input
stringlengths 1.54k
70.1k
| output
stringlengths 17
1.68k
|
|---|---|
We are pleased to report strong financial results again this quarter, which reflects the consistent execution of our strategic priorities as the global markets continue to recover.
As we size up the business climate and how we are managing through the recovery, we can report the GPC team is generating positive momentum in both our sales and operating results.
And we are well positioned for both near and long-term growth.
Despite inflationary pressures, our margins reflect the success of our category management initiatives in cost control efforts which have offset these increases.
And finally, our strategic efforts with our global supplier partners have prevented significant shortfalls and our overall inventory levels allowing us to deliver quality customer service.
Taken a look at our third quarter financial results, total sales were 4.8 billion up 10% from last year and up 11% from Q3 of 2019.
We also produced our 16th consecutive quarter of gross margin expansion.
And we further improved our productivity and customer service capabilities with the ongoing execution of our operational initiatives.
As a result, segment profit increased 14% and our segment margin improved 30 basis points to 9.3%.
This represents our strongest margin in 2 decades and confirms our key initiatives are driving meaningful improvements.
Net income was 229 million or a $1.59 for diluted share and adjusted net income was 270 million or a $1.88 per share.
This is a 15% increase from 2020 and establishes a new record for GPC's quarterly earnings, so just an outstanding job by the GPC team.
Total sales for global automotive also set a new record at 3.2 billion for the quarter.
This represents an 8% increase from Q3 2020, and a 15% increase from Q3 of 2019.
On a comp basis, sales were up 5% from last year and up 7% on a two-year stack, with our strongest year-over-year automotive comps coming from the U.S. business.
In addition, from a cadence perspective, sales held up well through the quarter with the strongest average daily sales volume in each of our geographies coming in September.
The broad strength in our global automotive sales reflects a number of factors.
First, we're proud of our team's efforts to shore up our supply chain amid the difficult backdrop of product delays and logistics challenges.
Supply chain disruptions have been more substantial for U.S. automotive than in our international or industrial operations.
And we continue to work closely with our global suppliers to manage through these issues and ensure we have the right inventory available for our customers.
We are confident in the effectiveness of our global sourcing team and believe we are well-positioned in the industry.
We also continue to benefit from our key growth initiatives and market tailwinds.
Among our growth initiatives, our emphasis on innovative sales programs and sales force effectiveness are positively impacting commercial sales.
As examples, we recently finalized an exclusive partnership in the education space for technician recruitment with over 10,000 active tech students in the process of earning their credentials.
We're also excited that NAPA and AAA have executed an agreement for NAPA to be the exclusive auto parts supplier for the new AAA branded premium battery.
This battery will be available to all consumers with a focus on the over 62 million AAA cardholders and 5,400 approved auto repair centers.
We're also equipping our sales team with incremental resources, training and development, which have led to more productive, customer-facing calls.
In addition, our omni -channel investments continue to drive strong B2B and B2C digital sales.
And finally, the international rollout of the NAPA brand is driving significant growth in both our European and Asia-Pac operations.
So now turning to the market tailwinds, these macro drivers include the following: The ongoing reopening of the economy, and improving miles-driven which generate the need for more repairs and more maintenance.
A robust used car market, that is keeping more cars on the road longer.
And improving the aftermarket fundamentals, such as the growing and aging vehicle fleet, which will continue to benefit the industry over the long term.
Looking next at our automotive highlights by region, total U.S. sales were up 9%.
Comp sales increased 8% from last year and are up 5% on a 2 year stack.
In Canada, total sales were up 1% with comp sales essentially flat both year-over-year and on a two-year stack as lockdowns in major markets have slowed the recovery.
it's been encouraging to see these restrictions of easing of late, which should lead to stronger demand through the final 3 months of 2021.
Our U.S. sales were driven by strong demand for product categories such as exhaust, ride control, brakes, tools, and equipment which all outperformed.
In addition, both retail and commercial ticket and traffic counts were positive for the third consecutive quarter.
By customer segment, sales to both commercial and retail customers held strong, with DIFM sales outperforming DIY for the second straight quarter.
We do remain pleased, however, with the continued strength of our DIY business and believe we can drive additional growth with ongoing initiatives, such as B2C digital investments.
These include new search features, improving catalog functionality, and enhanced payment options, such as, buy now and pay later.
NAPA online, B2C sales continue to grow at a rapid pace, up over 40% from the third quarter, and up 2x from 2019.
The strength in commercial sales in the quarter was driven by several of the initiatives mentioned earlier, as well as the ongoing economic recovery in the U.S..
Sales to our major account partners were strongest with mid-teen growth, followed by sales for our NAPA AutoCare customers, which were up low double digits.
We would add that our NAPA AutoCare membership has surged with the reopening of markets and includes nearly 400 shop upgrades thus far in 2021.
So really terrific momentum for our premier independent garage program.
Rounding out our commercial segments, fleet, and government and other wholesale customers, also posted high single-digit growth for the quarter.
So really strong results across all of our commercial accounts.
These are encouraging trends and as we look ahead, we remain confident in our growth strategy and our key priorities to deliver customer value and ultimately sell more parts for more cars.
Our AAD team in Europe continue to perform well with total Q3 sales up 8%, were up a strong 23% on a two-year stack.
Comp sales increased 2.5% from last year and were up 14% on a 2-year stack.
While the UK and Benelux continue to stand out with really strong results, we were pleased with the solid results in each of our 7 European markets.
A reflection of stable market conditions and execution of our key sales initiatives.
These include the continued roll-out of the NAPA brand and ongoing emphasis on key account development, which are driving market share gains.
Now looking at our Asia-Pac business, total sales were up 2% from 2020 and up 18% on a 2-year stack.
Comp sales were up slightly from last year and up 15% on a 2-year stack.
With both commercial and retail sales up double-digit, driven by positive growth with both the Repco and NAPA brand.
We're really pleased with these results given the severe lock downs and the major markets of Sydney, Melbourne, and Auckland during much of the quarter.
We're energized to see the reopening of these markets is finally getting underway, and we expect a surge in demand in the coming month.
So now let's discuss the Global Industrial segment.
Total sales for this segment were 1.6 billion, a strong 15% increase from last year, and a 5% increase from 2019.
Comp sales were up 13% and up 4% on a 2-year stack.
Through the quarter, average daily sales in July and August were in line with the second quarter, while our strongest results were in the month of September.
This quarter's positive momentum and industrial exceeded our expectations, which is a reflection of the great work by our motion team, and the strengthening of the industrial economy.
Both the PMI and industrial production were positive for the quarter and these indicators correlate closely to the overall healthy state of the industrial sales climate.
For the second consecutive quarter, we had positive sales growth across each of our industries served.
The industry's sectors that stood out with double-digit growth include our largest customers segment, equipment and machinery, as well as iron and steel, automotive, aggregate and cement, lumber and wood, fabricated metals, equipment rental, and oil and gas.
In addition, our newly added fulfillment and logistics industry experienced tremendous growth.
So as you can see, the current growth in our industrial business is quite broad across the markets we serve.
As we have conveyed in our prior calls and in our industrial Deep Dive event on September 15, our Motion business is a market leader in the industrial distribution space in North America and Australasia.
DMI team strive to be the preferred industrial solutions provider in the industries we serve.
We partner with the best manufacturers in the industry to provide Tier 1 brand, our customers demand.
In addition, we are constantly broadening our product offering, as well as our service capabilities to maximize our sales potential and drive market share gains in a very large and fragmented market.
With these fundamentals of our business in mind, our focus on continued profitable growth in this segment remained grounded in 5 key initiatives.
An omni -channel build-out to accelerate e-commerce growth and drive sales with new customers.
As examples, Motion.com and our inside sales center, which has grown from 15 to now, 35 reps in just 6 months continue to drive incremental sales from new motion customers.
The expansion of our industrial services and value-add solutions in areas such as equipment repair, conveyance, and automation.
Strategic M&A to generate significant growth in new markets and new products, and services as an industry consolidator.
Enhanced strategy to create a dynamic pricing environment that provides us a competitive advantage in the marketplace.
And lastly, network optimization and automation to further improve our operating efficiencies and productivity.
We're pleased with the progress from these initiatives, thus far, and we are excited for the opportunities ahead.
Another third quarter highlight, is the publication of our 2021 sustainability report update.
Our initiatives and activities over the past year have lead to continued progress toward our goal of promoting diversity, equity, and inclusion.
We've also taken steps to reduce the environmental footprint of our operations by reducing energy and emissions while increasing recycling opportunities across the globe.
2020 tested all of us and accentuated the importance of supporting our people and our communities.
We're really proud of our GPC teammates around the world for their resilience and contributions to further in our sustainability goals.
We invite you to learn more about these initiatives and our full report which you can find on the GPC website.
So in summary, we made great progress in several important areas during the third quarter.
And we're very pleased with the strong result in our automotive and industrial businesses, and the continued improvement in our sales and operations.
We could not be more proud of the GPC team.
It's always a proud moment to have the opportunity to showcase our global teams hard work, relentless customer service, and winning performance.
It's a challenging environment and teams have done an exceptional job to adjust and deliver results.
We continue to remain focused on our key pillars, including talent, sales effectiveness, digital supply chain, and emerging technology.
Teams are executing initiatives well and consider s strategic initiatives a central part of our operating cadence.
The teams have rigor around measurement and progress visibility.
We measure unique global initiatives and are ahead of our 2021 plan established at the beginning of the year.
As we execute our GPC strategic planning process for the upcoming year, we reflect on learn from and refine our priority initiative execution.
In addition through the year, we share best practices around the globe for common strategies to help us continuously learn and improve as one GPC team.
While our geographies and end markets are diverse, we share similar GPC global initiatives, all designed to deliver profitable growth in excess of market growth, operating leverage, and free cash flow.
Despite a challenging environment, we're pleased to see more normal team activities and customer activities starting to be possible in most of our geographies.
We recently had the opportunity to meet in person with the U.S. Automotive Executive and Field Management team in Atlanta.
We listened to field feedback, shared performance trends, enjoyed team camaraderie, introduced new talent, and collaborated on strategic priorities for the upcoming year.
Similarly, approximately 70 of our motion Executive and field leaders from around the country, recently had the chance to meet in person for the first time since early 2020, to detail business performance and review strategic initiatives priorities.
In Europe, our AAG executive leadership team recently met together in person for the first time in nearly 2 years.
Our Atlanta-based GPC and U.S. NAPA field support teams also hosted an employee appreciation event for 400 teammates, that included a well-received visit from our celebrity NAPA racing teammates, including Chase Elliott.
We're cautiously optimistic our teams in Australasia will soon be able to exit lockdown in November and also return to a more normal in-person routine.
At each of these events, it's energizing to see the positive attitudes, strong team alignment, and visible excitement about our GPC momentum and vision.
It's also reassuring to see our differentiated GPC culture up close and intact.
Paul and I have also had the opportunity to spend time in person with customers and vendors this quarter.
These discussions are critically important as we share our growth visions, listen to feedback, and explore ways to deepen our strategic partnership.
These conversations not only reinforce our GPC core strategic priorities, talent, sales effectiveness, digital and tech, supply chain and emerging tech; b but also always affirm the unique customer value propositions across our GPC businesses.
Growth, technology solutions, supply chain excellence, products and technical expertise, and long-standing local relationships are always key themes.
As an example, we recently visited with an industrial customer who is enjoying exponential growth.
Our Motion teammates co-locate associates at the customer facility to provide real-time expertise on the plant floor to ensure the facility is operating to its potential.
Part of the discussions with this customer explored the use of embedded technology solutions that will make customer ordering from motion easier and faster.
We're building plans to triple the size of this customer relationship over the next few years.
In our customer discussions or recent common theme is the supply chain challenges that face all Company.
We explained, we believe our global scale in-country resources, data and analytics, investments in our supply chain, strategic inventory actions, and proactive daily team approach, position as to navigate the headwinds relative to others.
We're in constant discussion with highest levels of our supplier partners, many of which for whom GPC represents a large and important global customer.
Over the past quarter, we've held numerous top-to-top meetings with our global executive leadership and vendor partners to review progress and jointly problems solved.
It's a challenging environment, but our global teams and partners are proactively acting each day to navigate it.
Turning to our focus on talent, we recently completed an end-to-end strategic review of our global GPC employee value proposition, and talent initiatives.
This disciplined work ensures we have the right capabilities aligned to our current and future business strategies.
The work also ensures we're constantly striving to be an employer of choice in this dynamic and competitive talent environment.
Around the globe, we continue to take deliberate actions to lead, recognize and ensure the well-being of our teams.
For example, we recently streamlined recruiting processes to move faster to attract talent, introduce new wellness incentives, improved holiday schedules, enhance vacation eligibility and flexibility, invested in healthcare costs to reduce the burden on our associates, improve tuition reimbursement programs, and relaxed dress code policies to name a few.
And talent's our most important advantage, we'll always work to take care of and invest in our people.
We also continued to execute well against our broader digital and technology initiatives.
During the quarter, the teams have made exciting progress under leadership of our new Chief Information and Digital Officer, Naveen Krishna.
We're focused on building high performing teams that engineered technology to solve customers problems at scale.
In addition, we'll optimize human and financial resources to focus on the most critical and impactful activities.
Our emerging technology initiatives, including electric vehicles and related technologies also continue to advance.
The global teams are partnering well to execute a disciplined and coordinated strategy.
We're pleased with the team momentum and will continue to dedicate resources to this exciting effort.
Last, the teams are executing our M&A strategy with discipline.
For example, we added several store groups to our North American and Europe an automotive network to increase local market density and we announced the acquisition of J&S Automotive Distributors, a leading automotive parts distributor in Ireland.
This new geography represents the 15th country in which GPC operates.
In addition, we were pleased to recently sign a definitive agreement to acquire AutoAccessoriesGarage, a leading U.S. based digital platform specializing in automotive accessories.
This strategic digital acquisition adds new capabilities and accelerates a strategic product category for the U.S. automotive team.
The acquisition pipeline is active and we remain disciplined to prioritize transactions we believe meet all of our GPC strategic and financial criterion.
Overall, we are really pleased with the record -setting team performance.
Despite uncontrollable headwind, the teams continue to rally together each day to service customers and deliver performance.
We look forward to working hard to close the year strong and build on our solid momentum as we move forward into 2022.
We are very pleased with our third quarter financial performance and we look forward to sharing a few additional details with you.
Recapping revenues, total GPC sales were 4.8 billion in the third quarter, up 10%.
Gross margin improved to 35.5%, an increase of 50 basis points from 35%, last year.
Our improvement in gross margin was primarily driven by the increase in supplier incentives due to improved volumes and the positive impact of strategic category management initiatives.
In the third quarter, we had continued pricing activity with our suppliers as anticipated, resulting in additional product cost inflation.
Our team was positioned to address these increases with effective pricing and global sourcing strategies and price inflation improve neutral to gross margin.
On a total Company basis, we estimate a 3% inflationary impact on Q3 sales, consisting of 3.5% inflation in global automotive, and 1% to 2% in industrial.
Based on current trends, we expect to see additional price inflation in the fourth quarter, and we will utilize our strategies to protect our gross margin as appropriate.
Our total adjusted operating and non-operating expenses were 1.35 billion in the third quarter, up 11% from 2020 and at 28% of sales.
The increase from last year is due to several factors, including the prior-year benefit of approximately 60 million and temporary savings related to the pandemic.
Additionally, our third quarter expenses reflect the increase in variable costs on the 450 million in additional year-over-year sales, as well as cost pressures in areas such as wages, Incentive compensation flight, rent, and health insurance.
We continue to execute on our ongoing initiatives to control expenses and improve our operations.
While pleased with our progress, thus far, we see room for further improvement in the quarters ahead.
Our total segment profit in the third quarter was 447 million up 14%.
Our segment profit margin was 9.3% compared to 9% last year, a 30 basis point year-over-year improvement, and up a 130 basis points from 2019.
So we're really pleased with the continued improvement and the excellent work by our team.
Looking ahead, we raised our margin expectations for the full year and we currently expect segment profit margin to improve 40 to 50 basis points from 2020 or 80 to 90 basis points from 2019.
This would be our strongest full year margin in more than 20 years.
Our tax rate for the third quarter was 24.9% on an adjusted basis, up from 23.4% last year, with the increase in rate primarily related to income mix shift to higher tax jurisdictions.
Our third quarter net income from continuing operations was 229 million, with diluted earnings per share of a $1.59.
Our adjusted net income was 270 million or a $1.88 per diluted share, which compares to 237 million or a $1.63 per adjusted diluted share in the prior year, a 15% increase.
So turning to our third quarter results by segment, our total automotive revenue was 3.2 billion up 8% from last year.
Our segment profit increased 6% to 281 million with profit margin as solid 8.8%.
While down 20 basis points from 2020 due to the prior-year benefit of temporary savings, this represents an 80 basis point margin improvement over 2019 and reflects the underlying progress in our operations.
For the 9 months profit margin is 8.6% up 80 basis points from 2020 and up 90 basis points from 2019, driven primarily by margin expansion in our U.S. and European operations.
Our industrial sales were 1.6 billion up 15% from 2020.
Segment profit of a 166 million was up a strong 32% from a year ago and profit margin improved to a 10.3%.
This is a 140 basis points from 2020 and up 220 basis points from 2019 and the first double-digit margin for industrial since the Fourth Quarter of 2006.
Year-to-date profit margin for this segment is 9.4% up a 120 basis points from 2020 and up a 150 basis points from 2019.
So this group is executing very well and posting excellent operating results through the industrial recovery.
So now, let's turn our comments to the balance sheet.
At September 30th, total accounts receivable is down 3.5%, primarily due to the timing of the 300 million in accounts receivables sold in October of 2020.
Inventory was up 10% in line with our sales increase and a reflection of our commitment to having the right parts, in the right place, at the right time.
Accounts payable increased 20% from last year due to the increase in inventory and favorable payment terms with certain suppliers.
Our AP to inventory ratio improved to 129% from 118% last year.
Our total debt is 2.4 billion down 474 million or 16% from September of last year, and down 245 million from December 31 of 2020.
We closed the third quarter with available liquidity of 2.4 billion and our total debt to adjusted EBITDA improved to 1.5 times from 2.2 times last year.
So our teams continue to do an outstanding job of optimizing our working capital and our capital structure.
We also continue to generate strong cash flow with another 300 million in cash from operations in the third quarter and 1 billion for the 9 months.
For the full year.
We expect our earnings growth and working capital to drive 1.2 billion to 1.4 billion in cash from operations.
And free cash flow of 950 million to 1.15 billion.
Our key priorities for cash remain the reinvestment in our businesses through capital expenditures, M&A, share repurchases and the dividend.
For the 9 months we have invested a 138 million in capital expenditures, and we have plans for additional investments to drive organic growth and improve efficiencies and productivity in our operations through the balance of the year.
In addition, we have used approximately a 143 million in cash for strategic acquisitions to accelerate growth.
These investments includes several automotive store groups across our markets, included in the entry into Ireland discussed earlier.
We continue to generate a robust pipeline of additional strategic and bolt-on acquisitions in both automotive and industrial segments.
This would include Auto Accessories Garage as mentioned before, which we expect to close in the fourth quarter.
Consistent with our long-standing dividend policy, we have also paid a total cash dividend of more than 349 million to our shareholders through the 9 months.
The Company has paid a dividend every year since going public in 1948 and has increased the dividend for 65 consecutive years.
And as part of our share repurchase program, we have also been active with share buybacks dating back to 1994.
In the third quarter, we used a $100 million to purchase 800,000 shares, and year-to-date we have used 284 million to purchase 2.2 million shares.
The Company is currently authorized to repurchase up to 12.2 million additional shares, and we expect to remain active in this program in the quarters ahead.
We expect total sales for 2021 to be in the range of +12 to +13%, an increase from our previous guidance of +10 to +12%.
As usual, this excludes the benefit of any unannounced future acquisitions.
By business, we are guiding to +14 to +15 total sales growth for the Automotive segment, an increase from +11 to +13% and a total sales increase of +10 to +11% for the industrial segment.
An increase + plus 6% to +8% On the earnings side, we're raising our guidance for adjusted diluted earnings per share to a range of $6.60 to $6.65, which is up 25% to 26% from 2020.
This represents an increase from our previous guidance of $6.20 to $6.35.
So we're encouraged by the strength in our financial results for the third quarter and the nine months.
And we enter the fourth quarter focused on our initiatives to meet or exceed our outlook for the year.
We look forward to reporting on our financial performance for the fourth quarter in full year in February.
As we close out another strong quarter, we are pleased with our progress in driving profitable growth, strong cash flow, and shareholder We attribute the positive momentum in our business to our global team work and disciplined focus across all of our operations.
Our team has confidence in the strategic plans we have put in place to capture long-term growth and margin expansion.
Our strategic plans combined with an exceptional balance sheet position GPC with the financial strength and flexibility to pursue strategic growth opportunities via investments at organic and acquisitive growth.
While also returning capital to shareholders through the dividend and share repurchases.
So as we look ahead, we are encouraged to see the impact of the global pandemic subsiding.
while the fundamentals of our two global businesses remained rock solid.
Our GPC teams around the world are stepping up under challenging circumstances and taking great care of our customers.
| q3 earnings per share $1.59 from continuing operations.
q3 sales rose 10.3 percent to $4.8 billion.
q3 adjusted earnings per share $1.88 from continuing operations.
raises 2021 outlook for revenue growth, diluted eps, adjusted diluted earnings per share and free cash flow.
sees 2021 total sales growth 12% to 13%.
sees 2021 adjusted diluted earnings per share $6.60 to $6.65.
sees 2021 free cash flow $950 million to $1.15 billion.
|
A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC.
I'll now turn the meeting over to Dave.
AMETEK concluded 2020 with a strong fourth quarter, delivering record operating results despite ongoing challenges presented by the pandemic.
Our businesses saw solid sequential sales and order improvements in the quarter while year-over-year growth turned positive across several of our businesses.
We also drove exceptional operating performance in the quarter, leveraging our broad set of operational excellence initiatives.
These efforts led to record backlog, margins and cash flow as well as the high quality of earnings that exceeded our expectations, positioning us extremely well as we look ahead to 2021.
The safety of our employees remains our number 1 priority.
We continue to adjust our practices and enforce our safety protocols across our businesses to help limit the possible spread of the virus.
While we are cautious in the short term given COVID-19 and ongoing travel restrictions, we are highly confident in the strength of our businesses and our ability to deliver exceptional growth and shareholder returns over the long term.
