adoption of both to increase and become more prevalent in the industry.
H&P's touch-of-a-button autonomous drilling approach is designed to optimize drilling in the vertical, the curve and the lateral.
These automated solutions include real-time automated geosteering, rotary and sliding execution and improved wellbore quality and placement.
The uniqueness of our automated solutions is backed by a patented economic-driven approach where the software not only makes optimal cost benefit decisions but also directs the rig to execute those decisions without the need of human intervention.
This improves reliability, enhances value and reduces risk for our customers.
Let me give an example of the H&P value proposition autonomous directional drilling provides.
When customers use AutoSlide on our FlexRig, directional drilling personnel are no longer required at the rig site.
This is possible because the directional drilling decisions are being calculated using an algorithm in our patented rig guidance system, which can accurately process through thousands of variables in seconds rather than relying on the manual calculations of the traditional directional driller.
The software-enabled FlexRig allows the curve to be landed more accurately and reliably and the lateral to be placed more precisely in the shale, which results in lower drilling costs, improved production, reduced long-term maintenance costs for our customers and lower environmental impact.
Commercial models that reward performance coupled with rig automation software that enhances value are being adopted across the spectrum of the industry.
Mark will give additional details on performance contracts, but we have been successful in expanding our customer base with a wide range of E&Ps from super majors to small private companies.
Today, H&P owns more than a third of the estimated 635 super-spec rigs in the US market.
With many rig count forecasts ranging from 450 to 550 rigs over the next couple of years, we see significant further super-spec FlexRig market share growth and opportunities for improved pricing.
H&P continues to invest in new and diversified technologies for the long-term sustainability of the company.
Recently, we have made investments in and are supporting the efforts of a few companies driving the evolution of the geothermal industry.
The core of this evolution is a transition from geographically concentrated and naturally occurring hydrothermal resources to enhance geothermal systems and closed loop systems.
The technologies and techniques these companies are exploring are expected to improve project economics, leading to the ultimate scalability of geothermal as a source of energy.
The growth potential of unconventional geothermal energy applications represents a new opportunity for H&P to increase the utilization of its installed FlexRig asset base along with our digital technology solutions.
Our leadership position as a drilling solutions provider is a natural fit for the evolving geothermal market.
This is driven in part from our technology offerings that have already been utilized by some geothermal companies in Europe and are a proven success in unconventional oil and gas drilling in the US and internationally.
Modern geothermal drilling applications require the benefits that autonomous drilling and digital technology delivers for wellbore quality and placement.
We are encouraged by the successes, but we are also cognizant that a substantial amount of uncertainty remains in the market surrounding the impact of the pandemic.
It may take several quarters to understand what the new normal activity environment will look like.
That said, I continue to be impressed with our team's ability to manage through this difficult time and particularly the diligence they have demonstrated in keeping our employees and customers health and safety top of mind.
Today, I will review our fiscal fourth quarter and full year 2020 operating results, provide guidance for the first quarter and full fiscal year 2021 as appropriate and comment on our financial position.
Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2020.
The company generated quarterly revenues of $208 million versus $317 million in the previous quarter.
The quarterly decrease in revenue is due to further declines in our rig count caused by the energy demand destruction associated with the COVID-19 pandemic as well as lower early termination revenues compared to the prior quarter.
Correspondingly, total direct operating costs incurred were $164 million for the fourth quarter versus $207 million for the previous quarter.
General and administrative expenses totaled $33 million for the fourth quarter, lower than our previous guidance.
During the fourth quarter, we closed on the sale of a portion of our real estate investment portfolio comprised of six industrial developments in Tulsa, Oklahoma for $40.7 million, which had an aggregate net book value of $13.5 million.
The resulting gain of $27.2 million is reported as the sale of assets on our consolidated operations.
Our Q4 effective tax rate was approximately 28% as we recognized an Oklahoma tax benefit related to the sale of our industrial properties in the state net operating losses.
To summarize this quarter's results, H&P incurred a loss of $0.55 per diluted share versus a loss to $0.43 in the previous quarter.
Absent these select items, adjusted diluted loss per share of $0.74 in the fourth fiscal quarter versus an adjusted $0.34 loss during the third fiscal quarter.
For fiscal 2020 as a whole, we incurred a loss of $4.60 per diluted share.
This was driven largely by the $563 million non-cash impairment announced in our second quarter as well as other select items, including restructuring charges and mark-to-market losses on our legacy securities portfolio.
Collectively, these select items constituted a loss of $3.74 per diluted share.
And absent these items, fiscal 2020 adjusted losses were $0.86 per diluted share.
Capital expenditures for the full fiscal 2020 totaled $141 million, below our previous guidance due to the combination of ongoing capital efficiency efforts as well as the timing of a small amount of supply chain spending that crossed into fiscal 2021.
This annual total is a reduction of $145 million from our initial fiscal 2020 budget and a reduction of over $315 million from fiscal 2019 capex.
H&P generated $539 million in operating cash flow during fiscal 2020, representing a decrease of approximately $317 million.
I will note that our cash and short-term investments balance increased by $176 million sequentially year-over-year, which I will discuss more in detail later in my remarks.
Turning now to our three segments, beginning with the North America Solutions segment.
We averaged 65 contracted rigs during the fourth quarter, approximately 15 of which were idle but contracted on some form of cold or warm stack rate.
I will refer to idle but contracted rigs with the acronym IBC hereafter.
This contracted average was down from an average of 89 rigs in Q3.
During the fourth quarter, we bottomed to 62 rigs contracted with about 16 IBC rigs resulting in 46 active rigs at the low activity point.
We exited the fourth quarter with 69 contracted rigs, of which 11 were IBC.
The exit count was slightly above our guidance expectations as demand for rigs found footing from the bottom late in the quarter.
Revenues were sequentially lower by $105 million due to the aforementioned activity decline as well as the IBC count.
Included in this quarter's revenues were $12 million of early termination revenue.
North America Solutions operating expenses decreased $43 million sequentially in the fourth quarter, primarily due to reduced activity and to the proactive operating initiatives at the field level that I discussed during the third quarter call.
That said, the sustained decline in rig activity during the quarter did cause per day expenses to increase on a per revenue day basis.
Expenses absorbed in the field include overhead for our field management and maintenance organizations, ongoing stacking costs, consumption of on-hand average cost inventory as we exhaust penny stock and limited reactivation costs for rigs returning to work.
Further, we had higher-than-expected self-insurance expenses, including numerous former employees on continued health and welfare benefits that will mostly expire toward the end of the first quarter fiscal 2021.
One comment to put these self-insurance expenses in context.
Our prior period self-insurance claims were generated with higher average rig activity, but some of these incurred but not reported claims are just now being developed when current operations are much smaller.
While we see both positive and negative volatility in our claims expenses as we true up the estimated liability each quarter, the percentage impact is more pronounced when our operations are smaller as they are today.
Now looking ahead to the first quarter of fiscal 2021 for North America Solutions.
As I mentioned earlier, we exited Q4 fiscal 2020 with more rigs contracted and running than expected.
The activity level has continued to grow as operators add rigs with oil hovering around $40 per barrel.
As of today's call, we have 82 rigs contracted with only two IBC rigs remaining.
The market remains uncertain with macro COVID demand pressures, political uncertainties and forward crude supply balances.
In all but two situations, operators with idle but contracted rigs have put them back to work and we are winning select opportunities for incremental rigs.
We expect to end the first fiscal quarter of 2021 with between 88 and 93 contracted rigs and we also expect the remaining two IBC rigs to return to work in late December or early January.
While the decrease in IBC rigs will not increase our contracted rig count, it will be accretive to activity and margins.
Almost all of these IBC rigs are on term contracts at rates entered into during the previous super-spec upgrade cycle.
As John discussed, our performance contracts are gaining customer acceptance.
And of the approximately 21 rigs we have added or expecting to add to the active H&P rig count, after September 30 through December 31, just over 30% are working under performance contracts.
As we mentioned in the May and July calls, our focus on solution-based performance contracts has driven us to evolve the nomenclature we used to present our business with investors.
We began this transition as we shifted our segment guidance to focus on the segment margins driven by rig and technology solutions rather than individual rig rates.
In the North America Solutions segment, we expect gross margins to range between $40 million to $50 million with approximately $1 million of that coming from early termination revenue.
This margin guidance is greater than the prior quarter in total.
And further, it is not impacted in any significant way by early termination revenues.
However, Q1 margins will be temporarily adversely impacted by reactivation costs as we rapidly add rigs from the recent bottom and recommissioning costs for a couple of walking rig conversions.
Our current revenue backlog from our North America Solutions fleet is roughly $554 million for rigs under term contract, but importantly is not inclusive of any potential performance bonuses.
This amount does not include the aforementioned $1 million of early terminations expected in Q1.
Regarding our International Solutions segment, International Solutions business activity declined from 11 active rigs during the third fiscal quarter to five active rigs at fiscal year-end.
This decrease is the result of rig releases in Argentina and Abu Dhabi, due in large part to the ongoing COVID-19 pandemic.
As we look toward the first fiscal quarter of 2021 for international, our activity in Bahrain is holding steady with the three rigs working, while our two rigs in Abu Dhabi and our entire Argentina and Colombia fleets are now idle.
In Argentina, we continue to work within an arduous regulatory environment, which has prevented us from reducing labor costs to levels that are more in proportion with reactivity potential.
This will lead us to incur a legacy cost structure into at least the first quarter and will cause international margins to be negative.
In the first quarter, we expect to have a loss of between $5 million to $7 million, apart from any foreign exchange impacts.
We still have a pending rig deployment in Colombia, but it has been delayed as our customer is still waiting on all the required regulatory approvals to begin work.
On the marketing front, our international business development team is seeing some bidding tendering activity in Argentina, Colombia, the Middle East and certain other markets.
At this juncture, these prospects are early in the process and are not included in our forward outlook.
Finally, turning to our Offshore Gulf of Mexico segment.
We have four of our eight offshore platform rigs contracted.
Offshore generated a gross margin of $4.6 million during the quarter, below our estimates, in part due to unfavorable adjustments to self-insurance reserves related to a prior period claim.
The previously mentioned gross margin also includes approximately $1 million of contribution from management contract rigs.
As we look toward the first quarter of fiscal 2021 for the Offshore segment, we expect that offshore rigs will generate between $5 million to $7 million of operating gross margin with offshore management contracts contributing an additional $1 million to $2 million.
Now, let me look forward to the first fiscal quarter and full fiscal year 2021 for certain consolidated and corporate items.
As we discussed in our May and July calls, we implemented numerous rightsizing efforts by reducing capital expenditures; reducing North America Solutions overhead; rightsizing selling, general and administrative overhead; and taking similar actions in the International segment where possible.
As mentioned, we are continuing to assess our international offices to appropriately calibrate for activity.
In all areas, we will continue to identify cost reduction opportunities and drive efficiency in our daily work activities.
Capital expenditures for the full fiscal 2021 year are expected to range between $85 million to $105 million, which is a reduction of approximately 33% to fiscal 2020 capex.
This capital outlay is comprised of three approximately equal buckets: First, maintenance capex to support our active rig fleet.
Given current activity levels, we have sufficient capacity to minimize new maintenance capex expenditures for the foreseeable future.
As you may recall, in fiscal 2019, we had bulk purchases in capex to scale up rotating componentry [Indecipherable] 200 plus working super-spec FlexRig count.
In addition, we continue to harvest components from previously impaired and decommissioned rigs to conserve capital.
As such, we expect fiscal 2020 year maintenance capex will range between $250,000 to $400,000 per active rig in the North America Solutions segment, well below our prior year guidance of $750,000 to $1 million.
Second, skidding to walking capability conversions.
For the customer with a want or need for walking rigs, we will invest to convert certain rigs from skidding to walking pad capability in exchange for a term contract as opposed to competitors walking rig capacity is fully utilized.
We have select customers who prefer certain rig design elements and are willing to enter into a contract with at least a year of term to enable that investment.
We estimate walking conversions to approximately $6 million to $7 million per rig.
Third, corporate capital investments.
The majority of this bucket is comprised of modernization for data center, data and analytics platforms and enterprise IT systems.
Our on-site data center has elements at the life cycle renewal stage and we are seizing the opportunity to move to both co-located data centers and cloud computing configurations that will be less capital intensive prospectively.
The data and analytics modernization focuses on the cloud forward approach for increased capability and scalability.
In the enterprise IT systems arena, we were implementing a new Human Capital Management system to better accommodate how we manage our diversified and dispersed employee base, including all phases of the employment cycle and employee experience.
Finally, a smaller amount of corporate capital is being allocated to office build outs as we reconfigure for new flex work arrangements with enhanced office capabilities that can facilitate smaller forward office footprints.
Depreciation for fiscal 2021 is expected to be approximately $430 million.
This is approximately $50 million less in fiscal 2020, primarily due to the second quarter impairments of non-super-spec rigs and associated capital spares.
Our general and administrative expenses for the full fiscal 2021 year are expected to be approximately $160 million.
The decrease sequentially is driven by our rightsizing efforts as discussed in the July conference call.
We believe our restructuring will enable us to achieve activity growth going forward without significant accretion of SG&A.
We are continuing our investment in research and development through the cycle as we push toward autonomous drilling.
Such innovation efforts will yield the next solution offering from our technology roadmap.
We expect R&D expenditures to be approximately $30 million in fiscal 2021.
The statutory US federal income tax rate for our fiscal 2021 year end is 21%.
In addition to the US statutory rate, we're expecting incremental state and foreign income taxes to impact our tax provision, resulting in an expected effective income tax rate range of 19% to 24%.
Based upon an estimated fiscal 2021operating results and capex, we are projecting a decrease to our deferred tax liability with no resulting material cash tax.
Now looking at our financial position.
Helmerich & Payne had cash and short-term investments of approximately $577 million at September 30, 2020 versus $492 million at June 30, 2020.
Including our revolving credit facility availability, our liquidity was in excess of $1.3 billion.
Our debt to capital at quarter end was about 13% with a positive net cash position as our cash on hand exceeds our outstanding bond.
Our debt metrics continue to be best-in-class measurement among our peer group.
As a reminder, we have no debt maturing until 2025 and our credit rating remains an investment grade.
Now, a couple of notes on working capital.
We earned cash flow from operations in the fourth quarter of approximately $93 million versus $214 million in fiscal Q3.
Our trade accounts receivable at fiscal year end was approximately $150 million with the preponderance being less than 60 days outstanding.
Our inventory balance is reduced $9 million sequentially from June 30 to $104 million at September 30 as we have leveraged consumables across the entirety of US basins and have reduced our min/max carrying targets to reflect the new activity levels.
As mentioned in the previous call, we commenced a project to optimize our accounts payable terms and negotiate additional or early payment discounts from suppliers.
These efforts continued to bear fruit during the fourth quarter.
We expect further benefits, but the impact will be relatively modest in comparison to what we have realized to-date.
The macro environment in fiscal 2020 drove capital allocation decisions, cost management measures and the rightsizing of the company to new activity levels.
These collective efforts undertaken to-date are aimed at generating free cash flow of that, when combined with the modest uses of cash on hand, will cover our capital expenditure plan, debt severance [Phonetic] cost and dividends in fiscal 2021.
Based on our budget for 2021 fiscal year, we expect to end fiscal 2021 with cash and short-term investments of approximately $450 million to $500 million.
The maintenance of our balance sheet strength and liquidity are foundational elements in our 100-year tradition of capital stewardship and they continue to be a significant differentiator in this volatile and cyclical industry.
| compname posts q4 loss per share of $0.55.
q4 loss per share $0.55.
expects its q1 of fiscal 2021 north america solutions rig count to exit at approximately 90 rigs up over 30% during quarter.
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A copy of the release can be found on our IR website at ir.
These statements are based on how we see things today and contain elements of uncertainty.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please note that we'll be using combined historical results for the second quarter defined as three months legacy IFF results and three months of legacy N&B results, and for the first half 2021 defined as six months of legacy IFF January to June, and five months of legacy N&B February to June in both the 2020 and '21 periods to allow comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig and our Executive Vice President and CFO, Rustom Jilla.
I will begin today's call by providing an overview of our performance during the first half of 2021 followed by an update on regarding our ongoing efforts to fully integrate the N&B business following the completion of the transaction in the first quarter of the year.
Rustom will then provide a detailed review of our second quarter financials highlighting segment level business performance and the market dynamics, we saw in the quarter.
Before we jump into the question-and-answer session Rustom will also conclude with an overview of our expectations for the remainder of 2021.
Now, beginning with Slide 6, I would like to review our business highlights for the first half of the year.
I'm pleased to report that IFF has delivered a strong performance in the second quarter, which is a robust acceleration viz our combined Q1 growth and through the first half of the year.
As I've said before, execution is everything and IFF has delivered strong financial results while advancing our ongoing integration efforts following the completion of the N&B merger in February.
In the first half of 2021, IFF achieved $5.6 billion in sales representing 8% growth or 5% on a currency neutral base.
For comparable purposes and to reflect the portfolio differences between our peers, I want also to highlight that both businesses performed well with legacy IFF achieving a very strong high-single digit growth rate with nearly 100 basis points of EBITDA margin expansion, and legacy N&B growing in mid-single digits.
At the same time, we continue to operate in a challenging global environment with significant headwinds in material cost and supply chain logistics.
In the first half combined EBITDA growth was a solid 6% and a combined EBITDA margin of 22.5%.
Importantly, our strong free cash flow of $533 million enables IFF to maintain significant financial flexibility, including our efforts to delever.
We remain on track to achieve our deleveraging targets of under three times by year three post transaction close and we improved our net debt to credit adjusted EBITDA leverage on 4.3 times in the first quarter to 4.2 times in the second quarter.
Finally, we are also well on track with integrating the N&B business and continue to realize synergies in line with our expectation of the transaction.
As we sharpen the IFF portfolio, we continue to progress on the divestiture of our Food Preparation business which we expect to be completed late in the third quarter or early fourth quarter.
As I mentioned last quarter, the divestiture of this non-core business will create a more efficient IFF with an enhanced ability to grow and innovate across the key business segments.
We are committed to ongoing active portfolio management and we'll continue to seek ways to increase value equation.
Stepping back to reflect on the first half of the year.
I'm very pleased with what we have been able to accomplish.
We delivered strong sales growth, which is an acceleration versus historical performance for both legacy IFF and legacy N&B in the midst of a transformational integration as well as a global pandemic.
This is a validation of our strategy, motivates our team to continue defying industry expectations as we continue to see the benefits of our expanded product offering and capabilities.
Long-term growth prospects of our business are strong and we are making investments in capacity, R&D, and Plant Technologies as well as increasing inventory levels and incurring higher logistic costs to maintain our growth momentum in the interim, specifically in the N&B business as we maximize our growth opportunities going forward.
As we look to the third quarter and second half of 2021 our objectives are clear, build on this momentum while executing on our integration plans allowing IFF to fully leverage our new capabilities and chief -- achieve our long-term expectations.
Turning to slide 7, I would like to briefly discuss the regional sales dynamics that influence our results for the first half.
Despite persisting global challenges and varied economic recoveries, we are pleased to report growth in each of our four key operating regions.
In North America, we achieved growth in all of our business segments, led by a single-digit growth in Scent, Nourish and H&B.
Similar to the first quarter, our Asian markets continue to perform well achieving a 5% increase in sales led by double-digit growth in India and a mid single-digit performance in China.
While we had anticipated that growth would have been impacted in India due to COVID in the second quarter, the business was resilient and finished higher than we expected with strong double-digit growth in Q2.
From a segment perspective and Asia's strong increases across our Nourish, Scent, and Pharma Solutions businesses all contributed to this sustained growth in this key region.
Latin America, our strongest performing region, we achieved 12% sales growth driven by double-digit performance in nearly all of IFF's business segments and underpinned by favorable currency movements.
[Indecipherable] Brazil, Mexico and South Cone, all achieved growth in the first half.
We are particularly pleased to report that our EMEA region has impressively rebounded in the second quarter up to high-single digits.
We achieved a 2% increase in sales in the first half as COVID 19 related restrictions eased.
Our Scent and Nourish business performed particularly well in Q2, both achieving double-digit growth.
Bearing [Phonetic] any newly emerging COVID 19 challenges we expect this growth to continue through the remainder of the year as global vaccination rates increase and Western and Central Europe continue to recover.
Now turning to Slide 8.
I will provide a more detailed look at our sales performance across IFF's key business segments through the first half of 2021, particularly those that significantly contributed to our overall 8% sales growth, or 5% growth on a currency neutral basis that I mentioned earlier.
We are pleased to report solid growth across all of our four core divisions, Nourish, Health & Bioscience, Scent and Pharma Solutions.
Nourish achieved currency-neutral growth of 6% driven by a strong performance in flavors ingredients and Food design.
Similar to the first quarter, Scent remains our largest sales driver on a year-to-date basis, achieving 8% of currency-neutral growth led by a strong performance in Fine Fragrance and Consumer Fragrance.
Our Health & Bioscience business has return to solid growth in the second quarter following a challenging first quarter where sales were affected by COVID 19 pressures in microbial control and grain processing, While microbial control continues to be challenged for the first half, we saw growth in grain processing, which showed a recovery in the second quarter as well as home and personal care cultures and food enzymes and animal nutrition.
Finally, our Pharma Solutions business also delivered growth through the first half of 2021 against a strong year ago comparison.
On slide 9, I would like to discuss the underlying dynamics influencing each of our four segments in the first half.
As I mentioned, we saw broad-based growth in all Nourish categories led by robust performance in Flavors.
Despite strong volume and continued cost discipline, higher raw material costs continue to affect margin when compared to the first half of 2020.
However, on a year-over-year basis, EBITDA grew about 7%.
Our Health and Biosciences businesses delivered growth in the first half led by strong performance in Home and Personal Care and grain processing.
This growth offsets COVID 19 related pressures in microbial control and a strong year ago comparable in Health.
Higher logistic costs related to capacity and strong demand impacted our margin.
Nonetheless, we are encouraged by this performance and expect continued improvement as we move into Q3.
Our leading growth and profit -- profitability driver Scent achieved an operating EBITDA margin increase of 170 basis points and absolute EBITDA grew nearly 20%.
This was driven by a strong rebound in Fine Fragrances as retail channels continue to recover, continued strength in Consumer Fragrances and double-digit growth in Cosmetic Actives.
Scent also delivered strong profitability led by higher volumes, favorable mix and higher productivity, which we expect to continue through the remainder of the year.
Lastly, in Pharma Solutions, the segment's 1% growth was driven primarily by improvements in industrials, so our margin was significantly challenged due to higher energy costs, lower manufacturing utilization and the result in the weather related raw material shortages.
Now on slide 10 and 11, I would like to discuss our continued synergy progress in connection with our merger with N&B.
From a revenue synergy perspective, we remain on track to meet our $20 million revenue synergy target this year.
Coupled with continued demand and positive feedback from our customers, we are also confident in our ability to meet our 2024 run rate revenue synergy target of approximately $400 million.
I would like to spend a moment highlighting how we realize this significant opportunity and share additional context on some of our recent wins.
In only six months since completing the merger, we are already seeing strong affirmation in the opportunity before us.
Our Home Care segment is a perfect example of how our expanded portfolio and combined capabilities with N&B delivers creative solutions for our customers and creates new opportunities for our business.
Recently, our Health and Bioscience division saw an opportunity to collaborate with our Scent division.
A global Scent customer expressed the need for enzyme technology and IFF's capabilities across divisions allowed us to deliver an integrated solution and ultimately create a superior dishwashing detergent.
Together with IFF's leading fragrance capabilities, our enzyme technology ensures fit for purpose delivery and performance, which creates a differentiated product for our customers.
This opportunity represents more than $5 million in annual sales potential.
At the same time, we are actively working with other customers across IFF network to develop solutions that require capabilities across our four divisions.
In the Food and beverage category, we continue to see demand for plant based meat alternatives that showcase the best of our expanded portfolio.
For low sugar, low fat yogurt, we are introducing new flavor technologies with improved texture and speed to market, which are key advantages for our customers.
Lastly, in our Health category we're developing an integrated solution for fiber gummy that leverages our unmatched scientific and technical expertise combined with our best-in-class flavor offering.
These are just a few examples of the cross-selling opportunities that we are seeing customers increasingly demand and differentiator for our business over the long term.
We made significant strides in the second quarter from an integration perspective, ramping up our cost synergies from a few million dollars in the first quarter to a total of approximately $15 million on the first-half basis.
This was largely a result of the comprehensive savings program we have implemented in the second quarter which allowed us to leverage our increased scale to reduce our indirect spend, benefit from various office consolidations and renegotiations, and right-size our organization.
Additionally, because of our operational strengths and commitment to the integration process early on, we were all [Phonetic] able to accelerate exiting our various transition service agreements with DuPont.
I'm very encouraged by the continued progress on this front and we are on track to deliver at least $45 million cost synergies for the full year, and ultimately our three-year run rate cost synergy target of $300 million.
And now, I will hand it over to Rustom.
I will begin with an overview of our consolidated second quarter results on Slide 12.
In Q2, IFF generated approximately $3.1 billion in sales, representing a 13% year-over-year increase or 9% on a combined currency-neutral basis, primarily driven by double-digit growth in our Nourish and Scent divisions and a strong Health & Biosciences performance.
Though our gross margin was pressured by higher input cost, raw materials and logistics inflation and higher air freight volumes, this was partly offset by our disciplined cost management practices, administrative expense reductions and cost synergies.
This enabled us to deliver adjusted operating EBITDA growth of 7%.
We also achieved strong adjusted earnings per share, excluding amortization of $1.50 for the second quarter.
I want to provide a perspective on sales performance in Q2 versus pre-COVID.
There is no doubt that 2020 was an extraordinary year due to COVID 19, so it makes more sense to also evaluate our performance relative to 2019's levels.
And as you can see, all four divisions in the second quarter delivered strong sales growth as compared to the space period.
Total company sales were up 8% on a two-year basis with double-digit growth in Nourish and Pharma Solutions, a high single-digit increase in Scent, and mid single-digit growth in H&B.
With the exception of a handful, all of our sub categories have grown relative to their pre-COVID levels.
Most notably, we are pleased to report that those categories most impacted by COVID 19 are ahead of their respective Q2 2019 levels including Cosmetic Actives, which is up double digits, Fine Fragrance, which is up high-single digits, and grain processing which is up low-single digits.
Foodservice in microbial control while we had strong growth in the second quarter of 2021 remained below Q2 2019's levels, but we expect it will continue to improve as we move forward.
This performance underscores the strength and diversity of our portfolio as well as our position as an essential partner to our customers.
Now on the next few slides, I will dive deeper into the second quarter financials of each of our four divisions.
Beginning with Nourish on Slide 14.
Sales for the division increased by 15% year-over-year or 11% on a currency neutral basis, driven by robust double-digit growth in flavors with Frutarom contributing to growth, and a strong ingredients performance particularly from our protein solutions, cellulosic, locust bean gum, and Food Protection categories.
Nourish also saw a strong rebound in Food design including a very strong 24% growth in foodservice as pandemic related restrictions continue to ease and consumer behavior and away from home channels continue to normalize.
As I mentioned in the previous slide, higher raw material costs put relatively modest pressure on the margins of most of our individual segments.
Although we are pleased to have delivered adjusted operating EBITDA growth of 7%.
Pricing continued to accelerate in Q2 and contributed over a percent of growth in the second quarter.
As we will discuss later, we expect this will increase significantly in the third and fourth quarter as more of our pricing actions take hold.
Turning to slide 15.
Our Health & Biosciences division saw year-over-year growth of 9%, or 5% on a currency neutral basis, led by double-digit growth in Home and Personal Care.
As Andreas mentioned earlier, we are particularly encouraged by Health & Biosciences returned to growth this quarter, led by our microbial control and grain processing categories strong recoveries from the industrial and supply chain challenges related to COVID 19.
Performance in our Health category was challenged based on the particularly strong double-digit probiotics year-over-year comparison, although this did not offset the rest of the segment's growth and we remain confident in the Health category's trajectory moving forward.
Health & Biosciences also delivered adjusted operating EBITDA growth of 5%.
While you see that the division's margin was down this quarter, this was due to higher logistics costs in order to balance robust customer demand and available capacity.
We have increased capacity investments in this business to support long-term growth and invested R&D and plant technology to increase output later this year.
We are incurring significantly higher air freight costs to maintain our growth momentum in the interim, and this is impacting our EBITDA margin.
Now turning to slide 16 to discuss the results of our Scent division, which continued to be a standout growth contributor this quarter.
Our Scent division generated $550 million in total sales representing year-over-year growth of 16%, or 13% on a currency neutral basis.
Scent also achieved adjusted operating EBITDA growth of 34% with margin expansion of 300 basis points, driven by robust volume mix and productivity, which did offset some inflationary pressures.
While Consumer Fragrances was down slightly this quarter against a very strong double-digit year ago comparison, a significant rebound in Fine Fragrances which grew by approximately 85% led by new wins and improved volumes more than offset Consumer Fragrance's more modest performance due to last year's double-digit growth.
Our Ingredients category also contributed the division's strong performance growing double-digits led by strong performance in Cosmetic Actives and Fragrance ingredients.
Overall, we are extremely pleased with Scent's continued strong performance.
Lastly, turning to Slide 17 to discuss Pharma Solutions.
Currency-neutral sales were flat against a strong year ago comparison with Industrial Pharma the most significant performance driver for this division, led by Global Specialty Solutions.
Core Pharma's performance was challenged against a very strong year ago comparison.
On a two-year basis, growth was solid at about 3.5%.
Adjusted operating EBITDA was pressured this quarter with the margin decline due to higher energy costs and lower manufacturing utilization due to a couple of plant shutdowns as a result of weather related raw material shortages.
Specifically we had raw material availability issues related to the Midwest storm in the US earlier this year, which meant we were not able to run production and absorb our fixed costs.
Going forward, the supply chain is improving, which we expect will lead to stronger margins in Pharma Solutions for the balance of the year.
Now turning to Slide 18.
I'd like to review our cash flow position leverage dynamics for the first half of 2021, which remain a top priority as we continue to navigate a recovery in global markets.
As you will see in the first half IFF generated $533 million in free cash flow, with free cash flow from operations totaling $698 million, driven by an improvement in core working capital.
CapEx for the first half totaled $165 million or approximately 3% of sales as we continue to invest in growth accretive areas that we believe will ultimately prove rewarding over the long term as well as in integration-related activities.
In the first half, we also delivered $274 million in dividends to our shareholders.
As we look ahead, we are confident that our cash generation will remain robust, and have announced that we are raising our quarterly dividend marking the 12th consecutive year of dividend increases.
From a leverage perspective, our cash and cash equivalents finished at $935 million with gross debt holding steady at $12 billion.
Our trailing 12 month credit adjusted EBITDA totaled $2.61 billion, and our net debt to credit adjusted EBITDA was 4.2 times.
We are slightly better than we expect to be at this point in time and we are still expecting to delever to below three times net debt to EBITDA in the first three years post transaction close.
Now moving to Slide 19, I'd like to provide an update on our financial outlook for the full year 2021.
IFF has built a solid foundation in the first half of the year and delivered particularly strong second quarter performance, and we expect strong growth will continue through the rest of the year.
For the full year 2021, we are once again increasing our forecast for total revenues with an expectation to achieve 2021 total revenues of approximately $11.4 billion, which equates to about 7% growth.
This is up from our previous $11.25 billion or 6% growth as we have confidence in our sales momentum continuing into Q3 and through the rest of the year.
Breaking down the contributors of growth, we expect currency-neutral sales to be about 5% and FX benefits to be approximately 2%.
While pandemic related uncertainties persist, we are encouraged by the strong performance and important recoveries we are seeing across the business, which we believe position us well to capture continued strong sales growth in Q3 and Q4.
At the same time, we now see full-year 2021 adjusted EBITDA margin at about 22.5% versus approximately 23% previously.
A part of this reduction is related to our margin performance in Q2 for all the reasons I explained earlier.
We also continue to see inflationary pressures across the supply chain.
From a raw material perspective, we have seen raw material costs continue to increase over the course of the year.
In the first half we were successful in raising our prices to recover a portion of the cost increases, and continue to expect close to full cost recovery in the second half.
It should be noted that we are also seeing more broad based non-raw material inflation such as higher energy costs that we're managing through.
Our expectations for air freights has also increased significantly as rates are higher, but mostly higher volumes to balance robust customer demand and available capacity.
We are absorbing higher logistics costs to grow the business in the short term and expect this is only temporary until our capacity expansion projects are complete.
The combination of unfavorable price to raw material costs and higher logistics costs are negatively impacting operating margin in 2021 by more than 100 basis points.
However, through higher sales, strong cost discipline, and our focus on unlocking additional cost synergies, we believe we will end up only about 50 basis points lower than our previous expectations with higher revenues and a roughly similar dollar EBITDA level.
For modeling purposes, please note the depreciation and amortization, interest expense, CapEx as a percentage of sales, adjusted effective tax rate excluding amortization, and weighted average diluted share count all remain the same as what we shared in Q1.
Overall, we are confident that we are well placed to continue capturing additional growth over the next two quarters and beyond, while maintaining our focus on execution, continued financial discipline and leveraging our significantly bolstered resources and expertise as a stronger, more diversified company.
Before I wrap up today's call I would like to first recognize our thousands of employees around the world who continue to display their unwavering commitment to serve our customers, unify our teams together with N&B and deliver for our communities.
Despite the uncertain environment that we have continued to navigate, IFF's first half and Q2 results showcase the strengths of our combined portfolio and our ability to execute our ambitious business objectives.
And I'm incredibly proud to lead such a talented and passionate group of IFFs.
We have much to be proud of this quarter as we move ahead, I'm confident that we have built the financial operational structures needed for our combined company to reach even greater heights.
As Rustom and I have mentioned, we are targeting a strong full year performance indicative of our post-pandemic aspirations, and I know we are exceptionally positioned to achieve this, and we are seeing this strong top line momentum will continue in the early days of the third quarter.
Together, we will further our mission to be an innovative force for good and redefine what it means to be a leader in the global value chain for consumer goods and commercial products.
| iff q2 adjusted earnings per share $1.50.
q2 adjusted earnings per share $1.50.
sees fy sales up about 7 percent.
raises full year 2021 sales outlook.
board of directors authorized a 3%, or $0.02 increase, in quarterly dividend to $0.79 per share.
sees fy sales about $11.4 billion.
|
So many of those listening today know him already.
In his previous role as Senior Vice President of Finance and Treasurer here at Cleveland-Cliffs, Celso was instrumental to our business and financial transformation.
Over the past five years, he has led all of our capital structure efforts, being the key person behind the execution and financing for our transformational acquisitions and managed our liquidity through the pandemic.
Prior to Cliffs, Celso had a very successful career as an investment banker, first at Jefferies and then at Deutsche Bank.
Also, if you couldn't tell by his last name, Celso is my son.
During the last several years, Keith Koci and I have been preparing Celso for this job.
With Keith now in charge of our new business unit as president of Cleveland-Cliffs Services, we could not have a better or more prepared professional to lead our financial organization.
I am humbled by the opportunity to serve as Cliffs' CFO, fully aware of not only our rich 174-year legacy, but also our position of immense influence as the largest flat-rolled steel producer in the United States.
I also fully expect that given my family name and the high standards set by our CEO, the expectations for me will be even greater than for anyone else in this seat.
I am prepared to deliver.
My experience here at Cliffs over the past five years has taught me that strategic and financial opportunities exist at all points in the cycle.
My priorities as CFO are simple: one, allocate capital in a way that strengthens our business; two, maintain and enhance our financial flexibility; three, deleverage the capital structure; four, evaluate and execute opportunistic M&A and capital market transactions, always with a focus on long-term shareholder returns; and five, continue our five-year track record of share outperformance relative to our peer group and the broader market.
With those introductory remarks aside, I will jump right into our third-quarter results.
We reported another quarter of record revenues of $6 billion, record net income of $1.3 billion and record adjusted EBITDA of over $1.9 billion, ahead of the guidance we recently set of $1.8 billion.
Our 42% quarter-over-quarter growth in adjusted EBITDA was primarily driven by continued price increases on our index linked and spot shipments.
These sharp increases on the revenue side were only partially offset by gradual increases on the cost side, including for labor, natural gas, and additional repairs and maintenance, most notably the reline of Indiana Harbor No.
7, the largest blast furnace in North America.
And even though it was clearly a one timer, we did not add back to EBITDA, the vaccination bonus payment of $45 million that was awarded and paid out to our workforce under our very successful vaccination incentive bonus program, which resulted in over 75% of our workforce fully vaccinated against COVID-19.
In the Steelmaking segment, we sold 4.2 million net tons of steel products with a mix of 32% hot-rolled, 18% cold rolled and 31% coated steel, with the remaining 19% consisting of stainless, electrical, plate, slab, and rail.
Our automotive percentage of revenue was 20% compared to 33% just two quarters ago, clearly reflecting the reduced volumes and the legacy annual prices from that sector.
Both of which should dramatically improve next year.
We expect the trends on pricing and costs in Q3 to carry over into Q4, with higher prices from both index-linked contracts and some of our repriced automotive contracts, offset by similar cost impacts we experienced in Q3.
Shipments will likely be lighter in Q4 due primarily to seasonality and lower automotive shipments.
Offsetting this, we will be moving up to the fourth quarter, some planned maintenance outages originally scheduled for next year, including the Dearborn hot end and both blast furnaces at Burns Harbor, along with a few other associated rolling and finishing facilities.
These outages are being accelerated to this year in anticipation of a strong automotive recovery in 2022.
All these events considered, our fourth quarter production should be reduced by approximately 300,000 net tons compared to the third quarter.
Our free cash flow generation came in at $1.3 billion for the quarter, slightly lower than our original guidance due to slow demand pull from automotive, leaving more inventory to close out the quarter than we expected.
The remaining outage period at IH7 as well as the additional outages we scheduled for the fourth quarter should allow us to reduce these inventory levels during Q4.
This free cash flow generated during Q3 was returned entirely to shareholders in the form of a stock buyback, executed via the complete redemption of our $58 million common share equivalent preferred stock.
With only one quarter's worth of free cash flow, we completely redeemed our preferred shares.
I will note that because of the weighted average calculation and the fact that the prefs were outstanding during a portion of Q3, the full $58 million share reduction is not baked into our Q3 earnings per share just yet, we will see a further reduction of diluted share count in the fourth quarter.
With the prefs now completely out of the way, we have resumed our aggressive debt reduction activities.
In only the last three weeks since the end of Q3, we have already generated approximately $500 million in free cash flow and have allocated all of it toward debt repayment under the ABL.
Upon closing of the FPT acquisition next month, all excess free cash flow will continue to be allocated toward further debt reduction.
By next quarter, our LTM adjusted EBITDA should exceed our overall net debt balance, resulting in less than one turn of overall net leverage for the foreseeable future at any reasonable HRC pricing assumption going forward.
Because of our strong profitability this year, at some point in the fourth quarter, we will have utilized the majority of our tax NOL balance, leading to an expected Q4 cash tax rate of around 10%.
Prior to the acquisitions of AK Steel and AM USA, we once expected to be utilizing these NOLs for several more years, but the significantly higher profit generation following the acquisitions will result in the consumption of the majority of the $2.5 billion NOL balance within a year of closing the December 2020 transaction.
Even with the additional cash tax outflow and payments related to the CARES Act FICA deferrals from last year to this year, free cash flow should remain remarkably healthy in Q4.
The $775 million price of the previously announced acquisition of FPT is equivalent to less than two months of our free cash flow generation.
Wrapping up, the financial position of the company is on stronger footing today than it has been during my entire time here at Cliffs and the trend should continue into Q4 and 2022.
The fixed price contract business we have with high-end clients, such as the automotive OEMs, gives us significant downside protection if spot prices trend lower.
Therefore, even under the current bearish futures curve for HRC, our average selling price should be much higher next year than it has been this year, leading to the expectation of another year of outstanding EBITDA, cash flow generation and debt reduction in 2022.
Very few companies can show the magnitude of growth Cleveland-Cliffs has delivered during the last couple of years.
We were a $2 billion revenue company in 2019, became a $5.3 billion revenue company in 2020 and expected to be a $20 billion-plus company in 2021.
All this growth was achieved preserving and enhancing our profitability as demonstrated by our Q3 numbers of $1.9 billion of adjusted EBITDA and $6 billion in revenues for an EBITDA margin of 32%.
These numbers have gone primarily from the 55% of our business that is linked to an index price with a smaller contribution from the fixed price contracts that were signed before the market price recovery of last year.
In the fourth quarter, this will begin to change.
And even more so, you see next year, when the bulk of our annual fixed contracts for automotive as well as appliances, stainless, electrical use plate and tin plate all reprice at significantly higher levels.
That should protect our profitability into next year, even assuming spot prices go down next year.
This being said, we do not believe we will see still spot prices returning back to historical low levels.
And the main reason for that is prime scrap.
Prime scrap is what electric -- furnace mills, old ones or brand-new, need to produce flat-rolled steel.
We have seen a looming shortage of this type of scrap coming for several years, which partially motivated our $1 billion investment in our direct reduction plant four years ago.
We were planning to supply HBI to EAF mini mills.
And that was in the past, but not anymore.
At this time and going forward, we also plan to use more prime scrap ourselves in our BOFs.
That will allow us to stretch our hot metal without building new production capacity.
Building new capacity is a common mistake the steel industry insists in making time and time again.
Cleveland-Cliffs is different, and we are not going to add capacity ourselves, but we are definitely seeing what others do, and we act accordingly.
With that in mind, a few days ago, we announced the acquisition of FPT.
While the majority of scrap companies we looked at had a prime scrap mix of 10%, 15%, FPT stood out with an outsized 50% of prime scrap in the mix.
FPT is actually one of the largest processors of prime scrap in the country, representing 15% of the entire merchant market in the United States.
Prime scrap is a byproduct of manufacturing, including automotive.
And Cleveland-Cliffs is the largest supplier of steel to this automotive and other flat-rolled consuming manufacturers.
As such, we can offer a compelling proposition for their scrap uptake, keeping the life cycle of our steel in a closed loop between Cleveland-Cliffs and the OEM.
Furthermore, the main theme for the steel industry is decarbonization and melting clean, low impurity scrap is a good way to reduce carbon emissions.
That applies to both EAFs and BOFs.
The BOF is often overlooked as a user of scrap.
But in our footprint, it's actually where we consume the most.
The use of higher amounts of scrap in the BOF boosts liquid steel output for the same amount of hot metal, which is what we call the liquid pig iron from the blast furnace.
So the more scrap used in the BOF, the less coke needed in the blast furnace per ton of crude steel produced.
With ample access to our own prime scrap, we can optimize our productivity with a higher scrap charge, while significantly reducing our carbon emissions.
On top of that, during the last 50 years, the supply of prime scrap in the United States has been steadily shrinking.
We expect that [Inaudible] trends to continue as yields continue to improve, and unfortunately, China continues to dominate manufacturing.
Finally, all of the new flat-rolled capacity coming online in the United States is from the EAF side, which means that demand for prime scrap and metallics will continue to increase.
That is very conservatively another nine million tons or 40% growth of demand for these products over the next four years.
With our decision to use our HBI internally at Cleveland-Cliffs and primarily in our blast furnaces, there is a zero response in supply to this massive growth in demand for prime scrap and metallics coming from the EAFs.
Pig iron may be the most likely alternative but they still choose emissions that comes attached to pig iron, whether imported or mainly in North America, effectively create a negative impact to the Scope 3 emissions associated to these EAFs.
In that regard, we fully expect that in a not-so-distant future, the Scope 3 emissions will have to be reported as much as our Scope 1 and 2 already are reported today.
That would create a level playing field for all steelmakers integrated and EAFs.
Moving forward, this is a good opportunity to remind everyone that no other steel company in North America has more capabilities in modern ones, by the way, than Cleveland Cliffs when it comes to producing flat-rolled steel.
That's particularly true regarding automotive.
People tend to confuse old plant names like Indiana Harbor, Cleveland Works or Burns Harbor with old plants.
In fact, old plant names actually carry pretty modern state-of-the-art equipment.
For example, our hot-dipped galvanizing line at Rockport Works was built in the '90s, and it's 80 inches wide and that is six foot, eight inches wide, or 2,032 millimeters before a metric system, more than two meters wide.
There is no other facility on the continent that can produce what we make there.
The same is true for the six footers at Tek and Kote in New Carlisle, Indiana and Columbus, Ohio.
Also, our advanced high strength steel capabilities at Cleveland Works are second to none, and the automotive OEMs know that.
Our pickling line tandem cold mill and galvanizing line in Dearborn, Michigan, by the way, another six footer, specialized in exposed panels, were both built in 2011.
One more time, Dearborn Works was built by Ford Motor Company in the early part of the 20th century.
But the PLTCM and the hot-dipped galvanizing line are only 10 years old.
Our level of technological sophistication and our ability to produce all kinds of automotive flat-rolled products, including stainless steel, are the reasons why Cleveland-Cliffs is by far the biggest supplier of automotive still in this country.
A couple of our competitors will be spending billions of dollars and working very hard to build capacity during the next three years.
We don't need to because we already have the capabilities we need.
That's why Cleveland-Cliffs supplies 2.5 times more steel to the automotive industry than the second largest supplier or more than the second plus the third combined.
Another important accomplishment during the quarter was the consistent performance of our direct reduction plant in Toledo.
The plant continues to operate above nominal capacity and to exceed our expectations, not only on production but also in quality and cost.
Case in point, our all-in cash cost of HBI in Q3 was $187 per net ton, a number much better than the cost projected when we first approved the construction of the plant a few years ago.
This figure is also much better than the price our competitors pay for both prime scrap and imported pig iron.
Also differently from our original plan, HBI sales to outside EAF mills are not significant and maybe discontinue completely very soon.
We actually have already decided to use the majority of our HBI in our blast furnaces, not even in our own EAFs.
That allows us to improve better cost and productivity while improving our coke rates and reducing our CO2 emissions.
Also, as a consequence of our HBI using our blast furnaces, we have already idled the coke batteries at Middletown Works and that coke is not needed at this time.
Another operational change, we started to implement in the third quarter involves our Minorca mine and pellet plant which we acquired as part of the ArcelorMittal USA acquisition.
Based on our tasks, we will soon be shifting our DR-grade pellet production away from Northshore and into Minorca, where we will not have to deal with the unreasonable royalty structure at Northshore.
As we plan to no longer sell pellets to third parties in the coming years, Northshore will become a swing operation, which we will keep idle every time we decided to do so.
In any event, we will continue to be able to feed our Toledo plant with a consistent feed of DR-grade pellets but from Minorca and not from Northshore.
As also explained earlier, we continue to generate plenty of cash and should see a meaningful reduction in debt during the fourth quarter, even after paying for the FPT acquisition.
Based on our expected EBITDA for this year, our 2021 full-year leverage is already at a very comfortable level of less than one time EBITDA.
With the new sales contracts we have already signed, our ability to continue to pay down debt is even stronger than what we announced last quarter.
The $45 million that we paid in vaccination bonus this quarter was by far our best use of cash.
And we are pleased that we reached above 75% vaccination rate across our entire footprint, beating by a large margin the percentage of vaccinated local population in all communities we operate.
We are keeping our workforce safe, healthy and compensating them to do so.
Soon, we look forward to welcoming another 600 Cliffs employees from the FPT acquisition.
We can't wait to bring them into our company and our way of doing business.
| believe that our average sales price next year should be higher than in 2021.
|
A copy of the release can be found on our IR website at ir.
These statements are based on how we see things today and contain elements of uncertainty.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please also note that we will be using combined historical results for the third quarter, defined as three months of legacy IFF results and three months of N&B results and for nine months year-to-date defined as nine months of legacy IFF January to September and eight months of N&B February to September, in both the 2020 and 2021 period to allow for comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig; and our recently appointed Executive Vice President and CFO, Glenn Richter.
As you know, Glenn joined us a little over a month ago as our new Executive Vice President and Chief Financial Officer.
I'm sure you will all find that his experience aligns perfectly with our strategic goals, making him an incredible asset to our team.
Rustom played an important role in our combination with DuPont N&B.
And for that, we are immensely grateful.
He has been important in putting IFF in the strong position it is today.
Before we conclude today's call with a question-and-answer session, Glenn will also speak to our outlook for the remainder of the year.
Now as I mentioned, I'd like to kick us off on Slide six by discussing our financial highlights for the first nine months of 2021.
Throughout the third quarter, we remained laser focused on extending the momentum IFF established in the first half of 2021.
In the first nine months of 2021, IFF achieved $8.6 billion in sales, representing 10% growth or 7% on a currency-neutral basis, a strong reflection of the strength of our market-leading platform and the compelling position we have established with our customers as a combined company.
We delivered a 22% adjusted operating EBITDA margin and a combined EBITDA growth of 5%.
As we will discuss in more detail, we continue to confront meaningful inflationary pressure due to higher raw material, logistics and energy costs.
We have maintained our robust cost discipline efforts and are entering the fourth quarter with continued financial strength, having achieved $884 million free cash flow or approximately 10% of our trailing nine months sales, driven by strong cash generation.
This cash generation has enabled us to stay on track to meeting our deleveraging target.
Finally, as I've mentioned in previous quarters, continued refinement and optimization of our portfolio is a critical component of our ongoing integration efforts.
I'm pleased to share that we have completed the divestiture of our food preparation business and are on track to complete the divestiture of our microbial control business in the second quarter of 2022.
Together, these two important divestitures will create a more focused IFF, allowing us to hone in on the constraints of our core business segments and it creates a stronger, more focused business.
We will continue to evaluate and optimize our portfolio as we move forward with our integration, looking for opportunities to rapidly divesting other noncore businesses.
We started this year with a simple commitment to focus on execution and deliver on the potential of the new IFF.
I'm pleased to say that even in a very challenging global environment, our team has met our integration objectives, while delivering strong results with continued sales momentum and profit growth.
Now turning to Slide 7.
I'd like to walk you through some of the regional sales dynamics underpinning our results for the last nine months.
First, I'm excited to share that we continue to experience strong growth in all four of our key operating regions despite ongoing and unique market uncertainties that have persisted across each geography.
In North America, we achieved 7% growth across all four of IFF's business divisions, led by high single-digit growth in Nourish and Scent.
These two divisions have continued to perform exceptionally well, quarter after quarter.
In Asia, we experienced a 7% increase in sales led by continued double-digit growth in India as well as a low single-digit growth in China, even amid particularly strong recent market complexities in the region.
From a business unit perspective, Nourish, Scent and Pharma Solutions continued to carry the region's growth throughout the year-to-date.
Latin America continues to be our strongest performing region and sales growth leader, having achieved 12% growth, largely fueled by double-digit growth in our Nourish and Scent divisions and continued local currency strength.
Perhaps, most impressive is a 7% sales growth that our EMEA region achieved to date, which includes a robust double-digit increase in the third quarter, impressive performance on our Scent and Nourish divisions growth, this encouraging rebound with Scent delivering double-digit growth led by our Fine Fragrance business and Nourish delivering high single-digit growth led by our Food Service business.
We expect this momentum to continue through the remainder of the year, and we will stay diligent to ensure our business remains nimble, positioned to perform against any new supply chain challenges that may arise.
Moving now to Slide 8, I'd like to take a closer look at our nine months year-to-date sales performance across IFF's key business segments.
Our largest division, Nourish, has been a strong performer throughout the year, achieving currency-neutral sales growth of 9% with broad-based strength from our Flavors, Ingredients and Food Design businesses.
Scent has had a similar strong year delivering 8% in currency-neutral growth to date, led by impressive double-digit growth in Fine Fragrance as well as strong growth in Consumer Fragrance and Ingredients.
Health & Bioscience has seen strong demand in key focus areas including Home & Personal Care, Animal Nutrition and Cultures & Food Enzymes.
As you know, we are in the process of selling our Microbial Control unit, which has continued to experience headwinds through this year but has rebounded from COVID-impacted lows with growth in both Q2 and Q3.
This divestiture should further enhance the performance of this important division.
Pharma Solutions, despite significant challenges, is flat so far for the year.
Supply chain challenges have had an outsized impact on this division throughout the year.
While we have seen encouraging growth in our Industrial business, the division still struggles to meet customer demand due to raw material availability challenges and logistics issues.
Now on Slide 9, you will see that we have outlined some of the factors influencing the growth and profitability of each of our four divisions so far this year.
As I previously mentioned, Nourish has had a strong year with Flavors and Ingredients experiencing double-digit growth.
We have been working hard in our execution to manage volume and cost to limit margin impact from higher raw material costs, which continued to be a headwind on our profitability.
While we have seen some margin impact of about 20 basis points in the year, we are proud of how our execution has mitigated much of the negative headwinds, while delivering meaningful growth.
Our team has did an exceptional job increasing prices to combat inflationary pressures, something that will continue to be critical as we move forward.
In Health & Bioscience, we mentioned broad-based growth across the markets, but here, we are seeing significant margin impacts from higher logistic costs.
As shared on our second quarter call, part of this that freight rates have increased significantly, but also we are having higher logistic costs to balance robust customer demand and available capacity.
We have increased capacity investments in this business to support long-term growth, investing in R&D and plant technology to increase output later this year and into 2022.
The Scent division has certainly realized the strongest, all-around bounce back as consumer demand rises across end markets.
Notably, Fine Fragrances alone has realized 36% growth year-to-date with double-digit growth in Cosmetic Active and continued solid performance in Consumer Fragrances.
At the time, sales profitability expansion of 110 basis points has been led by higher volume, favorable mix and higher productivity.
As I mentioned, Pharma Solutions was the only division in which we did not experience sales growth due to continued global supply chain challenges that have impacted our ability to meet strong customer demand.
These challenges, including supply and logistic constraints and ongoing inflation have, in turn, significantly pressured our margin compared to the first nine months of 2020.
Moving to the fourth quarter and entering 2022, we will be closely tracking supply chain dynamics, and we'll continue to prioritize returning our Pharma Solutions business to the profitability we know is achievable.
And in the fourth quarter, we're expecting year-over-year top and bottom line performance to improve.
As we have been talking about today, IFF is realizing very strong sales momentum across our business.
This is a reflection of the powerful new position we have created through our combination with the N&B business and a compelling value proposition we can offer to our customers.
While we are pleased to put many of the gross headwinds related to the pandemic behind us, it is important to understand that our growth this year is, in fact, meaningful above pre-pandemic results.
If you look at the total business, you will see that on a comparable 9-month pro forma basis, the new IFF has realized 9% sales growth over 2019 results.
This strength is broad-based too.
Each segment is realizing strong growth above pre-pandemic levels.
Nourish is a business that was particularly hard hit through the pandemic, is now strongly growing with sales growth of 9% compared to pro forma 2019 9-month period.
And important, especially given that much of the integration work is coming from within this division, these results showcase how our position in the market has been fundamentally strengthened through the merger and how our teams are delivering the full potential of IFF to our customers.
Moving to Slide 11, I would like to discuss the strong progress we have made in terms of synergy realization.
For just nine months, since completing our merger with N&B, our synergy progress reaffirms the tremendous opportunity we have in front of us as a combined company.
Having received significant and highly encouraging positive feedback from our customers, along with persistent robust customer demand, we are confident in our ability to meet our revenue target.
To date, revenue synergies have started to contribute to our top line performance, and we are pleased that our project pipeline is strong and growing.
In the first nine months of 2021, we've achieved approximately $40 million in cost synergies, representing nearly 90% of our 2021 cost synergy target with one quarter to go.
This was largely a result of the comprehensive savings programs we have implemented, where we are leveraging our increased scale and optimizing our organization.
I'm confident that we will more than exceed our $45 million year one synergy target.
And I'm encouraged by the continued progress we are making toward achieving our 3-year run rate of cost synergy target of $300 million.
His background is perfect, but there are two areas I think really stand out.
First, he brings tremendous depth with private and public companies and leading finance teams to enhance discipline and build processes that drive toward a goal of shareholder value creation.
He has time and time again shown an ability to help businesses accelerate top line growth while driving margin expansion.
In this way, he consistently implements productivity initiatives with lasting impact.
Second, he has been through several large-scale M&A integrations with a track record of strong success.
As we continue to execute on our multiyear transformational integration, this experience is invaluable.
Since joining IFF in late September, I've had the opportunity to briefly meet many in our investor community.
And the most common questions I've been asked is why did I join IFF and what are my near-term priorities.
Consequently, before I review our financial results, I thought it would be helpful to briefly provide these perspectives as an introduction.
There were three very compelling reasons for me to join IFF.
First, and perhaps most importantly, IFF is a company that is truly making a difference in helping solve some of the world's biggest challenges.
We are delivering reliable, innovative and sustainable solutions that are directly helping address issues such as improved nutrition and wellness, reducing greenhouse gas emissions and creating a more sustainable environment.
Second, the industry has very attractive organic growth characteristics, benefiting from continued strong consumer tailwinds from increased consumer focus on wellness and natural and sustainable products, increased demand in emerging markets and new consumer needs presented by aging demographics in developed markets.
I also believe that scale will become an important basis of competitive advantage as customers demand leading ESG platforms, increased innovation and speed to market, global supply chain resiliency and help in navigating increasingly complex regulations.
Third, I firmly believe that the combination of IFF with DuPont's legacy N&B business has uniquely created an industry-leading platform.
And since joining IFF, I've tried to immerse myself in the business completely, visiting sites, meeting with our business and operations teams and spending time at our R&D and creative centers.
I've also prioritized hearing from you, our investors and analysts.
And frankly, today, I'm even more bullish on the strength of IFF's global capabilities and the tremendous long-term potential we have to drive strong top and bottom line growth.
Relative to my near-term priorities, I have four primary areas of focus.
By far, our most pressing priority is to tackle the challenges from the global inflationary environment and to successfully execute broad-based pricing actions across all of our businesses.
Second, I'm also focused on enhancing our core financial processes and metrics, including better forecasting, improved business-level return metrics and tighter disciplines for our investment decisions, so that we're maximizing our growth potential and return on invested capital.
A third area of focus is ensuring we fully deliver on our merger synergies, while also accelerating our focus on sustainable productivity.
And finally, while we have made very good progress to date on our portfolio optimization, there is significant opportunity remaining.
In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you.
With that, I'd now like to provide an overview of our consolidated third quarter results.
In Q3, IFF generated approximately $3.1 billion in sales, representing a 12% year-over-year increase, primarily driven by the continued double-digit growth in our Nourish division and strong increases in both Scent and Health & Biosciences.
In terms of contribution, volume performance was the primary driver of our growth as pricing represented approximately two percentage points in the quarter.
Though our gross margin continued to be challenged by inflationary pressures, it was somewhat offset by our strong cost management focus, which resulted in adjusted operating EBITDA growth of 4%.
And while we had solid year-over-year EBITDA growth, our gross margin was down by 210 basis points as our pricing actions recovered only about 65% of our raw material increases or approximately 50% in the third quarter when we include raw material, logistics and energy increases.
As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis but expect that in the short term, specifically the fourth quarter, we will see a similar pressure given the time lag of price realization.
Let me finish on this slide by saying that we achieved strong earnings per share, excluding amortization of $1.47.
On the next few slides, I will dive deeper into the third quarter financial results for each of our four divisions.
Turning to Slide 13, I'll start with our Nourish division, which had an exceptional quarter.
In Q3, Nourish achieved 17% year-over-year sales growth or 15% on a currency-neutral basis, driven by robust double-digit growth in Flavors for the second consecutive quarter.
Ingredients also grew double digits with all subcategories, protein solutions, pectin and seaweed extracts, emulsifiers and sweeteners and cellulosics, LPG and food protection, increasing double digits.
Food Design also grew double digits, led by Food Service, where pandemic-related restrictions continue to be lifted with away-from-home consumer behaviors returning to more typical levels.
As a result of strong volume growth, price increases and our focus on cost management, Nourish achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points.
On Slide 14, you'll see that our Health & Biosciences division saw year-over-year sales growth of 7% or 5% on a currency-neutral basis, led by double-digit growth in Home & Personal Care and high single-digit growth in Cultures & Food Enzymes.
Our Health category was soft this quarter due to a particularly strong double-digit year-ago comparison, so we are pleased with the results when we look at it on a 2-year basis.
As Andreas mentioned earlier, inflationary pressures and higher logistics and energy costs to keep up with the robust customer demand has challenged our margins across our business, with H&B particularly impacted, which drove an operating EBITDA decrease of 12%.
Unpacking this a bit deeper, the bulk or 70% of our year-over-year EBITDA decline came from higher air freight volumes, where we have increased intercompany shipments to manage available capacity.
As we shared last quarter, we have increased capacity investments in this business to support long-term growth and have also invested in R&D and plant technology to increase output.
Until then, we will be incurring higher costs to support our customer demand, and this will impact our EBITDA margin.
Turning now to Slide 15.
Our Scent division continues to perform extremely well and experienced strong growth, achieving 10% year-over-year growth or 9% growth on a currency-neutral basis.
This performance was driven by Fine Fragrances' continued rebound, which grew approximately 36%, led by new customer wins and improved volumes.
Our Ingredients category also continues to perform well and contributed to Scent's overall success, seeing double-digit growth for the second consecutive quarter led by strong performance in both Cosmetic Actives and Fragrance Ingredients.
While our Consumer Fragrances business saw modest low single-digit growth against a strong double-digit year ago comparison, this is a marked improvement from Q2, and we expect further growth as we move forward.
On a 2-year average basis, Consumer Fragrance remained strong at 9% in the third quarter.
Scent also experienced adjusted operating EBITDA growth of 10%, driven by strong volume growth and favorable mix.
Margin was down modestly due to higher raw materials and logistics costs, a trend we see continuing.
I will provide more context shortly.
Lastly, in our Pharma Solutions business, we saw a currency-neutral sales decrease of 2% due to continued supply chain challenges related to raw material availability and logistics disruptions, which have made it challenging to meet persistent and growing customer demand.
While Industrials has continued to recover from COVID-19 lows, our core Pharma business saw soft performance against its solid year-ago comparison.
The division's adjusted operating EBITDA and margin also continue to be impacted by higher sourcing, logistics and manufacturing costs.
We also continue to see the impact of force majeures and raw material shortages with suppliers and shutdowns due to Hurricane Ida, resulting in unplanned outages in some of our product lines.
While we expect the current market environment and macro supply chain problems to continue challenging the segment, we remain optimistic and as Andreas mentioned earlier, we remain focused on returning the division to profitability as these industry conditions stabilize.
Now on Slide 17, I would like to review our cash flow position and leverage dynamics for the first nine months of 2021, both of which remain a top priority for us.
So far this year, IFF has generated $884 million in free cash flow, with cash flow from operations totaling approximately $1.1 billion.
As the team has mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities.
Year-to-date, we have spent $242 million or approximately 2.8% of sales on capex and expect a significant ramp-up in fourth quarter as our annual spend is traditionally more back half weighted.
From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target, with our cash and cash equivalents finishing at $794 million, including $122 million restricted cash, with gross debt reduced by $446 million versus the second quarter to $11.5 billion due to our debt maturity schedule as part of our deleverage plan.
Our trailing 12-month credit-adjusted EBITDA totaled approximately $2.7 billion, with a 4.1 times net debt to credit-adjusted EBITDA.
With our continued strong cash flow generation, including proceeds from divested noncore businesses, we remain confident that IFF is on track to achieve our deleveraging target of less than three times net debt to EBITDA within 20 to 36 months, post-transaction close.
Turning to Slide 18.
I'd like to take a moment to discuss the cost inflation trends that have impacted our business this year.
As I mentioned earlier, IFF and the industry at large have seen significant year-over-year inflation increases, which have been accelerating in the recent quarter.
The inflationary pressures we are seeing today are significant.
Just as examples, vegetable oil prices hit a record high after rising by almost 10% in October.
The price of wheat is up almost 40% in the last 12 months through October.
Brent crude prices have more than doubled over the past 12 months to the highest level since October 2018.
In the U.S., natural gas prices are up 100% from a year ago and in the U.K. grew up about 500%.
And transportation rates have increased significantly given the high demand and limited capacity to ship.
Across the raw materials, logistics and energy markets, like many industries around the world, we have seen costs accelerate each quarter, which has led to our margins being adversely impacted.
For example, in the first half of 2021, gross margin was down about 150 basis points, while in the third quarter, we were down about 210 basis points.
As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022.
Consequently, this will require us to successfully implement significant pricing actions across each of our businesses as well as improve our sourcing efficiencies, accelerate operational improvements and capture targeted integration synergies to drive profit growth.
Now moving to Slide 19.
I would like to share what this means for our consolidated financial outlook.
For the full year 2021, we are maintaining the increased total revenue forecast we announced in September to account for the strong demand.
For the full year 2021, we are targeting $11.55 billion in total revenue or approximately 8.5% growth, up from the forecast of $11.4 billion or 7% growth that we disclosed in the second quarter.
We also expect our sales growth to continue in the fourth quarter as our Q4 quarter-to-date sales trend is solid.
As mentioned, unprecedented macro supply chain challenges and inflationary pressures continue to impact our industry, and we do expect this to continue in the foreseeable future.
While we are intently focused on offsetting these inflationary pressures through pricing actions, these are lagging the inflationary pressures.
And as a result, we have further revised our adjusted EBITDA margin to be modestly below 21%, down from approximately 21.5% that was forecasted in September.
About half of this reduction is due to lower gross margin in the third quarter and the other half stemming from higher cost trends we see in the fourth quarter.
For the full year, we are targeting low single-digit EBITDA growth, a solid improvement in light of the external challenges.
We also adjusted our capex spend outlook down as we have been very thoughtful in balancing near-term operating priorities with the need to add capacity to support accretive growth across our businesses.
Overall, we are pleased of the progress we've made to date, strong top line growth and a commitment to meet near-term macro cost pressures, and we're confident that IFF is on the right path and poised for continued success across our core business.
Before I wrap it up, I'd like to reiterate how proud I am of IFF and our thousands of employees around the world who have showcased a remarkable resilience toward an evolving and continuously uncertain industry environment.
We have continued to deliver strong year-over-year sales and profit growth, and I'm confident that with our top-notch financial and operational structure supported by Glenn's financial leadership, we will be able to maintain and bolster our strong financial profile, while continuing to deliver for both our shareholders and our customers.
Q4 is off to a solid start, and I know that our momentum will propel us to achieve strong sales growth for the full year and bring us another step closer to achieving our synergy targets.
In sum, it is clear to me that IFF is in an incredible strong position.
We knew entering this year that the new IFF was poised to change our industry.
But to do so, we had to execute.
As we look at industry-leading sales growth for the full year, I'm just so proud of how everyone here stepped up and executed on our vision and delivered against our potential.
IFF is once again the clear leader of this field, creating another iconic chapter in this company's 132-year legacy.
This core strength of the business is why I felt now was the perfect time to start the transition to find IFF's next CEO.
I have every confidence that now is the right time to let the next chapter of IFF legacy begin.
As we announced, the search has begun for my successor, and we expect that person to be in place by early 2022.
I'm fully committed to a seamless transition and look forward to talking to you all about this more in the near future.
| qtrly adjusted earnings per share except amortization $1.47.
achieves strong double-digit sales growth in quarter; on-track to grow 8.5% for full year 2021.
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The pandemic has given us an opportunity to display our agility as a company.
We increased our communications with retailers.
We changed our marketing messages.
We shifted investments to categories that are most important to consumers.
And we set new production records for VITAFUSION, ARM & HAMMER laundry and ARM & HAMMER baking soda.
And we've moved people to focus on the online class of trade.
So we've been proactive in seizing the opportunities presented by the crisis and are increasing manufacturing capacity in our plants and externally with new co-packers.
The agility and resilience of the Church & Dwight team is showing up in our results.
Our priorities continue to be employee safety, meeting the needs of consumers and retailers, helping the communities where we live and ensuring the strength of our brands.
Our plant, warehouse and laboratory employees have done an exceptional job in keeping safe, which has contributed to our ability to operate our supply chain.
Our office employees continue to work remotely and are doing a super job running the company.
So now let's talk about the results.
Q3 was another exceptional quarter.
Reported sales growth was 13.9% and adjusted earnings per share was $0.70.
Revenue, earnings and operating cash flow were all significantly higher in Q3 than last year, driven by the significant increase in demand for many of our products.
Organic sales grew 9.9%, driven by higher consumption.
Regarding e-commerce, we were already strong pre-COVID and well positioned online.
In Q3, our online sales increased by 77% as all retailer.coms have grown.
One example would be gummy vitamins.
In 2019, 8% of our full year sales were online.
This year, we expect full year to be about 14% online.
Recall, we began the year targeting 9% online sales as a percentage of global consumer sales.
In Q1, it was 10% online; Q2, 13%; and Q3, also 13%.
So we expect the full year to be actually close to 13% as well.
We continue to conduct research on the purchasing habits of U.S. consumers.
There's no surprises here, actually.
There is continued consumer concern that stores will run out of stock and websites will face delivery issues.
Consumers report that they are consolidating shopping trips and continue to stockpile to ensure that they have enough product for a couple of weeks at a time.
If we look at year-to-date shipment and consumption patterns, our brands remain generally in balance in the 15 categories in which we compete.
With respect to our brands, we had broad-based consumption growth in Q3.
We saw a double-digit consumption growth in VITAFUSION and L'IL CRITTERS gummy vitamins, ARM & HAMMER baking soda, OXICLEAN, FLAWLESS, ORAJEL, NAIR, FIRST RESPONSE pregnancy kits and cleaners.
In Household, our laundry business consumption was up 4% and ARM & HAMMER cat litter was up 8%.
Water flossers is another bright spot as consumption turned slightly positive in Q3.
Although our Lunch & Learn activity continues to be significantly curtailed, we intend to continue to address this with incremental advertising.
In addition to VITAFUSION and L'IL CRITTERS, water flossers is another brand we expect to benefit from the heightened consumer focus on health and wellness.
BATISTE dry shampoo remains impacted by social distancing, with consumption down 10%, but improved sequentially compared to Q2 when consumption was down 22%.
TROJAN consumption was down 6% in Q3, but also improved sequentially when we were down 15% in Q2.
There's no doubt that consumers have made health and wellness a priority.
VITAFUSION and L'IL CRITTERS gummy vitamins saw the greatest consumption growth of any of our categories in Q3, up 49%.
The category consumption was even higher.
Our expectation is that consumer demand for gummy vitamins will remain high.
And we have new third-party capacity coming online in late Q4 to take advantage of this trend.
Consumers are focusing on health and wellness, but also, cleaning, home cooking and new grooming routines.
At a recent investor conference, you may have heard me cite consumer research that suggests it takes 66 days to form a new habit.
And only time will tell if all of these new behaviors will translate into permanently higher levels of consumption.
But if they do endure over time, we believe we are well positioned.
Now a few words about private label.
As you know, our exposure to private label is limited to five categories.
Private label shares have remained generally unchanged for the first, second and third quarters of this year.
Our international business came through with double-digit organic growth in the quarter, driven by strong growth in our GMG business, that's our Global Markets Group, and Canada.
In October, our GMG business is off to another strong start, and we continue to see strong POS recovery in Canada and Europe.
After three consecutive quarters of growth, our Specialty Products business contracted 3.4% in Q3, primarily due to the poultry segment.
Now turning to new products.
Innovative new products will continue to attract consumers even in this economy.
VITAFUSION gummy vitamins launched a number of new products.
And to capitalize on increased consumer interest in immunity, we launched POWER ZINC and Elderberry gummies.
We've launched ARM & HAMMER CLEAN & SIMPLE, which has only six ingredients plus water compared to 15 to 30 ingredients for typical liquid detergents.
And in the second half, we launched ARM & HAMMER ABSORBx clumping cat litter, a new litter, which is 55% lighter than our regular litter.
Now let's turn to the outlook.
We're having an exceptional year.
We now expect full year adjusted earnings per share growth of 13% to 14%, which is far above our evergreen target of 8% annual earnings per share growth.
Given our strong performance, we have raised our full year outlook for sales growth to be approximately 11% and organic sales growth to be approximately 9%.
As mentioned many times in the past, we take the long view in managing Church & Dwight in order to sustain our evergreen model.
In the second half, we took the opportunity to increase our marketing spend behind our new products and we made incremental investments in the company.
As we wind up the year, we are putting together our 2021 plan.
It's safe to say that we have a high degree of confidence that we will meet our evergreen model in '21.
In February, we'll provide our detailed outlook for next year.
Now in conclusion, I would like to remind everyone of the many reasons to have confidence in Church & Dwight.
The great thing about our company is we are positioned to do well in both good and bad economic times.
The categories in which we play are largely essential to consumers.
And we have a few categories that stand to benefit from the current environment.
We have a balance of value and premium products.
Our power brands are number one or number two in their categories.
And we have low exposure to private label.
We're coming off some of the best growth quarters we've ever had.
And with a strong balance sheet, we continue to be open to acquiring TSR-accretive businesses.
We believe our company is stronger and more agile than ever.
And finally, we have the resources, the common sense and the ambition to ensure that our brands perform well in the future.
Next up is Rick to give you details on the third quarter.
We'll start with EPS.
Third quarter adjusted EPS, which excludes an acquisition-related earnout adjustment, grew 6.1% to $0.70 compared to $0.66 in 2019.
As we discussed in previous calls, the quarterly earnout adjustment will continue until the conclusion of the earnout period.
Stronger-than-expected sales performance allowed the company to spend incrementally on marketing.
Reported revenue was up 13.9%, reflecting a continued increase in consumer demand for our products.
Organic sales was up 9.9%, driven by a volume increase of 10.2%, partially offset by 0.3% of unfavorable product mix and pricing, primarily driven by new product support.
Volume growth was driven by higher consumption.
Now let's review the segments.
Organic sales increased by 10.7%, largely due to higher volume.
Overall, growth was led by VITAFUSION and L'IL CRITTERS gummy vitamins, WATERPIK oral care products, ARM & HAMMER liquid laundry detergent and OXICLEAN stain fighters.
We commonly get asked to bridge the Nielsen reporting to our organic results.
This quarter, tracked consumption was 7.7% for our brands compared to an organic sales increase of 10.7%.
In this environment, one might assume that is restocking retailer inventory.
That is not the case.
We had 400 basis points of help from strong growth in untracked channels, primarily online, and 100 basis point drag from couponing to support new products.
The good news is, as you heard from Matt, consumption and shipments are in balance, both low double digits.
Consumer International delivered 11.6% organic growth due to higher volume, offset by lower price and product mix.
This was a great recovery for our international business from a flat Q2.
Growth was primarily driven by the Global Markets Group and Canada.
For our SPD business, organic sales decreased 3.4% due to lower volume, offset by higher pricing.
The lower volume was primarily driven by the nondairy animal and food production in sodium bicarbonate business.
Turning now to gross margin.
Our third quarter gross margin was 45.5%, 110 basis point decrease from a year ago.
Gross margin was impacted by 110 basis point drag from tariffs and a 90 basis point impact from acquisition accounting.
In addition, to round out the Q3 gross margin bridge is a plus 100 basis points from price/volume mix; plus 160 basis points from productivity programs, offset by a drag of 80 basis points of higher manufacturing costs, inflation and higher distribution costs; as well as a drag of 90 basis points for COVID costs.
Moving now to marketing.
Marketing was up $45.7 million year-over-year as we invested behind our brands.
Marketing expense as a percentage of net sales increased 230 basis points to 13.8%.
For SG&A, Q3 adjusted SG&A decreased 30 basis points year-over-year, primarily due to leverage from strong sales growth.
Other expense all in was $12.3 million and $3.9 million decline due to lower interest expense from lower interest rates.
And for income tax, our effective rate for the quarter was 17.3% compared to 21.6% in 2019, a decrease of 430 basis points, primarily driven by higher tax benefits related to stock option exercises.
And now turning to cash.
For the first nine months of 2020, cash from operating activities increased 29% to $798 million due to significantly higher cash earnings and an improvement in working capital.
As of September 30, cash on hand was $549 million.
Our full year capex plan continues to be approximately $100 million as we begin to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins.
As I mentioned back at the Barclays conference in September, we do expect a step-up in capex over the next couple of years to approximately 3.5% of sales for these capacity-related investments.
In addition, as you read in the release, due to the strong cash position, the company may resume stock repurchases in the future.