The AMETEK growth model continues to provide the framework for long-term sustainable success and our performance in 2020 was a testament to the strength and flexibility of the model.
Now let me return to our results for the quarter.
Sales in the quarter were $1.2 billion, down 8% compared to the fourth quarter of 2019.
Organic sales were also down 8% with the divestiture of Reading Alloys, a three point headwind, the acquisition of IntelliPower contributing one point to growth and foreign currency added two points.
As we saw in prior quarters, our commercial aerospace business was the most impacted by the pandemic with sales down approximately 35% in the quarter.
Orders continued to improve with our book-to-bill at 1.07 for the fourth quarter.
This led to a record backlog of $1.8 billion, providing us with a positive line of sight into 2021.
Operating income in the fourth quarter was $298.1 million, up slightly from the fourth quarter of 2020, and operating margins were a record 24.9%, up an impressive 210 basis points compared to the prior year period.
EBITDA in the fourth quarter was a record $360.7 million and EBITDA margins were also a record of 30.1%, up a robust 300 basis points over the fourth quarter of 2019.
This operating performance led to earnings per diluted share of $1.08, matching last year's fourth quarter results and comfortably ahead of our guidance for the quarter.
Our business has also delivered outstanding cash flow during the quarter.
With operating cash flow up 13% to a record $386 million and free cash flow conversion, exceptional 158% of net income.
Now let me provide additional details at the operating group level for the fourth quarter.
The Electronic Instruments group delivered superb operating performance despite challenging market conditions.
EIG sales in the fourth quarter were $819.4 million, down 7% from the prior year and in line with our expectations of solid sequential improvement.
Organic sales were down 10%, with the acquisition of IntelliPower contributing 2%, and foreign currency contributing 1%.
Commercial aerospace remained the largest driver of the sales weakness while other EIG businesses saw improvements versus prior quarters.
Our Materials Analysis division returned to growth in the fourth quarter, while other EIG businesses, including Zygo and Telular, also generated year-over-year growth.
Despite the overall sales decline, EIG's operating income in the fourth quarter increased 3% over the prior year to a record $236 million, and operating margins reached a new high of 28.8%, expanding an exceptional 270 basis points over the same period in 2019.
Our Electromechanical Group also delivered strong operating results in the quarter.
EMG sales were $379.5 million, down 11% from the fourth quarter in 2019, driven in large part by the divestiture of Reading Alloys.
Organic sales were down 4%, with the divestiture an 8-point headwind, and foreign currency adding two points.
In addition to continued strong growth across our defense businesses, we are pleased to see our automation business generate solid organic growth in the quarter.
Fourth quarter operating income for EMG was $79.8 million, and operating margin expanded an impressive 110 basis points to 21%.
Now for the full year results.
Despite very difficult end market conditions and meaningful top line headwinds in 2020, AMETEK was able to expand full year operating margins while delivering record levels of operating and free cash flow, truly outstanding performance.
Overall sales for the year were $4.5 billion, down 12% from 2019.
Organic sales declined 13%, with acquisitions adding 4%, the divestiture of Reading Alloys a 3% headwind, and foreign currency flat for the year.
Operating income in 2020 was $1.1 billion and operating margins were a record 23.6%, expanding 80 basis points over 2019.
EBITDA for the year was $1.32 billion and EBITDA margins were a record 29.2%, up 230 basis points from last year.
This led to full year earnings of $3.95 per diluted share, down 6% versus the prior year.
As Bill will highlight, our businesses did a fantastic job managing our working capital, which helped drive a record level of cash flow with full year operating cash flow up 15% to $1.28 billion.
In summary, while 2020 was very challenging, I'm extremely proud of the way AMETEK colleagues managed through the pandemic and delivered tremendous results.
Before I cover the outlook for 2021, I wanted to highlight certain key elements of the AMETEK growth model and how each position us for long-term success.
First and foremost, AMETEK's proven operational acumen stood out in 2020, with our businesses doing an incredible job driving our operational excellence initiatives.
In the fourth quarter, we generated $60 million in total cost savings with $50 million of structural savings and $10 million in temporary savings.
And for the full year, total incremental savings versus the prior year were $235 million, with approximately $145 million of structural savings and $90 million in temporary savings, including furloughs, travel reductions and temporary pay actions.
As we look ahead to 2021, we expect a much more modest level of temporary savings versus 2020 as the economy continues to recover from the worst of the pandemic and we continue to add back these temporary costs.
However, we do expect to drive meaningful incremental structural savings across our various operational excellence initiatives including across our global sourcing activities.
For the full year 2021, we expect approximately $140 million of incremental operational excellence savings.
Shifting to new product development.
Even through this downturn, we remain committed to investing in new products and solutions that help our customers solve their most complex challenges.
In 2020, we invested $246 million in research, development and engineering, approximately 5.5% of sales.
These investments led to outstanding innovation and dozens of new product launches.
In the fourth quarter, our vitality index or the percent of sales generated from products introduced over the last three years was an impressive 25%.
In 2021, we expect to invest approximately $270 million or 5.5% of sales in research, development and engineering to enhance our position as a global technology leader.
This is a 10% increase over 2020 RD&E spend.
Finally, I want to touch on our acquisition strategy.
Prior to the onset of the pandemic last year, we acquired IntelliPower, a leading provider of high reliability, ruggedized, uninterruptible power systems for mission-critical defense and industrial applications.
IntelliPower has integrated nicely into our Power Systems and Instruments division and is performing well.
While deal flow in 2020 was impacted by the pandemic, we are seeing continued improvements in the M&A markets and are managing a strong pipeline of acquisition targets across a broad set of markets.
As Bill will discuss shortly, AMETEK has significant balance sheet capacity and, when combined with our robust cash flow generation, provides us with meaningful capital to support our acquisition strategy, which remains our number 1 priority for capital development -- deployment.
Now shifting to our outlook for the year ahead.
While we remain cautious in the short term, given the uncertainty of the timing and pace of the recovery, we are confident in the strength of our businesses and our ability to manage through these uncertain times.
We continue to manage our businesses safely and prudently while ensuring continued investments in key growth initiatives.
For the year, we expect both overall and organic sales to be up mid-single digits versus 2020.
Diluted earnings per share for the year are expected to be in the range of $4.18 to $4.30, up 6% to 9% compared to 2020.
For the first quarter, we anticipate continued year-over-year impact from the pandemic, with overall sales down low to mid-single digits and first quarter earnings of $0.97 to $1.02 per share, flat to down 5% versus the prior year.
In summary, the strength of the AMETEK growth model, the asset-light nature of our businesses, our leading positions in attractive niche markets and our world-class workforce will continue to drive long-term sustainable success.
I'm confident that we are emerging from this unprecedented economic environment even stronger than we were before.
As Dave highlighted, AMETEK had an outstanding finish to 2020 with record operating performance and a high quality of earnings in the fourth quarter.
The way our teams persevered through the challenges of the past year was truly impressive.
With that, I will provide additional financial highlights for the fourth quarter and the full year and will also provide some additional guidance for 2021.
Fourth quarter general and administrative expenses were $17.7 million, up modestly from the prior year.
For the full year, G&A was down 11% from 2019 due to lower compensation costs and other discretionary cost reductions and, as a percentage of total sales, was 1.5% in both years.
For 2021, general and administrative expenses are expected to be up approximately 10% due primarily to the return of temporary costs, including compensation.
The effective tax rate in the fourth quarter was 20.1%, up from 17.6% in the fourth quarter of 2019.
The difference in tax rate was due primarily to the finalization of tax returns in each of the years.
For 2021, assuming the current tax regime, we anticipate our effective tax rate to be between 19% and 20%.
And as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full year estimated rate.
Our businesses continue to manage their working capital exceptionally well.
Operating working capital was an impressive 14% in the fourth quarter, down 330 basis points from the 17.3% reported in the same quarter last year, reflecting the outstanding work by our teams.
Capital expenditures were $37 million in the fourth quarter and $74 million for the full year.
Capital expenditures in 2021 are expected to be approximately $110 million.
Depreciation and amortization in the quarter was $65 million and for the full year was $255 million.
In 2021, we expect depreciation and amortization to be approximately $260 million, including after-tax, acquisition-related intangible amortization of approximately $117 million or $0.50 per diluted share.
As Dave highlighted, our businesses continue to generate tremendous levels of cash flow.
Operating cash flow in the quarter was a record $386 million, up 13% over last year's fourth quarter.
Free cash flow was also a record at $349 million, up 16% over the same period last year, resulting in a free cash flow conversion of 158% of net income.
Cash flow for the full year also set new record levels.
Operating cash flow for 2020 was $1.28 billion, up 15% over the prior year, and free cash flow was $1.21 billion, a year-over-year increase of 19%.
Full year free cash flow conversion was 158% of net income adjusted for the Reading Alloys gain.
Total debt at December 31 was $2.41 billion, down from $2.77 billion at the end of 2019.
Offsetting this debt is cash and cash equivalents of $1.2 billion.
Our gross debt-to-EBITDA ratio was 1.8 times and our net debt-to-EBITDA ratio was 0.9 times at year-end.
We entered 2021 with approximately $2.6 billion in liquidity to support our growth initiatives.
This liquidity, along with our strong balance sheet and no material debt maturities until 2024, enables us to manage the continued effects of the economic downturn while also deploying meaningful capital on strategic acquisitions.
To conclude, our businesses performed exceptionally well in the fourth quarter and throughout the year, delivering a high quality of earnings in a very challenging environment.
Our outlook for 2021 and beyond remains positive given our strong financial position, our proven growth model and our world-class workforce.
Andrew, we're now ready to take questions.
| q4 sales $1.2 billion versus refinitiv ibes estimate of $1.2 billion.
for 2021, expect overall sales to be up mid-single digits on a percentage basis compared to 2020.
q4 adjusted earnings per share $1.08.
for 2021, adjusted earnings per diluted share are expected to be in the range of $4.18 to $4.30.
sees q1 2021 adjusted earnings per share $0.97 to $1.02.
for q1 2021, overall sales are expected to be down low to mid-single digits.
|
We appreciate you joining us today.
We are pleased to report terrific financial performance driven by the consistent execution of our strategic priorities, and the ongoing recovery in the global markets.
In summary, the quarter was highlighted by, continued strong sales trends, which we believe led to market share gains, gross margin gains, then improved operational efficiencies that drove margin expansion, and record quarterly earnings, and the effective deployment of capital for growth and productivity investments, bolt-on acquisitions, the dividend and share repurchases.
Taking a look at our second quarter financial results, total sales were $4.8 billion, up 25% from last year and improved sequentially from plus 9% in the first quarter.
For your additional perspective our second quarter sales were 12% higher than in Q2 2019.
Gross margin was also strong representing our 15th consecutive quarterly increase, and we further improved our productivity with the ongoing execution of our expense initiatives.
As a result, segment profit increased 35% and our segment margin improved 65 basis points to 9.2% which represents our strongest margin in two decades.
Adjusted net income was $253 million and adjusted diluted earnings per share were $1.74, up 32%.
Total sales for Global Automotive were a record $3.2 billion, a 28% increase from 2020, and up 15% from the second quarter of 2019, and marks the first quarter in our 93-year history with auto sales exceeding the $3 billion mark.
On a comp basis sales were up 21% and on a two-year stack comp sales were up 8.5%.
Our comp sales in the second quarter were driven by double-digit year-over-year comp sales in each of our automotive operations.
Automotive segment profit margin improved to 9.1%, up 30 basis points from 2020 and an increase of 90 basis points from 2019.
This expansion was supported by strong operating results across all of our operations.
The automotive recovery reflects our focus on key growth initiatives, as well as several market tailwinds and these include the broad economic recovery and strengthening consumer demand, favorable weather trends, inflation and our ability to pass along price increases to our customers.
Finally, solid industry fundamentals, which have been further accelerated by a surge in used car market and improving miles driven.
While these market tailwinds are encouraging, we also see continued headwinds, which we continue to closely monitor.
These would include the spread of the delta coronavirus variant and its potential impact on the global economy, global supply chain disruptions, ongoing labor shortages in our operations, and the impact of inflation on our cost such as wages and freight.
Turning next to our regional highlights, our GPC teammates in Europe built on their excellent start to the year achieving the strongest sales growth among our operations with comp sales up 34%.
Each concrete posted substantial sales growth while our U.K. team continues to outperform.
The positive momentum in Europe reflects improving market conditions and favorable weather trends, as well as our focus on key sales initiatives, inventory availability and excellent customer service.
In particular, we have seen exceptional results from our key accounts partners and the ongoing expansion and roll out of the NAPA brand.
In our Asia-Pac business, sales were in line with the mid-to-high teen comps we have had in this market now for four consecutive quarters, commercial sales outperformed retail, although both customer segments posted strong growth.
The Repco and NAPA brands performed well and collectively are capturing market share.
The NAPA network continues to build and we have now more than 50 NAPA locations operating across Australia and New Zealand, in addition to our 400 plus Repco stores.
In North America, comp sales increased 20% in the U.S. and were up 12% in Canada, where lockdowns in key markets such as Quebec and Ontario have been headwinds for several quarters now.
Sales in the U.S. were driven by strong growth in both the commercial and retail segments, with DIFM sales outperforming DIY for the first time since before the pandemic began to take hold in Q1 of 2020.
The strengthening commercial sales environment is significant for us, as it accounts for 80% of our total U.S. Automotive revenue.
The strong recovery in the commercial sector contributed to record average daily sales volume in our U.S. Automotive business in June.
Our sales drivers by product category include brake, tools and equipment and under car, which all outperformed.
In addition, both retail and commercial ticket and traffic counts were strong for the second consecutive quarter, so another really positive trend.
By Customer segment, retail sales remained strong throughout the quarter with low double-digit sales growth on top of a healthy sales increase in the second quarter of last year.
While the DIY market is pulling back from the highs of 2020, we are optimistic our ongoing investments will create sustainable retail growth.
For commercial sales each of our Customer segments posted double-digit growth, which we attribute to the broad automotive recovery and investments in our sales team, our sales programs and our supply chain among other initiatives.
This quarter our strongest growth was with our major account partners and NAPA AutoCare centers.
We were also pleased with the growth in sales to our fleet and government accounts.
This was the first quarter of positive year-over-year sales growth for this group, since before the pandemic, as they lag the overall automotive recovery in the U.S.
We view this improvement as a meaningful indicator for further growth in the quarters ahead.
As the automotive recovery continues, we expect our commercial sales opportunities to outpace retail, consistent with the long-term growth outlook of the aftermarket industry.
We are confident in our growth strategy and our initiatives to deliver customer value and sell more parts for more cars across our global automotive operations.
We also remain focused on enhancing our inventory availability, strengthening our supply chain, and investing in our omni-channel capabilities while expanding our global store footprint to further strengthen our competitive positioning.
But now, let's discuss the global Industrial Parts Group.
Total sales for this group were $1.6 billion, a 20% increase from last year, and up 7% from 2019.
Comp sales rose 16% and reflect the fourth consecutive quarter of improving sales trends.
A strong sales environment combined with the execution of our operational initiatives drove a 9.5% segment margin, which is up a 130 basis point from both 2020 and 2019.
The ongoing market recovery over the last 12 months is in-line with the strengthening industrial economy and the overall increase in activity we have seen across much of our customer base.
The Purchasing Managers Index measured 60.6 in June, reflecting healthy levels of industrial expansion and marrying trends we have seen throughout the majority of this year.
Likewise, industrial production increased by 5.5% in the second quarter representing the fourth consecutive quarter of expansion.
Diving deeper into our Q2 sales, we experienced strong sales trends across each of our industries served and our product categories other than safety supplies, which had extraordinary sales in 2020 due to the pandemic.
Several industry sectors stood out as their sales increased by 30% or more over last year, including equipment and machinery, automotive, aggregate and cement, equipment rental and oil and gas.
In addition, our newly added fulfillment and logistics industry sector experienced tremendous growth.
In the past several years of expanding this segment, we have found our broad offering of products and services fits well with the needs of these customers.
To drive this growth.
We remain focused on several strategic initiatives, which include the build-out of our Industrial omni-channel capabilities with solid growth in digital sales via Motion.com.
Our new inside sales center, which was established in 2019, is generating incremental sales from new Motion customers and we see room for further growth.
The expansion of our services and value-add solutions businesses in areas such as equipment repair, conveyance and automation.
Over the last few years we have made several bolt-on acquisitions to build scale and continue to target additional M&A opportunities to further enhance our capabilities in these key areas.
Enhanced pricing and product category management strategies to maximize profitable growth the further optimization and automation of our supply chain network to improve operational productivity while delivering exceptional customer service.
We are encouraged by Industrial strong financial performance in the second quarter and the positive momentum we see in the overall industrial market.
We believe the Motion team is well positioned to capitalize on this momentum and enhance our market leadership position.
So in summary, each of our businesses did an exceptional job of operating through the quarter and we couldn't be more proud and grateful for their strong Q2 performance.
I'd like to personally congratulate the entire global GPC team for the hard work an impressive result.
The teams continue to build momentum and execute well.
We remain focused on our defined strategic initiatives.
And despite the global uncertainties that continue to impact our operations we're pleased with the strong sales growth, operating leverage and cash flow performance this quarter.
Last quarter, we outlined our plan to create value as we leverage GPC global capabilities to simplify and integrate our operations, we do so to improve the customer experience, to increase the speed and efficiency of execution and to deliver winning performance.
This includes continuous investments to position GPC for near and long-term profitable growth.
The key pillars of our investments include talent, sales effectiveness, digital, supply chain and emerging technologies.
Around the globe the teams executed well against our strategic priorities.
For example, on talent, we announced last month that Naveen Krishna joined the company, as Chief Information and Digital Officer.
Naveen will help lead our strategy and execution for all technology and digital initiatives.
He comes to GPC with more than 25 years of technology experience with companies such as Macy's, Home Depot, Target and FedEx.
Other examples of recent talent investments include category management, field sales and services, indirect sourcing, pricing, diversity equity inclusion, digital, data and inventory leadership to name a few.
Investment in our people is always a priority as we execute our mission to be an employer of choice.
To highlight other examples of our initiative momentum in local execution, Paul and I recently had the opportunity to spend time in person with our European team mates, and they showcased great examples of the strategic initiatives and winning team performance.
For example, we discuss details of the growth plans for a recent bolt-on investment Winparts, an online leader of automotive parts and accessories.
We expect this investment to provide new capabilities and accelerate our European digital vision.
We visited a best-in-class distribution facility in the Netherlands that increased operating productivity by approximately 20% over the past few years with the automation investments and process excellence initiatives.
We received an update on the consolidation of 10 back office shared service centers in France to one national location in France to drive cost and process efficiencies, and we saw first hand the power and differentiation of the NAPA brand in the local market.
Although, these are only a few select examples in Europe in each of our automotive and industrial businesses, we see similar examples of focus, strategic execution that are delivering results.
We also executed well on our acquisition strategy during the quarter.
The M&A environment is active and we remain disciplined to pursue strategic and value creating transactions.
For example, in addition to WInparts, we completed several other bolt-on acquisitions to deliver growth, add capabilities and create value.
The North American and European automotive teams completed various store acquisitions that increase our position in key strategic geographies and extend existing customer relationships.
Our automotive team in Asia-Pac, also executed two bolt-on strategic acquisitions including Rare Spares a market leader in the niche segment of automotive restoration parts and accessories and PARts DB, a leading cloud-based product and supplier data platform that will enhance our e-commerce and data capabilities.
We enter the third quarter with strong momentum, as our automotive and industrial markets recover and we execute our plans.
We continue to analyze and respond to areas that challenge our daily operations such as COVID-19, inflation, global logistics and product and labor availability.
For example, the global and local procurement teams partner closely with all levels of our suppliers to effectively assess product availabilities and delivery trends.
We have processes in place, backed with data and analytics to create visibility into direct and indirect inflation trends.
We utilize GPC scale and relationships including dedicated GPC resources in Asia to address our global logistics needs, and we continue to address labor challenges with competitive pay and benefits, flexible work programs, creative incentives to attract talent, a differentiated culture and compelling career opportunities.
We believe our team is well positioned to remain agile, as we focus on what we can control and navigate these macro global headwinds.
Overall, we're very pleased with our performance through the first half of the year and look forward to sharing our continued progress next quarter.
Total GPC sales were $4.8 billion in the second quarter up 25%.
Our gross margin improved to 35.3%, an increase from 33.8% last year or up a 120 basis points from an adjusted gross margin of 34.1%.
Our improvement in gross margin was primarily driven by the increase in supplier incentives, although, we also continue to benefit from channel and geographical mix shifts positive product mix, strategic category management initiatives including pricing and global sourcing strategies.
In the second quarter, there was significant pricing activity with our suppliers, resulting in product cost inflation.
We were positioned to pass these increases on to our customers and the impact of price inflation was neutral to gross margin.
We estimate a 1.5% impact of inflation in automotive sales for the quarter and a 1% impact in industrial.
Based on the current environment, we expect this to increase further through the second half of the year.
Our total adjusted operating and non-operating expenses are $1.3 billion in the second quarter, up 28% from last year and 28.1% of sales.
The increase in last year reflects the impact of several factors including the prior-year benefit of approximately a $150 million in temporary savings related to the pandemic.
The balance primarily relates to the increase in variable costs on the $1 billion in additional year-over-year sales.
And to a lesser extent, we experience rising cost pressures in areas such as wages, incentive compensations, freights, rents and health insurance, which we are managing.
We also invested in projects associated with our transformation and other strategic initiatives to drive growth and enhance productivity.
So overall, we continue to operate in line with our plans for the year and we remain focused on gaining additional efficiency in the quarters ahead, as you heard from Paul and Will.
On a segment basis, our total segment profit in the second quarter was $441 million, up a strong 35%.
Our segment profit margin was 9.2% compared to 8.6% last year a 65 basis point year-over-year improvement and up a 100 basis points from 2019.
So strong operating results, and a reflection of the work we have done to streamline our operations and optimize our portfolio over the last several years.
We would add that for the full year, we continue to expect our segment profit margin to improve by 20 to 30 basis points from 2020 or 60 to 70 basis points from 2019.
This would represent our strongest margin in five years.
Our tax rate for the second quarter was 27.2% on an adjusted basis up from 24.1% last year.
The increase in rate primarily reflects our higher U.K. tax rate, partially offset by stock compensation excess tax benefits.
Second quarter net income from continuing operations was $196 million with diluted earnings per share of $1.36.