For Q4, we expect reported sales growth of approximately 9%, organic sales growth of approximately 8%.
And as Matt mentioned, we have strong consumption across many of our categories.
Turning to gross margin.
We previously called 150 basis point contraction in the second half.
Now we're saying down 190 basis points.
The change is primarily due to nonrecurring supply chain costs.
We also expect significant expense, and we have called flat for the year in terms of a percent of sales, which implies a step-up in Q4.
We also anticipate a lower tax rate.
As a result, we expect Q4 adjusted earnings per share to be $0.50 to $0.52 per share, excluding the acquisition earnout adjustment as we exit 2020 with momentum.
And now for the full year outlook, we now expect approximately 11% for the year 2020 sales growth, which is above our previously 9% to 10% range.
We're also raising our full year organic sales growth to approximately 9%, up from our previous 7% to 8% outlook.
We raised our cash from operations outlook to $975 million, which is up 13% versus year ago.
Turning to gross margin.
We expect gross margin to be down 20 basis points for the year, primarily due to the impact of acquisition accounting, COVID costs, incremental manufacturing and distribution capacity investments and the higher tariffs on WATERPIK.
As to tariffs, remember back in 2018, we got caught up in Tier two tariffs for which we were granted an extension in 2019.
That exemption expired and was not extended as of Q3 2020.
We continue to work on mitigating that impact.
Another word or two on gross margin.
Previously, I have said the first half of the year was plus 150 basis points on gross margin and the second half was down 150 basis points on gross margin.
And so our outlook as of last quarter was flat for the year.
And then also last quarter, you heard me walk through investments we were making in the second half of 2020.
Examples here included a new third-party logistics provider, outside storage to handle surge inventories, preliminary engineering on capacity, VMS outsourcing costs as well as other investments around automation, consumer research and analytics.
Now we're calling down 190 basis points for the back half or down 20 basis points for the year, and that implies down 250 basis points for the quarter.
We have some supply chain nonrecurring costs.
Here are a few examples.
First, because of our outsized growth, I mentioned last quarter, we're adding a new 3PL distribution center.
In the quarter, we again had stronger sales.
And as such, had duplicative outside storage locations and the new 3PL distribution center that wasn't operational.
So for a period of time, we had duplicative costs.
We're also in the process of going through make first buy decisions.
And that will trigger a couple of asset write-offs likely in Q4.
We have lean training across the plants.
And finally, due to the great results this year, higher incentive comp cost that flow through COGS.
So our full year tax rate expectations are 19%, and we also raised our adjusted earnings per share growth to 13% to 14%.
Now that we're through the outlook, I also want to spend a minute on FLAWLESS.
As you saw in the release, we had an earnout benefit of approximately $50 million in the quarter in reported earnings.
We exclude any of the earnout movements in adjusted EPS.
Some color on that swing.
As a backdrop, we bought that business for $475 million upfront and a $425 million earnout tied to year-end 2021 sales.
That sales target represented in excess of 15% CAGR for three years off of a baseline of $180 million of trailing sales.
The revised 3-year CAGR for this business is closer to 8%.
And as such, the earnout liability comes down and earnings go up.
We're still positive on this business.
And the strong consumption growth these past six months is a great indicator for the future.
As you heard from Matt, the company is well positioned as we enter 2021.
And with that, Matt and I would be happy to take any questions.
| q3 adjusted earnings per share $0.70 excluding items.
sees q4 sales up about 9 percent.
sees 2020 reported sales growth raised to 11%.
2020 organic sales growth raised to 9%.
2020 adjusted earnings per share growth raised to 13%-14%.
2020 cash from operations raised to $975 million.
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I'd like to give you a sense for how Church & Dwight has reacted to the pandemic.
The virus disrupted just about everything.
Consumer behavior, retailer operations, our supply chain and how we work.
We pivoted every aspect of our business to meet the new challenges.
Initially, we had a daily huddle at 8:00 a.m. seven days a week to address employee safety, production levels, co-packer operations and shipment patterns.
Today, we meet five days a week.
We increased our communications with retailers and changed our marketing messages.
We moved people to focus on the online class of trade to create and upload new content.
To speed up our reaction time, we created new data feeds of POS data and retailer in stock levels.
We added more co-packers to our supply chain network.
We conduct weekly surveys of our consumers.
And all of our efforts are paying off.
The agility and resilience of the Church & Dwight team shows up in our results.
Our priorities continue to be employee safety, meeting the needs of consumers and retailers, helping the communities where we live and ensuring the strength of our brands.
Our plant, warehouse and laboratory employees have done an exceptional job in keeping safe, which has contributed to our ability to operate our supply chain.
The rest of our employees are working remotely and doing a super job running the company.
We have been supporting our communities through monetary and product donations, including the contribution of personal protective equipment.
In June, we began producing hand sanitizer in our U.K. plant for both donations and employee usage.
With respect to consumers and retailers, we are taking steps to increase both short and long-term manufacturing capacity, and we continue to work closely with suppliers and retail partners to keep pace with increased demand.
A good example is our installation in Q2 of a new liquid laundry line in our York plant, which was quite a feat given the obstacles presented by COVID.
And as I mentioned before, we've added more co-packers to ensure steady supply for other categories.
Now let's talk about the results.
Q2 was an exceptional quarter.
Reported sales growth was 10.6%.
Gross margin expanded by 220 basis points, and adjusted earnings per share was $0.77.
Revenue, gross margin, earnings and operating cash flow were all significantly higher than Q2 last year, driven by the increase by a significant increase in demand for many of our products.
Organic sales grew 8.4%, driven by higher consumption, restocking of retailer inventories and lower couponing.
Our exceptional first half is a testament to the diverse set of categories that we compete in and the strength of our brands.
Regarding e-commerce, even more consumers have moved online.
Our online sales increased by 75% in Q2 as all retailer.coms have grown.
We began the year targeting 9% online sales.
In Q1, 10% of our sales were online.
In Q2, it was 13%, and we expect second half online sales to be equally strong.
We continue to conduct research on the purchasing habits of U.S. consumers.
Of the categories that we are following, there is continued consumer worry about the ability to leave the house and concern that stores and websites will run out.
Consumers report that they are consolidating shopping trips and continue to stockpile to ensure that they have enough product for a couple of weeks at a time.
Similar to last quarter, I now want to talk about consumption and shipments.
Year-to-date shipment and consumption patterns are back in balance for our brands in the 15 categories that we compete.
We do have some additional opportunities in gummy vitamins and ARM & HAMMER baking soda as shipments are still well behind consumption.
In Q2, we saw a double-digit consumption growth in gummy vitamins, women's hair removal, cleaners and baking soda.
On the other hand, restrictions on consumer mobility drove double-digit consumption declines for WATERPIK, TROJAN condoms and BATISTE dry shampoo.
People are just not socializing due to government restrictions under mobility, which has a big effect on some personal care categories.
July consumption for the U.S. business is tracking to be over 10%, led by our gummy vitamin brands, OXICLEAN additives and baking soda.
1/3 of our July consumption growth is attributed to our gummy business.
In July, and I think this is important, only two of our 15 brands, that would be BATISTE and TROJAN, showed negative consumption.
In contrast, in the month of May, eight of our 15 key product lines showed negative consumption.
So consumption is trending positively.
July shipments for the U.S. business are tracking to be up high single digits.
Shipments of gummy vitamins, OXICLEAN additives, baking soda and WATERPIK are all up double-digit in July.
Our gummy vitamins have been on fire.
Consumption for May, June and July has been averaging up over 40%.
And there is an increased consumer focus on wellness, and it is likely that we will reach a permanently higher level of consumption.
We are looking at third parties to supplement our existing capacity right now.
You may recall that we announced our exit from private label early in Q1, and that turned out to be a timely decision because it helped free up capacity for our brands.
Regarding our laundry and litter businesses, consumption is recovering.
You will recall that there was massive pantry loading in laundry and litter in the month of March.
The laundry pantry loading appears to be absorbed as our consumption improved from being down low single digits in the quarter to up approximately 10% in July year-over-year.
Similarly, ARM & HAMMER litter improved from negative consumption in Q2 to up approximately 5% in July.
So our two big categories are recovering nicely.
In the water flosser category, WATERPIK is starting to recover from the steep decline in April when consumption was down 55%.
Q2 consumption was down significantly due to retailer closures, deprioritization of water flossers by some retailers and closure of dental offices.
Remember that dental professionals are an important source of water flosser recommendations, which influences first-time buyers.
The most recent surveys indicate that 95% of dental offices are now open, although most are at a reduced capacity.
The good news is monthly consumption of WATERPIK water flossers is now positive.
Although our Lunch & Learn activity continues to be significantly curtailed, we intend to address this with incremental advertising in the second half.
The FLAWLESS brand has had strong consumption growth in May, June and July due to reduced consumer access to salons.
The launch of our new full-body device, NU RAZOR, was perfectly timed.
FLAWLESS is one of our brands that could benefit from the at-home grooming trend, and we tend to strongly support FLAWLESS with advertising in the second half.
Private label shares is something we track closely.
As you know, our exposure to private label is limited to five categories, and the private label shares were generally unchanged in Q2, and it was also true in Q1.
Because of the virus, consumer trends are emerging, which affect our business, including a focus on cleaning, personal wellness and new grooming routines.
These consumer trends may endure over the long term, and if they do, we believe we are well positioned.
Our international business came through with slightly positive organic growth in the quarter, driven by strong growth in our GMG business, that stands for Global Markets Group.
In particular, China and Asia-Pacific turned in a remarkably strong performance in the second quarter.
And in July, our GMG business is off to a strong start.
And we're seeing strong POS recovery in Canada and Europe as well is starting to recover.
Our Specialty Products business has had three straight quarters of organic growth, and we expect continued organic growth for our Specialty Products in the second half.
Now turning to new products.
Innovative new products will continue to attract consumers even in this economy.
In Q2, we launched a new ARM & HAMMER laundry detergent called CLEAN & SIMPLE, which has only six ingredients plus water and this compares to 15 to 30 ingredients for the typical liquid detergent, and has the cleaning power comparable to our best-selling consumer favorite, which is ARM & HAMMER with OXICLEAN.
However, because of retailer stocking issues in the second quarter, we eliminated advertising, trade and couponing support that we had planned, and we pushed it to the second half.
We're excited to report today that we have another big product launch this year.
The second launch is in the clumping litter category.
This month, we began shipping ABSORBx, which is a revolutionary new ARM & HAMMER lightweight litter made from desert dry materials.
It absorbs wetness in seconds to trap and seal odors fast.
ABSORBx is 15% lighter than our existing lightweight, and it's 55% lighter than our regular clumping litter.
We have a significant amount of advertising, trade and couponing planned for the second half to get behind this exciting new launch.
And by the way, here's a fun fact, our friends at Clorox just posted to their website a new litter variant called Ultra Absorb.
And we'll take that as a complement.
Imitation is the greatest form of flattery.
Now let's turn to the outlook.
We had an exceptional first half, and we were running well ahead of our original full year earnings per share outlook.
We reinstated our earnings per share outlook with 13% growth, which is far above our evergreen target of 8% annual earnings per share growth.
As in prior years, when we find ourselves in this position, we use the opportunity to invest in our future, which we intend to do in the second half.
You may recall that just last year, we had this exact same opportunity to invest, and our earnings per share was down 4% in Q4 2019 as a result.
This year, we just got to a similar point much earlier.
It's important to note that we continue to take the long view in running Church & Dwight.
Now in conclusion, there are lots of reasons to have confidence in Church & Dwight.
The great thing about our company is we are positioned to do well in both good and bad economic times.
The categories in which we play are largely essential to consumers.
We have a balance of value and premium products.
Our power brands are number one or number two in their categories, and we have low exposure to private label.
We're coming off one of the best first halfs we've ever had and are entering this downturn in a position of strength and with a strong balance sheet.
And with a strong balance sheet, we continue to be open to acquire TSR accretive businesses.
And finally, we have the resources, the common sense and the ambition to ensure that our brands perform well in the future.
And next up is Rick to give you details on the second quarter.
We'll start with EPS.
Second quarter adjusted EPS, which excludes an acquisition-related earn-out adjustment, grew 35% to $0.77 compared to $0.57 in 2019.
The earnings per share increase was largely driven by higher sales due to continued high consumer demand for our products and higher gross margins.
As we discussed in previous calls, the quarterly earn-out adjustment will continue until the conclusion of the earnout period.
Reported revenue was up 10.6%, reflecting a significant increase in consumer demand for our products due to COVID.
Organic sales were up 8.4%, driven by a volume increase of 4.9% and positive product mix and pricing of 3.5%.
Organic sales growth was driven by higher consumption, lower couponing and recovery of retailer and stock levels.
Now let's review the segments.
Organic sales increased by 10.7% due to higher volume and positive price mix.
We typically try to break down the organic growth for you.
6% is consumption growth, reflecting strong, tracked and untracked in e-commerce growth, 1% from lower couponing, and then approximately 3.5% from improving retail and stock levels.
Overall, growth was led by ARM & HAMMER liquid laundry detergent, VITAFUSION and L'IL CRITTERS gummy vitamins, ARM & HAMMER clumping cat litter and baking soda and OXICLEAN stain fighters.
Consumer International delivered 0.6% organic growth due to positive price and product mix offset by lower volume.
Growth was driven by BATISTE Dry shampoo, FEMFRESH feminine hygiene portfolio and ARM & HAMMER liquid laundry detergent, launch detergents in the Global Markets Group business, partially offset by Europe and Mexico domestic market declines.
Of note, Asia-Pacific had strong performance in the quarter.
For our SPD business, organic sales increased 3% due to higher volume, offset by lower pricing.
And demand for our products continues to grow in the poultry industry.
Turning now to gross margin.
Our second quarter gross margin was 46.8%, a 220 basis point increase from a year ago due to a reduction in trade, couponing and improved productivity.
In terms of the gross margin bridge versus year ago, positive price and volume and mix contributed 220 basis points.
Productivity added 140 basis points, offset by higher manufacturing costs of 110 basis points which was driven by 110 basis points related to COVID supply chain costs and then improved commodity costs were offset by higher manufacturing costs.
Finally, a drag of 20 basis points from the prior year FLAWLESS accounting impact and a 10 basis point drag from FX is how we get to 220 up for the quarter.
Moving now to marketing.
Marketing was down $6.8 million year-over-year.
Marketing expense as a percentage of net sales decreased 180 basis points to 10.2%.
Due to retailer out of stocks, marketing spend was significantly reduced and shifted to the back half to support new products.
For SG&A, Q2 adjusted SG&A increased 30 basis points year-over-year, primarily due to higher incentive comp, intangible costs related to acquisitions and investments in R&D and IT.
And for net operating profit, the adjusted operating margin for the quarter was 21.5%.
Other expense all in was $14.7 million, a slight decline due to lower interest expense resulting from lower interest rates.
And for income tax, our effective rate for the quarter was 19.6% compared to 18.7% in 2019, an increase of 90 basis points, primarily driven by lower stock option exercises.
And now turning to cash.
For the first six months of 2020, cash from operating activities increased 70% to $599 million due to higher cash earnings and a decrease in working capital.
This includes deferring an $81 million income tax payment in line with the CARES Act.
Within the quarter, we fully repaid the revolving credit line that was accessed in Q1 during the early days of COVID.
As of June 30, cash on hand, was $452 million.
Our full year capex plan has gone from $80 million to $100 million as we begin to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins.
And now turning to the outlook.
Company is now reinstating the 2020 outlook, given we have half the year behind us and strong sales growth in July.
However, due to quarterly volatility in retailer orders and consumer consumption, we will only provide a full year outlook.
We now expect approximately 9% to 10% full year 2020 sales growth and approximately 7% to 8% organic sales growth.
Adjusted earnings per share growth is expected to be 13% above the high end of our original 7% to 9% outlook.
This implies a front-end loaded year and flat earnings per share in the second half as the company has shifted promotional and advertising dollars from the first half to the second half in support of new products.
Turning to gross margin.
The first half gross margin expanded 150 basis points.
We expect that second half will contract by a similar amount.
Half of it is simply the year-over-year impact of acquisition accounting.
The balance reflects incremental COVID costs as well as WATERPIK tariffs, new product support that Matt mentioned, incremental manufacturing and distribution capacity investments.
And so net, that means we'll be slightly below our original full year margin outlook.
As you heard from Matt, we intend to make incremental investments in the back half of 2020.
Some examples here include a new third-party logistics provider, outside storage to handle surge inventories.
Preliminary engineering on capacity decisions.
VMS outsourcing costs as well as other investments around automation, consumer research and analytics.
Lastly, consistent with how we've been managing throughout the crisis, our outlook may continue to adapt, and we may continue to defer trade couponing in advertising even into next year, depending on consumption, the resurgence of COVID-19 or supply constraints.
And with that, Matt and I would be happy to take any questions.
| compname reports q2 adjusted earnings per share $0.77 excluding items.
q2 adjusted earnings per share $0.77 excluding items.
2020 full year outlook raised from original outlook.
2020 reported sales growth forecast raised to 9-10%.
2020 organic sales growth forecast raised to 7-8%.
2020 adjusted earnings per share growth forecast raised to 13%.
|
We encourage you to review all of these materials.
Today, you will hear from our president and chief executive officer, Tom McInerney; followed by Dan Sheehan, our chief financial officer and chief investment officer.
Following our prepared comments, we will open up the call for a question-and-answer period.
Our actual results may differ materially from such statements.
Also, references to statuary results are estimates due to the timing of the filing of the statutory statements.
We are pleased to report another very strong quarter of operating performance, continuing the recent momentum in our businesses.
U.S. life reported adjusted operating income of $93 million for the quarter, up from $71 million in the prior quarter and $14 million in the prior year period.
The results were primarily driven by LTC insurance, which reported adjusted operating income of $133 million, reflecting strong earnings from in-force rate actions, including higher benefit reductions as well as higher net investment income.
Its results included very strong adjusted operating income, substantial growth in primary insurance in force, and robust capital sufficiency.
Dan will provide more details around Enact performance and its impact on Genworth's consolidated results.
We wanted to get another quarter with improved capital sufficiency in both Enact and our principal life insurance company, Genworth Life Insurance Company or GLIC.
We entered the fourth quarter with a strong cash position of approximately $638 million and exciting plans to further strengthen Genworth's balance sheet and advance our long-term growth agenda.
Looking forward, we remain focused on five strategic priorities, which we are working on in parallel.
As a reminder, our priorities are to maximize the value of Enact, reduce our holding company debt, achieve economic breakeven and stabilize the legacy LTC portfolio, advance our LTC growth initiatives, and return capital to shareholders.
Enact is a valuable business with a leading market position and attractive growth opportunities.
We monetize part of our ownership stake during the third quarter through the successful minority IPO, which created significant value for both companies.
Genworth received aggregate net proceeds of approximately $529 million from the IPO.
We use those proceeds to retire in full our outstanding promissory note to AXA of approximately $296 million, nearly a year ahead of schedule.
After the IPO, both Moody's and S&P issued upgrades to some of our ratings and outlooks as well as those of Enact, reflecting further improvement in our financial flexibility and credit risk profile.
We are proud of this outcome and the work we've done today to support these upgrades.
After the IPO, our ownership of Enact decreased from 100% to 81.6%.
We intend to maintain our position for the foreseeable future.
We expect our majority ownership in Enact to generate a significant dividend stream and to be an important source of cash flow going forward.
Next, I'd like to highlight the significant reduction in debt that we have achieved.
Inclusive of the $296 million AXA note repayment, we have reduced holding company debt by $1.5 billion year to date.
We are proud of this progress, which brings us closer to our target debt of approximately $1 billion.
We also made progress toward stabilizing our legacy LTC portfolio this quarter, primarily through our Multi-Year Rate Action Plan or MYRAP.
We have achieved approximately $323 million in rate action approvals year to date, including $117 million in the third quarter, which brings our cumulative total to over $16.3 billion on a net present value basis since 2012.
Pursuing these actual justified rate actions is critical to achieving breakeven on an economic basis for the legacy LTC business over time.
Since 2019, the annual benefit from IFAs has more than offset our statutory losses from our legacy LTC products.
In 2021, this included the impact of a illegal settlement.
As you can see on Slide 11, IFAs are critical to ensuring that premiums exceed payouts, helping to mitigate the risk of large losses in our legacy LTC business in the near term.
Over the longer term, we will reach a point when premiums will no longer exceed payouts and the losses that gave rise to our assumption for the shortfall will emerge.
That's why we're continuing to pursue IFAs while also addressing high risk LTC categories like policies with compounding benefit increases.
We're doing this by offering reduced benefit packages, which provide flexibility to policyholders facing a premium rate increases and which also limit tail risk to Genworth.
We're also developing care management initiatives to work to reduce both the likelihood of people needing care and the level of care they require.
Through IFA, benefit reductions, and care management, we are effectively working to mitigate both near-term and long-term risk associated with our legacy books.
And as you can see on Slide 10, we've made excellent progress on the long-term challenge as benefit reduction options continue to be selected at a higher frequency by our policyholders.
As of September 30, 2021, approximately 43% of Genworth's LTC policyholders have opted some form of reduced benefit option.
Taking a step back, the cumulative effect of rate increases, IFAs, achieved since 2013 has positioned us well to meet obligations over the intermediate term.
We've achieved over $16.3 billion in rate increases on a net present value basis against the current estimated $22.5 million shortfall in our legacy LTC business.
The continued focus on behalf of reductions in care management will help to reduce risk over the long term.
We are currently conducting our annual assumption review and expect to strengthen one of our assumptions for benefit utilization rate at the end of the year, just as that we have strengthened other assumptions to bring them in line with long-term expectations.
This assumption is a key driver of results and is expected to significantly increase our estimated shortfall, reflecting how our experience has evolved.
When our best estimates change and require the strengthening of assumptions, policyholders benefit from strong reserves backing our liabilities.
And as with prior assumptions strengthening, we continue to see broad based support from regulators for actuarially justified rate increases and fully expect these assumptions strengthening to be offset by allowed expansion of our multi-year right action plan.
With the combined effect of prior year IFAs, assumptions strengthening coupled with new IFAs, benefit reductions in care management, we remain confident in our ability to achieve economic breakeven.
We will share more details from our assumptions review on our fourth quarter call.
I also want to highlight the excellent work being done by our U.S. life colleague led by president and CEO, Brian Haendiges.
Brian joined Genworth as chief risk officer in 2020 and took on his current role in February this year.
He has been instrumental in further accelerating risk reduction in our legacy LTC blocks so that we are better positioned to pay benefits over the long term.
He will continue to play a key leadership role in this effort moving forward as well as helping us advance our strategic growth agenda in long-term care.
Before I move on to our LTC growth initiatives, I want to briefly touch on the upcoming changes to U.S. GAAP accounting under the new long duration target improvement or LDPI, standards that were issued by the Financial Accounting Standards Board.
We are preparing for the implementation of these new roles and expect to provide shareholders with a view on the expected impact sometime next year.
I have the effective date in January of 2023.
I want to note that the relative impact of these new accounting rules may be greater for Genworth Life Insurance Company compared to other life insurers, given that our U.S. life portfolio is weighted toward traditional long duration insurance liabilities, including long-term care insurance.
Accordingly, we expect a material impact on our U.S. GAAP balance sheet and income statements upon adoption in 2023 and going forward, including a significant reduction of our U.S. GAAP book value or equity.
GAAP book value for legacy life companies is expected to be significantly lower going forward under the new accounting.
The old U.S. GAAP long duration accounting was based on original pricing assumptions.
The new LDTI accounting will change from the original pricing regime to a best estimate or market-oriented accounting model.
The anticipated reduction in U.S. life's book value is a U.S. GAAP accounting change only.
It will not impact economic cash flows.
The best indicator of current and future economic cash flows for U.S. life and the legacy LTC business remains the statutory cash flow testing regime under statutory accounting.
insurance companies and improving dividends from operating insurance companies to their holding companies.
Statutory accounting for U.S. life will not be impacted by the LDTI U.S. GAAP accounting changes.
The new rules will have no impact on cash or cash flow and they do not change U.S. GAAP accounting for now.
Also as a reminder, we view the value of our U.S. life insurance legacy business at zero, given that we do not expect insurance regulators to approve future dividends from our legacy life companies for the foreseeable future.
At the same time, we have no plans to contribute a holding company capital into the legacy life insurance businesses.
The legacy U.S. life insurance legal entity will continue to fund claims using their existing reserves, statutory capital of $2.5 billion as of the end of June, and the actuarially justified multi-year rate action plan.
Given the importance of our statutory results and statutory cash flow and statutory capital levels to our regulators and our reliance upon these results to track the progress and impact of our LTC multi-year rate action plan, we are including new supplemental statutory earnings and capital information in our slides today and plan to do so moving forward.
Now turning to our next priority, advancing LTC growth initiatives.
We continue to work toward launching a new and innovative platform that will help address the societal need for long-term care in the U.S. The need for senior care is large and growing given by an aging population, longer life expectancy, increasing need for care, and rising care costs.
As reported in our Billion Dollar study published earlier this week.
Long-term care needs -- continue to have significant impacts on aging Americans and their families.
The vast majority of Americans are unprepared financially and unsupported in navigating care and health needs in their daily lives.
While we'll need a substantial, past [Inaudible] stand-alone LTC insurance offerings have been largely unsuccessful in addressing the needs of customers, who face these challenges, resulting in historically low LTC product penetration.
Meanwhile insurers have struggled with an ineffective distribution model and unprofitable economics and have attempted to innovate only on the edges to increase lives insured with hybrid offerings.
We believe the market is ripe for innovation and that Genworth with our 40-plus years of LTC experience and expertise is uniquely prepared to capitalize on this opportunity.
As we've said before, we believe a successful reinvigoration of the U.S. LTC market will address both financing and services and ultimately will help to reduce the likelihood of people needing care and/or less than the cost of care that they need.
Our long-term LTC growth strategy assumes that future revenues will be weighted more toward capital-light service and advice offerings versus risk-bearing highly regulated and capital-intensive LTC insurance products.
We believe future LTC products and services will require significantly less capital, have less risk, and produce higher returns for shareholders.
We believe the capital requirements will be moderate, given the anticipated lower level of risk.
As an initial step, we're working on expanding our services offering through our existing subsidiary CareScout, which is a leading provider of clinical assessments and care support solutions for insurers, healthcare organizations, and consumers.
We plan to invest a modest initial amount approximately $5 million to $10 million to recapitalize and scale this CareScout business so that we can offer more fee-based services going forward.
But at the same time, we're also working with a highly rated reinsurance partner on launching LTC insurance products with lower and more predictable risks than in the past.
The first product will be a low risk individual LTC insurance product with a significant amount of the risk we insured by our partner.
However, we firmly believe that the ability to rerate LTC policies annually is absolutely critical success to future LTC insurance products.
Accordingly, we don't intend to start writing new business until enough states support the need for annual rerating, enabling us to launch a business that a sustainable, scalable, and profitable we're engaging with our state insurance regulators on this topic and we're working toward launching our first new LTC insurance product with our reinsurance partner in the first half of next year.
We are still in early stages of engaging with rating agencies and other stakeholders and look forward to sharing our progress toward launching this new business on future costs.
As we chart a course to future growth, returning to capital -- returning capital to shareholders remains a top priority.
After we receive our -- after we achieve our debt target of approximately $1 billion.
We plan to return capital to shareholders via regular dividend and or share buybacks while also making prudent investments in our LTC growth initiatives.
This commitment to shareholder is an important part of our story in the near to medium term.
And over the longer term, we believe there is a significant opportunity to transform the LTC industry through the successful execution of our growth strategy.
Our vision to build a leading profitable platform that offers holistic solutions to the challenges of aging is a unique value proposition in the marketplace and will put Genworth in a category of one.
We know that realizing this vision will take time and we can't do it alone.
It will take partnerships with other companies and continued collaboration with regulators and other stakeholders to bring these new solutions to market and create value over time.
We look forward to sharing updates in due course.
They have both served as important counsel and partners in guiding Genworth's progress.
As we move into the next phase of Genworth's journey on more stable footing, they each have decided that now is the right time to move on to their own next phases.
Ward's decision to retire comes after 24 years with Genworth, taking the company through its recovery from the financial crisis and its several strategic review processes throughout which he has built strong relationships within Genworth and the regulatory community.
I respect her decision to depart Genworth to be closer to our family in New Jersey and I wish her and her family well.
Both positions will be filled by long-serving Genworth leaders, and I have every confidence and their ability to help lead Genworth through its next chapter.
This was another excellent quarter for Genworth, a strong financial performance and continued advancement toward our strategic priorities.
Net income this quarter was $314 million.
And with this quarter's $239 million adjusted operating income of $0.46 a share, we've reported more than $600 million in adjusted operating income so far this year.
During the quarter, we fully retire the remaining principal amount of the September 2021 debt maturity of $513 million.
We also successfully executed Enact's IPO, generating $529 million in net proceeds that we use to pay off the remainder of our AXA promissory note of $296 million and further enhanced our liquidity position.
Enact's NIW for the quarter was $24 billion and contributed its overall 10% year-over-year increase in insurance in-force.
For the third quarter, Enact reported adjusted operating income of $134 million to Genworth and a strong loss ratio of 14%.
I would note the Genworth's third quarter adjusted operating income excludes an 18.4% minority interest since the Enact IPO date of September 16th of $4 million and adjusted operating income for the third quarter.
Enact finished the quarter with an estimated PMR sufficiency ratio of 181%, approximately $2.3 billion above published requirements.
The improvement in the PMR sufficiency versus the prior quarter was driven by strong business cash flows and additional reinsurance credit.
Regarding a fourth quarter dividend, Enact is evaluating economic and business conditions, including the resolution of forbearance-related delinquencies.
Assuming these conditions remain supportive, Enact intends to recommend to their board the approval of a $200 million dividend.
Genworth would receive its pro rata share of that dividend based on its ownership interest or approximately $160 million.
Life segment, overall result was solid in the quarter at $93 million, driven by the continued strength of the LTC in-force rate action plan and variable investment income.
Mortality continue to be elevated in the quarter in part from COVID-19, which negatively impacted our life insurance results.
Long-term care had adjusted operating income of $133 million, compared to $98 million in the prior quarter and $59 million in the prior year.
As we discussed last quarter, our overall GAAP margins are slightly positive.
We've established a GAAP-only profits followed by losses reserve, which covers projected losses in the future.
As of the third quarter, the pre-tax balance of this reserve was $1.1 billion, up from $625 million as of year end 2020.
This reduced LTC earnings by $129 million after tax during the quarter.
Earnings from in-force rate actions of $304 million prior to profits followed by losses increased versus the prior year.
The Choice I legal settlement that we discussed last quarter favorably impacted our results by $48 million or $16 million after profits followed by losses.
As of quarter end, 42% of the settlement class have reached the end of their selection period and we expect the remaining class members to make their elections by mid-2022.
We also have an agreement for a similar settlement for PCS1 and PCS2 policy forms to still subject to final court approval, the process underway.
If approved in a timely fashion, we expect claimants to start making their elections mid to late 2022.
At this time, it's difficult to assess the overall impact of these legal settlements will have going forward as full implementation will take another one to two years.
Shifting to in-force rate action approvals to LTC, during the quarter, we received approvals impacting approximately $394 million of premiums with a weighted average approval rate 30%.
Year to date, we received approvals impacting $871 million of premiums, the weighted average approval rate of 37%, up from the comparable period last year when we received approvals impacting $595 million in premiums with the weighted average approval rate of 29%.
Our quarterly approvals are uneven.
We expect approvals in the fourth quarter and 2022 to be strong based on pending filings and regulators recognition of the importance of actuarially justified rate increases for Genworth and the industry.
We experienced favorable variable investment income in LTC again this quarter, reflecting higher limited partnership income, gains on Treasury Inflation Protected Securities and bond calls and mortgage prepayments.
While we have seen very strong variable net investment income this year.
We do expect this investment performance to moderate over time.
We did not materially adjust our previously established COVID reserve for mortality during the quarter.
as the pandemic continues to develop, mortality experience may fluctuate in the near term and we will increase or decrease the COVID-19 mortality adjustment accordingly.
New active claims have trended up gradually in 2021 although incidence remains lower than pre-pandemic levels and continues to drive favorable IBNR development during the quarter.
Pending claims submissions, which are a leading indicator of future new claim incidents, increased during the quarter and versus the prior year.
We expect to complete our claims assumption review in the fourth quarter while this work is ongoing and not completed.
Preliminary indications are that our claim reserve assumptions are holding up in the aggregate.
We also plan to complete our review of assumptions related to our active life reserves as well as loss recognition testing and statutory cash flow testing in the fourth quarter.
For these updates, we're generally not including data from 2020 or later in setting any long-term assumptions as we do not yet have sufficient information around longer term effects of the pandemic.
As Tom mentioned, a key area of focus for this year's active life reserve review is the utilization trend assumption, which reflects our view of how benefit utilization will emerge in the future.
Although our recent utilization experience has generally been favorable, we believe this is primarily driven by the pandemic and temporary in nature.
Another area of focus for the utilization assumption is the growth rate of the cost of care in our 2021 review as we compare our long-term assumption for our accumulated experience as well as to industry benchmarks.
While the expected change in the long-term utilization assumption would significantly increase the $22.5 billion legacy shortfall, as Tom stated, we plan to offset the increase to an expansion of our multi-year rate action plan.
We also continue to focus our discussions with regulators on refining options available to policyholders and responding to adverse changes and experience in a timely matter.
We expect to finalize our assumption review in the fourth quarter and we'll share more detail about these updates and associated margin impacts at that time.
Turning to life insurance, overall mortality for the quarter continue to be elevated versus historical experience, including the prior quarter and prior year.
Our third quarter included an estimate of approximately $24 million after tax in COVID-19 claims based upon death certificates received to date.
In our term Universal Life and Universal Life products, we recorded a $30 million after tax charge for DAC recoverability, up from $13 million in the prior quarter.
The charges continue to reflect the unfavorable mortality experience and continued block runoff.
Like LTC, we're generally not including data from 2020 or later in setting any long-term assumptions in life insurance.
However, we're closely monitor in our elevated mortality experience in the context of the ongoing pandemic, including older age mortality as well as mortality improvement.
With respect to interest rates, we're focused on our long-term view of interest rates and current portfolio yields.
On a statutory basis, stand-alone testing of Universal Life products leverages a prescribed interest rate and we expect to increase statutory reserves in the fourth quarter to reflect the decrease in this rate.
Any potential changes to our life assumptions could further negatively impact our statutory results or reduce GAAP earnings in the fourth quarter.
In fixed annuities, adjusted operating earnings of $28 million for the quarter was higher sequentially driven by favorable mortality and the change in reserves related to the increase in interest rates during the quarter.
In the runoff segment, our adjusted operating income was $11 million for the third quarter versus $15 million in the prior quarter and $19 million last year.
Variable annuity performance was driven by equity market performance, which was unfavorable versus the prior quarter and the prior year.
Additionally mortality in the corporate on life insurance products was unfavorable in the current quarter.
We expect capital in Genworth Life Insurance Company, GLIC, as a percentage of company action level RBC to be approximately 290%, up from 272% at the end of the second quarter.
Driving this result is U.S. life statutory earnings, which continue to benefit from higher LTC earnings from the impact of in-forced rate actions, including the benefit from the Choice I legal settlement.
Statutory earnings to LTC are generally higher than GAAP earnings as the concept of profits followed by losses that I discussed earlier does not exist for statutory accounting.
Page 12 of the investor deck highlights recent trends on a quarter lag in statutory performance for the consolidated life companies.
Statutory earnings are also more aligned to taxable earnings, which have resulted in strong cash tax payments to the holding company over the last few quarters.
As Tom noted, with the implementation of LDTI on a U.S. GAAP basis, we plan to highlight the statutory results for our U.S. life insurance business as a part of our quarterly earnings process going forward.
Rounding out the results, adjusted operating income in corporate and other was $1 million and was improved from last quarter in the prior year, driven by lower interest expense and a favorable tax adjustment.
Turning to the holding company, we ended the quarter with a very strong cash position of $638 million with no debt due until our $400 million maturity in August 2023.
As Tom mentioned, we've retired more than $1.5 billion of debt during 2021 while maintaining prudent cash buffers for forward debt service obligations.
This is outstanding progress toward our priority of reducing holding company debt to approximately $1 billion.
Most notably, the net proceeds from the Enact IPO were $529 million, which enabled the full retirement of the AXA promissory note of $296 million.
Intercompany tax payments were $96 million during the quarter and reflected a strong underlying taxable income of Enact and U.S. Life.
Life trends normalize over time we continue to optimize Genworth's group taxable assets and do not anticipate paying federal tax in the near-term.
With our improved liquidity position, we intend to retire our 2023 debt maturity once Enact declares their dividend, moving us $400 million closer to our debt target.
We then anticipate retiring the 2024 debt maturity, leaving an improved debt ladder with the next maturity not until 2034.
In closing, once we've achieved our goal of reducing holding company debt to approximately $1 billion, we'll be positioned to return capital to shareholders.
Dividends from Enact are our main source of cash flow for the foreseeable future and I expect that we'll have a further assessment of future dividend stream in the next several months.
While we that view, we continue to evaluate the optimal approach for shareholder returns.
Our approach will be to find opportunities to return capital to shareholders while still building value over the long term.
| q3 adjusted operating earnings per share $0.46.
|
Our speakers are Jim Owens, H.B. Fuller President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer.
First, a reminder that our comments today will include references to organic revenue, which excludes the impact of foreign currency translation on our revenues.
We believe that discussion of these measures is useful to investors to assist their understanding of our operating performance and how our results compare with other companies.
Unless otherwise specified, discussion of sales and revenue refers to organic revenues and discussion of EPS, margins or EBITDA refers to adjusted non-GAAP measures.
Many of these risks and uncertainties are and will be exacerbated by COVID-19 and resulting deterioration of the global business and economic environment.
Last evening, we reported first quarter results, which built upon the momentum we saw in Q4 of last year.
Organic revenues this quarter were up 10.5%, adjusted EBITDA was up 30% and adjusted earnings per share of $0.66 was nearly doubled last year's first quarter.
The H.B. Fuller team gained share and reduced operating expense in each of our businesses in 2020, which created the momentum that is delivering exceptional financial performance to begin fiscal 2021.
Market innovation and exceptional service led to the share gains as H.B. Fuller solved customer problems faster than competition and growth accelerated as demand continued to strengthen in the first quarter.
As we reported last March, COVID-19 impacted our fiscal Q1 of 2020 only in China and by about $15 million in revenue, $4.5 million in EBITDA and $0.06 of EPS.
Excluding this impact, our revenues were up 8% organically, EBITDA was up 23% and earnings per share was up 65%, exceptional results.
H.B. Fuller works with our customers to solve their toughest adhesive problems.
In today's remote work environment, this means collaborating in new ways and delivering market-driven innovation faster than ever.
For example, we proactively developed and qualified new engineering adhesives for mobile devices, automotive, electronics, electronic vehicle batteries and solar panels to name just a few.
These innovations helped drive one of our strongest quarters for engineering adhesive sales growth.
We created technology and branding opportunities with the new line of GorillaPro MRO adhesives and there will be more H.B. Fuller marketing innovation in the year ahead.
We work with Hygiene, Health and Consumable customers to develop innovative applications and to ensure supply to meet high demand for their products.
As a result, we substantially grew our sales across the majority of our HHC end markets in the first quarter.
H.B. Fuller's revenue growth was also broad based geographically in the quarter with organic growth in all three of our geographic regions.
Importantly, our growth came with positive incremental margins driven by product mix, reduced expenses and structural efficiencies resulting from our business realignment last year.
EBITDA margin increased 190 basis points year-on-year.
Raw material cost increased from where we exited 2020, but we're still relatively neutral on a year-over-year basis in the first quarter and in line with our expectations.
Raw material cost going forward will increase at a faster rate than originally anticipated due to increased demand, reduced inventories and supply constraint.
Winter storm Uri in the Gulf Coast in February has created additional tightening in the United States and is impacting global supply.
Supply has become tight for commodity materials, which make up a smaller portion of our portfolio.
As the year progresses, this will also have an impact on the supply and pricing of the specialty materials, which make up the majority of our purchases.
Most suppliers have made good progress in recovering from Uri.
However, the rate of recovery going forward will mostly depend on the output rates of the impacted assets and the time it takes for supply chains and inventory levels to fully recover.
We have done a very good job of serving customers thus far by working closely to manage inventories and available materials.
Our contracted positions with our suppliers, backward integration of key polymers and global breadth have helped us manage the supply crisis thus far.
The breadth of our adhesive chemistry and the diversity of our raw materials has meant that no single material has had a large impact on us and has enabled us to help customers find alternatives when short supply exists.
The near-term disruptions we are navigating in the US are considerable, but they are temporary and supply is expected to normalize to a more balanced level in the coming months.
Our planning assumptions anticipate that the risk of supply disruption will lessen as we exit the second quarter and we do not anticipate that it will have a material impact on our ability to meet demand.
However, we now expect year-on-year raw material inflation to be in the range of 5% to 8%.
H.B. Fuller has done a remarkable job in supporting customers through supply shortages and we also have implemented over $100 million in annualized price adjustments that are effective in Q2 and will enable us to continue to seamlessly serve our customers.
Some of these were effective on February 15, with most effective March 15 and April 1.
We are preparing for further price adjustments, if needed in Q3.
These price adjustments will fully offset the impact of raw material increases.
Now let me move on to discuss performance in each of our segments in the first quarter on Slide 4.
Hygiene, Health and Consumable Adhesives' first quarter organic sales increased 7.6% year-over-year, continuing the strong performance trend in this business unit in 2020.
Sales increased versus last year across the majority of our HHC markets with strong growth in Packaging, Tissue & Towel and Tape & Label and good growth in hygiene in particular.
HHC segment EBITDA margin was strong at 13.3%, up 180 basis points, margin improved versus last year, reflecting volume leverage, restructuring benefits and good expense management.
Construction Adhesives' organic revenue was down 10% versus last year as winter storm Uri, extreme weather and material supply issues across much of the United States impacted construction activity as we started the year.
Construction Adhesives' EBITDA margin declined versus last year reflecting these issues.
Underlying operational improvements from the GBU restructuring were offset by lower volume and the impact of severe weather.
Uri temporarily disrupted operations at our construction adhesive facilities in Texas in February.
Both plants have now been fully up and running since early March.
Aside from these near-term impacts, demand for Construction Adhesives continues to be strong for residential builds and remodeling.
Demand has also begun to improve on the commercial roofing side.
We are planning for both top-line performance and margins to improve significantly over the rest of the year.
Engineering Adhesive results were extremely strong with organic revenue up 21% versus last year, reflecting share gains and improving end market demand.
Sales increased versus last year across the majority of our EA markets with the strongest growth in electronics and new energy.
We expect continued strength and double-digit full year growth in this segment.
Engineering Adhesives' EBITDA margins were strong at 15.4%, up 300 basis points compared with Q1 last year, reflecting strong volume leverage and good expense management.
Looking ahead at our full year results, our planning assumptions are that COVID-related shutdown impacts will remain but continue to decrease as vaccines are rolled out around the world.
We anticipate that many raw materials will be tied through the summer as supply chains normalize and demand continues to be strong.
We anticipate continued improvement in underlying demand in each of our business units, driving volume growth in 2021 versus 2020.
Growth in some end markets such as commercial construction and aerospace will improve at a slower pace and may not return to 2019 levels of activity this year.
While Engineering Adhesives demand is expected to moderate from first quarter levels, which reflect some pent-up demand, we expect end market demand will likely be strong for the entire year.
Overall, when considering our strategic pricing actions, coupled with the solid volume growth in HHC, improved performance in Construction Adhesives and strong demand in Engineering Adhesives, we now expect full year revenue growth of high single digits to low double-digits versus 2020.
I'll begin on Slide 5 with some additional financial details on the first quarter.
Net revenue was up 12.3% versus same period last year.
Currency had a positive impact of 1.8%.
Adjusting for currency, organic revenue was up 10.5% with volume accounting for all of the growth.
Pricing had a neutral impact year-on-year in the quarter.
Year-on-year adjusted gross profit margin was 26.7%, up 20 basis points versus last year, driven by the higher volume.
Adjusted selling, general and administrative expense was up 2.9% versus last year.
SG&A was down 170 basis points as a percentage of revenue, reflecting savings associated with our business reorganization, lower travel expense, general cost controls, offset by higher variable comp than last year.
Net other income increased by $3 million versus last year, driven primarily by increased income on pension assets.
Net interest expense declined by $2 million, reflecting lower debt balances.
The adjusted effective income tax rate in the quarter was 27.5%, up 180 basis points versus the adjusted tax rate in the first quarter last year, driven primarily by mix of income and tax related to the global cash strategies.
Adjusted EBITDA for the quarter of $101 million is 30% higher than the same period last year, driven by strong top-line growth, particularly in Engineering Adhesives, restructuring savings and good cost management, partially offset by higher variable compensation.
Adjusted earnings per share was $0.66, up 94% versus the first quarter of last year, reflecting strong operating income growth and lower interest expense associated with our debt reduction.
Cash flow from operations in the quarter of $36 million was up from last year, reflecting strong income growth, partly offset by higher working capital requirements to support the strong top-line performance.
We continue to reduce debt paying down $16 million in the quarter compared to $6 million during the same period last year.
Regarding our outlook, based on what we know today and the planning assumptions that Jim laid out earlier, we anticipate revenue to be up high single-digits to low double-digits versus 2020 and EBITDA to be between $455 million and $475 million as continued strong volume growth and pricing actions offset higher raw material costs.
We expect cash flow to be strong for the rest of the year, allowing us to maintain our target to pay down approximately $200 million of debt during 2021.
We were very pleased with our strong start in the first quarter, which follows a strong fourth quarter, both of which greatly outperformed predominantly non-COVID quarters from the prior year.
We are growing through our strategy of delivering sustainable innovation and high value solutions and we are in a great position to continue to grow our business as global economies continue to open up in 2021.
This year, we will focus on three critical priorities to profitably grow our business in a dynamic environment.
Our top priority is to drive continued volume growth as we support our customers success in the current high demand and supply constrained environment.
This means continued growth through innovation, leverage of remote servicing tools as a new standard and finding creative ways to address any raw material shortages we see in the coming months.
Our second imperative is to strategically manage pricing aligned to the value we deliver in this inflationary environment.
Our company has built pricing tools and in-depth training in anticipation of the day when material inflation returned.
And we are already executing with speed and precision to maintain and grow our business while pricing to value.
Our third priority, to help fuel our growth will be to release productive capacity through our operational excellence programs.
Our 2020 operations investment was centered on creating the operational discipline and metrics that enable more productivity per employee work hour.
In a low capital-intensive business like ours, this helps to reduce cost and increase capacity.
We will also deliver an additional $200 million of debt reduction in 2021, moving the company closer to our net debt target of 2 to 3 times EBITDA.
On our conference call a year ago in March of 2020, I told you that because of our extraordinary collaboration with customers, a robust global operations and supply chain and our unmatched expertise and adhesive innovation, I was confident that H.B. Fuller which strengthened its position in this industry, setting ourselves apart from competition and enabling us to grow as global economies recover.
I was confident that we would emerge as an even stronger company than prior to the pandemic.
Our stronger performance throughout 2020 and our exceptional results in the first quarter are proof that my confidence was well founded.
This company is built on an agile business model where people collaborate remotely with each other, with customers and with suppliers around the globe.
In a changing world, these attributes of agility, collaboration and flexibility have enabled H.B. Fuller to excel.
As working conditions changed, supply and demand fluctuated and as supply constraints emerged, the H.B. Fuller team has been first and fastest among adhesive companies at addressing challenges.
Growing the business this year in a period of economic recovery presents exciting opportunities and unique challenges.
In 2021, our business priorities are squarely focused on capturing share and managing inflation risks as we continue to build on our rising leadership position in the global adhesives industry.
Our culture of collaboration and innovation and our improving operational execution gives me confidence that we are strongly positioned to continue to deliver sustained value for our shareholders in 2021 and in the years ahead.
Operator, please open up the call so we can take some questions.
| compname posts q1 adjusted earnings per share $0.66.
q1 adjusted earnings per share $0.66.
raises its full year guidance on stronger outlook for revenue and ebitda growth.
anticipates high-single digit to low double-digit revenue growth, and adjusted ebitda in range of $455 million to $475 million for fiscal 2021.
sees full year raw material costs to increase 5% to 8% versus 2020.
expects to pay down additional $200 million of debt in 2021.
|
In particular, the extent of the continued impact of COVID-19 on our business remains uncertain at this time.
During today's call, we will discuss GAAP and non-GAAP financial measures.
After the content of today's call, Lewis will begin with a recap of Dolby's financial results and provide our second quarter 2021 outlook, and Kevin will finish with the discussion of the business.
I think I'll jump right into the numbers.
First quarter revenue was $390 million, which was above the guidance range of $330 million to $360 million and was also above the $271 million we saw in Q4 and the $292 million in Q1 of last year.
Revenues were better than what we guided as we had a true-up in the quarter of about $20 million that relates to Q4 shipments, and we also had some recoveries in Q1 that came in sooner in the year than we thought.
So that's more of a shift in timing within the fiscal year.
Q1 also benefited from higher estimated market TAMs. In terms of the sequential growth from Q4, Q1 benefited from timing of revenue under contracts and higher recoveries, along with higher adoption, and this was consistent with what I highlighted at the beginning of the quarter.
And in addition, sequential growth was helped by holiday seasonality, which is sort of a typical factor.
In the year-over-year comparison, all of our cinema-related revenue streams were down significantly from last year's Q1, and that's because of COVID.
But then more than offsetting that were higher revenues from timing under contracts, higher recoveries and greater adoption of Dolby.
So the Q1 revenue of $390 million was composed of $373 million in licensing and $17 million in products and services.
So let me discuss the trends in-licensing revenue by end market starting with Broadcast.
Broadcast represented about 37% of total licensing in the first quarter.
Broadcast revenues increased by about 36% year-over-year, and that was driven by higher recoveries; higher adoption of Dolby, including our patent programs; and a higher true-up, which relates to the Q4 shipments.
And this was offset partially by lower market volume in set-top boxes.
On a sequential basis, Broadcast was up by about 16%, driven by holiday seasonality for TVs, higher recoveries and higher adoption, offset partially by the lower set-top box activity.
Mobile represented approximately 28% of total licensing in Q1.
Mobile increased by a little over 200% from last year and about 170% from last quarter due primarily to timing of revenue under customer contracts and also helped by higher customer adoption.
Consumer Electronics represented about 14% of total licensing in the first quarter.
On a year-over-year basis, CE licensing was up by about 6%, mainly due to higher adoption of Dolby, including our patent programs.
On a sequential basis, CE increased by about 52%, driven by higher seasonality, higher adoption in our patent programs and timing of revenue under contracts.
PC represented about 9% of total licensing in Q1.
PC was higher than last year by about 3% due to increased adoption of Dolby's premium technologies like Dolby Atmos and Dolby Vision.
And this was offset partially by declining ASPs that comes from mix of disc versus non-disc units.
Sequentially, PC was up by about 5%, driven by higher adoption of those premium Dolby technology.
Other Markets represented about 12% in total licensing in the first quarter.
They were up by about 8% year-over-year, driven by higher gaming from new console releases and also from higher Via admin fees and via the patent pool program that we administer.
And that was offset partially by significantly lower Dolby Cinema box office share because of COVID.
On a sequential basis, Other Markets was up by about 33%, driven by higher revenue from gaming and from the Via admin fees.
Beyond licensing, our products and services revenue was $16.9 million in Q1 compared to $14.3 million in Q4 and $34.2 million in last year's Q1.
We had anticipated the large year-over-year decrease in our guidance because most of this revenue comes from equipment that's sold to cinema exhibitors, and these customers continue to be negatively impacted by the pandemic.
The Q1 total was slightly above guidance, and that was mostly attributable to exhibitors in China.
Now I'd like to discuss Q1 margins and operating expenses.
Total gross margin in the first quarter was 90.9% on a GAAP basis and 91.5% on a non-GAAP basis.
Products and services gross margin on a GAAP basis was minus $5.5 million in Q1 compared to minus $15.5 million in the fourth quarter, and the fourth quarter included large excess of obsolete inventory charges because of our decision to exit the conferencing hardware arena.
We are taking steps to reduce the cost structure in manufacturing, and we should start to see some impact of this by the end of this quarter.
This quarter, meaning Q2.
Products and services gross margin on a non-GAAP basis was minus $3.9 million in Q1 compared to minus $14.1 million in the fourth quarter.
And I would apply the same comments here as I did in the GAAP section.
Operating expenses in the first quarter on a GAAP basis were $189.8 million compared to $198.7 million in Q4.
The Q1 total includes $13.9 million of gain from sale of assets as we completed the disposition of our former Brisbane manufacturing site during the quarter.
But it also includes $10 million of restructuring expense, primarily for severances and the related benefits, consistent with the comments that I made at the beginning of the quarter when I provided guidance.
Operating expenses in the first quarter on a non-GAAP basis were $167.1 million compared to $176.5 million in the fourth quarter.
Non-GAAP operating expenses were below what we've guided primarily due to various marketing programs that shifted out in timing as well as lower bad debt expenses than we had projected.
Operating income in the first quarter was $164.7 million on a GAAP basis or 42.3% of revenue compared to $48.6 million or 16.6% of revenue in Q1 of last year.
Operating income in the first quarter on a non-GAAP basis was $189.7 million or 48.7% of revenue compared to $74.1 million or 25.4% of revenue in Q1 of last year.
Income tax in Q1 was 14.5% on a GAAP basis and 19.9% on a non-GAAP basis.
Net income on a GAAP basis in the first quarter was $135.2 million or $1.30 per diluted share compared to $48.8 million or $0.47 per diluted share in last year's Q1.
Net income on a non-GAAP basis in the first quarter was $153.3 million or $1.48 per diluted share compared to $65.5 million or $0.64 per diluted share in Q1 of last year.
For both GAAP and non-GAAP, net income in the first quarter was above guidance due to revenue higher than what we projected, combined with operating expenses lower than what we had estimated.
During the first quarter, we generated about $82 million in cash from operations, which compares to about $31 million generated from operations in last year's first quarter.
And we ended the first quarter this year with about $1.2 billion in cash and investments.
During the first quarter, we bought back about 500,000 shares of our common stock and ended the quarter with about $147 million of stock repurchase authorization still available to us.
We also announced today a cash dividend of $0.22 per share.
The dividend will be payable on February 19, 2021, to shareholders of record on February 9, 2021.
Now let's discuss the forward outlook.
As a reminder, the approach we took at the beginning of the fiscal year was to give specific guidance for Q1, like normal, and then give a scenario of a revenue range for Q2 and then give some qualitative comments on the second half of the year.
We took that approach because of the uncertainties from COVID, which was causing very limited forward visibility.
Now nearly three months later, it's fair to say that visibility remains very limited.
Not surprising, given the ongoing disruption we're seeing around the world from pandemic.
So today, we'll take a similar approach to what we did before.
I will discuss full P&L guidance for Q2 and then provide some color on the second half of the year, but not detailed guidance.
Let me start by reminding you of a couple of comments I made last quarter that remained true today.
At that time, I said that for the first half of FY '21, we were anticipating year-over-year growth in licensing revenue from higher adoption of Dolby technologies, but we are also expecting year-over-year decline in products and services revenue because of the COVID impact on the cinema industry.
Let's talk more specifically now then about the Q2 revenue outlook.
Last quarter, I provided a Q2 revenue scenario of $270 million to $300 million for the quarter.
Today, our scenario is that Q2 revenue could range from $280 million to $310 million.
The TAM data for Q2 has risen modestly compared to what we were seeing a few months ago, and we have factored that into this latest scenario.
And to reinforce something I said last quarter, the transition from Q1 to Q2 this year reflects higher revenue in Q1 from timing under customer contracts and also recoveries.
Last year, in FY '20, that order was reversed in the sense that Q2 was the quarter that benefited more from the timing and recoveries.
So if I combine the Q2 actual that we just reported with the Q2 outlook I mentioned a second ago, that would put our first half revenue outlook range at $670 million to $700 million compared to our previous outlook range of $600 million to $660 million.
So that's the first half.
Now let's talk about revenue in the second half of FY '21.
There's four main factors that I'd like to highlight: TAMs, the pace of recovery in cinema space, timing of revenue and higher adoption of Dolby.
Let me explain a bit more.
First of all, the industry TAM data that we're currently seeing from analysts continues to indicate that TAMs are projected to be lower in our second half on a year-over-year basis, mainly because of an uptick in shipment volume of certain devices like TVs and PCs that happened in the second half of FY '20 but is not projected to repeat in the same time frame of FY '21.
Second, in the cinema space, the recovery that people might have been expecting seems to be pushing out in time, and that's judging by trends in content by big titles and screen openings or closings.
Third, as I alluded to earlier, some of the upside in our Q1 revenue, the quarter we just reported, came from deals closing sooner than we thought, in other words, moving from second half into the first half.
And fourth, we would anticipate that a higher adoption of Dolby technologies would drive year-over-year growth.
And then from a sequential perspective, i.e., transitioning from first half '21 to second half '21, we had said before and we continue to say that we anticipate second half revenue would be below first half because of a combination of lower seasonality in consumer device shipments and lower revenue from timing under contracts and from recoveries.
So considering these various factors, we could see a scenario for second half revenue in the mid- to high 500s.
But as I said earlier, we'll stop short of providing detailed guidance because of the limited visibility right now.
And of course, we plan to provide you all with an update in three months when we publish our Q2 actual results.
So let me quickly finish up by providing an outlook on the rest of the P&L for Q2.
I already highlighted the revenue range of $280 million to $310 million in total, of which licensing would comprise $270 million to $295 million, while products and services would comprise $10 million to $15 million.
Q2 gross margin on a GAAP basis is estimated to range from 88% to 89%, and the non-GAAP gross margin is estimated to range from 89% to 90%.
Within that, products and services gross margin is estimated to range from minus $3 million to minus $4 million on a GAAP basis and from minus $2 million to minus $3 million on a non-GAAP basis.
Operating expenses in Q2 on a GAAP basis are estimated to range from $200 million to $210 million.
In Q2, our annual salary increases for all the employees go into effect, and we also anticipate more activity in marketing programs as well as R&D projects.
Operating expenses in Q2 on a non-GAAP basis are estimated to range from $175 million to $185 million, and the projected increase from Q1 is driven by the same comments I made about the GAAP operating expenses.
Other income is projected to range from $1 million to $2 million for the quarter, and our effective tax rate for Q2 is projected to range from 20% to 21% on both a GAAP and non-GAAP basis.
So based on the combination of the factors I just covered, we estimate that Q2 diluted earnings per share could range from $0.36 to $0.51 on a GAAP basis, and from $0.57 to $0.72 on a non-GAAP basis.
That's all I have.
Over to you, Kevin.
Our fiscal year is off to a great start, and we continue to enable Dolby experiences to more people around the world.
Dolby Vision and Dolby Atmos are increasingly available across a broad range of new devices and services, and we are enabling more Dolby experiences in music and gaming, which is adding to our value proposition for broader adoption in areas such as Mobile and PC.
On top of that, we are excited about bringing Dolby to address everyday virtual experiences and interactions through Dolby.io.
All of this adds to our confidence in the significant growth opportunities that we see ahead of us.
As consumers spend an increased amount of time enjoying content within their homes, it is clear that the quality of these experiences matter.
And Dolby Vision and Dolby Atmos are consistently highlighted among the devices and services that enable the best way for people to enjoy their content.
The combined Dolby experience was highlighted at CES throughout the latest TV lineups from our partners, including LG, Sony and Panasonic.
TCL and Skyworth also announced they are adding support for Dolby Vision IQ, which optimizes the picture on your TV to the surrounding light and the content being viewed.
Earlier this quarter, OPPO launched their first TVs, which includes support for the combined Dolby Vision and Dolby Atmos experience.
And Dolby Atmos continues to be highlighted among the top sound bars in the market, including the latest products announced at CES from LG, JBL and TCL.
As we move beyond the living room, our partners are increasing the ways in which consumers can enjoy Dolby experience, including new adoption and headphones.
Apple is supporting Dolby Atmos in AirPods Max, adding to the ways the consumer can enjoy the Dolby experience across Apple's devices and services.
Samsung recently announced that their Galaxy Buds Pro supports Dolby Atmos and includes Dolby head tracking technology, which enables consumers to have a realistic and immersive sound experience as they physically move in relation to where their content is being played.
Within PC, we continue to see growing momentum for broader adoption of Dolby technologies.
Lenovo announced that they will be bringing the first PCs with Dolby Voice to market.
Dolby Voice for PCs will optimize the communications experience to create clearer and more natural meeting experiences.
This is another example of how we are bringing new value to our partners by addressing a primary use case for how consumers interact with their PCs on an everyday basis.
Lenovo also continues to support Dolby Vision and Dolby Atmos across their latest PC lineups.
Additionally, Dell continues to release new PCs that support Dolby Vision.
And in India, we saw new Nokia PCs from Flipkart come to market with the combined experience.
With a broad range of OEM partners and devices that support Dolby Vision and Dolby Atmos, it is becoming easier for consumers to discover content available in Dolby.
HBO Max became the latest major streaming service to support the combined Dolby Vision and Dolby Atmos experience, starting with the release of Wonder Woman 1984.
They joined top streaming services around the world like Netflix, Disney+, Apple TV+, Tencent, Rakuten and more that are enabling content and the combined experience.
In addition, Amazon Prime video began to stream live English Premier League matches in Dolby Atmos, and Canal Plus is now supporting Dolby Atmos within their on-demand services in Poland.
And while we're on the topic of movie and TV content, let me spend a moment on Dolby Cinema.
As Lewis said, the environment remains challenging across the industry.
At the same time, in certain regions where consumers have been able to return to the cinema and there is strong local content, we have seen that consumers will seek out a premium experience.
As the industry continues to evolve, we are confident that Dolby Cinema enables the best way to enjoy a movie and our partners remain deeply engaged.
12 new Dolby Cinema locations around the world were opened this quarter, including our first site in Taiwan.
So as we continue building on our strong presence within movie and TV content, we see significant opportunities to enable more Dolby experiences in areas like music and gaming.
The music and Dolby experience continues to expand globally across artists, services and devices.
Several new artists around the world released music in Dolby Atmos for the first time this quarter.
Anghami, one of the largest music streaming services in the Middle East, announced that they will be enabling support for Dolby Atmos music within their Anghami Plus service.
TIDAL continues to expand the number of devices within the home that enable the Dolby Atmos music experience with their TIDAL Connect feature.
The music and Dolby experience adds to our value proposition for deeper adoption within mobile, and creates new opportunities in new device categories like automotive, where we see strong initial engagement from potential partners.
Moving on to gaming.
The Xbox Series X and Series S will be the first consoles to support the combined Dolby Vision and Dolby Atmos experience for gaming content with updates scheduled for later this year.
New gaming titles like Call of Duty: Cold War and Immortals Fenyx Rising were released this quarter with support for Dolby Atmos.
As we grow the amount of gaming content in Dolby, we increase the reasons for broader adoption in mobile and PC devices.
Lenovo and ASUS recently announced new gaming PCs that will support Dolby experiences.
And this quarter, QQ Speed Mobile by Tencent became the first mobile game with Dolby Atmos.
Tencent games and Anghami Plus are examples of the growing momentum we have in enabling more Dolby experiences in gaming and music that address more of the content that consumers are most engaged with on their mobile devices.
With the release of iPhone 12 at the beginning of the quarter, consumers can now record, share and enjoy their videos in Dolby Vision.
BT is now streaming live sports in Dolby Atmos to mobile devices via their BT Sports app.
And Bilibili, one of the largest video sharing sites in China, began supporting content in Dolby Atmos.
As we continue to increase the amount of relevant content, we are adding to our value proposition for deeper and broader adoption of Dolby within mobile devices.
We also continue to deepen our engagement within the developer community with Dolby.io.
Having been in market now for about eight months, let me highlight a couple of opportunities that we are focused on.
First, there is an increasing demand for high-quality real time interactions across a broad range of apps and services, including social media, live performance and online education.
This is the use case for our interactivity APIs with Dolby Voice.
For example, Kiddom, a digital platform for online education, is expanding their usage to include our full suite of interactivity APIs, including Dolby Voice, to improve the quality of the communications experience between teachers and students.
Second, we see an opportunity to bring higher quality to recorded media content, starting with audio.
Video platforms are embedding our media APIs to enable higher quality audio experiences ranging from social media and podcasts, to product videos and even footage used for news broadcasts.
While we are still in the early days, we are learning from our engagement with developers to continue to involve our offer -- evolve our offering, increase usage and broaden the number of use cases that we can address.
So to wrap up, the combined Dolby Vision and Dolby Atmos experience is consistently highlighted among the best ways to enjoy movie and TV content.
We are seeing the Dolby experience expand across new forms of content, for music and gaming to user-generated content, all of which build upon our value proposition for broader adoption across devices and services.
The engagement with our developer platform continues to grow, bringing Dolby to a broader world of content experiences and interactions.
All of this gives us confidence in our ability to drive revenue and earnings growth into the future.
| dolby laboratories q1 non-gaap earnings per share $1.48.
q1 non-gaap earnings per share $1.48.
q1 gaap earnings per share $1.30.
expect continued uncertainty in global financial markets.
dolby laboratories- anticipate that cinema sites and production of content could continue to be negatively affected through fiscal 2021 or longer.
total revenue is estimated to range from $280 million to $310 million in q2 fiscal 2021.
diluted earnings per share is anticipated to range from $0.36 to $0.51 on a gaap basis in q2 fiscal 2021.
diluted earnings per share is anticipated to range from $0.57 to $0.72 on a non-gaap basis in q2 fiscal 2021.
|
I am joined today by Kroger Chairman and Chief Executive Officer Rodney McMullen and Chief Financial Officer Gary Millerchip.
A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.
We are excited to see that many of you will also be attending, either virtually or in person, our 2022 Business Update tomorrow in Florida when we will share additional details and answer questions about our long-term strategy and growth initiatives.
More information about virtual registration for this event can be found at ir.
[Operator instructions] Additionally, we would ask that you focus today's questions on our fourth quarter and full year 2021 results, as well as our 2022 guidance.
Our strategy of Leading With Fresh and Accelerating With Digital propelled Kroger to record performance in 2021 on top of record results in 2020.
We are incredibly proud of our associates who continued to deliver for our customers through the pandemic.
During 2021, our team delivered for all stakeholders by, first of all, achieving positive year-over-year identicals, without fuel, against very strong identicals last year and a two-year stack of 14.3%.
Also by connecting with customers through expanding our seamless ecosystem and remarkable, consistent delivery of full fresh and friendly customer experience for everyone, plus investing more than ever before in our associates to raise our average hourly rate to $17 and our average hourly rate to over $22 when you include compensation and benefits as well.
We balance all of these investments by achieving cost savings of greater than $1 billion for the fourth consecutive year, and alternative profits contributed an incremental $150 million of operating profit as well.
As we look to 2022, we expect the momentum in our business to continue, and we have confidence in our ability to navigate a rapidly changing operating environment.
We are leveraging technology, innovation, and our competitive moats to build lasting competitive advantages.
Our balanced model is allowing us to deliver for shareholders, invest in our associates, continue to provide fresh, affordable food for our customers, and support for our communities.
We remain confident in our growth model and our ability to deliver total shareholder return of 8% to 11% over time.
Kroger is leading with fresh.
Our fresh departments outpaced total company identical sales, excluding fuel, during the fourth quarter.
Kroger remains the No.
1 retailer in many exciting areas, such as specialty cheese, sushi, and floral.
As the world's largest florist, we sold over 76 million floral stems for Valentine's Day alone.
And the smiles that came along with that for our customers and associates were free.
We advanced our fresh strategy and strengthened our fresh offerings in 2021 by launching our Go Fresh & Local Supplier Accelerator, supporting our commitment to small businesses.
As a result of the launch, we have brought a number of new products to customers, and the initial results have exceeded our expectations.
We are still early in the program, and we will continue to partner with small businesses to expand our pipeline of new products.
We also remain a leader in innovation through exciting partnerships with companies like Kitchen United and Kipster.
We've completed the initial test phase of our End-to-End Fresh initiatives focused on bringing more days of freshness to our customers and are confident in its scalability and with plans to expand to targeted stores across the country.
Our brands continue to resonate strongly with customers and maintains a culture of innovation, launching over 660 new items during the year.
More than half of those new items were within our Simple Truth and Private Selection portfolios.
We accelerated Home Chef's incredible milestone of becoming a billion-dollar brand, our fourth greater-than-$1 billion brand, which is pretty special.
As a reminder for everyone, we merged with Home Chef in 2018.
At the time, we knew our customers were looking for ways to make mealtime easier without compromising on taste or freshness.
While Home Chef originated as a pure-play e-commerce offering, we saw immense potential to integrate and leverage it across our seamless ecosystem, scaling it within our stores and continuing to grow online.
The success of this integration demonstrates our ability to integrate and scale solutions that provide value to our customers and grow our competitive moats.
Kroger is focused on delivering a seamless experience that requires 0 compromise by customers, and I think that's a really important point, 0 compromise required by customers.
And what that means is the freshest products at competitive prices and flexible lead times.
Yael will go into a lot more detail tomorrow on what 0 compromise means for our customers at our business update.
The strength in our top-line sales in 2021 demonstrates our ability to meet our customers no matter how they choose to engage with us, whether it's in-store or online.
At the same time, we are actively encouraging customers to engage with us on our digital platforms, even when shopping in store.
That's because when a customer engages with us digitally, they spend more with Kroger within all modalities.
We continue to attract new customers to our digital platforms.
During the quarter, we saw new seamless pickup and delivery to household acquisitions increased 25% compared to the third quarter.
We remain committed to doubling digital sales and profitability by 2023, which was announced in 2021.
We look forward to sharing our glide path to this goal with you tomorrow.
We do not expect digital growth will be linear, especially as we cycle the sales spike in 2020 and customers become more comfortable shopping in store again.
We are incredibly proud of the new digital modalities we launched during 2021, including Kroger Delivery Now, our Boost membership program, and the rollout of new customer fulfillment centers, all of which we expect to contribute meaningfully to our long-term goals.
Yesterday, we announced a new customer fulfillment center for the Cleveland region, following on heels of our announcement of a cross-dock spoke facility that will serve Oklahoma City.
And just a few weeks ago, we opened our third customer fulfillment center in Forest Park, Georgia, and are leveraging learnings from Monroe and Groveland to drive efficiencies and scale in the new facility.
Customers are loving this new offering, and we continue to be pleased with the initial rollout of our facilities in Groveland and Monroe, and we look forward to sharing additional insights tomorrow.
Now turning to the supply chain.
Our teams across our stores, warehouses, plants, and offices have been incredible in working together to supply fresh food and necessities for our customers while addressing the rapidly changing environment.
During the quarter, industry challenges continued within the supply chain, and we remain confident in our ability to navigate these challenges.
Within our supply chain, we continue to deploy a wide array of tools, including our owned and operated fleet.
We are also partnering with our suppliers to improve product availability using the strength of our data science teams to provide insights that shorten lead times and optimize inventory flow across the extended supply chain.
We continue to focus on expanding our transportation contracts and attracting carriers from outside our industry, which has kept product flowing predictably across our network.
The teams are doing a great job managing the increased costs, and the trends within our costs are improving sequentially.
We are using our data and supplier data plus leveraging technology to support future growth.
We expect the supply chain to continue to improve throughout the year as a result of our actions.
When I visit our stores, I often hear from our associates that what they love most about their job is that they can positively impact the lives of our customers, communities, and each other every day.
And it's also what I love about our business too.
And it's what makes our purpose, to Feed the Human Spirit, so vital for our people.
One way we live our purpose is through progress toward our ESG goals and our commitments.
As part of our Zero Hunger | Zero Waste social and environmental impact plan, last year, Kroger donated 499 million meals, that's right, 499 million meals, to feed hungry families across America.
And we continue to make progress toward our goal of 0 waste.
As part of our commitments to helping people live healthier lives, we've administrated almost 11 million doses of the COVID-19 vaccine through Kroger Health.
For our more than 450,000 associates, we strive to create a culture of opportunity, and we take seriously our role as a leading employer in the United States.
Kroger has provided an incredible number of people with their first jobs, new beginnings, and lifelong careers.
As we continue to operate in a challenging labor market, we are dedicated to attracting and retaining the right talent across the organization to be able to continue delivering for our customers.
We are investing more than ever before in our associates by expanding our industry-leading benefits, including continuing education and tuition reimbursement, training and development, health and wellness, as well as the continued investment in wages that I mentioned earlier.
This is enabling us to navigate current labor conditions while continuing to provide America with the freshest food at affordable prices across our seamless ecosystem.
We are cultivating an environment where all associates are able to thrive.
For the fourth year in a row, Kroger earned top score in the Human Rights Campaign Foundation's 2022 Corporate Equality Index, the nation's benchmark in measuring corporate policies and practices related to LGBTQ+ workplace equality.
Last year alone, we provided more than $5 million to support associates through unexpected hardships through our Helping Hands Fund.
This includes providing critical funds for disaster relief for nearly 1,300 associates.
2021 was an incredible year for Kroger, and we are committed to continued growth.
One of Kroger's greatest strengths is our relentless focus on learning and improving every day.
I believe this has been a key on navigating our business successfully in every operating environment.
We remain customer-obsessed and focused on operational excellence to deliver for our customers, associates, communities, and shareholders.
Kroger continues to execute at a high level and is delivering exceptional results while navigating a rapidly changing environment.
Before I get into our results in more detail, I would like to start by echoing Rodney's appreciation to our fantastic associates.
Their dedication to serve our customers and support each other throughout the pandemic has been nothing short of incredible.
Our performance last year clearly highlights the strength of Kroger's go-to-market strategy as we achieved positive identical sales without fuel and adjusted earnings per share growth on top of record results in 2020.
We also continued to invest in our customers and associates to ensure Kroger is well-positioned for future success.
These investments were balanced with over $1 billion in cost savings and $150 million of incremental operating profit from alternative profit streams.
I will now provide additional color on our full year results.
We delivered adjusted earnings per share of $3.68 per diluted share, up 6% compared to last year.
Identical sales, excluding fuel, were positive 0.2% and digital sales on a two-year stacked basis grew by 113%.
Our adjusted FIFO operating profit was $4.3 billion, up 6% over 2020.
Gross margin was 22% of sales for 2021.
The FIFO gross margin rate, excluding fuel, decreased 43 basis points compared to the same period last year.
This decrease primarily related to higher supply chain costs and strategic price investments, partially offset by sourcing benefits and growth in alternative profits.
The OG&A rate decreased 61 basis points, excluding fuel and adjustment items, reflecting a reduction in COVID-related costs and cost-saving initiatives, partially offset by significant investments in our associates.
Turning now to our fourth quarter results.
Adjusted earnings per share was $0.91 for the quarter, up 12% compared to the same quarter last year.
Kroger reported identical sales without fuel of 4%, our strongest quarter of the year, with fresh departments leading the way.
Kroger's FIFO gross margin rate, excluding fuel, increased 3 basis points compared to the same period last year.
The stability in our gross margin rate reflects effective management of cost inflation and sourcing benefits, offset by strategic price investments and higher supply chain costs.
The OG&A rate, excluding fuel and adjustment items, increased 7 basis points.
The LIFO charge for the fourth quarter was $20 million, compared to an $84 million credit in the same period last year, and represented an $0.11 headwind to earnings per share in the quarter.
The year-over-year increase was attributable to higher inflation in most categories, with grocery and meat being the largest contributors.
One of Kroger's greatest strengths is our ability to successfully navigate many different operating environments, and our team is doing an excellent job managing the current higher inflationary environment.
We continue to leverage our data and work closely with our suppliers to minimize the effect on our customers and our financial model.
We are investing where it matters most to our customers using our proprietary data to be strategic in our pricing and personalization.
Our brands is also an important differentiator for Kroger in this environment, offering customers an unmatched combination of great quality and great value.
Our strategic approach is helping our customers manage their grocery budgets more effectively and is allowing Kroger to maintain a strong price position relative to our key competitors.
Fuel also remains an important part of our overall value proposition for our customers, and we continue to invest in our fuel program in 2021.
Customers that redeem fuel points spend, on average, four times more at Kroger and visit four times more frequently.
Our investment in fuel rewards, which is reflected in our supermarket gross margin, also helps customers stretch their dollars further and allowed us to achieve gallon growth of 5% in the fourth quarter, outpacing market growth.
The average retail price of fuel was $3.30 this quarter versus $2.20 in the same quarter last year.
Our cents per gallon fuel margin was $0.44, compared to $0.33 in the same quarter in 2020.
Turning now to cash flow and liquidity.
Our operating results generated exceptional free cash flow in 2021, which resulted in a further strengthening of our balance sheet and liquidity.
Kroger's net total debt-to-adjusted EBITDA ratio is now 1.63, compared to our target range of 2.3 to 2.5.
We were also disciplined in accelerating the return of cash to shareholders in 2021.
In total, Kroger returned $2.2 billion to investors via a combination of share repurchases and dividends.
I'd now like to take a few minutes to discuss our continued commitment to investing in our associates and our deep experience with collective bargaining.
Wages at Kroger grew before and during the pandemic.
As you know, we committed to significant associate wage investments when we launched our Restock Kroger program at the end of 2017.
Kroger has invested an incremental $1.2 billion in associate wages and training over the last four years.
In addition, we have committed to invest over $1.8 billion during the same time period to help address underfunding and better secure pensions for tens of thousands of associates.
Wage, healthcare, and pensions are included in all of the more than 350 collective bargaining agreements that cover approximately 66% of our associates.
These contracts are regularly negotiated by our professional labor relations team.
Our objective is to negotiate contracts that balance competitive wage increases and affordable healthcare for associates with keeping groceries affordable for the communities that we serve.
Our obligation is to do this in a way that maintains a financially sustainable business.
If negotiations do become contentious, we have contingency plans in place to continue to support our communities.
During the fourth quarter, we ratified new labor agreements with the UFCW for associates in Fred Meyer, King Soopers, and our Michigan division, covering more than 20,500 associates.
For 2022, we have contract negotiations with the UFCW for store associates in Las Vegas, Southern California, Seattle, Indianapolis, Portland, Columbus, Fort Wayne, Chicago, and Toledo, in addition to continued negotiations with the UFCW for store associates in Houston, Little Rock and Memphis.
We are actively proposing generous wage increases over the life of the various contracts we are negotiating, and these increases are included in our financial model and our guidance for 2022.
We are also communicating to local unions that coming to the table with unrealistic proposals, proposals that do not balance associate investments with keeping groceries affordable for our customers is untenable and undermines our shared goal of growing the company to create more jobs and advancement opportunities for more associates.
While we recognize there remain a number of uncertainties in the economic and geopolitical outlook, we believe the strength of Kroger's go-to-market strategy and our ability to manage multiple levers within our financial model will allow us to continue to build momentum within our business in 2022.
We have shared previously that we expect to emerge from the pandemic stronger, and our guidance for 2022 creates a new baseline for FIFO net operating profit that is some $900 million higher than the midpoint of our TSR model would have projected when we announced it in 2019.
Our plans contemplate meaningful investments in associate hourly rates, as well as investments, in delivering greater value for our customers and enhancing our digital capabilities.
We expect these investments and the impact of cycling COVID-19 vaccine revenue will be fully offset by tailwinds in our model and allow us to grow adjusted net earnings per diluted share to between $3.75 and $3.85.
The tailwinds in our 2022 plan includes sales leverage from growing identical sales without fuel between 2% and 3%.
We also expect to deliver cost savings of $1 billion, incremental alternative profit growth largely in line with 2021, and underlying improvement in Kroger Health profitability, excluding vaccine income.
Fuel profitability is expected to be relatively flat year over year as gallon growth is offset by slightly lower fuel margins.
In terms of quarterly cadence for identical sales of our fuel and earnings per share growth, we expect identical sales without fuel in quarter 1 and quarter 2 will be above the midpoint of our 2% to 3% range as we expect heightened inflation will continue in the first half of the year.
We would expect our second-half identical sales, without fuel, to be below the midpoint of our range as we expect the inflation to moderate later in the year as we cycle higher inflation from the second half of 2021.
Regarding adjusted EPS, we would expect quarter 1 to be above the annual growth rate range of 2% to 5%, quarter 2 to be below the range and the second half of the year to be within the range.
Turning briefly to our capital priorities.
We will continue to be disciplined with capital allocation.
This reflects some catch-up from the last two years, where spend was below original guidance due to COVID-related constraints, as well as an acceleration of our strategic initiatives, that will drive longer-term earnings growth.
At the same time, we expect to generate free cash flow of between $2 billion and $2.2 billion.
And consistent with our TSR model, we will continue to return excess cash to shareholders as evidenced by the acceleration in share buybacks over the last six months.
And finally, we are looking forward to spending more time with you at our business update tomorrow when you will hear from key members of our leadership team about our strategic priorities and our path to deliver total shareholder returns of 8% to 11% over time.
Kroger is operating from a position of strength, and we have a variety of levers and growth opportunities to continue to build on this strength.
As we reflect on 2021, we are incredibly proud of our ability to navigate both a rapidly changing operating environment and evolving customer behaviors.
We are obviously in an inflationary environment.
Our teams are managing it well.
And as Gary talked about, we are doing everything we can to keep prices low for customers, including our award-winning customer rewards program, which includes fuel rewards, our amazing and high-quality Our Brands products, and personalized offers and savings for each customer individualized.
As we look to 2022, we are confident in our ability to continue to differentiate ourselves, serve our customers in new and exciting ways and continue to change the definition of what it means to be a grocery retailer while never losing sight of what's most important to our customers.
And when we do this, we have a clear path to delivering on our commitment of 8% to 11% total shareholder returns over time for our shareholders.
As Rob shared at the top of the call, we would like to focus all questions on our quarter 4 and full year 2021 results, as well as 2022 guidance.
We look forward to sharing additional details about our long-term strategy tomorrow at our 2022 Business Update.
| qtrly earnings per share of $0.75; adjusted earnings per share of $0.91.
sees 2022 adjusted earnings per share of $3.75 to $3.85.
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With us on the call today are Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer.
If not, you can access the release on our website.
Before we get started, I would like to review World Fuel's safe harbor statement.
A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission.
We are speaking to you today for our second quarterly earnings call during the COVID-19 pandemic.
First, I want to say how proud I am and how well our global team has continued to operate our day-to-day business activities with nearly all of our employees working from home or on the frontline delivering fuel.
It is a testament to their professionalism and passion for the business.
As I've said previously, we took swift action at the beginning of the pandemic to activate our safety procedures and protocols.
And fortunately, we have had very few cases of COVID-19 among our employees.
Despite all of the continuing complexities in the world around us, we delivered a very respectable result in the second quarter.
While our aviation volumes were naturally lowered in the current environment, we delivered better-than-expected results, driven by increased cargo activity, unscheduled aircraft activity as well as historic oil price volatility during the quarter.
Global airline passenger volume, while recovering at varying cases in different parts of the world, is still far from pre-pandemic levels.
Before COVID-19 hit, the aviation industry was on a strong upswing with good passenger mile growth, consistent with a very long growth trend.
It's clear the world wants to travel by air.
That is not likely to change.
I'm optimistic that science will ultimately prevail and the airlines focus work on safety and cleanliness will bring back this industry, which is so vital to local, national and global economies and modern living.
World Fuel is fortunate to have a geographically and segment diverse portfolio of energy clients that rely on our solutions.
Our core marine activity held up as well.
While the cruise market continues to work its reentry plan with some limited cruising occurring in Asia and Europe.
We continue to be selective on marine risk as we have been over the last five years, which should position us well in today's market.
Our global land business delivered good results, boosted by seasonal strength in the U.K., which carried into April and a rebound in our North American gasoline and diesel business as many taking not taking to the skies began taking to the road.
As Ira will explain further, we have used the considerable learnings of the past four months to rethink our global work routines.
When the world does return to some steady state, we will have a more flexible and efficient hybrid workforce and workplace, with some returning to the office and some continuing to work remotely, driving both greater cost and business efficiencies and giving us the ability to access wider talent pools.
Our global team also continued to do a great job of managing cash, risk and operating expenses, with expenses down sequentially and strong operating cash flow, supporting our very healthy liquidity position.
Underwriting has always been a core competency and one of our core values to the marketplace.
Insulating buyers and sellers from a multitude of counter-party risks has been the essence of our existence for the last 35 years, and it still is.
Protecting the balance sheet and cash flow is what we have always focused on every day.
Speaking of liquidity, as announced earlier today, we have signed an agreement to sell our multi-service payment solutions business to Corsair Capital, a New York-based private equity firm.
Well, I love this business and its people, and it was certainly additive to World Fuel, focus is truly the key to success.
The sale will provide us with even more capital with which we can reinvest in our core business, enhancing our ability to drive growth, greater operating leverage and higher returns.
Ira will shortly provide you with all the related financial information timing.
So while the pandemic continues to challenge the world, we have been staying healthy and safe while serving our customers and suppliers with the same level of commitment and old-fashioned customer service excellence and operational support we always have.
Adversity often drives efficiency and productivity.
Many of the companies that come out on the other side of extraordinary events will be smarter, stronger, more efficient and poised for growth.
I am confident that we will be one of them.
The resilience of our company and commitment to best-in-class service has differentiated us as a solid counter-party with a sustainable business model for decades, and this has only been further accentuated over the past few months.
While the timing of returning to any sense of normalcy remains unclear, we remain focused on our long-term strategy, which encompasses strategic growth in our core businesses and a continual focus on cost and balance sheet management to deliver greater value for our shareholders and other stakeholders, while, of course, looking after the health and safety of all of our employees worldwide.
And now I will provide you with our financial update.
The nonoperational expenses in the second quarter principally consisted of an $18.6 million asset impairment relating to our decision to rationalize our global office footprint in light of the new world we are living in.
Some of our office locations will simply transition to a more permanent remote work environment and some will be relocated to smaller, more flexible and cost-effective locations.
Nonoperational expenses also included costs related to certain other organizational changes as well as acquisition and divestiture-related expenses.
So now let me get into some second quarter highlights.
Adjusted second quarter net income and earnings per share were $8 million and $0.13 per share.
Adjusted EBITDA for the second quarter was $57 million.
And lastly, we generated $236 million of cash flow from operations, which enabled us to continue to maintain more than $1 billion in total available liquidity, a critically important metric during this time period.
Consolidated revenue for the second quarter was $3.2 billion.
The significant year-over-year decline was driven principally by the dramatic impact of the COVID-19 pandemic on our segment volumes as well as significantly lower average fuel prices during the quarter due to the unprecedented impact of the pandemic on global demand.
Our aviation segment volume was 690 million gallons in the second quarter, representing a sequential decline slightly less than the 65% decline forecasted on last quarter's call.
Although we experienced relatively strong volumes related to cargo activity in certain business and general aviation customers, commercial passenger activity remained at levels below 25% of normal activity, and that was the principal driver of the volume decline in the second quarter.
Volume in our marine segment for the second quarter was four million metric tons, down approximately 18% sequentially, driven principally by the negative impact of the pandemic, our core reselling activity, including sales to cruise lines, experienced most of the volume decline.
We are hopeful that second quarter volumes were the low point as we are beginning to see some increased activity in certain segments of the marine market.
Our land segment volume was 1.2 billion gallons or and gallon equivalents during the second quarter.
That's a 50% decrease sequentially.
While volume declines in our land segment were not as significant as the aviation and marine segments, we did experience volume declines in our retail, commercial and industrial and connect businesses.
Consolidated gross profit for the second quarter was $214 million.
That's a decrease of 20% compared to the second quarter of 2019.
Our aviation segment contributed $92 million of gross profit in the second quarter.
That's down 35% year-over-year and basically flat sequentially, but significantly above the expectation shared on last quarter's call.
Despite the significant decline in traditional passenger activity during the quarter as well as a decline in government-related activity as a result of the ongoing drawdown of troops in Afghanistan, we did benefit from some situation-specific, nontraditional activity arising from the pandemic, such as repatriation flights and the repositioning of aircraft.
We also benefited from historic inventory volatility experienced during the quarter, whereas many of you know, crude oil prices started out at $20, then technically dropped to negative 40 and ultimately ended the quarter at just under $40.
The resulting return to a contango market following the somewhat prolonged backwardated market environment, served to contribute positively to our second quarter aviation results as well.
While we are slowly beginning to see an increase in volume during the early part of the third quarter in many parts of the world, we expect aviation gross profit in the third quarter to be generally flat sequentially due to reduced price volatility as compared to the second quarter as well as an expected further decline in activity in Afghanistan.
Obviously, with the ongoing effects of the COVID-19 pandemic globally, performance in the latter part of the year remains difficult to forecast at this stage.
The marine segment generated second quarter gross profit of $37 million, representing a slight increase year-over-year and generally in line with the guidance we provided on last quarter's call.
As we look ahead to the third quarter, we expect a modest sequential increase in marine gross profit, driven principally by seasonality and the modest volume growth in our core business mentioned earlier.
Our land segment delivered gross profit of $85 million in the second quarter, down 8% year-over-year.
Land results were actually better-than-expected at the start of the quarter as gas and diesel activity began rebounding midway through the quarter and the strength of our U.K. operations in the first quarter of this year actually continued into the early part of the second quarter.
However, many customer segments, such as the busing sector, for example, continue to be constrained until related markets reopen.
Our core operating expenses, which exclude our bad debt expense, were $154 million in the second quarter, down more than $20 million sequentially and just below the guidance provided on last quarter's call.
As mentioned last quarter, we made immediate cost-related decisions as the pandemic began impacting our business activity.
These measures included a global hiring freeze and other organizational changes, the postponement or elimination of all nonessential projects and a reduction in discretionary spending.
With the broader learnings stemming from our ability to effectively operate many functions within our business with a remote workforce, we explored the opportunity to rationalize our global office footprint, as mentioned earlier, which we expect will result in additional annualized cost reductions of close to $10 million, while ensuring a healthy and agile work environment for our employees as we look toward 2021 and beyond.
Based on the actions taken to date and our continued efforts to identify additional cost-saving opportunities, we expect core operating expenses to be in the range of $149 million to $154 million in the third quarter, representing another sequential decline in operating expenses.
Last quarter, we mentioned the likelihood that bad debt expense would increase over the balance of the year, considering the strain COVID-19 has placed on the global transportation industry and many of our customers around the world.
As a result, our bad debt expense increased to $25 million in the second quarter, principally due to the establishment of reserves related to a few notable bankruptcies in the commercial aviation market.
While our consolidated receivables portfolio was down from $2.9 billion at year-end to $1.4 billion in June and aviation's receivable portfolio is down from $1 billion to just over $400 million over the same time period, risk levels clearly remain elevated.
However, our underwriting team has done a fantastic job managing through this crisis and the challenging market conditions we've experienced since March.
Despite the historic market conditions experienced in the second quarter, we still delivered $35 million of adjusted income from operations.
I think that's another testament to the work of our team and they're laser-focused on supporting our customers through these unprecedented times while also carefully managing costs throughout the quarter.
In the second quarter, nonoperating expenses, which is principally interest expense, was $14.9 million, which is down 15% year-over-year, primarily driven by a decrease in borrowing rates.
While we have been making progress in reducing our tax rate over the past several quarters, due to the pandemic's negative impact on our profitability, most notably in the United States, as well as discrete tax items recorded during the quarter, we had an unusually high tax rate this quarter.
At this point, considering the current environment, it is difficult to forecast our effective tax rate for the second half of the year, but it is now more likely that our rate will be over 30% over the next two quarters.
Our team did a fantastic job managing working capital during the second quarter, resulting in $236 million of operating cash flow.
While prices were extremely volatile during the quarter, lower prices, combined with significant volume declines contributed to a reduction in working capital that resulted in substantial cash flow generation.
Our net debt position declined by more than $200 million sequentially to $450 million in the second quarter, again, due to our strong operating cash flow.
This resulted in a further decline in our net debt-to-EBITDA ratio to 1.2 times, and our total available liquidity remained at more than $1 billion consistent with or actually somewhat above our liquidity position at the beginning of the second quarter.
Obviously, looking forward, our available liquidity is dependent in great part upon our future performance and cash flows.
The strength of our balance sheet is a result of a phenomenal remote team effort involving our commercial business, our underwriting and collection teams and many other members of our organization.
Finally, today's announcement of the sale of our multi-service payment solutions business represents a significant step in our strategy to sharpen our portfolio of businesses.
Exiting this line of business will enable us to continue to simplify our business and focus our attention on driving growth and greater digitization in our core businesses, accelerating our ability to drive greater operating efficiencies and returns.
While the proceeds from the sale, which is expected to close within 90 days, will initially be utilized to repay outstanding debt, it also will provide us with additional capital to strategically invest in our core businesses.
In closing, like most businesses worldwide, our business has clearly been impacted by the global pandemic.
Our employees, our customers, our suppliers and even our shareholders have all been impacted.
Despite the continuing need to run our business remotely, our global team pulled together to deliver reasonably good second quarter results, given current circumstances.
While we have no direct control over the timing of a return to any sense of normalcy, we remain focused on our core priorities of keeping our employees safe, serving our customers with excellence, driving growth in our core businesses and continuing to improve our operating efficiencies, all of which should contribute positively to shareholder returns.
| world fuel services q2 adjusted earnings per share $0.13.
q2 adjusted earnings per share $0.13.
|
Leading our call today will be Mike Jackson, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer.
I will be available by phone following the call to address any additional questions that you may have.
Today, we reported all-time record quarterly results with adjusted earnings per share from continuing operations of $2.43, an increase of 94% compared to last year.
During the fourth quarter, same-store revenue increased $265 million or 5% compared to the prior year, a solid growth and new used and customer financial services revenue was partially offset by decline in customer care which has experienced a slower recovery correlated with lower miles driven.
New vehicle inventory levels remain constrained and we expect demand to exceed supply for an extended period.
Given these dynamics, we remain focused on optimizing our business in the current operating environment.
We expect industry sales to approach $16 million in 2000 -- 2021 with strong retail sales growth compared to last year.
We've seen a solid growth in '21 with January trends in line with our annual forecast.
For the quarter, same-store total variable gross profit per vehicle retailed increased $765 or 21% compared to the prior year.
Same-store new vehicle gross profit per vehicle retailed increased $919 or 50% and same-store used vehicle gross profit per vehicle retail increased $127 or 9% compared to the prior year.
We drove significant SG&A leverage in the quarter, adjusted SG&A as a percentage of gross profit was 63.8% for the quarter, representing an 820 basis point improvement compared to the fourth quarter of 2020.
We remain committed to operating below 68% SG&A as a percent of gross profit on a long-term basis.
We continue -- our continuing our opportunistic capital allocation strategy that balances investing in our business and returning capital to shareholders.
We expect to allocate capital toward the AutoNation USA expansion share repurchase and franchise acquisitions.
Today, we announced our Board authorized an additional $1 billion of share repurchase from October 22 through February 12.
We bought back 6 million shares or 7% of our outstanding shares.
We remain on track to open five new AutoNation USA stores by the end of this year.
The stores will be located in Austin, Phoenix and San Antonio and two stores in Denver.
We are also entered the planning phase to open an additional 10 AutoNation USA stores in 2022.
These stores will benefit from the AutoNation brand and its proven customer friendly processes.
We have set the long-term goal of selling over 1 million combined new and used retail units per year.
We recently announced that we have enhanced AutoNation Express, our integrated retailing solution that provides customers with a seamless and intuitive omnichannel shopping and purchase experience.
AutoNation Express is powered by real-time customer insights that provide a highly personalized mobile optimized step-by-step digital experience.
As Mike highlighted, today we reported adjusted net income from continuing operations of $213 million or $2.43 per share versus $113 million or $1.25 per share during the fourth quarter of 2019.
This represents an all-time high quarterly earnings per share and a 94% increase year-over-year.
The results were driven by solid growth in new used customer Financial Services profitability, partially offset by a decline in customer care.
During the quarter, new vehicle demand continued to exceed supply while our We'll Buy Your Car program supported our used vehicle inventories.
Fourth quarter 2020 adjusted results exclude a non-cash accounting loss of $62 million after tax or $0.70 per share associated with our equity investment in Vroom.
Moving to the balance sheet and liquidity.
Our cash balance at quarter end was $570 million which combined with our additional borrowing capacity resulted in total liquidity of approximately $2.3 billion at the end of December.
Note, in January of this year, we paid the maturity of our $300 million, 3.35% senior notes from available cash on our balance sheet.
Our covenant leverage of debt-to-EBITDA declined to 1.8 times at the end of the fourth quarter, down from 2.0 times at the end of the third quarter, including cash and used floorplan availability, our net leverage ratio was 1.3 times at year-end.
During the fourth quarter, we sold 3.1 million shares of our equity investment in Vroom for proceeds of $105 million.
Early in 2021, we sold the remaining shares of Vroom for proceeds of $109 million.
So in total, we realized a cash gain of $165 million on our investment.
AutoNation remains committing -- committed to delivering shareholder value through capital allocation, which includes attractive organic growth opportunities, a disciplined acquisition strategy, an opportunistic share repurchase.
Our AutoNation USA expansion provides an attractive growth opportunity and we remain on track to open five new AutoNation USA stores in 2021, an additional 10 in 2022 as Mike addressed earlier.
During the fourth quarter, we repurchased 4.7 million shares of common stock for an aggregate price of $302 million.
Year-to-date in 2021 through February 12, we repurchased an additional 1.3 million shares for an aggregate purchase price of $95 million.
Today, as Mike mentioned, we also announced that our Board has increased our share repurchase authorization by an additional $1 billion.
With the increased authorization, the company has approximately $1.1 billion available for additional share repurchase.
And as of February 12, there were approximately 82 million shares outstanding, excluding the dilutive impact of certain stock awards.
2020 was an unimaginable year but our associates came together and delivered record results.
We sold our 13 million vehicle in December, the only automotive retail in history to do so.
We have raised over $25 million in the fight against cancer.
We create the largest and most recognized automotive retail brand and we did it one sale, one service, one vehicle, at a time.
The acknowledgment and brand awareness continue on AutoNation was recognized for the third year in a row.
According to Reputation.com, and is having the number one reputation score for public auto retailers.
In '21 we are celebrating 25 years of leadership, innovation, excellence and recognition as the most admired -- as one of the most admired companies in the world by Fortune Magazine.
AutoNation was the highest-ranked automotive retailer on the list.
Congratulations to all 21,000 AutoNation associates for achieving such tremendous success.
| compname reports qtrly adjusted earnings per share from cont ops $2.43.
qtrly adjusted shr from continuing operations $2.43.
board authorized repurchase of up to an additional $1 billion of co's common stock.
qtrly same store new vehicle gross profit per vehicle retailed was $2,775, up 50%.
qtrly revenue $5,785.1 million, up 4%.
on track to extend footprint with five new autonation usa stores by end of 2021, 10 additional new stores in 2022.
set long term goal of retailing over 1 million combined new and used vehicles units per year.
qtrly same store used vehicle gross profit per vehicle retailed was $1,565, up 9%.
plans to build over 100 autonation usa pre-owned vehicle stores, with over 50 completed by end of 2025.
autonation usa store expansion will include extending co's coast to coast footprint with new markets.
qtrly same store revenue $5,776.1 million, up 5%.
|
With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Chris Stansbury, Senior Vice President and Chief Financial Officer; Andy King, President, Global Components; and Sean Kerins, President, Global Enterprise Computing Solutions.
I will now hand the call to our Chairman, President and CEO, Mike Long.
The critical engineering, design and supply chain services they provide to our customers, our suppliers and partners create technology that protects and improves our way of life.
The health of our people always comes first.
Over the course of a few months, we've learned a lot about the practices necessary to keep the business going while protecting our people.
We're increasingly optimistic that we have found a sustainable way to do business and actually thrive in the coming quarters.
On April 30, we provided an outlook for the second quarter.
We recognized then and now that to guide innovation forward, we must maintain our reputation for transparency.
In addition, we have a long-held belief in the power of data from the billions of transactions we do with thousands of customers across dozens of industries.
As a result, I'm pleased to report that we exceeded our quarterly earnings guidance for the quarter.
In fact, we've met or exceeded our guidance 46 times in the last 50 quarters.
As we reflect on what we can do to achieve long-term success, it's important to recognize both the items that are in our control and those that are not.
We can't control the demand for cars, data center equipment or electronic devices.
However, we can continue to position our business for rapid sales acceleration and mix shift to higher-margin engineered components and solutions.
One way we're doing that is by adding to our engineering and our sales teams today.
We've seen great opportunity to drive leverage from design, engineering and marketing that will benefit our customers and suppliers.
Another way for Arrow to position for the eventual improvement in demand is to execute on the business model and to strengthen the balance sheet.
Our results this quarter showed just that.
Cash flow from our operations totaled $418 million, $1.7 billion over the last 12 months, and we have also reduced debt by $1.1 billion over the last year.
We remain confident in our long-term strategy and execution.
Therefore, we increased our commitment to returning excess cash to our shareholders with an additional $600 million of share repurchases.
Arrow remains focused on maximizing our near-term opportunities, while positioning our business for the long term.
Design activity reached an all-time record for any quarter in our history, and our design activity has actually increased year-over-year for the third quarter in a row.
Typically, this is a good leading indicator of an improving market, and this is why we keep investing in our engineering capabilities.
Other indicators are consistent with short run stability.
Second quarter backlog increased from the first quarter, the third quarter in a row of sequential improvement.
Lead times were consistent with the first quarter and with last year.
Global components book-to-bill was 1.07 exiting the second quarter.
Book-to-bill was highest in the Asia region where the pandemic recovery is happening sooner.
Our Americas customer sentiment survey showed some improvement.
The percentage of customers saying they had too little inventory increased compared to last year, and the percentage of customers saying they had too much inventory decreased compared to last year but also remained higher than normal.
To date, we've not faced significant challenges securing the parts our customers need.
Turning to enterprise computing.
In the second quarter, sales were slightly above our midpoint expectation.
Like last quarter, we experienced strong demand for the solutions that enable the work from home and the business continuity.
Security software sales were strong, and storage sales increased compared to last year.
We remain confident in the consistent growth from data from connected devices and objects, and we believe that, that will be a long-term tailwind for our business.
Taking a step back, I want to emphasize that as a company, we have a long history on capitalizing on downturns and disruptions.
And despite the current environment, we continue to improve our team's leading design and demand creation for global components.
Hybrid cloud for enterprise computing solutions, and we can fund these investments with efficiencies that we gained from our superior operational platform, and we expect these investments to drive exceptional profit leverage in the long term.
In closing, we're continuing to support our stakeholders and communities.
We're committing to providing our customers with the products and solutions they need when they need them.
We remain disciplined and focused as we operate our facilities and businesses through these uncertain times.
Over the last several months, we worked diligently to avoid disruptions and are confident we'll continue to do so as we operate as a critical provider to the global technology and industrial ecosystem.
We will not stop looking for opportunities to expand our business, drive innovation and improve the performance of our end customers everywhere.
I'll now hand the call over to Chris to provide more details on the second quarter results and our expectations for the third quarter.
Second quarter sales were $6.61 billion.
Sales increased 4% quarter-over-quarter and decreased 8% year-over-year as adjusted.
The average euro-dollar exchange rate for the quarter was exactly in line with our expectation.
Global components sales were $4.72 billion.
This was above the high end of our prior guidance and represents an 8% year-over-year decrease as adjusted.
I mentioned last quarter that industry destocking has been going on for more than one year.
This quarter, global component sales increased sequentially for the first time since the second quarter of 2019.
Demand in Asia has been resilient.
And as we expected, the Americas and Europe were hard hit by the aerospace and transportation industries.
Global components operating margin was 3.8%, down 10 basis points year-over-year.
This was mainly due to regional mix with Asia contributing 45% of global component sales, up from 37% in the first quarter and 38% last year.
Enterprise computing solutions sales of $1.89 billion decreased 8% year-over-year as adjusted and were above the midpoint of our prior expected range.
As we've said in the past, uncertainty is bad for IT spending, and enterprise computing solutions is likely a later cycle business than global components.
That said, we believe some of the delayed investments in mission-critical technologies cannot be pushed out indefinitely.
Billings were approximately flat year-over-year, adjusting for changes in foreign currencies.
We experienced strong demand for security and storage solutions, while demand for servers and networking declined meaningfully year-over-year.
Global enterprise computing solutions operating income margin decreased by approximately 60 basis points year-over-year to 4.3%.
And similar to what we saw in the global components business last year, demand from smaller customers who rely on more of our capabilities has been weaker in this downturn.
Demand from larger, better capitalized customers has been more resilient.
Returning to consolidated results for the quarter.
Interest and other expense of $32 million was below our prior expectation due to lower borrowings and lower interest rates.
The effective tax rate of 24.1% was in line with our expectations.
Earnings per share were $1.59 on a diluted basis, exceeding the high end of our prior expectation.
Turning to the balance sheet and cash flow.
We reported strong operating cash flow of $418 million.
During the second quarter, we reduced borrowings by approximately $257 million, principally through the maturity of a $209 million 6% note retirement.
Our balance sheet is in great shape, and our liquidity position remains strong.
Current committed and undrawn liquidity stands at over $3.2 billion, excluding the $206 million cash balance that we have on hand.
We're closely monitoring credit and receivables.
Collections remained healthy and DSO increased, but in line with DPO.
This was due to the further expansion of customer engagements during the quarter that are neutral to working capital.
As we've said in the past, it's fair to measure our performance by the cash conversion cycle, not by any one metric in isolation.
The second quarter cash conversion cycle was four days shorter than last year.
We returned approximately $75 million to shareholders during the quarter through our share repurchase plan.
The remaining authorization under our existing plan is approximately $113 million.
The new $600 million authorization increases the total to $713 million.
Now turning to guidance.
Again, this quarter, we're providing wider-than-normal ranges to account for increased volatility, given the current environment.
With that said, we're forecasting consolidated sales to be approximately flat compared to the second quarter with higher global component sales and lower enterprise computing solution sales which is typical for the third quarter.
We expect a slight increase in earnings per share compared to the second quarter.
However, the percentage decline in earnings per share looks unfavorable on a year-on-year basis.
Compared to the third quarter of 2019, current demand conditions in the Americas and in Europe remain significantly depressed for both businesses.
| q2 adjusted earnings per share $1.59 excluding items.
q2 sales $6.61 billion versus refinitiv ibes estimate of $6.37 billion.
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Our actual results could significantly differ due to many risks, including those -- the risk factors in our SEC filings.
An audio replay will be made available on our website shortly after today's call.
It is now my pleasure to introduce Anant Bhalla.
Before we speak about second quarter results, I want to provide you with three strategy execution updates.
First, we reached agreement with Brookfield on a reinsurance contract that covers both, a portion of our in force, and new business flow.
We have filed the agreement with our regulator for approval.
We look forward to receiving regulatory approval and closing on the reinsurance treaty.
Shortly after, we would expect the second anticipated equity investment from Brookfield to be completed.
Second, we have completed our share repurchase of 9.1 million shares since starting our buyback in the fourth quarter of last year.
This fully offset the impact of shares issued to Brookfield.
The total buyback included repurchase of 3 million shares in the second quarter for $95.1 million.
Additionally, for the first time in our company's history, in the second quarter, we started leveraging our asset management partnerships to invest in single-family rental homes and middle market loans, consistent with ramping toward the AEL 2.0 asset allocation strategy.
During the quarter, we invested in 933 single family rental homes.
AEL, will indirectly be the landlord to residential renters with partners who manage the property through acquisition, renovation, leasing, and sale in focus metropolitan areas, where the trends of wage growth and rental growth dynamics are robust.
During the quarter, we allocated $104 million to middle market loans.
We expect middle market credit to be an important piece of the AEL 2.0 investment strategy.
Finally, we continued the revitalization of our go-to-market strategy pillar, which has historically been an industry-leading at scale, annuity funding origination platform.
This platform slowed down in recent years.
And one of the focus areas in my first year as CEO, was to revise sales by refreshing our product mix and how we go to market.
Go to market has been trending upwards since the fourth quarter of last year.
Preliminary estimates indicate that the second quarter of 2021 will mark the third straight quarter in which the company increased its fixed index annuity or FIA market share.
At American Equity Life, FIA sales were driven by the new competitive indices we introduced to AssetShield back in February.
At Eagle Life, the increase in FIA sales was driven by new relationships, our new income product, and an increase in our employee, wholesaler force.
In addition, on July 21, we announced to our independent agent distribution, the introduction of our new product EstateShield.
EstateShield is an expansion of our income offerings in the non-guaranteed income space.
This sub-segment of the market is a $4 billion per year product space historically dominated by two of our competitors.
EstateShield has received strong support from key distribution partners and we look forward to growing sales in the coming quarters.
We are committed to continue to introduce new products as we move through the AEL 2.0 transformation, which will help us compete effectively and grow our share of the annuity market.
Moving onto business results for the second quarter, total sales of $1.2 billion were down sequentially as expected versus the all-time record we set of $2.4 billion in the first quarter of this year.
As we discussed on the last call, we are focused on our fixed index annuity products, For the second quarter, FIA sales increased 33% sequentially to $887 million.
As I said earlier, we believe this will be the third quarter in a row in which FIA market share increased.
Clearly, the changes that we've made in our go-to-market franchise over the last year are resonating with distribution.
At American Equity Life, fixed index annuity sales increased 36% to $703 million from $517 million sequentially, as the refreshed AssetShield series continued to see increased momentum, led by a sequential 206% increase in AssetShield deposits.
In the quarter, the three proprietary indices we introduced to AssetShield, as part of our February refresh, the Credit Suisse Tech Edge Index, the Societe Generale Global Sentiment Index, and the Bank of America Destinations Index, accounted for 77% of second quarter AssetShield deposits.
FIA sales at Eagle Life of $185 million represented a 24% increase versus the first quarter of 2021, and a 155% increase compared to the year ago quarter.
Our new Eagle Select, income focus, guaranteed retirement income product accounted for roughly half of the sequential quarterly increase.
The Eagle Life team is increasing our presence within distribution partners by updating our FIA product shelf and increasing our sales force headcount, while raising the quality of talent.
In addition, we are leveraging relationships with advisors, and our distribution partners, centers of influence, uncovered through multi-year fixed rate annuities to migrate toward fixed index annuity.
As we indicated on past calls, our plan has been to reengage with distribution with a simpler multi-year fixed rate annuity product during COVID-19, and then pivot to driving growth through a revamped fixed index annuity product portfolio.
We are beginning to see our plan bear results.
As the financial planning needs of Americans evolve, American Equity is focused on providing our clients the dignity of a paycheck for life.
I believe our commitment to this core mission statement will become recognized and appreciated in the market over time.
This will help grow AEL in both our channels and open up other market access opportunities for us in the future.
At this time, I would also like to take a moment and share with you the conclusions of a corporate governance project undertaken by our Board of Directors.
Earlier this year, our Board, retained a nationally recognized expertise to review its structure and operations and to advise it on governance practices.
The Board has completed its review and is implementing changes to refresh our corporate governance, in line with best practices and to advance our strategic evolution.
The Board has set a new target size of seven to nine directors.
Plus, the CEO has set a new Director retirement age at 75 years and has modified the membership and structure of its committees.
Importantly, on this front, our audit committee well exercise increased risk management oversight.
The Nominating and Corporate Governance Committee will have an expanded role in Director compensation, selection and skills training.
The Compensation Committee we'll have a deeper role in executive talent development and succession planning.
We believe these changes will make our Board even more effective in driving stakeholder value realization and in playing its essential role in the successful transformation of the company.
Capital markets showed strong performance and the investment portfolio performed as expected in the quarter.
The overall credit quality remained strong with an overall rating of single A minus for long-term investments.
The net unrealized gain position improved by $1.2 billion in the quarter ending at $4.8 billion.
The strong bid for assets, combined with low treasury yields, continues to make the investment environment challenging, but we are finding good opportunities.
We use the strong bid to continue to reduce exposure to higher risk positions in structured assets, in select sub sectors that have the potential for future deterioration.
There were minimal credit losses in the quarter and the performance of our commercial loan portfolio remained strong with no new delinquencies or forbearances granted.
From a liquidity standpoint, we continue to hold cash in excess of target levels and what's needed to fund the reinsurance transactions.
At June 30, we held $10 billion of cash and equivalents in the insurance company portfolios.
As Anant will discuss in a moment, the average level of cash and equivalents increased in the second quarter.
The current point in time yield on the portfolio, including excess cash, is still approximately 3.3%, so the pressure on investment spread will continue into the third quarter.
After completion of reinsurance transactions and the redeployment of remaining cash in excess of our target, we estimate the yield on our investment portfolio would still have been approximately 4%.
With regards to redeployment, we expect to have substantially redeployed excess cash that's not expected to be used in the reinsurance transactions by year-end.
We are taking solid steps in the execution of our strategy to add $1 billion to $2 billion in privately sourced assets this year, growing to a pace of 5% or greater, of the portfolio in each subsequent year, to achieve an allocation of 30% or greater in privately sourced assets.
Year-to-date we have allocated approximately $800 million to privately sourced assets, including residential mortgage loans, single-family rental homes, commercial mortgage and agriculture loans, and middle market loans.
Traditional fixed income securities, continue to be part of our strategy to deploy excess cash.
Our focus in the traditional strategy has been strong investment grade credits in the public corporate and municipal sectors.
For the second quarter of 2021, the expected return on long-term investments acquired net of third party investment management fees, was approximately 4.15% compared to 3.74% in the first quarter.
We purchased $1.1 billion of long-term fixed income securities at a rate of 3.3% and $569 million of privately sourced assets at an expected return of 5.67%.
The privately sourced assets include the ongoing origination of commercial mortgage and agricultural loans, as well as residential mortgage loans.
Consistent with our long-term plans, we added privately sourced assets in new asset classes for the company, which consisted of residential real estate investments and investment in a joint venture that is sourcing middle market loans at attractive investment yields.
Now, turning to financial results.
For the second quarter of 2021, we reported non-GAAP operating income of $93.8 million or $0.98 per diluted common share, compared to $93.1 million or $1.01 per share for the second quarter of 2020.
Results were negatively affected by the transitionary effects I mentioned, both today, as well in the past, in particular the effect of cash in the portfolio in excess of target range and the level of operating expenses.
However, strong index credits in the quarter, boosted operating earnings through both a lower than expected increase in reserves for guaranteed lifetime income benefits, and lower than modeled amortization of deferred acquisition in deferred sales inducement costs.
Average yield or invested assets was 3.51% in the second quarter of 2021 compared to 3.58% for this year's first quarter.
The decrease was primarily attributable to a seven basis point reduction from interest foregone due to an increase in the average amount of cash held during the quarter.
Cash and equivalents in the investment portfolio average $10 billion over the second quarter, up from $8.6 billion for this year's first quarter.
Partnership income and other investments accounted for at fair value contributed an additional one basis points to yield, compared to the prior quarter, and eight basis points on an absolute basis.
The aggregate cost of money for annuity liabilities was 156 basis points, down two basis points from the first quarter of this year.
The cost of money in the second quarter benefited from full basis points of hedging gains compared to two basis points of gains in the first quarter.
Investment spread in the second quarter was 195 basis points, down five basis points from the first quarter.
Excluding non-trendable items, adjusted spread in the quarter was 181 basis points compared to 187 basis points for the first quarter.
In line with yield, we would anticipate our investment spread to rise back to our expected levels once the reinsurance transactions are completed and the excess cash is redeployed.
The cost of options was up slightly to 147 basis points from 145 basis points in the first quarter of 2020, primarily reflecting an increase in the cost of PK options hedging our monthly point to point strategies due to the decrease in volatility over the quarter.
Monthly point to point remains our largest hedge strategy at just over 25% of notional.
All else equal, we expect to see the cost of money remained relatively stable over the remainder of the year.
Should the yields available to us decrease, or the cost of money rise, we have the flexibility to reduce our rates, if necessary, and could decrease our cost of money by roughly 58 basis points, if we reduce current rates to guaranteed minimums.
This is up slightly from 57 basis points we cited on our first quarter call.
The liability for Lifetime Income Benefit Riders, increased $34 million this quarter, after net positive experience, an adjustment of $29 million relative to our modeled expectations.
The better than expected results primarily reflected the benefit from historically high equity index credits in the quarter, as well as positive renewal premium experience.
Deferred acquisition cost and deferred sales inducement amortization totaled $101 million, $31 million less than modeled expectations due to lower than model investment spread and benefit from high level of equity index credits.
Other operating costs and expenses increased to $65 million from $56 million in the first quarter.
Operating costs in the second quarter included $5 million of expenses associated with talent transition.
Post refinancing our existing AG33 redundant reserve financing facility later this year, we still expect operating expenses to settle in the high 40s million dollars per quarter area.
As we become a new AEL, we will invest in upgrading our infrastructure and our intent is to quantify this investment spend for you in the future.
Total debt -- total capitalization, excluding accumulated other comprehensive income at the quarter-end was 11.9% compared to 12.2% at year-end and 14.7% in last year's comparable quarter.
At June 30, cash and equivalents at the holding company were in excess of our target by $330 million.
Finally, we have $236 million of share repurchase authorization remaining under the current plan approved by the Board of Directors in October 2020.
Once the Brookfield Form-A is approved, we expect to actively repurchase more shares to both offset any dilution from future acquisitions to Brookfield, and to start on our plan of regularly returning capital to shareholders.
| q2 non-gaap operating earnings per share $0.98.
q2 2021 annuity sales of $1.2 billion driven by strong growth in fixed index annuity (fia) sales.
|
This is Bob Burrows, Investor Relations Officer for the company.
As is customary, today's call is open to all participants and the call is being recorded and is copyrighted by Emergent BioSolutions.
Turning to slides three and four.
During today's call, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance.
Turning to slide five.
The agenda for today's call will include Bob Kramer, President and Chief Executive Officer, who will comment on the current state of the company and Rich Lindahl, Chief Financial Officer who will speak to the financials for 3Q 2021 as well as the forecast for full year 2021.
This will be followed by a Q&A session where additional members of the executive leadership team are present and available as needed.
Since then, Emergent may have made announcements related to topics discussed during today's call.
Today, I'll provide an update on the progress that we've made at our Bayview site and then talk a little bit about our recent accomplishments and milestones and further talk about the business enhancements we've implemented to better focus on our customers.
I'll also discuss our revised full year guidance and our decision to end our involvement in the Center for Innovation in Advanced Development and Manufacturing or CIADM program with the US government.
My comments are summarized across slides seven and eight in the deck accompanying the call.
So let's get started.
As you've seen this year, our Emergent team and our business have shown their strength and resilience as we've made substantial progress in the quarter.
Some of the recent highlights include the following.
First, we've made significant progress in Bayview resuming operations and production for Johnson & Johnson at the end of July and more recently completing all remaining work on behalf of AstraZeneca.
As of the end of the quarter, we've contributed over 100 million dose equivalents of COVID-19 vaccine for global distribution.
Importantly, we look forward to continuing to support J&J's ongoing vaccine production in the months ahead, while continuing to support their regulatory path for their vaccine.
Next we secured key ongoing commitments from the US government on two core medical countermeasure products.
First, we received the contract modification exercising and funding the second of nine annual options to supply ACAM2000 to the Strategic National Stockpile valued at approximately $182 million.
Secondly, we received a contract modification exercising and funding the procurement of additional doses of AV7909 for the SNS valued at approximately $399 million over the next 18 months.
Also our NARCAN Nasal Spray team continues to perform well above expectations in the midst of a worsening opioid crisis helping ensure this critical product gets in the hands of the patients and caregivers who need it.
We also launched our pivotal Phase III trial for our chikungunya vaccine CHIKV VLP, a key milestone for us because it's the first Phase III drug development program that Emergent has funded on its own.
More importantly, it underscores our commitment to progressing our pipeline programs in pursuit of critical public health threats and expanding our travel health vaccines franchise.
And finally, we continue to grow our CDMO operations securing a new multiyear contract to produce Providence Therapeutics' mRNA COVID-19 vaccine candidate at our site in Winnipeg.
As these highlights demonstrate, our core strategy and diversified business model remains strong.
In addition, today we're announcing that the Department of Health and Human Services and Emergent have mutually agreed to end our partnership in the CIADM program.
The agreement will close out all open obligations and task orders issued under CIADM base contract including the task order related to COVID-19 response.
We're proud of the work all of our employees have done over the last nine years to honor our CIADM commitments.
And you'll recall that the program was initiated in 2012 in recognition of the shortage of domestic manufacturing capability needed to respond to an unforeseen widespread public health threat following the H1N1 influenza pandemic.
While an innovative idea execution of the CIADM program and the necessary operational investments by all administrations fell short of what was needed to maintain capability in case of an emergency.
In fact, when the COVID pandemic struck, Emergent was just one of two original partners remaining in the program.
Despite the issues, we responded swiftly engaging several of our facilities to meet the government's needs and made incredible progress in a time frame never before attempted under very challenging conditions.
Our COVID-19 work with BARDA under the CIADM program included a number of activities.
These included: a reservation of capacity at our Bayview, Camden and Rockville sites; a direct capital investment by the government in additional fill/finish capacity at our Camden and Rockville sites; both drug substance manufacturing for AstraZeneca in the reserved space at Bayview; and finally, drug product manufacturing for various COVID-19 therapeutic candidates in the reserved space in Camden.
As a reminder, the COVID-19 work under the CIADM program was always expected to end this year and importantly our decision does not affect our work with Johnson & Johnson as it was never part of our CIADM contracting.
We will continue to produce their COVID-19 vaccine drug substance at our Bayview facility.
And as I mentioned at the top of the call, we're extremely proud that our collaboration with J&J and in addition to AstraZeneca has contributed over 100 million dose equivalents of COVID-19 vaccine for global distribution.
So while we conclude our involvement in the CIADM program and bring to closure this important chapter in our business, it needs to be said that the work we accomplished under the program and related task order contracts with the US government served a critically important purpose one that our entire organization is immensely proud of.
Despite the setbacks we had earlier in the year the team's been committed to our mission of protecting and enhancing life and steadfast in learning from our past to be even better.
I'm proud of the team's resilience and the positive impact on millions of lives across the globe and importantly we're not done yet.
As we look forward, we're encouraged and optimistic about the opportunities we see ahead across our entire business.
Let me now pivot to recent business changes we've implemented in support of our strategy.
During the quarter we've shifted our operating structure to now have three business lines each focused on distinct customer or market types.
They are: the newly created government or medical countermeasure business; the commercial business; as well as the services or CDMO business, which remains essentially unchanged.
To be clear, all three of these report to our Chief Operating Officer, Adam Havey.
The government or MCM business will be led by Paul Williams who was previously running the vaccines business unit.
This new structure will better serve our customers by sharing their breadth and depth of experience as one team and reduces the complexity with multiple touch points going into the government on different business units.
The commercial business will be led by Doug White, who previously ran the devices business unit.
He will now drive our core commercial capabilities and seek new investment opportunities.
Doug's portfolio includes NARCAN Nasal Spray, travel vaccines and other similar customer facing products.
This organizational change provides an opportunity to put the strategic and operational pieces of this business under one umbrella that were previously across multiple business units, positioning us to expand into new markets and efficiently integrate newly acquired products in the future.
The services or CDMO business, the head of which we're continuing to accurately recruit for will continue to service our pharma and biotech innovator customers providing development, drug substance, and drug product manufacturing services that capitalize on our core skills and capabilities.
As for our R&D programs, we established a centralized and cross-functional product development committee that will govern the R&D portfolio.
We're also creating a science and innovation team led by Dr. Laura Saward, who previously ran the therapeutics business unit.
Overall this new structure positions us to execute effectively on our strategic plan and deliver long-term success, strengthening our foundation and providing new opportunities for growth.
So getting back to the operational highlights.
As I mentioned we resumed production of J&J's COVID-19 vaccine at our Bayview facility in late July, following the implementation of rigorous and comprehensive quality enhancements and the FDA's permission to restart.
Over the last five months, we've invested millions of dollars to overhaul cleaning procedures, upgrade our facilities, implement additional quality control and oversight practices, and make significant improvements to the processes for batch record keeping, personnel training, data integrity and lab testing.
Emergent teams along with support from our J&J colleagues oversee all operations and materials transfer.
We took the added step to bring in a recognized independent consultancy, who is expert in quality control and who are now reviewing and performing certifications prior to release of any batches.
We continue to work closely with the FDA and J&J toward increasing our production level consistent with these new procedures.
Finally, I want to commend our team whose around the work efforts over the last 18 months that accelerated the transformation of our Bayview facility from a clinical stage facility to one that is poised to support much larger scale production.
Now moving to our core government or medical countermeasures business.
Our work helping the US government protect Americans against smallpox, anthrax and other Category A biologic agents remains a top priority for the company.
Recall that we previously announced the US government exercised and funded, the next term extension for ACAM2000 under our 10-year contract and we also secured the next option exercise for our smallpox therapeutic, VIGIV.
We recently filed that up with the US government exercising the final option under the existing contract to supply doses of our next-generation anthrax vaccine candidate, AV7909 to the Strategic National Stockpile valued at approximately $399 million over the next 18 months.
As a reminder, the current contract for AV7909 facilitates procurement by the SNS, while we seek full FDA approval.
And to that end I'm pleased to announce two important updates today on the ongoing regulatory path for AV7909.
First, the FDA has agreed to our request for a rolling review of the AV7909 BLA.
The rolling review allows us to submit sections of the application to the FDA as they're completed rather than waiting until the entire BLA package is compiled.
We anticipate initiating the BLA submission in mid-December.
Based on this timing, we anticipate BLA approval by the FDA in late 2022 or early 2023.
Second, the FDA has granted orphan drug designation for AV7909.
This designation provides development incentives including a waiver of the BLA filing fee as well as potential seven-year marketing exclusivity upon regulatory approval.
On the R&D front we recently initiated our pivotal Phase three safety and immunogenicity study for our single dose chikungunya vaccine candidate.
CHIKV VLP is the only virus-like particle based vaccine candidate currently in development for active immunization against chikungunya disease.
The study expects to enroll 3,150 participants in 50 US sites in the coming months.
I'd like to congratulate the teams across our organization, who've made this significant milestone possible and who are advancing the development pipeline that will help fuel the long-term growth of the company.
We look forward to updating you on this program as we make progress.
Finally, with the launch -- the potential launch of a few other Phase I studies anticipated over the next year, as well as continued progress across our auto-injector platform programs focused on chemical threats, I remain encouraged by the contribution of our R&D programs and the effect they could have on our growth in the coming years.
Moving next to our CDMO business.
I want to highlight that we continue to see growth in this area both related to the pandemic and beyond.
We continue to receive interest from both existing clients, and new prospects from small, mid and large-sized companies as well as governments and other organizations.
Importantly, we're winning new business across all three service pillars of development services, drug substance and drug product including drug packaging.
For example, during the quarter we signed a new five-year agreement with Providence Therapeutics to support its mRNA vaccine development out of our Gaithersburg and Winnipeg facilities.
Building off an existing agreement this new baseline agreement is valued at $90 million and uses portions of all three of our integrated service capabilities, demonstrating the value of our integrated molecule-to-market model for customers.
We will continue to cultivate growth, expansion and maturation of this core business.
With respect to NARCAN Nasal Spray, our focus on the public health threat posed by the opioid epidemic is as strong as ever.
Our NARCAN team has worked tirelessly to ensure that NARCAN Nasal Spray is available and affordable as overdoses continue to devastate families and communities nationwide.
We remain committed to combating this crisis, not only through our work on NARCAN, but also through outreach efforts and public campaigns to elevate awareness of the dangers of opioids.
On the ongoing patent infringement litigation front, recall that the US Circuit Court of Appeals held final oral arguments on August two of this year.
While timing is up to the appellate court we continue to believe a decision could come by the end of this year.
Importantly, in the event of a generic entry we are prepared to launch an authorized generic product in partnership with a large generics company, and are confident in our ability to maintain significant market share.
Longer term we see Narcan and more broadly our opioid-related portfolio a core component of our portfolio of solutions impacting public health.
Finally, let me update two important corporate updates.
First, I'm pleased to announce that we intend to publish our inaugural ESG or sustainability report later this month.
The report will provide insight into our environmental, social and governance practices.
These include: product quality and patient safety standards; our human capital and employee-focused programs; our existing charitable and volunteer programs; our work to safeguard the environment and health of our communities and employees; as well as our corporate governance and business ethics principles and practices.
I also wanted to note that on a personnel front Mary Oates, previously our Head of Global Quality has decided to pursue a new career opportunity and has left Emergent.
We're conducting an external search for a new Head of Global Quality.
In the meantime, I'm confident, that our team of talented dedicated professionals will continue the important quality advancements made in the last several months.
To conclude our third quarter operational results demonstrate, that our business remains resilient and poised for growth, in line with our strategy.
We continue on our path of both organic opportunities and potential M&A informed by prudent capital deployment all aimed at generating enhanced shareholder value.
I'll start on slide 10 and open my remarks with some summary thoughts to put today's earnings report into context.
As you just heard from Bob, solid execution in the third quarter continues to illustrate the strength and durability of our differentiated business.
Our medical countermeasures platform was further reinforced by the ACAM2000 option exercise in July and the AV7909 contract modification on September 30.
We have restarted operations at Bayview and are helping J&J deliver on commitments related to their COVID-19 vaccine candidate.
The NARCAN Nasal Spray franchise is gaining momentum as we support the battle against the continuing public health crisis in opioids.
We are making steady progress building our CDMO business as evidenced by recent contract awards.
And we are advancing our R&D programs, most notably with the recent launch of the chikungunya Phase III trial.
Having said that, there are clearly several topics that merit further explanation, starting with the primary drivers of our revised 2021 financial guidance as laid out on slide 11.
The biggest influence relates to our mutual agreement with the US government to terminate the CIADM contract and associated task orders.
This change will be partially offset by the recognition of $60 million in deferred revenue and other final payments related to the CIADM base agreement.
You'll also note that given continued strong momentum in NARCAN Nasal Spray, we increased the full year forecast range of that product by $95 million.
After taking into account various other puts and takes, we have tightened the range of our total revenues which lowered the midpoint by $50 million.
During the third quarter, following a review of our revenue recognition policy, we determined that it was appropriate to reclassify certain suite reservation fees from stand-ready obligations to leases and therefore to apply lease accounting guidance.
You will note that our income statement now has separate line items for CDMO services and CDMO leases.
This change should also allow you to better understand the underlying fundamentals of our CDMO service-related revenue.
Under the lease accounting guidance, based on uncertainty regarding collectability of the full contracted amount, we converted to a cash basis of accounting for the BARDA task order.
Accordingly, in the third quarter we adjusted our revenue to align with the $315 million of cumulative cash collected under the BARDA task order from May 2020 through September 2021.
Looking ahead to the fourth quarter, pursuant to the termination of the CIADM agreement, we expect to recognize $215 million of revenue, comprised of $155 million of task order closeout payments and the $60 million of deferred revenue and other I just discussed.
Termination of the CIADM agreement also results in asset write-downs of approximately $38 million.
So we expect the net addition to pre-tax income in the fourth quarter related to this event to be approximately $177 million.
During the quarter, our new business wins were $118 million, a very strong performance for the organization, primarily reflecting the impact of the Providence Therapeutics contract for COVID-related work.
As for backlog, the sequential change reflects the impact of the termination of the BARDA task order.
Regarding the opportunity funnel, the period-to-period decrease reflects both the conversion of opportunities into secured business as well as two large contract opportunities that we did not win.
One is a company that decided to take the work in-house and the other is one that decided to defer the work to a future time.
That said, we continue to identify new leads and secure new business and this period-to-period fluctuation is not surprising as we pursue opportunities.
Lastly, gross margins and profitability.
As we have previously discussed, our gross margins are primarily driven by revenue mix across several dimensions: product sales proportion of products versus services and the types of services delivered.
The adjusted gross margins on our products continue to remain stable and consistent with historical patterns.
On the CDMO services side however, we are currently seeing several trends which are applying pressure to margins.
These include: lower capacity utilization for drug substance production at Bayview while it is solely dedicated to J&J's COVID-19 vaccine candidate; the additional investments we are making at Bayview in support of our quality enhancement plan; and higher raw material costs than originally anticipated.
While these factors are currently producing CDMO gross margins below our expectations over time we anticipate that CDMO profitability will improve as we continue to grow our CDMO revenue base, increase network utilization drive a higher mix of drug substance manufacturing, realize scale efficiencies and improve productivity.
With that let's turn to the third quarter numbers.
As indicated on slide 12 highlights include total revenues of $329 million below the prior year period and our guidance principally due to the $86 million reversal of revenue for the BARDA task order I mentioned earlier.
And adjusted negative -- adjusted EBITDA of negative $3 million and adjusted net loss of $19 million both significantly below the prior year period and due to a variety of factors which we will discuss in a moment.
Other key items in the quarter include: NARCAN Nasal Spray sales were $133 million an increase over the prior year reflecting a clear continuation of this franchise's robust performance and driven by continued strong demand for this critical drug device combination product for opioid overdose reversal across both the retail and public interest channels in the United States as well as increased Canadian sales.
ACAM2000 sales were $81 million higher than the prior year due to timing of deliveries following our announcement in July of the US government's exercise of the second option under the existing 10-year procurement contract.
As we have stated previously we expect to complete all related deliveries under this option exercise by the end of 2021.
Anthrax vaccine sales were $16 million lower than the prior year due to timing of deliveries as the modifications of the BARDA contract for AV7909 was not made until the last day of the quarter.
Other product sales were $41 million consistent with the prior year.
And CDMO revenues came in at $42 million lower than the prior year period due primarily to our move to cash basis revenue accounting for the BARDA task order and partially offset by $38 million in out-of-period adjustments related to our change in CDMO services revenue recognition policy which will be detailed in our 10-Q filing.
Looking beyond revenue we are now breaking out cost of goods sold between product and CDMO services.
Product cost of goods sold in the quarter were $103 million a $17 million decrease from the prior year largely due to one-time charges in the prior year offset by increases in the current year due to higher product sales.
CDMO cost of goods sold were $114 million an $86 million increase over the prior year reflecting the impact of out-of-period adjustments of $37 million as well as incremental costs at our Bayview facility as mentioned previously.
Gross R&D expense of $50 million lower than the prior year primarily reflecting a non-recurring $29 million impairment charge in the prior year.
Net R&D expense of $33 million or 10% of adjusted revenue in line with the prior year.
SG&A spend of $82 million or 25% of total revenues an increase over the prior year reflecting growth in headcount and professional services.
And gross margin was 30% in the quarter.
As I mentioned earlier we are now providing two additional gross margin metrics.
Adjusted product gross margin was 62% of product sales consistent with the prior period.
And adjusted CDMO services gross margin was 10% lower than the prior period primarily reflecting the impact of increased operating costs at our Bayview facility and the implementation of our quality enhancement plan.
Turning to slide 13 we will now review our key CDMO metrics.
In the third quarter we secured new business of $118 million reflecting robust demand for our services.
As of September 30 the rolling backlog was just over $1 billion a 9% decline from the second quarter reflecting the impact of the BARDA task order termination.
And lastly as of September 30 the opportunity funnel was $284 million down from $672 million at June 30 as I said before primarily reflecting a significant new business win in the current quarter as well as the loss of two large opportunities.
On slide 14 you can see the sequential trends in these metrics over the last five reporting periods.
We look forward to making further progress in this important part of our business as we move forward from here.
Moving on to slide 15, I'll touch on select balance sheet and cash flow highlights.
We ended the third quarter in a strong liquidity position, with $404 million in cash and undrawn revolver capacity of just under $600 million.
Our net debt position was $454 million, and our ratio of net debt to trailing 12 month adjusted EBITDA was one times.
Our year-to-date operating cash flow was negative $8 million, primarily reflecting timing of cash collections and increases in inventory balances.
Additionally, we reported cumulative year-to-date capital expenditures of $178 million.
Total revenue of $1.70 billion to $1.8 billion; NARCAN Nasal Spray sales of $400 million to $420 million; anthrax vaccine sales of $250 million to $260 million; ACAM2000 sales of $200 million to $220 million; and for the CDMO business we now anticipate a range of $600 million to $650 million.
Our profitability guidance includes adjusted EBITDA of $500 million to $550 million and adjusted net income of $315 million to $350 million.
These include: no raxibacumab revenue this year; the naloxone market remains competitive with at least one new entrant this year, which we actually saw with a branded competitor coming on market in Q3; no generic entrant prior to the resolution of our patent litigation case, and the continued manufacturing of J&J's COVID-19 vaccine at Bayview.
The considerations that have been revised are as follows.
We have incorporated the financial implications of our mutual agreement to terminate the CIADM agreement and related task orders, including the expected payment in Q4 of the relevant agreed upon amounts.
And the expected range of adjusted gross margin is now 54% to 56% taking into account both year-to-date performance and anticipated performance in the fourth quarter.
On a different note given the changes, we have seen in our business during the pandemic we've received a number of questions about what to expect from the business going forward.
As you know, our custom has been to provide a first look at annual guidance at the beginning of each calendar year once our budgeting process is complete.
We expect to maintain that practice for 2022, but I would like to offer a few thoughts on directional trends, so you can better understand the shape of the underlying business.
In terms of top line revenue, we haven't finished our budgeting process for 2022, but the current analyst consensus for total 2022 revenue directionally seems to be in line with our thinking.
More specifically, we anticipate that our medical countermeasures business will remain steady with high visibility provided by the long-term contracts, we currently have in place.
The opioid crisis has been worse than we anticipated when we acquired the program and as a result NARCAN Nasal Spray revenue has continued to exceed expectations.
Of course, the question on everyone's mind is what will happen, if a generic competitor enters the market.
More than half of our market is in the public interest space and so not necessarily subject to the usual automatic switch for AB rated products.
And for the remaining product markets as Bob said, we are prepared to launch an authorized generic in partnership with a large generics company.
All-in-all, we are confident that, it will continue to be a meaningful contributor to both our top and bottom line going forward.
On the travel health front, we are monitoring and calibrating our expenses to international travel conditions and do not anticipate meaningful revenue from our travel vaccines next year, although we are expecting upticks in travel following that.
For CDMO, we expect we will continue to support J&J out of our Bayview site, and build on the opportunities we see to serve customers from several of our other revenue-generating sites.
In terms of profitability, we are making investments in our manufacturing and quality systems that are putting pressure on our CDMO gross margins, but we expect these will continue to gradually improve over time.
And we are taking a disciplined approach to managing our SG&A expenses, as we prepare for a return to stronger top line growth in 2023 and 2024.
With respect to R&D, we continue to invest in long-term value drivers as well as programs with non-dilutive funding, but we are balancing those investments with some anticipated portfolio rationalization.
As a result, we currently anticipate that these trends may constrain adjusted EBITDA margins to a level that is at or below, the ranges we saw in 2018 and 2019.
We will refine these views, and expect to provide more definitive information early in the New year.
In the third quarter of 2021 we continued to deliver solid performance in certain key aspects of our business.
Anthrax vaccines, ACAM2000 and the rest of the core medical countermeasure products, the Narcan, Nasal Spray franchise as well as the new business wins in CDMO services.
We also experienced continued forward progress at scaling up the production capabilities at the Bayview site in support of J&J.
And we realized an important pipeline milestone with the CHIK vaccine Phase three trial launch last month.
While our guidance for this year has been revised a bit to reflect the termination of the CIADM agreement as well as current profitability trends in our CDMO business bringing the CIADM agreement to a conclusion was a clarifying step forward for the company.
Finally, our conviction in the long-term growth potential of our business is as strong as it has ever been.
| qtrly total revenue $329 million versus $385.2 million.
sees 2021 total adjusted net income of $315 million to $350 million.
|
As is customary, today's call is open to all participants and the call is being recorded and is copyrighted by Emergent BioSolutions.
Turning to Slides 3 and 4.
During today's call, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance.
Turning to Slide 5.
The agenda for today's call will include Bob Kramer, President and Chief Executive Officer, who will comment on the current state of the company; and Rich Lindahl, Chief Financial Officer, who will speak to the financials for 2Q 2021 and as well as the forecast for full year 2021, including guidance on 3Q 2021 total revenue.
This will be followed by a Q&A session where additional members of the executive leadership team are present and available as needed.
Since then, Emergent may have made announcements related to topics discussed during today's call.
Today, I'd like to spend some time talking about the progress we've made at our Bayview and then talk more broadly about the health of the overall business and our continuing dedication and focus on public health threats.
Our second quarter performance reinforces the strength of our strategy and we are maintaining our overall guidance for 2021.
Rich will go over in more detail those numbers in a few minutes.
My comments are summarized across Slide 6 and 7 in the deck accompanying the call.
Turning first to our efforts to produce COVID 19 vaccines.
There's been a great deal of attention paid to Emergent's history as a public health risk company with a leadership role in working with the U.S. government on biodefense.
When the pandemic struck, America turned to Emergent because of our history and unique capabilities, while millions of COVID-19 vaccine doses that we manufactured are currently protecting people around the world.
We faced serious challenges along the way.
We didn't always live up to expectations, including those that we set for ourselves.
However, we have learned some important lessons which are allowing us to improve our operations and at the same time strengthening America's public health response for the future.
The FDA inspection of Bayview earlier this year identified a number of areas for improvement.
Along with Johnson & Johnson, we established a comprehensive, robust quality improvement plan, which includes facility improvements, capability building and deployment of enhanced tools and controls.
We reviewed this plan with the agency and immediately began its implementation.
We also made additional investments during the quarter in quality, compliance and operations.
All of this work is in order to satisfy both ourselves as well as J&J and demonstrate to the FDA that we've achieved a level of sustainable compliance that will allow us to resume production.
We've made significant progress toward this goal and as we announced earlier today, we received the green light from the FDA to resume production at the site, which will continue to be the subject of routine inspections by the FDA.
They know at the end of the day, that's what matters most.
I also want to recognize our strategic partners and particularly the strong collaboration with our J&J colleagues.
We continue to work closely with them and the FDA as previously manufactured batches of COVID-19 drug substance are released and added to J&J's emergency use authorization, helping protect tens of millions of lives around the globe.
We're awfully proud of both of these accomplishments.
The hard work and investments that we've made in Bayview over the last decade, in particular the last few months are starting to pay off.
In addition, we continue to work collaboratively with AstraZeneca to complete all documents related to their drug substance.
So they and the U.S. government can make decisions regarding the disposition of this material.
Moving more broadly to our overall business.
We're in year two of our 2020 through 2024 strategic plan and continue to make meaningful progress against that plan.
So let's start with our core medical countermeasure business.
Our work supporting the U.S. government's priorities to protect the American public against smallpox, anthrax and other category aid biologic agents remained stable.
With respect to our smallpox franchise, in the second quarter, the U.S. government has exercised and funded the next term extension for ACAM2000 under our tenure contract.
This option exercise is valued at approximately $182 million and requires all doses to be delivered by the end of this calendar year.
This quarter, we also secured the next option exercise for our smallpox therapeutic VIGIV product valued at approximately $56 million.
For our next generation anthrax vaccine candidate, AV7909, we continue to engage with the government regarding exercising the final option under the existing contract to procure additional doses for inclusion into the strategic national stockpile.
The current procurement contract for AV7909 was put in place in 2016 and facilitated procurement by the SNS starting in 2019, while we seek full approval by the FDA.
We continue to make good progress toward our target of submitting our AV7909 BLA later this year.
In addition, we recently secured a procurement contract to supply doses of Anthrasil, our polyclonal antibiotic therapeutic for treating inhalational anthrax to the Canadian government as part of their anthrax preparedness strategy.
On the R&D front, in addition to our anticipated BLA filing for AV7909, we advanced the number of our medical countermeasure programs, and I'd like to highlight two of them.
Specifically, we continue work on our COVID-HIG candidate, which is being developed in collaboration with NIAID, BARDA and the U.S. Department of Defense as an early treatment option to address at risk COVID-19 populations.
COVID-HIG leverages our polyclonal hyperimmune platform and continues to show neutralizing activity against variants of SARS-CoV-2 virus in, in vitro models.
We anticipate in the near-term, the initiation of a Phase 3 study led by NIAID assessing the effect of hyperimmunes on patient populations that have not yet progressed to severe disease to determine the progression can be impacted.
In addition, we recently obtained approval for our Trobigard auto-injector from the Belgian Regulatory Authority.
Several years ago, through interactions with various governments around the world, we identified their need to have auto-injectors available in case of nerve agent attacks.
And as a result we invested in building that capability.
Achieving this first approval from our auto-injector platform is a key milestone in the maturity of our auto-injector platform.
Moving next to our contract development and manufacturing business, or CDMO.
When we first laid out in our last strategic plan, the goal was to leverage further our drug manufacturing network of nine sites to provide development services, drug substance and drug product services, to a diverse customer base.
We obviously have seen significant growth related to the pandemic, which was unanticipated at the time, but beyond COVID-19, we continue to see strong interest from current and potential clients and are winning new clients and projects in all three service pillars, those being development services, drug substance and drug product and drug packaging.
Interest is coming from small, mid and large companies, as well as governments and other organizations.
Rich will provide detailed information on new business, the backlog and our rolling opportunity funnel.
But I like to emphasize that even though we expect variation quarter-to-quarter as we grow the business, the growth over the 2019 baseline in our strategic plan is considerable.
Overall, the key takeaways that our CDMO business unit remains strong as the industry's demand for biologics manufacturing services continues to grow, while we pursue becoming an increasingly important service provider in support of pharma and biotech innovation.
Finally, a third pillar of our 2024 strategy was to continue our focus on public health threats, while diversifying our customer base beyond the U.S. government.
And I'm pleased to report the continued progress on that front as well.
As you know, the opioid crisis has been a public health threat, and it's claimed far too many lives and made even worse by the pandemic.
As announced earlier this week, we're very proud to be working with several nonprofits to help raise awareness of the risk of accidental opioid overdose through a month long public awareness campaign called Reverse the Silence.
In addition, as we have previously discussed, the U.S. circuit court of appeals has scheduled the oral argument for NARCAN U.S. appeal for August 2 on the ongoing Patent Infringement Litigation.
Based on this timing, we believe a decision is likely by the end of the year.
Regardless of the outcome of the appellate court's ruling, we continue to focus on the public health threat and our role as a provider of solutions to address the opioid epidemic.
Continuing with the diversification theme, while the travel space-travel health space has been understandably challenging, we continue to make good progress with building our development stage vaccine candidates.
We still expect to initiate a Phase 3 trial for Chikungunya virus VLP vaccine in 2021.
In addition, and then supported this important development program, we recently announced positive two-year persistence data from a Phase 2 clinical study that indicated that our vaccine candidate appears to generate a rapid and durable immune response.
We intend to publish the results of this study in the near term.
We also plan to initiate a Phase 1 study in late 2021 and early 2022, related to a number of vaccine candidates in the pipeline, including our Shigella, Lassa and universal flu vaccine candidates.
As you can see, we expect that the remainder of 2021 will be busy for our product development teams, including clinical regulatory and quality as our pipeline continues to mature.
That wraps up my comments regarding the business overall.
On the personnel front, we recently issued an 8-K announcing the reorganization of my direct reports, Rich Lindahl, our Chief Financial Officer; Karen Smith, our Chief Medical Officer and Katy Strei, our Chief Human Resources Officer continued to report directly to me.
In addition, rounding out my direct reports, Adam Havey's role has been expanded to include overall responsibility for all of our business units, as well as global manufacturing operations.
Mary Oates role has been expanded to include a focus on operational excellence in addition to current responsibility for global quality.
And finally, Nina DeLorenzo role has been expanded to include the management of the Global Communications and Public Affairs function, as well as the Global Government Affairs team.
As part of this reorganization, the role of Executive Vice President for Manufacturing and Technical Operations that has been held by Sean Kirk has been eliminated and consequently Sean is leaving the company.
We have a deep appreciation for Sean's 18 years of service at Emergent and wish him the very best for him and his family going forward.
We believe this organization and reorganization of our management team allows us to best position for the long-term success of the strategic plan.
To conclude, as you'll hear from Rich, our second quarter results demonstrate that Emergent's business remains durable, resilient, employees for growth.
We're on track with our 2024 strategy and Emergent is well positioned to play a meaningful role in strengthening our national public health threat preparedness.
And I continued to be proud of each member of the Emergent team who come into work every day, focused on a mission to protect and enhance life.
I'll start on Slide 9.
Despite recent challenges, we have continued to execute across all aspects of the business, vaccines, therapeutics, devices, and CDMO.
Our financial condition remained strong with the liquidity and financial flexibility to fund our operations and pursue opportunistic investments.
And we remain steadfast in our unwavering commitment to supporting global preparedness and response to public health threats.
Today's announcement that we are clear to resume manufacturing at Bayview is a Testament, not only to that commitment, but also to the strong teamwork and organizational discipline that had been hallmarks of this company throughout it's nearly 23-year history.
A quick run through of key highlights include, total revenues of $398 million, an increase of $3 million versus the prior year and in line with our guidance and adjusted EBITDA $50 million and adjusted net income of $18 million both decreases versus the prior year due to a variety of one time and other expenses, which we will discuss in a moment.
Breaking down quarterly revenue into its components, anthrax vaccine sales were $52 million lower than the prior year due to timing of deliveries.
NARCAN nasal spray sales were $106 million, an increase over the prior year, driven by continued strong demand for this critical drug device combination product for opioid overdose reversal across both the retail and public interest channels in the U.S., as well as increased Canadian sales.
Other products sales were $24 million consistent with the prior year and CDMO services revenue came in at $191 million, an increase over the prior year and reflecting contributions from all three service pillars, primarily for our government and innovator partners response to the COVID-19 pandemic.
As Bob noted in his remarks, earlier in July, the U.S. government exercised the next ACAM2000 contract option that is valued at $182 million.
Accordingly, we now expect sales of ACAM2000 to resume in the third quarter and to complete all related deliveries by the end of 2021.
Looking beyond revenue, the quarterly results also include cost of goods sold of $228 million, a $98 million increase over the prior year.
And reflecting the increased costs associated with a substantial increase in CDMO services revenues, as well as $42 million of inventory write-offs, which I will return to in a moment.
Gross R&D expense of $49 million consistent with the prior year, reflecting our continued commitment to investing in our pipeline of development programs across our three product focused business units.
Net R&D expense of $24 million or 6% of adjusted revenue consistent with the prior year, SG&A spend of $91 million or 23% of total revenues, an increase over the primary prior year, and primarily reflecting the impact of higher costs to support and defend our corporate reputation and combined product and CDMO gross margin of $144 million or 39% of adjusted revenue, a decline of $97 million and reflecting the impact of $42 million of inventory write-offs due to raw materials and in-process batches at the Bayview facility that the company plans to discard as they were deemed unusable.
$43 million associated with the product and service revenue mix, which was weighted more heavily to lower margin products and services and $12 million associated with costs incurred to remediate and strengthen manufacturing processes at our Bayview facility, many of which are temporary in nature.
Turning to Slide 11, we will now review our key CDMO metrics.
In the second quarter, we continue to obtain incremental contract awards resulting in secured new business of $53 million.
However, this outcome was significantly offset by $108 million of negative contract modifications.
As of June 30, the backlog is $1.1 billion.
And lastly, as of June 30, the opportunity funnel was $672 million down from $807 million at March 31.
While the CDMO teams ongoing business prospecting and marketing initiatives continue to generate new opportunities.
For now, we are removing potential opportunities at Bayview as all manufacturing activities at that facility are currently prioritized to support the J&J COVID 19 vaccine.
As a reminder, the opportunity the funnel does not include any value associated with an extension of the commercial supply agreement with Johnson and Johnson into years three to five of the existing contract.
On Slide 12, you can see the sequential trends in these metrics over the last four reporting periods.
We remain committed to serving our existing customers and continue to execute on our marketing initiatives with pharma/biotech innovators across all three of our service pillars.
We look forward to making further progress in this important part of our business as we move forward from here.
Moving onto Slide 13 for a review of our balance sheet and cash flow, we ended the second quarter in a strong liquidity position with $448 million in cash and $262 million of accounts receivable resulting in aggregate current liquid assets of nearly $710 million.