Our adjusted net income was $253 million or $1.74 per share, which compares to $191 million or $1.32 per share in the prior year, a 32% increase.
Turning to our second quarter results by segment.
Our automotive revenue was $3.2 billion, up 28% from last year.
Segment profit was $291 million, up 33%, with profit margin improved to 9.1%, up 30 basis points from 2020 and a 90 basis point increase from 2019.
We attribute the margin gain to the positive market conditions in our automotive business and our team's intense focus on the execution of our growth and operating initiatives.
We're encouraged by the positive momentum we will carry into the balance of the year.
Our Industrial sales were $1.6 billion in the quarter, up 20% from 2020.
Segment profit of $150 million was up 38% from a year ago and profit margin improved to a strong 9.5%, a 130 basis point increase from both 2020 and 2019.
So with the strengthening sales environment and continued operational improvements, this group continues to post excellent operating results and we expect Industrial to perform well through the balance of the year.
Now, let's turn our comments to the balance sheet.
At June 30th, our total accounts receivable is up 4% despite the strong sales increase, this is primarily due to the additional sale of $300 million in receivables in the second half of 2020.
Inventory was up 10%, consistent with our commitment to provide for inventory availability and our accounts payable increased 26%.
Our AP-to-inventory ratio improved to 129% from 112% last year.
We remain pleased with our progress in improving our overall working capital position.
Our total debt is $2.5 billion, down $700 million or 22% from June of 2020 and down $160 million from December 31 of 2020.
We closed the second quarter was $2.5 billion in available liquidity and our total debt-to-adjusted EBITDA has improved to 1.6 times from 2.9 times last year.
Our team has done an excellent job of improving our capital structure over the last year.
We continue to generate strong cash flow with another $400 million in cash from operations in the second quarter and $700 million for the six months.
For the full year, we expect our earnings growth and working capital to drive $1.2 billion to $1.4 billion in cash from operations and free cash flow of $900 million to $1.1 billion.
Our key priorities for cash remain the reinvestment in our businesses through capital expenditures, M&A, the dividends and share repurchases.
We have invested $90 million in capital expenditures thus far in the year and we expect these investments to pick up further in the quarters ahead, as we execute on additional investments to drive organic growth and improve efficiencies and productivity in our operations.
As Will mentioned earlier strategic acquisitions remain an important component of our long-term growth strategy.
We've used approximately $97 million in cash for acquisitions through these six months and we continue to cultivate a strong pipeline of targeted names and expect to make additional strategic and bolt-on acquisitions to complement both our Global Automotive and Industrial segments as we move forward.
Consistent with our long-standing dividend policy, we have also paid a total cash dividend of more than $232 million to our shareholders through the first half of this year.
This reflects a 2021 annual dividend of $3.26 per share and represents our 65th consecutive annual increase in the dividend.
Finally, as part of our share repurchase program, we have been active with share buybacks since 1994.
In the second quarter, we used $184 million to acquire 1.4 million shares.
The company is currently authorized to repurchase up to 13 million additional shares and we expect to remain active in this program in the quarters ahead.
In arriving at our updated guidance, we considered several factors, including our past performance and recent business trends, current growth plans and strategic initiatives, the potential for foreign exchange fluctuations, inflation and the global economic outlook.
We also consider the continued uncertainties due to the market disruptions such as with COVID-19 and its potential impact on our results.
With these factors in mind, we expect total sales for 2021 to be in the range of plus 10% to plus 12%, an increase from our previous guidance of plus 5% to plus 7%.
As usual, this excludes the benefit of any unannounced future acquisitions.
By business, we are guiding to plus 11% to plus 13% total sales growth for the Automotive segment, an increase from the plus 5% to plus 7%, and a total sales increase of plus 6% to plus 8% for the Industrial segment an increase from the plus 4% to plus 6%.
On the earnings side, we are raising our guidance for adjusted diluted earnings per share to a range of $6.20 to $6.35, which is up 18% to 20% from 2020.
This represents an increase from our previous guidance of $5.85 to $6.05.
We enter the third quarter, focused on our initiatives to meet or exceed these targeted results and we look forward to reporting on our financial performance as we go through the year.
We are pleased with our progress in capturing profitable growth, generating strong cash flow and driving shareholder value.
This quarter's 25% total sales growth reflects the benefits of the strengthening global economy and positive sales environment in both our automotive and industrial businesses.
Importantly, this dual recovery allows us to leverage the full scale of one GPC, which we believe creates significant value.
Our team also executed well and produced our 15th consecutive quarter of gross margin expansion, while further improving our productivity via ongoing expense initiatives.
Our global team network and disciplined focus in these areas enabled us to report strong operating results and record quarterly earnings.
Our exceptional balance sheet provides us with the financial flexibility to pursue strategic growth opportunities via investments in organic and acquisitive growth, while also returning capital to shareholders through the dividend and share repurchases.
The GPC team is focused on executing our growth strategy and operational initiatives to further enhance our financial performance in the remainder of 2021 and beyond.
| compname reports q2 earnings per share of $1.36.
q2 earnings per share $1.36 from continuing operations.
q2 sales $4.8 billion versus refinitiv ibes estimate of $4.33 billion.
q2 adjusted earnings per share $1.74 from continuing operations.
adjusts 2021 outlook for revenue growth, diluted earnings per share and adjusted diluted eps.
in compliance with all covenants connected to its notes and other borrowings.
sees full-year 2021 total sales growth 10% to 12%.
sees full-year 2021 adjusted diluted earnings per share $6.20 to $6.35.
sees full-year 2021 free cash flow $900 million to $1.1 billion.
sees full-year 2021 net cash provided by operating activities $1.2 billion to $1.4 billion.
|
It's a pleasure to be with you today.
2020 was an exceptional year for Employers and that we achieved record levels for the number of policies in force, stockholders' equity, statutory surplus and book value per share.
We also generated more submissions, quotes and binds than at any time in the history of the Company.
We accomplished these feats during a pandemic while working from home and supporting agents' small businesses and their injured workers.
Our fourth quarter and full-year results were very strong, especially considering the challenging macroeconomic environment.
Our record number of policies in force at year-end demonstrates that our policyholders are enduring the pandemic with reduced payrolls, which directly impact workers' compensation premium.
We remain optimistic that as more vaccines are delivered and state restrictions are lifted, we will be able to begin replacing the premium we lost in 2020.
In support of this anticipated recovery, we have continued to pursue in advance the significant investments we have made in delivering a superior customer experience for our agents and insureds.
As expected the challenging pandemic environment confirmed that ease of doing business is the critical element in producing and servicing small account business.
Prior to the COVID-19 pandemic, we experienced strong new business opportunities, as evidenced by record levels of submissions, quotes and binds.
But the levels began to decrease as the pandemic progressed, particularly in certain states.
Later in the year as many businesses began to reopen and resume more fulsome operations, we began to experience year-over-year increases in new business submissions and new policies bound in nearly all of the states in which we operate with the notable exception of California.
Unfortunately, even with the increase in new business policies that we experienced outside of California in 2020, our new business premium has fallen driven primarily by significant declines in payrolls and declines in the number of policies with annual premiums greater than $25,000.
In regard to losses, we experienced a significant decline in the frequency of compensable indemnity claims in 2020 despite government mandates and legislative changes related to the COVID-19 pandemic, including the presumption of COVID-19 compensability for all or certain occupational groups in many states.
We experienced this decline in nearly all states including California.
As a result, we reduced our current accident year loss and LAE ratio to 64.3% during the fourth quarter from the 65.5% maintained throughout the prior 21 months.
We also reduced our prior accident year loss and LAE reserves by nearly $40 million during the quarter which related to nearly every prior accident year.
Our underwriting expenses for the quarter and the year were each down and we have recently taken actions that will further reduce our underwriting expenses in 2021.
Our plan is to achieve our targeted expense ratios as quickly as possible despite the meaningful reductions in earned premium we're currently experiencing.
My primary goal as the new CEO will be to fully capitalize on the post COVID economic lift on the horizon, while continuing to maintain discipline both in terms of our underwriting and/or underwriting expenses.
With that Mike will now provide a further discussion of our financial results, Steve will then discuss some of the current trends and then Doug will provide his closing remarks.
For the year, we delivered a 7.6% return on adjusted equity and increased our book value per share, including the deferred gain by more than 15%.
These results are impressive in just about any operating environment and particularly during a pandemic.
Our fourth quarter results contributed nicely to these financial successes in 2020.
Our in-force policy count ended the year at an all-time high.
We experienced reductions in our current accident year loss and LAE and underwriting expense ratios.
And we recognized a significant amount of favorable prior-year loss reserve development, all despite the significant declines we experienced in our premiums written and earned.
Our net premiums earned were $152 million, a decrease of 11% year-over-year.
Since premiums earned are primarily a function of the amount and the timing of the associated premiums written, I'll let Steve describe that increase in his remarks.
Our loss and loss adjustment expenses were $48 million, a decrease of 51% year-over-year due to the current and prior-year favorable loss reserve development that Kathy spoke to previously as well as the decrease in earned premiums.
Commission expenses were $19 million for the quarter, a decrease of 7% year-over-year.
The decrease was largely the result of a decrease in earned premium, partially offset by a higher concentration of alternative distribution business, which is subject to a higher commission rate.
Underwriting and general administrative expenses were $43 million for the quarter, a decrease of 15% year-over-year.
The decrease was largely the result of reductions in employee benefit costs, professional fees and travel expenses.
From a segment reporting perspective, our Employers segment had underwriting income of $45 million for the quarter versus $8 million a year ago and its combined ratios were 70% and 96% respectively.
Our Cerity segment had an underwriting loss of $5 million for the quarter, consistent with its underwriting loss of a year ago.
Net investment income was $18 million for the quarter, down 20%.
The decrease was primarily due to lower bond yields.
At quarter-end, our fixed maturities had a duration of 3.2 and an average credit quality of A+ and our equity securities and other investments represented 8% of the total investment portfolio.
We were favorably impacted by $5 million of after-tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet and $15 million of net after-tax unrealized gains from equity securities and other investments, which are reflected on our income statement.
These net unrealized investment gains contributed to our nearly 6% increase in our book value per share including the deferred gain this quarter.
During the quarter, we repurchased $17 million of our common stock at an average price of $32.50 per share and we have repurchased an additional $10 million of our common stock thus far in 2021 at an average price per share of $32.19.
Our remaining share repurchase authority currently stands at $19 million.
Yesterday, the Board of Directors declared a first quarter 2021 dividend of $0.25 per share, which is payable on March 17th to stockholders of record as of March 3rd.
Net written premiums for the year of $575 million were down $117 million or 16.9% from the prior year.
The primary drivers for this decrease are new business written and final audit pick-up.
With respect to the decrease in final audit pick-up, we continue to see the impact of declining payrolls due to the pandemic and resulting shutdowns as discussed on previous calls.
New business premium decreased 33.3% despite increases in submissions, quotes and bound policies.
Submissions were up 3.7% year-over-year, quotes were up 7.4% and bound policies were at 0.2% growth.
On a year-over-year basis, our in-force policy count increased by 4.8%.
A recent workers' compensation industry report that was released with information from the Valen Data Consortium reflected decreased new business opportunity trends.
New business submissions were down 10% from the comparable periods in 2019 and were down as much as 23% in some industries.
The authors of the report suggested that the owners of these businesses were likely preoccupied with other matters and did not take time to shop for insurance.
Despite our increase in submissions over the prior year, this is in line with some of our observations and feedback from our distribution partners relative to the pandemic's impact starting in the second quarter of 2020.
We continue to experience high unit retention rates.
However, renewal premium for the year decreased 3.6%.
The decrease in renewal premium was driven primarily by decreased payroll related to the pandemic and continuing -- or continued declining rates in the majority of states in which we do business.
In addition, we non-renewed some middle market accounts that underperformed our profitability expectations.
I will be retiring in March.
So this will be my last earnings call.
It's been my pleasure to lead Employers for over 27 years and I believe that the Company is in the strongest financial position in its 108-year history.
I will soon be handing control of the Company over to Kathy whose background and experience are ideal to move Employers forward into the future.
I am very excited for Kathy and her team and for the future of the Company.
In closing, I want to express my gratitude to all of you for giving me the opportunity to be the CEO of this remarkable organization.
I'm very proud of what we've achieved and it's been a privilege to serve you.
| employers holdings declares qtrly cash dividend of $0.25 per share.
compname reports fourth quarter 2020 and year end financial results; declares quarterly cash dividend of $0.25 per share.
qtrly net premiums earned of $151.5 million, down 11% year-over-year.
|
In today's remarks by management, we will be discussing non-GAAP financial metrics.
I'm, of course, pleased with our results for the quarter, which were ahead of what we could have foreseen when we talked to you in February.
Our patient volume strengthened through the quarter, ramping up to March and into April.
I'm sure most of you saw the statistics published this week by the CDC, which indicated a sharp downturn in nationwide births in the fourth quarter of 2020.
As you know, we experienced the same trajectory at the end of last year, but to a significantly lesser degree.
We believe this reflects the typical profile of the hospitals where we provide neonatology services, which tend to be larger and bigger markets and with extensive labor and delivery services, including robust neonatal ICUs.
It may also reflect our geographic footprint, which has a heavier weighting in faster-growing states and markets.
Now through into the first quarter and the roughly 400 hospitals that make up our own births statistics, this downward trajectory on price did not continue.
Adjusting for the leap year, total births at the hospitals where we provide NICU services were essentially unchanged in Q1, which is better than what we reported in late 2020.
Lastly, while it's too early to make a final call, the improvement in our payer mix so far suggests that the volatility we experienced in November and December could have been more of an anomaly.
To give me one quick insight into how this rebound in trends impacted our results, our revenue for the quarter, excluding the CARES money we recorded, was over $30 million ahead of our internal expectations, which translated into meaningful year-over-year growth in adjusted EBITDA versus the expectation we shared with you in February that it could easily be down versus 2020.
Looking ahead to our full year 2021 expectations, we expect that our 2021 adjusted EBITDA will be at or above $220 million.
I said last quarter that we'll listen closely at our 2019 adjusted EBITDA of $265 million before the pandemic as the best available benchmark for how our business is recovering as well as backing out our estimate that the 2020 impact of the pandemic was roughly $40 million to $50 million.
If you look at the first quarter of 2021, our adjusted EBITDA of $45 million was still below the first quarter of 2019.
And when we reported -- and that's when we also reported $50 million in adjusted EBITDA.
And when you exclude the roughly $4 million in contribution from the CARES fund we recorded this quarter, we were roughly 18% below Q1 2019.
So while I'm certainly pleased with our results, it's still clear that we're not back to normal and, in fact, that our first quarter results reflect a similar run rate of COVID impact to what we experienced last year.
I don't think this should be surprising, given the unique nature of the services we provide and the time led of this COVID impact and since much of our patient volume is based on pregnancies and trial birth timing.
Lastly, I'll add that our operating results for the past two quarters have been unusually volatile.
So we're also mindful of the still uncertain nature of how fast or consistently we'll see things recover.
Now I've talked for a couple of quarters about my confidence that we can achieve a run rate of $270 million in adjusted EBITDA once we move past the impact of COVID-19 pandemic.
Our results bolster our confidence that we will reach and exceed that run rate.
But I'm not confident just because we saw better trends over the past couple of months.
I'm confident because we continue to push our operating plans and because we are reshaping how we do things here.
Our singular focus at MEDNAX is to reinforce our position as the formal provider of women's and children's healthcare in the markets we serve and to do so efficiently and as the best partner we can be to the patients we serve as well as to the payers and health systems we work with.
So let me talk about what we've been focused on and speak to you about our core Pediatrix and Obstetrix.
It's all about the patient.
Since MEDNAX first began caring for mothers and babies in their most challenging times about 40 years ago, the only absolute imperative that our founder and Board member, Dr. Medel, prescribed has been take great care of the patient.
Much of my time is spent with our clinicians, hospital partners, prospective partners, and of course, with my team.
And I can attest to this unwavering commitment.
There's an unshakable conviction at MEDNAX that we always take great care of the patients, everything else will follow.
Now that's easier said than done.
To take the best care of the patients, the mothers, babies and children required a lot of work and investment.
First, we have to recruit and retain the finest physicians and clinicians.
Second, to do this, we try to provide more support for our affiliated clinicians than anyone else in our field.
Third, we have a foremost independent research organization in our field of medicine, including complex newborn screenings.
one in four babies in the U.S. are patients of ours.
We have more knowledge and data in these areas than anyone else.
And since our care is provided, of course, at a very local level, we have to provide more support for our affiliated clinicians in each market where we are than anyone else.
Finally, we must always lead in our field.
For example, one of the most critical and active parts of our organization is our clinical support group.
This grew along with our full support team, make sure that we can continue to advance our skill and knowledge for the sake of our patients.
In two weeks, as we did even during the depth of the pandemic last year, we will be holding our Annual Medical Directors Meeting, where over 2,000 clinicians will actively participate and will learn from research, quality and clinical experts.
On top of these areas, we provide system support, recruiting support and every other kind of health to allow our clinicians to, again, take great care of the patients.
This long-winded tour of what we do is what I believe makes a de-choice among our nation's hospitals.
This is what makes us a lead employee, a partner to great medical brands.
This is what makes us the leading referral choice of physicians who want their patients to be in our care during their most difficult minutes, days and weeks.
I've spoken about our drive to employ our practice data and dashboards to improve patient access.
This has and continues to be a paramount importance to us.
It's a steady drumbeat.
We want to be certain that a patient who needs care from one of our affiliated physicians gets that care as soon as possible.
And we know as business leaders and owners the effect that this can have on volume.
So we're working with all of our practices to help them make scheduling as driven and efficient as we can, making sure their appointments are kept and immediately rescheduling no-shows, backfilling cancellations, using our scheduling tools to open additional slots staggering staff, outreach and referral management.
They're all part of this necessary equation.
We've already seen improvements in many practices, particularly in terms of higher percentages of kept appointments and reductions in no-shows.
This focus is also helping us to share best practices and create benchmarking capabilities so we can measure how effective our data has on practice scheduling in every measurable factor beyond just the post COVID recoveries we've recently seen.
We all know that a physical visit is not always needed or possible.
And we will make our telehealth process fluid to help our patients and attract new patients.
This efficiency and effectiveness also applied to our growth plans.
Our sales and business development team has reengineered a focused market-by-market approach that's driven by local intelligence and relationships.
We've also added resources to this team to make sure that we're highly integrated, not just in intensifying and winning new business but providing services quickly and seamlessly to the partners who put their trust in us and in pediatrics affiliated physicians.
In my view, we've lapped until now two other major ingredients to propel us forward.
First, our patient relationships have not extended path to our subspecialty practices.
We need to make sure as well as we can that when a patient needs to see a physician in our network, they can do so as quickly as easily as possible.
We're moving forward in pediatric urgent care to develop plans for expansion of their business in markets where we have a significant presence, and we will expand with our brand name pediatrics.
We believe that providing pediatric primary and urgent care and patient-friendly dedicated clinics will allow us to give patients easier access to the exceptional specialists across our organization when they need it and will also help strengthen our relationships with the communities where we provide services and with our hospital partners.
And maybe most significantly, we believe nobody knows how to care for babies, children and mothers like we do.
And we want to fully extend the types of relationships we currently have.
When a mother on trial want to find the best primary and urgent care practice, our answer should be and will be right here with us at Pediatrix.
Second, our brands, Pediatrix and Obstetrix, are not widely known.
We do believe our hospital partners know our name very well.
And more importantly, they know that they can rely on us for what we can do for their patients.
But patients learn about us and count on us at their most challenging times, and then they move on.
Our prospective practices and clinicians do not always think of who we are and what we provide as they cross their career paths.
To address this, and all of our work, we've launched a marketing campaign and its obvious key theme is trust.
Our ads are going to be widespread, and they're completely authentic.
They feature only our own doctors who speak about why people should trust them and trust us.
We will continue to reach out to reinforce the very unique importance of Pediatrix and Obstetrix.
In hospitals, Pediatrix and Obstetrix mean trust, life saving, world-class clinicians.
Our brand will be known to that.
We're working to ensure that MEDNAX can be the best possible partner to the patients we serve and to the physicians, payers and health systems we work with, all driven by our mission to take great care of the patient while, at the same time, taking great care of the business.
This isn't always easy, but we have a long track record of working hard to the best solution when we need to.
I'll add some detail for our first quarter results, including some of the bench making versus 2019 that Mark mentioned and touch on some of our G&A expectations as we move through the second quarter.
Lastly, I'll touch on our financial position as it stands today.
Turning to the quarter.
At the top line, our net revenue grew by $5.5 million or just over 1% year-over-year.
We recorded about $8 million in revenue from the provided relief fund established by the CARES Act during the quarter.
Overall, same unit revenue increased by 2.5% year-over-year, or 3.6% after excluding the additional calendar day in February 2020 for the 2020 leap year.
Same unit volumes declined 2.5% year-over-year or 1.4% adjusted for the leap year, compared to a 6.6% year-over-year decline in the 2020 fourth quarter.
First, as Mark mentioned, patient volumes improved throughout the quarter, such that we saw same unit growth in March across all of our service lines with the exception of PICU and pediatric hospitalist services.
Second, our NICU days for the quarter as a whole were down slightly more than total births at the hospitals where we provide NICU coverage.
This reflects a modest year-over-year decline in average length of stay, partially offset by a year-over-year increase in the rate of admission.
I know that the rate of admission was an area of interest for many of you following our fourth quarter release.
So I'll point out that in Q1, our admit rate reverted to its historical level after being modestly lower through the latter part of 2020.
Lastly, I'd like to address our 2021 volume relative to 2019.
Our first quarter same unit volume was down approximately 3% as compared to the same period in 2019, with hospital-based volume down to a greater degree than office-based volume.
We'll continue to look at this two year comparison throughout this year since it's likely that comparisons to 2020 will not be relevant based on the pandemic-related disruptions we experienced last year.
On the pricing side, we had a couple of favorable items in addition to our usual rate growth, which has been typically in the 1% to 2% range based on managed care and administrative fee revenues.
First, the cares revenue we recorded added little under 2% to our pricing growth.
On the expense side, our practice level, salary, wage and benefit expense was up by $2.7 million or about 85 basis points year-over-year.
This increase mostly reflects variable incentive compensation tied to practice level revenues, partially offset by a decrease in malpractice expense, which was higher in 2020.