This compares with approximately $732 million of aggregate current liquid assets as of the end of the first quarter.
We also still have undrawn revolver capacity of just under $600 million.
Finally, at the end of the second quarter, our net debt position was $416 million.
And our ratio of net debt to trailing 12 month adjusted EBITDA remained below one times.
These considerations include No Raxibacumab revenue until 2022.
The Naloxone market remains competitive with at least one new entrant this year, but no generic entrance prior to the resolution of our patent litigation case and the successful manufacturing of J&J's COVID-19 vaccine at Bayview.
On that last point, the FDA's green light to restart production at the site, which we confirmed earlier today is a key milestone toward that end.
One consideration that has been revised is that our expectation for gross margin for the full year is now approximately 61% to 63% on a GAAP basis, a reduction of 200 basis points from the prior range of 63% to 65%.
This change reflects the impact of the Q2 2021 performance as well as expectations for the remainder of the year.
We anticipate that this lower margin will be offset by cost savings related to R&D and SG&A.
Lastly, we are providing third quarter total revenue guidance of $400 million to $500 million.
In the second quarter 2021, we continue to deliver solid financial results that keep us on track with our full year outlook.
On a year-to-date basis, our revenues of $741 million represent approximately 41% of our full year 2021 forecasted total revenues at the midpoint, a similar waiting between first half and second half total revenues as has occurred in each of the last four years.
We remain confident in the strength of the business, which continues to be robust and resilient with the capabilities, capacity and financial strength needed to deliver preparedness and response solutions to a wide range of public health threats.
| sees q3 revenue $400 million to $500 million.
reaffirms 2021 full year forecast for revenues and profit.
emergent biosolutions - in quarter, inventory write-offs related to raw materials, in-process batches manufactured at bayview facility.
emergent biosolutions - fy other product sales, expected to be impacted on assumption that a new raxibacumab contract to be awarded later than planned.
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These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
In addition, this conference call contains time-sensitive information, that reflects management's best analysis only as of the day of this live call.
These reports include without limitation, cautionary statements made in Stride's 2020 annual report on Form 10-K.
These filings can be found on the Investor Relations section of our website at stridelearning.com.
In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. or GAAP, we will discuss certain information that is considered non-GAAP financial information.
The call will be available for replay for 30 days.
Since I became CEO three months ago, I heard one consistent question.
What will happen with education after the pandemic is over?
Well, we're soon approaching that point it looks like, and I don't think any of us know.
But many credible thought leaders seem to believe the shift to online learning is not temporary.
In fact, a lot of the key trends we are seeing from recent research on education, careers and the economy, support side view.
A recent New York Times article carried the headline, online schools are here to stay even after the pandemic.
The premise to the article was that the ongoing pandemic has changed the landscape of education permanently.
One quote, "A subset of families who have come to prefer online learning are pushing to keep it going".
Additionally, a recent study by the Society for Industrial and Applied Mathematics found that one-third of high school students would choose a fully online or hybrid education even after things return to normal.
These and other research like them support my long held belief, that the momentum in digital transformation is difficult to reverse and that the trend toward online and hybrid education will continue.
And more students are recognizing that college is not the only effective or most affordable path to a career.
The ECMC Group released findings from a study it conducted that showed today's high school students are seeking lower cost, quicker paths to careers.
In the study, 25% of Gen Z teens said they were more likely to attend a career and technical education school due to their pandemic experience.
This trend is playing out in college as well.
Last fall there was a 7% drop in enrollments in higher education.
This means more students will seek out other educational paths.
In a recent article in New York magazine, they make the following case, I quote, "People under the age of 40 are fed up.
They have less than half of the economic security than their parents did at the same age" For the first time in our nation's history, a 30-year-old isn't doing as well as his or her parents at age 30.
So the paradigm of offering opportunities needs to shift.
In our adult learning business, we are seeing people moving toward non-traditional educational apps.
Strada Education Network surveys have shown that adult learners who are looking for educational training options are focused on gaining certification and licensure rather than traditional degrees, and they prefer to get this training through online programs or directly from their employer.
Importantly, companies are beginning to recognize that non-traditional educational paths can be success -- as successful as college graduates.
Large corporations like Facebook, Google and Amazon and others have begun programs to hire non-college graduates, and in many cases, students right out of high school into professional high-paying technology jobs.
And all the indications suggest these professionals are excelling.
As such, companies are expanding these programs.
These transport our strategy of providing career skills.
The pandemic has accelerated the shift in modality to a more digital approach.
As these markets are poised to grow at increasing rates, Stride is well-positioned to benefit for many years to come.
The immediate impact of these trends are evident in our results for this quarter and in our fiscal 2021 guidance.
We've raised our guidance for the full year in each of the past two quarters.
Year-to-date, our Stride career revenue enrollments are up over 120%.
The ECMC study I mentioned above, also found that 61% of Gen Z teens believe a skill-based education makes sense in today's world and our Stride career programs offer a clear solution for these students.
The programs provide access to career-ready skills and certifications.
This allows students develop skills they can -- that can lead directly to a career or better prepare them for post-secondary education.
Regardless of which path they choose, we want to provide them with an education that will prepare them for careers in high growth areas like healthcare, technology and business.
Our adult acquisitions are doing well and growing at double-digit rates even though some of them have traditionally focused on in-classroom teaching.
Their shift to online programs has gone smoothly and we feel good about our future growth prospects.
Specifically, our two most recent acquisitions, Tech Elevator and MedCerts are performing against our acquisition plans, but more important, these companies serve mainstream markets at large scale future opportunities in front of them.
As we begin to invest in our Stride brand, we believe we will be able to generate meaningful growth for these products, incremental to what they would have been able to do as stand-alone businesses.
As more employers start to take notice of these kinds of pathways, they are looking to partner with training providers, to ensure they are hiring the right skilled workers.
For instance, MedCerts recently announced a partnership with Equus Workforce Solutions to offer a registered apprenticeship opportunities to employers seeking employees in high-demand fields.
These types of programs demonstrate that Stride's offerings address both learner and employer needs.
Beyond that, we can have [Indecipherable] build recruitment pipelines with our Tallo partnership.
Tallo now boasts 1.5 million users on their platform.
This community of both users and employers will help ensure that we are developing the right training programs, while giving them and others a path to employment.
And as we said during our Investor Day in November, we expect this growth and the trends we are seeing in the market to lead to overall career learning revenues, a $650 million to $800 million by fiscal 2025.
And as excited as we are about the prospects in our career and adult learning businesses, we are also focused on our general education business.
Unfortunately for many students the pandemic has caused a decline in academic achievement.
A recent study by NWEA showed that number of students who regressed academically increased significantly nationwide during the last year.
Fortunately, for students have found that attending established virtual programs like ours, they have been able to attend school uninterrupted.
Our partners have provided seamless education in a completely disrupted world.
We owe our gratitude to them.
The impact translated into academic outcomes as well.
In a recent study we conducted, programs managed by Stride, handily outpace schools like the ones in the NWEA study.
Not all online programs are created equal.
We believe ours is a gold standard, the data backs that up.
How does all of this translate into future trends,?
Just a little over a year ago we conducted a survey that validate the trends we've seen for many years.
An approximately 2% to 3% of families were considering a fully online high school option.
I just today received results of our most recent study that indicated that, that 2% to 3% had jumped to over 10%.
Similarly consideration for online career programs jumped from 15% to 25%.
The shift online school from home means that more families are seeking out Stride's offering of digital solutions.
Although online school might not be for everyone, many more families now recognize it as an option.
In addition to the increase in awareness, the pandemic has brought about structural changes to other parts of our lives.
It wasn't just students who were impacted.
It was parents, families, teachers, and administrators.
Many of these individuals have come to appreciate the flexibility that comes from working and schooling from home.
This shift gives more parents and families the opportunity to support their children's learning at home while they're also working there.
Or for teachers, they can teach at home.
We hired and managed more teachers than ever this year.
The flexibility for teachers to work out of their homes is another clear trend that provides great opportunities.
Overall, this means that Stride's offerings are more accessible to more families.
Now I know many of you are focused on what will happen with our enrollments this coming fall as the rollout of the vaccine proceeds and most school districts announced plans to get back into the classroom.
First of all, let me be clear that we support the reopening of brick-and-mortar schools.
In fact, we penned an open letter supporting President Biden's bipartisan push to get schools reopened.
Additionally, it's far too early in our enrollment season to know how many new students will come to our programs in the fall.
In fact, less than 10% of our normal overall enrollment volume happens before the end of April.
However, we do have some early indications of the rate at which existing families are indicating their return for the fall.
As of right now, the percentage of existing families that are responding to our outreach for returning in the fall is at an all-time high and the percentage that have indicated they are returning is at an multi-year high.
So far, we are seeing the opposite of a mass exodus back to brick-and-mortar schools that some have predicted.
This is some very early encouraging news.
However, I want to stress this is still very early in our enrollment season.
Finally, I want to highlight some existing -- sorry, some exciting upcoming programs from Stride.
Recently a survey we conducted found that over 65% of parents agreed that their children need additional educational curriculum over the summer to make up for lost time due to the pandemic.
Given the significant need, this summer we are going to offer free summer career experiences for students in Grade 7 through 12.
These programs are an excellent opportunity for current and prospective students to gain exposure to career skills, while engaging in exciting activities.
We plan to offer programs in nursing, theatre, Esports and even a JAM Camp for musicians.
We will also offer programs for recent Stride career graduates to further hone their career rating skills they learned in high school.
All these programs will help make Stride more accessible to more students, while teaching them valuable career skills.
So I believe the trends in our business as well as the overall macro conditions and our addressable market continue to work in our favor and grow as time passes.
Revenue for the quarter was $392.1 million, an increase of 52% from last year.
Adjusted operating income was $54.9 million, an increase of 146% and capital expenditures were $11.3 million, an increase of $1.9 million versus Q3 last year.
In each case, these results met or beat the expectations we provided in our guidance last quarter.
As James mentioned, our General Education business continues to perform very well, and Career Learning remains on a strong growth trajectory as it has been for this past several years.
Given the strength in these businesses, we have raised our guidance again for the full fiscal year.
Returning to our results for the quarter.
Revenue from our General Education business increased $89.2 million or 38% to $322.3 million.
This was due primarily to higher enrollments, partially offset by lower revenue per enrollment.
General Ed enrollments rose 43% year-over-year, while revenue per enrollment declined 4%.
For the full year, we expect revenue per enrollment to be down compared to last year due to state budgetary pressures resulting from COVID-19 and a higher mix of lower-funded states.
We do not however expect this decline to become a trend into next year.
In fact, we are confident, given what we know today about state policy, that enrollment funding should improve next year.
Career Learning revenue rose to $69.8 million, an increase of 191%.
This was largely driven by significantly higher volumes in our Stride Career Prep programs, formerly known as Destinations Career Academies as well as growth in our Adult Learning businesses, including the effect of MedCerts and Tech Elevator acquired in November 2020, and Galvanize acquired in late January 2020.
Gross margins were 35.5% in the quarter, up approximately 500 basis points from the same period last year.
For the full fiscal year, we expect gross margins to be approximately 34% plus or minus 50 basis points.
We believe this improvement will continue into next year.
Last November, at Investor Day, I laid out a 2025 goal for gross margin percent of 36% to 39%, and I expect us to get there much faster.
Selling, general and administrative expenses in the quarter were $100.5 million, up 58% in the year-ago period.
The increase in SG&A was driven primarily by higher costs associated with the growth in enrollments and higher stock-based compensation expense as well as the expenses for our adult learning businesses.
We expect SG&A for the full fiscal year 2021 to be in the range of $420 million to $425 million.
Up from fiscal 2020 due to higher costs associated with the growth in enrollments, higher stock-based comp expense as well as the inclusion of the SG&A associated with Galvanize, MedCerts and Tech Elevator.
Our expectation for fiscal year '21 interest expense is that it will be between $17 million and $18 million including approximately $4 million in cash interest and $12 million in non-cash amortization of the discount on our convertible senior notes, and another $1 million of non-cash amortization of debt issuance costs.
Our convertible notes are subject to new accounting guidance, which can be adopted in FY '22 and no later than FY '23.
Once the guidance is adopted, the debt discount will be eliminated from the balance sheet and the associated non-cash amortization expenses are eliminated from the P&L on a going forwards basis.
EBITDA for the third quarter was $62.2 million, up 89% from the third quarter of fiscal 2020.
Adjusted EBITDA was $75 million, up 92% from the same period a year ago.
Operating income was $38.6 million, adjusted operating income was $54.9 million, an increase of 146%.
Additionally, we are raising our guidance for adjusted operating income to $156 million to $159 million for the full fiscal year 2021, and that's up from our previous guidance of $145 million to $155 million.
We ended the quarter with cash and cash equivalent at $329 million, an increase of $70.9 million compared to the second quarter.
We expect working capital to be a significant source of cash in the fourth quarter, primarily due to accounts receivable.
So we expect our cash balance at the end of fiscal 2021 to increase significantly.
We believe that our strong free cash flow generation and liquidity will continue to provide the financial flexibility to fund our existing operations and to pursue strategic acquisitions.
Capital expenditures for the quarter totaled $11.3 million below the range of $12 million to $15 million we guided to last quarter.
We expect full year capex to be in the range of $50 million to $55 million.
Our effective tax rate for the quarter was 30.2% and we expect our full year tax rate to be in the 27% to 29% range.
We expect that free cash flow defined as cash from operations less capex will trail our adjusted operating income.
This timing difference is primarily due to working capital changes related to the timing of payments from certain states, some of which are associated with our growth in states that regularly pay in the following year.
And some of which is related to delayed payments due to COVID.
Now returning to our updated guidance.
To summarize, we expect the following for the full year fiscal 2021.
Revenue in the range of $1.525 billion to $1.530 billion.
Adjusted operating income between $156 million and $159 million.
Capital expenditures of $50 million to $55 million and a tax rate of 27% to 29%.
In Q3, we saw another successful quarter owing to the tremendous demand for our products and services, both in General Education and Career Learning.
We delivered double-digit or better growth in revenue adjusted operating income and adjusted EBITDA, while significantly improving our gross margins and our robust cash and liquidity position.
We remain very excited about the prospects for our business as a whole and will continue to execute on our high growth Career Learning strategy.
| compname posts revenue of $392.1 million – career learning revenue grows 191% year-over-year.
compname posts revenue of $392.1 million – career learning revenue grows 191% year-over-year.
q3 revenue $392.1 million versus $257.2 million.
sees full fiscal year 2021 revenue in range of $1.525 billion to $1.530 billion.
sees fiscal year 2021 capital expenditures in range of $50 million to $55 million.
sees fiscal year 2021 adjusted operating income in range of $156 million to $159 million.
|
With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Sean Kerins, Chief Operating Officer; and Chris Stansbury, Senior Vice President and Chief Financial Officer.
Our actual results could differ materially due to a number of risks and uncertainties, including the risks factors in our most recent 10-K and 10-Q filings with the SEC.
These non-GAAP measures are not intended to be a substitute for our GAAP results.
I'll now hand the call to our Chairman, President and CEO, Mike Long.
Over the last few quarterly reports, I've shared with you the growing momentum behind our business.
Even as we navigated the pandemic, we maintain staffing.
We continue to identify efficiencies to fund greater investments in design, engineering and supply chain services.
I'm pleased to report that this momentum is yielding results.
We achieved all-time record sales, gross profit and earnings per share, not just for the second quarter, but for any quarter in Arrow's history.
In our industry, maintaining a leadership position requires constant evolution.
At Arrow, we strive to be our customers' trusted source for solutions to their manufacturing and information technology challenges.
We always seek new ways to help their businesses be more successful.
To do so, we must consistently expand and enhance our service offerings in the areas of engineering, design for manufacturing, supply chain management and secure workload management.
And we've made great progress on these fronts.
Arrow is now operating from a position of strength.
The opportunity for our business has never been greater.
In the current environment, it's rare to find a company or industry that's not facing challenges from a supply chain perspective.
We're ideally positioned to help customers address those challenges by leveraging our unmatched databases of design, electronic components information from our media properties.
Beyond information, we see the companies around the globe are rethinking their approaches to component procurement.
Just-in-time deliveries have become a high-risk, low-return strategy.
Customers are seeking reliability, and we can work with them to create a more stable and a more secure stream of parts that benefits our suppliers as well.
As a result, we've expanded our customer base, and are engaging with new companies who are in the past had not considered Arrow services.
We're providing solutions tailored to their specific challenges to achieve success.
The trajectory of our global components business was very positive during the second quarter.
Our global components business capitalized and continued strong demand in all regions, with sales up 40% year-over-year.
Sales were above the high end of our expectations for the fifth quarter in a row.
The upside largely attributable to our ability to secure additional inventories to meet the strong demand.
We saw robust demand from key industries such as transportation, industrial, communications, consumer electronics and data networking.
We also saw growth in the aerospace and defense sector on a year-over-year basis as the commercial aviation industry continues to recover.
As a result, global component sales reached $6.6 billion, which is an all-time record in the company's history.
Again, this quarter, we achieved significant growth along with exceptional profit leverage on sales.
Operating income from global components increased more than two times the rate of sales growth.
We continue to provide customers with valuable supply chain services that utilize our global ERP capabilities and distinguishes our level of inventory insight from many of our competitors in this area.
Our digital platform is also helping customers manage component supply and safeguard their manufacturing.
The sales contribution from design and engineering activity which were remarkably resilient through the pandemic is keeping pace with the market growth.
Stepping back to a multiyear view of our industry.
We see several key indicators of a smooth transition to normalized demand.
First, based on our current orders and backlog, even with a heavy level of caution and skepticism, we see the urgent need for electronic components for production extending well into 2022.
Second, we believe customers want to keep their places in line with lead times extending.
Lastly, and this has been changing the increasing electronic content in and everything around us is a tailwind for the business.
Turning to enterprise computing solutions.
Sales were in line with our expectations and billings increased at a solid rate year-over-year.
We experienced growth in storage and networking, which was helped by businesses and their workers returning to their offices.
While the corner turned out largely as we expected, in the short run, lower spending on work and learn from home is an offset to growth.
We saw supply chain issues limit our ability to capitalize on stronger demand.
While we're pleased with our enterprise computing solutions performance, we see strong potential for even better results.
IT spending priorities are shifting toward more complex transformational projects that tend to be better aligned with our value-added focus.
The growing threat of landscape and the return to on-site business have greatly increased activities for our business.
Increases in cyber threats such as ransomware attacks continue to shine a light on the importance of being proactive toward security protocols.
Arrow has proven itself to be an expert in this area, and continues to be the trusted partner for VARs, MSPs and their end customers.
Finally, I'm happy to report that we increased our share repurchase authorization by an additional $600 million.
This comes approximately one year after our last $600 million authorization and shows our continued commitment to returning cash to the shareholders at unmatched levels in our industry.
As our metrics show, we have never, in our history, been better positioned to balance working capital demand with robust growth.
This makes increasing cash returns and easier decision.
With that, I'll now hand the call over to Chris to provide more details on our second quarter results and expectations for the third quarter.
Second quarter sales increased 25% year-over-year on a non-GAAP basis.
The average euro-dollar exchange rate for the quarter was $1.21 to EUR one compared to the rate of $1.18 we had used for forecasting.
The slightly stronger euro benefited sales growth by approximately $69 million more than we anticipated.
Interest expense was slightly lower than we expected, but a slightly higher-than-expected effective tax rate offset any impacts to the bottom line.
For the full year 2021, we continue to expect our effective tax rate to be near the low end of our long-term range of 23% to 25%.
Turning to the balance sheet and cash flow.
Second quarter operating cash flow was $281 million despite substantial inventory demand to fund growth.
Over the last five-, 10- and 15-year period, cash flow from operations has consistently averaged 90% of non-GAAP net income.
But on a year-to-year basis, cash flow has an inverse relationship to sales growth.
Our cash cycle of approximately 50 days improved by six days compared to last year.
This improvement significantly aided cash flow performance in the face of working capital demands.
Our liquidity position is the best in the history of our company and continues to improve.
Leverage, as measured by debt-to-EBITDA is the lowest level in nearly 10 years.
We returned approximately $250 million to shareholders during the second quarter through our share repurchase plan and this was the largest single quarter of share repurchases in our history and was enabled by our strong profits and proactive working capital management.
We remain committed to returning cash to shareholders and recently expanded the operation by $600 million.
The total authorization under our plan is approximately $663 million and we're confident that we're purchasing shares below their intrinsic value based on the increasing return on invested capital and return on working capital that we're showing in the business.
Now turning to guidance.
Midpoint sales and earnings per share guidance would be an all-time third quarter, our forecast implies that third quarter profits would be slightly above the second quarter despite slightly lower sales.
Both businesses continue to face supply constraints that are limiting our ability to make the most of strong customer demand.
Our guidance reflects continued strong profit leverage for global components on a year-over-year basis and for global enterprise computing solutions profitability to remain consistent with last quarter and last year.
Finally, as we discussed last quarter, please note the CFO commentary includes information on our fiscal calendar closing dates for 2021.
In 2021, the fourth quarter starts on October 3, unlike in 2020, when it started on September 27.
This makes the fourth quarter shorter than prior year fourth quarters, but year-over-year comparisons for the second and third quarters are not affected and our fiscal year-end on December 31, as always.
| compname announces additional $600 million share repurchase authorization.
|
Before turning the call over to Ron, I'd like to make a few comments about forward-statements.
Dan Malone, our CFO, will begin our call with a review of our financial results for the fourth quarter and the year-end 2020, and I will then provide a few more comments on these results.
The key takeaways from our fourth quarter and full year 2020 results are: fourth quarter sales were down 3.8%, record full year sales were up 4% with the help of acquisitions, but down 11% without.
Fourth quarter net income and earnings per share were down 16% from the prior fourth quarter on a GAAP basis and down about 6% on an adjusted basis.
Full year net income and earnings per share were down 10% from prior year on a GAAP basis, but increased more than 2% year-over-year on an adjusted basis.
Full year adjusted EBITDA was up 11.6% from the prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year.
Record full year operating cash flow of $184.3 million was up 108% over prior year, and fourth quarter operating cash flow exceeded an unusually strong operating cash flow performance in the prior year quarter.
Outstanding debt was reduced by $158.6 million in 2020, and our debt net of cash position improved by $166.5 million during the year.
Record backlog of $354.1 million was up 35.6% over the prior year-end.
Fourth quarter 2020 net sales of $288.6 million or 3.8% lower than the prior year quarter.
While we saw a strong rise in order rates and backlog, the COVID-19 pandemic continued to negatively impact our manufacturing efficiencies and inbound supply chain during the quarter.
Also the timing of these new orders and the fact that strong customer demand hasn't been consistent across all of our business segments has limited the immediate top line impact.
Full year 2020 net sales of $1.16 billion were a Company record and 4% higher than the prior year with the contribution of the Morbark and Dutch Power acquisitions.
Without these acquisitions, organic sales were down 11% from prior year.
Net income for the fourth quarter was $8 million or $0.68 per diluted share compared to prior year fourth quarter net income of $9.6 million or $0.81 per diluted share.
Excluding the Morbark inventory step-up expense, severance cost related to a plant closure, one-time acquisition transaction cost and acquisition-related amortization expense, adjusted fourth quarter 2020 net income was $13 million or $1.10 per diluted share compared to $13.8 million or $1.18 per diluted share in the prior year quarter.
Net income for full year 2020 was $56.6 million or $4.78 per diluted share compared to net income of $62.9 million or $5.33 per diluted share for the prior year.
Excluding the full year impact of the adjustments I just mentioned in the quarter comparison, adjusted full year net income was $70.3 million or $5.94 per diluted share compared to $68.4 million or $5.80 per diluted share in the prior year.
Industrial Division fourth quarter 2020 net sales of $202.7 million represented an 8.9% decrease from the prior year quarter due to the pandemic-related impact on customer demand and disruptions to our supply chain and operations.
While this division ended the year with higher backlog than the previous year-end, the surge in orders that created this favorable comparison is largely concentrated in forestry and tree care products.
Other business units, notably those serving the municipal government sector, finished the year with order backlog below pre-pandemic levels.
Agricultural Division fourth quarter 2020 sales were $85.9 million, up 10.5% from the prior year fourth quarter.
During the quarter, we continued to see strong organic growth across this division.
The immediate top line benefit of the surge in customer demand was constrained by the negative impact of the pandemic on inbound supply chain and manufacturing efficiencies, as previously mentioned.
Full year 2020 adjusted EBITDA was $145.2 million, up $15.1 million or about 11.6% over the prior year and was essentially flat to the third quarter trailing 12-month results.
Our adjusted 2020 EBITDA as a percentage of net sales improved by nearly 100 basis points over prior year.
Higher Morbark margins, favorable product mix, the benefits realized from facility consolidations and other cost containment measures more than offset the negative impact -- the negative pandemic impact previously mentioned.
During 2020, we generated $184.3 million of operating cash flow compared to $88.8 million in the prior year, an increase of 108%.
Strong operating cash flows continued during the most recent quarter, as we exceeded an unusually strong operating cash generation in the prior year fourth quarter and we further delevered our balance sheet.
We ended the fourth quarter with a record $354.1 million in order backlog, an increase of over 35% since the prior year-end.
During the fourth quarter, we saw an acceleration of customer demand, particularly for our forestry and agricultural products, while demand has grown overall for the Company and all of our units have seen improvements in customer demand since the pandemic impacted the second quarter.
Order rates for some of our businesses are still below pre-pandemic levels.
To recap our fourth quarter and full year 2020 results, fourth quarter sales down 3.8%; record full year sales, up 4%, but down 11% without acquisitions; fourth quarter net income and earnings per share down 16% on a GAAP basis and down 6.8% on an adjusted basis; full year adjusted EBITDA up 11.6% from prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year; record full year operating cash flow, up 108% over prior year with favorable comparisons continuing in the fourth quarter; full year debt reduction of almost $159 million and debt net of cash improvement over $166 million; and record backlog, up more than 35% over the prior year-end.
We're particularly pleased to see that the momentum, which we have -- which has been building for the last several quarters, really since the slowness in the -- the end of this -- in the second quarter and -- but it's built in the third, continued into fourth and with strong bookings and a record backlog at the end of the year, and I'm pleased that this trend has continued even into the first quarter of 2021 with our backlog continuing to grow even further, and now it's over $400 million.
However, there were also issues related to the pandemic that impacted our operations in the fourth quarter.
These included sporadic cases of COVID that, while not large and not at a lot of locations, were -- always had a follow-on effect that like you could have one person that went home sick and then suddenly we close down the whole department for several days while we clean it and get things better and ready to make sure everybody else in there is OK.
We've always had [Phonetic] a couple of things like that.
We are also experiencing more supply chain issues, but again can be small.
You cannot ship a product as you have -- are missing a [Indecipherable] O-ring, but that's the kind of ripple effect these can have.
All of this together caused shipments in the fourth quarter to be a little below our expectations, but still good.
And margins were even better, particularly when adjusted for the non-cash charges that were above average in the fourth quarter for 2020.
The two major non-cash charges were the inventory step-up charge related to the acquisition of Morbark and the reorganization reserve related to the proposed plant consolidation we've announced in the Netherlands.
We are not finished with the inventory step-up charges at Morbark, which affected us every quarter since we bought them.
But as of the end of the fourth quarter, all goals are now finished and should not be affecting our results going forward.
And the plant consolidation in Europe, we're actually -- even though we took a charge in the fourth quarter, it's actually -- the timing was a little bad because that actually, within the next year, will have a projected payback of less than one year on that investment -- on that the plant consolidation.
So, it's a very positive move in the long term, even though it impacted the fourth quarter results.
But net of these two items, net income from the quarter was just below the previous year's -- adjusted net income was just below the previous year's adjusted net income, despite soft sales and less organic sales and certainly the ongoing COVID issues.
So, all in all, we're pleased.
On top of this, we were extremely pleased with our efforts in the fourth quarter and throughout 2020 in controlling cost and managing our assets, which, as Dan pointed out, resulted in very strong levels of cash generation, record EBITDA and reductions in outstanding debt, ensuring the Company's solid financial stability despite the certainly challenging economic environment, which we are all operating.
In addition, we are pleased that even with the limitations imposed on us during most of the year 2020 that certainly restricted our travel and caused many of our office personnel to have to work remotely for some periods of time, we were able to complete many of our operational developments that we already had planned for the year.
These include most of the integration initiatives related to the 2019 acquisitions of Morbark and Dutch Power.
We also completed the construction of a new manufacturing plant for our Super Products unit in Wisconsin that allowed us to consolidate three facilities into one modern efficient facility, and we were able to complete that project totally in 2020.
And there was continuous progress on a range of other product development and operational improvement initiatives ongoing throughout the year.
So, actually, we really made a lot of progress in a very challenging year.
Alamo Group's Industrial Division performed well in both the fourth quarter of 2020 and for the full year, even though for us, they probably had the most market challenges due to COVID.
The biggest end user of their products are governmental entities, most of which struggled with budgetary issues during the year and are still being impacted today.
Yet while organically, our sales were off, they still held up well due to the stable nature of demand for our types of products that continued to be used through the year for infrastructure maintenance.
And we're pleased bookings, which were very soft in the second quarter and gradually and steadily increased each quarter since then, have continued this trend as we moved into 2021.
As Dan pointed out, some of it's a little spotty.
Some units are doing better than other units.
But certainly in total, they're up.
And it's interesting like -- say like Morbark, one of our new units, they were probably hurt the most early on COVID, and yet, they have come back the most -- the strongest, as things have continued to build back up.
So, it had been a little spotty but in total, as I said, it continues to be good and strong.
Certainly, our Agricultural Division has held up even better and actually showed a small increase in sales for the year and margins did even better.
We were -- I think the ag sector in general was helped by increased subsidies to farmers during the year, and actually we started -- COVID [Phonetic] period started with fairly low levels of dealer inventories going into the year 2020 due to the weak agricultural industry of the last several years.
So as a result, at the end of the year, as I said, we have record backlogs.
Dealer inventories are still fairly on the low end, so there's still more upside potential there.
But we're also seeing improved commodity prices in the ag industry.
So, the outlook for further growth in this division is very positive as we move into 2021.
In fact, we believe the positive trends we are seeing in both of our divisions bode well for Alamo Group's outlook for 2021, though the pandemic and its repercussions, as well as all the impacts it has had on the global economy are still far from over.
For us specifically, ongoing COVID infections are spotty, but certainly are still causing challenges.
Supply chain issues are affecting us and many -- almost everybody in our industry.
Everything from truck chassis, tractors and all are out -- the lead times on them have nearly doubled for many of our key inputs.
Certainly, even the adverse weather conditions of the last several weeks, especially in Texas, not only were a couple of our plants closed for couple days, but we saw like one major supplier that -- they said they were closed four days, and so now they are two weeks later than their plan.
So, that's causing some issues.
And we're also seeing a few inflationary pressures too in this which -- I think with our reactions to that, that will -- most of that will flow through fairly quickly.
But in the short term, it can have some effect on our -- all of our operations.
So, all these issues together will certainly dampen our first quarter performance, but we actually feel quite good about the year 2021 in total.
There is positive momentum in our markets.
There is stable demand for our types of products, which continue to be used daily in maintenance and operations and are wearing out on a regular basis.
In addition, contributions from recent acquisitions, ongoing operational improvement initiatives, as I've said, such as the plant consolidation initiatives we've taken on, altogether make the outlook for the full year of 2021 very bright for Alamo Group.
And we certainly hope that the greater availability of the new COVID vaccines will start to take -- have a impact on the pandemic and will begin to abate and we can all return to a little bit more conditions.
But regardless, we actually feel quite good about the outlook for Alamo for 2021.
| compname reports q4 earnings per share of $0.68.
q4 earnings per share $0.68.
q4 sales $288.6 million versus refinitiv ibes estimate of $289.8 million.
q4 net sales of $288.6 million, down 3.8%.
backlog at $354.1 million at quarter end, up 35.6% compared to year end 2019.
qtrly acquisition adjusted diluted earnings per share non-gaap $1.10.
|
Please ensure that your lines are muted until the operator announces your turn to ask a question.
Leading our call today will be Mike Manley, our chief executive officer; and Joe Lower, our chief financial officer.
I will be available by phone following the call to address any additional questions that you may have.
But as this is my first call, I was also trying to think about what may be helpful for me to touch on in addition to the financial results.
And I thought that, firstly, I'm going to give a brief overview of some of the things that I've been doing over the last three months.
And then I'm going to go through the highlights of the group's performance and hand over to Joe who will give you more of the fine detail.
After that, I'm going to touch on a number of the key topics I gained attention over the last few weeks.
And in closing, before our Q&A, I thought I may give a knock to the future, which will albeit just a summary of some of my preliminary observations.
So as you can imagine, when you join in the organization, particularly one that has a broad national footprint of retail locations and over 20,000 people in the field, you spend quite a lot of time traveling around the country.
And today, I have the opportunity to visit a number of our franchise dealerships, including our most recent acquisitions, many of our AutoNation USA stores, our auction sites and a number of our collision centers from coast to coast.
Now obviously, I knew from our previous life that AutoNation was the largest automotive retailer in the United States, and that it also begun to build additional brand businesses and capabilities at scale.
But I have to genuinely say that reading about it on paper actually doesn't do it justice to what has been built and the talent that the organization possesses, that could actually see, feel, and get a sense of by actually visiting the locations.
I think when you get the opportunity to travel to our dealerships and businesses, you really start to recognize the incredible assets that the group has been able to build, acquire and develop.
When I think about the 330 franchises in our dealerships, not only do the brands we represent account for 99% of all new vehicles sold in the U.S., but we're also fortunate to have a superbly balanced portfolio of the best automotive brands in the world.
And they are located in some of the most exciting franchise territories.
In addition to visiting our retail businesses, I've also met with a number of our OEM partners.
And I have to say, unfortunately, I haven't been able to get around all of them.
So for me, this is a big clear to do and finish list.
And I'm looking forward to meeting with our partners that I haven't met yet.
But I have to say the ones and have now been incredibly encouraged by our conversations.
We've had what I would consider very frank exchange of views.
And very importantly, I've been able to see the brand and the product plans for the future.
And for me, just makes representative fantastic brands even more exciting when you understand what's actually coming through the pipeline.
Now obviously, our franchise dealerships is an important core part of our group, and our scale gives us significant opportunities.
But it's also clear that we're also developing businesses and platforms that will significantly expand our reach, and I think give us the opportunity to take advantage of things as they unveil in the future.
As you know, we're building a strong focus used car brand with AutoNation USA.
And as Joe will tell you in a minute, all of the stores we have, including those added in 2021, are up and running.
They're profitable, ahead of our expectations, and adding happy customers to our growing family on a daily basis.
And finally, and I think this is really important, the one thing you really do get a true feel of once you're on the inside on a day-to-day basis is the quality and the passion of the AutoNation team.
It doesn't matter where I've been, either in our dealerships, our collision centers and our corporate office, I think there's really a clear will to win and a customer and community-focused culture.
So on this point, as a reality check, I do have to say I've never heard an incoming CEO say anything bad about the team he or she walked into.
Certainly, not at least on the first.
But and you know doubt probably expected me to complement our people.
But my comment actually goes well beyond platitudes.
Because you can imagine, our strong performance, how pleased I am with the team's delivery of the seventh consecutive record quarter.
And I think we have to remember, this is still delivered during very unusual times, with significant disruption from lack of supply, winter COVID spikes and competition everywhere.
And my comments actually go beyond that.
They're made as much for the performance the team delivered as they are for the less visible selfless work they do in our communities and the fight against cancer.
AutoNation's Drive Pink campaign was a true revelation to me.
Not in the center, an organization was involved in social and community projects or charity works, because actually, I think that's what organizations are supposed to do.
But I was amazed to see just how many of our associates get involved on their own time to support Drive Pink and drive out cancer.
Today, the people of AutoNation have raised over $30 million, which has been plowed into research, treatment and care.
Now that is a team that I can tell you, I'm already very proud of.
So just give you a brief flavor of my first three months, and now I'm going to turn to our results.
So you've seen from the numbers, we delivered another outstanding quarter and a very strong year.
And today, as I already mentioned, we report our seventh consecutive record quarterly results with adjusted earnings per share of $5.76, which is an increase of $137, and revenue increasing by $797 million or 14% compared to the prior year.
Now this was driven by robust growth in used vehicle sales, consumer finance services and aftersales.
Total units for the quarter declined by 1%.
And that was driven by new vehicle sales, down 20%, which was largely offset by an increase in 21% of used vehicle volume compared to the prior year.
And with strong consumer demand, we continue to focus on our sourcing capabilities to used vehicles, which further strengthened both our franchise dealerships and our AutoNation USA businesses.
When I look at that, nearly 90% of all pre-owned vehicles retailed in the quarter were self-sourced prior acquisition strategy, which obviously includes all of the trade-ins, but now increasingly, our we buy your car program, which processes directly from customers.
And as a result, used vehicle revenue increased 55% for the quarter.
Now as I previously mentioned, AutoNation USA is a successful part of our plan.
And in November, we opened AutoNation USA Avondale and Phoenix and recently entered the new market with our 10 AutoNation store, USA store in Charlotte.
Now each new store opened in 2021 has exceeded expectation, and as I said, profitable in the first four months of operation.
And we remain on target to open 12 additional new stores over the next 12 months.
I think our focus on margin expense control significantly contributed to our performance as strong new used finance and insurance margin per unit, up significantly year over year and in the quarter, and continued our improvement in our after sales business, which delivered an 11% increase in gross profit.
I know it's been discussed over, the ongoing expense control, something which, frankly, I consider structural in the business now helped contribute to an overall increase in total store profits by over 150%.
Now with that, I'm going to hand you over to Joe, who's going to take you through the detail of the financials.
Today, we reported fourth quarter total revenue of $6.6 billion, an increase of 14% year over year, driven by impressive growth in used vehicles of 55% as well as double-digit growth in both customer financial services and aftersales.
This was partially offset by a 7% decline in new vehicle revenue due to the continuing supply chain disruption to new vehicles production.
Strong consumer demand and tight new vehicle inventories continued to support new vehicle margins in the fourth quarter.
We expect demand to continue to achieve supply well into 2022.
In addition, many consumers have shifted to used vehicles due to limited availability of new, which has been very beneficial as we continue to demonstrate exceptional growth, supported by our self-sourcing capabilities and ongoing expansion of our AutoNation USA footprint.
For the quarter, total variable gross profit increased 49% year over year, driven primarily by an increased total variable PBR of $2,026 or 50% increase, with a slight decline in total units of 1%.
As Mike mentioned, 21% growth in used units year over year largely offset a 20% decline in new units over the same period.
We also demonstrated strong growth in aftersales gross profit, which increased 11% year over year.
Taken together, our total gross profit increased 34% compared to the fourth quarter of 2020.
Fourth quarter adjusted SG&A as a percentage of gross profit was 56.7%, a 710 basis point improvement compared to the year ago period.
As measured against gross profit on an adjusted basis, our metrics improved across all key categories, with overheads decreasing 370 basis points, compensation decreasing 230 basis points and advertising decreasing 110 basis points year over year.
Longer term, we expect normalized SG&A to gross profit to be in the mid-60% range, well below our pre-pandemic levels that were consistently above 70%.
This improvement is the result of structural changes that we have made to our business model.
Floor plan interest expense decreased to $5 million in the fourth quarter of 2021 due primarily to lower average floor plan balances.
Combined with the lower effective tax rate and fewer shares outstanding, we reported adjusted net income of $380 million or $5.76 per share, a 130% increase year over year.
This results our seventh consecutive all-time high full earnings per share result.
Our strong operating performance and cash flow generation continue to provide us a significant capacity to deploy capital.
During the fourth quarter, we closed on the previously announced acquisition of Priority 1 Automotive Group, adding $420 million in annual revenue.
We remain focused on identifying additional acquisitions that allow us to expand our current portfolio and offer attractive long-term financial returns.
As Mike discussed, we continue to see a tremendous opportunity to capture a larger share of the used vehicle market by leveraging our sourcing capabilities, rich data analytics and AutoNation USA growth strategy.
We recently opened our 10th AutoNation USA store in Chile, North Carolina and expect to open 12 more stores over the next 12 months.
Longer term, we continue to target over 130 stores by the end of 2026.
We also continued to repurchase our own shares.
During the fourth quarter, we repurchased 3.1 million shares for an aggregate purchase price of $382 million.
This represents a 5% in shares outstanding from the end of the third quarter.
The company has approximately $776 million available for additional share repurchase at this time.
As of February 15, there were approximately 62 million shares outstanding.
We ended the fourth quarter with total liquidity of approximately $1.5 billion.
And our covenant leverage ratio of debt-to-EBITDA of 1.5 times remains well below our historical range of two to three times.
Looking ahead, we will continue our disciplined capital allocation strategy, leveraging our strong balance sheet and cash flows to invest in our business and drive long-term shareholder value.
So strong results, as you can see.
And again, congratulations to all of the AutoNation team, and their delivery is fantastic.
So I do just want to add a couple of points I think are important.
When I step back and think about the business and our results, I look to understand which of the key profit drivers are, let's say, circumstantial to varying degrees and which are the drivers are now structurally embedded in the group.
And I think this is important because it's clear to me that some are mistakenly discounting all of the improvements in performance is totally temporary.
And they're preferring to rely on 2019 as a more reliable baseline.
And I think this is wrong.
Because now, you can see there are clearly structural improvements that should translate into long-term value.
So the business drivers that I consider in that category are improvements in F&I performance, which is more driven by a focus on product penetration rather than rate, by used volume, which is more related to sales effectiveness, operational focus as well as additional USA stores, and finally, the SG&A control that Joe just mentioned again.
And we can clearly see the benefits of that coming through in our net income margin.
And in my view, we should continue to translate into value and not be so quickly discounted as situational at this time.
So obviously, that leads one of the biggest variables, which is clearly new vehicle margin.
And naturally, there's a lot of debate where this may go in the future.
And I remember in my previous life, on quarterly discussions on calls like this, we spent a lot of time talking about breakeven points and what level of SAAR can you still make a profit or level of SAAR can't you make a profit.
And if you look at the fourth quarter, we delivered a SAAR around that $13 million from my estimate, well below anyone would have been able to forecast.
And the levels of profitability for both OEMs and dealers clearly show the benefits of selling vehicles at MSRP.
And what a concept, right, selling at MSRP.
So if that's the learning, I think, has got to do that.
By the way, while we're on the subject of retail price, we've seen a number of comments about vehicles being sold above MSRP, quoting the potential adverse impacts on brands and customers, which I understand.
And by the way, last year, less than 2% of all the new vehicles sold by AutoNation were above MSRP.
But this discussion on MSRP branded customers actually also adds to my optimism regarding new vehicle margins going forward.
Because I think it's equally clear that significant discounting and high incentives can also damage a brand, which is another reason for our industry to balance appropriately supply and demand, and another reason why we may expect higher new vehicle margins than we have historically seen pre-COVID.
So finally, let me briefly turn to the future.
I think everybody recognizes the industry will go through a significant transformation.
And that's not just in terms of product and powertrain, but in many other ways as well.
When COVID is behind us, we'll see the emergence of additional mobility models and choices.
We'll see changes in the way customers approach vehicle ownership and usage.
And we will progressively see changes in how dealers and OEMs are traditionally competed.
And for me, this is an exciting time and offers many more opportunities and downsides.
And now I'm more convinced than ever, having seen under the hood of AutoNation, that the group can be well placed and positioned to continue to grow and thrive.
AutoNation in the past has been known for its innovation and progressive approach.
And you can be certain we're going to be taking this approach to the next level.
As we see it today, we have over 11 million customers in our family already, and every year, an additional three million interactions.
So we have the opportunity not only to leverage our brand, our scale, our strong bricks and mortar footprint, but also to build on our growing digital capabilities and expand our business model to ensure we have greater autonomy and control in our future.
So obviously, a lot more to come in the coming months.
But I'd like to make one announcement that will help indicate some of what the future may hold for AutoNation.
And that is, I'm now creating a new executive role.
And I'm delighted to announce Gianluca Camplone will be joining the group from March 1 and assuming the position of EVP, head of mobility, business development and strategy, and COO of Precision Parts.
This role will report directly to me.
Gianluca will sit on our executive committee.
And I'm sure several of you will already know Gianluca Camplone.
But for those who do not know him, he joined AutoNation from McKinsey, where he was most recently serving as senior partner and leader of the advanced industry global practice and private equity industrial practice in North America.
Gianluca orchestrated a companywide $1 billion digital business building program.
And he spearheaded a global team on multiple billion-dollar mergers in the automotive sector.
He's led a major dealer performance transformation at a leading North American commercial vehicle manufacturer.
And in addition, very relevantly, he redesigned the multibillion dollar used car business and multichannel environment for a global auto manufacturer.
So as you can tell, I'm incredibly excited about the future.
I'm absolutely delighted that Gianluca has agreed to join our executive team.
And I think, as you can tell, it bodes well for some of the things that I'm certain AutoNation and we can do that not only will give us a great future, but as I said, give us a lot more autonomy and control over where we're going.
So let me close.
I think demand for vehicles continues to be strong.
Used vehicle growth is robust.
And the -- we are going to continue, as Joe said, AutoNation USA store expansion.
And obviously, we're going to look aggressively opportunities to expand our customer-centric personal transportation solutions.
| compname reports q4 revenue was $6.6 billion, up 14%.
q4 revenue was $6.6 billion, up 14%.
q4 earnings per share $5.87; q4 adjusted earnings per share $5.76.
q4 new vehicle revenue declined 7% and used vehicle revenue increased 55%.
expect consumer demand for personal vehicle ownership to remain strong for the foreseeable future.
|
With us on the call today are Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer.
If not, you can access the release on our website.
Before we get started, I would like to review World Fuel's Safe Harbor statement.
A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission.
As with prior conference calls, we ask that members of the media and individual private investors on the line participate in listen-only mode.
I hope that you're all doing well, while continuing to stay safe and healthy.
We obviously have some very exciting news to talk about this evening regarding the definitive agreement to acquire the Flyers Energy Group that we just announced, which Ira and I will cover after Ira's financial review.
Flyers is an ideal addition to our US land business and will significantly contribute to the scale and density of our commercial and industrial platform in the US, more about this exciting news later.
Overall, our business performed well in the third quarter as we witnessed some encouraging trends, primarily in our aviation segment where commercial passenger activity continue to increase both domestically with activity climbing to more than 80% of its pre-pandemic levels and internationally where easing travel restrictions have led to increased activity in Europe and Asia.
We continue to make strides in expanding our aviation service network and comprehensive offering.
In marine, market conditions remain challenging in the third quarter compounded by the fact that we did not have the benefit from certain seasonal business we have generated in prior years.
However, we have begun seeing improvement in certain markets such as the cruise sector where activity continues to recover with more ships sailing monthly.
We also recently concluded a term LNG bunker supply agreement on the US West Coast demonstrating our ability to provide a broader range of energy solutions and cleaner marine fuels.
And lastly, we are continuing to build a stronger foundation in our land segment by remaining laser focused on enhancing our core product and service offerings and meeting the evolving demands of our customers throughout the world including recently developing a multiyear carbon offset program for a large cruise operator facilitated by World Connect, our gas power and sustainability business.
In addition to continuing to invest in the commercial and industrial ground fuels market in North America, our inorganic focus will also include World Connect activities tailed [Phonetic] by our growing global base, customer base effectively navigate the energy transition.
Before I walk through our third quarter results, please note that the following figures exclude the impact of non-operational items netting only $1 million this quarter, which principally related to acquisition divestiture and restructuring related adjustments in expenses.
Now let's continue with third quarter financial highlights.
Adjusted third quarter net income and earnings per share were $23 million and $0.36 per share, respectively.
Adjusted EBITDA for the third quarter was $63 million.
And volume continue to improve across all of our business segments as markets continue to recover.
With third quarter consolidated volume up 9% sequentially and 23% year-over-year.
We generated positive cash flow from operations of $83 million during the third quarter contributing to our net cash position of $282 million.
This was our 14th consecutive quarter of positive operating cash flow totaling approximately $1.4 billion over such period.
And now I'm going to get into our financial results in greater detail.
So, let's jump back to the volume.
Aviation segment volume was 1.7 billion gallons in the third quarter, an increase of 21% sequentially, consistent with the growth forecast provided on our second quarter call and an increase of 63% compared to the third quarter of 2020.
We experienced volume increases both sequentially and year-over-year in our commercial passenger and business in general aviation operations.
The year-over-year volume increases resulted from the continuing recovery in air travel and the sequential increase was driven by both the general economic recovery and traditional summer seasonality.
Volume in our marine segment for the third quarter was 4.8 million metric tons, an increase of 4% sequentially and 9% year-over-year.
We experienced increases in core resale activity during the third quarter in marine.
And although we may see some disruption from the supply chain bottlenecks at certain ports, marine activity should benefit from the ongoing economic recovery possibly higher fuel prices as well as we head into 2022.
Our land segment volume was 1.3 billion gallons or gallon equivalents during the third quarter.
That's practically flat sequentially, but an increase of 4% year-over-year.
The year-over-year volume increased spend across much of our North American retail and commercial industrial operations and our Connect business continues to post solid year-over-year growth driven by an increasing demand for our energy management and sustainability offerings.
Consolidated volume for the third quarter was 4.2 billion gallons or gallon equivalents, an increase of 9% sequentially and 23% year-over-year driven by the significant rebound in aviation activity.
Consolidated gross profit for the third quarter was $197 million, an increase of 7% sequentially and 3% year-over-year.
Our aviation segment contributed $113 million of gross profit in the third quarter.
That's up 28% sequentially and 19% year-over-year.
As previously noted, the year-over-year increase in gross profit generally related to the continued rebound in core activity, partially offset by the reduction in government-related activity in Afghanistan, where as you already know, all activities ceased a part of the final troop withdrawal during the third quarter.
Our team in Afghanistan did an amazing job over the past 10 years.
All of our employees made it out of the region safely and we will be forever grateful for their dedication and valuable contribution to our business.
Most particularly, Derek McRobbie and his team who stuck it out [Phonetic] until the very end supporting the evacuation missions on the ground at Kabul Airport.
As we look ahead to the fourth quarter, we expect aviation gross profit to decrease sequentially, principally driven by the traditional seasonal decline in activity and the conclusion of activity in Afghanistan.
However, we expect continued increases in both volume and gross profit on a year-over-year basis.
The marine segment generated third quarter gross profit of $22 million down 4% sequentially and 31% year-over-year.
Despite the year-over-year increase in volume and marine.
Gross profit declined as a result of lower margins in our core business driven by continued competitive market pressure and the loss of some seasonal business we had benefited from in the past.
As we look ahead to the fourth quarter, we expect Marine gross profit to modestly increase both sequentially and year-over-year driven by some signs of improving marketing conditions in our core business.
Our land segment delivered gross profit of $63 million in the third quarter, a seasonal decline of 15% sequentially and a decline of 4% year-over-year when excluding MultiService from last year's results.
We experienced a year-over-year decline in gross profit from our Core Commercial and Industrial business activity in North America driven principally by current supply chain disruptions which had temporarily eroded margins due to increased transportation costs.
We also experienced a year-over-year decline from government-related activity, again as a result of the conclusion of activity in Afghanistan.
These declines were offset by increases in the North American retail business and power activity in Europe where related markets have been strengthening.
Looking ahead to the fourth quarter, we anticipate land gross profit will increase principally related to seasonal activity in the UK.
Core operating expenses which exclude bad debt expense were $153 million in the third quarter.
Looking ahead to the fourth quarter, we expect core operating expenses excluding bad debt expense to be in the range of $156 million to $160 million.
After experiencing elevated losses during the front end of the pandemic, we continue to manage our broad portfolio of receivables exceptionally well with bad debt expense near zero in the third quarter.
Again, adjusted EBITDA was $63 million in the third quarter, that's up 6% sequentially but down slightly compared to last year's third quarter.
Interest expense in the third quarter was $10 million, which is effectively flat year-over-year and fourth quarter interest expense should be about the same in the range of $10 million to $11 million.
And our adjusted effective tax rate for the third quarter was just under 31% and we expect the fourth quarter effective tax rate to be about the same.
Despite rising prices and volume, we generated $83 million of operating cash flow during the third quarter, our 14th consecutive quarter of positive operating cash flow.
This further strengthen our balance sheet resulting in a net cash position of $282 million at quarter end at a total cash position of nearly $800 million.
We also repurchased 750,000 shares of our common stock during the quarter, demonstrating our continued commitment to drive additional shareholder value through both buybacks and dividends.
Before we move on to discussion of the Flyers Energy acquisition, let's sum up the quarter.
Aviation's continuing recovery contributed to a strong quarter and we see continued growth opportunities across all three of our business segments as the economic recovery continues.
We generated strong operating cash flow in a sharply rising price environment contributing to an ending cash position of nearly $800 million setting us up well for the Flyers acquisition, but also for the additional growth opportunities ahead.
The world around us is changing rapidly and we're excited about organic and inorganic growth opportunities that will support our customers' evolving needs throughout the world.
As we've been repeating for some time now, we've been sharpening our portfolio of business activity strategically shedding non-core activities and we indicated that we were focused on investing in and growing our core commercial and industrial land business in North America as well as our increasingly relevant natural gas, power and sustainability platform.
With today's announcement of the signing of a definitive agreement to acquire Flyers Energy, we are taking a very significant step in this direction.
This acquisition will add significant scale and density to our North American land platform.
We are very excited about it and we think that it's a watershed turning point for the Company that will position us for growth for many years to come.
Ira will now review the transaction in greater detail.
The remaining $100 million we paid in two equal $50 million instalments upon the first and second anniversaries of closing.
The cash portion of the upfront purchase price will principally be paid with cash on hand.
Again, we had $796 million of cash at end of September, with the remainder to be drawn under our revolving credit facility.
The transaction is expected to be significantly accretive to margins, earnings per share and cash flow and is expected to close within 60 to 90 days subject to customary closing conditions, including regulatory approval.
Flyers which has been very successfully operated by the Dwelle family for decades is based in Auburn, California and distributes diesel, renewable fuels, lubricants and gasoline to more than 12,000 small to medium sized commercial and industrial and retail customers spanning 20 states.
Estimated volume for 2021 is $850 million gallons with forecasted 2021 revenue and gross profit of $2.4 billion and $135 million respectively.
We really look forward to welcoming the talented and experienced Flyers team to World Fuel.
They are a great bunch of people.
Flyers are the national fleet fueling network consisting of approximately 200 card lock sites which are operated by Flyers and an additional 200 third-party sites, which are part of their national network.
Card locks are effectively unmanned fuel sites serving commercial trucking fleets providing 24 hour access 365 days per year.
Flyers operates a stable and ratable low cost business model with a loyal and growing commercial customer base.
While their card lock operation is clearly their largest segment, Flyers also operates a small retail distribution business which will expand the World Fuel network to more than 2,000 retail locations nationwide and they also operate a wholesale diesel and lubricants business.
As we have stated repeatedly over time, we have been strategically focused on sharpening our portfolio of activities in our land segment.
Just two years ago, before the pandemic began, our land segment was fragmented without significant upscale in our core activities that being our North American commercial, industrial and retail activity and our growing gas power and sustainability activities.
These combined business activities represented less than 50% of total land gross profit back in 2019 before the start of the pandemic.
If you fast forward to our new run rate upon closing this transaction, these core activities will represent more than 80% of land gross profit and the overall land business will represent a greater percentage of our global franchise driving greater scale synergies and operating leverage.
The transaction will also expand our North American platform to more than 30,000 commercial and industrial customers, customers to whom we can support with options to purchase lower carbon renewable fuels.
Flyers already distributes renewable diesel at several card lock locations and we will look to continue growing renewable fuels distribution across our combined networks.
Speaking of our combined networks, this transaction will provide our North American land business with a national platform, which significantly improves scale.
We will be significantly expanding our card lock network, which is a low cost operating model driving above average returns accretive to our overall returns in our land business.
The transaction will provide regional density in California, Arizona and Nevada and will strengthen our density in the Rockies and Midwest.
The transaction also brings us a truly best-in-class management team poised to join with us to drive further growth and significantly enhance our land segments' shareholder value contribution.
Again Flyers is a stable, ratable and growing business with a low risk portfolio of customers at a seasoned management team with significant industry experience, which will strengthen and expand our North American land platform.
The transaction will also heighten our opportunity to participate in the growing low carbon renewables market.
We also believe that there remains a strong pipeline of additional investment opportunities, which can drive even further growth and operating efficiencies down the road.
Flyers will also improve the overall tax efficiency of our Company by adding substantial US profitability to our consolidated results.
And this strategic transaction will also drive a step change in the ratability of our global business, making our results easier to understand and forecast.
This is especially true in our land business, which we know hasn't always been the easiest to understand.
That will be fewer moving parts, more ratability and improving margins, contributing significantly to earnings per share and cash flow, a very exciting and important step forward in our longer term growth journey.
While this will indeed be the largest acquisition in the history of our Company, the substantial cash flow we have generated over the past three to four years combined with the cash generated from the sale of MultiService last year allows us to complete this transaction largely with cash on hand, leaving us with a strong and liquid balance sheet post-acquisition to support organic growth as well as further investments in core business activities principally on North American land and global gas power and sustainability business providing a more exciting experience for our global team of nearly 5,000 professionals and driving greater value to our shareholders.
| q3 adjusted earnings per share $0.36.
qtrly revenue $8,350.9 million versus $4,482.7 million.
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With us on the call today are Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer.
If not, you can access the release on our website.
Before I get started, I'd like to review World Fuel's safe harbor statement.
A description of the risk factors that could cause results to materially differ from these projections, can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission.
As with prior conference calls, we ask that members of the media and individual private investors on the line participate in listen-only mode.
As I mentioned last quarter, our organization continues to evolve within a fundamentally changed marketplace.
We've made progress within the digital and energy transition and performed well within a constrained supply chain.
The choppy start-stop reopening of markets and borders has added challenges.
There is no historical analog for the dynamics we were experiencing.
Despite this, we have done an extraordinarily good job of managing risk and supporting our customers, suppliers and partners from cyber to driver shortage to credit risk and lockdowns, our team has done an exceptionally good job of supporting a very different market.
And while conditions in many parts of the world remain fragile, our team again performed with both commercial and operational excellence in the second quarter, delivering solid results.
The aviation market continues to recover, with North American commercial passenger activity now back to 80% of pre-pandemic levels, while international activity still has a longer way to a full recovery.
I recently returned from Europe, but it's clear that airports are getting busier and activity is picking up.
So the prognosis for commercial passenger activity is clearly improving each quarter.
At most of our 80 operated locations outside of the U.S., activity was substantially ahead of where we were a year ago.
Lastly, as were publicized in media, our government bases in Afghanistan is generally coming to an end, as most bases have now been closed.
We expect some activity to continue, but this is expected to be modest.
Many sectors within the marine industry are performing well.
The container segment is especially buoyant, dry bulk is strong, with tankers looking more positive over time and the cruise market slowly entering restart mode.
While our marine business continues to perform well, we've been impacted by the lack of volatility and a corollary reduction in demand for our risk management offerings.
Our highly experienced marine team continues to build its logistics capabilities, and add complementary services, which includes sustainability offerings, leveraging our deep expertise within our World Connect business.
Our land business continues to evolve with the growing emphasis on natural gas, power and sustainability-related services.
The pandemic's impact on our land business is less pronounced, with volumes getting back to pre-COVID levels.
Strong seasonal first quarter results in Europe continued into the first month of the second quarter, and our commercial and industrial and retail businesses all performed well during the quarter.
We continue to gain traction in supporting our long-term fuel customers, with our natural gas and power and growing suite of sustainability offerings.
On the technology front, our team continues to develop a broader suite of offerings to complement our core business activities, and while it has been a long haul, we are getting closer to completing the integration of our North America land operating platforms, with one step in this process successfully completed in the second quarter.
This integration will drive efficiencies and will facilitate more synergistic integrations in the future.
I'm proud of the team's efforts in these areas, which are critical to our long-term success.
Finally, our balance sheet and liquidity profile remains strong.
We remain poised to invest in organic growth, as markets continue to recover and we will be supplementing organic growth with strategic investments, which should accelerate our growth in our core businesses and drive increasing shareholder returns.
I hope that you're all enjoying the summer, while continuing to stay safe and healthy.
Our business continues to perform well, in what remains a challenging operating environment, and I am proud of our people and all the great work we have done, supporting our customers and managing our business through this extraordinary period in our lives.
We remain extremely engaged with our customers and suppliers, and are proactively [Indecipherable] support.
And we are pleased to see that many of the markets we serve are showing increasing signs of improvement, others, including our aviation business in parts of Europe and Asia, have been slower to recover.
Meanwhile, we remain focused on enhancing our value proposition in all the markets we serve, and we're excited about the long-term prospects and opportunities that exist across our business.
The non-operational items principally relate to acquisition and divestiture, asset impairment and restructuring-related adjustments and expenses.
Now let's begin with some of the second quarter highlights.
Adjusted second quarter net income and earnings per share were $25 million and $0.39 per share, respectively.
Adjusted EBITDA for the second quarter was $60 million.
Volume improved significantly, as markets continue to recover, with second quarter consolidated volume up 9% sequentially and 33% year-over-year.
And lastly, generating $37 million of cash flow from operations during the second quarter and $500 million over the past 12 months, increasing our net cash position to more than $200 million, further strengthening our balance sheet.
And now I'll review our financial results in greater detail.
Consolidated revenue for the second quarter was $7.1 billion, an increase of $1.1 billion or 19% sequentially and an increase of $3.9 billion or 126%, compared to the second quarter of last year.
The year-over-year increase is driven by the significant increase in volume across all of our operating segments, as well as our 130% increase in average fuel prices compared to the second quarter of 2020.
Our aviation segment volume was 1.8 billion [Phonetic] gallons in the second quarter, an increase of 230 million gallons or 20% sequentially, and double the volume generated in the second quarter of last year.
The volume increases both sequentially and year-over-year, spanned our commercial passenger and business in general aviation businesses.
Although we've continued to experience increased activity with overall segment volume at more than 60% of pre-pandemic levels, at this time, we remain optimistic about the second half of the year and beyond.
However, uncertainty remains in many parts of the world, where travel restrictions remain in place and delta variant cases have been increasing.
Regardless, we remain in close contact with our customers and suppliers, and are ready to meet their needs across our global footprint.
Volume in our marine segment for the second quarter was 4.6 million metric tons, an increase of 360,000 metric tons or 8% sequentially and an increase of nearly 600,000 metric tons or 15% year-over-year.
Our land segment volume was 1.3 billion gallons or gallon equivalents during the second quarter, flat sequentially, but an increase of 120 million gallons or gallon equivalents of 10% year-over-year.
The year-over-year volume increases in the land segment came from improvements in our retail, commercial and industrial and wholesale businesses in North America, as well as continued growth in our Connect natural gas, power and brokerage businesses.
Consolidated volume for the second quarter was 3.9 billion gallons, an increase of 310 million gallons or 9% sequentially, and an increase of 960 million gallons or 43% compared to the second quarter of 2020.
Consolidated gross profit for the second quarter was $185 million, that's down 4% sequentially and 6% year-over-year.
Our aviation segment contributed $88 million of gross profit in the second quarter, an increase of 15% [Phonetic] sequentially or a decline of 3% year-over-year.
The year-over-year decline was driven by a reduction in our government-related activity in Afghanistan, as a result of the ongoing military withdrawal, which should be substantially completed by the end of next month, as well as declining margins principally related to a more normalized business mix, as well as lower physical inventory profitability in our core aviation business, when compared to the second quarter of last year.
As we look ahead to the third quarter, we expect aviation gross profit to increase sequentially, driven principally by the continuing recovery in North America and international commercial passenger activity.
The land segment generated second quarter gross profit of $23 million, that's a decline of 11% sequentially and 39% year-over-year.
The year-over-year decline is principally a result of lower profitability compared to the second quarter of last year, which benefited from volatility arising from the implementation of the IMO 2020 regulations, as well as the impact of competitive market conditions during this past quarter, where price volatility was also limited.
As we look ahead to the third quarter, we expect marine gross profit to increase modestly on a sequential basis, based upon some quarter-to-date improvement in our core resale business activity.
As we look toward the -- as we look toward the latter part of the year and beyond, we expect cruise line activity to accelerate and should contribute incrementally to our financial results.
Our land segment delivered gross profit of $74 million in the second quarter, a decline of 18% sequentially, but an increase of 8% year-over-year when excluding the profitability related to the multi-service business from last year's results.
Sequentially, we experienced the traditional seasonal decline in our U.K. business as well as a decline in gross profit related to our business in Afghanistan.
Year-over-year gross profit in our North American retail and commercial and industrial businesses, as well as our Connect business, all showed increases when compared to the second quarter of last year, demonstrating continued progress in growing our core land business activities.
Connect's growth is reflective of our increasing focus on natural gas, power and a growing suite of sustainability solutions, and it now represents nearly a third of land's overall gross profit.
Looking ahead to the third quarter, we anticipate land gross profit will be relatively flat on a year-over-year basis, when excluding the results of multi-service.
We continue to believe that our land segment has many opportunities for growth, both organically and through strategic investments, principally in our commercial and industrial and Connect businesses.
Core operating expenses, which exclude bad debt expense, were $147 million in the second quarter, which was in line with our guidance for the quarter, as we continue to manage our controllable costs well.
Looking ahead to the third quarter, operating expenses, excluding bad debt expense, should remain in the range of $146 million to $150 million.
As previously discussed, our team has continued to do an excellent job, managing our receivables portfolio throughout the pandemic, with more than 90% of our portfolio now current.
Our team's efforts have been paying off, with no leasing losses of any significance, compounded by successfully collecting certain high-risk receivables, which had been previously reserved for, this resulted in a credit to bad debt expense this quarter of approximately $1 million.
Adjusted income from operations for the second quarter was $39 million, that's down 7% sequentially, but up 17% year-over-year, related to the segment activity that I mentioned earlier.
Adjusted EBITDA for the second quarter was $60 million, down 3% sequentially, but up 11% compared to last year.
Second quarter interest expense was $10 million, that's flat year-over-year, as total interest expense continues to benefit from low average borrowings, as well as low rates, and we get into the quarter with no borrowings on our revolving credit facility, and in a net cash position, again, in excess of $200 million.
We expect interest expense for the third quarter to be approximately $9 million to $11 million.
Our adjusted effective tax rate for the quarter was 10.3%, which is significantly lower than our tax rate in the second quarter of 2020, and the rate we had previously forecast for this year's second quarter.
As a result of certain business initiatives, we recently updated our forecasted global jurisdictional income mix, which significantly reduced our second quarter tax rate.
Furthermore, we also had a discrete tax benefit relating to a change in U.K. statutory tax rate, that was announced during the second quarter.
In a nutshell, our second quarter tax rate was much lower than forecast for the reasons just explained, but the forecast of changes in income mix will also contribute to a lower tax rate, compared to where we started the year, with our tax rate for the second half of the year now expected to be in the range of 29% to 33%.
Our total accounts receivable balance increased to approximately $1.8 billion at quarter end, principally related to the increase in volume in our aviation and marine segments, as well as the sequential rise in average fuel prices.
We remain focused on managing our working capital requirements, which resulted in operating cash flow generation of $37 million during the second quarter, again, despite a 14% sequential increase in prices and a 9% increase in volume.
This further strengthened our balance sheet.
In closing, in the face of continued travel restrictions in many parts of the world, our business continues to recover, delivering solid results this past quarter.
And despite rising prices and increasing volumes, we again generated healthy operating cash flow, which now aggregates to nearly $750 million over the past six quarters.
As noted many times in the past, this cash flow supports our balance sheet with significant liquidity to grow our business organically, as the recovery continues, and inorganically as strategic opportunities arise.
Yes, our business has been meaningfully impacted by the pandemic, through its effects on the needs of many of our customers we serve throughout the world.
But our results have also shown our resiliency, evidenced by our ability to manage expenses prudently, manage our balance sheet extraordinarily well, and maintaining and growing relationships with our customers during this unprecedented time period.
We believe these relationships in our global platform, which combines our liquid fuel offerings with natural gas and power with a broad portfolio of services, and a growing suite of sustainability solutions, will serve us very well as the recovery in global markets accelerates.
| q2 adjusted earnings per share $0.39.
qtrly revenue $7,085.5 million versus $3,158.3 million.
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Joining me on the call today are Rob Goldstein, our chairman and chief executive officer; and Patrick Dumont, our president and chief operating officer.
Also joining us on the call today are Dr. Wilfred Wong, president of Sands China; and Grant Chum, chief operating officer of Sands China.
In addition, we may discuss non-GAAP measures.
Please note that we have posted supplementary earnings slides on our Investor Relations website.
We may refer to those slides during the Q&A portion of the call.
Just some brief comments, and we'll go right to Q&A.
Our results continue to reflect the pandemic's impact.
We did generate positive EBITDA of $244 million per quarter, about the same as the first quarter.
Our Macao performance reflected sequential improvement, but pandemic-related travel restrictions continue to impact our performance.
We do remain confident in the eventual recovery in both Macao and Singapore, and we cannot define the timing of the full recovery that's underway and will continue in 2021.
Singapore remains in the $500 million to $600 million range annually, although the second quarter was impacted by heightened pandemic-related restrictions for a portion of the quarter.
We will also be subject to closures of both portions of MBS from today through August 5 as part of COVID-19-related protocols.
This will obviously have a negative impact on Q3 results.
And as if, there remains no visibility as to when air traffic will return in Singapore, unless Macao, it is difficult to project additional EBITDA from MBS until the resumption of air travel.
Our considerable investments in Macao continues to take shape as the market recovers Four Seasons and Londoner will present growth opportunities, and we continue to have the largest footprint in this incredible market.
China continues to demonstrate economic resilience.
The spending in Macao's very strong at the premium mass level from both a gaming and retail perspective.
You may want to reference Pages 29 and 30 in your deck.
We do have great optimism about our ability to form to pre-pandemic levels once the vacation returns.
Our company is dividing the three areas, the Asian portfolio in Macao and Singapore.
While we believe Macao will accelerate in the second half of this year and lead recovery, Singapore will follow up on the resumption of air travel.
We are confident we'll return to a $5 billion plus EBITDA from Asia in the future.
The sale of the Las Vegas assets create liquidity and vast optionality to explore large land-based destination resorts in United States and Asia.
And finally, in the early innings of building out our digital presence, we are exploring multiple opportunities at present.
And we are eager to have this effort become entailed to our company in the years ahead.
We'll update you at the appropriate time.
Let's take some questions.
| property ebitda was positive $244 million, versus negative $425 million.
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It was a year ago this week that we reported our 31st consecutive year of sales growth.
In 2019, we achieved record levels of sales, earnings per share and cash flow.
As you may recall 2020 got off to a good start for us with mid-single-digit growth in sales through February 2020 was forecasted to be another good year of sales and earnings growth.
By mid-March a global pandemic and national emergency had been declared and the lives of people throughout the world were disrupted.
In the months that followed we worked to keep our employees and our store customers safe from the virus.
We reduced spending, negotiated lower product costs and improved liquidity.
We significantly reduced our exposure to excess inventories caused by temporary store closures.
And by curtailing inventory commitments, we were able to improved price realization and margins last year.
When the pandemic hit, we accelerated the execution of new capabilities to support the same-day pickup of eCommerce orders in our stores, curbside pickup and the direct shipment of eCommerce orders from our stores.
We engaged remotely with our wholesale customers, leveraged our investments in digital product imagery and secured higher bookings for our product offerings this year.
We also engaged more deeply and effectively with consumers through social media, building a virtual community of families with young children.
During the pandemic, we added over 2 million new eCommerce customers and with the support of our wholesale customers, the online sales of our brands exceeded $1 billion last year.
The pandemic was a challenging experience for all of us, but it also enabled us to find new ways to improve our business.
We believe the foundation of our company is now stronger because of the pandemic and we are better positioned to weather future storms that may occur.
It was the strongest quarter of the year in terms of sales and earnings contribution and the performance was in line with what we had planned.
We reporting a record gross profit margin in the fourth quarter enabled by a stronger product offering, leaner inventories and more effective marketing.
As planned, spending grew in the quarter, driven by investments in eCommerce, better staffing and retention in our distribution centers and the partial restoration of compensation for all of our employees.
Compensation was curtailed for several months earlier in the year.
With respect to sales trends, the fourth quarter got off to a strong start with October sales at 95% of prior year sales, consistent with the very strong demand we saw in September.
On a comparable basis, normalizing a holiday calendar shift and excluding the 53rd week.
November and December sales were 84% of prior year sales.
Our best analysis of the deceleration in demand relative to September and October reflects lower store traffic due to the resurgence of the virus heading into the final months of the year.
And we're lean on inventories heading into the holidays and less promotional than last year.
Sales trends improved meaningfully at the end of December and continued into January.
We saw growth in January sales and are expecting first quarter sales to be comparable to last year.
March is expected to be the largest month of sales and earnings contribution in the first half this year.
March sales have historically been driven by Easter holiday shopping and the arrival of spring like weather in more parts of the country.
We're expecting very good growth in the first half of this year as we comp up against temporary store closures last year.
And for the year, we're also expecting good growth in sales and profitability despite the lingering effects of the pandemic.
Our Retail segment was the largest contributor to our fourth quarter sales and profitability.
All of our U.S. stores remained open for the quarter though we did curtail hours 13% based on lower traffic.
COVID continues to have a material impact on store traffic.
Our border and tourist stores have been most affected by the pandemic.
Our border and tourist stores represent 10% of our U.S. stores that contributed over 20% of the decline in comparable sales.
This past year, we saw a fewer international guests in our stores and fewer shopping with us online.
In part, we attribute the decline in online demand from international customers to a significant reduction in our promotions this past year.
Those who came into our stores in the fourth quarter came to buy.
Our store conversion rate grew 5% in the quarter.
The average transaction value grew 9%, driven by higher units per transaction and better price realization.
We ran much leaner in store inventories in the fourth quarter, recall that we curtailed fall and winter inventory commitments when the risks of the pandemic became clear to us in March.
With leaner inventories, we focused our marketing less on promotions and more on the beauty of our product offerings.
In the fourth quarter 94% of our comparable stores were cash flow positive.
Our mall stores saw the largest decrease in comparable sales.
90% of our stores are in open-air shopping centers and these stores outperformed the chain.
As we shared with you last year, we plan to close about 25% of our 2019 store portfolio upon lease expiration.
About 60% of those closures are planned this year, 80% of the closures are planned by the end of next year.
These stores collectively contributed over $140 million in sales in 2020 with an EBITDA margin of less than 3%.
By comparison, the balance of our stores had an EBITDA margin of nearly 18%.
Our focus is on fewer better higher margin stores located in more densely populated areas to provide a higher level of convenience to in-store and online customers.
Our store closure plan is expected to be accretive to earnings in 2021 and provide a $10 million cumulative earnings benefit by 2025.
ECommerce continues to be our fastest growing and highest margin business.
ECommerce penetration grew to 45% of our retail sales, up from 38% in the third quarter.
Increasingly, we are seeing customers enjoy the convenience of picking up their online purchases at our stores located closer to their homes.
Omni-channel sales grew to 24% of our eCommerce orders in the fourth quarter, up from 12% last year.
Last year, we leveraged our stores from Maine to Hawaii to ship online purchases from over 600 stores.
As a result, we improve the speed of delivering online purchases and improve the profitability of our eCommerce business.
We expect the mix of omni-channel sales to grow to nearly 40% of online orders by 2025.
Our Wholesale segment was the second largest contributor to our fourth quarter sales and profitability.
Collectively, we continue to see double-digit growth with our exclusive brands which were margin accretive in the quarter.
ECommerce sales of our brands through our wholesale customers grew over 30% in the fourth quarter and up over 50% for the year.
Sales of our flagship Carter's brand were lower in the fourth quarter, reflecting our decision to curtail fall and winter inventory commitments.
Off-price sales were also lower in the quarter.
The excess inventories created by temporary store closures and related cancellations due to the pandemic were largely sold through our own stores at higher margins.
Going forward, we will continue to use our own stores to move through a higher percentage of excess inventories rather than selling to the off-price channel.
Spring selling is off to a good start with our wholesale customers.
They too are leaner on inventory, have a lower mix of prior season goods and are seeing better price realization and margins.
We're projecting very good growth in wholesale this year, especially in the first half, assuming all stores remain open.
Our International segment contributed over 11% of our fourth quarter sales.
Canada and Mexico contributed nearly 90% of our international sales.
Our eCommerce sales in those markets grew over 60% in the fourth quarter and grew to 30% of our international retail sales from 18% last year.
Both businesses performed remarkably well despite COVID-related store closures in the fourth quarter.
In Canada and Mexico, many of our stores were closed in the weeks leading up to Christmas.
Some of those closures continued through February.
The strength in our international wholesale sales was our Simple Joys brand sold exclusively through Amazon.
That business nearly doubled in the fourth quarter with Amazon's expansion of our brand into Europe and Japan.
Most challenging component of our International segment is with smaller retailers, representing our brands in over 90 countries.
Though individually small, collectively they contributed about 15% of our international sales in 2019 and were margin accretive.
Wholesale sales to these retailers were down over 50% in the fourth quarter.
Based on bookings from these wholesale customers, we're projecting a good recovery in this component of our business this year.
Our supply chains did an excellent job, supporting the continued acceleration in eCommerce demand in the fourth quarter.
The speed of delivering online purchases was meaningfully better than last year and we saw a related improvement in our customer satisfaction ratings.
In 2020, we invested to ensure the safety of our distribution center employees, raised their wages to improve staffing and retention, and invested in technology to improve the speed of delivery.
Our supply chain team also negotiated lower product costs for 2021, which may enable us to further improve our gross profit margin this year.
In the fourth quarter, we began to see delays in the receipt of products from Asia.
Our suppliers were running on average 10 days late due to COVID-related challenges and precautions and transportation delays.
Since the reopening of stores last summer, there's been a surge of imports into the United States.
As a result, there is an unusual shortage of cargo containers in Asia, further delaying the shipment of our products to the United States.
Given the imbalance in the supply and demand for cargo containers, the cost per container has risen significantly in recent months.
This is a macro issue.
Our best information suggests we'll see delays and higher transportation rates for most of the first half.
The surge in imports has also caused congestion at the West Coast ports in California, adding additional time to the receipt of goods.
Our wholesale customers are challenged by the same delays.
The late arrivals of our warm weather products and there is plenty of warm weather ahead of us.
To date, we have not experienced any meaningful order cancellations, but that's a higher risk than usual given the abnormal delays in deliveries from Asia.
Since our last call with you, we have revisited the longer term potential of our brands.
By 2025, we expect sales to grow to nearly $3.7 billion with an expansion of our operating margin to 13%.
Our growth strategies are focused on leading in eCommerce, winning in baby, aging up our brands and expanding globally.
Our Carter's brands have the largest share of the eCommerce children's apparel market in the United States.
In the fourth quarter, Carter's online experience was rated as one of the top user experiences among the largest U.S. and European eCommerce websites.
We also have unparalleled relationships with the leading retailers of young children's apparel, including Amazon, Target, Walmart, Kohl's and Macy's.
Carter's is the number one brand in baby apparel with over 4 times this year of our nearest competitor.
It's been the best-selling brand in young children's apparel for generations of consumers.
It's possible that we may see fewer births near-term due to the pandemic.
We've seen births decline almost every year since the Great Recession began in 2007.
And since 2007, our sales and earnings have more than doubled.
With the promise of vaccines more broadly available this year, government stimulus helping families with young children, historically low interest rates, strong housing market and an improving economy, we view the risk of fewer births as a potential short-term challenge, but not a longer term obstacle to our growth.
We have the number one market share in the baby and toddler apparel markets.
The largest growth in our sales before the pandemic, both in percentage and absolute dollars, was driven by our product offerings focused on 10 -- 5 to 10-year-old children.
With the continued success of our age-up initiative and the reopening of schools this year, we expect that our age-up strategy will be a good source of growth for us in the years ahead.
We plan to extend the reach of our brands globally and profitably.
International sales contributed about 12% of our consolidated sales in 2020 and are expected to grow to 15% of sales by 2025.
Over the next five years, over 60% of our international sales growth is forecasted to be driven by our multichannel operations in Canada and Mexico.
Our brands are also sold through Amazon, Walmart and Costco on a global basis.
We expect good growth from these multinational retailers and other retailers who are extending the reach of our brands to families with young children throughout the world.
In summary, we strengthened our business this past year and we're expecting a good multi-year recovery from the pandemic.
We have built a unique multi-brand multi-channel model, which we believe is well positioned to grow and gain market share.
We're committed to strengthen our business and provide good returns to our shareholders in the years ahead.
I'll begin on Page 2 with our GAAP income statement for the fourth quarter.
Net sales in the quarter were $990 million, down 10% from the prior year.
This year's fiscal year included a 53rd week, so the fourth quarter consisted of 14 weeks versus 13 weeks last year.
This extra week represented $32 million in additional net sales in 2020 and contributed roughly $1 million of operating income.
Reported operating income was $134 million, a decrease of 18% and reported earnings per share for the fourth quarter was $2.26, down 20% compared to $2.82 a year ago.
On Page 3 is our GAAP income statement for the full year.
Obviously, sales and earnings this past year were meaningfully affected by the global pandemic.
Net sales for the year were just over $3 billion, a decline of 14%.
Reported operating income was $190 million, down nearly 50% and reported earnings per share for the year was $2.50, down 57% from $5.85 in 2019.
Our fourth quarter and full year results for both 2020 and 2019 contained unusual items which are summarized on Page 4.
We've treated these items as non-GAAP adjustments to our reported results to enable greater comparability and to provide what we believe is a clear view into the underlying performance of the business.
My remarks today will speak to our results on an adjusted basis which excludes these unusual items.
On Page 5, we've summarized some highlights of the fourth quarter.
It was a strong finish to what's obviously been an eventful and challenging year.
We met our expectations overall for our financial performance in the quarter.
We saw good continued momentum in several important parts of our business.
ECommerce comparable sales were strong, up 16% in the U.S. and up 47% in Canada.
Our store sales in the U.S. were stronger than we had forecasted in part due to a slight improvement in the store traffic trend in December.
A real headline and driver of our fourth quarter performance was gross margin, which expanded significantly over last year; this was an acceleration over the gross margin expansion which we achieved in the third quarter.
Despite lower earnings, our cash flow was very strong in the year, reflecting our working capital initiatives implemented in response to the pandemic.
And our balance sheet and liquidity both were in great shape at the end of the year.
Turning to Page 6 for a summary of net sales for the fourth quarter; reported net sales declined 10% to $990 million.
On a comparable 13-week basis, net sales declined 13% year-over-year.
I'll cover our business segment results in some more detail in a moment.
But as we had expected, sales were lower year-over-year across the business.
Sales were negatively affected certainly by the ongoing disruptions of the pandemic, but also in part due to some of our decisions earlier in 2020 to curtail our fall and inventory commitments.
In recent weeks, we have also been further challenged by delays in the planned receipt of inventory.
This is an industrywide issue with many companies experiencing delays in the scheduled arrival of product from Asia.
We've estimated that the impact of late arriving product negatively affected sales by about $30 million in the fourth quarter.
Turning to Page 7 and our adjusted P&L for the fourth quarter; while sales were down versus last year, as I mentioned, the profitability of our sales increased significantly with our gross margin increasing by 460 basis points to 47.1%.
This represented record quarterly gross margin performance.
So despite sales decreasing over $100 million, gross profit dollars were roughly comparable with a year ago.
This increased gross margin rate was driven by the strength of our product offering, improved price realization, which was a result of more effective marketing and promotion, and our focus on inventory management, including good progress in reducing excess inventory.
Royalty income declined about $1 million versus last year, largely due to the timing of shipments of spring seasonal goods which shifted from the fourth quarter last year into first quarter 2021 and late arriving product.
Adjusted SG&A increased 5% to $327 million.
We partially restored certain compensation provisions, which had been suspended earlier in the year.
So the fourth quarter reflected some element of catch up for these expenses.
Our employees did great work this past year managing through very difficult circumstances.
As we rationalized our promotional activity in Q4, we reinvested some of those savings into marketing, specifically digital media, which delivered good returns.
We also made several investments to strengthen our eCommerce and omni-channel capabilities, including the launch of a new mobile app, enhancing our websites and continued investment in improving the speed and efficiency of our distribution center which supports eCommerce.
We believe these investments will strengthen our capabilities long-term and help us as the business recovers from the pandemic.
Adjusted operating income was $145 million compared to $162 million in the fourth quarter of 2019 and adjusted operating margin was 14.7%, comparable to last year.
Below the line, net interest expense was $15 million, up from $9 million in the prior period due to the $500 million in new senior notes we issued in the second quarter.
We had a $2 million foreign currency gain in the fourth quarter and our effective tax rate was approximately 18%, down from about 19% last year.
On the bottom line, adjusted earnings per share was $2.46, down 12% compared to $2.81 in 2019.
Moving to Page 8 with some balance sheet and cash flow highlights.
Our balance sheet and liquidity remained very strong.
Total liquidity at the end of the fourth quarter was approximately $1.8 billion with $1.1 billion of cash on hand and virtually all of the borrowing capacity under our $750 million credit facility available to us.
Quarter-end net inventories were up 1% to $599 million.
While largely comparable to last year in total of the composition of our inventory was very different because of our decisions to proactively curtail inventory earlier in the year, our inventory levels in our stores and for the core Carter's brand at wholesale were meaningfully lower than a year ago.
Our exclusive brand inventories were generally higher at year-end.
Total year-end inventories were down year-over-year when considering the inventory from summer 2020, which we pack and hold earlier in the year as the pandemic unfolded.
We made good progress selling through this pack and hold inventory during the year and expect to sell the remaining balance as we move through the first half of 2021.
We also made good progress reducing our overall level of excess inventory during the fourth quarter.
Our Q4 accounts receivable balance declined 26% compared to the prior year, principally due to lower wholesale sales.
Accounts payable increased by $290 million to $472 million, which reflects the extension of payment terms and rent deferrals.
Long-term debt was nearly $1 billion, up from roughly $600 million at the end of last year.
This increase reflects our successful senior notes issuance this past May and full repayment of outstanding revolver borrowings in the third quarter.
Operating cash flow in 2020 increased by about $200 million to $590 million.
Our strong focus on working capital and management of spending enabled us to achieve this record performance despite lower earnings in 2020.
Note that while we're planning higher earnings in 2021, operating cash flow is expected to be lower this year due to the repayment of deferred rent and adjustments to some vendor payment terms.
Moving to Page 9 with a summary of our adjusted full year performance; while 2020 sales and earnings were of course meaningfully affected by the pandemic, the combination of our strong product offering, marketing, inventory management and productivity initiatives enabled us to minimize the overall profit impact of lower sales.
With demand so uncertain we made the choice early on in 2020 to focus more on profitability than on sales.
The effectiveness of our initiatives is most evident and looking at the difference in our performance between the first and second halves of the year, which we've summarized on Page 10.
First half sales were significantly affected when our retail stores were closed for much of the second quarter and shipments to many of our wholesale customers were suspended, while their own stores were closed.
Gross margin performance was starkly different between the first and second half.
In the first half our gross margin declined by 350 basis points in part due to taking higher provisions for excess inventory.
In the second half, we achieved record gross margin as a result of improving our realized pricing and making good progress on clearing through that excess inventory.
Profitability followed this gross margin performance with a much smaller decline in adjusted operating income in the second half with an expansion of our adjusted operating margin versus a decline in the first half.
Turning to Page 12 with a summary of our business segment performance in the fourth quarter.
In the largest part of our business, U.S. retail, we improved profitability significantly despite the decline in total sales driven by improved product margin and good growth in our high margin eCommerce business.
Profitability in U.S. wholesale and International declined with sales lower it was more difficult to leverage costs in these businesses.
The increase in corporate expenses was largely due to the additional provisions for compensation and to a lesser extent some spending on external consulting in the quarter.
Now, turning to Page 13 with some detail on U.S. retail performance in the fourth quarter.
Total segment sales declined 6% compared to last year.
Total comparable sales declined 9%, reflecting strong eCommerce growth and lower store sales.
Q4 traffic while down meaningfully versus a year ago came in ahead of our expectations and was better than the apparel industry benchmark which we follow.
The adjusted operating margin of our U.S. Retail segment improved by 280 basis points to 19.1%, driven by higher product margins as a result of improved price realization, lower product costs and lower inventory provisions.
These gains were partially offset by investments to strengthen our eCommerce business and the timing of compensation provisions.
Moving to Page 14 with an update on our omni-channel initiatives; our investments in recent years to build our omni-channel capabilities are clearly paying off.
The ability to pair our leading eCommerce website with our nationwide network of stores is a strong competitive advantage.
As shown in the chart here, we saw strong year-over-year growth in omni-channel demand in the fourth quarter.
We believe these capabilities provide a better experience for our customers in terms of convenience, flexibility and shorter click to consumer times.
Our store-based fulfillment options also generally provide better economics compared to traditional fulfillment from our distribution center.
Lastly, our ship-to-store and pickup in-store options have driven significant traffic to our stores accounting for 1.7 million store visits in 2020.
About 25% of the time customers picking up their online orders made incremental purchases while in the store.
Moving to Page 15 to some of our recent marketing; fourth quarter marked the arrival of the first babies conceived during COVID.
While 2020 certainly provided its share of stress and negative news, there is no happier occasion than the arrival of a new baby.
Campaign featured real families and their babies born in 2020.
Campaign has generated an overwhelmingly positive response, which drove gains in brand awareness, brand favorability and future purchase intent with customers, while introducing Carter's the number one most trusted baby brand to a new audience of parents.
On Page 16 we continued to innovate in our marketing in the fourth quarter and lean into emotionally driven digital experiences for families such as our virtual visits with Santa and virtual PJ parties with Leslie Odom Jr., the star of Hamilton.
These millennial parents have responded well to these digital offers.
As Mike said, we added 1 million new online customers in 2020.
These brand's storytelling and customer engagement efforts resulted in a record 8 billion media impressions across the year, a significant increase over 2019.
Overall, Carter's continues to enjoy the highest level of engagement on social media among all the other major players in the young children's apparel market.
Turning to Page 17; we continue our efforts to expand the reach of our brands to more diverse consumers, which reflects our company's broader focus on diversity and inclusion.
To celebrate the wonderful legacies of historically black colleges and universities and to inspire the next generation, we recently launched an HBCU apparel collection partnering with a series of HBCU alumni influencers.
We also partnered with Sisters Uptown Bookstore in New York City on a Black History Month reading series, highlighting historical black figures and their notable contributions to our country and society.
Moving to Page 18 and with a recap of the U.S. wholesale results for the fourth quarter; net sales were $290 million compared to $349 million a year ago.
Despite late arriving product, we've largely achieved our sales forecast in wholesale for the quarter.
Sales of the Carter's brand and sales in the off-price channel were each down about 40%, tracking with our reduced inventory positions in these parts of the business.
We are planning for good growth of sales in the core Carter's brand in 2021.
With regard to the off-price channel sales, we made much greater use of our own retail stores in the past year to clear excess inventory at higher recovery rates than we've historically achieved in the off-price channel.
Online demand for our brands through our wholesale customers was strong in the fourth quarter with growth of 36% over the prior year.
U.S. wholesale adjusted segment income was $54 million in the fourth quarter compared to $67 million a year ago.
Adjusted segment margin declined 60 basis points, reflecting higher compensation and marketing expenses that were offset in part by lower inventory-related charges and lower bad debt expense.
On Page 19, we've included a photo from Kohl's, which is one of our largest and longest tenured wholesale customers.
Our Carter's baby shops at Kohl's continue to provide a competitive advantage, which elevates the presence of our brand and the customer shopping experience.
Our Little Baby Basics assortment drove strong sales increases all season as customers stocked up on these must-have basics.
This product is shown here in the front isle of this Carter's shop.
On Pages 20 through 22, we've included a few slides that highlight our exclusive brands which are available at Target, Walmart and on Amazon.
These brands had a terrific 2020 and that momentum continued into the fourth quarter where collectively sales of the exclusive brands increased 13% over 2019.
On Page 21, we've depicted some of the beautiful Child of Mine product carried at Walmart.
We've seen a significant -- we've seen significant growth of the Child of Mine brand online with Walmart over the past year.
On the next page, Simple Joys on Amazon continues to be a good source of growth for us.
In 2020, we expanded our product offering in key categories and added incremental categories such as outerwear, robes and sleep bags.
Pictured here is our latest brand store featuring a range of products, including our 2-Way Zip Sleep & Play swimwear and play wear for newborns to toddlers.
Moving to Page 23 and our fourth quarter results for our International segment; international net sales declined 13% to $114 million.
We saw significant disruption in our Canadian and Mexico stores in the fourth quarter as many stores were closed due to the pandemic in these markets.
Online demand in Canada was very strong with eCommerce comps up nearly 50%.
As Mike mentioned, the disruption in our international partners business continued in the fourth quarter, but we're planning for a rebound in this part of our business in 2021.
International adjusted operating margin was 13.3% compared to 16.2% a year ago.
This decline reflects deleverage of store expenses due to lower store sales, eCommerce investments, and the catch-up compensation provisions, offset by lower inventory costs.
On the next few pages, beginning on Page 25, we've summarized some of our thoughts on our strategic positioning in the industry and the growth we're targeting over the next few years.
We believe the company has a number of strategic advantages in the marketplace.
You've heard us speak about many of these over the years.
Our brand portfolio contains the most established and trusted brands in which multiple generations have clothed their children.
We are unique in our multi-channel business model that broadly distributes our brands, including through a growing and vibrant direct-to-consumer business.
We've had a long record of strong operating performance and returns, including significant cash generation.
On Page 26, we've summarized our mission and vision.
Clearly, our objective is to continue to lead the marketplace with special emphasis on the strategic pillars listed here, leading in eCommerce, continuing to win in baby, aging-up and expanding globally.
We've recently refreshed our multi-year financial forecast.
It is difficult to predict the future right now with a lot of precision, but we believe good growth is possible over the next several years.
We believe we can generate mid-single-digit growth overall in net sales comprised of low single-digit growth in U.S. retail, mid-single-digit growth in U.S. wholesale and high single-digit growth in our International segment.
We believe profitability can grow faster than sales as we continue to pursue our transformation and productivity agenda.
So our target for operating income is in the low double-digit growth range.
We believe our anticipated significant cash generation provides us an opportunity to augment operating income growth through debt pay down and the resumption of share repurchases and thereby target earnings per share growth in the mid-teens.
Our forecasts indicates we will generate substantial cash in the coming years, which provides us significant flexibility to reinvest in the business and pursue alternatives, which includes evaluating M&A opportunities where appropriate, paying down debt and returning capital to shareholders.
On Page 27, there are a number of elements which we believe will contribute to our planned growth in sales and earnings over the coming years.
We've summarized some of these here for you.
I won't read this list, but the good news is the number of factors listed.
We have multiple meaningful ways to drive growth in our business.
Turning to Page 29 and our outlook for 2021; while there remains significant uncertainty regarding the ongoing impact of COVID-19, we believe we will have good growth in both sales and earnings in 2021.
We're expecting all of our business segments will deliver growth in net sales with our consolidated net sales growing about 5%.
We're planning for good growth in operating income and operating margin expansion in 2021.
Adjusted earnings per share is expected to grow about 10%, a bit less than what we are planning for operating income growth because of the higher interest costs from the senior notes we issued last year and an assumption of a higher tax rate with more of our income expected to be generated in the United States this year versus overseas.
We expect the first half of the year will be the more meaningful period of sales and earnings growth for a number of reasons, including the comparison to the first half of last year with the initial pandemic disruptions as well as various timing differences between the years and wholesale shipments and spending.
We won't match 2020's record year of cash generation as we repay deferred rent and have other changes in working capital.
We'd expect 2022 to be a more normal year of significant operating and free cash flow generation.
We're cautious and conservative in our planning assumptions given the continued uncertainty which exists, this posture has served us well overtime.
In terms of the first quarter, we expect sales will be comparable to last year.
We do expect first quarter profitability will increase significantly with operating income in the neighborhood of $30 million and adjusted earnings per share of approximately $0.25 compared to losses a year ago.
In terms of key risks, we continue to monitor the status of later arriving product across our various channels and the potential impact these delays may have on the sales of spring product.
Also, we're seeing an ongoing escalation of transportation costs in the marketplace, which may result in additional expense above what we have planned in this year.
| q4 adjusted non-gaap earnings per share $2.46.
q4 earnings per share $2.26.
sees fy 2021 sales up about 5 percent.
qtrly u.s. ecommerce comparable sales increased 16%.
sees 2021 adjusted diluted earnings per share growth of approximately 10%.
carter's - for q1 2021, projects net sales to be comparable to q1 2020 & adjusted diluted earnings per share will be about $0.25.
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Joining the call today are Tom Ferguson, Chief Executive Officer; Philip Schlom, Chief Financial Officer; and David Nark, Senior Vice President, Marketing, Communications and IR.
Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and employees to implement the company's growth strategies.
In addition, AZZ's customers and its operations could be potentially adversely impacted by the ongoing COVID-19 pandemic.
While we continue to be impacted by COVID-19, our markets are stabilizing and our businesses have adapted to the new normal way of operating, which encompasses a variety of challenges that we have had to overcome.
While we have had an uptick in COVID cases, all of our plants have remained open with normal production.
The collective efforts of our folks generated consolidated sales of $227 million for the third quarter, split almost equally between our Metal Coatings and Infrastructure Solutions segments.
We had sequential improvement in operating performance, and we have returned over $44 million of capital to shareholders in the form of cash dividends and share repurchases through the third quarter of this year.
Also, we have made good progress on our Board-led strategic review that we announced earlier.
While sales were down 22% from Q3 of last year, our realignment activities and operational performance generated net income of $19.7 million, down about 10% from the same period of the prior year.
This resulted in earnings per share of $0.76 per diluted share, or $0.80 on an adjusted basis.
Our Metal Coatings business continues to execute strongly while navigating the economic uncertainty resulting from COVID.
Hot-dip galvanizing sales were down 8.8% from the same quarter last year, while Surface Technologies was down more due to the nature of their customer base being more impacted by COVID.
Within our Infrastructure Solutions segment, third quarter sales results improved sequentially, even with a muted fall refining turnaround season.
Segment results were below the same quarter of the prior year due to the protracted weak demand for refined oil products, as well as lower international sales, primarily from China.
As we previously communicated earlier this year due to shifting industry and customer dynamics and the protracted impact of the COVID-19 pandemic, we began to take aggressive steps to accelerate the strategic restructure of our portfolio of businesses with the goal of becoming predominantly a coatings business.
Our actions during the quarter included recording a loss on the sale of SMS of $1.9 million and initiating a comprehensive Board-led review of our businesses with the assistance of leading independent financial, legal and tax advisors.
As I mentioned, our review of the Infrastructure Solutions businesses and associated assets, and the exploration of other capital allocation opportunities to maximize shareholder value is ongoing and I am pleased with the progress the team has made during the quarter.
Finally, given the share repurchases currently and attractive use of our capital, we repurchased over 652,000 shares in the quarter, which brings our total for the year to over 850,000 shares.
While our Metal Coatings segment had lower sales in the third quarter of the prior year, they were able to generate higher operating income and improved operating margins to 24.8%.
Surface Technology sales were still way off at some plants, primarily due to how badly COVID impacted demand for several of their largest customers.
However, during the quarter, Surface Technologies began to reopen powder coating lines in two Texas plants that had previously been idled earlier in the year.
I am particularly pleased with how the Metal Coatings team continues to drive value through outstanding customer service and operational performance while maintaining market-level pricing as they benefited from lower zinc costs during the quarter.
We remain committed to our strategic growth plan for this segment, as evidenced by last week's announcement regarding the acquisition of Acme Galvanizing in Milwaukee, Wisconsin.
Although COVID has slowed our normal pace of acquisitions, I am grateful that the team was able to close this acquisition right after the holidays.
As we previously indicated on our second quarter earnings call, the third quarter turned out sequentially stronger, but turnaround activity remained constrained by COVID travel restrictions and continued low demand for refinery products.
Our Infrastructure Solutions segment's third quarter fiscal 2021 sales decreased by 31.5% to $111 million.
This resulted in operating income of $8.7 million as compared to $17.4 million in Q3 a year ago.
As I mentioned previously, the decline in sales was a result of muted refinery turnaround activity in the quarter, particularly in the U.S., as well as lower China high-voltage bus shipments and decreased demand for some of our oil patch related products and services.
WSI's domestic and foreign facilities remained open and working and crews deployed on several smaller projects.
All of the electrical platforms operations also remained open throughout the quarter, as they effectively managed the uptick in COVID cases.
Due to the prolonged uncertainty associated with COVID pandemic on many of our end markets, we will not provide an update to our previously suspended fiscal 2021 earnings and sales guidance range.
However, we believe our fourth quarter will be seasonally lower than the third quarter, but we should generate improved earnings versus the fourth quarter adjusted earnings of last year.
Our low debt level combined with our consistent ability to generate strong cash flow provides us with the ability to effectively manage our debt and liquidity throughout the remainder of fiscal year 2021 and beyond.
We expect to establish guidance for normal cadence for the fiscal 2022, as we wrap up our annual budgeting process and review it at our upcoming Board meetings.
Our Metal Coatings business is operating at a fairly normal level despite some continued restrictions and disruptions in a few of the cities and states we're operating in.
We are confident though that our business remains vital to improving and sustaining infrastructure.
So, we will use the remainder of our fiscal year to position our core businesses to emerge stronger and better equipped to provide sustainable profitability growth long into the future.
For the third quarter of fiscal year 2021, we reported sales, as Tom had noted, of $226.6 million, a $64.5 million decrease or 22.2% lower than the third quarter of the prior year.
Sales were down primarily as a result of lower sales in the company's Infrastructure, Industrial platform as a result of the pandemic and lost aggregate sales from divested entities over the past year.
Net income for the third quarter of fiscal '21 was $19.7 million, a decrease of $2.3 million or 10.6% below the prior year third quarter.
Diluted earnings per share of $0.76 per share declined 9.5% compared to the $0.84 per share in the prior year third quarter.
Despite the lower sales, third quarter fiscal 2021 gross margin improved 100 basis points to 24.1% on a year-over-year basis and was driven by continued strong margin performance within the Metal Coatings segment.
Operating margins of 12.3% of sales increased 80 basis points compared to 11.5% of sales in the prior year.
Operating income for the third quarter of fiscal 2021 decreased 16.6% to $27.9 million from $33.4 million in the prior year third quarter.
Third quarter EBITDA of $39.6 million decreased 15.4%, compared to $46.8 million in EBITDA in last year's third quarter.
As for the year-to-date results, through the third quarter of fiscal '21, we reported year-to-date sales of $643.3 million, 21.2% below the $816.5 million in sales in the same period last year.
Year-to-date net income for the third quarter was $23.5 million, a decrease of $35.4 million or 60.2% from the same period last year.
Year-to-date net income, as adjusted for the restructuring and impairment charges primarily incurred earlier in the year was $39 million, which was $19.9 million or 33.8% lower than the comparable prior year results.
Year-to-date reported diluted earnings per share declined 59.8% to $0.90 a share as compared to $2.24 per share for the same period last year, primarily driven by restructuring and impairment charges, as well as softer markets and travel restrictions resulting from the pandemic, mostly in our Infrastructure Solutions segment.
On an adjusted basis, year-to-date 2021 diluted earnings per share was $1.49 per share, a reduction of 33.5% from the prior year.
Our fiscal year 2021 year-to-date gross margin of 22.2% declined 60 basis points from a gross margin of 22.8% from the prior year.
Year-to-date reported operating profit of $42.8 million was $43.8 million or 50.5% lower than the $86.6 million reported for the same period last year.
Year-to-date reported operating margin of 6.7% decreased 390 basis points compared to 10.6% last year.
On a year-to-date basis, excluding the impact of the $20.3 million of restructuring and impairment charges, operating margins were 9.8% or 80 basis points below prior year.
I'll now turn to discussion regarding our liquidity and capital allocation.
On a year-to-date basis, our net cash provided by operating activities of $59.4 million declined $12.7 million or 17.6% from the comparable period in the prior year, primarily the impact of lower year-to-date net income.
During the third quarter of fiscal 2021, as Tom had noted, we repurchased 652,000 shares of our common stock at an average price of $37.66.
On a year-to-date basis, we have repurchased 852,000 million [phonetic] shares at an average price of $36.31 per share.
Investments in capital equipment to support our business were $8.6 million for the third quarter and $27.9 million on a year-to-date basis, which are in line with our expectations of spending roughly $35 million for the year.
As of the end of our third quarter of fiscal '21, our existing debt of $182 million is down $20.9 million from the end of the year, as we continue to effectively manage our balance sheet.
I will close by sharing with you some key indicators that we continue to monitor.
For the Metal Coatings segment, fabrication activity will remain solid during the balance of our fourth quarter and we are off to a reasonably good start in December.
Within our galvanizing business, we are closely tracking steel fabrication and construction activity.
Zinc costs in our kettles are relatively stable, but we anticipate increases in zinc costs in fiscal 2022 as zinc prices on the LME have been rising for a while now.
The Acme Galvanizing team is being quickly integrated into our existing operating network, bringing our total hot-dip galvanizing locations to a market-leading 40 sites in North America, in spite of recently closing two Gulf Coast locations.
For Surface Technologies, we are primarily focused on growing sales with both existing and new customers and driving operational process improvements.
Within the Industrial platform of the Infrastructure Solutions segment, we continue to carefully monitor the COVID situation in the states with large refining capacities.
Currently, we still are experiencing travel restrictions in some countries.
For the Electrical platform of the Infrastructure Solutions segment, we are carefully tracking proposal activity and experienced solid bookings in December.
We will continue to focus on growing the backlog for many of our business units so that we enter fiscal year 2022 in good shape.
Finally, for corporate, we have strong cash management processes and have further focused our oversight on cash flow indicators and customer credit.
Currently, we have not experienced any slowdown in customer payments.
Post-COVID crisis, we remain committed to our growth strategy around Metal Coatings and achieving 21% to 23% operating margins, including an increased contribution from Surface Technologies.
We believe galvanizing would tend to run to the high end, if not above the 23%, while Surface Technologies is going to have to rebuild this margin profile as customer demand grows.
For Infrastructure Solutions, we will continue to focus on improving operating margins while we complete the comprehensive strategic evaluation of this segment.
We feel quite confident, in spite of COVID and other disruptions, about the actions we have already taken and the restructuring activities that are now under way.
We intend to focus on completing the Board-led review of our businesses and finish this fiscal year well positioned to enter fiscal 2022 with momentum.
Finally, we will remain active in the area of M&A, primarily in Metal Coatings, and we'll aggressively seek activities that support our strategic growth plan.
While pandemic-related deal travel was still somewhat restricted during the third quarter, we are seeing improved travel conditions and have an active portfolio of opportunities that we will continue to pursue.
| compname reports qtrly earnings per share of $0.76.
azz inc - qtrly earnings per share of $0.76.
azz inc - qtrly sales of $226.6 million, increased sequentially by 11.4% from q2.
azz inc - board authorized a new $100 million share repurchase program.
azz inc - qtrly adjusted earnings per share $0.80.
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But before we begin, I'd like to recognize all Church & Dwight employees around the world for their continued dedication to keeping our company going during the pandemic, especially our supply chain and R&D teams as during this quarter the company faced the complexities of raw material shortages and labor shortages at our suppliers and third-party manufacturers.
Now let's talk about the results.
Q2 was another solid quarter for the company.
Reported sales growth was 6.4%, organic sales growth -- grew 4.5% and exceeded our 4% Q2 outlook.
The 4.5% organic growth is impressive considering Q2 2020 organic sales growth was 8.4%.
Adjusted earnings per share was $0.76 and that's $0.07 better than our outlook.
The earnings per share beat is attributed to two things, one, a temporary reduction in marketing, and two, our revenue growth handily exceeded our outlook.
Another item that is noteworthy is we overcame a tax rate which was much, much higher than expected in Q2.
We grew consumption in 13 of the 16 categories in which we compete, and in some cases on top of big consumption gains last year.
Another way to look at this is to compare our Q2 consumption on those 16 categories to 2019, a pre-COVID year, we have higher consumption in 14 of those 16 categories compared to Q2 2019.
Regarding brand performance, nine of our 13 brands saw a double-digit consumption growth and I'll name them for you: gummy vitamins, stain fighters, cat litter, condoms, battery powered toothbrushes, depilatories, dry shampoo sailing spray and water flossers.
Now although many of our brands delivered double-digit consumption growth it is not reflected in our 4.5% organic sales growth as shipments were constrained by supply issues which we do expect to lessen by Q4.
In Q2, online sales as a percentage of total sales was 14.2%.
Our online sales increased by 7% year-over-year.
But remember, this is on top of the 75% growth in e-commerce that we experienced in Q2 2020 versus '19.
We continue to expect online sales for the full year to be 15% as a percentage of total sales.
With 70% of American adults having at least one vaccine shots so far, the US has been opening up consumers becoming more mobile.
In recent days however, it appears that trend could slow down due to the delta variant combined with many people still being unvaccinated.
Outside the US, many countries continue to enforce periodic lockdowns and we expect that to continue.
As described in the release we faced shortages of raw and packaging materials.
Labor shortages at suppliers and third-party manufacturers have reduced their ability to produce.
And transportation challenges have further contributed to supply problems.
Besides shortages, we are dealing with inflation.
Significant inflation of material and component costs is affecting our gross margin expectations, which Rick will cover in his remarks.
Due to a lower case fill rate we pulled back on Q2 marketing, especially for household products.
We expect the supply issues to begin to abate in Q4.
The higher input costs and transportation costs are expected to continue though for the rest of the year.
On past earnings calls we described how we expected categories and brands to perform in 2021.
Overall, our full year thinking is generally consistent.
To name a few categories, demand for vitamins, laundry additives, and cat litter is expected to remain elevated in 2021.
Condoms, dry shampoo, and water flosses are recovering and experiencing year-over-year growth as society opens up and consumers have greater mobility.
Baking soda and oral analgesics are expected to decline from COVID highs.
Now I'm going to talk about the divisions.
Consumer Domestic business grew organic sales 2.8%.
This is on top of 10.7% organic growth in Q2 2020.
Looking at market shares in Q2, five out of our 13 power brands met or gained share.
Our share results are clearly impacted by our supply issues.
I'll comment on a few of the brands right now.
VITAFUSION gummy vitamins saw great consumption growth in Q2, up 10%.
Consumers have made health and wellness a priority.
It appears that new consumers are coming into the category and they're staying.
So here's a supporting statistic.
In the last year, VITAFUSION household penetration is up 17%.
That means the brand is now in one out of every ten households.
Next up is WATERPIK.
WATERPIK grew consumption 72% in Q2 as it continues to recover from COVID lows and benefits from the heightened consumer focus on health and wellness.
WATERPIK is also benefiting from dental offices returning to pre-COVID patient levels.
We expect the frequency of our Lunch 'n Learn program to return to normal levels in the second half of this year.
BATISTE dry shampoo grew consumption 37%.
Dry shampoo is recovering as stores have reopened and consumers are becoming more mobile.
Similarly TROJAN delivered 11% consumption growth.
Society has been opening up.
As restaurants, bars and clubs have reopened people are hooking up again.
Here's a fun fact that might be a contributing factor.
In Q2, TROJAN launched on TikTok with explosive uptick from consumers with over 47 million views.
Next I want to discuss International.
Despite intermittent lockdowns in our markets, our international business came through with 10.4% organic growth in the quarter, primarily driven by our strong growth in our Global Markets Group.
Asia continues to be a strong growth engine for us.
WATERPIK, BATISTE, and ARM & HAMMER led the growth for the international division in the quarter.
Our Specialty Products business delivered a positive quarter with 11.8% organic growth.
This was driven by higher pricing and volume.
Milk prices remain stable and demand is high for our nutritional supplements.
At the prior year quarterly organic growth for specialty products was 3%.
So 11.8% is an impressive result.
Now, turning to new products.
Innovative new products will continue to attract consumers.
In the household products portfolio, we introduced OXICLEAN laundry and Home sanitizer.
It's the first and only sanitizing laundry additive that boost stain fighting and eliminates 99.9% of bacteria and viruses.
In the personal care portfolio, VITAFUSION launched Elderberry gummies, Triple immune gummies, and Power Zinc gummies to capitalize and increased consumer interest in immunity.
WATERPIK launched WATERPIK ION, a water flosser which is 30% smaller with a long lasting lithium-ion battery.
It is specifically designed for smaller bathrooms spaces.
To capitalize on its earlier success, WATERPIK SONIC FUSION, the world's first flossing toothbrush was upgraded to SONIC FUSION 2.0 with two brush head sizes and two speeds, and that's doing extremely well.
And finally, FLAWLESS is taking advantage of the at-home beauty and self-care trends with at home manicure and pedicure solutions.
Now let's turn to the outlook.
Since we last spoke to you in April, unplanned cost inflation has grown by another $35 million.
In addition to the price increases on 33% of our portfolio that we announced in April, we have just announced price increases on other categories, which means we have now priced up 50% of our portfolio.
Of course there is a lag in the positive impact of these increases which impacts our earnings outlook.
We now expect to be at the lower end of our range of adjusted earnings per share growth of 6% to 8% as a result of heightened input costs.
Although we expect to be at the low end of the range, it's really important to remember that we are comping 15% earnings per share growth in 2020.
We expect full year reported sales growth of 5% with 4% full year organic sales growth.
It's also important to call out that we are committed to maintaining the long-term health of our brands by ensuring sustained high levels of marketing investment in the second half.
In conclusion, July consumption continues to be strong.
We are navigating through significant supply challenges and cost inflation.
We believe we are well positioned for 2022 with the pricing actions we have taken.
We expect our portfolio of brands to do well both in good and bad times and in uncertain economic times such as now.
We have a strong balance sheet and we continue to hunt for TSR accretive businesses.
Next up is Rick to give us details on Q2.
We'll start with EPS.
Second quarter adjusted EPS, which excludes the positive earn-out adjustment was $0.76, down 1.3% to prior year.
And as we discussed in previous calls, the quarterly earn out adjustment will continue until Q4, which is the conclusion of the earn out period.
$0.76 was better than our $0.69 outlook primarily due to continued strong consumer demand for many of our products as well as a temporary reduction in marketing spend as supply chain shortages were impacting customer fill rates, which we expect to recover in Q4.
The $0.76 includes a $0.04 drag from a higher tax rate and a $0.04 drag from the VMS recall costs.
Reported revenue was up 6.4%.
Organic sales were up 4.5% driven by a volume increase of 4.3%.
Matt covered the topline and I'll jump right into gross margin.
Our second quarter gross margin was 43.4%, a 340 basis point decrease from a year ago.
This was right in line with our outlook for down 350 basis points for the quarter.
Gross margin was impacted by a 480 basis points of higher manufacturing costs primarily related to commodities, distribution, and labor costs.
Tariff costs negatively impacted gross margin by an additional 50 basis points.
These costs were partially offset by a positive 40 basis point impact from price volume mix and a positive 140 basis point impact from productivity programs as well as a ten basis point positive impact from currency.
Moving to marketing, marketing was down $5.3 million year-over-year as we lowered spend to reduced demand until fill rates could recover.
Marketing expense as a percentage of net sales decreased 100 basis points to 9.2%.
We continue to expect full year marketing expense as a percentage of net sales to be approximately 11.5% in line with historical averages.
For SG&A, Q2 adjusted SG&A decreased 140 basis points year-over-year with lower legal costs and lower incentive comp.
Other expense all in was $11.4 million, a $3.3 million decline to the lower interest expense from lower interest rates.
And for income tax, our effective rate for the quarter was 24% compared to 19.6% in 2020, an increase of 440 basis points, primarily driven by lower stock option exercises.
You will hear in a minute this also impacts our full year tax rate.
And now to cash.
For the full -- for the first six months of 2021 cash from operating activities decreased 42% to $344 million due to higher cash earnings being offset by an increase in working capital.
Accounts payable and accrued expenses decreased due to the timing of payments.
As a reminder, in the year-ago numbers there was an $80 million benefit in Q2 related to the timing of US federal income tax payments shifting from the second to the third quarter in the prior year.
We expect cash from operations to be approximately $90 million for the full year.
As of June 30th, cash on hand was $149.8 million.
Our full year CapEx plan is now $140 million as we continue to expand manufacturing and distribution capacity, primarily focused on laundry, litter, and vitamins.
The decrease from our previous $180 million is project timing related.
For Q3 we expect reported sales growth of approximately 3%, organic sales growth of approximately 1.5% entirely due to supply chain constraints.
We expect gross margin expansion in the quarter led by our price increases.
Adjusted earnings per share is expected to be $0.70 per share, flat from the last year's adjusted EPS.
A strong operating performance is offset by higher tax rate.
And now for the full-year outlook, we now expect full-year 2021 reported sales growth to be approximately 5%, organic sales growth to be approximately 4%.
Our consumption is strong and outpacing shipments.
We expect our customer fill level to improve by Q4.
Turning to gross margin, we now expect full year gross margin to be down 75 basis point.
This represents an incremental impact from our last guidance due to broad based inflation on raw materials and transportation costs.
Our April outlook expected gross margin to be flat for the year, and $90 million of inflation from our original guidance.
Now we're absorbing $125 million of incremental costs for the full year.
This additional $35 million of inflation drives the change in our gross margin outlook.
We've taken another round of pricing actions with over 50% of our global brands having announced price increase.
While some of this benefit helps the second half of 2021, most of the benefit is in 2022.
As a reminder, we price to protect gross profit dollars, not necessarily margin.
The $35 million movement versus our previous outlook is primarily non-commodity related, transportation, labor, third-party manufacturers, and other raw material price increases make up the majority.
Commodities are also up.
And while we have 80% of our commodities hedged, let me give you a sense of what's going on with major commodities.
Over the past few months, second half expectations for resins have moved up considerably.
For example, previously in our forecast it was based on HDPE being up 30% in the second half of the year, now it's up 60%.
Polypros [Phonetic] moved from being up 40% to now 90%.
In addition, transportation costs such as diesel have continued to rise.
We previously expected second half diesel to be up 18% and now it's of 27%.
Cartons and corrugate previously were single digit, now they're low double digit.
So that's the latest Bank [Phonetic] on commodities and now we'll move to tax.
Our full year tax rate expectations are now 23%, higher versus our last expectations due to lower stock option exercises.
This is a $0.04 drag versus our previous outlook.
We now expect adjusted earnings per share to be at the lower end of our previous range of 6% to 8%.
Our brands continue to go from strength to strength as strong consumption in organic sales growth lapped almost 10% organic growth a year ago.
While inflation is broad based, we have taken pricing actions to mitigate, which gives us confidence in margin expansion in the back half.
And with that, Matt.
And I would be happy to take any questions.
| church & dwight co q2 adjusted earnings per share $0.76 excluding items.
q2 adjusted earnings per share $0.76 excluding items.
sees fy sales up about 5 percent.
sees 2021 adjusted earnings per share now at lower end of 6-8% range.
expect q3 net sales to be comparable to q2 net sales.
|
Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the risk factors, MD&A, and other sections of our annual report on Form 10-K and our other SEC filings.
Additionally, we'll be discussing certain non-GAAP financial measures.
We would also like to extend our thoughts and prayers to our associates in India, who are grappling with an aggressive resurgence of COVID in the country.
At Lowe's, we have associates in Bangalore, India in our digital information technology and finance functions, who played a key role in our transformation efforts over the past two years.
To help our team in India safeguard their health, we sent personal protective equipment to our team members there.
We've also made financial commitments to support nonprofit organizations in India that are working to respond to this humanitarian crisis.
As we have moved into the second year of the pandemic, we remain focused on our No.
1 priority, which has always been protecting the health and safety of our associates and communities.
And with that in mind, in Q1, we invested nearly $60 million in support of COVID safety protocols.
Now turning to our results.
Our outstanding performance continued this quarter with total company comparable sales growth of 25.9%.
comps were 24.4% with broad-based growth across all geographic regions and divisions.
In fact, for the quarter, comp sales for all 15 U.S. regions exceeded 18% and all U.S. divisions exceeded 20%.
During the quarter, operating margin expanded 313 basis points on an adjusted basis, leading to diluted earnings per share of $3.21, which is an 81% increase on an adjusted basis over the prior year.
Our outperformance in operating margin was supported by our continued transition to an everyday competitive price strategy, as well as our disciplined pricing and product cost management strategies.
Our improved operating margin also reflects the progress of our operational transformation driven by our perpetual productivity initiatives or PPI.
Bill will discuss our everyday competitive price strategy, pricing, and product cost management, and Joe will provide details on our PPI initiatives later in the call.
On Lowes.com, sales grew 36.5% on top of 80% growth in the first quarter of 2020, which represents a 9% sales penetration this quarter and a two-year comp of 146%.
With customer demand for an integrated omnichannel shopping experience only increasing, we continue to invest in our omnichannel capabilities.
Pro comps outpaced DIY comps with over 30% comps in the quarter.
Although this has been a two-year journey, I'm very pleased with the progress that we made with our Pro customer.
We began by addressing the basics, ensuring that we were carrying the brands and products that Pros need in the job life quantities, and also provided the excellent service this busy customer expects.
And now, we've shifted to the more strategic phase of growth in the Pro by resetting the layout of our stores with the Pro in mind and deepening our relationship with the pro through a loyalty program that provides them with members-only benefits.
Joe will discuss more about the specific initiatives that we're undertaking to serve the Pro, both online and in-store later in the call.
The small and medium-sized Pro is our target customer.
This customer is a frequent shopper who purchases products in multiple departments, which drives increased productivity throughout the store.
And I'm confident that we have a compelling growth opportunity as we continue to improve our engagement with this highly valued customer.
In addition to the strength in Pro, we delivered over 60% comps along with significant increase in customer satisfaction in our installation services business.
We've overhauled this business and improved the service offering by consolidating our provided network and implementing industry-leading technology.
And although all of us are looking forward to a post-COVID world, our research tells us that the importance of the home will remain elevated for many years to come.
And given the increased importance of the home, this quarter, we launched SpringFest, our new reimagined approach to the season.
Our campaign provided inspiration for home projects, so our customers could transport themselves to the destination of their choice without ever leaving the sanctuary of home.
In a moment, Bill will discuss the outstanding results that we're able to generate from this reimagination of spring.
Now turning to Canada.
We delivered comp growth that outpaced the U.S. despite several COVID-related operating restrictions.
This quarter, we also announced the acquisition of STAINMASTER brand, which is the most recognized and trusted carpet brand on the market today.
With this acquisition, we're building on our decade-long exclusive position as the only national home improvement retailer to carry STAINMASTER carpet.
This is an important step in our Total Home strategy as we seek to elevate our product assortment and provide consumers with the products and brands they trust for every project across the entire home.
We see great potential to extend the STAINMASTER brand in other product areas, where we can continue to leverage its high-performance characteristics.
This acquisition also expands our private brand portfolio joining the family of private brands, including allen + roth, Kobalt, and Project Source.
We're focused on expanding our private brand penetration with a balanced brand strategy that includes a powerful national brand portfolio that appeals to both Pro and DIY customers.
At the same time, we'll offer a select number of high-value private brands, building consumer loyalty for these products.
Our results in the first quarter continue to give me confidence that we're making the right investments to accelerate our market share gains through our Total Home strategy by enhancing our investments in Pro, online, installation services, localization, and elevating our product assortment.
These initiatives will allow us to drive sustainable growth as we deliver a total home solution for our Pro and our DIY customers.
Before I close, I'd like to once again extend my appreciation to our frontline associates.
In the first quarter, I had an opportunity to visit stores in nine of our 15 geographic regions.
As I observed, our associates hard at work serving customers through very challenging circumstances, my respect and admiration continues to grow.
In recognition of these efforts, we decided to close our stores and distribution centers on Easter Sunday for the second year in a row to give our associates a much-deserved day off to spend with their families and loved ones.
I'm also pleased to announce that for the fifth consecutive quarter, 100% of our stores earned a winning together profit-sharing bonus, a record $152 million payout to our frontline hourly associates.
This represents an incremental $70 million above the target level.
While the near-term macro outlook remains uncertain, we're confident that we will continue to outperform the market driving both market share gains and improved operating efficiency.
Our two-year-plus journey to transform Lowe's has given us improved operating capabilities and a technology infrastructure that's dramatically enhanced, which in turn makes us more agile and able to respond quickly to any potential changes in the business environment.
We delivered U.S. comparable sales growth of 24.4% in the first quarter.
Our compelling offerings, great values, and improved in-stocks allowed us to capitalize on the continued strong demand for home improvement products.
Consistent with recent trends, growth was broad-based across Pro and DIY customers, in-store, and online, and across product categories.
In fact, 13 of 15 merchandising departments generated comps over 15% and all merchandising departments were up more than 20% on a two-year comp basis.
As Marvin described, we were extremely pleased with how consumers responded to our SpringFest event.
Similar to our approach to the winter holidays, we extended this event across four weeks to create a new sense of excitement and to prompt return trips, while also avoiding congestion in our stores.
We offered four different weekly giveaways of garden-to-go kits that provided everything needed for a fun spring project, and also strengthen our customer connection through a required MyLowe's activation online.
The success of this event was due to the great organizational alignment across our stores, marketing, and merchant teams.
Turning now to our top-performing categories.
Lumber again delivered the highest comp driven by strong Pro demand and unprecedented inflation in the category.
Over the past year, as lumber products have been in tight supply, our merchants have worked closely with our suppliers and successfully secured new sources and additional product to ensure that we can maintain a competitive in-stock position in the category.
Strong in-stocks in this tight market have allowed us to continue to strengthen customer relationships, especially with the Pro.
In addition to lumber, we delivered comps exceeding 30% in electrical, decor, kitchens, and bath, and seasonal and outdoor living.
Our electrical category posted strong comps in the quarter, driven by inflation in copper, as well as solid demand from the robust repair/remodel market.
In support of our total home market share acceleration strategy, we drove strong engagement with our customers as reflected by increased sales in decor, and kitchens, and bath.
The strong sales in our decor category were driven by great performance in home accents as we continue to elevate our product assortments, especially with our recently refreshed allen + roth brand.
In fact, this quarter, our merchant teams launched new spring collections that span across a broad array of product categories through a lifestyle point of view with inspirational on-trend designs that gives our customers the confidence they need to decorate their homes in style.
Our kitchens and bath department outperformed in the quarter as homeowners continue to enhance their living spaces and economic stimulus supported bigger-ticket projects.
Finally, seasonal and outdoor living benefited from the early demand in patio and grills as homeowners embrace the arrival of spring.
We also saw strong sales in the newly launched battery-powered EGO and SKIL brands as consumers are attracted to the convenience and the quality of their zero-emission rechargeable outdoor power equipment.
In fact, during the quarter, EGO delivered some of their largest weekly sales results in the history of their brand.
The addition of EGO and SKIL has only strengthened our No.
1 position in outdoor power equipment and truly complements the leading brands we carry such as John Deere, Honda, Husqvarna, Aaron's, and CRAFTSMAN.
And during the quarter, we continued to see strong demand for our other powerhouse brands like Weber and Char-Griller, which remain the top two brands in outdoor grilling.
We were excited to add new brands to our arsenal, including the exclusive launch of FLEX cordless power tools.
The FLEX brand is known by the most discerning builders, contractors, and trade professionals.
And this new lineup of power tools offers the latest innovation, more power, and faster charging than the competition.
We are also excited to bring the Lesco brand of fertilizer to Lowe's this spring.
A brand that is trusted by landscape pros and knowledgeable homeowners alike.
The addition of FLEX power tools and Lesco fertilizer further complements our powerful Pro brand lineup, which already includes Simpson Strong-Tie, DEWALT, Spyder, Bosch, Eaton, and SharkBite.
As Marvin mentioned, we delivered strong sales growth of 36.5% and a two-year growth of 146% on Lowes.com.
We continue to enhance the online customer experience with improved search and navigation functionality that allows consumers to easily shop for products across categories.
Additionally, we continue to see strong download rates of our mobile app as we are working to enhance our customer loyalty through a great mobile experience.
As Marvin mentioned, we delivered a solid improvement in our product margins this quarter, driven by disciplined vendor cost management, improved and enhanced pricing systems, and our continued transition to a more relevant everyday competitive price strategy that is complemented by targeted seasonally relevant promotions.
All of these initiatives are part of our ongoing merchandising excellence strategy.
We will continue to leverage and refine these capabilities as we deliver strong everyday values to our consumers, while we continue to manage our product margins by taking a data-driven portfolio approach to pricing.
Our Total Home strategy will continue to allow us to expand and elevate our product and brand assortments and take market share.
In the first quarter, our associates were laser-focused on providing excellent customer service, supporting a safe store environment, and delivering record sales volumes.
As Marvin mentioned, 100% of our stores earned a "Winning Together" profit-sharing bonus, a record $152 million payout to our frontline hourly associates.
As Marvin mentioned, our focus on perpetual productivity improvement, or PPI, initiative continued to yield results during this quarter as we leverage store payroll by using technology to reduce tasking hours, improve customer service, and increase sales productivity.
For example, we rolled out digital signs, first in appliances, and most recently, in our lumber department.
These signs cut down on associate tasking labor, and they also support better product margin performance as we can now more rapidly implement price changes in line with the market.
We're also leveraging an improved freight flow app, creating a fully digital process that gives our associates better line of sight to when products will arrive at our stores.
The app, which was developed in-house, even helped store associates to prioritize the incoming merchandise so they can quickly and efficiently position the product on the sales floor for our customers.
And we launched secure mobile checkout, which we are using to improve the speed of service in high traffic areas inside the store and on the exterior of the store in areas such as outside lawn and garden and under the Pro canopy.
This checkout app developed in-house is allowing us to take care of customers from scanning items, tendering payment, and printing or emailing receipts before they even join a line.
Our customers are delighted with the solution, especially on busy weekends.
We are also driving productivity in our in-store fulfillment.
This quarter, we expanded our contact with shopping options by completing the rollout of BOPIS lockers to 100% of our U.S. stores in April.
Customers really enjoy these touchless easy-to-use lockers.
In fact, this has already become the highest-rated store fulfillment options.
Having built these lockers in 100% of our U.S. stores will allow us to expand our omnichannel capabilities, further improve customer satisfaction, and limit customer congestion at our service desk.
Turning to our Pros.
As Marvin mentioned, Pro outpaced DIY in the quarter with over 30% comps.
We continue to gain momentum with the Pro through our improved in-stock inventory levels, our enhanced service offerings, and our new Pro loyalty program.
Our Pro sales associates have also begun to leverage our new CRM platform to proactively engage with our Pro customers and sell the entire project to them.
Our most compelling growth opportunity with the Pro is expanding the share of wallet with our existing customers.
Our new CRM platform, as well as the redesigned store layout that aligns product adjacencies, enable us to more effectively serve their needs for the entire project across all of their jobs.
And we continue to enhance the shopping experience for our Pro customers, small to medium-sized businesses who are always pressed for time.
We are launching a tailored shopping experience created specifically for Pros to ensure that the time they spend away from their job site is efficient and productive.
We're introducing new convenience products at checkout and services like dedicated Pro trailer parking and phone charging stations, all designed to help add value to each trip the Pros take, thus cutting down on the number of stops they make throughout the day.
We're also enhancing their online experiences with the ongoing migration of LowesForPros to the cloud.
This will give our Pro customers access to incremental options that our DIY customers already have on lowes.com, and it will allow us to more quickly add new Pro-only features in the future, including a personalized app experience.
Both in-store and online, we continue to demonstrate that Lowe's is on a mission to be the new home for Pros.
As Marvin mentioned, we are seeing terrific momentum in our installation business, with over 60% comps this quarter.
As a reminder, just two years ago, this was a money-losing business and poor customer satisfaction.
Although we are lapping Q1 2020 results that were pressured by COVID, we are very pleased with the overall execution and the trajectory of this business.
In closing, I cannot be more pleased with the improvements we are making in our stores as reflected in our strong net promoter scores in a recent third-party study.
Our executive officers, senior officers, merchants, and field leaders are out visiting stores on a weekly basis to ensure that we are listening to and supporting our frontline associates.
This remains a very difficult environment to operate retail stores in, and I could not be prouder of the accomplishments of this team and their commitment and hard work from our frontline associates.
In Q1, we generated $4 billion in free cash flow, driven by improved operational execution and continued strong consumer demand.
We returned $3.5 billion to our shareholders through both a combination of dividends and share repurchases.
During the quarter, we paid $440 million in dividends at $0.60 per share.
We also repurchased 16.8 million shares for $3.1 billion at an average price of approximately $182 a share.
We have approximately $17 billion remaining on our share repurchase authorization.
Capital expenditures totaled $461 million in the quarter as we invest in our strategic initiatives to drive the business and to support our growth.
We ended the quarter with $6.7 billion of cash and cash equivalents on the balance sheet, which includes proceeds from our $2 billion notes offering in March.
In addition, we entered into a $1 billion term loan facility in April, which remains undrawn.
Our balance sheet remains extremely healthy with adjusted debt to EBITDA at 2.07 times at the end of the quarter, well below our long-term target of 2.75 times.
Now, turning to the income statement.
In Q1, we generated diluted earnings per share of $3.21, an increase of 81% compared to adjusted diluted earnings per share last year.
This growth was due to strong sales growth, improved gross margin rate, and SG&A leverage as a result of strong execution across many facets of our business.
Please note that in the prior-year quarter, there was a very modest impact on diluted earnings per share related to the Canadian restructuring effort.
My comments from this point forward will include approximations when appropriate and comparisons to certain non-GAAP measures where applicable.
Strong sales growth was driven by several factors, including a continued consumer focus on the home, a favorable weather backdrop across the country, commodity inflation, especially within the lumber category, consumer support from the March government stimulus package, and our improved execution as we continue to elevate our product and service offerings.
Q1 sales were $24.4 billion, driven by a comparable sales increase of 25.9%.
This was a result of a balanced contribution from both ticket and transactions as comparable average store ticket grew 14.1% and transaction count grew 11.8%, with strong repeat rates from both new and existing customers.
While a little difficult to measure, we estimate that the March government stimulus checks drove 300 basis points of growth, while commodity inflation benefited comps by 460 basis points in the quarter.
Lumber and other commodity prices remained at elevated levels versus last year.
U.S. comp sales were up 24.4% in the quarter, consistent with results from the past few quarters.
Growth was well balanced across DIY and Pro customers, selling channels, geographies, and nearly all merchandise departments.
Our U.S. comps were 24% in February, 35.9% in March, and 13.9% in April.
February comps were negatively impacted by the harsh winter storms that hit Texas and several other states, while March were positively impacted by storm recovery and the third round of stimulus.
Additionally, we began cycling last year's COVID-related spikes in the band in the second half of April, and those more difficult comparisons impacted April comps.
Looking at U.S. comp growth on a two-year basis from 2019 to '21, February sales increase 30.3%, March increased 48.1%, and April increased 37.1%.
Gross margin was 33.29%, up 19 basis points from last year and up 183 basis points as compared to Q1 of '19.
Product margin rate improved 165 basis points.
As Bill mentioned, our teams effectively leveraged our merchandising excellent strategy to manage product cost and retail pricing throughout the quarter.
While we are seeing inflation in some product categories, our merchants work to diligently mitigate and minimize vendor cost increases.
Additionally, our supply chain team leveraged our scale and carrier relationships to minimize distribution cost pressures experienced throughout the retail sector.
On the pricing side, our shift to an everyday competitive price strategy continued to benefit our margins in Q1 as we leverage enhanced pricing tools to improve margin across the array of products that we sell.
We began to see improving trends from our increased focus on shrink control this quarter, with shrink improving sequentially from Q4 of 2020.
However, results pressure gross margin by 15 basis points versus last year.
We expect that our shrink performance will continue to improve as we move throughout the year.
These benefits to product margin rate were partially offset by 90 basis points of pressure from product mix shifts due to lumber inflation and a less favorable product mix, 20 basis points of pressure from supply chain costs as we continue to invest in our omnichannel capabilities, and 20 basis points of pressure from credit revenue.
SG&A of 18.4% levered 288 basis points, compared to adjusted SG&A in LY, driven primarily by lower COVID-related costs, as well as operating costs leverage resulting from strong sales and our ongoing productivity from our PPI initiative.
As anticipated, we incurred nearly $60 million of COVID-related expenses, as compared to approximately $320 million of COVID-related expenses last year.
The $260 million reduction in these expenses generated 140 basis points of SG&A leverage.
Additionally, strong sales and a focus on efficiency and productivity allowed us to generate leverage of 100 basis points in operating salaries, 35 basis points in occupancy expense, and 5 basis points in advertising.
Now, operating profit was $3.2 billion, an increase of 63% over LY.
Operating margins of 13.3% of sales for the quarter was up 317 basis points to the prior year, driven by both improved operating leverage and improved gross margin rate.
The effective tax rate was 23.5%.
The tax rate was slightly lower than expected, primarily due to a tax benefit related to divesting of certain employee stock options.
We continued to build up our inventory levels throughout the quarter to meet the sustained high levels of customer demand while improving our in-stock position.
At quarter-end, inventory was $18.4 billion, up $2.2 billion from Q4 levels, in line with seasonal patterns.
This reflects an increase of $4.1 billion from Q1 of 2020 when inventory levels were pressured due to unexpected spikes in demand, as well as COVID-related supply disruptions.
Of note, this includes a year-over-year increase of $780 million related specifically to inflation.
Now, before I close, let me comment on our current trends and how we are planning our business for the balance of 2021.
Our year-to-date results are tracking ahead of the robust market scenario that we covered in our December Investor Update.
The underlying drivers of home improvement demand appear to be more resilient and stable than we originally forecasted.
Those factors build our confidence in our ability to deliver strong results on top of an exceptional year in 2020, including 12% operating margins and flat gross margin rates for the year.
We remain confident that our total home strategy will enable us to capture market share.
We are very encouraged by our performance in Q1, including our strong sales volume even as we begin to cycle last year's mid-April surge in demand.
Month to date, May U.S. comp sales trends are materially consistent with April performance levels on a two-year comparable basis.
Looking forward, year-over-year comparisons remain difficult throughout the remainder of the year.
Also, we continue to see COVID restrictions in some areas across Canada.
As markets reopen, we are closely monitoring consumer behavior, anticipating a potential modest shift in spending away from the home.
We remain agile and ready to respond to whatever environment we face this year with our focus on gaining market share throughout 2021 while improving operating margins.
With regards to our quarterly performance, please note that we are cycling particularly high gross margin levels in Q2 of LY.
In the prior quarter, there was an industrywide pullback in promotions and a more favorable product mix.
As a result, we currently anticipate a moderate decline in gross margin rates in Q2.
Despite this moderate year-over-year decline, our gross margin rate is expected to expand nicely over pre-pandemic 2019 levels.
Investments and pricing, vendor cost management, and our everyday competitive promotional strategy have been driving improvements in our gross margin performance over the past two years.
As I stated earlier, we continue to expect to deliver flat gross margin rates for 2021.
Further, we expect the business to generate robust levels of free cash flow.
We plan to invest $2 billion in capex this year to drive future growth and returns as we continue our disciplined approach to capital allocation with $9 billion in planned share repurchases this year while also supporting our dividend.
In closing, we're very excited about the momentum in our business and our ability to deliver significant shareholder value over the long term.
| lowe's companies q1 earnings per share $3.21.
q1 earnings per share $3.21.
q1 sales $24.4 billion versus refinitiv ibes estimate of $23.86 billion.
q1 earnings per share $3.21 excluding items.
continues to plan for $9 billion in share repurchases and $2 billion in capital expenditures in fiscal 2021.
currently tracking ahead of robust market scenario provided at its december 9, 2020 investor update.
qtrly comparable sales increased 25.9%.
|
But before we begin, I would like to recognize all Church & Dwight employees around the world for their continued dedication to keeping our company going, especially our supply chain and R&D teams as during this quarter, the company faced the complexities of widespread raw material and labor shortages at our suppliers and at our third-party manufacturers.
Now let's talk about the results.
Q3 was a solid quarter.
Reported sales growth was 5.7%, organic sales growth grew 3.7% and exceeded our 1.5% Q3 outlook.
The 3.7% organic growth rate in the quarter is impressive, considering the prior year Q3 2020 organic sales growth was 9.9%.
So that's growth on top of growth.
The adjusted earnings per share was $0.80, and that's $0.10 better than our outlook.
We grew consumption in 12 of the 16 categories in which we compete, and in some cases, on top of big consumption gains last year.
Regarding brand performance, five of our brands saw a double-digit consumption growth, and I'll name them for you: vitamins, ARM & HAMMER cat litter, Scent Boosters, BATISTE and ZICAM.
And although many of our brands experienced double-digit consumption growth, it's not all reflected in our 3.7% organic sales growth as shipments were constrained by supply issues.
In Q3, online sales as a percentage of total sales was 14.3%.
Our online sales increased by 2% year-over-year.
Now keep in mind, this is on top of 100% growth in e-commerce that we experienced in Q3 2020 versus 2019.
And we continue to expect online sales for the full year to be above 15% as a percentage of total sales.
Now as described in the release, Hurricane Ida's impact was substantial, which resulted in limited availability of raw materials and caused our fill levels to continue to be below normal.
Labor shortages at suppliers and third-party manufacturers have constrained their ability to produce.
Transportation challenges have further contributed to supply problems.
Now the good news is that over the past 18 months, we have made our supply chain more resilient by qualifying dozens of new suppliers and co-packers, which provides, of course, both short-term and long-term benefits.
And in a few minutes, Rick will tell you about our plans to expand capacity in 2022, with a significant increase in capex next year to support our growth plans.
Now due to the lower than normal case fill rate, we pulled back on Q3 marketing compared to the prior year, and we expect the supply issues to begin to abate in the first half of 2022.
Our biggest issue is widespread inflation.
We're dealing with significant inflation of raw and packaging materials, labor, transportation and component costs which is compressing our gross margin.
These conditions are expected to continue well into 2022, and Rick will cover gross margin in his remarks in a few minutes.
On past earnings calls, we described how we expected categories to perform in 2021.
Overall, our full year thinking is generally consistent.
Just to name a few categories, demand for vitamins, laundry additives and cat litter has remained elevated in 2021.
The condoms, dry shampoo and water flosser categories have recovered and are experiencing year-over-year growth as society opens up and consumers have greater mobility.
Baking soda and oral analgesics have declined from COVID highs as expected.
So now I'm going to talk about each business.
First up is Consumer Domestic.
So the Consumer Domestic business grew organic sales 2.8%, and this is on top of 10.7% organic growth in Q3 2020.
Looking at market shares in Q3, six of our 13 power brands gained share, and our share results are clearly impacted by our supply issues.
I will comment on a few of the brands right now.
Vitafusion gummy vitamins saw a huge consumption growth in Q3, up 24%.
Consumers have made health and wellness a priority.
It appears that the new consumers that came into the category are staying, because if we look at the last year, Vitafusion household penetration is up almost 10%.
Batiste dry shampoo grew consumption 36% in the quarter and grew share to over 40%, first time that's happened.
Dry shampoo is recovering as stores have reopened and consumers are becoming more mobile.
Next up is Waterpik.
Waterpik consumption declined in the quarter due to the year-over-year timing of a major online retailer sales event.
But the good news is that Waterpik continues to have strong consumption year-to-date and continues to benefit from the heightened consumer focus on health and wellness.
In Household Products, ARM & HAMMER liquid laundry held share despite leading with price.
ARM & HAMMER scent boosters continue to gain share, going the other way was unit dose share, which declined due to supply issues.
The good news in unit dose is that we are now self-reliant with reliable in-house production.
And also in household products, ARM & HAMMER cat litter grew consumption 11%, while gaining 50 basis points of market share.
Next up is International.
Despite disruptions due to COVID, our International business came through with 2.3% organic growth, primarily driven by strong growth in the Global Markets Group.
Asia continues to be a strong growth engine for us.
STERIMAR, FEMFRESH, Vitafusion and L'il Critters led the growth for the International business.
Now the next one is Specialty Products.
Our Specialty Products business delivered a very strong quarter with 18.5% organic growth, but this was on an easy comp.
The prior year quarterly organic growth for Specialty Products was actually down 3.4%.
So 18.5% is a really nice rebound.
And this was driven by both higher pricing and volume.
Milk prices remained stable and demand is high for our nutritional supplements.
Now let's talk about pricing.
In response to the rising costs, we have already taken pricing actions in 50% of our portfolio, effective July one and October 1.
The volume elasticities have been slightly better than expected since the July price increases.
We will be announcing pricing actions effective Q1 2022 on an additional 30% of the portfolio.
That means that as of Q1 2022, we expect to have raised price on approximately 80% of our global portfolio of brands.
Due to our expectation of incremental cost increases, we continue to analyze additional pricing actions that can be put in place next year in 2022.
Now let's turn to the outlook.
Significant inflation of material and component costs and co-packer costs impacted our gross margin in Q3.
Looking forward, we expect input costs and transportation costs to remain elevated in Q4 and we expect significant incremental cost increases in 2022.
Our earnings per share expectations are unchanged.
We expect adjusted earnings per share growth of 6% this year.
It's important to remember that we are comping 15% earnings per share growth in 2020.
We expect full year reported sales growth of 5.5%, with 4% full year organic sales growth.
It's also important to call out that we are committed to maintaining the long-term health of our brands by ensuring a healthy level of marketing investment in Q4 and in 2022.
As many of you know, we typically target 11% to 12% marketing spend.
Q3 was 12.3%, and we expect Q4 to be approximately 13%.
Just to wrap things up, October consumption continues to be strong.
We're navigating through significant supply challenges and cost inflation.
We expect our portfolio of brands to do well, both in good and bad times and in uncertain economic times such as now.
We have a strong balance sheet, and we continue to hunt for TSR-accretive businesses.
And next up is Rick to give you more details on Q3.
We'll start with EPS.
Third quarter adjusted EPS, which excludes the positive earnout adjustments, was $0.80, up 14.3% to prior year.
We don't expect any further adjustments to the earnout.
The $0.80 was better than our $0.70 outlook, primarily due to continued strong consumer demand and higher-than-expected sales as well as lower incentive comp and lower marketing spend as supply chain shortages were impacting customer fill rates.
We also overcame a higher tax rate year-over-year.
Reported revenue was up 5.7% and organic sales were up 3.7%.
Matt covered the details of the top line.
I'll jump right into gross margin.
Our third quarter gross margin was 44.2%, a 130 basis point decrease from a year ago.
This was below our previous outlook of expansion as we faced incremental pressure from the effect of Hurricane Ida on material costs and distribution.
Gross margin was impacted by 500 basis points of higher manufacturing costs, primarily related to commodities, distribution and labor.
Tariff costs negatively impacted gross margin by an additional 40 basis points.
These costs were partially offset by a positive 250 basis point impact from price/volume mix and a positive 120 basis point impact from productivity.
Marketing was down $10 million year-over-year as we lowered spend to reduce demand until fill rates could recover.
Marketing expense as a percentage of net sales was healthy at 12.3%.
For SG&A, Q3 adjusted SG&A decreased to 180 basis points year-over-year with lower legal costs and lower incentive comp.
Other expense all-in was $12.1 million, a slight decline due to lower interest expense from lower interest rates.
And for income tax, our effective rate for the quarter was 20.4% compared to 17.3% in 2020, an increase of 310 basis points, primarily driven by lower stock option exercises.
We continue to expect the full year rate to be 23%.
And net of cash.
For the first nine months of 2021, cash from operating activities decreased 18% to $653 million due to higher cash earnings being offset by an increase in working capital.
We continue to expect cash from operations to be approximately $950 million for the full year.
As of September 30, cash on hand was $180 million.
Our full year capex plan is now $120 million, down from the original $180 million in the outlook due to project timing.
This capex moves out a year, and we now expect capex in 2022 to exceed $200 million.
Future is bright as we continue to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins.
On October 28, the Board of Directors authorized a new stock repurchase program up to $1 billion.
As you read in the release, this is a sign of our confidence in the company's future performance and the expectations of our robust cash flow generation.
Our number one priority for capital allocation remains acquisitions, and given our low leverage ratios, we have confidence to do both.
Through October, we purchased approximately $130 million worth of shares.
And in Q4, we will likely get ahead of our 2022 planned purchases as well.
And now for the full year outlook.
We now expect the full year 2021 reported sales growth to be approximately 5.5% and organic sales growth to be approximately 4%.
Our consumption is strong and outpacing shipments.
We expect our customer fill levels to improve throughout Q4.
Turning to gross margin, we now expect full year gross margin to be down 170 basis points, previously down to 75 basis points.
This represents an incremental impact from our last guidance due to broad-based inflation on raw costs and transportation costs.
That was exacerbated by Hurricane Ida.
In our prior outlook, we had discussed $125 million of higher cost versus our plan.
That number today is $170 million, and the majority of that increase in the last 90 days relate to transportation, labor, and other increases.
As a reminder, we price to protect gross profit dollars, not necessarily margin.
The $45 million movement versus our previous outlook is primarily noncommodity-related.
Commodity spot pricing today is elevated compared to spot pricing just three months ago.
And now for the full year.
We expect adjusted earnings per share to be 6%.
Our brands continue to go from strength to strength as strong consumption and organic sales growth lap almost 10% organic growth a year ago.
And while inflation is broad based, we have taken pricing actions to mitigate, which gives us confidence over the long term.
For our Q4 outlook, we expect reported sales growth of approximately 3%.
We expect organic sales growth of approximately 2% due to the supply chain constraints and our SPD business to return to a more normal growth rate.
Adjusted earnings per share is expected to be $0.61 per share, up 15% from last year's adjusted EPS.
And with that, Matt and I would be happy to take any questions.
| sees fy sales up about 5.5 percent.
q3 adjusted earnings per share $0.80 excluding items.
sees fy adjusted earnings per share growth at 6%.
expect supply availability issues to begin to abate in first half of 2022 for most of our brands.
expect significant incremental cost increases in 2022.
church & dwight - on october 28, authorized a new stock repurchase program under which up to $1 billion of company's common stock may be repurchased.
church & dwight - now expect fy gross margin to decrease 170 basis points and adjusted operating profit margin expansion of 70 basis points.
church & dwight - faces complexities of raw material, labor shortages at plants, suppliers, third-party manufacturers, exacerbated by hurricane ida.
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I'm joined by Christa Davies, our CFO; and Eric Andersen, our President.
I'd like to start by acknowledging the tremendous work of our colleagues across the firm.
Our team continues to find ways to get back, not just to normal, but even better than before.
As we like to call it, the new better.
The idea of the new better started in the second half of last year with a series of regional and local client coalitions.
There are now 10 coalitions of leading companies around the world that we formed to export the societal and economic implications of the pandemic.
The Group rejects the idea of accepting a sub-optimal new normal and is working to find new better.
The work is ongoing and continues to offer meaningful insights into how leading organizations will work, travel, and convene in the year ahead.
And we're translating those insights into new solutions that are designated and designed to accelerate recovery from COVID-19.
For instance, we know that widespread global vaccine distribution is a key part of the solution and one that Aon is enabling, let me describe.
Recognizing limitations with current supply chain solutions, Aon colleagues from Commercial Risk, Rein [Phonetic] Health Solutions collaborated with insurance, reinsurance, InsurTech, and supply chain industry partners to develop a groundbreaking solution that uses sensors and analytics in the transportation and storage of vaccines.
The centers provide transparent real-time data and alerts if the temperature of a vaccine shipment falls outside the manufacturers' range, potentially allowing for mitigation efforts and helping to maximize the number of doses administered to the public.
It's just another example of how we're creating innovative solutions to move our industry and society forward.
We're also donating all 2021 revenue from the solution to an international organization working to help end the human and economic toll caused by the pandemic.
Turning now to financials.
Our global team delivered outstanding results across each of our key financial metrics, including 6% organic revenue growth, a very strong start to the year on top of 5% organic in Q1 2020.
Substantial operating margin expansion of 170 basis points, 16% earnings per share growth, and 91% free cash flow growth.