Our G&A expense was down nearly $1 million year-over-year, despite incurring approximately $5 million of costs related to transitional services we provided to the buyers of our anesthesia and radiology medical groups.
The reimbursement for those expenses is reflected in our investment and other income line item.
So there's minimal impact to our adjusted EBITDA, but those costs do inflate our reported G&A expense.
In the near term, I'll note that while the radiology PSA arrangement has concluded, we do anticipate that we'll continue providing services under our anesthesiology PSA, at least through the second quarter of this year.
So you should expect a similar expense and reimbursement dynamic in the second quarter.
We expect to wind down the Anesthesiology PSA services sometime after the second quarter, at which point we'll also be able to begin winding down the expenses we're incurring and move toward that future state expectation for G&A.
Again, there may be some period of time when we're still incurring some of those expenses but not being reimbursed for them.
Lastly, our balance sheet reflects our reduced leverage profile and strong liquidity position.
We ended the quarter with $270 million in cash and net debt of $730 million, implying leverage just north of three times.
And I think we are ready to take questions.
| q1 same store sales rose 2.5 percent.
during 2021 q1, mednax's operations were negatively impacted by reductions in patient volumes and revenue from covid-19 pandemic.
|
Just after the close of regular trading, Edwards Lifesciences released third quarter 2021 financial results.
These statements include, but aren't limited to, financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters, and foreign currency fluctuations.
Finally, a quick reminder that when using the terms underlying and adjusted, management is referring to non-GAAP financial measures.
Otherwise, they're referring to GAAP results.
Let me begin by expressing appreciation for our global teams who have been highly engaged throughout the pandemic.
We're also pleased that our supply chain remained resilient during these challenging times to meet the needs of the patients we serve.
Turning to results, third quarter total Company sales of $1.3 billion increased 14% on a constant-currency basis versus the year-ago period.
Strong mid-teens growth was driven by our innovative platforms, although lower than our July expectations due to the significant impact COVID had on U.S. hospitals.
Although we experienced encouraging signs of patient confidence and continued willingness to seek medical care in July, the Delta variant had a significant impact on hospital resources during the last two months of the third quarter, especially in the U.S. Despite the pronounced impact of the Delta variant in the U.S. in Q3, we're encouraged by the recent decline in hospital COVID admissions.
We believe some procedures were unfortunately deferred in the third quarter.
And based on what we saw in Q2, we expect many of these patients who deferred treatment in Q3 will be treated in the future.
We continue to expect total Company sales growth to be in the high teens for the full year.
In TAVR, third quarter global sales were $508 and $58 million dollars, up 14% on an underlying basis versus the year-ago period.
We estimate global TAVR procedure growth was comparable with our growth in the third quarter.
Globally, our average selling price remained stable.
In the U.S., our TAVR sales grew 12% on a year-over-year basis and we estimate that our share of procedures was stable.
Growth was broad-based across both high and low volume centers.
As you might expect procedure volumes in Q3 were affected by seasonality and varied by geography and even by hospital, as patients and providers turn their focus again to the pandemic.
Our TAVR sales in July benefited from encouraging signs of continued recovery from the pandemic, however procedures were negatively impacted in the last two months of Q3 due to the significant impact Delta had on hospital resources.
Outside the U.S. in the third quarter, our sales grew approximately 20% on a year-over-year basis, and we estimate total TAVR procedure growth was comparable.
We continue to be encouraged by strong international adoption of TAVR, broadly, in all regions.
And despite the impact of Delta, the TAVR market in Europe showed relative resilience with strong growth in procedure volumes.
Growth was broad-based across Europe and driven by continued strong adoption of our SAPIEN three Ultra platform.
We were pleased with the growth rate considering that in Q3 of 2020 centers in Europe had already recovered from pandemic lows.
Longer-term, we see excellent opportunities for continued OUS growth, as we believe global adoption of TAVR therapy remains quite low.
It's worth noting that recently, published guidelines from the European Association of Cardiothoracic Surgery not definitively recommend TAVR for patients over the age of 75.
The acknowledgment by the Surgical society the TAVR is preferred for those over 75 is a significant development.
We believe these guidelines represent an important long-term opportunity and although transcatheter valves have been commercially available for over a decade in Europe, it remains clear that there is still a large, unmet need for this therapy.
Strong TAVR adoption continued in Q3 in Japan.
As expected, we received reimbursement approval in Q3 for treatment of patients at low surgical risk.
We remained focus on expanding the availability of TAVR therapy throughout this country, driven by the fact that AS remains a significantly under-treated disease among this large elderly population.
At the upcoming TCT meeting, there's a planned late-breaking update on the economic outcomes of PARTNER three at two years.
In summary, based on October procedure trends, we expect Q4 growth for TAVR to be similar to Q3.
We continue to expect underlying TAVR sales growth of around 20% in 2021.
We remain as confident as ever, about the long-term potential of TAVR because of its transformational impact on the many patients for suffering from aortic stenosis and because many remained untreated.
The long-term potential reinforces our view that this global TAVR opportunity will exceed $7 billion by 2024, which implies a low double-digit compound annual growth rate.
Now, turning to TMTT, we've made meaningful progress across all our platforms with over 6000 patients treated to date, to transform treatment and unlock the significant long-term growth opportunity.
We remain focused on three key value drivers.
A portfolio of different shaded therapies, positive pivotal trial results to support approvals and adoption, and favorable real-world clinical outcomes.
This quarter we progressed on the enrollment of five pivotal trials across our portfolio to support therapies for patients suffering from mitral and tricuspid regurgitation.
We are gaining experience with a PASCAL precision platform as part of our class trials, and physician feedback continues to be positive.
We look forward to presenting randomized data from the class 2D pivotal trial next year and remain on track for the U.S. approval of PASCAL for patients with DMR late next year.
This important milestone will mark a transition from large single-arm studies through significant pivotal trial results that support approval and adoption and will be the first of several key datasets from our class of trials.
We continue to treat patients with both of our mitral -- our transcatheter mitral replacement therapies through the ENCIRCLE pivotal trial SAPIEN M3 and MISCEND study of EVOQUE Eos.
We are ramping up enrollment with our novel EVOQUE tricuspid replacement therapy as part of the TRISCEND II Pivotal Trial.
These processing transfemoral therapies are critical for many patients without treatment options today and exemplify the importance of a comprehensive portfolio.
As we continue to expand our body of clinical evidence, we look forward to presenting meaningful data at TCT and PCR London Valves next month.
In addition, 30-day outcomes for mitral repair with PASCAL from our Miclast, post-market clinical follow-ups study of over 250 patients.
We also anticipate several live case demonstrations of our differentiated therapies.
Turning to the financial performance in TMTT, despite the impact of Delta in summer seasonality, global sales of $22 million were driven by the continued adoption of PASCAL in Europe.
As we expanded commercially, we continue to experience high procedural success rates and excellent clinical outcomes for patients.
And we remain committed to employing our high-touch clinical support model.
We are pleased with our level of site activation during the quarter.
We continue to expect to achieve our previous full-year guidance of $80 million to $100 million and estimate the global TMTT opportunity to triple to approximately $3 billion by 2025.
And we're pleased with our progress toward advancing our vision to transform the lives of patients with mitral and tricuspid valve disease.
In Surgical Structural Heart, third quarter global sales were $217 million, up 6% on an underlying basis versus the year-ago period.
Despite the Q3 resurgence and COVID cases we were encouraged to see continued SABR procedure growth across most regions.
We remain encouraged by the steady global adoption of Edwards RESILIA tissue valves, including INSPIRIS RESILIA aortic valve, the KONECT RESILIA valves conduit and our MITRIS RESILIA mitral valve.
This advanced tissue treatment is increasing supported by growing body of real-world evidence as demonstrated at the European Association of Cardiothoracic Surgeons annual meeting earlier this year.
Registry data confirmed excellent real-world outcomes with INSPIRIS RESILIA in patients under the age of 60.
As patients increase their awareness of surgical valve choices, we believe that they are learning about the durability potential of RESILIA and engaging with their positions to choose this technology.
In summary, we have confidence that our full year 2021 underlying sales growth will be in the mid-teens for Surgical Structural Heart, driven by market growth and adoption of our premium technologies.
We continue to believe the Surgical Structural Heart market that we serve will grow mid-single-digits through 2026.
In Critical Care, third quarter global sales were $213 million up 17% on an underlying basis versus the year-ago period.
Growth was driven by contributions from all product lines led primarily by strong HemoSphere capital sales in the U.S.
Our True Wave disposable pressure monitoring devices used in the ICU remained in demand due to the elevated hospitalizations in the U.S. and demand for products used in high-risk surgery also grew year-over-year in addition to demand for the ClearSight non-invasive finger cup used in elective procedures.
In summary, we continue to believe the Critical Care will grow revenue in the low double-digit range in 2021.
We remain excited about our pipeline of Critical Care innovations as we continue to shift our focus to smart recovery technologies designed to help clinicians make better decisions for their patients.
Today, I'll provide additional perspective on the third quarter, along with how we anticipate the rest of the year may unfold and some color on what to expect at the investor conference on December 8th.
Total sales in the third quarter grew 14% on an underlying basis over the prior year.
As indicated earlier, this strong sales growth is lower than we expected in July before the U.S. Delta surge.
Earnings in the quarter of $0.54 met our expectations as COVID -related constrained spending more than offset lower-than-expected sales.
As Mike mentioned, based on the improving trends with the Delta variant.
And our October procedure trends, we're projecting total Q4 sales of between 1.30 billion and 1.38 billion.
A as it relates to each product line, we are forecasting fourth quarter TAVR sales of $850 million to $910 million and still have the potential to reach underlying TAVR sales growth of around 20% for the full-year 2021.
We're also maintaining our previous ranges for TMTT, Surgical Structural Heart, and Critical Care.
We continue to expect our full-year adjusted earnings per share guidance at the high-end of $2.07 to $2.27 with fourth-quarter adjusted earnings per share of 53 to 59 cents.
And now I will cover additional details of our third quarter results.
Our adjusted gross profit margin was 76.3% up from 75.5% in the same period last year when we experienced substantial costs responding to COVID, the improvement was also driven by a more profitable product mix, partially offset by a negative impact from foreign exchange.
Like most companies, we are seeing signs of inflation, generally, in things like some of the raw materials we use in production, as well as shipping and logistics.
With that said, some of the extraordinary costs we incurred when COVID hit last year have lessened.
And the net result is no material impact to our gross profit margin performance or guidance for 2021.
More broadly, we're continuing our investments to ensure that our supply chain is strong and resilient and capable of delivering life-saving products for our patients.
We continue to expect our 2021 adjusted gross profit margin to be between 76% and 77%.
Selling general and administrative expenses in the third quarter were $364 million or 27.8% of sales compared to $307 million in the prior year.
This increase was primarily driven by personnel-related costs and increased commercial activities compared to the COVID impacted prior year.
We are planning a sequential ramp up of expenses in the fourth quarter as COVID related restrictions continued to subside.
We still expect full-year 2021 SGNA expenses as a percentage of sales excluding special items to be 28% to 29%.
Research and development expenses in the quarter grew 22% over the prior year to $238 million or 18.2% of sales.
This increase was primarily the result of continued investments in our transcatheter innovations, including increased clinical trial activity.
We are planning to increase these expenses in the fourth quarter as we invest in developing new technologies and generating evidence to expand indications for TAVR and TMTT.
For the full-year 2021, we continue to expect R&D expenses as a percentage of sales to be 17% to 18%.
Our reported tax rate this quarter was 13% or 13.9%, excluding the impact of special items.
This rate included a 320-basis point benefit from the accounting for stock-based compensation.
We continue to expect our full-year rate in 2021, excluding special items to be between 11% and 15%, including an estimated benefit of four percentage points from stock-based compensation accounting.
Foreign exchange rates increased third quarter reported sales growth by 70 basis points for $8 million compared to the prior year.
At current rates, we continue to expect an approximate $70 million positive impact, or about 1.5%, to full-year 2021 sales, compared to 2020.
Foreign exchange rates negatively impacted our third quarter gross profit margin by 30 basis points compared to the prior year.
And relative to our July guidance, FX rates positively impacted our third quarter earnings per share by less than a penny.
Free cash flow for the third quarter was $471 million, defined as cash flow from operating activities of $532 million less capital spending of $61 million our year-to-date free cash flow was $1.1 billion.
The strong cash flows are a reflection of our exceptional portfolio of patient-focused technologies that are generating returns from previous investments, which allows us to fund future internal and external opportunities.
We continue to maintain a strong and flexible Balance Sheet with approximately $3 billion in cash and investments as of September 30th.
Average shares outstanding during the third quarter were 632 million and we continue to expect our average diluted shares outstanding for 2021 to be at the lower end of our 630 to 635 million guidance range.
We have approximately $1.2 billion remaining under the share repurchase program.
Before turning the call back over to Mike, I'll make a quick comment about our outlook for 2022.
It's premature to offer detailed guidance today, but we will provide 2022 financial guidance at our Investor Conference on December 8th.
In general, in 2022, we're planning on less disruption from COVID, as we assume the resumption of more normalized sales and earnings growth, we will provide guidance for gross profit and operating margins, as well as more visibility into any potential impact from changes in corporate tax rates.
And with that, I'll pass it back to Mike.
We're very pleased with our strong year-to-date performance despite the headwinds associated with the pandemic.
And as patients and clinicians increasingly choose transcatheter valve therapy, we remain optimistic about the long-term growth opportunity.
We are committed to aggressively investing in our focused innovation strategy, because we believe there is a broad group of patients still suffering from Structural Heart disease and the pandemic's impact will wane.
We remain confident that the innovative therapies resulting from our investments will continue to drive strong organic growth in the years to come.
And as you heard from Scott earlier, our 2021 Investor Conference will take place on Wednesday, December 8th, here at our headquarters in Irvine, California.
Either way, we really hope you can be a part of it.
In addition to our 2022 financial guidance, you'll hear more about Edwards focused innovation strategy and our comprehensive and exciting product pipeline.
For more information, please visit the Investor Relations section of the Edwards website at ir.
As a reminder, please limit the number of questions to one, plus one follow-up, to allow for broad participation.
If you have additional questions, please reenter the queue, and management will answer as many participants as possible during the remainder of the call.
| compname says qtrly sales grew 15% to $1.3 billion.
qtrly sales grew 15% to $1.3 billion; underlying sales grew 14%.
q3 earnings per share was $0.54.
full year 2021 sales, earnings per share guidance range unchanged.
qtrly tavr sales of $858 million, up 15% on a reported basis.
tavr sales negatively impacted in last two months of q3 due to significant impact covid had on hospital resources.
|
This is Craig Lampo, Amphenol's CFO, and I'm here together with Adam Norwitt, our CEO.
I will provide some financial commentary, and then Adam will give an overview of the business as well as current trends, and then we'll take some questions.
The company closed the second quarter with record sales of $2.654 billion and GAAP and adjusted diluted earnings per share of $0.59 and $0.61, respectively.
Sales were up 34% in U.S. dollars, 30% in local currencies and 22% organically compared to the second quarter of 2020.
Sequentially, sales were up 12% in U.S. dollars and in local currencies and 7% organically.
Orders for the quarter were a record $3.120 billion, which was up 58% compared to the second quarter of 2020 and up 14% sequentially, resulting in a very strong book-to-bill ratio of 1.18:1.
Breaking down sales into our two segments.
The interconnect segment, which comprised 96% of our sales, was up 34% in U.S. dollars and 30% in local currencies compared to the second quarter of last year.
Our cable segment, which comprised 4% of our sales, was up 27% in U.S. dollars and 24% in local currencies compared to the second quarter of last year.
Adam will comment further on trends by market in a few minutes.
GAAP and adjusted operating income were $476 million and $532 million, respectively, in the second quarter of 2021.
GAAP operating income includes $55 million of transactions, severance, restructuring and certain other noncash costs related to the MTS acquisition.
And the company also incurred $34 million related to the extinguishment of outstanding MTS senior notes that in accordance with GAAP was recorded as an increase to goodwill in the second quarter and therefore had no impact on the second quarter earnings.
Excluding these acquisition-related costs, adjusted operating margin was 20%, which increased by a strong 200 basis points compared to the second quarter of last year and increased by 40 basis points sequentially.
The year-over-year improvement in adjusted operating margin was primarily driven by normal operating leverage on the higher sales volumes and a lower cost impact from the COVID-19 pandemic, partially offset by the impact of the challenging commodity and supply chain environment that we experienced in this year's quarter.
The sequential increase in adjusted operating margin was driven by the normal conversion on the increased sales levels, partially offset by the impact of MTS Sensors business, which is currently operating below the company's average operating margin.
From a segment standpoint, in the interconnect segment, margins were 22% in the second quarter of 2021, which increased from 20% in the second quarter of 2020 and increased 50 basis points sequentially.
In the cable segment, margins were 6.1%, which decreased from 9.4% in the second quarter of 2020 and 8.8% in the first quarter.
These lower margins in the cable segment are directly related to the rapid increases in the prices of certain commodity and logistics costs, which we have not yet been able to offset with pricing actions.
Given the dynamic market environment, we are very proud of the company's performance.
Our team's ability to effectively manage through the current market challenges is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high-performance, action-oriented culture.
The company's GAAP effective tax rate for the second quarter was 17.5%, which compared to 20.7% in the second quarter of 2020.
On an adjusted basis, this effective tax rate was 24.5% in the second quarter of both 2021 and 2020.
GAAP diluted earnings per share was $0.59, an increase of 40% compared to $0.42 in the prior year period.
And adjusted diluted earnings per share was a record $0.61, an increase of 53% compared to $0.40 in the second quarter of 2020.
The company continues to be an excellent generator of cash.
Operating cash flow was $411 million in the second quarter or 109% of adjusted net income.
And net of capital spending, our free cash flow was $307 million or 81% of adjusted net income.
From a working capital standpoint, inventory days, days sales outstanding and payable days were 85, 71 and 60 days, respectively, all excluding the impact of acquisitions in the quarter and within our normal range.
During the quarter, the company repurchased 2.5 million shares of common stock for approximately $167 million at an average price of approximately $67.
At the end of the quarter, total debt was $5.2 billion and net debt was $4 billion.
Total liquidity at the end of the quarter was $2.3 billion, which included cash and short-term investments on hand of $1.2 billion plus availability under our existing credit facilities.
Second quarter 2021 GAAP EBITDA was $597 million, and our net leverage ratio was 1.6 times.
On a pro forma basis, after giving effect to the sale of MTS test and simulation business, net leverage at June 30, 2021 would have been 1.3 times.
As previously discussed, due to the pending sale of the MTS test and simulation business, that business is being reported as a discontinued operation.
And therefore, its expected results are excluded from our Q3 guidance.
In addition, in conjunction with the divestiture of the test and simulation business, the company will incur certain additional cash tax-related and other acquisition-related costs in the third quarter, which will not be included in income from continuing operations and therefore are not included in our guidance.
And I hope that you, your family, friends and colleagues continue to stay safe and healthy and indeed are able to enjoy the summer so far.
As Craig mentioned, I'm going to highlight some of our achievements in the second quarter.
I'll then get into a discussion of the trends and our trends and progress across our served markets.
Our results in the second quarter were substantially better than expected as we exceeded the high end of our guidance in sales and adjusted diluted earnings per share.
Craig already mentioned, our sales grew a very strong 34% in U.S. dollars and 30% in local currencies, reaching a new record of $2.654 billion.
On an organic basis, our sales increased by 22%, with growth driven in particular by the automotive, military, industrial and broadband markets as well as contributions from the company's acquisition program.
We're very pleased to have booked record orders in the quarter of $3.120 billion and that represented a very strong book-to-bill of 1.18:1.
Despite facing operational challenges in certain geographies related to the ongoing pandemic as well as continued increases in costs related to commodities and supply chain pressures, we were very pleased to deliver very strong adjusted operating margins of 20% in the quarter.
This was a 200 basis point increase from last year's levels and a 40 basis point improvement sequentially.
Adjusted diluted earnings per share grew a very significant 53% from prior year to another new record of $0.61.
And just an outstanding reflection of our continued strong execution.
And finally, the company generated operating and free cash flow of $411 million and $307 million, respectively, in the second quarter.
I just can't emphasize enough how proud I am of our organization around the world.
These results once again reflect the discipline and agility of our entrepreneurial organization as we have continued to perform well amid what is a very dynamic and challenging environment.
Very pleased that in the quarter, we closed on the acquisition of Unlimited Services.
Unlimited is based in Oconto, Wisconsin, but also with operations in Mexico and has annual sales of approximately $50 million.
This is a great manufacturer of cable assemblies for the industrial market, primarily with a particular focus on heavy vehicles.
The addition of Unlimited broadens our already strong position in value-add interconnect products that are integrated into a wide array of industrial applications.
In fact, our ability to identify and execute upon acquisitions and then to successfully bring these new companies into Amphenol remains a core competitive advantage for the company.
Now turning to our served markets.
I just would comment once again how pleased we are that the company's broad and balanced end market diversification continues to create real value for us.
We believe that ultimately, this diversification mitigates the impact of the volatility of individual end markets while also giving us broad exposure to leading technologies and the innovations of those technologies wherever they may arise across the broad scope of the electronics industry.
Now turning to the military market.
The military market represented 11% of our sales in the quarter.
And as expected, sales grew a strong 45% from the COVID impacted prior year second quarter and were up 30% organically.
And this was really driven by broad strength across virtually all segments of the military market.
On a sequential basis, sales increased by 12%, also very strong.
As we look into the third quarter, we remain -- we expect sales to remain at these current elevated levels.
And we continue to be very excited by the strength of our position in the military market.
And that position is really based upon our industry-leading breadth of high-technology interconnect and now sensor products, together with our support of essentially all major military programs.
This gives us great confidence for our long-term performance in this important area.
The commercial air market represented 2% of our sales in the quarter.
Sales grew by 7% versus prior year, really with the benefit of the contributions of our recent acquisitions.
On an organic basis, sales were down by about 14% as the commercial aircraft market continued to experience declines in demand for new aircraft production.
Sequentially, however, our sales did increase by better than expected 19%.
And that's really from the benefit of the MTS acquisition as well as some organic progress.
As we look ahead, we expect a slight seasonal moderation in sales in the third quarter, which we would typically see in commercial air.
And regardless of the ongoing difficult environment, our team working in this commercial aerospace market remains committed to leveraging the company's strong interconnect and sensor technology position across a wide array of aircraft platforms and next-generation systems that are integrated into those planes.