Within organic revenue, we continue to see strength in our core, driven by strong retention and net new business generation, and overall growth within more discretionary areas of revenue, with some areas coming back faster than others.
Commercial Risk delivered 9% organic, an outstanding result with very strong new business growth and growth in project-related work and double-digit growth in transaction liability.
Reinsurance delivered 6% growth with strong net new business in treaty and double-digit growth in facultative placements.
Retirement Solutions delivered 5% growth, and I would highlight strength in core retirement and double-digit growth in Human Capital.
Health Solutions growth of 4% was driven by strength in the core, offset by pressure in project work.
One of the areas we're seeing a little slower bounce back.
And data and analytics continue to see pressure from the travel and events practice globally, resulting in a 2% organic decline, so against the prior Q1 quarter of pre-pandemic results.
These results are an improvement from our Q4 earnings call outlook.
During the quarter, we saw better-than-expected macroeconomic growth, which positively impacted client buying behavior.
Looking forward, if macroeconomic conditions continue to be strong, we would expect mid-single-digit or greater organic revenue growth for the full year 2021.
And while our Q1 results demonstrate that our Aon United strategy is driving innovative solutions that address our client's biggest challenges, we keep seeing signs that we must move faster.
We see our clients justifiably focused on the economic impact of COVID-19, but they're also increasingly focused on other challenges, like climate change, supply chain disruption, reimagining, and reconfiguring how and where work gets done, the growing health-wealth gap, and cyber.
Our recent cyber risk reports highlighted findings from our proprietary cyber quotient evaluation, a comprehensive assessment of cyber risk maturity.
The 2020 data tells us that organizations across regions and industries are only maintaining a basic level of cyber readiness.
Specifically, only two in five organizations report they are prepared to navigate new exposures, and only 17% report having adequate application security measures in place.
And on a recent Grey Swan report, we look back at 40 years of corporate crisis, analyzing 300 examples that show the significant impact on shareholder value due to lack of preparedness.
The total impact represents $1.2 trillion in destroyed value and in 10% of the events, 50% of shareholder value was lost.
These risks and challenges are exactly what we want to help our clients assess and prepare for.
In another great example, our Human Capital and Commercial Risk teams realize that their client in the life sciences and med-tech space had not done an assessment or quantification of cyber risk for their business or products.
Our team analyze risks across infrastructure, technology, vendor, and digitally enabled products and quantified potential losses or impacts as reputation business interruption, or [Indecipherable] revises.
In response to this prioritized and quantified risk assessment, our client strengthened their own security measures and changed their insurance coverage, increasing their preparedness and reducing potential future volatility to their business.
A topic that's more critical than ever for companies in the life sciences industry.
Looking forward, this is a process and a solution offering that makes innovative cyber solutions more accessible to our clients in the life sciences space.
As we look to our pending combination with Willis Towers Watson, we're confident their insights and capabilities will be a compelling catalyst to this work.
As we brought together the executive committee that will be in place after the close of the combination, the potential is clear than ever.
We have an opportunity to be more relevant to clients at a time when they need us the most.
Another example, our Aon team is currently advising a client on the integration of their largest transaction to date, a complex global merger that's moving very quickly.
Colleagues from Data Analytics, Retirement, Health and Benefits, and Human Capital came together to advise our client on harmonizing their people programs while balancing synergies and deal objectives to drive employee engagement and retention, as well as a shared vision from day one.
Our client is relying on Aon to help them protect their greatest asset, their people.
We know that the combination with Willis Towers Watson will enable us to bring together our combined capabilities and then each company’s client insight around health, retirement, and engagement will improve and accelerate our ability to deliver projects like these for clients.
In summary, our first quarter results demonstrate the continued success of our strategy and position us with momentum to drive improvement on our key metrics over the course of the year, building on the track record of progress that we've delivered over the past decade.
The events in 2021 continue to highlight unmet need and growing demand from clients around their biggest challenges, which we know are best addressed by our One Firm Aon United strategy.
Our ability to address client need and accelerate innovation will only get better in our pending combination with Willis Towers Watson, which continues to increase our commitment and excitement to the potential of the combined firm.
As Greg mentioned, we delivered a strong operational and financial performance in the first quarter to start the year, highlighted by 6% organic revenue growth that translated into double-digit growth in operating income, earnings per share, and free cash flow.
Our Aon United strategy has enabled continued growth across our key financial metrics.
We look forward to building on this momentum through the rest of 2021 and in our pending combination with Willis Towers Watson.
As I further reflect on the quarter, we delivered organic revenue growth of 6%, driven by ongoing strength in our core business with an uneven recovery in our more discretionary areas.
I would also note that total reported revenue was up 10% including the favorable impact from changes in FX, primarily driven by a weaker U.S. dollar versus the euro.
Second, we delivered strong operational improvement with operating income growth of 15% and operating margin expansion of 170 basis points to 37.4%.
Stepping back, our goal is to deliver sustainable operating margin expansion over the course of the full year, as there can be volatility quarter to quarter given the seasonality of our business and timing of expenses, including long-term investment in growth.
In Q1, margin expansion was helped by two factors.
First, organic revenue growth exceeded our Q4 outlook due to the impact of macroeconomic factors and client buying behavior.
Second, Q1 2020 had higher expenses in areas like T&E and investments in the business, which made for an easier comparable when compared to our expectations for the rest of 2021.
Looking to the rest of 2021, we anticipate investment in the business and some potential resumption of T&E later in the year.
Looking forward to quarterly patenting of expenses for the balance of 2021.
As we described last year, we reduced certain discretionary expenses at the onset of the pandemic, given the significant macroeconomic uncertainty.
And then returned to somewhat more normalized levels of spend in the back half of the year, as macroeconomic conditions improved and the outlook stabilized.
In 2021, compared to 2020, we expect approximately $200 million less expense to be recognized in the fourth quarter, offset by approximately $135 million more expense in Q2 and $65 million more expense in Q3.
Put another way, we expect $135 million of expense to move from Q4 to Q2 and $65 million of expense to move from Q4 to Q3 when comparing to our expectations for the remainder of 2021 to prior year results, prior to any growth occurring.
This shift, representing about 2% of our annual cost base is primarily due to the actions we took and highlighted last year, including the reduction of certain discretionary expenses, including variable compensation in Q2 and Q3 of 2020.
This shift also spreads our expense base more evenly across quarters, though we still do expect the occasional variability and lumpiness in expenses.
This change will have an impact on quarterly margins, reducing margins in Q2 and Q3, and increasing them in Q4.
However, it does not change our expectation of full-year margin expansion for 2020-2021.
As we stated previously, our goal is to deliver sustainable margin expansion over the course of each full year, driven by accelerating revenue growth, portfolio mix shift to higher growth, higher margin businesses, and leverage from Aon Business Services.
Aon Business Services is focused on innovation, as well as effectiveness.
Recently our Aon business services team saw an opportunity to improve premium accounting with a blockchain solution.
The team works with a carrier partner and the insurance industry's standard-setting group to design and develop the clearing house to premium transactions.
This process has been live since the 1st of January 2021 and has over 13,000 transactions executed.
It's already improving the speed at which errors are identified and resolved.
Over time, we expect our major carrier partners and other brokers to join the platform.
We see this as a significant opportunity to improve the client experience with higher quality and reduce inefficiencies across the industry.
As with other Aon Business Services process improvements, efficiencies in this new blockchain process enable our colleagues to spend more time with clients and on higher value-added activities.
Turning back to the results of the quarter.
We translated strong operational performance into earnings per share growth of 16%.
As noted in our earnings material, FX translation was a favorable impact of approximately $0.18 in the quarter.
If currency to remain stable at today's rates, we'd expect a $0.04 per share favorable impact in Q2, a $0.02 per share favorable impact in Q3, and a $0.01 per share favorable impact in Q4.
Finally, moving to cash and capital allocation.
Free cash flow increased 91% to $532 million, primarily driven by strong operational improvement, a decrease in restructuring cash outlays, and a decrease in capex.
I would note that we do expect capex for the full year to increase modestly as we invest in technology to drive business growth.
Looking forward, we expect to drive free cash flow growth over the long term, building on our 10-year track record of 14% CAGR growth in free cash flow, including 64% growth to $2.6 billion free cash flow in 2020.
We remain incredibly excited for the long-term cash flow potential of the pending combination.
We make capital allocation decisions based on our ROIC framework, highlighted by $50 million of share repurchase in the first quarter.
As a reminder, Q1 is our seasonally smallest quarter for free cash flow, due primarily to incentive compensation payments.
We also repaid $400 million of term debt in February.
Looking forward, we expect to remain highly focused on closing and then successfully integrating our combination with Willis Towers Watson.
Following that, we expect to continue to invest organically and inorganically in innovative content and capabilities in priority areas to service our client's unmet needs.
We remain very confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile.
In the near term, we expect to continue to manage our leverage ratios conservatively and return to our past practice of growing debt as EBITDA grows over the long term.
As I look towards our pending combination with Willis Towers Watson, we remain incredibly excited about the potential for growth in innovative solutions to clients and the shareholder value creation opportunity.
We are continuing to work collaboratively with the appropriate regulators to gain approvals and we've offered remedies.
We continue to anticipate $800 million of cost synergies, taking into account the remedies offered.
We would expect to allocate any divested proceeds according to our ROIC framework in which share buyback continues to be our highest return on investment.
We are working toward the close in the first half of 2021 subject to regulatory approval.
In summary, our first quarter results reflect continued progress building on a decade of momentum, driven by our Aon United strategy and underpinned by our Aon Business Services operational platform.
We remain incredibly excited about closing out the pending combination and beginning the integration process with Willis Towers Watson, which will continue to enable long-term shareholder value creation.
| q1 revenue rose 10 percent to $3.5 billion.
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Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance.
As such, our outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
We will also be making reference to certain non-GAAP financial measures such as segment operating income and other operating statistics.
I'm excited to be in Abu Dhabi this week, having just participated in the ADIPEC Conference, which has provided a unique occasion to meet face-to-face with colleagues, customers and of course, our strong partner, ADNOC Drilling.
Also joining Mark and me today in Abu Dhabi is John Bell, Senior Vice President, International and Offshore Operations.
And he will be available for International and ADNOC-specific questions.
Before getting into our traditional discussion topics, I wanted to first mention that ADIPEC, which is a global energy conference in Abu Dhabi, in this week there was over 150,000 attendees, 33 energy ministers and representatives from over 50 energy companies.
I've been impressed with the focus on ESG and especially the discussions of the impacts on energy, security for the globe.
In addition to industry leaders sharing their focus on sustainability and ESG, there were also leaders of countries from around the globe that were present to give their perspectives on the energy transition and the importance of ongoing investments to ensure a smooth transition.
Dr. Sultan Al Jaber, the ADNOC Group CEO and UAE Minister of Industry and Advanced Technology gave a very compelling speech at ADIPEC's opening ceremony.
He started with a reminder that energy transitions take multiple decades, and I quote, Rewiring the energy system is a multi-trillion dollar business opportunity that is good for humanity and good for economic growth.
He also had a call to action stating, what the world really needs is to hold back emissions now progress.
Let us together drive that progress.
Let us always keep in mind our industry must play a pivotal role in the energy transition.
We have the knowledge, the skills and the people to make a difference in our world.
Now that statement really resonates with me.
Working with our customers to reduce emissions and our collective environmental footprint is a major area of focus for us here at H&P.
The strategic alliance we signed with ADNOC is a great opportunity to deliver rig technology through the sale of eight high spec H&P FlexRigs as well as to make a significant $100 million investment in their initial public offering.
ADNOC has a 2030 oil production target of 5 million barrels per day and a goal to achieve natural gas independence.
We believe H&P can make significant contributions toward helping ADNOC achieve those goals through this new partnership, while also providing additional opportunities for us to expand in this pivotal and growing energy regions.
Looking at the rest of our international activity, historically, we've experienced a lag compared to the US.
So we are expecting activity to improve in these markets in the coming quarters.
A recent example is a couple of new agreements with YPF as we will put four rigs back to work under term contracts in Argentina during fiscal 2022.
We continue to pursue other international opportunities, and look forward to improving activity.
Shifting to North America Solutions, it is hard to believe that a year ago H&P had only 80 active rig drilling [Phonetic].
Today we have 141 active FlexRigs.
The response of our people and their leadership through the pandemic has been nothing short of amazing.
Particularly impressive is their service attitude in responding to customers as rig demand has been recovering.
Our folks are resilient and deliver on safety, efficiency and reliability for our customers each and every day.
We expected that the rig activity increases would be more measured during our fourth fiscal quarter as we realized more rapid rig churn among customers who are sticking to their disciplined spending plans.
Given that, we were pleased with the 5% incremental rig count increase experienced during the quarter, and are even more optimistic as we look ahead to the fourth calendar quarter where we expect to see our rig count increase sequentially and at a higher pace as E&Ps reset their annual capital budgets.
We believe our customers will remain disciplined.
And similar to 2021, the budgets for 2022 will be adhered to, but the new budgets will be reset at higher levels based on a higher commodity price environment, meaning more active rigs in 2022.
As evidenced by our rig count growth to date, we expect the rig count will have a significant increase in calendar Q4 of 2021 and Q1 of 2022.
As mentioned, our US land rig count stands at 141 rigs today, up from 127 at September 30, our fiscal year-end.
And we expect to add roughly another 10 to 15 rigs by year end of calendar 2021.
To summarize North America Solutions, during calendar fourth quarter, we expect to add 25 to 30 rigs.
To put that in perspective, this is approximately the same number of rigs we added in the preceding nine months.
Further, we are also readying several more rigs during the first fiscal quarter that we expect to commence work in the first half of January.
This activity increase is exciting as our customers are investing in their calendar 2022 budgets.
It does however cause near-term margin compression due to the one-time expenses incurred to reactivation.
Mark will discuss the details more in a moment, and I'll add that we are pleased with the future cash generation these rigs will have, post reactivation as we return to greater scale operations driving both pricing higher and leveraging our fixed costs.
Given the well publicized challenges in what we hope is finally a post pandemic environment, it's not surprising to see rig reactivation and field labor cost increasing.
All of the super-spec rigs that are available to work today have been idle for well over a year, which equates to higher start-up costs.
Competition for quality people is also escalating, and we will be increasing field labor wages accordingly.
And as a reminder, those cost increases are passed through to the customer.
The tightening supply of readily available rigs coupled with these cost increases have already begun to move contract pricing effort in the market.
Based upon what we are experiencing today, we expect price increases will become even more pronounced in the coming months as rig demand picks up heading into 2022.
Mark will talk about our strong balance sheet in his remarks, but I wanted to mention one of our goals was to generate free cash flow, and we are encouraged that we believe that is achievable in the back half of 2022 with the rig count and revenue expectations we have.
These market conditions demonstrate further potential for H&P's new commercial models and digital technology solutions.
Our digital technology solutions deliver value through improved efficiencies, reliability, lower cost and better overall outcomes.
Today, approximately 35% of our FlexRigs are on performance contracts, and several customers are experiencing the powerful synergies, a combination of performance contracts and digital technology can deliver.
Adoption continues to improve and is driving economic returns higher not only for our customers, but for ourselves as well.
In closing, we are encouraged heading into 2022 and fully expect that the demand for H&P's drilling solutions will continue.
E&P capital discipline, rising commodity prices and a collective vision to play our crucial role and a smooth energy transition will strengthen the industry.
There are still many challenges, but I'm confident that our people and solutions have the Company well positioned to deliver value for customers and shareholders in this improving environment.
Today, I will review our fiscal fourth quarter and full year 2021 operating results, provide guidance for the first quarter and full fiscal year 2022 as appropriate and comment on our financial position.
Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2021.
The Company generated quarterly revenues of $344 million versus $332 million in the previous quarter.
The increase in revenue corresponds to a modest increase in our rig count during the quarter.
Correspondingly, total direct operating costs incurred were $269 million for the fourth quarter versus $257 million for the previous quarter.
During the fourth quarter, we closed on two transactions with ADNOC drilling.
First, H&P sold eight FlexRig land rigs including two already in Abu Dhabi and six from the United States for delivery during 2022.
Consideration received for this sale was $86.5 million and any gains above book values together with required investments to prepare and deliver the rigs will be recognized as each rig is delivered.
Second, H&P made a $100 million investment in ADNOC Drilling in conjunction with its initial public offering in early October.
General and administrative expenses totaled $52 million for the fourth quarter, higher than our previous guidance due primarily to professional services fees associated with the ADNOC transactions and our ongoing cost management efforts.
As well as increases to the short-term incentive bonus plan accruals to reflect full fiscal year operating results.
On September 27, we issued $550 million in unsecured senior note bonds to refinance our 487 million outstanding bonds that were due in May 2025.
Our new issuance came at a coupon of 2.9% and a 10-year tenure maturing in September 2031.
The additional debt of about $63 million funded the make-whole provision and accrued interest for the call of the existing bonds as well as an associated transaction cost.
This made the transaction and subsequent debt extinguishment in October, liquidity neutral.
Also, note that the make-whole premium and accrued interest will be recognized in the first fiscal quarter 2022 concurrently with the October 27 redemption.
Our Q4 effective tax rate was approximately 24%, in line with our previous guidance.
To summarize, fourth quarter's results, H&P incurred a loss of $0.74 per diluted share versus a loss of $0.52 in the previous quarter.
As of these select items, adjusted diluted loss per share was $0.62 in the fourth fiscal quarter compared with an adjusted $0.57 loss during the third fiscal quarter.
For fiscal 2021 as a whole, we incurred a loss of $3.04 per diluted share.
Again, this was driven largely by the non-cash impairments to fair value for decommissioned rigs and equipment, the majority of which were previously impaired and are held for sale.
Collectively, these select items constituted a loss of $0.44 per diluted share.
Absent these items, fiscal 2021 adjusted losses were $2.60 per diluted share.
Capital expenditures for fiscal 2021 totaled $82 million below our previous guidance due to the timing of supply chain spending that crossed in the fiscal 2022.
Relative to our original guidance range of $85 million to $105 million, the variance was primarily driven by a delay in the start of planned IT infrastructure spending that we have previously discussed.
Most of that planned IT spend will now be incurred in fiscal '22.
H&P generated $136 million in operating cash flow during fiscal 2021.
Considering the pro forma impact of our recent debt refinancing, the collective cash and short-term investments balances decreased minimally by $7 million year-over-year due in part to working capital improvements achieved during fiscal 2021 as well as asset sales.
Turning to our three segments beginning with the North America Solutions segment.
We averaged 124 contracted rigs during the fourth quarter, up from an average of 119 rigs in fiscal Q3.
We exited the fourth fiscal quarter with 127 contracted rigs.
Revenues were sequentially higher by $12 million due to the aforementioned activity increase.
North America Solutions operating expenses increased $18 million sequentially in the fourth quarter primarily due to the addition of six rigs as well as a higher material and supplies expense.
Throughout fiscal 2021, we prudently managed our expenses and inventory levels using previously expensed consumable inventory harvested during stacking activities in calendar 2020 rather than utilizing fully costed inventory or purchasing new inventory.
As rig activity increased, our level of previously expensed inventory or what we have been referring to internally as quote-unquote, penny stock, has been exhausted resulting in the issuance of a higher cost inventory and the purchasing of additional inventory to replenish stock levels, replenishments go on the balance sheet.
Through fiscal 2021, we did not experience inflation in our costs.
However, we are anticipating inflationary pressures moving forward, which I will touch on in a moment.
Additionally, as I will expand on later, we've put six rigs to work in the first half of October, the first fiscal quarter of 2022, but the reactivation costs are primarily incurred in fiscal 2021.
The onetime reactivation expenses associated with all of those rigs was $6.6 million in fiscal Q4.
Now looking into the first quarter of fiscal 2022 for North America Solutions.
As expected, rig count growth was moderate during the fourth fiscal quarter.
Publicly traded customers continued to operate within their calendar year budget plans, which are currently being reset for calendar 2022 in an oil and gas commodity environment that is significantly more robust than this time last year.
Accordingly, we expect to see sizable spending increases, especially with our public company customers during the first fiscal quarter of 2022.
As of today's call, we have 141 rigs contracted, and we expect to end our first fiscal quarter with between 152 and 157 working rigs with current line of sight for a few additional rigs turning to the right in early January.
In the North America Solutions segment, we expect gross margins to range between $75 million to $85 million inclusive of the effect of about $15 million in reactivation costs.
As I mentioned in last quarter, there is positive correlation between the length of time a rig has been idle and the costs required to reactivate it.
Most of the costs we are reactivating -- most of the rigs we are reactivating in the first quarter have been idle for 18-plus months.
Reactivation costs were mostly incurred in the quarter of start-up, so the absence of such costs in future quarters is margin accretive.
As John mentioned, we are expecting to achieve higher pricing in light of higher demand in tight, ready-to-work, super-spec supply.
I will now pause to comment on inflationary considerations ahead for fiscal 2022.
We have seen increases in commodity pricing such as for steel.
Products reflecting upward pricing due to this pressure include capital items such as drill pipe.
Note that our upcoming capital expenditure guidance is inclusive of such pricing increases.
For margin-related expenditures, I will touch on two items.
First, maintenance and supplies pricing is increasing across some categories such as oil-based products like lubricants and steel-based products like fluid ends [Phonetic].
Second, as John discussed, we are increasing field labor rates to respond to market conditions and assist in talent retention and attraction.
Further, our contracts are structured to pass through labor price increases over a 5% threshold.
Therefore, significant labor increases are margin neutral due to contractual protections.
Fair margin guidance was inclusive of our expectations for inflation in the first fiscal quarter.
As it relates to supply chain access to parts and materials to run our business, we are in constant communication with our suppliers and they've placed advance orders for certain IRS categories.
Our proactive approach to inventory planning, coupled with our scale and healthy vendor partner relationships provide us reasonable assurance of supply chain issues as we see them today will not materially impact our business.
We will continue to engage our suppliers and partners to stay ready to adjust as developments unfold.
Subsequent to September 30, 2021 we sold two peripheral service lines, which provided rig move trucking and casing running tools services to a portion of our North America segment customers.
These business lines were largely margin neutral to H&P having collected revenues in the fourth quarter and full fiscal year of 2021 of $10 million and $34 million respectively.
To conclude comments on the North America segment, our current revenue backlog from our North America Solutions fleet is roughly $430 million.
Regarding our International Solutions segment, International business activity increased by one rig in Argentina to six active rigs during the fourth fiscal quarter.
As we look to the first fiscal quarter of 2022 for International, activity in Bahrain is holding steady with the three rigs working, and we expect to go from three to four rigs working in Argentina as well as get the contract of the Colombia rig turning to the right.
Note that three of the YPF rigs John mentioned earlier will commence work in subsequent FY22 quarters in Argentina.
Turning to our Offshore Gulf of Mexico segment, we continue to have four of our seven offshore platform rigs contracted.
Offshore generated a gross margin of $8 million during this quarter, which was within our guided range.
As we look to the first quarter of fiscal 2022 for offshore, we expect that the segment will generate between $6 million to $8 million of operating gross margin.
Now, let me look forward to the first fiscal quarter and full fiscal year 2022 for certain consolidated and corporate items.
As we increased our rig count, capital expenditures for the full fiscal 2022 year are expected to range between $250 million to $270 million.
This capital outlay is comprised of three buckets, similar to fiscal 2021.
First, maintenance capex to support our active rig fleet will be approximately 50% of the total FY '22 capex.
In fiscal 2019, we had bulk purchases in capex to scale up rotating componentry for a then 200-plus working super-spec FlexRig count.
In addition, we harvested components from previously impaired and decommissioned rigs to conserve capital.
As such, we were able to utilize resources on hand and preserve capital in 2021.
But now we have reached the end of those inventories and we are needing to recommence a regular cadence of component equipment overhauls and drill pipe purchases.
This, coupled with a sharp activity increase we are experiencing is driving our fiscal 2022 maintenance capex back into our historical range of between $750,000 to $1 million per active rig per annum in the North America Solutions segment.
Second, skidding to walking capability conversions will approximate 35% of the fiscal 2022 capex.
Although our peers have walking rigs available in the market, select customers prefer certain rig design elements and commit to a conversion.
For customers that need walking rigs, we will invest to convert certain rigs from skidding to walking pad capability and exchange for a term contract that will enable the new investment, which we currently estimate is $6.5 million to $7.5 million per conversion.
Third, corporate capital investments will be about 15% of fiscal 2020 capex.
Over half of this bucket is comprised of modernization for data center, data and analytics platforms and enterprise IT systems, most of which has moved from fiscal 2021 to fiscal 2022 and will improve our infrastructure and cyber security posture.
Portions of the balance of this corporate capital investment are for Power Solutions capital associated with ESG research and development efforts, and for certain real estate matters.
As part of the ADNOC sale transaction mentioned earlier, we will deliver the eight rigs to ADNOC throughout the year of 2022 with sale proceeds of $86.5 million received in September 2021 and are included in accrued liabilities on our balance sheet.
In addition to the capital expenditures just described above, we will spend approximately $25 million in cash to prepare and deliver the rigs to ADNOC.
When we incur these expenses, they together with the net book values which among other assets are classified in assets held for sale will collectively represent the accounting basis in the rigs for the purpose of determining gains to be recognized in the upcoming quarters upon each delivery.
Depreciation for fiscal 2022 is expected to be approximately $405 million.
Our general and administrative expenses for the full 2022-year expected to be approximately $170 million, which is roughly consistent with the year just completed.
Fiscal 2022 SG&A will be partly front loaded in the first fiscal quarter due to short-term incentive compensation payments for fiscal year 2021 results and the timing of certain professional services fees.
Specifically, we expect $45 million to $85 million in Q1 with the remainder spread proportionately over the final three quarters.
Our investment in research and development is largely focused on autonomous drilling, wellbore quality and ESG initiatives.
And we anticipate these innovation efforts to yield further enhancements and solutions offerings on our technology roadmap.
We anticipate R&D expenditures to be approximately $25 million in fiscal '22.
We are expecting an effective income tax rate range of 18% to 24% for fiscal 2022.
In addition to the US statutory rate of 21%, incremental state and foreign income taxes also impact our provision.
Based upon estimated fiscal 2022 operating results and capex, we are forecasting another decrease to our deferred tax liability.
Additionally, we are expecting cash tax in the range of $5 million to $20 million.
Now looking at our financial position.
Helmerich & Payne had cash and short-term investments of approximately $1.1 billion at September 30, 2021.
When considering the aforementioned 2025 bond repayment and make-whole premium that occurred in October, the pro forma cash and short-term equivalents of September 30, 2021 were $570 million, sequentially compared to $558 million at June 30, 2021.
Including availability under our revolving credit facility, but excluding the $546 million, 2025 bond extinguishment amount, our liquidity was approximately $1.3 billion commensurate to the prior quarter.
Our debt to capital at quarter-end was temporarily at 26% given the debt overlap at the September 30 balance sheet date, accounting for the repayment of the 25 bonds.
However, pro forma debt to capital are just down to 16%.
Our working capital stewardship since the March 2020 downturn resulted in cash accretion.
As we look forward toward the end of fiscal '22, we do expect to consume a modest amount of cash given the one-time recommissioning expenses together with net working capital increases as our rig activity climbs.
Fiscal Q1 will experience lower cash flow from operations in the following quarters due to the rig ramp up and the seasonal cash expenditures for incentive compensation, property taxes, etc.
We do expect to end the fiscal year with between $475 million to $525 million of cash on hand and $25 million to $75 million of net debt.
In summary, we are expecting to generate free cash flow that when combined with the modest uses of cash on hand early in the fiscal year will cover our capital expenditure plan, debt service cost and dividends in fiscal '22.
The growth in rig count early in the fiscal year provides a platform for cash generation in the second half of the year that pointing forward fully covers our cash uses including our dividend and sets the stage for further cash accretion.
Our balance sheet strength, liquidity level and term contract backlog provide H&P the flexibility to adapt to market conditions, take advantage of attractive opportunities and maintain our long practice of returning capital to shareholders.
That concludes our prepared comments for the fourth fiscal quarter.
| compname reports q4 loss per share of $0.74.
q4 loss per share $0.74.
operating revenues of $344 million for quarter ended september 30.
expect utilization of readily available rigs to remain very high.
projected increase in rig demand will be more than we can accommodate with our current active fleet.
will have to reactivate more long-idled rigs to satisfy demand.
experiencing increased rig activity with 141 rigs working in north america today.
expect to see activity improve in international markets in coming quarters as well.
|
I'm joined by Tom Greco, our President and Chief Executive Officer; and Jeff Shepherd, our Executive Vice President and Chief Financial Officer.
We also hope that you and your families are healthy and safe.
The health and safety of our team members and customers has been a top priority over the past year.
With strength across all channels, we delivered comparable store sales growth of 24.7%, and margin expansion of 478 basis points versus the prior year.
On a two-year stack, our comp sales growth was 15.4%.
Adjusted diluted earnings per share of $3.34 represented an all-time quarterly high for AAP, and improved more than 230% compared to Q1 2020.
Free cash flow of $259 million was up significantly versus the prior year, and we returned over $203 million to our shareholders through a combination of share repurchases and our quarterly cash dividend.
In addition, we recently announced an updated capital allocation framework targeting top quartile total shareholder return, highlighted by operating income growth, share repurchases and an increase in our dividend.
This further reinforces our confidence in future cash generation and our commitment to returning excess cash to shareholders.
As outlined in April, we are building an ownership culture, as well as a differentiated operating model at Advance.
Over the past few years, we've made substantial investments in our brands, our digital and physical assets, and our team.
These investments, along with external factors, enabled us to post a strong start to 2021.
Clearly, the federal stimulus package, along with our first real winter weather in three years, was a benefit to our industry.
From a category perspective, net sales growth was led by batteries, appearance chemicals and wipers.
Geographically, all eight regions posted over 20% growth.
Importantly, over the past year, the Northeast, our largest region, had been below our overall reported growth rate and well below that of our top-performing regions.
In Q1, the gap narrowed, and in recent weeks, the Northeast has been leading our growth.
This was in line with our expectations as mobility is increasing in large urban markets in the Northeast, which were disproportionately impacted by COVID-19 last year.
Both DIY omnichannel and Professional performed well, delivering double-digit comp sales growth in the quarter.
We saw strong increases versus year ago with a double-digit increase in transactions and high single-digit increases in dollars per transaction in both channels.
In terms of cadence, DIY led the way early in Q1.
As the country began to reopen later in the quarter, Professional came on strong, resulting in Pro growth of over 20% in Q1, with continued momentum into Q2.
The changes in channel performance highlights the importance of flexibility in our operating model, as we adapt to rapid shifts in consumer behavior relative to 2020.
Throughout AAP, our merchant, supply chain and store operations teams have been extremely agile in adjusting to this evolving environment to ensure we take care of our customers.
Within the Pro sales channel, our overarching focus remains to get the right part in the right place at the right time.
This enables us to compete on availability, customer service and speed of fulfillment, which are the primary drivers of choice for Pro-verizers [Phonetic].
To achieve these goals, we continued to strengthen our value proposition through improved availability as well as our Advance Pro catalog featuring tools like MotoLogic and Delivery Estimates [Phonetic].
As vaccinations rollout across the country, mobility is increasing across all income strata.
As discussed in April, this is very good for AAP, as our diverse set of assets within Pro is uniquely positioned to capitalize on this trend.
Specifically, WORLDPAC led our Professional growth in the quarter.
With the customer base that serves higher end installers and more premium vehicles, WORLDPAC gained momentum throughout Q1.
This is because, middle to high income motorists are becoming increasingly mobile, and in some cases, they are now returning to a daily commute.
Saying it simply, they're driving more than they did a year ago.
Secondly, we're seeing benefits from the own brand product offering expansion with the integration of Autopart International.
Further, we believe our independent Carquest stores are also well positioned.
They're leveraging our enterprise assortment and have excellent relationships with customers.
These relationships have been strengthened over the past year, given the support we provided to both independents and our Pro customers during a difficult time.
We continue to grow our independent store base through a combination of greenfield locations and the conversion of existing independent location.
Today, we're extremely excited to announce that we're adding 29 new independent locations to the Pacific Northwest to the Carquest family, the single largest convergence in our history.
Baxter Auto Parts announced that they will bring over 80 years of automotive aftermarket experience and strong customer relationships to the Carquest banner.
This is a testament to the strength of the Carquest Independent program, including product availability, differentiated brands, technology platforms and robust marketing plan.
We also grew our TechNet program across all Pro channels.
TechNet enables independent service shops to create their own national network.
We now have over 13,000 North American members, and we'll continue to leverage TechNet to differentiate our Pro offering and build loyalty.
In summary, we expect that as our Pro installers recover, our industry-leading assortment, customized Pro solutions, and dedicated Pro banners will enable us to drive market share gain in the growing segment throughout the balance of the year.
Meanwhile, our DIY omnichannel business led our growth for the fourth consecutive quarter.
Stepping back and as a reminder, there was a significant increase in DIY penetration across the industry beginning in Q2 2020.
According to syndicated data, an estimated 4 million new DIY buyers were added.
Spend per buyer for 2020 grew close to 9%, led by online spend per buyer.
DIY growth was led by project, recreation and more discretionary categories as people worked on their vehicles or even learned how to work on their vehicles.
These trends generally continued through Q1, and the industry is now beginning to lap the significant increase from prior year in Q2.
From an Advance standpoint, we grew share of wallet and overall market share in Q1, led by DieHard batteries.
DieHard continues to have strong momentum and our advertising is clearly resonating with customers.
We plan to continue to invest behind this powerful brand in 2021 to further build awareness and association with Advance.
Our loyalty program remains focused on attracting, retaining and graduating Speed Perks members.
Our loyalty program enables us to provide personalized offers and increase share of wallet as we leverage our customer data platform.
In Q1, this helped drive growth in our VIP members by approximately 14% and our Elite members by 30%.
Consistent with broader retail, during Q1, we began to see a shift back to store sales from e-commerce, given the outsized growth of the online business during the onset of the pandemic in 2020.
Our investments in digital and e-commerce have been another differentiator for our DIY business.
We continue to strengthen our online experience on desktop, mobile and with our app, which recently crossed nearly 1.3 million downloads.
The integration of our digital and physical assets is communicated through our Advance Same Day suite of services.
This enables DIYers to find the right part from our industry-leading assortment, order it online, and either pick it up in one of our stores within 30 minutes or have it delivered in three hours or less.
Finally, we're very excited about our footprint expansion and new store opening plans for the year.
We're targeting between 100 to 115 new stores in 2021.
This includes the Pep Boys leases we're executing in California.
The opening of the California locations will ramp up during the back half of the year and finish in 2022.
Now, I'd like to transition to the unique opportunity we have to significantly expand our margins.
As we outlined in our strategic update, there are four broad initiatives: leveraging category management, streamlining our supply chain, improving sales and profit per store, and reducing corporate SG&A.
Our largest merchant expansion initiative is leveraging category management to drive gross margin improvement.
This involves three components: material cost optimization, own brand expansion, and strategic pricing.
Material cost optimization and strategic sourcing has been an ongoing effort for us and will continue to be a focus.
Given the current inflationary environment, we are leveraging these capabilities to push back on cost increases, to keep our price to the customer low.
We'll continue to work collaboratively with our supplier partners on managing input costs.
Own brand expansion as a percent of our mix is an important contributor to margin rate improvement.
However, growing our DieHard and Carquest brand is not just about margin, it's also about differentiation.
Our merchant team is building our capabilities and sourcing to develop high quality products, leveraging our strong supplier relationships.
Two recent examples include our DieHard robust enhanced flooded battery and our Carquest Hub Assembly.
Once equipped with a differentiated product, our marketing team is building the awareness and the reputation of our own brand as evidenced by our DieHardisBack advertising campaign.
Finally, we supplement innovative quality parts and breakthrough marketing with an improved [Technical Issues] and extensive team member training.
This includes enhanced part, product and brand training to ensure our store team members are well positioned to provide our customers with trusted advice and an excellent in-store experience.
So, we're not only on track with margin expansion behind own brands, we're also leveraging these brands to enhance differentiation and improve store traffic.
Our extensive research around customer journey highlights the role that brands play in customer purchase decisions.
When a customers car won't start, we want them to think of DieHard first, such as this becomes a reason that they come to Advance.
This is why collaborating with our supplier partners is so important to ensure high quality for our own brands.
We are confident as we continue to invest in product quality, building our brands, and training our team members to drive own brands as a percent of mix, we will further deliver growth across AAP.
The final component of our category management initiatives is strategic pricing.
By investing in new tools, we're now able to competitively price on a market-by-market basis using detailed analytics to improve rate.
We're also realizing success in reducing discounts online through a rapid test and learn approach, which is driving significant margin expansion in key categories.
In total, our category management initiatives are currently on track to deliver up to 200 basis points of margin expansion through 2023.
As we look beyond 2023, we plan to continue building out customer data and personalization platforms to further enhance the customer experience and expand margins.
Same with gross margin, we once again leveraged supply chain in Q1 versus both 2020 and 2019.
Despite the current environment, we remain focused on executing our primary margin expansion initiatives while working to mitigate the impact of global supply chain challenges.
We expect to complete our warehouse management system implementation in 2022 with the majority of our largest buildings converted this year.
In conjunction with WMS, we're also rolling out our labor management system, which allows us to implement common standard operating procedures across our DC network.
This will also enable us to incentivize hourly team members based on their performance.
In terms of cross-banner replenishment, or CBR, we've converted over 70% of stores to date and expect to complete the remaining stores we originally planned by the end of Q3.
CBR significantly reduces our miles driven, which is even more important today given rising fuel and labor costs.
More importantly, CBR will complete the integration of the Advance and Carquest supply chains and enables us to service our approximately 4,800 corporate Advance stores and 1,300 independent Carquest stores from a single supply chain.
We also continue to integrate the dedicated professional supply chain within WORLDPAC and Autopart International.
In the quarter, we converted another five AI stores to the WORLDPAC system and are on track to complete this integration by the end of Q1 2022.
In April, we discussed two additional supply chain initiatives building on what will soon be a more streamlined supply chain network.
This includes tiering our supply chain and transforming in-market delivery and customer fulfillment.
Our tiered supply chain pools the slowest moving SKUs into four strategically located regional DCs.
This will allow us to make room for faster moving SKUs and ultimately improve the availability of our higher turnover products.
Our second new initiative is transforming in-market delivery and customer fulfillment to improve service and productivity.
The new delivery management system was selected for multiple modes of transportation to move and deliver parts at lower costs.
Both of these initiatives are in their early stages, and we are targeting completion of these in 2023 and 2024, respectively.
In terms of SG&A improvements, our store operations team is executing initiatives to increase sales and profit per store.
We've now increased sales per store for three straight years, and we're on track to get to our target of $1.8 million average sales per store by 2023.
In Q1, with strong top-line growth and disciplined execution, we leveraged store payroll versus both 2019 and 2020.
We've also made improvements in scheduling and task management to drive efficiency, which helps with our customer experience as it enables us to schedule our most tenured and knowledgeable team members when we need them most.
We continued to invest in our store team members in terms of training, technology and in compensation, including our unique Fuel the Frontline stock ownership program.
We believe these investments have enabled us to attract the very best parts people in the business and are enabling continued improvement in primary execution metrics like net promoter score, units per transaction and ultimately sales and profit per store.
Finally, we took steps to reduce corporate and other SG&A costs in the quarter.
This includes three broad territories: integration, safety, and new ways of working.
In terms of integration, our finance ERP is near completion and we continue to build proficiency in our global capability center at Hyderabad, India.
I'd like to take this opportunity to recognize our India team, who stood up an entirely new operation literally in the middle of a global pandemic last year.
We've been working hard to support them as COVID-19 infection rates have risen in India over the past few weeks.
The GCC team including IT, Finance and HR team members today has certainly enabled us to reduce costs, both in terms of capex and OpEx.
In addition, the IT team brings new skills in the area of software engineering, data analytics and artificial intelligence.
These critical capabilities will help enable the successful implementation of our many tech initiatives.
Secondly, our safety performance continues as field leaders across Advance hold their teams accountable as we build a safety culture.
We delivered a 9% reduction in our total recordable injury rate compared to the previous year, and reduced our lost-time injury rate 2%.
By focusing on people, behavior and continuous improvement, we're reducing claims and overall cost.
Third, we recently completed a thorough review on the ways we work in our corporate offices and incorporated key learnings from working remotely for over a year.
The objective was to ensure our corporate team is focused on our highest value priorities, while eliminating less productive work.
From this work, we announced a restructure of our corporate functions and the reduction of our corporate office footprint.
This will result in savings of approximately $30 million in SG&A, which will be realized over the next 12 months.
We also believe the streamline approach will be more effective to supporting our field and supply chain teams.
While we're pleased with our Q1 performance, we're confident that there is so much more opportunity ahead.
To fully realize our potential, we plan to continue to invest in our brands, the customer experience, our team members and market expansion to drive top-line growth above market.
Our entire team also remains focused on the execution of our margin expansion initiatives.
We're energized and focused on building on the momentum we saw in Q1 to execute our long-term strategy in the months to come.
Now, let me pass it over to Jeff, who will go into more details on our financial results.
In Q1, our net sales increased 23.4% to $3.3 billion.
Adjusted gross profit margin expanded 91 basis points to 44.8% as a result of improvement throughout gross margin, including supply chain, net pricing, channel mix and material cost optimization.
These improvements were slightly offset by unfavorable inventory-related costs, product mix and headwinds associated with shrink and defectives.
Our Q1 adjusted SG&A expense was $1.2 billion.
On a rate basis, this represented 35.8% of net sales, which improved 387 basis points compared to one year ago.
The improvement was driven by sales leverage in both payroll and rent, as well as lower claim-related expenses from the Company's emphasis on safety.
We discussed our labor management system previously, but we really saw the benefit this quarter as we staffed our store based on customer needs, utilizing nights, weekends and an improved mix of full and part-time schedules.
In addition, our ongoing focus on team member safety will always remain one of our highest priorities.
The savings were partially offset by an increase in field bonus costs related to our improved performance.
In addition, as Tom outlined earlier, we invested in marketing during Q1, primarily associated with DieHard.
This lap marketing cuts the previous year, which were made at the onset of the pandemic.
We also saw an increase in third party and service contracts related to our transformational plans, primarily within IT.
Related to the increased COVID-19 cases we saw late in 2020 and early 2021, we incurred approximately $16 million in COVID-19 cost during the quarter, which is flat to the prior year.
While the future impact of COVID-19 remains unknown, we expect these costs to subside throughout the year, assuming infection rates continue to decline.
Our adjusted operating income increased from $113 million last year to $299 million.
On a rate basis, our adjusted OI margin expanded by 478 basis points to 9%.
Finally, our adjusted diluted earnings per share was $3.34, up from $1.00 a year ago.
Our free cash flow for the quarter was $259 million, an increase of $330 million compared to last year.
The improvement was primarily driven by year-over-year operating income growth, as well as improvements we achieved from working capital initiatives, including higher utilization of our supply chain financing facilities that we began to see during the pandemic last year.
Our AP ratio improved by nearly 1,000 basis points to 84%, the highest we've achieved since the GPI acquisition.
A portion of the improvement is attributable to the actions we took during the pandemic, and the continued partnerships we have with our suppliers.
In the quarter, we spent $71 million in capital expenditures versus $83 million in the prior year quarter.
We expect to be within our guidance for capital expenditures, as we continue to invest in our transformation initiatives.
During Q1, we returned more than $200 million to our shareholders through the repurchase of 1.1 million shares and our quarterly cash dividend.
We expect to be within our 2021 share repurchase guidance of $300 million to $500 million.
Miles driven are beginning to grow for the first time in over a year, and historically, this has been overall positive for our industry.
In addition, our Professional business is accelerating, and we expect Pro to outperform DIY for the balance of the year.
For these reasons, we're raising our comp sales guidance to up 4% to 6%.
We're also cognizant of several macroeconomic factors.
This includes inflationary costs in commodities, transportation and wages, along with currency headwinds.
As a reminder, our industry has historically been very rational and successful in passing on inflationary costs in the form of price, and that is our intention this year as well.
Also our Pro business carries a lower margin rate than DIY, which may partially offset the gains we expect to see in sales.
As a result of our top-line strength and current cost assumptions, we're updating our adjusted OI margin range to be between 9% and 9.2%.
Our guide for comp sales is now up 3 full points, and our adjusted OI margin rate is now up 30 basis points compared to our initial guidance provided in February.
We remain committed to delivering against the strategy we laid out in April and are confident in our ability to execute our long-term strategic plans to deliver strong and sustainable total shareholder return.
| q1 adjusted earnings per share $3.34.
q1 sales $3.3 billion versus refinitiv ibes estimate of $3.28 billion.
q1 same store sales rose 24.7 percent.
|
With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Chief Financial Officer; Andrew Johnson, Executive Vice President and Chief Legal Officer; and John Nypaver, Vice President and Treasurer.
Actual results may differ materially.
Before we begin, let me wish all of you a healthy and happy New Year ahead.
2020 was an unprecedented year for everyone dealing with the COVID virus, but I'm happy to see improvements around the world as the new vaccines are being distributed in increasing numbers.
I trust that 2021 will be a much better environment as we emerge from this crisis period.
Before discussing our progress in 2020, let me comment on the postponement of our 10-K filing.
As you know, one of our key actions last year was to begin divesting assets that were not core to our Additive Manufacturing business.
We quickly prioritized the sale of our two software businesses GibbsCAM and Cimatron.
They were focused on subtractive or machining technology.
This divestiture, while complex to execute, went very well, and we closed at the end of the year, which allowed us to eliminate our debt and have cash on the balance sheet for future investment.
Our auditors have asked for a little more time to bring their work to a close, and we therefore filed for an extension of our 10-K.
With that said, we were very pleased to be able to release our Q4 and full year operational results last evening, which we have labeled as 'Unaudited' for clarity, and to discuss them with you today.
With that, let me now recap the progress we've made in our business and our view of the future.
For 3D Systems, 2020 presented both significant challenges and, along with them, clear opportunities for us to focus our company on what we believe will be an accelerating need for Additive Manufacturing across many industries moving forward.
Many of you may recall that one of my first actions upon joining the company last May was to clearly define our purpose statement, that is to be the leader in enabling additive manufacturing solutions for applications in growing markets that demand high reliability products.
Using this as our guidepost, we then developed a four-stage plan to deliver increased value to both our customers and our shareholders.
Our four-part plan was simple: reorganize into two business units, Healthcare and Industrial solutions; restructure our operations to gain efficiencies; divest non-core assets; and invest for accelerated profitable organic growth.
We set aggressive measurable goals and timelines and focused intensely on execution.
These efforts began bearing fruit quickly with a return to growth in Q3, and rapidly building momentum on both our top and bottom line in Q4.
From a topline perspective, the results really speak for themselves.
Both our Healthcare and Industrial businesses delivered exceptional double-digit revenue growth on a consecutive quarter basis with our Healthcare business even surpassing last year's pre-COVID performance by a significant margin.
From a bottom-line perspective, the combination of volume growth and the increasing benefit from our restructuring efforts, improved operating margin significantly, returning the company to profitability and positive operating cash performance.
This was our first quarter of year-over-year revenue growth since 2018, and we delivered it while still battling the worst global pandemic in modern history and while executing a massive top to bottom reorganization and restructuring of the company.
I could not be prouder of our leadership team and our tremendous employees worldwide who never took their eye off meeting our customer commitments through all of this change.
This success has left us in a terrific position moving forward as the virus subsides and the world begins recovering in earnest later this year.
With that quick summary, let me share a few highlights from each phase of our plan.
Let's begin with reorganization.
As a reminder, our company is focused on application-specific solutions for our core vertical markets, Healthcare and Industrial.
Over the second half of 2020, we reorganized our sales and marketing activities, combining our hardware, material, software, and services resources into a unified application-oriented customer-focused organization, rather than having multiple independent teams as in the past.
This reorganization not only improved our sales efficiencies, it also allowed us to work much more effectively with our customers on specific application solutions, which is a cornerstone of our strategy moving forward.
Within each of our two business units, we have market-specific vertical leaders focused on key growth markets, such as dentistry, personalized health services, and medical devices within our Healthcare business, and aerospace, automotive, electronics, and consumer products for our Industrial business units.
These business and market leaders determine both our go-to-market strategies and our development priorities for new products and services, ensuring the specific customer application needs are kept at the forefront of our resource allocation process.
In addition to these changes in our sales structure, we also created a new group we call our customer success team.
This group ensures that our customer needs continue to be met after their initial purchase over the life of the system.
It includes servicing and upgrades of the equipment, providing our customers immediate access to our rapidly expanding materials portfolio, and delivering software upgrades that drive improved efficiencies in their manufacturing environment.
These benefits ensure that the value our customers receive from their 3D Systems solution grow substantially over the life of their ownership, which can often exceed 15 years from the initial purchase.
A testament to our success in delivering this value is seen in our customers' operations around the world each day.
The 3D Systems technology provides over a 0.5 million production parts every 24 hours, 365 days a year, which is more than the rest of the industry combined.
And with the breadth of our additive technologies now spanning an enormous range of plastic and metal application solutions, we're well positioned to build upon this foundation at an even faster pace moving forward.
So with an understanding of how we're organized, let me comment briefly on our sales performance in the fourth quarter and the current market dynamics.
For Healthcare business, we delivered exceptional growth in Q4 and notably this growth was seen broadly in both dental and medical applications, the latter of which includes medical devices, personalized healthcare, simulation systems and -- moving forward -- regenerative medicine or bioprinting for short.
I'll comment further on this new area of the business in a few moments.
But for now, suffice to say that our Healthcare business exited the year firing on all cylinders and we're very excited about the short and long-term outlook for this business.
For our Industrial business, while we are still in a recovery phase from the extreme softness we experienced in the middle of 2020, in Q4 we were pleased to build upon the positive momentum we had established in Q3.
Our Industrial business growth reflected increased demand in markets like aerospace, automotive and consumer applications as the industrial economy continued to slowly recover.
We expect this momentum to continue in 2021.
However, the risks of COVID headwind still linger until the vaccines are more widely distributed later this year.
Once these pressures fully subside, we're very bullish on the outlook for this business.
Next, I'll spend a few minutes summarizing our restructuring efforts.
Last summer, we announced a restructuring program that was designed to ultimately yield a $100 million of run rate cost savings with $60 million to be achieved by the end of 2020.
I'm pleased to say that we achieved our $60 million savings target by year-end and that our efforts are continuing unabated.
Looking ahead, we have detailed plans within our core additive business to deliver an additional $20 million in savings this year, with the balance of $100 million linked to our analysis of future divestitures.
As these efficiencies are realized, we will make prudent investment decisions to support the increasing opportunities for growth and profitability that we see ahead for our company and for the additive manufacturing industry in total.
Jagtar will talk more about this in a few minutes.
Moving next to our divestiture efforts.
Having defined our company's focus last summer, we progressively evaluated all of our assets using this lens.
It quickly became clear last year that certain of our businesses, while good performers in their own right, clearly did not feel well within our focus on additive manufacturing.
As such, we began discussions with interested parties in several areas and successfully completed the sale of Cimatron and GibbsCAM at the year-end.
These two businesses were focused on digital machining technologies and, as such, were outside of our core.
Completion of the sale brought us increased organizational focus while enabling us to eliminate our debt and add cash to our balance sheet for future investment.
We will continue to evaluate assets for divestment, consistent with our core strategy in the quarters ahead.
The fourth phase of our transformation process corresponds to investment for growth.
As we move into 2021, we see two significant drivers of accelerated demand.
One is the technical maturity of additive solutions on an industrial scale, which is now become increasingly clear to OEMs worldwide.
The second is an accelerating cultural change in our customer base associated with the rise of a new generation of engineering design leadership that was exposed from a young age to additive manufacturing.
These engineers, which began entering the workforce in large numbers over the last decade, are embracing the benefits and design paradigms associated with additive manufacturing, which essentially decouples component complexity for manufacturing costs.
This allows our customers to design products that have greatly enhanced performance and reliability, while avoiding cost penalties that would occur using traditional machining, molding, or casting methods.
When combined with the new materials that are now available for printing, the result is a dramatic increase in demand for Additive Manufacturing solutions.
To be a leader in this exciting market, we believe that a company must have expertise in hardware and software, with a strong portfolio of advanced materials to enable application solutions that are critical to our customers' product performance and cost objectives.
Solving for specific applications often requires a unique combination of these elements which we bring together through our application engineering experts.
Moreover, many customers have a strong need for both polymer and metal solutions, which is why we continue to invest systematically in both technology areas and leverage them as required to meet these rapidly evolving needs.
Looking ahead, we see significant growth opportunities in each of our core markets.
Within Healthcare, this includes dental applications as well as a rapidly growing range of medical device applications and the emerging field of personalized health services.
These services encompass both surgical aids that are custom-created, to match a patient's specific procedure as well as implanted devices that aids in the patient's recovery or quality of life.
We anticipate all of these applications for which performance and quality are of paramount importance to be both the near-term and long-term drivers of the business.
Adding additional exciting momentum to our Healthcare business over the long-term, meaning 2022 and beyond, will be our newest area of development, regenerative medicine.
As we announced in mid-January, over the last three years, our Chief Technology Officer and the Inventor of the entire Additive Manufacturing industry, Chuck Hull and his team, have been working very closely with our partner, United Therapeutics, to demonstrate the capability to actually print human organs in order to address the enormous need of transplant patients.
The first application selected for development was a fully functioning biocompatible human lung.
In December, we created a -- we reached a critical milestone in these efforts.
In short, we demonstrated the capability to reproducibly print extremely complex, ultra-thin walled structures using collagen-based and other biocompatible materials.
These structures which have the required balance of properties needed for organ application, enable vascularization to support blood flow, and thus the ability to sustain human life.
The printed structures are perfused with human cells, which can thrive and multiply, which is why the team has named the process Print to Perfusion.
While there is more work to do, including completion of the required regulatory approvals, the printing technology that has now been demonstrated for the lung application can be taken in many additional directions.
Near term applications are numerous, such as the creation of customized soft tissue implants for trauma patients or for use in breast reconstruction following mastectomy.
In the laboratory, the creation of test modules termed tissue-on-a-chip could be used to better simulate human response to new drug therapies, shortening the development time and reducing or even eliminating the need for animal testing.
All of these applications and a host of others are now within reach, which is why we've made the decision to increase our internal investments and to expand our application partnerships in regenerative medicine in 2021.
So in short, looking ahead for Healthcare business, we see an exciting year ahead.
This momentum continues to build with expanding applications and an even more exciting long-term outlook as regenerative medicine opens entirely new and potentially significant markets for the company.
Turning to our Industrial business, we see a continuation of recovery as the impact of COVID on the global industrial economies recedes.
We are particularly excited about our near-term efforts in space systems, where additive manufacturing of large, complex, metal components for rocket propulsion is helping build a foundation of experience for our newest generation of metal printers, which are particularly well suited to high temperature, lightweight materials.
Automotive and semiconductor equipment applications are also offering near-term growth potential, as is electrical componentry applications where customization is beneficial to performance.
Based upon our development pipeline, we also expect 2021 to be an exciting year for expansion of our materials portfolio, which is central to the benefits that our customers derive from the use of additive manufacturing.
The availability of these new materials in concert with our customer success team, organizational change, is intended to maximize the benefits we bring to our customers over the lifetime of their investment in our printing technology.
To end on an exciting note, with regard to our Industrial business, we were very pleased to announce last week a brand new industrial product platform for 3D Systems, which we refer to as High Speed Fusion or our HSF technology.
This filament fusion process developed in conjunction with Jabil is specifically targeted at aerospace and automotive applications.
Growing out of a project, we referred to as Roadrunner, the printer itself is three times faster and more precise than competing systems in the market today.
It also has a significantly larger working volume and very high temperature printing capability that is essential to next generation polymer systems for the demanding aerospace and automotive applications with size, speed and precision that exceeds any of the current market offerings.
Equally important, we will be offering a broad range of materials for this new platform, which should further accelerate its adoption in the market.
Based upon our initial analysis, these new markets that Roadrunner will open for us are in excess of $400 million and we'll expand from there as the full capabilities of the new platform are adopted.
This development effort has been under way for over a year, and we expect the platform to be fully available to the market in 2022.
This adds one more exciting dimension to our Industrial business.
So let me conclude my introductory comments by saying simply that we're very pleased with our progress over the last six months.
We look forward to building upon this momentum with a strong focus on growth and gross profit margin expansion in our core Additive Manufacturing business moving forward.
With a strong balance sheet, improving margins and exciting growth opportunities opening ahead of us, we look forward to a terrific future for all of our stakeholders.
Let me begin my commentary by reminding everyone that the financial data that we are discussing remain subject to final audit by our independent registered public accounting firm.
As a result, our actual results may differ from the anticipated results discussed.
As Jeff discussed earlier, in the fourth quarter, we achieved a development milestone in our regenerative medicine efforts.
This triggered a cash payment from one of our development partners related to this achievement.
That payment and our growing initiative in regenerative medicine prompted us to reevaluate our accounting methodology for this contract.
However, it is important to note that this recasting has only a minor impact on the numbers and does not have any impact at all on our bottom line reported results.
In addition, to be extremely clear, when viewed in the context of our overall revenue growth in the fourth quarter, the impact of this payment was immaterial to our results.
Even if the payment would have been entirely excluded, we would still have seen year-over-year growth in the fourth quarter.
Now moving on to the numbers, starting with a look at the full year 2020.
2020 revenue of $557.2 million decreased 12.4% compared to the prior year, primarily due to the impacts of COVID-19, the effects of which occurred most severely at the onset of the pandemic, with a strong rebound in activity in the second half of the year.
As we discuss our results in the future, it will be important to compare our growth to a baseline that excludes revenue from divestiture activities, such as the divestitures that closed just after the new year.
This revenue will no longer be part of our operating model, and we want to provide a clear baseline revenue for 2020 on which we intend to grow organically in 2021.
As such, excluding $44.4 million of revenue from businesses that were divested last year or at the beginning of this year, baseline 2020 revenue would have been approximately $512.8 million.
Our growth from this baseline provides a way to measure performance of our Additive Manufacturing business in 2021.
Gross profit margin on a GAAP basis for the full year 2020 was 40.1% compared to 44.1% in the prior year.
Non-GAAP gross profit margin was 42.6% compared to 44.8% in the prior year.
Gross profit margin decreased primarily due to the under-absorption of supply chain overhead resulting from lower production and end-of-life inventory changes of $12.4 million and mix.
Operating expenses for the full year 2020 on a GAAP basis increased 1.4% to $342.3 million compared to the prior year.
On a non-GAAP basis, operating expenses were $236.9 million, a 16.2% decrease from the prior year.
The lower non-GAAP operating expenses reflected savings achieved from cost-restructuring activities as well as reduced hiring and lower travel expenses resulting from the coronavirus pandemic.
Moving on to the specifics of the fourth quarter.
For the fourth quarter, we expect revenue of $172.7 million, an increase of 2.6% compared to the fourth quarter of 2019 and an increase of 26.8% compared to the third quarter of 2020, driven by growth in both Healthcare and Industrial.
We were quite pleased with this organic revenue growth, which we delivered while still facing headwinds from the pandemic that impacted our operations and those of our customers.
We expect a GAAP loss of $0.16 per share in the fourth quarter of 2020 compared to a GAAP loss of $0.04 in the fourth quarter of 2019.
Turning to non-GAAP results.
We expect non-GAAP income of $0.09 per share in the fourth quarter of 2020 compared to non-GAAP income of $0.05 per share in the fourth quarter of 2019.
Consistent with our new strategic focus announced late last year, we are now discussing revenue by market, Healthcare and Industrial.
Revenue from Healthcare increased 48% year-over-year and 42.4% quarter-over-quarter to $86.6 million, driven by all parts of the Healthcare business: dental, medical devices, simulators and regenerative medicine.
Excluding dental applications, revenue in the balance of the Healthcare business, which we refer to broadly as medical applications, increased 27.7% year-over-year.
In short, we were very pleased with both the magnitude and the breadth of the revenue growth in our Healthcare business in the fourth quarter.
Industrial sales decreased 21.6% year-over-year to $86 million as demand has not fully rebounded to pre-pandemic levels.
On a sequential quarter-over-quarter basis, we saw broad-based revenue improvement of approximately 14.2% in our Industrial business, with no single customer or segment responsible for the improvement.
Now we turn to gross profit margin.
We expect gross profit margin of 42% in the fourth quarter of 2020 compared to 44.1% in the fourth quarter of 2019.
Non-GAAP gross profit margin was 42.9%, compared to 44.3% in the same period last year.
Gross profit declined year-over-year, primarily as a result of timing and the reallocation of costs from opex to cost of goods sold.
Looking forward, and as mentioned previously, our gross profit will be impacted by the sale of our Cimatron and GibbsCAM software business.
While revenue in these two businesses were expected to decline, their divestiture is expected to negatively impact gross margins going forward by about 300 to 400 basis points, while our restructuring and transformation activities will benefit gross margins.
Net, going forward in 2021, we expect non-GAAP gross margins in a range of 40% to 44%.
Operating expenses for the fourth quarter were $71.7 million on a GAAP basis, a decrease of 9.2% compared to the fourth quarter of 2019, including an 11.2% decrease in SG&A expenses and a 3.1% decrease in R&D expenses.
Importantly, our non-GAAP operating expenses in the fourth quarter were $58 million, a 15.8% decrease from the fourth quarter of the prior year as we saw the benefits from our restructuring efforts.
The primary differences between GAAP and non-GAAP operating expenses are $6.1 million in restructuring charges as well as $4 million in amortization of intangibles and stock-based compensation and $3.7 million in legal and divestiture-related charges, consistent with our historical GAAP to non-GAAP adjustments.
Next, I would like to briefly touch on our cost-reduction activities.
Recall that in 2020 we announced a restructuring to reduce operating costs by $100 million per year, with $60 million of annualized cost reduction by the end of 2020.
As Jeff mentioned, we were pleased that we delivered on our objective of $60 million cost reduction in 2020.
In addition, we have plans for an additional $20 million of cost reductions in 2021.
Additional cost reductions beyond what is currently planned for 2021 require us to streamline and integrate parts of our business that we may instead choose to divest.
Therefore, the plans to achieve the remaining $20 million toward our $100 million cost-reduction plan will be achieved by divestitures or through further cost reductions that we will implement once we have finalized our divestiture analysis.
As we look forward in 2021, our operating expenses will be impacted by the sale of our Cimatron and GibbsCAM business, our cost-transformation activities and our investment decisions that are expected to drive future growth.
We are excited about the opportunities in our markets and will continue to make investments in 2021 to position the company well for future growth.
This quarter, we are introducing adjusted EBITDA as a metric that we find useful in measuring the health of the business.
We focus on adjusted EBITDA as evidence of the results of our strategy and restructuring actions, and we believe it is a helpful metric to use to compare to prior results.
Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $28.7 million or 5.2% of revenue in 2020, compared to $31.2 million in 2019 or 4.9% of revenue.
For the fourth quarter of 2020, adjusted EBITDA improved materially to $22.9 million or 13.2% of revenue, compared to $12.9 million or 7.7% of revenue in the fourth quarter of 2019.
The improvement is the result of the business growth in the quarter as well as the results from our restructuring efforts.
We were pleased that we could grow adjusted EBITDA in Q4 despite the challenging economic environment.
Now let's turn to the balance sheet.
We ended the quarter with $84.7 million of cash on hand, including restricted cash and cash and assets held for sale.
Cash on hand decreased $50 million since the beginning of 2020.
Importantly, our cash on hand increased $8.4 million from Q3 2020 to Q4 2020.
We did not issue any shares under our at-the-market equity program called the ATM program during the quarter.
Therefore, the increase in cash on hand reflects the improved operating performance of the company and the flow-through of cost actions that we have taken.
Our term loan at the end of the year was $21 million.
We have a $100 million revolver that was undrawn as of December 31, 2020, and has approximately $62 million of availability based on terms of the agreement.
Following the sale of our Cimatron and GibbsCAM business, which officially closed at the beginning of January, we used part of the proceeds to pay off the term loan, making us debt-free and in net cash position as we moved into the new year.
Additionally, as previously discussed, we terminated the ATM program.
As we look forward into 2021, we have greatly improved the operating efficiencies of our business and are continuing to do so.
We are focused heavily on reinvesting for growth based on the increasing opportunities we see for our core additive manufacturing business, and we are continuing the evaluation of our portfolio with an eye toward the potential for divestitures and subsequent reinvestment of proceeds into our core business efforts.
We believe that our market opportunity has considerable growth potential.
We have made tremendous progress in cost reduction and operational efficiency and have chosen to reinvest portions of the savings back into the business to drive future growth.
In 2020, we completed the reorganization and restructuring of our company to drive growth in our core businesses, successfully achieving our targeted cost savings while focusing on delivering application solutions for our customers.
As a result, we're now a company with a strong focus on two key markets, Healthcare and Industrial Solutions, and one that has a much more streamlined and efficient cost structure.
We started 2021 by completing the sale of our Cimatron and GibbsCAM software businesses, and we'll continue to see cost savings from our restructuring efforts throughout the year.
We'll continue to explore divesting noncore assets and look to grow our customer relationships through focusing on application solutions in our most exciting growth markets.
We believe revenue in our core business centered around a solutions-based approach to Additive Manufacturing will grow rapidly moving forward.
And we'll selectively invest for growth opportunities like regenerative medicine, materials development and ongoing improvement in our product lines.
Many may ask what rapidly means in terms of growth rates.
All we can say today is that uncertainty remains around the pace at which COVID impact will receive and the global economies rebound.
We're hopeful that the momentum continues to accelerate.
And with that, we'll be able to deliver double-digit growth rates in our core additive business in the year ahead, but these next few months will ultimately determine this outcome.
What I can say with certainty is that our continued focus on operational execution.
We are very excited about the trajectory we're on and the future value we expect to bring to all of the stakeholders in our company.
| compname says q4 loss per share $0.16.
q4 revenue $172.7 million versus refinitiv ibes estimate of $168.5 million.
on a non-gaap basis, company expects 2021 gross profit margins to be between 40% and 44%.
qtrly loss per share $0.16.
qtrly non-gaap basic and diluted income per share $0.09.
|
We have adapted procedures with the safety of our employees and customers in mind, while also continuing to serve our residents and customers in a difficult environment.
We have seamlessly transitioned to work-from-home in our corporate and regional offices.
The effort and dedication that our teams have shown during these past five weeks is admirable.
We have successfully navigated through new regulatory protocols and operating environments at an impressive pace, while maintaining our high quality standards.
I am proud of our team.
Our first quarter was strong with an NOI growth rate of 5.2%.
We saw strong demand on the MH side of the business, with a 4.9% increase in rental revenue.
We wrapped up our snowbird season and have a total RV revenue growth rate of 4.8%.
The drivers in that revenue were a 7.4% growth rate in annual revenue, a 7% growth rate in seasonal revenue and a 7.6% decline in transient revenue.
Let me first address our MH business.
Since the middle of March, we have taken steps to increase social distancing, include closing the common area amenities and opening our offices by appointment only.
We have been and remain focused on ensuring the health and well-being of our employees, residents, members and guests.
Our customers have appreciated the importance of these steps and have followed the new guidelines.
We have an occupancy rate of 95% in our core portfolio.
We have often focused on the occupancy rate, but at this time, I think it's important to focus on the quality of our resident base.
Our residents are homeowners who have generally paid cash for their home.
Our residents are committed to their communities, they care about the community and they actively display a pride of ownership in their homes.
Our overall occupancy consists of less than 6% renters.
We see our renters as future owners.
In 2019, 33% of all home sales were the result of a renter conversion.
In April, we saw continued strength in MH platform, with 96% of our residents paying us timely.
We have a deferral plan in place for April rental payments for those residents facing financial hardship due to the impact of COVID-19.
Moving to our RV business, we have had an acquisition strategy over the years of buying RV resorts that are heavily focused on annual and seasonal revenue streams.
80% of our RV revenue is longer term in nature and 20% come from our Transient customers.
Our properties have been impacted by local shelter and place orders which call for reduced or eliminated travel activity inside a jurisdiction.
Our RV annual customer generally has developed roots at the community.
The annual customer tends to own a park model, resort cottage or has an RV on the site that has add-ons that create a more permanent footprint.
For the first quarter, the annual revenue grew by 7.4%, comprised of 5.8% rate and 1.6% occupancy.
Our northern RV resorts generally open in April.
Our annual customers at these locations pay a deposit in advance and then complete their payment when they arrive for the season.
These are summer homes and weekend getaways for our customers.
This year the opening of 46 of our RV resorts has been delayed until at least the end of April.
While we have begun collecting the annual rent due, the delay in opening has caused a change in the normal payment pattern for these customers.
Our seasonal revenue stream comes from customers who have a reservation of 30 days or more.
Our seasonal revenue primarily comes from our sunbelt locations with 70% of the revenue generated between November and March.
The first quarter, which represents half of the full year anticipated seasonal revenue grew by 7%.
The second quarter seasonal revenue is generally our slowest quarter with approximately 15% of the overall seasonal revenue in 2019, occurring in the second quarter.
Our transient business represents under 6% of our total revenue.
We have always said that this piece is the most difficult to forecast.
Our transient customer stays with us an average of three nights.
The transient business serves an important role for us as we seek to convert that transient customer to a seasonal or annual customer.
Most of our RV resorts have a small portion of their overall revenue stream focused on the transient business, which becomes a lead generator for the rest of the business.
Towards the end of March, we stopped accepting transient reservations for the remainder of March and all of April.
As a result, the following shelter-in-place orders, we reduced activity to protect our employees and residents from any potential risks associated with transient traffic.
At this point, the shelter-in-place orders are limiting our ability to accept transient reservation.
With respect to our membership business, we have seen strong demand from the members during this pandemic.
As shown in our supplemental, cash receipts are similar to this year to last year at this time.
We made the decision to withdraw guidance because we are operating under unprecedented conditions and thought it would be more meaningful for us to provide an outlook when there are updates to regulatory protocol.
Our business has held up extremely well during these circumstances.
We are seeing the best of humanity from our employees, residents, guests and members.
We have often described a sense of community at our properties and we have seen these in full display over the past month.
We see neighbors caring for neighbors, working together to support the greater community.
The demand is high for our property that is seen by our April results.
Based on feedback that we have received, our customers are very much looking forward to enjoying the outdoors lifestyle at our properties this season.
The ELS team has reacted to an evolving climate in an impressive manner, and for that I'm grateful.
I will provide an overview of our first quarter results, highlight operating performance in April, including the results of our recent annual property and casualty insurance renewal and discuss our balance sheet and liquidity position.
For the first quarter we reported $0.59 normalized FFO per share.
Our results reflect the initial impact of COVID-19, which primarily affected our transient RV business.
Core MH rent growth of 4.9% includes 4.4% rate growth and approximately 50 basis points related to occupancy gains.
Core RV rental income from annuals and seasonals outperformed expectations for the quarter.
Our transient revenues, which were pacing ahead of guidance through February ended the quarter down 7.6% compared to last year.
As Marguerite mentioned, we began closing our reservation grid to incoming customers in mid-March.
First quarter membership dues revenue, as well as the net contribution from upgrade sales were higher than guidance.
Dues revenues increased 6.1% as a result of rate increases and an increase in our paid member count of 4.3%.
During the quarter we sold approximately 3,200 Thousand Trails camping passes.
We upgraded 727 members during the quarter, 15% more than the first quarter last year.
Core utility and other income was in line with guidance for the quarter and includes the year-over-year increase in real-estate tax pass-throughs resulting from the Florida reassessments we discussed in January.
First quarter core property operating maintenance and real-estate tax expenses were unfavorable to forecast, mainly as a result of higher than expected R&M expenses.
We incurred expenses to recover from storms in California and certain northern properties.
In summary, first quarter core property operating revenues were up 5.4% and core NOI before property management increased 5.2%.
Property operating income from the non-core portfolio, which includes our Marina portfolio, as well as assets acquired during 2019 was $2.8 million in the quarter.
Overall, the acquisition properties continue to perform in line with expectations.
Property management and corporate G&A were higher than guidance in the quarter because of the timing of expenses related to certain administrative matters.
Other income and expenses generated the net contribution of $1.4 million for the quarter.
Ancillary, retail and restaurant operations were impacted by COVID-19 and were lower than expected.
Interest and related amortization was $26.1 million and includes the impact of the refinancing we completed during the quarter.
I'll provide some detail on this transaction shortly when I discuss our balance sheet.
In addition to describing our operational response to the pandemic, the update highlights cash collections and liquidity as indicators of April performance.
In our MH properties, we've collected 96% of April rent.
The collection rate is net of approximately $180,000 of rent deferral requests we've approved.
Our largest population within the MH portfolio age qualified properties have the highest collection rate at 97% collected.
Our renter population, while a very small portion of our portfolio, has the lowest rate of collection with approximately 91% collected.
At this time of the year, our RV collection efforts are focused on the northern resorts, annual customers as they typically are returning to begin their season of camping.
As detailed in the update, 46 of these properties have delayed openings, which has affected typical payment patterns.
To-date, we have collected approximately 61% of the April and May annual RV renewals as compared to 71% collected at this time last year.
Our seasonal revenue in April was impacted by cancellations as certain customers chose to leave early.
However, we also saw customers extend their stays and are currently showing a revenue decline of 12% in April.
Our last update relates to our recent property and casualty insurance renewal.
On April 1st, we completed the renewal of our property general liability, workers comp and other ancillary insurance programs.
While terms and conditions are substantially similar to the expiring policies, adverse market conditions resulted in a higher than expected premium increase of 27%.
The resulting insurance expense for the remainder of the year is approximately $1.1 million higher than our expectation.
Now, I'll discuss our refinancing activity in the first quarter, highlight current secured debt market conditions and provide some comments on our balance sheet, including our current liquidity position.
During the quarter, we closed a $275.4 million secured facility with Fannie Mae.
The loan is a fixed interest rate of 2.69%.
which is the lowest coupon we've seen on a secured 10-year deal in the MH, RV space.
With the proceeds, we've repaid our secured debt maturing in 2020, which carried a weighted average interest rate of 5.2% and the outstanding balance in our line of credit.
The remaining proceeds funded working capital, primarily our expansion activity.
As I provide an update on the secure debt market, bear in mind that the current environment is quite volatile.
Conditions have been changing rapidly and we anticipate they'll continue to do so for some time.
That said, current secured financing terms available for MH and RV assets range from 55% to 75% LTV, with rates from 3% to 3.75% for 10-year money.
As we've seen in challenging times in the past, sponsor strength is highly valued by lenders and ELS continues to be highly regarded.
High quality aged qualified MH will command preferred terms from participating lenders.
In these uncertain times, we decided it was prudent to increase our available cash balance.
As noted on our COVID-19 update page, we have a current available cash balance of $126 million with no debt maturing in 2020.
We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of capital available to us.
Our debt to EBITDA and our interest coverage are both around 4.9 times.
The weighted average maturity of our outstanding secured debt is almost 13 years.
| withdrawing our full year 2020 guidance.
qtrly normalized funds from operations $0.59 per common share.
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Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope you're doing well.
I'll start today with some perspective on our first quarter results, current industry conditions, and company-specific opportunities.
Dave will follow with more specific detail on the quarter's performance and provide some additional color on our outlook and guidance.
And then, I'll close with some final thoughts.
In the early fiscal 2022, we are executing well and making progress on our strategic initiatives.
We reported record first quarter sales, EBITDA and earnings per share, as well as another strong quarter of cash generation despite greater working capital investment year-to-date.
As widely evident across the industrial sector, inflationary pressures and supply chain constraints are presenting challenges as industrial production and broader economic activity continues to recover.
Nonetheless, we are in a strong position to handle these conditions and believe the current backdrop is reinforcing our value proposition and long-term growth opportunity.
As it relates to the quarter and our views going forward, I want to emphasize a few key points that continue to drive our performance.
First, underlying demand remains positive.
Second, our industry position, operational capabilities, and internal growth initiatives are supporting results.
And third, we continue to benefit from efficiency gains and effective channel execution.
In terms of underlying demand, trends remain favorable across both our segments during the quarter.
Industrial supply chain constraints are having some impact on the timing of demand flowing through to sales, though solid execution and our favorable industry position, still drove an over 16% organic increase in sales versus prior year levels.