As personal and business travel continues to recover from the pandemic, we look forward to jet manufacturers beginning to expand their production levels.
The industrial market represented 27% of our sales in the quarter, and our performance in the second quarter in industrial was really much stronger than expected with sales increasing by 54% in U.S. dollars and 28% organically.
This growth was broad-based across most areas of the worldwide industrial market and was driven in particular by organic strength in the transportation, battery and heavy electric vehicle, marine and energy generation segments, together with the contributions from our acquisitions that have been completed over the past year.
On a sequential basis, sales increased by a very strong 26% from the first quarter really with the benefit of acquisitions as well as strong organic performance.
Looking into the third quarter, we expect sales to remain at these elevated levels despite what would typically be a seasonally lower quarter.
I can't say enough how proud I am of our team working in the industrial market.
And we've had a long-term strategy to expand our high-technology interconnect, antenna and sensor offering, both organically as well as through complementary acquisitions.
And that strategy has positioned us strongly with industrial customers around the world who are accelerating their adoption of electronics.
The acquisition of Unlimited Services further bolsters our leading value-add capabilities in this important market, and we look forward to realizing the benefits of this strategy for many years to come.
The automotive market represented 20% of our sales in the quarter.
And I can just say that sales were higher than our expectations, growing a very strong 134% in U.S. dollars and 117% organically as our team was able to execute strongly in the face of a robust and broad recovery in the automotive market.
In particular, we once again drove very strong growth of our products used in electric and hybrid electric vehicles this quarter, which confirms again for us our global team's long-term efforts at designing in high voltage and other interconnect and sensor products into these important next-generation platforms.
Despite an increase in production disruptions among our automotive customers due to the widely reported global supply chain issues, we were able to achieve a small sequential increase in our sales, which was a bit better than we had expected coming into the quarter.
No doubt about it, though, there continues to be a range of widely reported supply chain challenges that are arising within the automotive industry, and this is impacting overall demand from vehicle manufacturers around the world.
Accordingly, as we look toward the third quarter, we do expect a modest sequential decline in our sales.
I remain extremely proud of our team working in the automotive market.
They continue to demonstrate a high degree of agility and resiliency in both driving a significant recovery from last year's reduced production levels while expertly navigating the myriad of supply chain challenges that the entire automotive industry is still facing.
We look forward to benefiting from their efforts long into the future.
Turning to the mobile devices market.
That market represented 10% of our sales in the quarter.
Our sales to customers in the mobile devices market declined from prior year by 4% in U.S. dollars and 6% organically as declines in handsets and laptops more-than-offset growth in wearables.
I would just remind you that our last year's second quarter did include a significant sequential recovery and really a catch-up from the COVID impacted first quarter of 2020, which made the comparison versus prior year, a little more challenging.
Sequentially, our sales fell by 6% from the first quarter, which was modestly better than our expectations.
Looking to the third quarter, we now expect an approximately 25% increase in sales from these second quarter levels as we benefit from the seasonally typical higher demand in the mobile device market as customers launch a range of new products.
While mobile devices remains the most volatile of Amphenol's end markets, our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in the second half of 2021 and beyond.
Our leading array of antennas, interconnect products and mechanisms continues to enable a broad range of next-generation mobile devices, thereby positioning us well for the long term in this exciting market.
The mobile networks market represented 5% of our sales in the quarter.
Sales were flat to prior year and down 4% organically as sales to both OEMs and wireless service providers moderated.
On a sequential basis, however, our sales increased by 5% compared to the first quarter, which was in line with our expectations coming into the second quarter.
And as we look toward the third quarter, we expect a further increase in sales as Mobile Networks customers ramp up their investments in next-generation networks.
Our team around the world continues to work aggressively to realize the benefits of our efforts at expanding our position in such next-generation networks and the equipment that populates them around the world.
And as customers ramp up these investments of such advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers.
The information technology and data communications market increased by 21% in the second quarter.
Sales in the second quarter rose by 5% in U.S. dollars and 3% organically from the very significant levels in last year's second quarter.
Our strength this quarter was driven, in particular, by robust sales to web service providers, which was partially offset by some weakness in sales to networking equipment OEMs. Sequentially, our sales grew a very strong 20% from the first quarter, which significantly outperformed our original expectations.
Looking now into the third quarter, we expect sales to increase modestly from these very high levels.
We remain very encouraged by the company's outstanding position in the global IT datacom market.
Our OEM and web service provider customers around the world continue to drive their equipment and networks to ever higher levels of performance in order to manage the continued dramatic increases in demand for bandwidth and processor power.
In turn, our team is singularly focused on enabling this continuing revolution in IT datacom with industry-leading high-speed power and fiber optic interconnect products.
And we look forward to realizing the benefits of our leading position for many years to come.
Turning finally to the broadband market.
This market represented 4% of our sales in the quarter, and sales increased by 12% from prior year and were flat organically as we benefited from our recent acquisition of Cablecon.
On a sequential basis, sales increased by 7% from the first quarter, which was a bit lower than we had anticipated coming into the quarter.
For the third quarter, we expect sales to moderate from current levels as operators digest the really high levels of spending that they have exhibited over the recent quarters.
And regardless of this more muted outlook, we continue to look forward to supporting our broadband service operator customers around the world, all of whom are working to increase their bandwidth to support the expansion of high-speed data applications to homes and businesses.
Now turning to our outlook.
And I would just note that given the current dynamic market environment, and of course, assuming no new material disruptions from the COVID-19 pandemic as well as constant exchange rates, in the third quarter, we expect sales in the range of $2.640 billion to $2.700 billion, and adjusted diluted earnings per share in the range of $0.60 to $0.62.
This would represent sales growth of 14% to 16% and adjusted diluted earnings per share growth of 9% to 13% compared to the third quarter of last year.
I remain confident in the ability of our outstanding entrepreneurial management team to adapt to the continued challenges in the marketplace and to capitalize on the many opportunities to grow our market position and expand our profitability.
I had to say that our entire organization remains committed to delivering long term and sustainable value, all while prioritizing the continued safety and health of each of our employees around the world.
And with that, operator, we'd be very happy to take any questions that there may be.
| compname reports q2 earnings per share of $0.59.
q2 adjusted earnings per share $0.61.
q2 gaap earnings per share $0.59.
q2 sales $2.654 billion versus refinitiv ibes estimate of $2.48 billion.
sees q3 adjusted earnings per share $0.60 to $0.62 from continuing operations.
sees q3 sales up 14 to 16 percent.
|
Chief Investment Officer Greg Wright, Chief Technology Officer Chris Sharp, and Chief Revenue Officer Corey Dyer are also on the call and will be available for Q&A.
For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC.
Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.
We continue to enhance our product mix with a record contribution from our sub-1 megawatt plus interconnection category.
We extended our sustainability leadership with the publication of our third annual ESG report.
We raised revenue and EBITDA guidance for the second quarter in a row, setting the stage for accelerating growth in cash flow.
Last but not least, we further strengthened the balance sheet with the redemption of high coupon preferred stock and the issuance of low-cost, long-term fixed rate debt.
Our formula for long-term value creation is a global, connected, sustainable framework.
We continue to advance along these lines during the second quarter.
Our business continues to globalize.
And, once again, we generated solid performance and strong bookings across all regions.
Our full-spectrum product offering continues to blossom with record sub-1 megawatt bookings in the second quarter and regional highs in both EMEA and APAC.
Together, with interconnection, the sub-1 megawatt category comprised nearly half of our total bookings, demonstrating customers' enthusiastic adoption of PlatformDIGITAL to help accomplish their digital transformation initiatives.
I'll discuss our sustainable growth initiatives on Page 3.
In June, we were awarded the Green Lease Leader Gold award from the Institute for Market Transformation and the U.S. Department of Energy for the third year.
We remain the only data center provider to receive this award, which recognizes Digital Realty as a leader in the real estate industry that incorporates green leasing provisions to better align our interest with our customers and drive high performance and healthy buildings.
During the second quarter, we published our third annual ESG report, detailing our 2020 sustainability initiatives, including the utilization of renewable energy for 100% of our energy needs across our entire portfolio in Europe as well as our U.S. colocation portfolio and reaching 50% of our global needs.
We also reported progress toward our science-based target, ensuring a deep focus on our renewable energy, energy efficiency and supply chain sustainability initiatives.
Our ESG report highlights many of our ongoing initiatives, including our diversity, equity and inclusion efforts along with our community involvement.
Digital Realty is committed to being an active member of and giving back to the communities where we operate globally.
We encourage and celebrate community involvement and employee engagement activities through our Do Better Together initiative.
We also recently underscored our commitment to transparency and accountability on our diversity, equity and inclusion journey with the publication of our EEO-1 report.
Events over the past year and a half have demonstrated that now more than ever, ESG belongs at the forefront of our business.
I'm proud of our leadership in this area as we advance our broader goal of delivering sustainable growth for all of our stakeholders, investors, customers, employees, and the communities we serve around the world.
Let's turn to our investment activity on Page 4.
We are continuing to invest in our global platform with 39 projects underway around the world as of June 30, totaling nearly 300 megawatts of incremental capacity, most of which is scheduled for delivery over the next 12 months.
We are investing most heavily in EMEA with 19 projects totaling over 150 megawatts of capacity under construction.
Most of this capacity is highly connected, including projects in Frankfurt, Marseille, Paris, and Zurich.
Demand remains strong across these metros, and each continues to attract service providers as well as enterprise customers from around the world, many of which contributed to a truly standout performance by the region during the second quarter in the up-to-1 megawatt category.
In North America, over half of our capacity under construction is concentrated in two hot markets, Portland and Toronto, that can sometimes be overlooked in favor of more traditional North American data center metros.
We've had tremendous recent success in these two metros.
We have 30 megawatts under construction in Portland or, more specifically, Hillsboro, that are now fully pre-leased, while our Toronto connected campus continues to gain momentum as the premier Canadian hub for global cloud service providers and enterprise customers.
Finally, in Asia Pacific, we are accelerating our organic growth in this underserved region.
We opened our third data center in Singapore, a 50-megawatt facility that received permitting prior to the moratorium on new data center construction.
Demand for this scarce capacity is robust, and we have another 18 megawatts largely presold and scheduled to open this quarter.
Also coming soon in this region are a pair of MC Digital Realty data centers in Japan.
With the world's eyes currently on Tokyo for the Olympics, we are opening a new Tokyo facility that's poised to win the gold medal.
We are also opening another data center in Osaka this quarter, along with our first data center and the first carrier-neutral offering in Seoul, Korea, during the fourth quarter.
We are very excited about the opportunity in Seoul.
Finally, earlier this month, we announced our intention to enter India in partnership with Brookfield Infrastructure.
Given the success of our existing partnership on the Ascenty platform in Latin America, the complementary skills and expertise that we both bring to this partnership, and with the significant growth opportunity available in India, we are excited to expand our footprint in this robust and dynamic market.
Let's turn to the macro environment on Page 5.
We are fortunate to be operating in a business levered to secular demand drivers.
Our leadership position provides us with a unique vantage point to detect secular trends as they emerge globally on PlatformDIGITAL.
The first of these trends is the growing importance of data gravity for Global 2000 enterprises.
Last year, we introduced the Data Gravity Index, our market intelligence tool, which forecasts the growing intensity of enterprise data creation life cycle and its gravitational impact on global IT infrastructure between key global markets.
Earlier this year, we took the next step and published an industry manifesto, enabling connected data communities to guide cross-industry collaboration, tackle data gravity head-on, and unlock a new era of growth opportunity for all companies.
Earlier this week, we announced a collaboration with Zayo to further interconnection business through the creation of an open fabric-of-fabrics.
With data sets exploding and data gravity challenges expanding, this initiative will enable multinational enterprises to connect these data oceans through fabric and orchestration.
Third-party research continues to support data gravity's growing importance.
Market Intelligence firm, Gartner, recently conducted its 6th annual survey of chief data officers, and less than 35% of these executives reported their business have achieved their data sharing objectives, including data exchange with external data sources that drive revenue-generating business outcomes.
Issues often arise due to multiple data hosting and processing meeting places together with the need for appropriate security controls and the inability to overcome latency challenges with direct private interconnection between many counterparties.
PlatformDIGITAL was designed to solve these problems.
Digital transformation is compounding this enterprise data and connectivity problem.
Recent research indicates that enterprise workflows utilize an average of 400 unique data sources, while exchanging data with 27 external cloud products.
Digital Realty's enterprise and service provider customers are turning to PlatformDIGITAL to overcome these issues by deploying their own data hubs and using interconnection to securely exchange data in and across multiple metros.
Our leadership position is resonating with industry experts and influencers.
For the second consecutive year, Digital Realty was named a global leader by IDC MarketScape for data center colocation and interconnection services, further acknowledgment of our consistently improving customer capabilities.
This recognition reflects our execution against the PlatformDIGITAL road map, providing unique differentiated value for customers with our fit-for-purpose, full-spectrum global capabilities.
Earlier this month, Cloudscene again ranked Digital Realty as the strongest provider of data center ecosystems in EMEA for the second consecutive year.
Digital Realty was ranked second in both North America as well as Latin America and jumped up three spots to No.
Also, in July, GigaOm published their analysis of edge infrastructure capabilities.
Digital Realty ranked as an industry leader on multiple criteria across three broad categories.
Our capabilities were ranked highest in vendor positioning and evaluation metrics comparison and second among the key criteria comparison.
Given the resiliency of the demand drivers underpinning our business, and the relevance of our platform to meeting customers' needs, we believe we are well positioned to continue to deliver sustainable growth for customers, shareholders and employees, whatever the macro environment may hold in store.
Let's turn to our leasing activity on Page 7.
We signed total bookings of $113 million in the second quarter, including a $13 million contribution from interconnection.
Network and enterprise-oriented deals of 1 megawatt or less reached an all-time high of $41 million, demonstrating our consistent momentum and the growing success of PlatformDIGITAL as we continue to capture a greater share of enterprise demand.
The weighted average lease term was over eight years.
We landed 109 new logos during the second quarter, with a strong showings across all regions, again, demonstrating the power of our global platform.
The geographic and product mix of our new activity was quite healthy, with APAC and EMEA, each contributing approximately 20%, the Americas representing nearly 50%, and interconnection responsible for a little over 10%.
The megawatt or less plus interconnection category accounted for almost half of our total bookings with particular strength in the cloud, content and financial services verticals.
In terms of specific wins during the quarter and around the world, we landed a top five cloud service provider to anchor our new Tokyo campus.
Close on the heels of this magnetic customer deployment, Japan's most popular social media applications selected PlatformDIGITAL on the same campus.
NAVER, the leading Korea-based cloud provider serving the greater APAC region, selected our new carrier-neutral facility in Singapore to support data-intensive workloads for their high-performance computing and I -- AI-intensive technology-based platform.
A European broadcaster is leveraging PlatformDIGITAL in Vienna and Frankfurt to rewire their network in favor of data-intensive interconnection with benefits in performance, scalability, and cost savings.
A Global 2000 enterprise data platform is adopting PlatformDIGITAL in Amsterdam, Dublin and Frankfurt to orchestrate workloads across hundreds of ecosystem applications, delivering improved performance, security, cost savings, and simplicity.
In London, PlatformDIGITAL is supporting a top three global money center banks fortification of their business continuity capabilities without compromising their data-intensive interconnection requirements.
On the continent, our connectivity and operational capabilities are helping two independent fintech customers improve performance enhance -- and enhance access to their connected data communities.
Finally, in North America, a life sciences digital marketing firm chose PlatformDIGITAL to improve their network architecture and enable future growth.
Turning to our backlog on Page 9.
The current backlog of leases signed but not yet commenced ticked down from $307 million to $303 million as commencement slightly eclipsed space and power leases signed during the quarter.
The lag between signings and commencements was a bit longer than our long-term historical average at just over seven months.
Moving on to renewal leasing activity on Page 10.
We signed $178 million of renewals during the second quarter in addition to new leases signed.
The weighted average lease term on renewals signed during the second quarter was just under three years, again, reflecting a greater mix of enterprise deals smaller than 1 megawatt.
We retained 77% of expiring leases, while cash releasing spreads on renewals were slightly positive, also reflective of the greater mix of sub-1 megawatt renewals in the total.
In terms of second quarter operating performance, overall portfolio occupancy ticked down by 60 basis points as we brought additional capacity online across six metros during the quarter.
Same capital cash NOI growth was negative 1.5% in the second quarter, largely driven by the churn in Ashburn at the beginning of the year.
As a reminder, the Westin Building in Seattle, the Interxion platform in EMEA, Lamda Helix in Greece and Altus IT in Croatia are not yet included in the same-store pool.
So these same capital comparisons are less representative of our underlying business today than usual.
Let's turn to our economic risk mitigation strategies on Page 11.
The U.S. dollar fluctuated during the second quarter but remained below the prior year average, providing a bit of an FX tailwind.
As a reminder, we manage currency risk by issuing locally denominated debt to act as a natural hedge so only our net assets within a given region are exposed to currency risk from an economic perspective.
In addition to managing credit risk and foreign currency exposure, we also mitigate interest rate risk by proactively terming out short-term variable rate debt with longer-term fixed rate financing.
Given our strategy of matching the duration of our long-lived assets with long-term fixed-rate debt, a 100 basis-point move in benchmark rates would have roughly a 75 basis-point impact on full year FFO per share.
In terms of earnings growth, second quarter core FFO per share was flat year-over-year but down 8% from last quarter driven by $0.12 noncash deferred tax charge related to the higher corporate tax rate in the U.K., which came into effect during the second quarter.
Excluding the tax charge, which was not previously contemplated in our guidance, we outperformed our internal forecast due to a beat on the top line with a slight assist from FX tailwinds as well as operating expense savings, partially due to lower property-level spending in the COVID-19 environment.
For the second time this year, we are raising our full-year outlook for total revenue and adjusted EBITDA to reflect the underlying momentum in our business.
The deferred tax charge does run through core FFO per share.
Since it is noncash, the deferred tax charge does not hit AFFO.
Most of the drivers of our guidance table are unchanged.
But I would like to point out that we are lowering our expected recurring CapEx spend for the remainder of the year, setting a stage for accelerating growth in cash flow.
As you could see from the bridge chart on Page 12, we expect our bottom line results to improve sequentially over the balance of the year as the deferred tax charge comes out of the quarterly run rate and the momentum in our underlying business continues to accelerate.
We do still expect to see some normalization in our cost structure with an increase in property-level operating expenses that have been deferred due to COVID, along with an uptick in G&A expense as we return to the office and resume a more normal travel schedule.
So your model should reflect these higher costs.
Last, but certainly not least, let's turn to the balance sheet on Page 13.
As you may recall, we closed on the sale of a portfolio of noncore assets in Europe for $680 million late in the first quarter, which impacted second quarter adjusted EBITDA to the tune of approximately $10 million.
As a result, net debt to adjusted EBITDA was slightly elevated 6x as of the end of the second quarter but is expected to come back down in line with our long-term range over the course of the year through a combination of proceeds from asset sales and growth in cash flows as signed leases commence.
Fixed charge coverage ticked down slightly, also reflecting the near-term impact from asset sales, but remains well above our target and close to an all-time high at 5.4x, reflecting the results of our proactive liability management.
We continue to execute our financial strategy of maximizing the menu of available capital options while minimizing the related costs and extending the duration of our liabilities to match our long-lived assets.
In mid-May, we redeemed $200 million of preferred stock at 6.625%, which brought total preferred equity redemptions over the prior 12 months to $700 million at a weighted average coupon of just over 6.25%, effectively lowering leverage by 0.3 turns.
In mid-June, we issued 0.5 million shares under our ATM program, raising approximately $77 million.
In early July, we raised another $26 million with the sale of the balance of our Megaport stock.
We also took our first trip to the Swiss bond market in early July, raising approximately $595 million in a dual tranche offering of Swiss green bonds with a weighted average maturity of a little over six and a half years and a weighted average coupon of approximately 0.37%.
This successful execution against our financial strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers, enables us to prudently fund our growth.
As you can see from the chart on Page 13, our weighted average debt maturity is nearly six and a half years, and our weighted average coupon is down to 2.2%.
dollar-denominated, reflecting the growth of our global platform and serving as a natural FX hedge for our investments outside the U.S. 90% of our debt is fixed rate to guard against a rising rate environment, and 98% of our debt is unsecured, providing the greatest flexibility for capital recycling.
Finally, as you can see from the left side of Page 13, we have a clear runway with nominal near-term debt maturities and no bar too tall in the out years.
Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy.
Andrew, would you please begin the Q&A session?
| q2 revenue rose 10 percent to $1.1 billion.
|
These statements reflect the participants' expectations as of today, but actual results could be different.
Participants also expect to refer to certain adjusted financial measures during the call.
We hope that you are all staying safe and healthy.
I'd like to begin by welcoming Tom, who with almost 30-years of CFO experience and deep roots in brands and retail, has been a tremendous addition to our team as we drive the recovery in our business and the return to profitable growth.
We concluded an incredibly challenging year with a fourth quarter that exceeded our expectations across the board.
Our performance was driven by record digital revenue and superb all-around results at Journeys, highlighted by our stronger-than-anticipated store volume.
As it did throughout fiscal '21, our organization successfully navigated difficult operating conditions to serve our customers this time during the all-important holiday selling season.
I could not be more proud of how well our teams have also executed during the pandemic.
They have faced each new challenge in a very dynamic environment with tenacity and ingenuity while operating under protocols to ensure our highest priority, the health and safety of each other and our customers.
Before we get into a review of fourth-quarter performance, I'd like to highlight some of the major accomplishments from fiscal '21.
Starting with the significant and unfamiliar task of efficiently closing and then swiftly reopening our entire fleet of nearly 1,500 retail locations, some of them multiple times.
Capitalizing on the accelerated shift to online spending, achieving record digital revenue of $450 million, an increase of almost 75% year over year while also fueling record profitability for this channel, driving record conversion rates in stores, helping us to partially offset the impact from lower traffic levels and store closures.
Increasing market share in Journeys and Schuh, which represent a large majority of our revenue with their ability to retain sales in this face of the pandemic disruption.
Conserving capital and reducing operating expenses by 15% compared with fiscal '20, generating cash flow of over $130 million to ensure healthy liquidity.
And so finally, delivering sequential improvement every quarter.
In particular, bottom line results reflect the strong foundation we built for the digital channel prior to the pandemic.
Our online business generated double-digit operating margins before COVID-19 due to our focus on full price selling, disciplined marketing spend and shipping and return policies to reinforce profitability.
Our overall performance under difficult circumstances also reflects the strong competitive positions of our retail concepts prior to COVID-19 and our success capitalizing on opportunities to further strengthen the leadership positions of our teen and young adult footwear businesses.
In today's channel-less world, where our consumer can shop anywhere the consumer wants, Journeys and Schuh's results underscore the tremendous loyalty they've developed with their existing customers and compelling proposition they offer new customers.
So turning now to the fourth quarter.
The work we did to have the right assortments and right holiday campaigns helped deliver Q4 results then are ahead of expectations in spite of some store closures not anticipated in the U.K. and Canada and supply chain delays and disruption.
While we continue to face softer traffic levels than one year ago across our retail businesses, Journeys stores posted a nice improvement compared with the third quarter as more shoppers visited Journeys locations during the peak weeks leading up to Christmas.
Our store teams once again drove very strong levels of the customer conversion to help materially offset the headwinds from less traffic.
Meanwhile, our business online, especially mobile, experienced very strong gains in both traffic and conversion, with new customers, again, driving increased volumes.
New website visitors were up 40%, contributing an almost 50% growth in new customer purchases, and we delivered another strong quarter of this digital growth with comps up 55%.
The combination of these factors led to a total revenue decrease of 6% versus last year, with stores open about 90% of the possible days in the quarter.
This result was better than we expected due mainly to the stronger store sales at Journeys and that represents a meaningful improvement from last quarter's 11% decline in Q2's 20% decline.
While gross margins were down compared to last year, the gap narrowed for the third consecutive quarter and the sequential improvement was driven by an increase at Journeys due to the strong full price selling.
As a result of decisive cost containment actions, along with onetime benefits, including substantial rent abatements recognized in the quarter, we drove total expenses down twice as much as revenue on a percentage basis.
Inclusive of the rent abatements, operating income was up year over year.
By tightly managing inventory throughout the year, we had the flexibility and confidence to bring in new fresh product.
However, much lower year-end numbers that also reflect the disruption in the supply chain which caused delays, especially at Journeys and Schuh, where we would have liked to have received product earlier.
Turning now to discuss each business in more detail.
Let's start with Journeys and begin by congratulating our team on its impressive results across the board.
Journeys delivered record operating profit in the biggest quarter of the year in the midst of a pandemic.
Fourth-quarter top line results matched last year's levels as the merchant team skillfully interpreted trends making the right product calls and its store and digital teams delivered an exceptional customer experience.
When our stores were open this year, Journeys that customers were enthusiastic to shop our physical locations and engage with our people.
And over the holidays, we were pleased by the strong appetite to shop our stores.
With replenishment orders for many key styles arriving post holiday, combined with the first wave of these checks from the December stimulus program delivered early in the new year, the business accelerated as January progressed, leading to a strong finish to the quarter.
Comfort reigns as the fashion choice of the pandemic and Journeys' offering of casual product continued to resonate strongly with consumers.
While teens always have a big complement of fashion athletic footwear in the closets when fashion swings toward non-athletic or what we call casual footwear, Journeys' is especially well positioned among its competition to deliver this assortment.
This Fall and winter, our consumers' appetite for the Boots began early and our boot business was good.
And our casual business was even better, especially in women's and kids.
Following a good back-to-school season, Schuh came into the fourth quarter with this positive momentum and a strong assortment of high demand brands and styles.
with Schuh stores closed for about two-thirds of the possible days in the quarter.
Fortunately, with best-in-class digital abilities, Schuh was able to capture a significant portion of lost store volume through its digital channel, and total sales were down only 13%, capping off a year in which Schuh, like Journeys, gained market share.
As with Journeys, Schuh's casual assortment gained ground over its fashion-athletic assortment with the boots and casual strong throughout the quarter and women's leading the way.
Meanwhile, Johnston & Murphy's casual footwear offering and apparel categories were, again, the bright spots for the brand in what still remained a very tough environment due to the work-from-home trend and significantly fewer social gatherings during the pandemic.
The plan going forward is to accelerate the work started years ago to evolve J&M into a footwear first lifestyle brand, with a range of footwear and apparel from dressier to more casual.
Despite the challenging year, and there were some solid proof points that this strategy continues to gain traction including the success in the innovative XC4 collection through the relaunch of golf.
For the upcoming year, J&M has focused 90% of new product development on our expansion of its casual offering to include casual athletic, leisure, rugged, outdoor and performance.
We brought in a new Head of Product Development, who brings a successful track record developing casual brands to aid in these efforts.
And so as our customer returns to work and socializing, which we hope will be sooner than later, J&M's assortment will be ready for the post-pandemic lifestyle and further void by J&M core customers increased level of savings during the pandemic.
So turning now to the current quarter.
Early February extended January's positive momentum until we hit the offset of income tax refunds, which were delayed by a few weeks this year.
Nevertheless, February sales came in, and in line with our expectations, and in March, we have seen an uptick as refunds began to catch up.
Looking ahead, while great progress is being made on this front, we expect the environment to remain fluid in the near-term until the vaccine is more fully rolled out.
In terms of how this shapes our results, it means the first half will show an improvement to last year, given easier comparisons due to the COVID shutdowns, but we will still be under pressure from store closures especially in the U.K., which is expected to be shut down until shortly after Easter.
We anticipate store traffic will also continue to be affected across all geographies this spring.
These dynamics will further pressure our results in these low volume months, when in normal times, fixed operating expenses makes it challenging to breakeven.
Stimulus will help, we will see how much, and we are also optimistic about a greater recovery in the back half.
But what we're most excited about is we see opportunities to solidify the digital gains we've made and capitalize on the ongoing industry consolidation to further expand our market share.
As many challenges as COVID-19 has now created for our company, it has also provided us the real opportunity to transform our business at a faster pace.
We've learned a lot and will work hard to accelerate the initiatives and investments we plan to also achieve these goals and exceed the expectations of the consumer whose needs have advanced.
We were pleased with our performance in Q4 as we handily exceeded our expectations in all facets of operating results.
Building upon our strong return to profitability in the Q3, sequential improvements compared to the prior quarters in revenue, gross margin and SG&A due to some help from rent abatements, drove higher operating income than last year.
A higher tax rate offset the higher operating income, resulting in adjusted earnings per share of $2.76, compared to $3.09 last year.
Turning to the specifics for the quarter.
While comps were up 1%, consolidated revenue was $637 million, down 6% compared to last year, driven by continued pressure at J&M and the impact from store closures during the quarter.
A robust e-commerce comp of 55% was really offset by a decline in-store revenue of 19%, driven by a comp decline of 10%.
While our stores were closed for 10% of the possible operating days during the quarter.
Digital sales increased to 27% of our retail business from 17% last year.
Consolidated gross margin was 45.8%, down 110 basis points from last year.
As we have experienced all year, increased shipping to fulfill direct sales that pressured the gross margin rate in all our businesses totaling 80 basis points of the overall decline.
Notably, Journeys' gross margin increased 210 basis points driven by lower markdowns.
Schuh's gross margin decreased 410 basis points due to the increased e-comm shipping expense.
J&M's gross margin decrease of 1,690 basis points was due to more closeouts at wholesale, higher markdowns at retail and incremental inventory reserves.
So, finally, the combination of lower revenue at J&M, typically the highest gross margin rate of our businesses and the revenue growth of licensed brands typically our lowest gross margin rate negatively impacted the overall mix by 50 basis points.
The largest year-over-year savings came from the occupancy costs, driven in large part by the execution of about $18 million of rent abatements with our landlord partners who provided support for the time stores were closed and savings from the U.K. government program, which provides property tax relief.
The next largest areas of savings came from the reduction in-store salaries -- store selling salaries, driven by our effective use of workforce management tools and from lower bonus expense.
These savings were partially offset by increased marketing expenses needed to drive traffic in both stores and online.
We took the most significant cost actions at J&M evident by the 29% reduction in SG&A in the Q4 and our 25% reduction for the full year.
In addition to the rent abatement savings, our organization has been intently focused on a multiyear effort centered around occupancy cost, and we have achieved even greater traction with the pandemic.
We negotiated 123 renewals this year and achieved a 23% reduction in cash rent or 22% on a straight-line basis in North America.
This was on top of an 11% of cash rent reduction or 8% on a straight-line basis for 160 renewals last year.
These renewals are for an even shorter-term averaging approximately one and a half years compared to the three-year average that we saw last year, with almost one-third of our fleet coming up for renewal in the next 24 months, this will remain a key priority for us going forward.
In summary, the fourth quarter's adjusted operating income was $64.7 million versus last year's $59.3 million.
Our adjusted non-GAAP tax rate for the fourth quarter was 37.5%.
Tax initiatives under the CARES Act and then other provisions generated a onetime $65 million permanent income tax benefit for Fiscal year-end '21.
This permanent benefit is excluded for non GAAP reporting.
Turning now to the balance sheet.
Q4 total inventory was down 20% on sales that were down 6%.
The levels of Journeys and Schuh are also lower than we would like given the delays in the supply chain.
For the fourth quarter, our ending net cash position was $182 million, $100 million higher than the third quarter's level, driven by strong cash generation from operations.
The year-end cash balance that benefited from both the lower inventory levels as well as rent payables that will be trued up once remaining COVID related deals are fully completed and executed.
Capital expenditures were $6 million as our spend remains focused on digital and omnichannel and depreciation and amortization was $11 million.
We closed 16 stores and opened none during the fourth quarter, capping off the full year in which we closed 33 stores and opened 13.
Now looking forward to fiscal '22, given the uncertainty remaining within this pandemic, we are not providing specific guidance for Q1 or the full fiscal year.
That said, I do want to share some high-level thoughts on how we are thinking about our business.
To do this, we think it's best to use the pre-pandemic fiscal '20 as the reference point as there is simply too much noise in our fiscal '21 results, for drawing informative comparisons for future expectations.
Thinking about Q1 revenue, although we expect a nice recovery compared to fiscal '21, we will be below fiscal '20 levels.
This is mainly due to Schuh with major store closures expected through the most of Q1 and continued pressure on J&M.
Directionally, the overall sales decline for Q1 compared to fiscal-year end '20 could be in the neighborhood of the 11% decline we experienced in the past third quarter.
We will have more stores closed than in the fourth quarter.
Our view does not really contemplate additional store closures or restrictions beyond what we know today.
In addition, we have not included any stimulus from the most recent bill in our forward-thinking, which historically is a tailwind.
Gross margin rates for Q1 will be below fiscal '20 levels, more than that 210 basis point decline we experienced this past third quarter.
The increase in closed stores will drive higher e-commerce penetration and the higher shipping costs that come with it.
Additionally, we anticipate the negative headwind from J&M to continue into Q1.
Now we expect SG&A dollars in Q1 to be below FY '20 Q1 levels, inclusive of some onetime benefits.
However, there will be some deleveraging due to the sales volume likely in the neighborhood of 100 basis points.
This is driven by closed stores and lower store volumes as the fixed store occupancy expense causes deleverage.
In summary, it will be really difficult to turn a profit in Q1 as is typical during our lower volume quarters of the year.
Combined with the seasonality of our business, we are expecting more than 100% of our full year earnings to also come from the third and fourth quarters.
Even though we are expecting an overall loss in Q1 since that loss is generated in foreign jurisdictions for which there is no-tax benefit, we expect a tax expense related to a small amount of U.S. earnings in Q1.
The annual tax rate is expected to be approximately 32%.
For fiscal '22, capital expenditures will be between $35 million and $40 million and centered on digital and omnichannel investments, which comprised about 75% of this amount.
Mimi will talk further about the initiatives for the coming year.
This does not include another $16 million net of tenant allowance related to the move to a new headquarters location, which were delayed because of the pandemic.
But which was precipitated by the landlord's plan to demolish our current building.
We estimate depreciation and amortization at $48 million.
We currently plan to open up to 15 new stores, mainly at Journeys.
New store leases will be designed to minimize our risk by including landlord support on the build out costs variable rent and kick out opportunities.
We currently plan on closing about 35 stores, but discount could go up or down based on our ability to obtain short-term lease deals at attractive rents.
Our strong year-end cash position enables us to invest in our business.
We had now moderated capital expenditures with the onset of the pandemic and expect to catch up with some of our initiatives.
In addition we plan to increase our inventory levels to drive increased back half sales.
These investments will be funded by our earnings and a net inflow of cash from our tax planning initiatives.
Also, we anticipate this year's numbers will include bonus expense.
As a reminder, our EVA program pays for year-over-year improvement and we paid no bonus in the year we just finished.
For this year, we are assuming an average of 14.6 million shares outstanding this assumes no stock buybacks under our current $100 million Board authorization, of which $90 million is remaining.
And now turning to discuss in general, our cost structure.
Given the accelerated shift of our business from stores to digital and impact from the pandemic, we must reshape our cost structure.
Initially, we believe we can reduce operating expenses by as much as around $25 million to $30 million, approximately 3% on an annualized basis.
This is a good start to a multiyear profit improvement plan to rebound from the pandemic and to enable investments in growth, while also at the same time, improving operating margins and return on invested capital.
We will provide more detail as the year progresses.
I have been extremely impressed with the talent and drive of the team since I arrived.
I'm confident that we have the right people who are focused on the right priorities to drive the organization forward as we move into the next fiscal year.
As I said, COVID-19, and has provided us the opportunity to transform our business at a faster pace as we emerge from the pandemic and to build our company into an even stronger position.
With online behavior advancing by several years, we need to accelerate these many of our digital and omnichannel initiatives in our pipeline.
The investments we have made paid huge dividends this year, importantly, as a footwear-focused company, digital provides the platform to drive profitable growth across all our concepts.
The pandemic also drove or hastened a number of our consumer trends that play into the sweet spots of our two largest businesses, Journeys and Schuh, such as an increased emphasis on comfort and greater casualization.
While this was already the direction Johnston & Murphy was headed, we're accelerating progress here as well.
A year ago, I have described the outcome of our five-year planning process and the six strategic growth pillars around which we aligned our business.
While the past year only reinforce that we are focused on the right areas, we reevaluated our initiatives to take further advantage of the significant changes that are under way in our industry.
I'll walk you through the pillars and briefly highlight select initiatives for fiscal '22.
The first pillar is build deeper consumer insights to strengthen customer relationships and brand equity.
Data-driven consumer insights and the more robust CRM capabilities are key to driving our next big wave of growth.
Not only do we have robust information for our online customers.
But in North America, 70-plus percent of store customers trust us enough to give us their data as well, providing a very strong foundation on which we continue to build.
We also implemented a completely new CRM system in fiscal '21 at Schuh, aimed at increasing frequency of shopping and average order value.
Our new campaigns delivered results that exceeded our expectations.
This new CRM system will create the basis for the launch in fiscal '22 of the loyalty program that incentivizes customers to consolidate their purchases across brands at Schuh, through recognition and rewards.
Likewise, over at Journeys, we just finished an evaluation of how to take Journeys' CRM capabilities to the next level and enable us to introduce a loyalty program for Journeys in the future.
The second pillar is intensify product innovation and trend insight efforts.
I've talked about J&M's product innovation, which then uses proprietary technology to differentiate the brand from competitors as it fast tracks development of a broader casual offering.
Additionally, we're excited to reap the benefits of last year's Togast acquisition, which advanced our strategy of growing the branded side of Genesco.
Beyond acquiring new talent and additional sourcing these capabilities, we secured the rights to the Levi's footwear license for men's, women's and kids in the U.S.
We are leaning in not only to the gender, but also the category opportunities in areas like slippers, flip flops and slides.
Levi's is one of the most recognized consumer brands with our heritage dating back almost 170 years.
The Levi's brand halo and casual aesthetic are a perfect fit with pandemic fashion preferences and we are very optimistic about the growth prospects here as demand in the channels for this product returns.
Next, I'll discuss the third and fourth pillars together.
Accelerate digital to grow direct-to-consumer and maximize the relationship between what's physical and digital, with a series of initiatives we have under way.
While we doubled e-commerce in the five years leading up to the pandemic, we aim to double the business again in a much shorter period by leveraging the 75% comp increase we achieved last year.
And to do this, in North American stores, we're launching the initial rollout of BOPUS, an offering we've had in the U.K. that drives around 20% of Schuh's online purchases and steers customer traffic to its stores.
As the lines between physical and digital further blur, we're tackling last mile innovation by also rolling out this capability, along with buy online, ship to store and ultimately, offerings important to our customers like curbside pickup.
The foundational project for this effort was last fall's upgrade of our inventory, locating and order brokering system which provides the requisite improved inventory accuracy.
Building on this, we will install new store point-of-sale software and hardware to accelerate the digitization of our stores and provide a platform for new capabilities, including mobile checkout, line busting and features to make non selling tasks more efficient.
These projects plus the completion of another bespoke e-commerce picking module at the Journeys distribution center comprise the greater part of our capital spend in fiscal '22 and which Tom highlighted as being significantly more concentrated in the digital and supply chain.
The fifth pillar is reshape the cost base to reinvest for future growth.
So, as our business transforms, we require a cost structure that supports an omnichannel business, while our stores remain a critical strategic asset in this omnichannel world, we've been working to evolve historical rent and selling salary models.
Tom just took you through our cost initiatives, and I want to reinforce that working with our landlord partners to find a solution that rightsizes rent to match traffic levels is a big part of this endeavor.
Finally, the sixth pillar pursue synergistic acquisitions that add growth and create shareholder value, we are also pursuing reactively rather than proactively until we recover further from the pandemic.
So now to conclude, as I reflect on my first year as CEO, I have been truly amazed by these executional excellence and resilience of our entire organization as we navigated a year like none other.
Genesco's success can be traced directly back to you who have stepped up in so many ways right from the very beginning of the pandemic.
| compname reports q4 non-gaap earnings per share from continuing operations of $2.76.
q4 non-gaap earnings per share from continuing operations $2.76.
q4 same store sales rose 1 percent.
q4 sales $637 million versus refinitiv ibes estimate of $617.6 million.
|
We have in the room today, Nick DeIuliis, our President and Chief Executive Officer; Don Rush, our Chief Financial Officer; Chad Griffith, our Chief Operating Officer; and Yemi Akinkugbe, our Chief Excellence Officer.
Today, we will be discussing our first quarter results.
And then we will open the call up for Q&A.
Then we're going to go over to Don Rush, our Chief Financial Officer, to talk about the financials, and then Yemi will wrap things up to talk about some thoughts on ESG that we've got.
But starting now on Slide two.
There's one main theme that I think is important to highlight, and the theme there is steady execution.
First quarter was another example of steady execution, and it's illustrated by us generating $101 million in free cash flow.
This is the fifth consecutive quarter that the company generated significant free cash flow.
Similar to last quarter, we used some of that free cash flow to pay down debt.
That helped build further liquidity.
And we use some of the free cash flow to buy back our shares in the open market at attractive pricing.
So for the quarter, we repurchased 1.5 million shares at an average price of $12.26 per share at a total cost of $18 million.
We still have ample capacity of around $240 million under our existing stock repurchase program, which, as a reminder, that's not subject to an expiration date.
Also in the quarter, we upped our free cash flow guidance by $25 million to $450 million.
That's $2.04 per share compared to the previous guidance of $1.93 per share.
Our steady performance drives our confidence in continuing to execute upon our seven year free cash flow plan, and we continue to expect will generate over $3 billion over those seven years.
Again, this is done by steady execution each and every day.
Our long-term plan is largely derisked through our hedging program that supports us a simple operational program that consists of one rig and one frac group.
We've worked hard to get the company to where we are today, and our focus is going to remain on successfully executing that plan.
I want to jump over now to Slide three.
This is a slide that we have shown for the past few quarters now, but I think that it's a really powerful one.
Our competition for investor capital is not so much among just our Appalachian peers, but more so across the broader market.
And as you can see by three of the main financial metrics that we track, CNX streams incredibly well across various metrics and indices.
We believe that these things matter most to generalist investors, along with what has become a much simpler differentiated story.
CNX is a differentiated company due to the structural cost advantage we enjoy compared to our peers, mainly because we own our midstream infrastructure.
And this moat provides us with superior margins that drive significant free cash flow, which, in turn, puts us in a unique position to flexibly allocate capital across the full spectrum of shareholder value creation opportunities.
While our near-term focus is to continue to reduce debt and opportunistically acquire shares, we continually evaluate all our alternatives that we've got.
So last, in that regard, with respect to the often asked about potential M&A activity, our view remains consistent from last time we spoke.
Our two key screening metrics or the ability to deliver long-term free cash flow per share accretion and having good risk-adjusted returns.
The strength of our company affords us the ability to be patient on this front to ensure that we avoid M&A missteps that too often permanently can destroy shareholder value.
With that, now, I'm going to turn things over to Chad.
I'm going to start on Slide four, which highlights some of the key metrics that make CNX an incredibly attractive investment today, particularly relative to our peers.
For us, it begins in the upper right quadrant where we illustrate our peer-leading production cash costs.
While our Q1 result of $0.66 is up roughly $0.05 quarter-over-quarter, we're still more than $0.11 better than our next closest competitor.
It's also worth noting that, that $0.05 increase was driven predominantly by some reworking of our FT book, which allowed us to eliminate some unused FT and exchanges for some FT that is better matched up with our production locations.
As Don will go into more details momentarily, our low production cash costs allow us to generate more operating cash flow per Mcfe at a given gas price relative to our peers.
And this operating margin creates -- this operating margin advantage creates many other advantages for CNX.
First, we'll generate more EBITDA per Mcfe, which means we need less daily production to achieve the same level of EBITDA compared to our peers.
This allows us to maintain that level of EBITDA, but less maintenance drilling, thereby consuming fewer of our acres each year.
The operating margin advantage also enhances each well's return on capital, which means a greater subset of our net acres are in the money.
So fewer well each year from a broader amount of net acres means that we'll be able to sustain this formula for decades to come.
By the way, the lower number of new wells required to maintain our EBITDA means that less of that EBITDA is consumed by maintenance capital expenditures.
That is how we generate, on average, $500 million per year of free cash flow over the next six years at strip pricing.
Wrapping up this slide, you can see that we continue to trade at very attractive free cash flow yield on our equity, while continuing to pay down debt and returning capital to shareholders.
Slide five is another illustration of our cost structure when you look at it on a fully burdened basis.
That means that this cost illustration includes every cash cost that exists in our business.
We expect cost to continue to improve, primarily driven by a reduction in the other expense bucket, which consists primarily of interest coming down and additional unused FT rolling off.