And stronger growth on a two-year stack basis relative to recent quarters.
This positive momentum has continued into our fiscal second quarter with organic sales month-to-date in October up by a mid-teens percent over the prior year.
As it relates to customer in markets, trends during the quarter were strongest across technology, chemicals, lumber and wood, pulp and paper and aggregate verticals.
In addition, we continue to see stronger order and sales momentum across heavy industries, including industrial machinery, metals and mining, providing incremental support to our sales growth in the early fiscal 2022.
Forward demand indicators also remain largely positive.
[Technical Issue] activity across our service center network is holding up well, despite sector wide supply chain pressures.
We believe this partially reflects the diversity of our customer mix, as well as sustained MRO demand as customers catch up on required maintenance activity, provide greater facility access, and continue to gradually release capital spending.
Our ability to provide strong technical and local support, inventory availability and supply chain solutions, places our service center network in a solid position to address our customers' evolving needs near term, while helping them prepare and execute growing production requirements over the intermediate to long-term.
In our Fluid Power and Flow Control segment, we continue to see strong demand from the technology sector.
This includes areas tied to 5G infrastructure and cloud computing, as well as direct solutions we are providing to semiconductor manufacturing.
Customer indications and related outlooks across the technology end market remained robust, reflecting various secular tailwinds and production expectations continue with an ongoing recovery and longer and later cycle markets such as industrial OE and process flow.
We believe the underlying demand backdrop across our fluid power and flow control operations remains favorable.
In addition, we're seeing strong growth indications across our expanding automation platform.
The current tight labor market, combined with evolving production considerations post the pandemic, is driving greater customer interactions and related order momentum for our automation solutions.
We remain focused on expanding our automation reach and capabilities, both organically and through additional M&A.
During the quarter, we announced the tuck-in acquisition of RR Floody Company, a regional provider of advanced automation solutions in the U.S. Midwest.
The transaction further optimizes our footprint and strategy across next generation technologies, including machine vision and robotics.
Overall, the demand environment remains positive and we're seeing ongoing contribution from our internal growth initiatives.
That said, we expect supply chain constraints to persist across the industrial sector near term.
Lead times remain extended across certain product categories, driving component delays and an increase in fulfillment timing.
We saw greater evidence of this across both our segments during the quarter.
Our teams are effectively managing through these issues to date, as reflected by our first quarter results, as well as our ability to increase operational inventory levels in the U.S. by 6% during the quarter.
Our products are primarily sourced across North America, limiting our direct exposure to international freight and supply chain dynamics.
Our technical scale, local presence and supplier relationships are key competitive advantages in the current backdrop, providing a strong platform to gain share as the cycle continues to unfold.
The broader supply chain backdrop is also increasing inflationary pressures across our business, both through the products we sell and the expense we incur to support our competitive position and growth initiatives.
We saw ongoing supplier price increases develop during the quarter, with indications of additional increases in coming quarters.
Our price actions, strong channel execution and benefits from productivity gains are helping offset current inflationary headwinds, as reflected by solid EBITDA growth and EBITDA margin expansion during our first quarter.
We continue to take appropriate actions to offset these headwinds.
Overall, we are encouraged by our ongoing execution.
First quarter results highlight the strength of our position and company-specific earnings potential despite broader challenges industrywide, and reinforce our ability to progress toward both near term and long-term objectives in any operational environment.
Combined with a strong balance sheet, increasing order momentum exiting the quarter, and greater signs of secular growth tailwinds across our business, we remain positive on our potential going forward.
This will serve as an additional reference for you as we discuss our most recent quarter performance and outlook.
Turning now to our results for the quarter.
Consolidated sales increased 19.2% over the prior year quarter.
Acquisitions contributed 2.1 percentage points of growth, and foreign currency drove a favorable 80 basis point increase.
The number of selling days in the quarter was consistent year-over-year.
In many of these factors, sales increased 16.3% on an organic basis.
On a two-year stack basis, [Technical Issue] positive in the quarter and strengthened from fiscal '21 fourth quarter trends.
As it relates to pricing, we estimate the contribution of product pricing on a year-over-year sales growth was around 140 basis points to 180 basis points in the quarter.
As a reminder, this assumption only reflects measurable topline contribution from price increases on SKUs sold in both periods, year-over-year.
On a two-year stack basis, segment organic sales were up nearly 2%, an improvement from fiscal '21 fourth quarter trends.
And markets such as lumber and forestry, open paper, chemicals, aggregates, and food and beverage had the strongest growth on a two-year stack basis during the quarter, while our primary metals, machinery, and mining are showing greater improvement, both year-over-year and sequentially.
In addition to solid sales performance in our U.S. service center operations, we saw favorable growth across our international operations, which contributed to the segment's topline performance in the quarter.
Within our Fluid Power and Flow Control segment, sales increased 24% over the prior year quarter with acquisitions contributing 6.6 points of growth.
On an organic basis, segment sales increased 17.4% year-over-year and 6% on a two-year stack basis.
Segment sales continue to benefit from strong demand within technology end markets, as well as across life sciences, chemical and agricultural end markets.
Sales trends within primary metals and refinery end markets, also improved nicely during the quarter, partially offset by moderating trends across certain transportation vertical.
By business unit segment, growth was strongest across fluid power and automation.
In addition, demand across our later and longer cycle flow control operations continues to improve, with customer quote activity and order momentum building through the quarter.
Extended supplier lead times and inbound component delays had some effect on segment sales growth during the quarter, though the overall impact remains limited and manageable to date.
Moving to gross margin performance, as highlighted on page eight of the deck.
Gross margin up 28.6% declined 22 basis points year-over-year.
During the quarter, we recognized LIFO expense of $3.6 million compared to $1.1 million of expense in the prior year quarter and a $3.7 million LIFO benefit in our fiscal '21 fourth quarter.
The net vital headwind had an unfavorable 25 basis point year-over-year impact on gross margins during the quarter.
LIFO expense was higher than expected during the quarter, reflecting supplier product inflation and a greater level of strategic inventory expansion year-to-date.
Excluding the impact of LIFO, gross margins were relatively unchanged year-over-year, and up sequentially, reflecting strong channel execution, pricing actions, and ongoing progress with internal margin initiatives.
Turning to our operating cost.
Selling, distribution and administrative expenses increased 10.6% year over year, or approximately 7% on an organic constant currency basis.
SG&A expense was 20.3% of sales during the quarter, down from 21.9% in the prior year quarter.
We had another solid quarter of SD&A expense control, reflecting our leaner cost structure following business rational vision [Phonetic] taken in recent years, as well as benefits from our operational excellence initiatives, shared services model, and technology investments.
These dynamics are helping mitigate the impact from inflationary pressures, higher employee-related expenses, lapping a prior year temporary cost actions, and normalizing medical expense.
Combined with improving sales and effective price cost management, EBITDA grew 31% year-over-year, while EBITDA margin of 9.9% was up 89 basis points over the prior year.
Including reduced interest expense and a slightly lower tax rate, reported earnings per share of $1.36 was up 52% from the prior year.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the first quarter was $48.6 million, while free cash flow totaled $45 million or 85% of net income.
We had a strong quarter of cash generation considering creating greater working capital investment year-to-date, including a strategic inventory build during the quarter to support growth and address supply chain constraints.
We continue to benefit from our working capital initiatives and solid execution across our business.
Our cash performance and outlook continues to support capital deployment opportunities.
During the quarter, we deployed a total of $36 million on share buybacks, debt reduction, dividends, and acquisitions.
With regards to share buybacks, we repurchased nearly 77,000 shares for approximately $6.5 million.
We ended September with just over $247 million of cash on hand and net leverage at 1.7 times adjusted EBITDA, which is below the prior year level of 2.1 times and the fiscal '21 fourth quarter level of 1.8 times.
Our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option.
Combined with incremental capacity on our AR securitization facility, an uncommitted private shelf facility, our liquidity remains strong.
Turning now to our outlook.
This includes earnings per share in the range of $5 to $5.40 per share based on sales growth of 8% to 10%, including a 7% to 9% organic growth assumption, as well as EBITDA margins of 9.7% to 9.9%.
We are encouraged by our year-to-date operational performance and remain focused on our growth, margin, and working capital initiatives.
Combined with our favorable industry position, ongoing order momentum, and forward demand indications, our fundamental outlook and underlying earnings potential remain firmly intact.
That said, as previously highlighted, LIFO expense year-to-date is running higher than our initial expectations, assuming fiscal Q1 LIFO expense levels of $3.6 million sustained for the balance of the year.
This would result, in LIFO expense representing an approximate 40 basis point year-over-year headwind on EBITDA margins, compared to our initial expectation up 20 basis points to 30 basis points.
Combined with ongoing uncertainty from industrial supply chains and inflationary pressures, we currently view the midpoint of earnings per share guidance as most reasonable from a directional standpoint pending additional insight into how the year progresses.
In addition, based on month-to-date sales trends in October, and considering slightly more difficult comparisons in coming months, we currently project fiscal second quarter organic sales to grow by a low double-digit to low teen percentage over the prior year quarter.
We expect gross margins will be down slightly on a sequential basis during the second quarter, assuming a similar level of LIFO expense as the first quarter.
This would be directionally aligned with normal seasonal trends.
Further, we expect SD&A expense will be flat, to up slightly on a sequential basis, compared to first quarter levels of approximately $181 million.
Lastly, from a cash flow perspective, we continue to expect free cash flow to be lower year-over-year in fiscal 2022 compared to fiscal 2021 as AR levels continue to cyclically build and we replenish inventory.
That said, we are encouraged by our first quarter cash flow performance and continue to drive working capital initiatives as a partial offset across our business.
Overall, we are encouraged by how we started the year and what we see entering our fiscal second-quarter.
Order momentum remains firm across our businesses, our fluid power backlog is at record levels, and we are effectively building inventory to support our growth opportunities.
Our increased exposure to technology end markets is driving greater participation in secular growth tailwinds, while our later cycle Flow Control business is seeing increased activity across key market verticals.
We're also making great progress in building our automation platform, including organically as customer and supplier relationships continue to develop and broaden across new industry verticals, and within our legacy end markets.
Customer outlooks on underlying demand and capital spending, remain largely favorable over the intermediate term and we're on track to achieve our initial guidance provided in mid-August.
As is common across the industry right now, we're dealing with inflationary pressures, supply chain constraints, and lingering COVID related impacts.
As our historical track record and first quarter results show, we know how to execute in any environment.
In addition, I believe our strategy on our ongoing initiatives will prove out further in this environment as the industrial economy continues to evolve both cyclically and structurally.
The breadth and availability of our products, combined with our leading technical solutions and localized support, is a significant competitive advantage right now.
We look to leverage these capabilities across our expanded addressable market during these dynamic times and in years to come.
At the same time, our balance sheet and liquidity provide strong support to pursue strategic M&A opportunities.
We maintain a disciplined approach to M&A and are actively evaluating opportunities primarily across key priority areas of fluid power, flow control and automation.
There remains significant potential to further scale our leading technical industry position across these areas.
We're eager to demonstrate what we're fully capable out in the years ahead as we continue to leverage our position as the leading technical distributor and solutions provider across critical industrial infrastructure.
| applied industrial technologies q1 earnings per share $1.36.
q1 earnings per share $1.36.
q1 sales rose 19.2 percent to $891.7 million.
applied industrial technologies - fiscal 2022 guidance maintained including earnings per share of $5.00 to $5.40.
|
Before Ana Graciela delves into key aspects of our earnings results for the fourth quarter, I would like to discuss with you the economic and business environment in Latin America, important developments that took place during the quarter, and the impact of these events on our perception of risk and financial results.
During our third quarter 2018 conference call, we mentioned that the credit quality of our portfolio, cost structure, and allowances for expected credit losses, set the base to improve our earnings generation capacity.
Our fourth-quarter results are the first step in that direction.
On our last call, we also identified key events that were impacting emerging markets, Latin America, and commodity-related industries.
Namely, the effect of higher US interest rates and a strong US dollar, protectionist rhetoric on trade and tariffs from the US, along with political and macroeconomic uncertainty and overall lower growth prospects for key countries in Latin America.
Some of these trends from the third quarter 2018 continued into the fourth quarter.
In December, the Federal Reserve raised interest rates for the fourth time in 2018 responding to strong US growth, low unemployment and core inflation readings above 2%.
Higher interest rates brought about weaker financial market conditions with 10 year US treasuries over 3% and LIBOR reaching its highest level in the last 10 years; equity markets started showing signs of stress.
In fact, December 2018 was the worst US stock performance of any December since the Great Depression.
Europe was also showing signs of significant deceleration which coupled with the stronger US dollar and weakening commodity prices, led to slower fund flows to emerging markets in general and Latin America in particular.
China was also a source of uncertainty as the government's effort to curtail corporate debt-driven growth are slowing the Chinese economy.
Macroeconomic global risks are intensifying.
We now need to add the prospects of slowing economies in Europe and China, and maybe also the US to attempt from the protectionist trade environment.
Today we know that the Fed is taking deep developments into account with a more dovish outlook on the potential for future rate increases and a slowdown in the unwinding of its $4 trillion balance sheet.
Although a highly controversial candidate, Jair Bolsonaro hit the ground running with several market-friendly announcements to open the Brazilian economy and introduce fiscal adjustments particularly focused on pension reform.
Positive investment and portfolio fund flows ratcheted up growth expectations to close to 3%, growth rates Brazil hasn't seen in more than four years.
The USMCA was another bright spot in an otherwise grim picture from Mexico, but more about that later in the call.
Continuing with the positive news from the fourth quarter, Argentina completed the final agreement with the IMF, and although it significantly tightened monetary policy and established strict fiscal spending controls, it did not lead to the social unrest some feared.
Even Costa Rica which stretched the patience of the rating agencies managed to approve in their famous Sala IV, a fiscal reform package.
Although the package was deemed actions insufficient by the rating agencies which proceeded to downgrade its credit rating, the colon recovered a significant part of its devaluation, and the government managed to repay an extraordinary loan it took from the central banks.
All these developments are setting the stage for some growth out of the region for 2019.
Although still subpar, growth rates of 2% or slightly higher are now possible for Latin America.
That said, problem spots persist.
Mexico, for example, seems to be on a path of reversing or at a minimum challenging established macroeconomic policies.
Recent developments such as the cancellation of the new airport project, uncertainty over the fate of energy reform threatening to curtail bank fees and potential government intervention in the writing of its independent entity, or a stark departure of what investors have come to expect from Mexico over the last 20 years.
Another potential source of volatility is Argentina with significant political uncertainty as the recession generated by restrictive IMF policies, is hitting Argentine purchasing power.
We have elections coming up in October, but the primaries in August will also be important as these will determine if we will see a less than market-friendly candidate from the Peronist block.
What does this all mean for Bladex?
A macroeconomic context that offers no room for complacency as risks of major economies slowing and trade sanctions continuing our partially counterbalanced by a somewhat better macroeconomic picture from some key countries in Latin America.
We still see tepid growth in credit demand in sufficient liquidity in most countries in the region.
Nevertheless, our book of business is prudently growing.
We are identifying new prospects, we are increasing share of wallet with our existing client base and are structuring value-added transactions with key clients.
Although our year-end headline margins were impacted by low yielding liquidity due to higher-than-expected central bank deposits, Bladex continues to improve its origination.
We have a better mix of medium to short term loans, lengthening the average life of our portfolio and increasing our origination margin.
On the cost side, net-op restructuring and other nonrecurring charges, our recurrent expenses continue to decline.
As you'll hear from Ana Graciela, our NPLs declined significantly due to asset sales, restructuring, and partial write-offs.
Our Tier 1 capital ratio remains strong, our book value remains solid above $25 per share, and that is why our Board of Directors approved to maintain a $0.358 per share dividend.
Against this backdrop, the management of Bladex as well as its Board of Directors is cautiously optimistic for the first quarter of 2019 and look forward to an improvement in profitability throughout the year.
First, let me highlight on page 4 the banks return to profitability, recording a fourth-quarter 2018 profit of $20.7 million or $0.52 per share in the improvement of quarter on quarter top line revenue by 13%, mainly on account of increased loan average portfolio balances and higher fees as well as the normalization of credit provisioning.
These results represent a significant improvement from third-quarter 2018 results and an increase in quarterly trends denoting the absence of nonrecurring charges and were relatively stable year on year.
For the year 2018, profits of $11.1 million reflect impairment losses on financial instruments and nonfinancial assets for a total of $68 million.
These impairment losses relate to the bank's credit per loan, which we also refer to as nonperforming loans or NPL.
In addition, and to a lesser extent, impairment losses also relate to charges associated to the disposal of obsolete technology in line with the bank's objective to optimize its operating infrastructure.
Now I will refer to the evolution of net interest income and financial margins on pages five and six.
Net interest income for the fourth quarter of 2018 increase by 2% quarter on quarter to $28 million, mainly driven by 4% increase in average loan balances in the absence of NPL's interest reversal, partly affected by higher low yielding liquid assets.
Here in liquidity balances were above historical levels as the bank scheduled its funding sources anticipating a potential temporary decline of its deposit space.
Although average deposits declined by 12% quarter on quarter, this trend was reverted by the end of the year resulting in a 7% quarter on quarter increase.
Consequently, liquid balances represented 22% of total assets at December 31, 2018.
The bank expects to bring back the ballad of liquid assets to normalized levels during the first quarter of 2019.
Our estimation is that this temporary excess liquidity had a negative impact of approximately 17 basis points in net interest margin for the quarter.
Hence, the 13 basis points quarter on quarter declined in net interest margin to 1.61% is mostly attributable to these effects.
Excluding this impact, financial margins for the quarter were supported by a quarterly increasing trend in average lending balances and lending credit spread, the latter of which started to revert its negative trend during the fourth quarter of 2018.
Throughout the year, lending spreads were pressured downward on account of better quality loan origination as the bank increased its lending share to financial institutions, sovereign and quasi-sovereign entities, while origination in the corporate sector remained focused on top-quality exporters with US dollar generation capacity.
As a result of this overall decline and an average lending spreads throughout the year 2018, net interest income of $110 million represented a year on year decrease of 8%, and annual net interest margin of 1.71% declined by 14 basis points.
Our lending spreads for the gear were partly upset by the net positive effect of an increase in the interest rate environment.
Throughout the year, the bank's assets and liabilities reprised at a similar pace given its narrow interest rate gap structure resulting in a net positive effect on the banks higher yield on equity invested in financial assets.
During the quarter, the bank originated $3.1 billion in loans, exceeding maturities by $54 million.
Loan disbursements for the year 2018 total $14.3 billion as we continue to perform well on our short-term origination capacity and we are also able to deploy longer tenor transactions with our traditional client base of top-quality financial institutions, exporting corporations, and multilatina.
As a result, our loan portfolio increased by 1% on ¼ on quarter basis and by 5% year on year to $5.8 billion as of December 31, 2018.
Now moving on to page 7, fees and commissions were relatively stable year on year at $17.2 million for 2018.
Fee income from letters of credit and contingencies performed well with quarter on quarter increase of 25% to $3.5 million.
On an annual basis, fees from this line of business increased by 12% to $12.3 million.
Quarterly fees from syndication, the other main component of degeneration for the bank, increased to $1.9 million in the fourth quarter and totaled $4.9 million for the year 2018, a 26% decrease from the previous year denoting that transaction based on even nature of this business.
The bank has positioned itself as a relevant player in originating syndicated transactions across the region and was able to close seven transactions during 2018 for a total of $847 million.
On pages eight and nine, the commercial portfolio including loans, letters of credit, and contingencies remained well diversified across countries and industries.
Overall exposure to financial institutions, sovereign and quasi-sovereign, represented 67% of the total commercial portfolio at year-end 2018 from 45% in 2015, denoting a continued improvement in portfolio quality over the last four years.
Financial institutions alone, the bank's traditional client base accounted for predominant 52% of total exposure in 2018.
Integrated oil and gas sector exposure accounted for 10% of the total portfolio as of December 31, 2018 and is mainly concentrated in quasi-sovereign entities which constitutes long-standing business relationships of the bank.
The remaining overall exposure is well diversified among several industry sectors, none of which exceeded 5% of total exposure as of December 31, 2018.
In terms of country exposure, Brazil represented 19% conmetric with the size and prospect of its economy and its relevance in international trade flows.
86% of Brazil's exposure is with banks, sovereign, and quasi-sovereign.
The average remaining tenor of the country's portfolio is approximately 14 ½ months with 67% maturing in 2019.
We are closely monitoring our exposures in Mexico, which constitutes 40% of total exposure, Argentina with 10%, and Costa Rica with 6%; countries in which the bank has identified very good business opportunities cognizant of relative and certainly that should start to unveil throughout 2019 such as possible adverse economic policies and outcomes of the newly established government in the case of Mexico and presidential elections in Argentina, which are critical to the continuity of recently implemented economic reform and adherence to the IMF accord.
In Costa Rica, we are monitoring the implementation and success of the recently approved fiscal reform.
The bank's tactical approach in these three countries is to focus on short tenor origination in winning sectors that should remain resilient, even in the case of economic and political downturn.
Total commercial portfolio continued to be mostly short-term with an average remaining tenor of close to 11 months and with 74% maturing in 2019.
Trade-related loans represented 59% of the short-term bank portfolio at year-end.
On to page 10, we present the evolution of NPL and allowances for credit losses.
During the fourth quarter of 2018, the bank was able to reduce its NPL levels by $54 million as a result of the sale of an NPL and the restructuring of another.
Of the $54 million reduction during the quarter, the bank collected sales proceeds of $12 million, wrote up principal balances for $33 million against individually allocated credit allowances and recognized the new financial instrument at fair value for $9 million after restructuring terms.
NPL's then total $65 million in represented 1.12% of the loan portfolio at December 31, 2018, with ample reserve coverage of 1.6 times.
96% of banks NPL constitutes a single $62 million loan in the sugar sector in Brazil which significantly deteriorated during the third quarter of 2018 and was then classified as NPL.
This loan, individually provisioned at 75%, accounted for most of the increase in the allocated reserve for loan losses categorized as stage III under accounting standard IFRS-9.
Stage II depicts performing exposures showing some credit quality deterioration since origination due to the weakening of financial conditions of the borrower placed on watchlist category or to increase levels of the exposure's country or industry risk.
At December 31, 2018, stage II exposure totaled $389 million of which $58 million corresponded to seven individual credits on the watchlist category which are performing but in runoff mode.
The remaining exposure represents performing credit in countries that the bank downgraded in its internal country rating review as was the case with Costa Rica in the fourth quarter of 2018.
Stage I exposure, which relates to the performing portfolio with credit conditions on change since origination showed an increasing annual trend in represented93% of total exposure.
On page 11, quarterly operating expenses of $12.4 million showed ¼ on quarter seasonally high level.
Annual expenses totaling $48.9 million for 2018, increased by 4% year on year, mainly on nonrecurring expenses related to personnel restructuring and compensation of infrastructure platform.
Run rate base of annual operating expenses are estimated at approximately $46 million for 2018.
Efficiency ratio of 38% for the year 2018 reflects these nonrecurring expenses as well as lower topline revenues alluded to this board.
Now on page 12, I would like to summarize the main aspects for fourth-quarter and full-year 2018 results.
In the fourth quarter, the bank got back on a profitable track with a $20.7 million net income on the backdrop of quarter on quarter increase in topline revenue and portfolio average balances coupled with the normalization of credit provisioning.
Annual profits up $11.1 million were mostly impacted by credit impairments and to a lesser extent operational charges, all of which totaled $68 million.
Annual revenue decreased by 8%, mostly on account of lower average annual lending spread reflecting improved quality of the commercial portfolio although we saw a stabilization of credit spread in the last month of the year.
The decreasing trend in NPL at year-end with proactive management of these few exposures involving sales restructuring and partial write-offs.
Operating expenses for the year include nonrecurring restructuring and optimization charges with a decrease in the level of run rate expand base.
Capitalization remains solid at 18.1% Tier 1 ratio, while our Board of Directors capped our quarterly dividend unchanged at $0.385 per share.
Travis, you can now open the Q&A session.
| compname reports q4 profit of $20.7 million, or $0.52 per share.
compname announces profit for the fourth quarter 2018 of $20.7 million, or $0.52 per share.
full-year 2018 profit of $11.1 million, or $0.28 per share.
q4 earnings per share $0.52.
net interest income ("nii") for 4q18 increased 2% quarter-on-quarter to $28.0 million (-1% yoy).
|
blackhillscorp.com, under the Investor Relations heading.
Before we begin today, we would like to note that Black Hills will be attending the EEI Financial Conference starting November 7 in Hollywood, Florida.
Materials for our investor meetings will be posted on our website prior to the start of the conference.
Leading our quarterly discussion today are Lin Evans, President and Chief Executive Officer; and Rich Kinzley, Senior Vice President and Financial Officer.
Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially.
I'll begin on Slide 4.
But before I discuss our key achievements for the third quarter, I'd like to start by recognizing our dedicated Black Hills team.
Working together, we delivered strong operational and financial results, and we serve record peak customer loads, and we delivered quarter-over-quarter earnings that were up 21% compared to last year.
We have a great team, and I value and appreciate them very much.
Our Board recently approved a 5.3% increase in our dividend, achieving 51 consecutive years of dividend increases.
This represents one of the longest streaks in our industry.
And naturally, we're quite proud of this accomplishment and the growth that it reflects.
We also made excellent progress on our regulatory initiatives, including our three rate reviews and Winter Storm Uri cost recovery.
And finally on this slide, early in the quarter, we published our updated and our comprehensive corporate sustainability report, along with our new and expanded ESG disclosures.
We continue to make solid strides communicating our sustainability focus, including our achievements and our goals for the future.
Slide 5 lays out our financial outlook.
Given our success in delivering strong operational, financial and regulatory performance in the second and third quarters, we're increasing the lower end of our 2021 earnings guidance range by $0.05 per share.
We're also maintaining our 2022 earnings guidance range, and we continue to target a 5% to 7% average earnings growth for 2023 through 2025, and at least 5% annual dividend growth.
Slide 6 lays out our regulatory progress with a focus on regulatory rate reviews, our investment rider requests and Winter Storm Uri cost recovery.
We've made good progress on our regulatory strategies this year, achieving constructive and productive outcomes.
We've reached a unanimous settlement agreement with all parties for our Colorado natural gas rate review that will provide $6.5 million in new annual revenue.
We anticipate new rates being effective January 1, 2022, pending final approval of the settlement.
We also received approval for a new three-year system safety and integrity rider, which is a critical mechanism to help us provide ongoing safe and reliable service to our Colorado gas customers for years to come.
In Kansas, we also reached a unanimous settlement agreement for our rate review, which includes the renewal of our five-year safety focused capital investment rider.
The settlement benefits customers through a net neutral base rate impact.
In addition, we're pleased that the settlement provides federal and state tax reform benefits to customers, a timely benefit for our Kansas customers given current high natural gas commodity prices.
In Iowa, we're working through the regulatory process and hope to achieve a resolution by year-end, with final rates effective in the first quarter of 2022.
Shifting to our Winter Storm Uri cost recovery process.
We filed our recovery plans in all states by the second quarter.
We've already obtained approvals for Nebraska Gas and South Dakota Electric, and we're collecting interim rates for Arkansas, Iowa and Wyoming gas.
At Wyoming Electric, Uri related costs will flow through their normal cost adjustment mechanism.
We also recently received a positive settlement for Wyoming Gas and we're currently engaged in settlement discussions for Kansas Gas.
We expect to complete our Uri cost recovery filings either during the fourth quarter or in the first quarter of next year, and we remain confident we will recover the costs submitted in our applications.
Looking forward, we're preparing for our next rate reviews for Arkansas Gas and Wyoming Electric.
We're planning to file a rate review for Arkansas gas late this year.
For Wyoming Electric, we'll file by midyear 2022, as required by a prior settlement agreement from several years ago.
Moving to Slide 7.
To enable continuing growth in Wyoming, we're excited to announce a 285-mile electric transmission expansion project that we're calling, Ready Wyoming.
As proposed, the project will provide many benefits for our customers.
Among those benefits are enhancing resiliency through further interconnection of our Wyoming and South Dakota electric systems, expanding access to existing third-party transmission systems and providing access to new energy markets and additional renewable resources.
Importantly, the project will also increase overall transmission capacity, allowing us to serve the growing Cheyenne community.
The project's expanded access and capacity will allow us to better serve growth in technology businesses like data centers and blockchain and crypto miners, which I'll discuss in more detail in a later slide.
The project will also enable and benefit renewable energy expansion both through expanded access for existing renewable resources and for new wind and solar projects in the Cheyenne region.
We're working toward filing for approval of the project in the first quarter of 2022.
And following approval, we plan to construct the project in several phases or segments spanning 2023 through 2025.
Moving to Slide 8.
We have refreshed and increased our 2021 through 2025 capital investment program by $149 million, to a total of $3.2 billion.
In doing so, we firmed up nearly $300 million in projects that were placeholders in last quarter's forecast.
This $3.2 billion forecast includes incremental investment for the Ready Wyoming project.
This is a robust plan, and there are certain other investment opportunities we're aggressively pursuing, including other potential transmission projects and what we call capital-light growth opportunities that may arise.
I'll note that our current base capital forecast does not include potential transmission or renewable generation assets that may derive from our South Dakota and Wyoming Integrated Resource Plan or from our clean energy plan to be filed in Colorado next year.
To help evaluate additional opportunities to lower cost for customers, we joined several other utilities in the Western U.S. to form the Western Markets Exploratory Group.
This group will explore the potential for developing an organized wholesale market in the Western interconnect while also reviewing transmission expansion opportunities and other possible grid solutions.
In Cheyenne, we continue to experience strong load growth, including growth from data centers and related businesses.
For perspective, the peak demand day for Wyoming Electric increased from 192 megawatts in 2014 to 274 megawatts this past summer.
That's a 43% increase during that period.
With our entrepreneurial approach, combined with our Ready Wyoming transmission project, we're optimistic about recruiting more technology-oriented businesses into Cheyenne and Wyoming.
As an example, this summer, our growth team received numerous request to serve crypto mining businesses.
You may recall Wyoming was an early leader in passing legislation to support blockchain and crypto mining business and we already have an approved block chain interruptible service tariff in place.
In response to the multitude of crypto mining inquiries, we issued a reverse request for proposals in August.
That RFP results in a very robust response.
We recently narrowed the bidders list and we've selected finalist for contract negotiations.
We also continue to be very optimistic about ongoing population migration into our service territories.
Both our electric and gas utility service territories are seeing accelerating customer growth, and we continue to witness ongoing customer growth trends.
Finally, we demonstrated our discipline throughout the pandemic and after Winter Storm Uri to manage costs, and we're also fostering ongoing sustainable cost savings through innovation and continuous improvement.
You'll hear more about these efforts in the near future as we discuss our companywide Energy Forward program.
Moving to Slide 9.
We're fully engaged on sustainability for our communities.
We made significant progress toward our carbon intensity reduction goals listed on this slide.
In 2020, we already achieved a 30% reduction at our electric operations and a 33% reduction in our gas utility since 2005.
Our forward emission goals are not based on aggressive assumptions or technology that doesn't currently exist.
Our Midwest culture is to be true to our word and we have published goals that we expect to meet or exceed based on existing assets and current technologies because our goals are reliant upon current technology.
There's potential upside for acceleration in our carbon reduction goals.
As technologies advance and as cost decline for renewables and battery storage, we're confident in our emissions goals.
We're also watching technologies for potentially reducing carbon emissions from our existing plants, which could accelerate achieving our emission goals.
One of our defined steps to meet our 40% reduction goal by 2030 within our electric operations will be the conversion of our Neil Simpson II coal-fired power plant to natural gas.
We'll also add renewable generation and battery storage resources to achieve our emissions goals.
For our natural gas utility, we expect to reach to 50% reduction by 2035.
We'll do that through continued pipeline replacement programs and additional emission reduction strategy such as damage prevention, expanding leak detection and energy efficiency.
We're adopting process improvements such as vacuum technology for gas system blowdowns.
We're also integrating more renewable natural gas in our system with several projects already in service and many more in development, and we voluntarily committed to reduce methane emissions through our participation in the EPA methane challenge and the One Future Coalition.
Looking to the future, we're supporting research to advance emissions reduction technologies.
We're participating in a feasibility study to test the viability of using hydrogen and natural gas generation at our Cheyenne Prairie Generating Station.
We're also supporting the University of Wyoming's research program for turbine firing technologies that would further reduce emissions.
We've invested alongside our peers at our carbon capture research project and other emerging clean energy technologies.
Our goal in fostering innovation is to find more efficient and affordable ways to deliver energy with lower emissions, which will benefit our communities and our stakeholders.
I encourage you to visit the sustainability link on our investor website to read more about our sustainability progress and our commitments.
In August, we published SASB and NGSI disclosures as well as our 2020 sustainability reports and other refreshed and more comprehensive disclosures.
Slide 10 has a graphic that shows the decarbonizing trends in our generation fleet.
We've been upgrading our fleet for nearly a decade, beginning with the retirement of 123 megawatts of four older coal-fired power plants in 2013 and 2014.
Since that time, we've added 282 megawatts of owned wind generation and another 132 megawatts of wind energy through power purchase agreements with a number of other renewable projects in flight.
Looking forward, and as I stated previously, we already announced that the Neil Simpson II coal-fired power plant will be converted to natural gas in 2025.
The remainder of the time line shows how we expect to meet carbon reduction goals by converting or replacing the remaining coal-fired power plants over the next two decades.
This time line could very easily be influenced by generation and emission technology advances and cost declines.
In our cold weather geography, having immediately reliable, and dispatchable generation capacity is an absolute must.
As we demonstrated during Winter Storm Uri, we experienced no outages.
Slide 11 lists recent achievements by our team.
I'm pleased with our team's engaged mindset toward continuously improving our operations, especially in regard to safety, reliability and the customer experience in our workplace culture.
Our dedicated team at Cheyenne Prairie Generating Station was recently awarded OSHA's highest worksite safety recognition Star status.
This recognition is no simple task.
It required a multiyear rigorous audit and approval process to be recognized as a leader in the prevention of hazards and a focus on continuous improvement of safety and health management systems.
I'm happy to note this is our second time achieving this recognition with the Cheyenne Prairie team, joining the Pueblo Airport Generating Station team in Colorado as OSHA recognized industry leaders in safety.
We're also industry leaders in reliability with all three of our electric utilities recently listed in the upper half of the top quartile for reliability, as measured by SAIDI.
This remarkable achievement reflects years of diligent effort by our team and executing our customer-focused operations and investment strategy.
We also continue to improve our customer experience, achieving a J.D. Power ranking of second overall by our gas utility in the South region.
Also, our year-to-date Net Promoter Score through mid-October was approximately 64, an improvement from 60 in 2020 and notable improvement from a score of 42 four years ago.
I already mentioned our great workplace and engaged team.
I'm pleased to report we were named for the second consecutive year to Achievers 50 Most Engaged Workplaces.
We survey our employees about every 18 months to understand how we're doing and how we can improve as a team.
This anonymous survey is conducted by a third party and returned strong scores as compared to our industry, especially in regard to safety, company values and management effectiveness.
Finally, on this slide, we were named a Veteran-Friendly Employer of the Year at Wyoming's 2021 Safety and Workforce Summit.
Slide 13 summarizes earnings per share for the third quarter.
We delivered earnings per share of $0.70 compared to $0.58 in Q3 2020, a 21% increase.
Positive financial results were driven by new rates, strong customer growth and usage and mark-to-market gains.
On a consolidated basis, weather was not a major driver of earnings compared to normal, but was unfavorable compared to Q3 2020, which experienced a $0.05 benefit compared to normal.
Slide 14 illustrates the detailed drivers of change in net income quarter-over-quarter.
All amounts listed on this slide are after tax.
The main drivers compared to last year were $1.5 million of gross margin improvement from new rates and riders, $2.8 million of increased margin from customer growth and higher usage per customer, especially in our electric utilities, and $4.8 million mark-to-market gains for both wholesale energy and natural gas commodity contracts.
We continue to manage O&M closely with a minimal quarter-over-quarter increase.
DD&A increased as a result of our capital investment program and interest expense increased as a result of higher debt balances mainly due to the impact from Winter Storm Uri.
The improvement in other income expense over the prior year was driven by lower benefit costs, market impacts of nonqualified deferred compensation expense and benefits from company-owned life insurance.
Slide 15 shows our financial position through the lens of capital structure, credit ratings and financial flexibility.
We have a manageable debt maturity profile and are committed to maintaining our solid investment-grade credit ratings.
At the end of September, we had more than $500 million of available liquidity on our revolving credit facility.
In July, we amended and extended our revolving credit facility with similar terms through July 2026.
And in August, we issued $600 million of notes due in 2024.
Proceeds from the notes were used to repay our term loan balance and other short-term indebtedness.
The new notes are repayable after six months, providing flexibility to pay down proportionately alongside increased cash flows from Winter Storm Uri cost recovery plans.
The weighted average length of recovery we requested in our regulatory plans is 3.7 years.
New debt and deferred recovery of fuel cost for Winter Storm Uri temporarily increased our debt to total capitalization ratio to 62% at the end of March, and it remained at that level through the end of September.
As we recover storm costs, repay debt and execute on our equity offering program, we expect to reduce our debt to total capitalization ratio.
We continue to target a debt to total cap ratio in the mid-50s within the next two to three years.
During the third quarter, we issued $23 million through our at-the-market equity offering program for a total of $63 million year-to-date.
We expect to issue a total of $100 million to $120 million in both 2021 and 2022.
The increase in 2022 compared to what we previously disclosed is mainly related to the increases in our capital forecast.
Moving on to our dividend on Slide 16.
Last week, we delivered on our dividend growth target with our Board approving a 5.3% increase in our quarterly dividend.
For 2021, the quarterly dividend achieved 51 consecutive years of dividend increases, one of the longest track records in our industry and a record we're quite proud of.
Over the last five years, we have increased our dividend at an average annual rate of 6.4%, and we anticipate increasing our dividend by more than 5% annually through 2025, while maintaining our 50% to 60% payout ratio.
We're pleased with how our team responded in the second and third quarters and meeting our financial objectives and overcoming the challenges presented by Winter Storm Uri.
We've made excellent progress on our regulatory activities, increased and clarified our capital investment program and enhanced our ESG disclosures.
Once again, we've shown our ability and agility to continue delivering solid financial results and strategic progress.
| compname reports q3 earnings per share $0.70.
q3 earnings per share $0.70.
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We will also discuss certain non-GAAP financial measures.
Participants in today's call include our President and Chief Executive Officer, Steve Strah; Senior Vice President and Chief Financial Officer, Jon Taylor; and our Vice Chairperson and Executive Director, John Somerhalder.
We will also have several other executives available to join us for the Q&A session.
Yesterday, we reported first quarter 2021 GAAP earnings of $0.62 per share and operating earnings of $0.69 per share, which is in the upper end of our guidance range.
As Jon will discuss, our results reflect the continued successful implementation of our investment strategies, higher weather-adjusted load in our residential class and strong financial discipline in managing our operating expenses.
Last month, I was honored to be named FirstEnergy's CEO and appointed to the Board of Directors.
I greatly appreciate the trust and confidence the Board has placed in me, since I was named President last May and Acting CEO in October.
I have great pride in FirstEnergy and the work our employees do to serve our customers and communities.
It's my privilege to continue leading the company as we navigate our current challenges and position our business for long-term stability and success.
As we work to move FirstEnergy forward, my priorities are the continued safety of our employees and customers.
Ensuring that ethics, accountability and integrity are deeply ingrained in our culture and supported by a strong corporate compliance program.
Executing FE forward, our transformational effort to capitalize on our potential, deliver long-term results and maximize near-term financial flexibility and continuing our investments in infrastructure growth opportunities from electrification, grid modernization and renewable integration to benefit our customers.
During today's call, I'll provide an update on the Department of Justice investigation, regulatory matters and our FE Forward initiative and other business developments.
John Somerhalder will join us for an update on the Board and management's work toward instilling a culture of compliance built upon the highest standards of ethics and integrity.
As we discussed on our fourth quarter call, we are committed to taking decisive actions to rebuild our reputation and focus on the future and continuing to cooperate with the ongoing government investigations.
We have begun discussions with the DOJ regarding the resolution of this matter, including the possibility FirstEnergy entering into a deferred prosecution agreement.
We can't currently predict the timing, outcome or the impact of the possible resolution with the DOJ.
Our goal is to take a holistic and transparent approach with a range of stakeholders across the spectrum of matters under review.
This approach is consistent with the changes we're making in our political and legislative engagement and advocacy.
For example, we are stopping all contributions to 501(c)(4)s.
We've paused all other political disbursements, including from our political action committee.
And we have limited our participation in the political process.
We have also suspended and/or terminated various political consulting relationships.
In addition, we'll be expanding our disclosures around political spending in order to provide increased transparency.
For example, we have committed to post updates on our website, on our corporate political activity, relationship with trade associations and our corporate political activity policy, which is under revision.
A comprehensive and open approach is also the cornerstone in our regulatory activity.
In Ohio, we continue taking proactive steps to reduce the regulatory uncertainty, affecting our utilities in the state.
This includes our decision in late March to credit our Ohio utility customers approximately $27 million.
This comprises the revenues that were collected through the decoupling mechanism authorized under Ohio law plus interest, the partial settlement with the Ohio Attorney General to stop collections of decoupling revenues and our decision not to seek recovery of lost distribution revenues from our Ohio customers.
Together, these actions fully address the requirements approved in Ohio House Bill 128 as well as the related rate impact of House Bill 6 on our customers.
These are important steps to put this matter behind us.
In other Ohio regulatory matters, we proactively updated our testimony in the ESP quadrennial review case to provide perspective SEET values on an individual company basis.
We are engaged in settlement discussions with interested parties on this matter as well as the 2017, 2018 and 2019 SEET cases that were consolidated into this proceeding.
During our last call, we mentioned that we were proactively engaging with our regulators to refund customers for certain vendor payments.
Those conversations are under way in each effective jurisdiction.
In Ohio at the PUCO's request, the scope of our annual audit of Rider DCR has been expanded to include a review of these payments.
Outside of Ohio, our state regulatory activity is concentrated on customer-focused initiatives that will support the transition to a cleaner climate.
For example, on March 1, JCP&L, filed a petition with the New Jersey Board of Public Utilities seeking approval for its proposed EV driven program.
If approved, the four-year $50 million program would offer incentives and rate structures to support the development of EV charging infrastructure throughout our New Jersey service territory, in an effort to accelerate the adoption of electric vehicles and provide benefits to our residential, commercial and industrial customers.
And in late March the Pennsylvania PUC approved our five-year $390 million energy efficiency and conservation plan, which supports the PUC's consumption reduction targets.
In March, we closed the transaction to sell JCP&L's 50% interest in the Yards Creek pump-storage hydro plant and received proceeds of $155 million.
And we also announced plans to sell Penelec's Waverly New York distribution assets, which serves about 3,800 customers to a local co-op.
The deal, which is subject to regulatory approval will simplify Penelec's business by solely focusing on Pennsylvania customers.
During our fourth quarter call, we introduced you to FE Forward, our companywide effort to transform FirstEnergy into a more resilient, effective industry leader delivering superior customer value and shareholder returns.
We expect the FE Forward initiatives to provide a more modern experience for our customers with efficiencies in operating and capital expenditures that can be strategically reinvested into our business, supporting our growth and investments in a smarter and cleaner electric grid, while also maintaining affordable electric bills.
During the first phase of the project, we evaluated our processes, business practices and cultural norms to understand where we can improve.
While our safety and reliability performance is strong, we found opportunities in many areas to enhance and automate processes, take a more strategic focus on operating expenditures and modernize experiences for our customers and employees.
We've identified more than 300 opportunities and now we are diving deeper into these ideas, developing detailed executable plans as we prepare for implementation beginning later this quarter.
Examples of this work include, improving the planning and scheduling through integration of systems to allow our employees to deliver their best to our customers, leveraging advanced technologies such as drones and satellite imagery to improve our vegetation management programs, using predictive analytics and web-based tools to provide our customers with more self service options and improve their experience and leverage purchasing power to optimize payment terms.
As part of these efforts, we intend to evaluate the appropriate cadence to initiate rate cases on a state-by-state basis to best support our customer focused strategic priorities.
We will also remain focused on emerging technologies, smart grid, electric vehicle infrastructure and our customers' evolving energy needs as we think through how to reduce our carbon footprint.
We're off to a great start this year, and yesterday we reaffirmed our 2021 operating earnings guidance of $2.40 to $2.60 per share.
Our leadership team is committed to upholding our core values and behaviors and executing on our proven strategies as we put our customers at the center of everything we do.
We will take the appropriate steps to deliver on our promise to make FirstEnergy a better company, one that is respected by our customers, the investment community, regulators and our employees.
It's a privilege and a pleasure to join you today.
I'd like to start by sharing my impressions of FirstEnergy after almost two months in this role.
This is a company with a firm foundation, including a commitment to improve in the area of governance and compliance, our commitment to customers by embracing innovation and technology to help ensure the strength, resilience and reliability of its transmission and distribution businesses, a deep seeded and strong safety culture and a strong potential to deliver significant value to investors through customer focused growth.
Since joining the team, I've been supporting senior leadership in advancing the company's priorities, strengthening our governance and compliance functions and enhancing our relationships with external stakeholders, including regulators and the financial community.
Steve spoke about our business priorities.
So, I will focus my remarks today on our compliance work including remedial actions.
First, I'd like to update you on our internal investigation which has rebuild no new material issues since our last earnings call.
The focus of the internal investigation has transitioned from a proactive investigation to continued cooperation with the ongoing government investigations.
Management and the Board with the assistance of the compliance subcommittee of the Audit Committee, have been working together to build a best-in-class compliance program.
Through these efforts, we have identified improvement opportunities in five broad categories, including governance, risk management, training and communications, concerns management and third-party management.
As part of these efforts FirstEnergy is embracing a commitment to enhancing its compliance culture to be best-in-class.
Some of the actions completed to date include hiring, our Senior Vice President and Chief Legal Officer, Hyun Park in January; Antonio Fernandez, who joined as Vice President and Chief Ethics and Compliance Officer last week; and myself.
On the Board side, Jesse Lynn and Andrew Teno, joined us from Icahn Capital in March.
And the Board has nominated a new Independent Member, Melvin Williams for election at the Annual Shareholders Meeting when Sandy Pianalto's term ends next month.
I believe the insights and experience of these new leaders are helping to round out a very committed and confident Board and management team.
In March, the Board affirmed our confidence in Steve by naming him CEO.
Steve has consistently demonstrated the integrity, leadership skills, strategic acumen and deep knowledge of our businesses needed to position FirstEnergy for long-term success and stability.
These changes along with the Board's reinforcement of the executive team's commitment to setting the appropriate tone at the top or support a culture of compliance going forward.
For instance, we recently held an event where the Chairman and the Chair of the Compliance subcommittee addressed the company's top 140 leaders, regarding the expectations to act with integrity, in everything we do.
Our legal department recently completed training on up the ladder reporting and we have enhanced our on-boarding process for new employees and for third-parties on expectations around our code of business conduct.
Over the course of the next few months, there will be many more steps the company will take to enhance our compliance program such as, continuing to build the new more centralized compliance organization under Antonio's leadership; addressing our processes, policies and controls, which include additional oversight for political contributions; continuing to emphasize our values and expectations in ongoing communications with our employees, incorporating compliance into our goals and performance metrics and holding all employees regardless of title to the same standards; enhancing the channels for incident reporting and developing thorough and objective processes to investigate and address allegations of misconduct; and insuring increased communications with and training of employees with respect to our commitment to ethical standards and integrity of our business procedures; compliance requirements; our code of business conduct; and other company policies; and understanding and utilizing the process for reporting suspected violations of law or code of business conduct.
We have also enhanced our internal controls around disbursements to require additional approvals, targeted reviews of any suspicious payments and a reassessment of approval levels across the entire company.
Additionally, in the area of disbursements, we will update and clarify policies and procedures, conduct training and institute a regular audit program that reviews payments and services performed.
A detailed list of the corrective actions we are taking can be found on Pages 8 and 9 of our first quarter FactBook.
Over the next several months, we expect to make significant progress in the areas of compliance led by Antonio's organization, where it will continue to be overseen by the Board and the newly established management steering committee for Ethics and Compliance.
Through these efforts, we expect the material weakness associated with the tone at the top to be remediated by the time we file our fourth quarter earnings.
Our leaders are continuing to elevate the importance of compliance and working to regain the trust of employees and our stakeholders by modeling appropriate behavior and consistently communicating that compliance and ethics are core values, just like safety.
We are committed to ensuring that employees understand what is expected of them and are comfortable reporting ethical violations without fear precautions.
By continually emphasizing the importance of compliance to our strategies and future as well as demonstrating that we are setting the right tone at the top, we strive to bolster confidence among our employees that the management team and the Board are taking the proper decisive actions to move the company forward.
I believe we have learned a lot from recent challenges and are taking the right actions to emerge as a better, stronger company with a bright future.
Now I'll turn the floor over to Jon Taylor for a review of first quarter results and the financial update.
We have provided new disclosures in three main areas within our Investor FactBook.
Our steps to support a cleaner, smarter grid and the movement to more green and renewable resources, additional disclosures on our balance sheet, including our funds from operations target and the steps we're taking to achieve our goals and third, enhanced ESG disclosures.
Also note that we continue to provide more robust disclosures on ROEs including more granular sensitivities.
Yesterday we announced GAAP earnings of $0.62 per share for the first quarter of 2021 and operating earnings of $0.69 per share, which was at the upper end of our guidance range.
GAAP results for 2021 include two special items, regulatory charges related to customer refunds associated with previously collected Ohio decoupling revenues and expenses associated with the investigation.
In our distribution business our results for the first quarter of this year as compared to 2020 reflect higher residential usage on both in actual and weather-adjusted basis as well as growth from incremental riders and rate increases, including DCR and grid modernization in Ohio, the distribution system improvement charge in Pennsylvania and the implementation of our base rate case settlement in New Jersey.
These drivers were partially offset by $0.10 per share related to the absence of Ohio decoupling revenues and our decision to forgo the collection of lost distribution revenues from our residential and commercial customers.
Our total distribution deliveries for the first quarter of 2021 decreased 2% on a weather-adjusted basis as compared to the last year, reflecting an increase in residential sales of 2% as customers continue to spend more time at home in the first quarter of 2021, a decline of 7% in commercial sales and in our industrial class first quarter low decreased 3%.
It's worth noting that total distribution deliveries through the first quarter are consistent with our internal load forecast, with residential demand 2% higher versus our forecast, while industrial load is down 2%.
In our regulated transmission business earnings decreased as a result of higher net financing costs, which included an adjustment to previously capitalized interest, partially offset by the impact of rate base growth at our ATSI and MAIT subsidiaries.
Finally, in our corporate segment, results reflect lower operating expenses, offset by the absence of a first quarter 2020 pension OPEB credit, related to energy harbors emergence from bankruptcy as well as higher interest expense.
We are off to a solid start for the year and are reaffirming our operating earnings guidance of $2.40 to $2.60 per share for 2021.
We've also introduced second quarter guidance of $0.48 to $0.58 per share.
In addition, our strong focus on cash helped drive a $125 million increase in adjusted cash from operations and a $185 million increase in free cash flow versus our internal plan for the first quarter.
As to a couple of other financial updates, our 2021 debt financing plan remains on track.
In March FirstEnergy transmission issued $500 million in senior notes and a strong well supported bond offering that showcase the strength of our transmission business.
The deal was oversubscribed and on par with an investment grade offering.
We used the proceeds to repay $500 million in short-term borrowings under the FET revolving credit facility.
In addition, we repaid $250 million at the FirstEnergy Holding Company.
We also successfully issued $200 million in first mortgage bonds at MonPower in April, that was also very well supported.
This supports our earlier commitment to reduce short-term borrowings as well as our goal to improve our credit metrics at FirstEnergy, return to investment grade as quickly as possible and maintain the strong credit ratings at our utilities.
We continue to provide the rating agencies with regular updates on our business and we are working with them to develop a clear outline of what is needed to return FirstEnergy to investment grade credit ratings.
Key milestones include governance and compliance changes at our company, resolution of the DOJ investigation and solid credit metrics.
As to more longer term financing needs through the execution of FE Forward, we have reduced our debt financing plan by approximately $1 billion through 2023, mainly at the FirstEnergy and FirstEnergy Transmission holding companies.
Additionally, as we have previously mentioned, equity is an important part of our overall financing plan, with plans to raise up to $1.2 billion of equity over 2022 and 2023.
As we said previously, we'll flex these plans as needed and we are also exploring various alternatives to raise equity capital in a manner that could be more value enhancing to all stakeholders.
These actions combined with new rates at JCP&L and our 60% plus formula rate capital investment program will generate $150 million to $200 million of incremental cash flow each year, while maintaining relatively flat adjusted debt levels through 2023, all of which will support our targeted 12% to 13% FFO to debt range.
Turning to our pension.
Our funding status was 81% at March 31, up from 78% at the end of last year, resulting in a $500 million reduction in our unfunded pension obligation, which improves our adjusted debt position with the rating agencies.
The extended funding timeframe permitted under the American Rescue plan, together with the modification of interest rate stabilization rules means that we do not expect any funding requirements for the foreseeable future, assuming our plan achieves a 7.5% expected return on assets.
Although, we plan to make contributions into the pension next year, this legislation provides us with additional discretion and flexibility to make voluntary contributions as we assess our capital allocation plans.
As Steve mentioned discussions have begun with the Department of Justice.
While no contingency has been reflected in our consolidated financial statements, we believe that it is probable we will incur a loss in connection with the resolution of this investigation.
However, we cannot yet reasonably estimate the amount.
Finally last month President Biden introduced the American Jobs Plan, which includes a corporate tax increase and proposed minimum tax as well as potential opportunities related to proposed infusion into the electric vehicle infrastructure and the energy grid.
Clearly, it's very early in the process, but the corporate tax provision could be slightly cash positive for us if implemented in its current form.
Our solid first quarter results and expectations for the year reflect our strong operating fundamentals and the continued success of our strategies to modernize and enhance our distribution and transmission systems.
As we move our company forward, we are laser focused on unlocking opportunities and increasing value for our shareholders, customers and employees.
Now, let's open the call to your Q&A.
| sees fy non-gaap operating earnings per share $2.40 to $2.60.
q1 gaap earnings per share $0.62.
affirming its full-year 2021 operating (non-gaap) earnings guidance of $2.40 to $2.60 per share.
for q2 of 2021, gaap and operating (non-gaap) earnings forecast range of $260 million to $315 million, or $0.48 to $0.58 per share.
operating (non-gaap) earnings for q1 of 2021 were $0.69 per share.
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Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.
Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K, which is filed with the Securities and Exchange Commission.
drhorton.com and we plan to file our 10-Q later today or tomorrow.
The D.R. Horton team delivered an outstanding first quarter, highlighted by a 48% increase in earnings to $3.17 per diluted share.
Our consolidated pre-tax income increased 45% to $1.5 billion on a 19% increase in revenues and our consolidated pre-tax profit margin improved 380 basis points to 21.2%.
Our homebuilding return on inventory for the trailing 12 months ended December 31 was 38.5% and our consolidated return on equity for the same period was 32.4%.
These results reflect our experienced teams, their production capabilities and our ability to leverage D.R. Horton's scale across our broad geographic footprint.
Even with the recent rise in mortgage rates, housing market conditions remain very robust and we are focused on maximizing returns while continuing to increase our market share.
There are still significant challenges in the supply chain, including shortages in certain building materials and a very tight labor market.
We are focused on building the infrastructure and processes to support a higher level of home starts while working to stabilize and then reduce construction cycle times to our historical norms.
After starting construction on 25,500 homes this quarter, our homes and inventory increased 30% from a year ago to 54,800 homes with only 1,000 unsold completed homes across the nation.
Our January home starts and net sales holders were in line with our targets and we are well positioned to achieve double-digit volume growth in 2022.
We believe our strong balance sheet, liquidity and low leverage position us very well to operate effectively through changing economic conditions.
We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations while managing our product offerings, incentives, home pricing, sales base and inventory levels to optimize returns.
Earnings for the first quarter of fiscal 2022 increased 48% to $3.17 per diluted share compared to $2.14 per share in the prior-year quarter.
Net income for the quarter increased 44% to $1.1 billion compared to $792 million.
Our first quarter home sales revenues increased 17% to $6.7 billion on 18,396 homes closed, up from $5.7 billion on 18,739 homes closed in the prior year.
Our average closing price for the quarter was $361,800, up 19% from the prior-year quarter, while the average size of our homes closed was down 1%.
Our net sales orders in the first quarter increased 5% to 21,522 homes, while the value increased 29% from the prior year to $8.3 billion.
A year ago, our first quarter net sales orders were up 56% due to the surge in housing demand during the first year of the pandemic when we had significantly more completed homes available to sale and prior to the significant supply chain challenges we've experienced since.
Our average number of active selling communities decreased 3% from the prior-year quarter and was up 3% sequentially.
Our average sales price on net sales orders in the first quarter was $383,600, up 22% from the prior-year quarter.
The cancellation rate for the first quarter was 15%, down from 18% in the prior-year quarter.
New home demand remains very strong despite the recent rise in mortgage rates.
Our local teams are continuing to sell homes later in the construction cycle so we can better ensure the certainty of the home close date for our homebuyers with virtually no sales occurring prior to start of home construction.
We plan to continue managing our sales pace in the same manner during the spring and we expect our number of net sales orders in our second quarter to be equal to the same quarter in the prior year were up by no more than a low single-digit percentage.
Our January home sales and net sales order volume were in line with our plans and we are well positioned to deliver double-digit volume growth in fiscal 2022 with 29,300 homes in backlog, 54,800 homes in inventory, a robust lot supply and strong trade and supplier relationships.
Our gross profit margin on home sales revenues in the first quarter was 27.4%, up 50 basis points sequentially from the September quarter.
The increase in our gross margin from September to December reflects the broad strength of the housing market.
The strong demand for homes combined with a limited supply has allowed us to continue to raise prices and maintain a very low level of sales incentives in most of our communities.
On a per square foot basis, our home sales revenues were up 3.4% sequentially while our cost of sales per square foot increased 2.9%.
We expect our construction and lot costs will continue to increase.
However, with the strength of today's market conditions, we expect to offset most cost pressures with price increases in the near term.
We currently expect our home sales gross margin in the second quarter to be similar to or slightly better than the first quarter.
In the first quarter, homebuilding SG&A expense as a percentage of revenues was 7.5%, down 40 basis points from 7.9% in the prior-year quarter.
Our homebuilding SG&A expense as a percentage of revenues was lower than any first quarter in our history and we remain focused on controlling our SG&A while ensuring our infrastructure adequately supports our business.
We have increased our housing inventory in response to the strength of demand and are focused on expanding our production capabilities further.
We started 25,500 homes during the quarter, up 12% from the first quarter last year, bringing our trailing 12-month starts to 94,200 homes.
We ended the quarter with 54,800 homes in inventory, up 30% from a year ago.
25,600 of our total homes at December 31 were unsold, of which only 1,000 were completed.
Our average cycle or average construction cycle time for homes closed in the first quarter has increased by almost two weeks since our fourth quarter and two months from a year ago.
Although we have not seen much improvement in the supply chain yet, we are focused on working to stabilize and then reduce our construction cycle times to historical norms.
At December 31, our homebuilding lot position consisted of approximately 550,000 lots, of which 24% were owned and 76% were controlled through purchase contracts.
23% of our total owned lots are finished and at least 47% of our controlled lots are or will be finished when we purchase them.
Our growing and capital-efficient lot portfolio is a key to our strong competitive position and is supporting our efforts to increase our production volume to meet demand.
Our first quarter homebuilding investments in lots, land and development totaled $2.2 billion, of which $1.2 billion was for finished lots, $570 million was for land development and $390 million was to acquire land.
Forestar, our majority-owned residential lot manufacturer, operates in 55 markets across 23 states.
Forestar continues to execute extremely well and now expects to grow its lot deliveries this year to a range of 19,500 to 20,000 lots with a pre-tax profit margin of 13 and a half to 14%.
At December 31, Forestar's owned and controlled lot position increased 33% from a year ago to 103,300 lots.
Horton or subject to a right of first offer based on executed purchase and sale agreements.
$330,000 million of our finished lots purchased in the first quarter were from Forestar.
Forestar is separately capitalized from D.R. Horton and had approximately $500 million of liquidity at quarter end with a net debt to capital ratio of 33.9%.
With its current capitalization, strong lot supply and relationship with D.R. Horton, Forestar plans to continue profitably growing their business.
Financial services pre-tax income in the first quarter was $67.1 million with a pre-tax profit margin of 36.4% compared to $84.1 million and 44.9% in the prior-year quarter.
For the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 66% of our home buyers.
FHA and VA loans accounted for 44% of the mortgage company's volume.
Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 721 and an average loan-to-value ratio of 88%.
First-time homebuyers represented 55% of the closings handled by the mortgage company this quarter.
Our rental operations generated pre-tax income of $70.1 million on revenues of $156.5 million in the first quarter compared to $8.6 million of pre-tax income on revenues of $31.8 million in the same quarter of fiscal 2021.
Our rental property inventory at December 31 was $1.2 billion compared to $386 million a year ago.
We sold one multifamily rental property of 350 units for $76.2 million during the quarter.
There were no sales of multifamily rental properties during the prior-year quarter.
We sold two single-family rental properties totaling 225 homes during the quarter for $80.3 million compared to one property sold in the prior-year quarter for $31.8 million.
At December 31, our rental property inventory included $519 million of multifamily rental properties and $642 million of single-family rental properties.
As a reminder, our multifamily and single-family rental sales and inventories are reported in our rental segment and are not included in our homebuilding segments, homes closed, revenues or inventories.
In fiscal 2022, we continue to expect our rental operations to generate more than $700 million in revenues.
We also expect to grow the inventory investment in our rental platform by more than $1 billion this year based on our current projects in development and our significant pipeline of future projects.
We are positioning our rental operations to be a significant contributor to our revenues, profits and returns in future years.
Our balanced capital approach focuses on being disciplined, flexible and opportunistic.
During the three months ended December, our cash used in homebuilding operations was $115 million as we invested significant operating capital to increase our homes and inventory to meet the current strong demand.
At December 31, we had $4.1 billion of homebuilding liquidity consisting of $2.1 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.
We believe this level of homebuilding cash and liquidity is appropriate to support the scale and activity of our business and to provide flexibility to adjust to changing market conditions.
Our homebuilding leverage was 17.3% at the end of December and homebuilding leverage net of cash was 6.9%.
Our consolidated leverage at December 31 was 25.1% and consolidated leverage net of cash was 15.2%.
At December 31, our stockholders' equity was $15.7 billion and book value per share was $44.25, up 29% from a year ago.
For the trailing 12 months ended December, our return on equity was 32.4% compared to 24.4% a year ago.
During the quarter, we paid cash dividends of $80.1 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in February.
We repurchased 2.7 million shares of common stock for $278.2 million during the quarter.
Our remaining share repurchase authorization at December 31 was $268 million.
We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.
As we look forward to the second quarter of fiscal 2022, we are expecting market conditions to remain similar with strong demand from homebuyers, but continuing supply chain challenges.
We expect to generate consolidated revenues in our March quarter of $7.3 billion to $7.7 billion and homes closed by our homebuilding operations to be in a range between 19,000 and 20,000 homes.
We expect our home sales gross margin in the second quarter to be approximately 27.5% and homebuilding SG&A as a percentage of revenues in the second quarter to be approximately 7.5%.
We anticipate the financial services pre-tax profit margin in the range of 30% to 35% and we expect our income tax rate to be approximately 24% in the second quarter.
For the full fiscal year, we continue to expect to close between 90,000 and 92,000 homes, while we now expect to generate consolidated revenues of $34.5 billion to $35.5 billion.
We forecast an income tax rate for fiscal 2022 of approximately 24% and we also continue to expect that our share repurchases will reduce our outstanding share count by approximately 2% at the end of fiscal 2022 compared to the end of fiscal 2021.
We still expect to generate positive cash flow from our homebuilding operations this year after our investments in home building inventories to support double-digit growth.
We will then continue to balance our cash flow utilization priorities among increasing the investment in our rental operations, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend and consistently repurchasing shares.
In closing, our results reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across multiple brands.
Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to capitalize on today's robust market and to effectively operate in changing economic conditions.
We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividend and share repurchases on a consistent basis.
Horton team for your focus and hard work.
We are incredibly well positioned to continue growing and improving our operations in 2022.
We will now host questions.
| q1 earnings per share $3.17.
qtrly consolidated revenues increased 19% to $7.1 billion.
homes closed in quarter decreased 2% to 18,396 homes compared to 18,739 homes closed in same quarter of fiscal 2021.
qtrly net sales orders increased 29% in value to $8.3 billion on 21,522 homes sold.
reaffirms its previously issued fiscal 2022 guidance.
homebuilding revenue for q1 of fiscal 2022 increased 17% to $6.7 billion from $5.7 billion in same quarter of fiscal 2021.
updating its fiscal 2022 guidance for consolidated revenues to range of $34.5 billion to $35.5 billion.
|
There are many factors that may cause future results to differ materially from these statements, which are discussed in our most recent 10-K and 10-Q filed with the SEC.
Before discussing our progress since our last call, I want to introduce our new Chief Financial Officer, Steve Coughlin.
Steve has been with AES for 14 years and has served in a variety of roles, including as Chief Executive Officer of Fluence and most recently as Head of both Strategy and Financial Planning.
I am happy to report that we are making excellent progress on our strategic and financial goals, and remain on track to deliver on our 7% to 9% annualized growth in adjusted earnings per share and parent free cash flow through 2025.
We had a strong third quarter with adjusted earnings per share of $0.50, a 19% increase versus the same quarter last year.
We expect to deliver on our full year guidance, even with a $0.07 noncash impact from an updated accounting interpretation related to the equity units of a convert we issued earlier this year.
Steve will provide more details shortly.
Today, I will discuss both the growth in our core business as well as the strategy and evolution of our innovation business called AES Next.
We see ourselves as the leading integrator of new technologies.
The two parts of our portfolio are mutually beneficial to one another and enable us to deliver greater total returns to our shareholders.
More specifically, and as we have proven, our core business platforms provide the optimal environment for exponentially growing technology start-ups.
At the same time, our AES Next businesses provide us with unique capabilities that enable us to offer customers the differentiated product they seek to achieve their sustainability goals.
Turning to Slide four.
I will provide you with an update on our core business, including our growth in renewables and an update on the overall macroeconomic environment.
We continue to see great momentum in demand overall.
As we speak, we have senior members of our team, attending the COP26 Climate Conference in Glasgow, meeting with governments, organizations and potential customers.
Since our last call in August, we have signed an additional 1.1 gigawatts of renewable PPAs, bringing our year-to-date total to four gigawatts.
Additionally, we are in very advanced discussions for another 850 megawatts of wind, solar and energy storage.
Based on our current progress, we now expect to sign at least five gigawatts this year versus our prior expectations of four gigawatts.
This represents the largest addition in our history and 66% more than in 2020.
With our pipeline of 38 gigawatts of potential projects, including 10 gigawatts that are ready to bid in the U.S., we are well positioned to capitalize on this substantial opportunity.
Our success is a result of our strategy of working with our clients on long-term contracts that provides customized solutions for their specific energy and sustainability goals.
As such, almost 90% of our new business has been from bilateral negotiated contracts with corporate customers.
This allows us to compete on what we do best: providing differentiated, innovative solutions.
One example of our work with major technology companies to provide competitively priced renewable energy netted on an hour-by-hour basis.
As we announced earlier this week, we signed a 15-year agreement to provide around-the-clock renewable energy to power Microsoft's data centers in Virginia.
Year-to-date, we have signed almost two gigawatts of similarly structured contracts with a number of tech companies, integrating a mix of renewable sources and energy storage.
Outside the U.S., we have a similar strategy of focusing on bilateral sales with corporate customers, which has enabled us to sign long-term U.S. dollar-denominated contracts with investment-grade customers.
For example, in Brazil, we see demand for more than 25 gigawatts of renewables, providing a significant opportunity to earn mid- to high-teen returns in U.S. dollars, while at the same time, diversifying our Brazilian portfolio of mostly hydro generation.
To that end, for the first time ever in Brazil, we are in very advanced negotiations to design a 300-megawatt U.S. dollar-denominated contract with a large multinational corporation for 15 years.
Turning to Slide five.
Our backlog of 9.2 gigawatts is the largest ever with 60% in the U.S. These projects represent one of the main drivers for our growth through 2025 and beyond.
With this pace of growth, we are laser-focused on ensuring that we have adequate and reliable supply chain.
For several years, we have anticipated a boom in renewable development that could potentially lead to inadequate panel supply.
And as such, we took pre-emptive measures to ensure supply chain flexibility.
Despite current challenges in the market, we have non-Chinese panels secured for the majority of our backlog, which is expected to come online through 2024.
We have benefited from a number of strategic relationships with various suppliers and a clear advantage stemming from our scale and visibility of our pipeline.
More generally, we continue to proactively manage potential macroeconomic headwinds, including inflation and commodity prices.
As part of our efforts to derisk our portfolio over the past decade, we have taken a systematic approach to risk management.
In fact, in places where we use fuel, it is mostly a pass-through and, therefore, we have limited exposure to changes in commodity prices.
Furthermore, more than 80% of our adjusted pre-tax contribution is in U.S. dollars, insulating us from fluctuations in foreign currencies.
We not only remain committed to achieving our long-term adjusted earnings per share and parent free cash flow targets, but we also continue to improve our credit metrics and are on track to achieve BBB ratings from all agencies by 2025.
Now to Slide six.
We continue to benefit from a virtuous cycle with our corporate customers, in which our ability to provide innovative solutions leads to more opportunities for collaboration and more projects.
For example, this quarter, we announced a partnership with Google to provide our utility customers cost savings and energy efficiency features as well as opportunities to accelerate their own clean energy goals through Nest thermostats.
Moving to Slide seven.
Through AES Next, we integrate new technologies to bring innovation to the industry and work with existing and new customers.
AES Next operates as a separate unit within AES where we develop and incubate new businesses, including a combination of strategic investments and internally developed businesses, representing approximately $50 million of gross capital annually.
As I mentioned, the combination of AES Next and our core business creates the optimal environment for growth, whereby we can better create solutions for customers by utilizing our industry insights and operating platforms.
One example of this mutually beneficial arrangement is in the combination of renewables plus storage.
We first combined solar and storage in 2018 in Hawaii.
And today, nearly half of our renewable PPAs have an energy storage component.
Another example is 5B, a prefabricated solar solution company that has patented technology, allowing projects to be built in 1/3 of the time and on half as much land while being resistant to hurricane force winds.
We see 5B's technology as a source of current and future competitive advantage for AES, allowing us to build more projects in places where there is a land scarcity, constraints around height or soil disruption or hurricane risk.
Likewise, 5B benefits greatly from the ability to grow rapidly on our platform, and we are currently developing projects in the U.S., Puerto Rico, Chile, Panama and India.
I am highlighting the AES Next portion of our business because it is increasingly clear that AES essentially has two distinct business models that add value to our shareholders in very different ways.
With our core business, we continue to measure our success through growth in adjusted earnings per share and parent free cash flow as well as PPAs signed.
With AES Next, these businesses contribute value creation through their extremely rapid growth in valuation with the potential for future monetization.
Nonetheless,they are a drag on AES' earnings during their ramp-up phase.
In 2021, this drag on earnings is expected to be approximately $0.06 per share.
We assume these losses from AES Next in our 2021 guidance and our 7% to 9% annualized growth rate through 2025.
Turning to Slide eight.
As you know, last week, Fluence, our energy storage joint venture with Siemens, which began as a small business within AES, became a publicly listed company with a current valuation of around $6 billion.
Similarly, early this year, another AES Next business, Uplight, received evaluation in a private transaction of $1.5 billion.
The value of our interest in these two businesses is now at least $2.5 billion or $3 per share compared to the book value of our investments of approximately $150 million.
In my view, this massive shareholder value creation more than justifies the temporary negative impact to earnings.
In summary, our strategy of being the leading integrator of new technologies on our platform has yielded great results, and we have several other innovations in development under AES Next.
As they mature, we will continue to take actions to accelerate their growth and show their value.
It's my pleasure to participate in my first earnings call as Chief Financial Officer of AES.
I have been at AES for 14 years and feel very fortunate to work at a company that is transforming the electric sector so profoundly along so many talented people in finance and throughout the company.
With our strategic and financial progress to date, AES is well positioned to continue leading this transformation.
In my previous role, I led corporate strategy and financial planning where we developed our plan to get to greater than 50% renewables at least 50% of our business in the U.S. and to reduce our coal share to less than 10% by 2025, all while growing the company 7% to 9%.
We are committed to those goals, and I look forward to continue executing toward them.
Before I dive into our financial performance, I want to discuss the adjustment to our accounting that we made this quarter relating to the treatment of the $1 billion in equity units we issued in the first quarter this year.
Our prior guidance assume that the underlying shares would not be included in our fully diluted share count until 2024 upon settlement of the equity units.
This approach was in line with industry practice and supported by our interpretation of the accounting literature and our external auditors.
However, we are now subject to an updated interpretation of these instruments, and we are adjusting to include these shares in our fully diluted earnings per share calculations.
This adjustment results in an annual impact of roughly $0.07 this year and $0.09 in 2022 and 2023 using a full year of an additional 40 million shares.
It's important to keep in mind that this adjustment has no cash impact and has absolutely no impact on our business or longer-term growth rates as we had included the underlying shares in our projections for 2024 and beyond.
Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted earnings per share guidance range, but we now expect to be at the low end of the range.
Now I'd like to cover two important topics: our performance during the third quarter and our capital allocation plan.
Turning to Slide 11.
You can see the strong performance of our portfolio in this quarter.
Adjusted earnings per share was $0.50 for the quarter versus $0.42 for the comparable quarter last year.
This 19% increase was primarily driven by improvements in our operating businesses, new renewables and parent interest savings.
These positive drivers were partially offset by lower contributions from South America, largely due to unscheduled outages in Chile.
Third quarter results also reflect an approximate $0.03 quarter-to-date impact from the higher share count due to the inclusion of 40 million additional weighted average shares relating to the equity units that I just mentioned.
Turning to Slide 12.
Adjusted pre-tax contribution, or PTC, was $428 million for the quarter, an increase of $97 million versus third quarter of 2020.
I'll cover our results by strategic business unit over the next four slides, beginning on Slide 13.
In the US and Utilities SBU, PTC increased $69 million as a result of our continued progress in growing our U.S. footprint.
The improvement was largely driven by higher contributions from Southland, which benefited from higher contracted prices, new renewables coming online at AES Clean Energy and higher availability at AES Puerto Rico.
In California, our 2.3 gigawatt Southland legacy portfolio demonstrated its critical importance by continuing to meet the state's pressing energy needs and its transition to a more sustainable carbon-free future.
In fact, as you may have heard, last month, the State Water Resource Control Board unanimously approved an extension of our 876-megawatt Redondo Beach facility for two years through 2023 to align with our remaining legacy units.
If the demand/supply situation remains tight, some of our legacy portfolio could be available to meet California's energy needs beyond 2023 if state energy officials determine a need, although we have not assumed this in our guidance.
As you can see on Slide 14, at our South America SBU, lower PTC was primarily driven by unscheduled outages in Chile due to a blade defect impacting six turbines across our fleet that has now largely been resolved.
Our third quarter results were also driven by lower hydrology in Brazil.
Before moving to MCAC, I would like to provide an update on 531-megawatt Alto Maipo hydro project, owned by a subsidiary of AES Andes in Chile.
Construction continues to go well, and generation is expected to begin in December of this year, with full commercial operation of the plant expected in the first half of 2022, in line with our expectations.
Alto Maipo is in discussions with its nonrecourse lenders to restructure its debt to achieve a more sustainable and flexible capital structure for the long term.
AES Andes has honored its equity commitment to Alto Maipo and will not be assuming any additional equity obligations.
We expect the restructuring to be completed in 2022.