We are expecting around $10 million of unused firm transportation to roll off in 2021, a modest amount next year in 2022 and then another $20 million rolling off across -- through 2023 through 2025.
These are simply contractual agreements that are expiring.
So with these changes, and assuming all future free cash flow goes toward debt repayments, we would expect fully burden cost to decrease to around $0.90 per Mcfe and then lower in years beyond 2021.
Before handing it over to Don, I wanted to spend a couple of minutes on our operations, the gas markets and provide a hedge book update.
During the quarter, we turned in line five Marcellus wells, and we're in the process of drilling out another 13 that will be turned in line within the next two weeks.
Those 18 wells had an average lateral length of just over 13,000 feet and has an average all-in cost of less than $650 per foot per lateral foot.
Also during the quarter, we brought online two Southwest PA Utica wells, the Majorsville 12 wells.
Deep Utica have continued to come down with the all-in capital cost for these two wells averaging $1,420 per lateral foot.
Production from these wells are being managed as part of our blending program, but we're very encouraged by the data we're seeing.
As we've really discussed, we only have four additional SWPA Utica wells in our long-term plan through 2026, but based on what we're seeing so far at Majorsville 12, we're excited about the deep Utica's potential as either a growth driver if gas prices improve or as a continuation of our business plan for years and into the future.
As for our CPA Utica region, as a reminder, we continue to expect about a pad a year through the end of the 2026 plan.
This continues to be an area that we are very excited about.
Shifting to the gas markets, we saw weakening in the near-term NYMEX and weakening to the curve of in-basin markets.
As a gas producer, we're always rooting for stronger prices.
But fortunately, our cost structure and hedge book make higher prices a luxury for CNX, instead of a necessity as it is for many of our peers.
The way we see it, there are four fundamental drivers of gas price that need to be in our favor to actually see higher gas prices.
One, moderate production levels; two, lower storage levels; three, higher weather-related demand; and four, sustained levels of LNG exports.
If all four hit, expect gas prices to surge.
But despite our optimism and others' dire needs, it's becoming less likely each year that all four of those factors line up in favor of strong gas prices.
As an example, just last year, everyone was expecting all four factors to line up in 2021, and the forward curve surge, but a mild winter, lack of strong winter storage draw and growing drilling and completion activity have weighed on 2021 pricing.
The difficulty in having all four factors line up in favor of strong gas prices is why we will continue to focus on being the low-cost producer and protecting our revenue line through our programmatic hedging program.
That's why we do not rely on full commodity cases to make projections or investment decisions.
Insead, our free cash flow projections and investment decisions are based on the forward stroke.
Speaking of our hedging program, during Q1, we added 136 Bcf of NYMEX hedges, 15.5 Bcf of index hedges and 61.3 Bcf of basis hedges.
For 2021, we are now approximately 94% hedged on gas based on the midpoint of our guidance range and after backing out 6% to liquids.
That 94% includes both NYMEX and basis hedges or fully covered volumes, which are hedged at $2.48 per Mcf.
It is a true realized price that we will receive in the year.
We are also now fully hedged on in-basin basis through 2024.
We will continue to programmatically hedge our volumes before we spend capital by locking in significant economics, which are supported by our best-in-class cost advantage.
Q1 was the fifth consecutive quarter of generating significant free cash flow and consistent execution of our plan.
Our confidence in future execution supports a $25 million increase in our 2021 free cash flow guidance and our continued expectation to generate over $3 billion across our long-term plan.
Slide seven is a new slide that highlights our superior conversion of production volumes into free cash flow.
The top chart highlights that CNX is able to convert production volumes into EBITDA more efficiently than our peers as a result of our low-cost structure generating higher margins.
The bottom chart further highlights the superior conversion cycle through a reinvestment rate metric, which is simply capital divided by operating cash flow.
As you can see, CNX has an incredibly low reinvestment rate, which supports our expectation to generate average annual free cash flow of $500 million across our long-term plan.
Our profitability profile allows us to generate an outsized free cash flow per Mcfe of gas and per dollar of capital spending.
Also, this low reinvestment rate demonstrates the company's commitment to generating cash used toward investor-friendly purposes, which include balance sheet enhancement and returning capital to shareholders.
Slide eight highlights our balance sheet strength.
We have no bond maturities due until 2026, so we have a substantial runway ahead of us that provides significant flexibility.
In the quarter, we reduced net debt by approximately $70 million.
And after the close of the quarter, we completed our semiannual bank redetermination process to reaffirm our existing borrowing base.
Lastly, as you can see on the slide, our public debt continues to trade in the 4% to 5% range.
Now let's touch on guidance that is highlighted on Slide nine.
There are a couple of updates on this slide.
The first is the pricing update, which is simply a mark-to-market on what NYMEX and Basis are doing for cal 2021 as of April seven compared to our last update, which was as of January 7, 2021.
We also increased our NGL realization expectations by $5 per barrel as a result of the increase in expected NGL realizations.
As we have already highlighted, we are increasing free cash flow for the year by $25 million.
Lastly, there are a few other guidance related items to highlight that are not captured on this slide that I would like to address in advance of questions.
We expect production volumes to be generally consistent each quarter throughout the rest of the year, with a very slight decrease expected in the second quarter.
As for capital cadence, we expect capital to have a bit more variation.
Specifically, we expect our first half capital to be more than our second half capital, so Q2 should be near Q1 and Q3 and Q4 a bit less.
As we have said previously, quarterly capex cutoffs are difficult to predict since a pad going a bit faster or a bit slower can change the period numbers materially without changing our long-term plan and forecast at all.
I'm Yemi Akinkugbe, the Chief Excellence Officer here at CNX.
A few of you may be wondering what exactly this role entail.
The short answer is I oversee and manage all operational and corporate support function withing the company.
The longer answer is what I want to speak about in more detail today.
We've been focused on the underlying tenets of ESG and its benefit with generation.
This is an effect or a means we only talk about to ponder up to certain interest for short-term end.
Instead, the concept was part of our fabric long before the current management team joined the company, and it will be part of our fabric long after it's gone.
With that backdrop, let's talk for a minute where we have been and where we are heading on this front.
A lot of you when it comes to ESG is simple and can really be summed up in three words: tangible; impactful; local.
We've been the first mover across the board, and I just want to highlight a few of our significant accomplishments over the years.
First, we proactively reduced Scope one and two CO2 emissions over 90% since 2011, something that a few, if any, of any public company had claimed.
Two, we were the early adopters and innovators of commercial-scaled coalbed methane capture in the 1980s.
This resulted in historical mitigation of cumulatively over 700 Bcf of methane emission that would have otherwise been vented into the atmosphere.
Annually, we capture nearly as much methane from this operation than the nation's largest waste management company does from its landfill.
That ingenuity and leadership on a key tenet of ESG is what ultimately birth this company we see today.
Three, we were the first to fully deploy an all-electric frac spread in the Appalachian Basin.
This improved our emission footprint, increased our efficiency and support our best-in-class operational cost performance.
The elimination of diesel fuel in this operation is equivalent to taking 23,000 passenger vehicles off the road for a year.
We recycled 98% of produced fluid in our core operation.
This prevented unnecessary water withdrawal and eliminates the need for disposal.
Our unique pipeline network decreases the need for water trucking, which have the dual benefit of reducing community impact of trucking, while reducing overall air quality emissions.
These achievements are important and impactful, but ESG is not just about proven track record.
To us, it's about what we are doing now and how we'll continue to push the envelope through intangible, impactful and local accomplishments.
Committing to target or goals decades into the future without a concrete path to accomplish them and without accountability for those words, in our opinion, is the epitome of flawed corporate governance.
These are the strategies that have allowed CNX to thrive for over 150 years and will continue to drive our success.
Let me introduce a few of our efforts this year.
We introduced methane-related KPIs into our executive compensation program.
We've committed to make substantial multi-year community investment of $30 million over the next six years to widen the path of the middle class in our local community, while growing the local talent pipeline.
We've redoubled our efforts to spend local and hire locally.
100% of our new hires will be from our area of operation, and we will maintain at least 90% local contract workforce.
We committed 6% of our contract spend to local, diverse and businesses in 2021 and dedicated 40% of the total CNX small business spend to companies within the Tri-State area.
We adopted a task force on climate-related financial disclosure, or TCFD framework and a FASB standard for both our E&P and midstream operation.
In addition, the transparency and the financial sustainability of our business is second to none.
One year into our seven year free cash flow generation plan, we have a low-risk balance sheet driven by the most efficient, lowest cost operation in the basin.
This leads to independence from equity and debt market when pursuing value creation.
Finally, while you will hear more about this in the weeks and months ahead, I want to take the opportunity to announce that CNX is developing an innovative proprietary solution in combination with a few commercial solutions that allows us to significantly minimize from a blowdown and pneumatic devices, which make up about 50% of our emission source.
The blowdown solution under development will also allow us to recirculate methane, which will otherwise be admitted into the atmosphere back into the gathering system.
This is yet another leadership step for a company that continues to lead and deliver tangible impactful ESG performance that is reducing risk and creating sustainable value for our shareholders.
Tangible, impactful, local ESG is our brand of ESG.
We don't follow the herd.
We chart our own course and do what we know is right and impactful over the long term for employees, our communities and our shareholders.
| qtrly average daily production 1,562.5 mmcfe versus 1,476.5 mmcfe.
2021e fcf guidance increased to approximately $450 million.
|
On a consolidated basis, the company reported net sales for the second quarter of $406 million and adjusted EBITDA of $15 million.
A few highlights to mention.
Our Paperboard business continued to see strong demand.
Based on that strong demand, we implemented previously announced price increases across our SBS portfolio.
We successfully completed our largest major maintenance outage of 2021 in April at our Lewiston, Idaho mill, which impacted the business by $22 million.
As previously discussed, our tissue business saw lower shipments, reflecting market trends.
Consumers destock their pantries and retailers work through elevated inventory levels.
Both industry data and our own sales orders point to a bottoming out of shipments in April.
We started seeing a recovery in May.
With the decrease in orders and elevated pull price levels, we took downtime on our tissue assets to meet demand and reduce inventories, which impacted our fixed cost absorption.
We also announced an indefinite closure of Anina Wisconsin tissue mill and an exit from the away-from-home tissue market.
These actions will result in a lower overall cost structure of our tissue business.
In comparing the first quarter to second quarter 2021 raw material inflation was largely offset by the previously announced price increases in SBS and mix.
And finally, we maintained ample liquidity of $297 million at quarter end and reduced net debt by $4 million.
As noted during previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people and safely operating our assets to service customers.
We're monitoring the latest trends and are adjusting protocols and policies to keep our people safe.
Let's discuss some additional details about both of our businesses.
As you recall, we estimate that approximately 2/3 of paperboard demand is derived from products that are more recession-resilient and 1/3 is driven by more economically sensitive or discretionary products.
We continue to experience strong demand from our folding carton customers, and a recovery in food service segments.
Demand for food packaging products and retail paper place has remained healthy throughout the pandemic.
We're also pleased with the market reception of our sustainability focused brands with NuVo Cup and ReMagine folding carton.
Both are playing a role in our favorable market position and our order books continue to be robust.
We are diligently working to implement the previously announced price increases.
Since the beginning of this year, Fastmarkets RISI, a third-party industry publication recognized price increases that totaled $130 per ton in folding carton and $100 per ton in cup, including the latest increases in July of $30 per ton in folding and $50 per ton in carton.
Typically, it takes us up to two quarters before realizing most of these price changes in our financials.
We will discuss the estimated impact to our 2021 results later in our comments.
We completed our largest planned maintenance outage for 2021 during the second quarter.
The economic impact from this outage to our adjusted EBITDA was $22 million, within our previously discussed range of $21 million and $24 million.
Our industry view remains largely the same.
The market for tissue in the U.S. is traditionally 2/3 at home and 1/3 away from home with around 10 million tons per year of total demand.
As consumers spend more time at home in 2020, there was a shift toward at-home consumption.
Throughout the pandemic, we witnessed consumer pantry loading and retailers responding by placing higher orders with existing suppliers and seeking out tertiary suppliers, both domestic and international to need demand.
We believe that this could have led to more than a month of excess inventory in the supply chain by the end.
Let me share some data in context pertaining to demand trends that we witnessed in the first half of this year.
Consumers started to return to a more normal lifestyle in Q1 and Q2 as vaccines were becoming available and restrictions were being eased.
This led to a reduction of at-home tissue purchases and destocking of consumer pantries.
Based on IRI market data, consumer purchases based on dollar sales bottomed out in March.
Due to these consumer trends, retailers were faced with higher inventories in Q1 and into Q2.
In response, they reduced orders to manage their inventories.
Based on Fastmarkets RISI data, retailer shipments of finished goods bottomed out in April.
This is consistent with our order patterns.
Both external data and our own internal order patterns are indicating that we're in a demand recovery period, which we believe will continue for balance of the year.
We believe the industry's long-term trends are healthy, and we expect continued growth in overall consumption and private brands continuing to gain share.
Let me provide some additional detail on our tissue volume trends.
We shipped 10.2 million cases in the second quarter, which was down approximately 36% and 13% compared to the second quarter of 2020 and first quarter of 2021, respectively.
Our low point for shipments was 3.1 million cases in April.
Since then, we've had more month-over-month growth in May and June.
We expect this improvement trend to continue throughout the fourth quarter.
We're also closely monitoring channel and customer trends to ensure that we're aligned with areas in the market with the highest long-term growth potential.
To adjust to reduce demand, high inventory levels and high coal prices, we took significant asset downtime in the second quarter, which negatively impacted our profitability.
We will continue to manage our production levels in Q3 and Q4 to service demand reduce inventory and minimize cost.
Additionally, in the second quarter, we announced the indefinite closure of our Neenah, Wisconsin site with production ceasing in July.
While our people in Neenah operated a site well, the assets were not economically viable.
Retail volume from Neenah is being shifted to other lower-cost facilities, such as our Shelby, North Carolina mill.
By closing Neenah, we're also exiting the away-from-home market, where we had a small and subscale position.
While the decision was the right one for the business, it is difficult on our people and in the community.
The consolidated company summary income statement shows second quarter 2021, the second quarter of 2020 and the first half of each year.
In the second quarter of 2021, our net loss was $52 million.
Diluted net loss per share was $3.10 and adjusted loss per share of $1.07.
The adjustments incorporate the impacts from the Neenah site closure as well as other adjustments.
The impact of the Neenah aclosure activities in the quarter was $41.7 million.
The noncash portion of the charge, $36.9 million was primarily a fixed asset impairment, but also included inventory and other reserves.
The cash portion of the charge was for employee pay during a worn notification period and severance-related expenses of $4.9 million.
We anticipate that we will have similar employee-related cash expenses in the third quarter, slightly above $4 million.
These estimates reflect our best assessment at this time, and we will update them as appropriate as we monetize the assets at Neenah.
The corresponding segment results are on slide seven.
Our Paperboard business completed a major maintenance outage in the second quarter of 2021 that impacted us by $22 million, while consumer products saw lower production and demand.
In our comments during the second quarter, we mentioned that our adjusted EBITDA could be close to breakeven for the second quarter of 2021 relative to the first quarter of 2021 adjusted EBITDA of $54 million.
With $15 million of adjusted EBITDA for the second quarter, we came in better than our initial expectations.
The improved performance relative to expectations included the impact of the Neenah closure better tissue demand, cost mitigation efforts and better SBS price realization.
Slide eight is a year-over-year adjusted EBITDA comparison for our Pulp and Paperboard business in the second quarter.
We have and are continuing to implement the previously announced price increases as well as experiencing some positive mix benefits with similar sales volumes as last year.
Our costs were impacted by the major maintenance outage of $22 million as well as inflation in raw material inputs and freight.
You can review a comparison of our second quarter 2021 performance relative to first quarter 2021 performance on slide 14 in the appendix.
Price and mix were a limited part of the story for tissue.
Our sales of converted products in the second quarter were 10.2 million cases, representing a unit decline of 36% versus prior year.
Our production of converted product in the quarter was 9.6 million cases or down 40% versus the prior year.
With the actions that we took at Neenah, drawdown of inventory and lower incentive comp accruals in SG&A, we were able to partially offset some of the raw material inflationary headwinds.
We anticipate the financial impact from raw material inflation will increase in the coming quarters.
You can review a comparison of our second quarter 2021 performance relative to the first quarter of 2020 on slide 15 in the appendix.
We also have finished goods production and other financial data on a quarterly basis on slide 16 for both businesses.
Slide 10 outlines our capital structure.
Our liquidity was $296.5 million at the end of the second quarter.
With the cash flow headwinds of the second quarter behind us, we believe we will generate more free cash flow in the back half of 2021 to further reduce our net debt.
Maintenance financial covenants do not present a material constraint on our financial flexibility, and we do not have near-term debt maturities.
Slide 11 provides a perspective on our third quarter outlook and other key drivers for full year 2021.
Our expectations assume that we continue to operate our assets without significant COVID-related disruptions.
As previously discussed, demand visibility in tissue as well as inflation expectations have and will continue to be unpredictable.
I would like to focus my comments for the third quarter expected adjusted EBITDA of $40 million to $48 million and build up to that range from our second quarter adjusted EBITDA of $15 million.
The planned major maintenance outage at Lewiston in April is behind us with a negative impact of $22 million.
And we recently completed the planned outage at Cypress Bend this past weekend with an anticipated impact of $3 million to $5 million.
The difference of the adjusted EBITDA impact between the second and third quarters resulted in an expected increase of adjusted EBITDA of $17 million to $19 million.
Previously, announced SBS pricing is expected to positively impact us during the quarter by $9 million to $11 million.
We estimate that raw material cost inflation will negatively impact our business by $9 million to $13 million in the third quarter relative to the second quarter.
When comparing the second quarter to our expectations for the third quarter, we believe that our previously announced SBS price increase could largely offset raw material inflation.
Tissue shipments are expected to grow by 10% to 15% relative to the 10.2 million cases shipped in the second quarter.
We shipped 3.7 million cases in July relative to our average monthly shipments of 3.4 million in the second quarter and our low point of 3.1 million cases in April.
The recovery in tissue shipments is occurring, and we expect it to continue through the rest of 2021.
As we expect to reduce inventories, we anticipate production being slightly below demand.
With the closure of Neenah, we are exiting the away-from-home tissue business, which was approximately 100,000 to 150,000 cases per month and will mildly impact our converted shipment volume trend lines and comparisons.
We will also receive the benefits during the third quarter from the Neenah closure.
While we are not providing specific annual guidance for 2021, there are several drivers, assumptions and variables we'd like to provide to you with an update relative to 2020.
We are expecting continued positive impact from the previously announced SBS price increases were expected to result in year-over-year benefits of $40 million to $45 million.
In our Paperboard business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $25 million to $27 million, which is down from our previous guidance.
We are moving our head box project at Lewiston from the third quarter of 2021 into 2022 to accommodate our strong paperboard demand.
We have updated our guidance, including some adjustments to 2022 on slide 20, which reflects our current plan.
Our current view can -- is that our tissue volume decline year-over-year will be above 20%, which is not adjusted for the impact of our exit from the away-from-home business.
In total, from 2020 to 2021 input cost inflation, including pulp, packaging, energy, chemicals and freight is expected to be $60 million to $70 million relative to our previous estimate of $65 million to $75 million.
The majority of this inflation is in pulp.
The Neenah site recently generated negative adjusted EBITDA.
And by closing the site, we will avoid these losses and lower our overall cost structure by moving production to other sites.
These actions will also help realize the benefits of the Shelby investment.
In total, the benefit on a combined basis is expected to exceed $10 million annually with full benefit realization occurring in the fourth quarter.
For the full year 2021, we are also anticipating the following: we expect interest expense between $36 million and $38 million; depreciation and amortization between $104 million and $108 million; capital expenditures between $50 million and $55 million, which is slightly lower than prior expectations; and our effective tax rate is expected to be slightly higher than previous expectations at 26% to 27%.
I would like to reiterate my comments from last quarter regarding the actions that we're taking across the company to proactively address our market-driven headwinds and tailwinds.
In our Paperboard business, we're benefiting from the implementation of previously announced price increases and are maximizing production to meet demand.
This includes moving some maintenance and a head box installation from 2021 to 2022.
In our tissue business, we're working with customers to offset higher costs through product and other changes.
In addition to the market recovery in tissue demand, we're focused on growing our volume through various sales initiatives that have been discussed in previous quarters.
Across both businesses, we're taking steps to reduce both short- and long-term costs.
As previously discussed, we continue to focus on generating cash to reduce our net debt.
Last quarter, I spoke about performance improvement efforts focused on improving core operations in the medium to long term, aimed at achieving the full profit potential of Clearwater Paper over the next several years.
Given the inflation and competitive pressures in our industry, we are working to find ways like this effort to combat margin compression and achieve margin expansion.
We're in the planning phases currently, and I look forward to updating you when we're in the execution phase.
Let me remind you of why I think these businesses are well positioned in the long run.
For our Paperboard division, we believe that the key strengths of this business are the following.
First, we operate well-invested assets with a geographic footprint, enabling us to efficiently service our customers.
We have a diverse customer base, which serves end markets that have largely stable demand.
Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment.
Third, we will lead to product and brand development, the business is well positioned to take advantage of trends toward more sustainable packaging and food service products.
Lastly, our Paperboard business has demonstrated an ability to generate good margins and solid cash flows.
Our Consumer Products division is a leader within the growing private branded tissue market.
From our vantage point, we believe the key strengths of this business are the following.
First, we have a national footprint with an ability a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers.
Our expertise in manufacturing, supply chain and transportation is a key differentiator.
Second, there are long-term trends away from branded products to private brands.
Private brand tissue share in the U.S. rose to over 30% recently, up from 18% in 2011.
While these trends are impressive, we're still a long way from where many European countries are where private brands represent over half of total tissue share.
Lastly, tissue is an economically resilient and need-based product.
Historically, demand has not been negatively impacted by economic uncertainty.
After we get beyond the COVID-related distortions in the market, we're optimistic that this business will generate meaningful cash flows over the long run.
We're committed to improving our business to be successful both in the near and long term, and we believe that we will come out of 2021 a better and stronger operation than where we started.
Our balance sheet is well positioned to support us with strong liquidity, limited financial maintenance covenants and debt maturities, which are a few years away.
We're again with our Board to develop a medium- to long-term capital allocation plan.