And AES Andes already assumed zero cash flow from Alto Maipo, so we don't see the restructuring impacting our guidance.
Now turning back to our third quarter results on Slide 15.
The higher PTC at our MCAC SBU primarily reflects higher LNG sales in Dominican Republic and demand recovery in Panama.
And finally, in Eurasia, as shown on Slide 16, higher results reflect improved operating performance in Bulgaria.
Now to Slide 17.
To summarize our performance in the first three quarters of the year, we earned adjusted earnings per share of $1.07 versus $0.96 last year.
As I mentioned earlier, in terms of our full year guidance, we are incorporating the $0.07 per share noncash impact from the adjustment for the equity units issued earlier this year.
Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted earnings per share guidance range, but we now expect to come in at the lower end of the range of $1.50 to $1.58.
It's important to note that this adjustment does not affect our longer-term growth expectations and has no impact on our cash flow.
With three quarters of the year behind us, our year-to-go results will benefit from contributions from new renewables, continued demand recovery across our markets, reduced interest expense and our cost savings programs.
These positive drivers are offset by the impact of the higher share count and the dilution from AES Next, as Andres discussed earlier.
Now turning to our 2021 parent capital allocation on Slide 18.
Beginning on the left hand of the slide and consistent with our prior disclosure, we expect approximately $2 billion of discretionary cash this year.
We remain confident in our parent free cash flow target midpoint of $800 million and the $100 million from the sale of Itabo, and we received the $1 billion of proceeds from the equity units issued in March.
Moving over to the right-hand side.
The uses are largely unchanged from the last quarter with $450 million in returns to our shareholders this year, consisting of our common share dividend and the coupon on the equity units.
We also continue to expect almost $1.5 billion of investment in our subsidiaries, with about 60% going toward renewables globally.
Our investment program continues to be heavily weighted to the U.S. with approximately 70% targeted for our U.S. businesses.
The increased focus on U.S. investments will contribute to our goal of growing the proportion of earnings from the U.S. to at least half of our base.
Finally, as I ramp up in my new role, I've had the chance to speak with many of our internal and external stakeholders.
It's clear that AES continues to successfully execute on our strategy, and we remain resilient in the face of volatile macroeconomic conditions.
Continuing to drive the successful execution and delivering on our financial goals is my top priority.
I look forward to getting input from more of our investors and analysts and providing the information you need to understand the great future ahead for AES.
In summary, we have had a strong third quarter, with both our core business and AES Next doing well.
We are increasing our target for science renewable PPAs from four gigawatts to five gigawatts and Fluence successfully completed its $6 billion IPO.
We remain committed to delivering on our strategic and financial goals, including our 7% to 9% annualized growth rate in earnings and cash flow, and will continue to create greater shareholder value by being the leading integrator of new technologies.
With that, I would like to open up the call to questions.
| aes reaffirms 7% to 9% annualized growth target through 2025; now expects to sign 5 gw of renewables under long-term contracts in 2021.
qtrly adjusted earnings per share of $0.50.
reaffirming 2021 adjusted earnings per share guidance range of $1.50 to $1.58; now expecting low end of the range.
|
autozone.com under the Investor Relations link.
Please click on quarterly earnings conference calls to see them.
As I have said previously throughout the pandemic, we could not deliver the kind of results we have without the outstanding performance of our entire team, especially our store and supply chain AutoZoners'.
As our sales volumes have remained at historic all time highs, our AutoZoners' continue to enthusiastically meet and embrace the challenge.
As we say they are going the extra mile for our customers and we owe them a tremendous debt of gratitude.
Also want to reiterate our highest priority remains being committed to keeping all of our customers and AutoZoners safe.
We will also share how inflation is affecting our costs and retails and how we think that will impact our business for the remainder of the calendar year.
On to our sales results.
Our domestic same-store sales were an impressive 4.3% this quarter on top of last year's historic 21.8% growth.
This time last year, we had no vision, none of delivering a positive comp this quarter, but our team once again performed at an exceptionally high level.
Congratulations again to AutoZoners everywhere.
Our growth rates for retail and commercial were both strong with domestic commercial growth north of 21%.
Our commercial business set a record this quarter with $1.2 billion in sales for the quarter, an incredible accomplishment.
Additionally, we reached a new milestone in commercial sales surpassing $3 billion for the year, finishing with over $3.3 billion in annual sales versus $2.7 billion in sales a year ago, an impressive 23% increase.
We set new records in annual sales volumes per store reaching $12,600 for the year, up from $10,600 just last year.
We continue to execute well in commercial and we couldn't be more proud of our team's recent success.
I'm also very proud of our organization on our domestic DIY performance.
We ran a roughly flat comp this quarter after increasing well over 20% in last year's fourth quarter.
While our DIY two-year stack comp decelerated some from the third quarter, we were expecting substantially more deceleration as we got further and further from the last round of stimulus back in March.
We were quite pleased with the stability of our two-year stack same-store sales.
In commercial on a two-year basis, our sales were very consistent with last year's performance -- sorry, last quarter's performance.
Now let's focus on our sales cadence.
This quarter stretched from early May to the end of August.
The first eight weeks of the quarter, our comp was 3.1%.
In the last eight weeks, our comp averaged 5.5%.
The strength in the back half of the quarter was attributable to easier comparisons to last year.
Given the dynamics of the past 18 months, we like others who benefited from the lumpiness of the pandemic sales, believe it is more insightful to look at a two-year stack comp.
For Q4, our two year comp was 26%.
On a two-year basis, our cadence for each four week period of the quarter was 26.8%, 28.2%, 25.5% and 24%.
Our two year comp sales trends were remarkably strong and fairly consistent across the quarter.
Regarding whether we experience a noticeably warmer summer out West and in previous years, which helped our sales.
But we experienced a milder summer in the Midwest and Northeast, which drove our sales to underperform the chain there.
Overall, weather impacts were neutral on our performance.
Regarding the quarter's traffic versus ticket growth, our retail traffic was down roughly 4%, while our retail ticket was up 3%.
This was expected a stimulus stay at home orders and closures of big box retail automotive service departments that drove outsized traffic last year.
Our commercial business saw the vast majority of growth come from transaction growth from new and existing customers.
It was encouraging for us to see sales trend remains strong this quarter and we like the momentum we are seeing in both domestic businesses heading into fiscal year '22.
During the quarter, there were some geographic regions that did better than others as there always are.
Across both our retail and commercial customer basis, we saw the Midwest, Mid-Atlantic and Northeastern markets underperform, roughly 400 basis points in comp versus the remainder of the country.
The data suggests that we have actually gained some share in these markets.
However, we believe the milder summer weather was a large contributor to our sales comp results there.
And across the country in retail, our share trends remained strong despite the reopening of big box retailers automotive service departments that were closed this time last year.
We have been very pleased that we have retained the roughly 10% market share we gained in our retail sales floor business last year.
Our number one priority continues to be the health, safety and well-being of our customers and AutoZoners.
On Q2's call, we shared that we would provide every AutoZoner with a $100 incentive once they completed their vaccination for COVID-19, that's every AutoZoner including part-timers.
This was the logical next step in our efforts to provide a safe working and shopping environment as we have with our ongoing PPP efforts.
We spent another $2.7 million in the fourth quarter reimbursing our AutoZoners for the vaccine.
I continue to be inspired by our Board and management team's commitment to doing what is right, putting safety first, while caring deeply for our AutoZoners.
We are strongly encouraging our AutoZoners to get the vaccine as our culture and values of taking care of one another have been on display for the past 18 months.
Now let's move into more specifics on our performance for the quarter.
Our same-store sales were up 4.3% versus last year's fourth quarter.
Our net income was $786 million and our earnings per share was $35.72 a share, 15.5% above last year's fourth quarter.
Our domestic retail same-store sales were down slightly for the quarter, while our commercial business remains remarkably strong.
Commercial total sales grew approximately 21%.
We averaged $74 million in weekly sales, which was approximately $14,400 in sales per program per week, which was easily an all-time record for us.
The initiatives that we have in place are meaningfully helping our commercial business.
I'll remind you that this is a highly fragmented $75 billion market and we believe our product and service offerings provide us a tremendous opportunity to significantly grow sales and market share over time.
Next I'll talk about trends across our merchandise categories, particularly in the retail business.
Our sales floor categories continue to outpace the hard part categories with categories like wipers, fluids and lighting, all showing strength.
Our hard parts business was in line with our expectations and ran roughly flat with last year.
We were especially pleased as last year our hard parts business was very strong, especially in categories like batteries.
We believe our hard parts business will continue to strengthen as our customers drive more.
Let me also address [Technical Issues] we are seeing from inflation and pricing in our space.
This quarter we saw our retail sales impacted positively by about 2% year-over-year from inflation, while our cost of goods was basically flat.
We believe both numbers will be higher in the first quarter as cost increases in many merchandise categories work their way through the system.
We can see low single-digit inflation in retails as rising raw material, labor and transportation costs are impacting us and our suppliers.
We have no way to say how long it will last, but our industry has been disciplined about pricing for decades.
While we continue to be encouraged with the current sales environment, it is difficult to forecast near-term sales.
What I will say is, this past quarter sales were better than we expected and we exited the fiscal year with strong fundamentals in our business.
For FY '22, our sales performance will be led by the continued strength in our commercial business as we execute on our initiatives.
Both DIY and Commercial have gained considerable share that we are maintaining and we believe that we are in an industry that is positioned for solid growth for the long-term.
We will earn our fair share, and we hope to exceed expectations.
In addition, we continue to believe our products and services will be in high demand during more difficult economic times and this resiliency gives us significant confidence about our future prospects.
As we progress through the year, we will as always be transparent about what we are seeing and provide color on our markets and outlook as trends emerge.
As Bill mentioned, we had another great quarter.
Our growth initiatives are continuing to deliver strong results and the efforts of our AutoZoners in our stores and distribution centers have enabled us to maintain strong results.
For the quarter, total auto parts sales, which includes our Domestic, Mexico and Brazil stores were $4.8 [Phonetic] billion, up 8%.
And for the total year, our total auto parts sales were $14.4 billion, up 15.9%.
Now let me give a little more color on sales and our growth initiatives.
Starting with our commercial business, for the fourth quarter our domestic DIFM sales increased 21% to $1.2 billion and were up 31% on a two year stack basis.
Sales to our DIFM customers represented 24% of our total sales and our weekly sales per program were $14,400, up 18% as we averaged $74 million in total weekly commercial sales.
Once again, our growth was broad-based as national and local accounts all grew over 20% in the quarter.
For the full-year, our commercial sales grew 22.6% and 29% on a two-year stack basis.
Our execution of our commercial acceleration initiatives is delivering exceptional results as we focus on building a faster growing business.
The disciplined investments we're making are helping us grow share and we're making tremendous progress and growing our business in this highly fragmented portion of the market.
We now have our commercial program in over 86% of our domestic stores and we're focused on building our business with national, regional and local accounts.
This quarter, we opened 72 net new programs, finishing with 5,179 total programs.
We continue to leverage our DIY infrastructure and increased our share of wallet with existing customers.
In fiscal year '22, commercial growth will lead the way.
Our growth strategies continue to work as we continue to grow share.
We are confident in our strategies and execution, and believe we will continue to gain share.
We remain focused on delivering improvements in the quality of our parts, particularly with our Duralast brand, making improvements in our assortment, maintaining competitive pricing and staying committed to providing exceptional service.
These core focus areas have enabled us to drive double-digit sales growth for the past five quarters and positioned us well in the marketplace.
As we move forward, we're focused on our core initiatives that we believe will accelerate our sales even further.
Let me highlight one key initiatives that is driving our performance and positioning us for an even brighter future in our commercial and retail businesses, and that's our mega hub strategy.
Our mega hub strategy is giving us tremendous momentum and we are doubling down.
We now have 58 mega hub locations and we expect to open approximately 20 more over the next 12 months.
As a reminder, our mega hubs typically carry roughly 100,000 SKUs and drive tremendous sales lift inside the store box, as well as serve as the fulfillment source for other stores.
The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business, and we're testing greater density of mega hubs to drive even better sales results.
With this effort, we are leveraging sophisticated analytics to help us expand our market reach, give us closer proximity to our customers and improve our product availability and delivery times.
I will remind you that our current mega hub strategy envisions our expansion to a total of 100 to 110 mega hubs.
However, as these assets continue to outperform our expectations, we would expect to expand significantly further.
We are excited about this work and its ability to further accelerate our commercial growth.
All of our efforts are building meaningful competitive advantage and give us tremendous confidence in our ability to create a faster growing business.
On the retail side of our business, our domestic retail business was down just 40 basis points, but up 23.4% on a two year stack.
For the full-year, the retail business was up 11.2% and 18.7% on a two year stack basis.
The business has been remarkably resilient as we have gained and maintained nearly 300 points of market share since the start of the pandemic.
We are excited about the initiatives that drove the tremendous sales and share growth and the relentless focus on execution by our AutoZoners in our stores and distribution centers has been remarkable.
We are winning in the marketplace and the execution of our AutoZoners, who are taking care of our customers remains a key competitive advantage.
As we exit fiscal '21, I'm really pleased with the competitive positioning of our DIY business and our outlook going forward.
The work we have done on improving the customer shopping experience, expanding assortment, leveraging our hub and mega hub network and maintaining competitive pricing have led to tremendous results over the last two years.
DIY has been a strong contributor to the growth of our company and while comps are difficult, because of our strong past performance, the fundamentals of our business have never been stronger.
Our strategy and execution are delivering solid results.
Now, I'll say a few words regarding our international business.
We continue to be pleased with the progress we're making in Mexico and Brazil.
During the quarter, we opened 29 new stores in Mexico to finish with 664 stores and five new stores in Brazil to finish with 52.
On a constant currency basis, we saw accelerated sales growth in both countries.
Most importantly, as those economies stabilize, we remain committed to our store opening schedules in both markets and expect both to be significant contributors to sales and earnings growth in the future.
Now let me spend a few minutes on the P&L and gross margins.
For the quarter, our gross margin was down 82 basis points, driven primarily by the accelerated growth in our commercial business, where the shift in mix coupled with the investment in our initiatives drove margin pressure, but increased our gross profit dollars by 6.4%.
I mentioned on last quarter's call that we expected to have our gross margin down in a similar range to our third quarter, where we were down 118 basis points.
However, the team has been focused on driving margin improvements, primarily through pricing actions that offset inflation to drive a better-than-expected outcome.
As Bill mentioned earlier in the call, we're beginning to see cost inflation in certain product categories along with rising transportation costs.
To be clear, overall we have pricing power and consistent with prior inflationary cycles, we have been successful thus far at passing these higher cross through our retails.
Overall, the industry pricing remains rational and we're pricing accordingly.
All of the actions we are taking have resulting [Phonetic] in us growing our DIY and DIFM businesses at a significantly faster rate than the overall market and we're committed to capturing our fair share, while improving our competitive positioning in a disciplined way.
We should expect our margins in the first quarter to be down in a similar range to the fourth quarter.
We are however focused on driving new customers to AutoZone and over time growing absolute gross profit dollars at a faster than historic rate in our total auto parts operating segment.
Moving to operating expenses.
Our expenses were, up 9.2% versus last year's Q4 as SG&A as a percentage of sales deleveraged 33 basis points.
The deleverage was primarily driven by higher payroll expenses to support our sales and customer service initiatives and higher IT investments that underpin our growth initiatives.
These dynamics were partially offset by lower pandemic-related expenses in the previous year.
While our SG&A dollar growth rate has been higher than historical averages, we've been focused on maintaining high levels of customer service during a period of accelerated growth and taking care of our AutoZoners' during these difficult times.
We will continue to be disciplined on SG&A growth as we move forward and manage expenses in line with sales growth over time.
Moving to the rest of the P&L, EBIT for the quarter was just over $1 billion, up 2.6% versus prior year's quarter, driven by strong topline growth.
EBIT for fiscal year '21 was just over $2.9 billion, up 21.8% versus fiscal year '20.
Interest expense for the quarter was just over $58 million, down 11.5% from Q4 a year ago as our debt outstanding at the end of the quarter was just under $5.3 billion versus just over $5.5 billion last year.
We're planning interest in the $46 million to $48 million range for the first quarter of fiscal 2022 versus $46 million in last year's first quarter.
For the quarter, our tax rate was 20.3% versus 22.3% in last year's fourth quarter.
This quarter's rate benefited 215 basis points from stock options exercised, while last year it benefited 35 basis points.
For the first quarter of 2022, we suggest investors model us at approximately 23.6% before any exemptions on credits due to stock option exercises.
Moving to net income and EPS.
Net income for the quarter was $786 million, up 6.1% versus last year's fourth quarter.
Our diluted share count of 22 million was lower by 8.1% from last year's fourth quarter.
The combination of higher earnings and lower share count drove earnings per share for the quarter to $35.72, up 15.5% over the prior year's fourth quarter.
Net income per share for fiscal year '21 was $95.19, up a remarkable 32.3%, reflecting our outstanding topline performance and lower share count.
Now let me talk about our cash flow.
For the fourth quarter, we generated $1.3 billion of operating cash.
Our operating cash flow results continue to benefit from strong sales and earnings previously discussed.
You should expect us to be an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders.
Regarding our balance sheet, we now have nearly $1.2 billion in cash on the balance sheet and our liquidity position remains strong.
We are also managing our inventory well, as our inventory per store growth was up four-tenths of a percent versus Q4 last year.
Total inventory increased 3.7% over the same period last year, driven by new stores.
Net inventory defined as merchandise inventories less accounts payable on a per store basis was a negative $203,000 versus negative $104,000 last year and negative $167,000 last quarter.
As a result, accounts payable as a percent of gross inventory finished the quarter at 129.6% versus last year's Q4 of 115.3%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program.
We repurchased $900 million of AutoZone stock in the quarter.
As of the end of the fiscal quarter, we had approximately 21.1 million shares outstanding.
At quarter end, we had just over $418 million remaining under our share buyback authorization and over $900 million of excess cash.
For the full-year, we bought back $3.4 billion of stock or approximately 2.6 million shares.
The powerful free cash flow we have generated this year combined with excess cash carried over from last year has enabled us to buyback over 11% of our shares outstanding at the beginning of the year.
We have bought back nearly 90% of the shares outstanding of our stock since our buyback inception in 1998, while investing in our existing assets and growing our business.
We remain committed to this disciplined capital allocation approach where we expect to have powerful free cash flows that will enable us to invest in the business and return meaningful amounts of cash to shareholders.
So, to wrap up, we had another very strong quarter highlighted by strong comp sales, which drove a 6.1% increase in net income and a 15.5% increase in EPS.
We are driving long-term shareholder value by investing in our growth initiatives driving robust earnings and cash and returning excess cash to our shareholders.
Our strategy is working and I have tremendous confidence in our ability to drive significant and ongoing value for our shareholder.
Also congratulations on your one-year AutoZone anniversary that you celebrated last week.
As we start a new fiscal year, I'd like to take a moment to discuss our operating theme for the new year.
It is go the extra mile, and we will be hosting our Annual National Sales Meeting here in Memphis next week to formally announce this theme.
Being in person for the first time in two years, yes, we are going to host our AutoZoners, who are vaccinated and wearing mask in person, and we are going to celebrate all they have accomplished over the past two years.
I can't tell you how excited I am about next week.
2022 will again be focused on superior customer service and flawless execution.
In fiscal '22, we are launching some very exciting initiatives.
We will be announcing some significant expansions to our supply chain to fuel the growth of our Domestic and Mexico businesses.
We are also targeting to open 20 new domestic mega hubs in the US that will enhance our ability and support growth in our retail and commercial businesses.
We will open approximately 200 new stores throughout the Americas with notable acceleration in our Brazil business.
These capacity expansion investments reflect our bullishness on our industry and our own growth prospects.
We are being disciplined, yet we are being aggressive.
Lastly, I want to reiterate how proud I am of our team across the Board, for their commitment to servicing our customers and doing so in a very safe manner.
At the start of the pandemic last year, we could never have guessed the positive impact it would had on our sales.
First and foremost, our focus will be on keeping our AutoZoners and customers safe, while providing our customers with their automotive needs.
And secondly, we must continuously challenge ourselves during these extraordinary times to position our company for even greater future success.
I continue to be bullish on our industry and in particular on AutoZone.
| autozone q4 same store sales up 4.3%; q4 earnings per share of $35.72.
autozone 4th quarter same store sales increase 4.3%.
4th quarter earnings per share increases to $35.72.
q4 earnings per share $35.72.
domestic same store sales, or sales for stores open at least one year, increased 4.3% for quarter.
quarter -end inventory increased 3.7% over same period last year.
|
They will provide an update on Greenbrier's performance and our near-term priorities.
The recovery in our markets we forecast for the second half of this calendar year is now well underway.
Greenbrier follows a disciplined strategy throughout the pandemic and as a result, the company is in a very strong position.
Last year, we articulated our strategy centered on continuing safe operation of our facilities as critical supply infrastructure under U.S. Presidential policy number 21, U.S. Department of Homeland Security and U.S. Department of Transportation.
We also emphasized building and sustaining a strong liquidity position to withstand worst case scenarios, eliminating all non-essential spending, reducing our fixed cost, rightsizing our labor force to reduced pandemic demand.
Our actions were purposeful, and particularly regarding employee safety and those issues related to our cost base and manufacturing capacity.
Greenbrier has a flexible business plan and a flexible manufacturing strategy, along with scalable manufacturing, these are central to Greenbrier's response not only in the V-shaped downturn, but in the improving market outlook and the upturn and strong economic recovery.
This phase of our strategy is equally important.
It presents novel challenges and operational risk as we add a large number of new production lines, many involving product changeovers, manufacturing line additions and new designs.
Simultaneously, we must safely and I emphasize safely integrate large numbers of new or furloughed manufacturing employees.
Fortunately, our management team is seasoned and experienced at managing these operating dynamics.
We are confident in our ability to execute.
Of course, COVID-19 continues to be an issue we are addressing.
Reduced contagion rates among our workforce in the U.S., in Mexico and Europe are very good to see.
Brazil remains a hotspot.
But because we are proactive, cases among our Brazilian colleagues remain relatively low.
Despite these measures, we recently lost another colleague Jorge Telis to COVID-19.
Jorge worked in the paint department at our Greenbrier Sahagun, otherwise known as plant 2 facility in Mexico.
He was in his early 40s and he worked in Greenbrier for over four years.
Jorge is the eighth member of the Greenbrier family we have lost to COVID-19.
We are supporting his family through this difficult time.
As vaccines become more widely available around the world, it is essential to remember that COVID-19 is a dangerous and increasingly contagious disease.
We are urging and incenting our employees to get vaccinated.
As new COVID variance appear globally, we will remain attentive and defend our employees and our stakeholders against this continued very real threat.
I'm pleased to see that Greenbrier's financial results for the quarter demonstrate strong solid performance.
Lorie and Adrian will cover our detailed results later in the call.
For now, I will simply say that we are very pleased.
Q3 earnings moves Greenbrier solidly into the black [Phonetic] for fiscal 2021 through nine months after a very weak first half, and the outlook is strong for the fourth quarter and 2022.
Importantly, our liquidity position also remains strong.
At the end of the third quarter of 2020, we announced we achieved liquidity target of $1 billion despite some challenging quarters.
Since then, Greenbrier continues to maintain almost that level of liquidity, including cash and additional available borrowing on our debt facilities.
Future tax refunds and other initiatives underway.
In the third quarter, we also executed a strategic debt refinancing, taking advantage of the opportunity to do so in these markets where money is reasonably available and interest rates are cheap.
We extended maturities on our convertible notes to add another four years of favorable interest rates.
Liquidity is important during a steep recovery cycle of these steep cycle, remembering that this is a 100 year pandemic that everyone has had to navigate.
And this part of the cycle requires increased working capital and so we're pleased that we will have the working capital to deal and navigate through this time, particularly with supply chains being a little royal.
We are balancing efficient management of working capital and protecting our supply chain, ensuring production and labor continuity.
Our COVID strategy along with the three-year strategy of achieving scale in our business are producing solid results.
Our international backlog now is about a third of our of our base.
The results in the third quarter reflect both a steady recovery in our markets as well as Greenbrier's ability to manage through some of the most challenging quarters in the company's history and in fact, in the -- over the last 100 years.
During our last two calls I discussed many of the steps Greenbrier was taking to prepare for economic recovery and positive momentum in our markets.
This momentum is reinforced as we prepare Greenbrier's three-year plan and navigates as we achieve greater scale and efficiency.
A greatly reduced and leaner cost structure achieved during the pandemic should also be a boost to our business unit efficiency and our financial momentum.
We are joined today by an important guest, Brian Comstock.
Brian is Greenbrier's Executive Vice President and Chief Commercial & Leasing Officer.
He is here to share a little bit more about our outlook on the commercial side of our business.
Across the economy, there are positive indicators and data points that indicate a sustained recovery in rail.
In North America, the latest U.S. economic indicators reflect growing optimism with GDP consensus forecast growth continuing to be revised up.
Through May, North American rail traffic was up 12.1%.
Loadings were led by increases in grain, intermodal and auto.
We expect to see continued near-term demand for intermodal units and grain Covered hoppers as both segments continue to set monthly volume records.
These segments should remain highly active well into 2022.
Overall, system velocity has slowed approximately 2 miles per hour due to robust rail freight recovery.
Slowing rail velocity as everyone knows, decreases railcars and storage and increases demand for new railcars.
Certain railcar types are in tight supply, including intermodal units, boxcars and gondolas.
These fleets are almost fully deployed with over 95% utilization.
Total North American railcar utilization is nearly 80% as of June 1st.
Since the peak last year, over a 160,000 cars have been taken out of storage in North America, bringing the number of storage cars to approximately 360,000 units.
With higher scrap pricing and proposed tax benefits for construction of new, more efficient and environmentally friendly equipment, we expect the trend of declining cars and storage to continue.
We are also seeing robust activity in the railcar conversion market with the recent 1,000 tank car conversion order.
The increase in commodity prices almost -- across almost every important sector has captured our attention.
The current price for steel is more than three times higher than the August 2020 price.
Greenbrier continues to utilize price indexing and material escalation pass-throughs to protect gross margin dollars.
Although elevated steel prices can be a potential headwind, order cadence remains robust.
In Europe, longer-term broad scale economic reforms to address climate change are ushering in an era of modal shift for freight, from polluting and congested road travel to efficient higher speed rail service.
This modal shift will drive growth in railcar demand in the years to come.
This growth is in addition to the replacement demand as the fleets in the EU countries are aging, with many cars already well past the time for replacement.
Greenbrier's backlog in Europe was strong at the end of the third quarter.
Our focus has now turned to ramping up manufacturing output to meet the market demand with several production lines already booked well into fiscal 2023.
Finally, in Brazil, the economy is improving.
Our visibility is a good and we are experiencing our highest levels of backlog since we entered the market.
Greenbrier's global commercial team continues to see strengthening in new railcar inquiries and orders.
In the fiscal quarter -- third fiscal quarter, Greenbrier won orders for 3,800 railcars totaling $400 million and our backlog as of May 31st was 24,800 units valued at $2.6 billion.
Subsequent to quarter end, the commercial team has booked nearly 3,000 additional orders for intermodal, automotive, covered hoppers and gondolas.
I want to emphasize the conversion activity I spoke to earlier is not reflected in the new railcar orders or backlog.
Overall, pipelines are strong and I'm optimistic this momentum will carry into fiscal 2022.
Now over to Lorie for more about our Q3 operating performance.
Today, we are reporting results from operations that are significantly better than our results for the first half of our fiscal 2021.
Our employed produced a great quarter after a challenging first six months.
One thing we've learned over the last 18 months is the resiliency and flexibility are vital in an ever evolving pandemic setting.
And while it's too early to declare victory, especially as COVID variance emerge, our flexible operating model is responding quickly and efficiently as well as safely to the improving demand environment.
We delivered 3,300 units in the quarter, including 500 units in Brazil.
Our Q3 deliveries increased 57% from the second quarter.
Our global manufacturing performance this quarter shows that operating leverage of higher production rate which will continue in Q4.
This strong performance is against the backdrop of adding almost a 1,000 employees.
Brian mentioned the significant increase in raw material pricing and the volatility in the supply chain.
So I'd like to highlight the outstanding job our purchasing and sourcing group is doing.
This group is ensuring that our facilities have the materials and components to continue uninterrupted production, at times, that means even collaborated with our suppliers to work with their suppliers to make certain that we have the material we need for our customers.
Over the remainder of fiscal 2021 and into 2022, the manufacturing team is focused on building high quality railcars while maintaining employee safety.
Increased car loadings and rail traffic also began to benefit our wheels repair and parts business in the third quarter.
Each of the units that comprise our GRS business experienced double-digit revenue growth and strong sequential margin improvement.
The margins achieved by GRS in Q3 are the highest since the reintegration of our repair business in 2019.
The GRS management team continues to evaluate our footprint and refine our operations around quality, efficiency and safety, with a focus on being a key service provider to our customers.
The business is prepared for stronger activity levels and I'm cautiously optimistic that the demand recovery we've seen so far will continue to gain momentum for this business unit.
Our leasing and services team had a strong and quite busy quarter.
GBX Leasing was formed and $130 million of the initial $200 million railcar portfolio was contributed to the joint venture.
This activity was levered 75% or 3:1, so about $100 million was funded from the non-recourse warehouse credit facility.
We'll will continue to fund assets into GBX Leasing as they become available in Q4 and beyond.
And we also have several growth opportunities on the radar.
From a commercial standpoint, GBX Leasing is a strong complement to our integrated business model that enhances our distribution strategy to direct customers, operating lessors, industrial shippers, and our syndication partners, while also creating a new annuity stream of tax-advantaged cash flows.
GBX Leasing is consolidated in the leasing and services segment of our financial segment with our partner's share of earnings deducted in the net earnings attributable to non-controlling interest line.
Our capital market team, also part of leasing and services, syndicated 200 units in the quarter and yielded valuable operating leverage.
Our syndication model provide several tools to generate revenue and off-net margin.
Summer part of our normal course of business and others are available to be deployed opportunistically.
In Q3, we completed an asset sale transaction on favorable terms, which generated increased revenue and margin.
We expect syndication activity to increase meaningfully in the fourth quarter.
Our management services group also helps in leasing and services is a major strategic customer value.
We continue to drive growth in this business through a combination of onboarding new customers, expansion of services within the existing customer base, and growth and customer fleets, including the GBX Leasing service.
At the end of Q3, Greenbrier was providing management services on 445,000 railcars or about 26% of the total North American fleet.
Positive operating momentum is building as we enter fiscal 2022.
Given the strong performance in Q3 and continuing into Q4, we expect to exit the year with gross margins in the teens and further decisive actions taken over the last 15 months, Greenbrier is a stronger and leaner organization and is well positioned to benefit from the emerging economic recovery.
Greenbrier's Q3 results were much improved after a challenging first six months of fiscal 2021, a few highlights from the quarter.
Our revenues of $450 million which increased over 50% from Q2.
Each operating units increased sequentially, although increased production across North America and Europe was the largest driver.
We achieved month-over-month momentum coming out of lower production levels in our second fiscal quarter.
Book-to-bill of 1.2 times made up of deliveries of 3,300 units, which included 500 units from Brazil and orders of 3,800 new units.
This is the second consecutive quarter that book-to-bill exceeded 1 times.
Aggregate gross margin of nearly 16.7%.
In the quarter, we recognize the benefit from long-standing international warranty and contingencies after the expiration of the warranty period and final resolution of the contract.
Excluding this activity, manufacturing margin would have been in the low double digits.
Selling and administrative expense of $49 million increased sequentially, reflecting start-up costs from the formation of GBX Leasing and higher employee-related costs.
Adjusted net earnings attributable to Greenbrier of $23.3 million or $0.69 per share excludes $3.6 million or $0.10 per share of debt extinguishment losses, EBITDA of $53 million or 11.7% of revenue.
The effective tax rate in the quarter was a benefit of 64%.
This primarily reflects the tax benefits from accelerated depreciation associated with capital investments in our lease fleet, primarily GBX Leasing.
These deductions will be carried back to earlier high tax years under the CARES Act, resulting in a tax benefit in the quarter and cash tax refunds to be received in fiscal 2022.
We also recognized $1.9 million of gross costs, specifically related to COVID-19, employee and facility safety.
These costs have been trending down, but we expect to continue spending for the foreseeable future to ensure the safety of our employees.
Greenbrier continues to have a strong balance sheet and we are well positioned for the recovery that is emerging, including cash of $628 million and borrowing capacity of over $220 million, Greenbrier's liquidity remains healthy at $850 million plus another $149 million of initiatives in process.
In the quarter, Greenbrier began extending the maturities of its long-term debt with the issuance of $374 million of 2.875% senior convertible notes due in 2028.
Concurrently, we retired $257 million of senior convertible notes due in 2024, and maybe from time-to-time retire additional 2024 notes in privately negotiated transactions within the limitations of applicable securities regulations.
As part of the convertible note issuance process, we repurchased $20 million of our outstanding common stock.
The principal balance of the new convertible notes will be settled in cash with the flexibility to choose either cash or share settlement for any amounts paid over par.
The cash interest expense of the notes is about half of the cash cost of high yield notes.
Turning to capital spending, leasing and services is expected to spend approximately $130 million in 2021, reflecting continued investments into our lease fleet, primarily at GBX Leasing to maximize the tax benefits I spoke to earlier.
Manufacturing and wheels repair and parts capital expenditures are still expected to be about $35 million for the year, with spending focused on safety and required maintenance.
Spending will be higher in Q4 than in the prior few quarters as we supports the increasing production and business activity levels.
While we have extended the debt maturities of a portion of our capital structure, we will continue to opportunistically extend maturities as it makes sense for the rest of Greenbrier as long-term debt.
Today, Greenbrier's Board of Directors announced a dividend of $0.27 per share, which is our 29th consecutive dividend.
Looking ahead, Greenbrier expects the fourth quarter to be the strongest performance of the year.
In addition, a full quarter of increased production rates and increased business activity creates positive momentum into fiscal 2022.
| q3 adjusted earnings per share $0.69.
q3 revenue $450 million versus refinitiv ibes estimate of $489.4 million.
expects q4 to be strongest performance of year.
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They will provide an update on Greenbrier's performance and our near-term priorities.
And with that, I will hand the call over to Bill.
Greenbrier adhered to disciplined management program throughout this year of the pandemic.
Our simple core strategy since March 2020 has been number one, to maintain a strong liquidity base and balance sheet; number two, to safely operate our factories, while generating cash, reducing costs and adjusting to reduce demand for our products and services, that reduction and demand was clearly shown in this quarter's results; number three, to prepare for economic recovery and forward momentum in our markets.
We believe we're now solidly in this recovery phase.
We believe that our Q2 just completed in February will be the most challenging quarter of our fiscal year, particularly affected by very bad weather in North America.
There's good reason to be optimistic as vaccines expanded in the United States.
Vaccinations will bolster already accelerating infection and mortality rates and allow America to turn the corner on the pandemic at last.
Globally, we are prepared for the pandemic to take a longer course toward resolution.
Sadly, we learned last week that Greenbrier lost two more employees, our sixth and seventh loss to COVID-19.
Merala Nisioh [Phonetic], 58 was a assistant to the plant manager at our Severin, Romanian facility where she worked for over 32 years.
We also lost Luis Martinez aged 43.
Luis was maintenance manager in our factory in Tlaxcala, State of Mexico -- in the State of Tlaxcala in Mexico.
He's been with Greenbrier since December 2017.
He was survived by his wife and four children ages, 19, 17, 11 and five.
We mourned the loss of Merala and Luis.
And we're extending support and prayers to their family and to colleagues who worked with them.
Our results in the second quarter reflect the current -- temporary difficulties in the operating environment, particularly in North America, but also in Europe and Brazil, and I emphasize temporary.
In addition to lower production levels related to the market downturn and as earlier mentioned, severe weather conditions impact our second quarter results in North America.
On a much more positive note, revenue, aggregate gross margin and EBITDA, all improved sequentially month-by-month during the quarter, indicating positive momentum.
Our order pipeline of inquiries took a big jump in March.
We completed our GBX joint venture post quarter with Steve Menzies and funded the first $100 million tranche of railcars from a newly established $300 million non-recourse credit line established for this business.
Our financial results were also positively impacted by tax benefits related to the creation of GBX Leasing joint venture and additional capitalization of railcars into the Greenbrier leasing fleet in our second fiscal quarter.
Adrian Downes, our CFO, will touch on this in a few minutes.
Finally, post quarter and almost all in the month of March, we received orders for another 1,700 railcars with an approximate value of $190 million on top of the 3,800 railcars orders received during the quarter worth $440 million in all 5,500 cars worth about $630 million in the space of four months or more.
In recent weeks, North American rail traffic grew in year-over-year comparisons, including double-digit increases in grain and intermodal loadings.
The added traffic has driven year-to-date rail velocity down by nearly 6% compared to the same period in 2020 or about 2 miles an hour.
Slowing rail velocity, as all of you know, impacts cars and storage and demand for new railcars.
Consider that about 148,000 cars have been taken out of storage in North America alone since the peak storage levels of last year, storage statistics have fallen now to 378,000 units, well below what we believe to be the frictional level of storage, 400,000 cars.
At that point, new cars need to be built.
With returns of cars serviced, higher scrap pricing and tax benefits for construction of new, more efficient and environmentally friendly equipment, we expect this trend to continue.
Throughout the course of the pandemic, we've been laser-focused on maintaining our strong liquidity position.
We ended the quarter with over $700 million of liquidity, including nearly $600 million of cash and another $115 million of available borrowing capacity.
We expect to add another $100 million shortly.
Now let's talk for a moment about our plan for recovery.
Vital to our ongoing success is the ability to rapidly align production capacity and execution with our forward view of the market.
We began to reduce capacity prior to the onset of the pandemic as our industry was already entering a weaker period due to PSR.
COVID-19 compelled us to take a series of further actions to protect the enterprise and to ensure Greenbrier attained its strongest possible financial position.
We have maintained long-term profitability over the years by prioritizing our manufacturing flexibility and refusing to allow our unique manufacturing platform to become a mere commodity.
Refinement of our go-to-market strategy, adding GBX Leasing to our successful formula of direct sales, syndications and partnerships with operating lessors will reinforce our recovery.
We reactivated a number of North American production lines in March, and several of our production lines are already booked well into or through fiscal 2022.
The inquiry rate for new manufacturing business has picked up dramatically.
We expect a continued high rate of commercial activity to continue April, May, and beyond.
Consistent with our earlier forecasts that the second half of calendar 2021 would be the time of a V-shaped recovery.
Forecast for rail traffic fundamentals in North America support Greenbrier's outlook that we are entering a period of sustained and expanding railcar [Indecipherable].
FTR Associates projects the total rail traffic will grow by 5.7% year-over-year in 2021 and intermodal traffic will grow by 6.4%.
In North America, that's even more bullish and closer to 7% for 2021.
In February, the Purchasing Managers' Index reached its highest level since February 2018.
At the same time, however, supply chain disruptions that have been evident for months persist with congestion at West Coast ports, and these continue to weigh in the North American traffic flows.
Strong consumer demand, manufacturing growth and Fed policy on lower interest rates, along with low-cost funding available globally will continue to spur economic recovery from the COVID-19 crisis.
Federal stimulus spending in the US is at extraordinary levels.
Also, a federal infrastructure bill will provide additional stimulus for a sustained growth into 2022 and probably beyond.
Other bills in the work -- in the works at past should enhance US job growth and further incent the construction of more efficient, environmentally friendly railcars.
In Europe, the large EU recovery and resiliency facility will begin to impact EU economy, and money remains plentiful and cheap.
A wave of pent-up consumer and investment demand is expected to materialize, although vaccine rollout has been slower than in America.
In the meantime, rail freight has continued to perform well through the latest rounds of lockdowns and restrictions.
Order rates have ticked up dramatically with EU.
EU policy and congestion and the environment is attempting to shift transportation from truck to rail, which is three to four times more fuel efficient and produces less congestion and better air quality in cities.
Rail freight traffic has actually grown over pre-crisis levels in some countries.
In the UK, rail may turn out to be one of the few beneficiaries of Brexit as trade flows are rerouted to accommodate new circumstances.
Longer term, broad scale economic European reforms to address climate change are ushering in an era of mode of shift from freight -- for freight from polluting and congested road travel to efficient higher-speed rail service.
This will drive significant growth in railcar demand in the years to come, above and beyond replacement demand growth.
And the fleets in EU countries are aging.
Many cars are already well past the time for replacement.
Finally, in Brazil, the continued impact of COVID-19 has left the country's health system in a very weak condition.
Greenbrier Maxion continues to operate well in a stressful environment.
Demand for its products is strong.
Earlier, we rightsized this business and it has a strong and profitable backlog.
About 30% of our present backlog is in Europe and Brazil.
We expect tailwinds from both regions.
Our approach globally continues on course to emphasize safe operations of all of our facilities under essential industry status.
We continue to plan for robust liquidity and ongoing cost containment and to execute on the growing number of orders we expect, while maintaining pricing discipline and control of costs, especially on steel and components.
Entering the second half of our fiscal year, Greenbrier enjoys an industry-leading manufacturing leasing and services franchise on three continents, and we've achieved scale.
Our business outlook is significantly improving, which will bring advantages from that scale.
Despite the lingering uncertainty created by COVID-19, the one thing I'm certain about is that our franchise will benefit strongly from all the things I've mentioned in these remarks today.
Meanwhile, we will continue to preserve our strong liquidity position, make prudent business decisions about deployment of capital, grow our market opportunities, manage our manufacturing capacity judiciously.
We will do all this with -- at all times respect for our customers, for our workforce and through diversity and environmentally sound policies.
Our team continues to work hard to accomplish these goals and to maintain focus as better days draw closer as the COVID chill on society melts away.
Now over to you, Lorie.
I too am proud of how Greenbrier employees responded in our second quarter.
We expected it to be a challenging operating quarter, but the extreme winter weather that impacted every location in North America added an additional test.
I was impressed with the creativity and commitment shown to ensure operations continued as seamlessly as possible.
Over the last several quarters, Greenbrier has balanced right-sizing our global footprint and production capacity with maintaining our ability to respond quickly as recovery begins.
The first six months of the fiscal year were painful, but we're seeing improved demand in each of our markets, and we've recently restarted several production lines in North America and are poised to flex our manufacturing footprint as conditions evolve.
As you heard from Bill, we remain focused on executing our COVID-19 protocols by focusing on employee safety and maintaining our liquidity to ensure we're prepared for the emerging economic recovery.
Regarding the second quarter activity, Greenbrier delivered 2,100 units in the quarter, including 400 units in Brazil.
We received orders for 3,800 units in the quarter valued at approximately $440 million.
International order activity accounted for nearly half of the orders in the quarter and the average sales price in backlog increased sequentially reflecting a more favorable mix of railcars.
Our book-to-bill ratio of 1.8 times resulted in a growing backlog to 24,900 units valued at $2.5 billion.
Our global manufacturing performance was not indicative of its true value.
While a positive gross margin was achieved, the team's operational execution was tremendous in a challenging environment.
Now bear with me while I throw some numbers at you.
Compared to Q1, our deliveries in Q2 were down 37% and that followed a 45% decline from Q4 to Q1.
And then, further if you were to do a year-over-year comparison, you guys like all these year-over-year comparisons of Q2, manufacturing revenue was down 59% on 54% lower deliveries.
With such a steep decline in revenue and production, it's effectively impossible to quickly cost cut your way to profitability.
It was more a matter of weathering the short-term pain for the longer-term goal of responding effectively to increasing activity.
Over the next six months, the manufacturing team will be focused on increasing production rates quickly and efficiently, while maintaining employee safety, quality and customer satisfaction.
Volumes in our wheels and parts business improved sequentially, although still well below normal winter level.
The volume and mix of work continue to lag in our repair business, although we are seeing some early signs of increased activity and improved efficiency as we right-size those operations.
We've well-positioned shops that serve our customer base in an efficient and safe manner, and our network is prepared for the return of more normalized activity levels later in the calendar 2021.
Our leasing and services team continues to navigate the downturn well with fleet utilization improving sequentially during a time when approximately 25% of the total North American railcar fleet and storage.
Greenbrier's capital market team had a relatively quiet quarter with 100 units syndicated.
This lower volume is reflected of the lower production rates in the prior two quarters and the types of railcars being produced.
Our Management Services Group added another 38,000 new railcars under management during the quarter, bringing total rail cars under management to 445,000 or about 26% of the North American fleet.
After quarter-end, we finalized the formation of GBX Leasing.
The joint venture is an exciting development for us and an opportunistic deployment of our capital.
The JV achieved several important goals for Greenbrier.
From a commercial standpoint, it's a strong complement to our integrated business model of railcar manufacturing and services that further enhances our distribution strategies to direct customers, operating lessors, industrial shippers and syndication partners.
We expect the joint venture will help Greenbrier continue to grow its diversified customer portfolio with the focus on industrial shipper customers and small batch production to leverage long-standing customer relationships and capabilities gained through the acquisition of the manufacturing unit of ARI.
We've realized significant cost synergies following the US manufacturing acquisition, and we expect that this joint venture will result in meaningful commercial synergies.
Financially, GBX Leasing delivers clear benefits.
Over the long term, it reduces our exposure to the new railcar order and delivery cycle by creating a new annuity stream of tax-advantaged cash flows and sound portfolio practices, including asset diversity, staggered lease terms and debt maturities.
Adrian will discuss the tax benefit shortly.
GBX Leasing will acquire approximately $200 million of railcars per annum from Greenbrier with the initial portfolio identified from leased railcars on our balance sheet or in backlog.
The joint venture will be levered about 3-to-1 debt to equity during the initial $300 million traditional non-recourse warehouse facility, of which we've drawn the first $100 million and those transition to a more traditional asset-backed securities financing as time progresses.
GBX Leasing will be consolidated in our financial statements, and we plan to provide additional supplemental information to illustrate the performance and benefits of this exciting new venture.
Looking ahead, I'm optimistic about a recovery in calendar 2021 that will primarily benefit our fiscal 2022.
And while the first six months of '21 were difficult, we still expect gross margins in the low-double-digit to high-single-digit range, and we'll continue controlling costs to improve financial performance.
Greenbrier remains healthy with strong liquidity and no near-term debt maturities.
We have leadership positions in our core markets in North America, Europe and Brazil, and see early signs of recovery in each geography.
And you can see that, particularly with what Bill mentioned, our recent orders for 1,700 railcar units in just the first month of our Q3.
The decisive actions we've taken over the last 12 months have positioned Greenbrier to exit the pandemic economy a stronger and leaner organization.
And now, Adrian will provide commentary on the quarterly results.
During the quarter, Greenbrier continued managing for near-term stability, while positioning for a strong recovery.
Obviously, the pandemic has had a major impact on our revenue and delivery levels.
Nonetheless, we were able to achieve positive margins in each segment as a result of our flexible manufacturing footprint and aggressive cost reductions.
Reduced deliveries and revenue is a power driver of bottom line performance even in the face of dramatic reductions and payroll, overhead and SG&A.
Performance did improve each month within the quarter, and we exited the quarter with positive momentum increasing production rates to build sequential momentum in Q3 and Q4.
A few quarterly items I'll mention include revenue of $296 million; book-to-bill of 1.8 times made up of deliveries of 2,100 units, including 400 units from Brazil and orders of 3,800 new units; aggregate gross margin of 6%; selling and administrative expense of $43 million, flat sequentially and 20% lower than Q2 of fiscal 2020.
Net loss attributable to Greenbrier was $9.1 million or a loss of $0.28 per share.
EBITDA was negative $1 million.
The effective tax rate in the quarter was a benefit of 62%, due to the net operating losses and tax benefits from accelerated depreciation associated with capital investment in our leasing assets.
These deductions will be carried back to earlier high tax years under the CARES Act, resulting in a $16 million tax benefit in the quarter and cash tax refunds to be received in fiscal 2022.
We also incurred $2.5 million of incremental pre-tax costs specifically related to COVID-19 employee and facility safety.
These costs will continue for the foreseeable future.
Moving to liquidity, we have continued managing for near-term balance sheet strength and are positioned for a recovery.
Including borrowing capacity of $115 million, Greenbrier's liquidity remains healthy at $708 million plus another approximately $100 million of initiatives and process.
Cash in the quarter ended at $593 million, reflecting $48 million of inventory purchasing to support higher production levels beginning in Q3 and the $44 million increase in leased railcars for syndication.
Historically, tax receivables have been included in the accounts receivable line in our balance sheet, but to improve transparency, we separated this activity in the quarter to provide a more accurate picture of operating receivables as well as the future tax refunds I just mentioned.
Capital expenditures, net of equipment sales, in the quarter was $9.2 million.
Leasing and services capital spending is expected to be about $90 million in 2021, with about 42% of that already occurring in the first half of the year.
This capital spending includes GBX Leasing, which began operations in Q3 and approximately $130 million of leased railcar assets were transferred into the JV at that point, including some assets, which were already on our balance sheet at the beginning of the year.
An additional approximately $70 million of assets will be newly built or transferred later this year.
Manufacturing and wheels repair and parts capital expenditures are still expected to be about $35 million for the year with spending focused on safety and required maintenance.
We continue to have healthy cushions in our debt covenants.
And while we have no significant debt maturities until late calendar 2023 and calendar 2024, we are proactively evaluating opportunities to extend maturities and capitalize on the low interest rate environment.
Greenbrier's Board of Directors remains committed to balanced capital deployment.
Authorization of share repurchases remains in effect through January 2023.
And today, we're announcing a dividend of $0.27 per share, our 28th consecutive dividend.
Since the start of our program, the growth of our dividend represents a compound annual rate of 9%.
| q2 loss per share $0.28.
q2 revenue $296 million.
|
We are again presenting results from multiple locations, so please bear with us if we encounter any technical difficulties.
As you have seen from today's announcement, we had an outstanding quarter.
Stronger player demand drove improved momentum across all our main activities in Q1.
This translated into 25% revenue growth from the prior-year period and a 6% increase from Q1 '19.
Lottery reached the record levels with the same-store sales up over 30%, including double-digit gains across games and regions.
Growth accelerated for our digital and betting activities where revenues nearly doubled in Q1.
We continue to monitor costs as the top line recovers and we are making excellent progress on structural cost reductions with the OPtiMa program, which Max will discuss later.
You can see these in the over 70% increase in EBITDA and 44% EBITDA margin for the first quarter.
It was an outstanding performance and among the highest levels ever achieved.
With such strong Q1 results and an expectation of progressive recovery for land-based gaming as we move through the year, we believe we can return to pre-pandemic revenue, profit, and leverage levels this year.
This swift recovery from the impact of the pandemic is due to the unique and resilient nature of our business model across products and regions.
I'd like to spend some time on Q1's lottery performance.
The 32% same-store sales increase was fueled by 52% growth in Italy and 28% in North America and the rest of the world.
Even without the benefit of stronger multi-jurisdiction jackpot activity, same-store sales for North America and the rest of the world were up over 20%.
Compared to 2019, global same-store sales were up 24%.
The sustained strength in lottery same-store sales for the last three quarters confirms a complete recovery from the pandemic.
This is supported by the highest segment revenue and profit levels we have ever achieved.
And the momentum continues.
Global same-store sales are trending up over 20% for the Q2-to-date period compared to the second quarter of 2019.
In the U.S., higher disposable income, which includes the benefit of government stimulus, is another factor.
But lottery has always maintained a steady growth profile.
This is because it is a content-driven business.
The games have high entertainment value with broad player appeal.
A consistent stream of new games offers fresh opportunities for player engagement.
Throughout the pandemic, the lottery has become a valued and routine activity in the new normal.
We expected that to continue.
According to our research, many intend to play lottery at higher levels than they did before COVID.
This is an encouraging sign.
Innovation is another important contributor.
In the draw-based arena, add-on and progressive jackpot games are fueling double-digit growth in the U.S., while the 10eLotto Extra is an important driver in Italy.
Instant ticket sales are benefiting from higher average ticket prices, as well as player interest in the second chance and the free ticket games.
It is reasonable to expect sales to moderate from current levels as other entertainment options become more widely available, especially in Italy.
We believe we will see a return to more normal steady increases after we cycle through the pandemic-related peaks and valley over the next several quarters.
Our expectation is that when the restriction of the pandemic will be largely over to see some stickiness to the recent increased play levels, particularly in North America, and the market will resume a more normal growth rate, mid-single digits in the U.S., but starting from a higher individual consumption.
The recovery for our global gaming segment is progressing well in the U.S., which accounts for about 70% of the segment revenue.
U.S. casinos are open for business as the pace of vaccination is driving confidence among players and operators This has led to a substantial improvement in slot GGR since January, not only in the regional U.S. markets where most of our business is conducted but also in Las Vegas.
Core players ever returned and new players, mostly younger, are entering the market as other entertainment options are limited.
This is translating into a swift recovery in our business.
Even as more units are powered up is on active U.S. units were up high single digits sequentially.
New multilevel progressive such as Dragon Lights, Gong Xi Fa Cai, along with the Wheel of Fortune franchise, are driving these stronger results.
We also had good unit sales in the quarter, fueled by a 40% increase in the U.S. and Canada units, including double-digit growth in replacement, which were not far from Q1 '19 levels.
The resilience speaks to the diversity in our customer mix across regional, tribal, and commercial casinos, as well as the VLTs.
Regal Riches and the Lion Dance were among the top-selling core video titles, while Wild Life Extreme and the Big City 5s were the best realty titles.
We expect continued progressive improvement throughout the year across all aspects of our global gaming segment.
It is clear from our meetings over the last few months that the digital and betting is of great interest to you.
It is for us, too, as IGT plays an important role in the iGaming, sports betting, and iLottery ecosystems.
During Q1, GGR across the portfolio was two to three times the prior-year levels.
Most of that growth came from an expanding player base in existing markets.
There are no signs of the digital trend cannibalization in the land-based business.
Digital and betting revenue nearly doubled in Q1, posting the strongest quarterly increase in the last year.
We expect the business to maintain a strong double-digit growth profile for the next several years through a combination of organic growth including the contribution from new jurisdictions.
We are investing to support this growth and maintain leadership positions in all three verticals.
In iGaming, we are expanding our content portfolio through a combination of internally developed games and those developed with third-party studios.
There is an additional opportunity for IGT to act as a distributor of third-party content.
And this is an emerging area of opportunity for us.
All these should result in IGT having 20%, 30% share of the North American iGaming market.
Outside North America, there is also an opportunity to penetrate emerging international markets such as Germany, Greece, and the Netherlands.
We intend to maintain a leading role in the iLottery industry, leveraging the longest standing relationship we have with the world's leading lottery today into our commitment to investing in three main objectives: first, expand the portfolio of games; second, to enhance our platform capabilities; and third, by increasing the marketing and other activities to support players acquisition and retention for our customers.
As we look out over the next three to five years, we see the potential for the number of U.S. jurisdictions authorizing the iLottery to double from current levels.
Today, our presence in the U.S. sports betting markets powers 16 states representing over 40 sportsbooks.
IGT's land-based sports betting platform is the most widely used in the country.
We see the greatest opportunity for us in offering turnkey sports betting solutions to commercial and tribal casino operators.
Since the launch of our in-house trading team last summer, we have made good progress assigning customers including Maverick Gaming, Snoqualmie, and Emerald Queen, among others.
We have many more deals in the pipeline.
There are 17 states where legislation is spending this year and four more where legislation has been passed but sports betting is not yet operational.
We are proactively securing a partnership in jurisdictions where regulatory approval is spending, ensuring our customer is with the launch as markets go live.
Our first-quarter results marked a strong start to the year and illustrate the compelling foundation IGT can build on over the next several years.
This is especially true for our global lotteries segment where record sales and profits confirm the high entertainment value and broader player appeal of the games, bolstering our favorable long-term growth outlook.
The faster recovery in our land-based U.S. gaming activities is accentuated by accelerating the momentum for the right growth of digital and betting businesses.
Stronger revenue trends are further enhanced by significant structural cost reductions that improve our outlook for profit margins and cash flows.
With the proceeds of the recent sale of certain Italy B2C gaming businesses that will be used for debt reduction, our leverage profile should be significantly improved by yearend.
The financial performance exhibited in the first quarter of 2021 displays the strength of the IGT portfolio with our lottery business running at a fast pace both on a core basis and supported by exceptional jackpot activity in the early part of the period.
Our gaming unit is on an accelerated path to recovery with a strong contribution from our OPtiMa program as well as sustained robust growth in our digital platform verticals.
These trends brought a performance of over $1 billion in revenue and $450 million in adjusted EBITDA.
Our profitability showcases the dynamic margin leverage of our lottery business as well as disciplined cost-saving actions throughout the company.
We achieved roughly one-third of this year's over 200 million OPtiMa savings target during Q1, mainly through product simplification and margin improvement efforts.
As giving volume gradually improved throughout the year, we expect to see an increase in benefit from our operational excellence initiatives.
Compared to the prior year, we saw the expected reoccurrence of certain normal running expenses in the first quarter, primarily employee-related costs.
Continued healthy cash conversion and capex discipline drove over 200 million in free cash flow, which is high for a first-quarter performance.
Interesting to note, we return to profitability and net income level this quarter, generating $0.38 per share.
Turning to our lottery segment on Slide 13.
Revenue increase over 40% to 749 million.
Global same-store sales rose over 30% on broad-based growth across instant tickets, drawer-based games, multi-state jackpots, and iLottery.
Same-store sales grew double-digit in January and February where there were no prior real impacts from the pandemic, highlighting the strong underlying play of demand.
In fact, the comparison to Q1 2019 in terms of the top line is showing an astounding 20 percent-plus growth.
Part of the same-store sales growth includes roughly 20 million in revenue from higher multi-state jackpot activity and outside of same-store sales, lottery service revenue includes approximately 60 million in performance-driven incentive accruals from our U.S. lottery management agreements.
There's 80 million in total in Q1, benefits flow through almost entirely to profit.
Product sales, which are naturally lumpy and represent about 5% of annual lottery revenue, were down 10 million on large software license sales in the prior year, partly offset by an increase in instant ticket printing revenue.
The margin leverage from lotteries largely fixed cost structure is particularly evident this quarter as our revenue growth translated into incremental margins of over 80%.
And we also had the benefit of the 80 million in Q1 revenue items indicated before.
Operating income more than doubled from the prior-year period to 337 million with adjusted EBITDA growing 74% to 447 million.
So all in all, an excellent performance by a vibrant and pandemic-resilient lottery business.
Turning to global gaming, the revenue of 266 million was down 14% over the prior year.
We continue to see sequential improvement in this business with higher revenue and adjusted EBITDA and lower operating loss.
Compared to the fourth quarter, KPIs are improving and the contribution from digital and betting continues to accelerate with revenue growing over 80% from the prior year.
Sequentially, the global installed base was stable.
Over 75% of our U.S. casino installed base was active and service revenues close to prior levels due to higher productivity on the active machines.
In North America, yields on active units increased double-digit compared to the previous-year period.
We sold just over 4,400 units globally in the quarter, up 20% over the prior year, and up 2% sequentially.
Unit shipments were driven by VLT replacement sales in the U.S. and Canada and the casino opening of Resorts World Las Vegas and Hard Rock Indiana.
Overall, product sales are down due to a multi-year strategic agreement booked in Q1 last year and AWP upgrades in the prior year as well.
Operating loss and adjusted EBITDA reflect a lower base of revenue, partially offset by the benefit of cost savings actions.
Margin leverage improved in the quarter as expenses have come down.
On Slide 15, you can see that the recovery of top-line trends and diligent cost-savings initiatives are driving strong cash flow in the quarter.
Cash from operations was 251 million despite the concentration of interest payments in the first quarter.
Free cash flow was 204 million, and you can see the direct impact on net debt and leverage, which was down at full-term versus yearend 2020.
We now expect leverage to return to pre-COVID levels by the end of this year, highlighting the unique resilience of the IGT business.
On the next slide, we can see our debt maturities.
In the last year, we have made significant improvements to our capital structure as we pay down debt, extending maturities, and reduce interest costs.
Each of our most recent debt transactions in euros and dollars was at the lowest coupon rate in company history.
Since our last earnings call, there have been two additional improvements.
First, in late March, we successfully refinance approximately 1 billion notes due in 2022 with a combination of new notes and bank debt and extended maturity date to 2026.
Second, the 630-plus-million euro in net proceeds from the sale of the Italy gaming business will contribute to the full redemption of our euro-denominated 2023 note through the exercise of the make-whole call.
As you can see, these two changes meaningfully reduce our net near-term debt maturities and will allow us to save, going forward, about 60 million in annual interest cost with the full run rate of savings starting to materialize in Q3 this year.
In summary, our strong first-quarter performance was driven by a combination of global lottery growth, progressive recovery in U.S. gaming, and OPtiMa cost-savings initiatives.
We are on track to structurally reduce our cost structure by more than 200 million this year with each segment contributing according to plan.
We continue to convert adjusted EBITDA to cash flow at a healthy rate and the free cash flow we generate is used primarily to reduce debt, allowing us to reach pandemic levels of leverage by the end of the year.
Now I'd like to share our perspectives on the second quarter on Slide 18.
Quarter to date, global lottery same-store sales growth is over 20%, so our second-quarter revenue should be higher on a year-over-year basis, though we do not expect the $80 million in Q1 lottery revenue benefits related to jackpot activity and LMA contract incentive to recur.
We expect continuous sequential improvement in the gaming business in line with what we have seen in the last few quarters.
While second-quarter profitability will be lower sequentially, we expect second-quarter operating income and adjusted EBITDA will be higher than prior year, even without the benefit of the drastic temporary reductions in cost savings during the second quarter of 2020.
Depreciation and amortization should be relatively stable, and for the full year, let me reiterate that we expect all relevant key financial metrics to return in line with 2019 trends.
The meaningful progress on vaccination campaigns in our core markets and overall has convinced us that it is time to update the market on our long-term targets in line with sentiments echoed by several market participants we have interacted with recently.
I'm excited to announce we will be hosting an Investor Day later in the year where we can elaborate and update you on our strategic priorities, long-term financial targets, and capital allocation plans.
We will have many opportunities to connect before that including second-quarter earnings in early August, G2E in early October, and our normal conference and roadshow participation.
Then on November 9, we will report our third-quarter earnings, as well as hosted our Investor Day.
Hopefully, it will be in person in New York City.
So, please mark your calendars.
| compname reports q1 earnings per share of $0.38.
q1 earnings per share $0.38.
qtrly consolidated revenue of $1,015 million, up 25% from prior year.
|
I'm joined today by our CEO, Bill Crager; and CFO, Pete D'Arrigo.
Such comments are not guarantees of future performance, and therefore, you should not put undue reliance on them.
We also will be discussing certain non-GAAP information.
As we look back on 2020, we recognize how hard a year it was for so many people.
The pandemic impacting every single person's life, and for so many, in devastating in tragic ways.
We honor the incredible work of healthcare workers and the frontline workers who have shown such brave resilience and dedication over these months.
While the difficult and practical implications of the pandemic have played out, a digital rumble began to shake across the economic landscape.
Cloud-based companies like Envestnet engaged from the first moment, leveraging our service and support infrastructure to help our clients navigate these disrupted times.
We also spent the year paving the way toward an exciting and accelerated digital future.
Last year, we took swift action to ensure the safety of our employees.
We met the extraordinary demands of the year managing historic account and trade volumes as we grew the company and improved the way we served our clients.
We added a net 1.5 million accounts last year, completed 15 million service tasks and executed an incredible 76 million individual trade orders.
This was executed by our team as we worked remotely and while our clients worked remotely.
We completed a significant and important initiative to streamline our organizational structure and add leadership talent, which positions us to operate more as one Envestnet, both internally and also for the marketplaces that we serve.
And despite the headwinds created by March market values, we grew impressively, delivering very solid financial results.
We reported just shy of $1 billion in revenue, which is 10% higher than a year ago, and adjusted EBITDA grew 26% compared to 2019.
And importantly, we chartered the course for advancing a tremendous opportunity for our industry to better serve its customers, further expanding our strategic purpose, developing a bold investment plan to capture the sizable opportunity before us as we make financial wellness a reality for everyone.
Over our history, Envestnet has been very successful in anticipating, investing in and driving the future.
We began 20 years ago as a TAMP, a turnkey asset management platform, a category we invented, and we continue to lead by a substantial margin.
Over time, our capabilities expanded.
We unbundled our own investment solutions from the core technology, enabling advisors in powerful new ways, opening access to the industry's largest marketplace of investment solutions and strategies.
We launched the first unified managed account, the UMA, bringing multiple investment strategies into one brokerage account, improving how advisors at optimize asset allocation and tax efficiency within client portfolios.
This powerful integration of technology with investment product made it far easier for advisors to deliver portfolio strategies while to help drive down the costs for end investors.
We forged an integrated future of data and planning-centric advice for advisors to deliver to their clients.
Our acquisitions of Yodlee in 2015 and MoneyGuide in 2019 were critical as we evolved into an industry-leading integrated wealth platform.
Impact investing, overlay solutions, direct indexing, integrated access to credit insurance, and just announced this week, trust services, the scope of what we are doing, the progress we are making in each of these areas and the growth potential they represent for us are very important to note.
The scale, capabilities and how we utilize data are significant competitive differentiators for us, and we plan to build on it.
Envestnet is proud to work with thousands of firms, including 17 of the 20 largest U.S. banks, 47 of the 50 largest wealth management and brokerage firms, over 500 of the largest RIAs and hundreds of fintech companies.
We are the industry leader in wealthtech, supporting more than 106,000 financial advisors, 13 million investor accounts and more than $4.5 trillion in assets.
We have the scale and infrastructure to grow from here.
Our consumer financial data aggregation capabilities are unmatched: 17,000 data sources, 470 million connected accounts, which grew by over 62 million last year, 35 million users, and also in the past year, nearly three million households that benefited from a financial planning experience using our award-winning software.
We and our customers, financial services firms and the advisors who work for them, are improving the financial lives of millions of people.
This has enabled us to become the financial wellness ecosystem powering the industry into the future.
We are using modern technology to create linkages and building out a network that becomes an evolving system, ever-adapting, ever-engaging, ever-improving connections that the consumer defines the batteries of and will call upon when, where and how they choose.
This is a bigger vision, one that will provide our customers the super power to engage in intelligent, holistic servicing of the consumer's financial life.
That's why we're accelerating our investments in the ecosystem.
These investments, which I've been referencing for the past few earnings calls, are in three areas.
First, we are making major enhancements to our already strong capabilities on behalf of our existing customers.
We're making it easier for them to work with us, easier for them to leverage all that we offer, eliminating friction from the process.
For instance, we're providing an integrated trading environment that will bring together the feature sets of investment, FolioDynamix and Tamarac into a singular tool.
Advisers will have the entire universe of investment strategies and solutions just a click away.
We're also digitizing and hyperpersonalizing more of the end consumer experience with more use of data, intelligence and insight.
The second area is data.
Data is embedded in all that we do.
We've been redefining the way data is used to create better intelligence, insight and guidance for advisors to help their clients.
Nobody else has a data engine quite like this.
Envestnet can connect the data from a person's daily financial transactions with our market-leading financial planning capability, which we've broken down into powerful, focused financial apps that tie into a financial strategy, and with a click, advisors can then execute on it.
We're using more and more of the intelligence in our data to drive recommended actions.
For example, our recently launched recommendations engine addresses the individual's needs against the backdrop of an extraordinary data set.
We are seeing promising evidence as firms use the data to grow faster and discover new opportunities within their existing customer base.
Digital experience is the third area of investment for us.
We are on the cusp of making this intelligent, connected financial life in reality with our innovative digital environment for end consumers, powerfully taking the parts of the financial life and bringing them together in an extraordinary and accessible experience.
We will empower advisors to offer this as the financial center for their clients in a powerful way that they have not experienced before.
This is just the start of the progress that we are making.
With investment at the center of the financial wellness ecosystem, we can engage with future partners in incredibly value-creating ways.
Our strategy opens a network of potential partnerships that expands far beyond our current marketplace beyond our walls, an existing network of investment managers, insurance companies, lenders, banks, custodians, broker-dealers and RIA firms.
An example could be in healthcare or even in personal wellness.
We'll also open our platform and inspire third-party developers who can create new apps, addressing emerging marketplace needs and/or utilizing our infrastructure to engage underserved parts of the financial services market.
In doing so, we gain access to millions of consumers.
We can improve their financial lives by deploying Envestnet solutions through a broader network of fintech companies and nontraditional outlets that are utilizing embedded finance as part of their strategy, while providing the essential bridge back to full-service advice within our advisor community.
As the orchestrator of this large and growing ecosystem, the revenue potential for us is significant.
While life changed over the course of the last year, in many ways, it also sped up.
We sped up as well.
Trends that have been emerging for years are accelerating at a faster pace, more digital, more intelligent, more consumer-driven.
Consumer expectations have grown so quickly, whether it's a grocery delivery, mortgage approval or the ability to open and fund a new investment account.
And we are leading our industry in helping our customers meet the expectations of consumers now and into the future.
I wrote about this in a white paper that we published earlier this week called, The Intelligent Financial Life.
Our supplemental deck includes a link.
I encourage you to read it and watch the related video.
In a nutshell, here's what it says.
Today, most people have two distinct financial lives, how they interact with their money each day and then how they plan for their money into the future.
Neither of these connects with each other, resulting in a complex challenge for the individual, oftentimes leading to extraordinary stress in their lives.
The white paper was a call to action for our industry, a playbook for more deeply engaging and impacting the financial lives of consumers while unlocking tremendous opportunities for companies that enable this.
What's required to empower this intelligent financial life is an interconnected ecosystem that brings it all together for the consumer.
We, Envestnet, are uniquely positioned to deliver on the intelligent financial life by leaning into our ecosystem, expanding the ability for Envestnet and other participants in our vast and growing network to deliver what the consumer is demanding and to capitalize on this large and quickly growing opportunity.
The outcome of this strategy is connecting people with their money and empowering more impactful decisions in ways financial consumers have not experienced before.
For Envestnet, it means a broader reach into the market, faster revenue growth as the model is utilized and more operating leverage from our increasingly scaled infrastructure, yielding a higher profitability in the long run.
The opportunity to create value for all participants in our ecosystem is massive and growing.
With Envestnet at the center of it, we can curate, connect and orchestrate everything that can impact the consumer's financial life, empowering advisors and firms to reach deeper into relationships, doing more, adding value, creating growth.
With our industry-leading footprint and capabilities, there is no better firm positioned to capitalize on this opportunity than Envestnet.
And the time to do this is now.
Today, I'm going to review our results for the fourth quarter and full year and provide context for our 2021 outlook and beyond.
Consistent with earlier in the year, our fourth quarter results were strong.
Adjusted revenue for the quarter was $264 million, above expectations, as we saw outperformance across all revenue lines.
Asset-based revenue benefited from favorable net flows and continued adoption of higher value fiduciary solutions.
Subscriptions-based revenue performed well, driven by higher-than-expected usage in the data and analytics segment.
Operating expenses came in consistent with our expectations for the quarter with a relatively low level of spending already factored into our forecast.
As a result, our adjusted EBITDA of $65 million was also ahead of expectations, as were our adjusted earnings per share of $0.69.
For the full year, adjusted revenue was $999 million, 10% higher than in 2019 despite the significant market pullback in the first quarter of 2020.
Adjusted EBITDA came in 26% higher than last year at $243 million.
Our adjusted EBITDA margin for the year was 24.3%, three percentage points above the prior year.
As we discussed in the November earnings call, this is not an appropriate starting point as we look forward into 2021 and beyond.
Expense management and pandemic-related circumstances lowered our 2020 expenses significantly and unsustainably for the long term.
Around $25 million to $30 million of operating expense favorability can be attributed solely to an operating environment that limited travel, caused delays in hiring and generally reduced spending activity.
This is important context as we consider our outlook for 2021.
As we built our spending plans for this year, we see three drivers of increase in our operating expenses compared to 2020.
First is what I would call normal expense growth to support the needs of the business today, including supporting additional customer activity as the business grows.
Normal expense growth typically is lower than our revenue growth as we've proven our ability to expand margin over time.
The total increase in this category is around $10 million or a little more than 2% above last year.
Second is what I would characterize as a partial restoration of normal spending levels that we experienced prior to the pandemic for certain items.
In this category, we've assumed a broad resumption of business activity over the course of 2021, but still at levels below where they were prior to the pandemic.
In the second category, we're expecting increases in our travel and entertainment expense and fully restoring our annual marketing spend.
This category also represents around $10 million of year-over-year increase in operating expense.
Depending on how circumstances unfold, some of this expense could be pushed further out if travel remains limited.
Third is the acceleration of investment spending to capitalize on the sizable opportunity Bill described earlier.
These investments will ramp up over the next couple of quarters as we add headcount and other resources in product engineering, marketing and go-to-market activities to accelerate revenue growth in the business longer term.
In 2021, these investments account for around $30 million of increased operating expense The spend in these three categories, combined with an increase in our asset-based cost of revenue, will result in our operating expenses growing faster than revenue in 2021 as we noted in November, effectively reversing the temporary margin lift we saw in 2020.
Specific guidance for the full year of 2021 includes the following: adjusted revenue growth of 10.5% to 12% compared to 2020.
That's approximately $1.10 to $1.12 billion.
By segment, this is driven by strong double-digit growth in our wealth business as we continue adding new firms, advisors and accounts to the platform and deploy additional solutions through our installed base.
We expect revenue growth in data and analytics to be in line with last year as we see ongoing momentum with financial institutions and fintech firms, while continuing to address pricing pressure in the analytics space.
By revenue line item, we expect asset-based revenue to be up nearly 20%, reflecting the strong fundamentals of the wealth business.
As usual, our guidance is market neutral to the end of the prior quarter, in this case, December 31.
Subscription revenue is expected to grow in the low to mid-single digits, and we're expecting a decline in professional services and other revenue as we continue to deemphasize such fees.
Adjusted EBITDA should be between $225 million and $235 million, slightly below 2020, as the increase in operating expenses will more than offset the contribution from higher revenues.
Adjusted earnings per share is expected to be between $1.95 and $2.08.
This is down from the $2.57 we delivered in 2020 due to the modest decline in adjusted EBITDA and an increase in depreciation expense.
Our guidance also includes the early adoption of a new accounting standard, impacting how we account for our convertible notes, which will lower earnings per share by $0.20.
Some additional color on our 2021 guidance and trends we expect to see during the year.
This is a big contributor to the EBITDA guidance for the quarter.
As we expect to restore spending to more normal levels and ramp up our investment activity, operating expenses should increase somewhat more meaningfully in the second quarter and the second half of the year.
Turning to the balance sheet.
We ended the year with $385 million in cash and a net leverage ratio of two times EBITDA, down from 2.1 at the end of September.
Similar to last quarter, our $500 million revolver remains entirely undrawn.
So we remain comfortable that we have the liquidity and flexibility to invest in growth opportunities, both organically and through strategic activities without increased risk to our operations.
As we support our customers' needs across the ecosystem and begin to benefit from the investments we're making now, we believe revenue growth can accelerate into the mid-teens within the next five years.
Over time, EBITDA margins should reach the mid- to upper 20s as we continue to benefit from our increasing scale.
The age of the intelligent connected financial life is coming, and our industry will need to deliver this to consumers: an interconnected experience that supports the consumer completely from today's spending to tomorrow's plans, fully linked, intelligent and accessible to help them make the best financial decisions when they need it, even when they aren't aware that they do need it.
Connecting the financial lives of millions of consumers is a massive opportunity.
It requires a financial wellness ecosystem, and that is what is emerging here at Envestnet.
We are building upon the significant capabilities we offer in the marketplace today.
We are positioned to become the core long-term essential provider that helps the industry connect people much more powerfully to their money.
With our expertise, data-driven intelligence, leading financial planning tools, integrated capabilities to execute trades, insurance policies, loans, trust and more and a consumer-friendly technology to view everything in one single place, Envestnet is the company that is best positioned to connect consumers' financial lives and make financial wellness a reality for everyone.
I could not be more excited about this future.
With that, Pete and I are happy to take any questions.
| q4 adjusted earnings per share $0.69.
sees fy 2021 adjusted net income per diluted share $1.95 - $2.08.
|