We look forward to sharing more on these ideas, which include internal investments, external investments and return of capital to shareholders as we get closer to our 2.5 times target leverage ratio.
| q2 loss per share $3.10.
q2 adjusted non-gaap loss per share $1.07.
q2 revenue $406 million versus refinitiv ibes estimate of $420.7 million.
|
Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Mike Murphy, Chief Financial Officer.
Financial results for the third quarter of 2021 were released shortly after today's market close, along with the filing of our 10-Q.
On a consolidated basis, the company reported net sales of $450 million, adjusted net income of $9 million, and adjusted EBIT of $50 million.
A few highlights to mention, our paperboard business continue to see strong demand.
Based on that demand, we implemented previously announced price increases across our SBS portfolio.
As per our expectations, we saw improving trends and tissue orders and shipments.
We completed the last of our major maintenance outages for the year at our Cypress Bend, Arkansas terminal.
We also completed the closure of the high cost Neenah tissue mill and our exit from the away-from-home tissue segment.
We saw accelerating inflation across both of our businesses, particularly in energy, chemicals, wood fiber and transportation, as pulp reached its peak and started to ease.
And finally, we maintained ample liquidity of $270 million at quarter end and reduce net debt by another $7 million.
As noted during previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people and safely operating our assets to serve as customers.
We're monitoring the latest trends and are adjusting protocols and policies to keep our people safe.
Let's discuss some additional details about both of our businesses.
The industry continues to experience strong backlogs even with a higher SBS pricing that has been reported by Fastmarkets RISI, the third-party industry publication.
We have benefited from these industry dynamics and previously announced price increases.
Since the beginning of this year, Fastmarkets RISI has reported price increases for the US market that totaled $250 per ton in folding carton and cardstock.
This includes a $50 per ton increase in October for both grades.
We'll continue to see strong demand from our folding carton customers and a recovery in the foodservice segments.
We're also pleased with the reception of our sustainability focused brands of NuVo cup and ReMagine folding carton.
Both are helping our customers differentiate themselves in the market.
It typically takes us a couple of quarters for price changes to be fully reflected in our financials.
It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in RISI's reporting.
We will discuss the estimated impact of our previously announced pricing to our 2021 financials later in our comments.
Finally, we completed a planned maintenance outage at our Cypress Bend, Arkansas mill during the third quarter.
The financial impact from this outage to our adjusted EBITDA was $5 million.
We continue to operate in a difficult market environment.
As previously discussed, COVID led to significant volatility in tissue demand and retailer behavior in 2020 and 2021.
With that said, let me provide you with our point of view on the overall market.
In North America, we view tissue demand as being approximately 10 million tons with annual demand growth of 1% to 2%, slightly exceeding population growth.
Pre-COVID, the market was about two-thirds at home and one-third away from home.
Using that math, the at home market is six million to seven million tons, of which approximately two-thirds is branded and one-third is private branded.
We operate in the private branded market, which is approximately two million tons and has grown more quickly than the branded market.
In terms of the retailer, environment, clubs and the mass merchandisers have gained share at the expense of traditional grocers over the years.
As a reminder, we have greater exposure to grocery than the overall market.
In terms of supply, tissue capacity additions have primarily targeted the private branded space with capacity growth exceeding demand growth.
To the best, we believe that private branded manufacturers will operate a depressed capacity utilization levels in the next several years.
Let me share some context pertaining to demand trends that we witnessed in the first nine months of the year.
Consumers started to return to a more normal lifestyle in the first half of the year, as vaccines were becoming available and restrictions lessened.
This led to a reduction of at home tissue purchases and destocking of consumer pantries.
Based on IRI market data, consumer purchases measured in dollars bottomed out in March.
Due to these consumer trends, retailers were faced with higher inventories in the first quarter and into the second quarter.
In response, they reduced orders to manage their inventories.
Based on RISI data, retailers shipments of finished goods bottomed out in April.
This is largely consistent with our order patterns.
We observed demand recovery at the retailer level throughout the third quarter.
There was a demand uptick in August, related to the emergence of the Delta variant that led to higher orders than we anticipated.
September order patterns return to more normal levels, but we observed another uptick in orders in late October.
This volatility is a reminder of the unpredictable nature of our market during COVID.
Let me provide some additional detail on our tissue volume trends.
We ship 12.3 million cases in the third quarter, a 21% increase from the 10.2 million cases shipped in the second quarter.
This was a bit higher than our guidance of 10% to 15% growth, partly driven by the August demand uptick.
We expect demand to be flat in the fourth quarter relative to the third quarter.
But there's a high degree of uncertainty in consumer and retailer behavior as we head into the holidays.
We will continue to selectively take asset downtime as needed to manage inventories and our cost structure, particularly while coal prices are at elevated levels.
The consolidated company summary income statement shows third quarter 2021 -- the third quarter of 2020 in the first nine months of each year.
In the third quarter 2021, our net income was $2 million, diluted net income per share was $0.11, and adjusted net income per share was $0.55.
The adjustments incorporate the impacts from the Neenah mill closure as well as other adjustments.
The impact of the Neenah closure activities in the quarter was $5.4 million, which was related to severance and related expenses.
Corresponding segment results are on slide seven.
Slide eight is a year-over-year adjusted EBITDA comparison for our Pulp and Paperboard business in the third quarter.
We benefited from our previously announced price increases and a mild mix improvement with similar sales volumes as last year.
Our costs were impacted by $5 million of major maintenance outage expenses, and higher inflation and maintenance expenses.
You can review a comparison of our third quarter 2021 performance relative to second quarter 2021 performance on slide 14 in the appendix.
Price/mix were a limited part of the story for tissue.
Our sales have converted products in the third quarter were 12.3 million cases representing a unit decline of 15% versus prior year.
Our production of converted product in the quarter was 11.4 million cases are down 25% versus the prior year.
Please note that we largely exited the away from home tissue segments in the third quarter of this year, which historically represented 3% to 4% of our overall case volume.
While inflation pressure was significant, the action that we took it at Neenah helped offset some of the higher costs that we face.
You can review a comparison of our third quarter 2021 performance relative to second quarter of 2021 on slide 15 in the appendix.
We also have finished other operational and financial data on a quarterly basis on slide 16 for both businesses.
Slide 10 outlines our capital structure, our liquidity was $270 million at the end of the third quarter.
During the third quarter, we reduced net debt by $7 million.
Maintenance financial covenants do not present a material constraint on our financial flexibility.
And we do not have near-term debt maturities.
We've continued to target the net debt to adjusted EBITDA ratio of 2.5 times, which we expect to achieve by 2023.
Slide 11 provides a perspective on our fourth quarter and full year 2021 outlook the key drivers.
Our expectations assume that we continue to operate our assets without significant COVID related disruptions.
As previously discussed, demand visibility and tissue, as well as inflation expectations have and will continue to be unpredictable.
But that said, our expectation for the fourth quarter is adjusted EBITDA of $48 million to $56 million.
Let me walk you through the build up to that range from our third quarter adjusted EBITDA $50 million.
Previously announced SBS prices is expected to positively impact us during the quarter by $7 million to $9 million which is helping to offset inflation.
Raw material and freight cost inflation is expected to negatively impact us by $7 million to $12 million.
There are no planned major maintenance outages, which will benefit us, given the $5 million Q3 outage.
Tissue shipments are expected to be flat, while we take additional asset downtime to manage inventories.
We are expected to achieve the full run rate benefit of the Neenah closure, which we previous previously stated as being more than $10 million annualized.
If we take actuals for the first nine months and add our expectations for the first quarter, we expect adjusted EBITDA of $167 million to $175 million for the full year 2021.
We wanted to comment on some of the key drivers for 2021 relative to 2020.
We are expecting continued positive impact from previously announced SPS price increases, which are expected to result in year-over-year benefits of $53 million to $55 million.
In our paper board business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $27 million.
Our guidance for 2022 planned major maintenance outages is on slide 20.
We expect to have additional major maintenance outages in 2023.
And we'll provide an update when we refine our estimates.
Our current view is that our tissue volume decline year-over-year will be above 20%, which is not adjusted for the impact of our exit from the away-from-home business.
In total, from 2020 to 2021, input cost inflation, including pulp, packaging, energy, and chemicals, as well as freight is expected to be $80 million to $85 million relative to our previous estimate of $60 million to $70 million.
Increasing energy, chemicals and fiber prices, drove our inflation expectations higher.
While pulp pricing has started to decrease, we do not expect for that to have a material impact on our financials until early next year.
The Neenah mill recently generated negative adjusted EBITDA by closing the site, we will avoid these losses and lower our overall cost structure by producing our retail volume at other lower cost sites.
These actions are helping us to fully realize the benefits of the Shelby North Carolina mill investment.
In total, the benefit from the Neenah closure is expected to exceed $10 million annually.
For the full year 2021, we are also anticipating the following.
Interest expense between $36 million and $38 million; depreciation and amortization between $104 million and $107 million; capital expenditures of approximately $42 million and $47 million, which is lower than our prior expectations; and historical average of around $60 million, excluding extraordinary projects, and our effective tax rate is expected to be 26% to 27%.
It has certainly been an interesting with robust SBS market conditions, significant inflationary headwinds and volatility and tissue demand.
As we mentioned previously, we believe that supply and demand drive near to medium term pricing and margins.
Our paperboard business is benefiting from these dynamics, while tissue remains challenged.
I'm proud of how our people have managed these challenges and opportunities.
We're committed to a strong finish in 2021 in positioning Clearwater Paper for future success.
For the last couple of quarters, I spoke about performance improvement efforts, focused on our core operations in the medium to long term.
These efforts are well underway and are aimed at offsetting inflationary and competitive pressures that we face in our industry.
It is important for us to invest in these efforts to maintain and grow our cash flows in the long run.
We're encouraged by the work to-date as we start moving from planning to execution, and believe that we are well positioned to combat margin compression in the next several years.
Let me remind you, why I think these businesses are well positioned in the long run.
For our paperboard division, we believe that the key strengths of this business are the following.
First, we operate well-invested assets with a geographic footprint, enabling us to efficiently service our customers.
We have a diverse customer base, which serves end markets that have largely stable demand.
Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment.
Third, we believe through product and brand development, the business is well positioned to take advantage of trends toward more sustainable packaging and food service products.
Lastly, our paperboard business has demonstrated an ability to generate good margins and solid cash flows.
Our Consumer Products division is a leader within the growing private branded tissue market.
From our vantage point, we believe the key strengths of this business are the following.
First, we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers.
Our expertise in manufacturing, supply chain and transportation is a key differentiator.
Second, there are long-term trends away from branded products to private brand.
Private brand tissue share in the US rose to over 30% recently, up from 18% in 2011.
While these trends are impressive, we're still a long way from where many European countries are in which private brands represent over half of total tissue share.
Lastly, tissue is an economically resilient and an essential need-based product.
Historically, demand has not been negatively impacted by economic uncertainty.
We are optimistic that this business will generate meaningful cash flows over the long run.
We're committed to improving our business to be successful both in the near and long-term, and I firmly believe that we will come out of 2021, a better and stronger operation than where we started.
In addition, in addition to appropriately sustaining our asset base, our capital allocation plan is focused on paying down debt and improving our cost structure and operating performance.
As Mike mentioned earlier, with this plan, we will achieve our near-term target leverage ratio of 2.5x by 2023.
Our long-term capital allocation prioritizes maintaining a strong and flexible balance sheet with a focus on shareholder value.
We will share additional perspectives on our long-term capital allocation prioritization when we reach our near term leverage ratio target.
| compname posts q3 earnings per share of $0.11.
q3 earnings per share $0.11.
q3 adjusted non-gaap earnings per share $0.55.
q3 revenue $450 million.
|
Today's call is being recorded, and the supporting materials are the property of Dana Incorporated.
They may not be recorded, copied, or rebroadcast without our written consent.
Actual results could differ from those suggested by our comments today.
Additional information about the factors that could affect future results are summarized in our Safe Harbor statement found in our public filings, including our reports with the SEC.
As we jump right in, I'd like to share a quick overview of our results for the third quarter.
Dana delivered $2.2 billion of sales, representing an increase of $210 million over this time last year as our customers continue to see strong demand despite several headwinds.
Diluted adjusted EBITDA for the quarter was $210 million, a $9 million improvement over last year.
Free cash flow was a use of $170 million as the semiconductor shortage drove significant and unplanned OEM demand reductions which, of course, led to substantial downstream component inventory accumulation across the company.
Diluted adjusted earnings per share was up slightly compared with last year at $0.41 for the quarter.
Moving to the key highlights on the upper right-hand side of the page.
Today, we will provide you with an update on how we're navigating through unprecedented supply chain constraints, raw material cost inflation, and labor shortages that are impacting the entire global mobility industry.
We'll also outline how Dana is well-positioned to capitalize on long-term cyclical growth as near-term issues begin to subside.
Finally, I'll provide a recap on our recent Capital Markets Day that we conducted last month at our world headquarters in Maumee, Ohio.
This event was intentionally focused on vehicle electrification and more specifically the tremendous progress we've achieved by executing the strategy that we initially announced in 2016 and refreshed in 2019.
Very clearly our success in e-Propulsion continues to accelerate across all mobility markets as Dana's cohesive and streamlined global team is generating significant value for our customers around the globe.
Please turn to page 5 and we'll begin our discussion with the ongoing supply chain challenges and how it is impacting our markets.
Whether it is the semiconductor shortages causing OEMs to idle vehicle manufacturing or dramatic shortages of labor, sea containers, truck drivers, raw materials or numerous other issues resulting from the global pandemic, companies across the mobility industry are having to navigate through unprecedented manufacturing constraints.
As we all know too well, supply chain disruptions have significantly reduced global auto production as OEMs are challenged to procure chips required to produce their vehicles and meet robust consumer demand.
This reduced vehicle output has led to historically low finished vehicle inventories in the light vehicle segment.
The commercial vehicle and off-highway segments are largely experiencing similar high demand.
For example, the current Class 8 truck sales backlogs have reached pre-pandemic levels, and finished vehicle inventory levels for construction and agriculture equipment are at the lowest levels in the last three years, resulting in unfulfilled end-customer demand.
On the right side of the page, we are illustrating the issues constraining supply.
The disruptions we are seeing continue to cause component, raw material shortages, and escalating prices across all of our end markets.
In addition to the chip shortages I mentioned, shipping congestion at the ports around the world is translating to delays, container shortages, and increasingly just a cost resulting in overall higher input cost.
Labor shortages, particularly in the United States, are also leading to production inefficiencies, plant downtime, and higher labor cost.
All of this has led to customers struggling to meet the strong end-market demand.
We're actively navigating through the unprecedented and challenging market dynamics by working to offset and recover higher input costs for commodities such as steel through our established mechanisms.
Though due to the ongoing price inflation and inherent lag in recoveries, we continue to see a substantial margin headwind that will remain until the input cost stabilize and turn the other way.
While we do expect these challenges to continue in the near term, when supply chain issues do finally lessen, we anticipate a sustained recovery period as suppressed end-market inventory levels, combined with high consumer demand for our key platforms, provides the opportunity for a strong volume tailwind for us.
We are seeing the dynamic across all three of our end markets.
The alignment of these three will provide further demand momentum across our entire mobility landscape and Dana remains well-positioned to capitalize on the cyclical growth opportunities.
Moving to slide 6, I'd like to share a recap with you of our recent Capital Markets Day.
Last month, many of you participated either in person or virtually in our 2021 Capital Markets Day, which we hosted at our Sustainable Mobility Center on the campus of our world headquarters.
The goal of this event was to share our perspective on how electrified mobility will evolve in the coming years and how Dana's class-leading innovation and global presence will help to drive outsized growth and financial returns for our shareholders.
As many of you may recall, we introduced eight key elements that we believe showcase how Dana has successfully built a substantial EV franchise.
First is our guiding vision toward a zero-emissions future that is at the heart of everything we do and is the overarching theme of our electrification pursuits.
Second, we examined how our total addressable market is going to rise dramatically over the next decade as electrification becomes commonplace in each of the markets we serve.
Third, we presented Dana's industry-leading technical competencies in e-Propulsion systems.
More specifically, we illustrated how we are leveraging our design, engineering, and manufacturing team members' depth and capabilities to provide the most advanced three-in-one electrified drivelines in-house across all mobility markets.
Fourth, we discussed that as the use of batteries and electrodynamics accelerate in the mobility markets, the driveline will remain, and Dana will be a clear beneficiary of this megatrend.
The combination of electrodynamics and mechanical systems will increase our content per vehicle potential by three times and compared to our historical ICE product portfolio.
This migration of mechanical powertrains to smart electrodynamic systems requires embedded software controls, designing and integrating these into the driveline, along with in-house production of high-value sub-components will create a significant margin expansion opportunity for Dana in the future.
Six, Dana is a unique and compelling investment because we serve both the established OEMs transforming their businesses and the emerging OEMs are just getting started.
Our e Propulsion systems are on a vast array of vehicles and, as a result, we are well-positioned to capitalize on our broad base of new and existing customers.
Seventh, we utilize our existing global footprint and asset base, established operating system, and deep industry know-how that most our other competitors do not have and will require decades to build.
We view this as a significant cost and strategic advantage for Dana.
And finally, Dana's financial profile will remain robust throughout our electrification journey, because our core ICE product will remain in demand through the transition, thus generating significant cash flow to the power EV growth.
Our core business is not in a state of secular decline, but rather grows through the transition with assets that will remain largely relevant.
The combination of these factors tells the story of how the ICE to EV transition is positioning us for above-market secular growth and demonstrating that Dana is a great investment within the EV growth landscape.
Turning to slide 7, I'd like to share some evidence of how and where this is already happening.
During our Capital Markets Day, we highlighted a significant number of electrification new business wins.
As the saying goes, the scoreboard always tells the truth, and our electrification strategy is working.
Our EV solutions are being utilized by our off-highway customers in construction, underground mining, material handling, and even some green shoots in the agriculture applications.
In commercial vehicle, it's not by accident that we've achieved a market-leading position as Dana's initial focus and commitment was to medium- and heavy-duty trucks and buses.
In the light vehicle market, we're extremely active supporting full-frame electric truck OEMs with both rigid and independent e-axle concepts and potential solutions leveraging not only our complete in-house e-Propulsion capabilities but also significant experience we have from markets that were early electrification adopters, such as buses, material handling, and last-mile delivery vehicle solutions.
And while we are on the topic of the light vehicle market, we also announced for the first time in addition to significant battery and electrification cooling wins, a major new business win for a hydrogen fuel cell metallic bipolar plates.
The combination of our past successes, present capabilities, application know-how, and clearly demand [Phonetic] strategy for the future enables us to partner with and create value for our customers at any stage of their electrification progression, ultimately leading to us winning our share of nearly $19 billion addressable market by the end of the decade.
Now, I'd like to hand it over to Jonathan to walk you through our financials.
In the third quarter of this year, sales were $2.2 billion, a $210 million increase over last year, primarily driven by improved demand in our heavy-vehicle end-markets and the recoveries of raw material cost inflation in the form of higher selling prices to our customers.
Adjusted EBITDA was $210 million for a profit margin of 9.5%, which was 60 basis points lower than last year despite the higher sales as margin compression from raw material cost inflation more than offset the margin expansion from organic sales growth.
Diluted adjusted earnings per share was $0.41, a $0.04 improvement from the prior year.
And finally, free cash flow though was a use of $170 million, which was significantly lower than the third quarter of last year due to higher working capital requirements this year as recent customer schedule volatility and supply chain challenges have mandated higher inventory levels to ensure on-time delivery.
Please turn with me now to slide 10 for a closer look at the drivers of the sales and profit change for the third quarter.
The change in third quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here.
First, the organic growth increase of over $100 million was driven by improved demand for heavy vehicles in both our commercial vehicle and off-highway equipment segments.
The elevated incremental conversion of 40% was the result of targeted cost containment and cost recovery actions in the quarter, which helped to offset operational inefficiencies brought on by volatile customer production schedules, supply chain disruptions, and labor shortages.
Second, foreign currency translation increased sales by about $20 million as the dollar weakened against a basket of foreign currencies, principally the euro.
As usual, this did not affect our profit margin.
Finally, while we had expected commodity costs to level off in the second half of this year, unfortunately steel prices have continued to rise.
During the quarter, gross commodity cost increased by more than $100 million compared to last year.
We recovered nearly 70% of these cost increases in the form of higher selling prices to our customers.
This remains lower than a steady-state recovery ratio due to the timing lag caused by the continued rapid rise in commodity prices.
Rising steel costs are entirely responsible for the margin compression during the quarter despite higher production.
Please turn with me to slide 11 for a closer look at how the adjusted EBITDA converted to cash flow.
Free cash flow was a use in the quarter of $170 million.
This use was driven by higher working capital requirements, specifically production inventory, resulting from volatile customer production schedules and instability in the global supply chain.
A combination of unpredictable demand pattern for our products, longer lead times for raw materials, and the impact of slower-than-usual logistics channels have caused us to hold significantly more inventory than normal to ensure that we protect our customers across all end-markets.
Inventory levels increased by more than $100 million sequentially and more than $400 million versus the same time last year as, at the time, the industry was just ramping the supply chain back up coming out of the pandemic containment-related shutdowns in the second quarter of 2020.
We expect our inventories will gradually retreat toward a more normalized level in the next few quarters, but the cash flow benefit won't be recognized until next year.
I'll provide some additional information on this in just a few moments.
Please turn with me now to slide 12 for a look at how the changing market conditions are affecting our full-year outlook in the form of our revised guidance for 2021.
On our last two quarterly earnings calls, we outlined the key assumptions underpinning our full-year sales, profit, and cash flow guidance.
Raw material costs were anticipated to plateau, the supply chain conditions were expected to improve modestly, and the chip famine was presumed to progressively abate.
Unfortunately, none of these came to fruition and, as a result, our top- and bottom-line expectations for this year have declined, as you can see on the right of the page.
We now anticipate full-year sales to be $8.9 billion at the midpoint of our revised range, down about $100 million from the indication we provided during our Q2 earnings call as lower-than-expected market demand of, approximately, $170 million will be partially offset by $70 million in additional commodity recoveries.
Full-year adjusted EBITDA is now expected to be about $845 million at the midpoint of the revised range, which is down about $115 million from our previous indication.
Loss contribution margin from lower end-market demand and higher operating costs make up, approximately, $70 million of this profit headwind and increased commodity costs will further lower profit by about $45 million.
Profit margin is expected to be, approximately, 9.5% and free cash flow margin is expected to be about 1%.
Diluted adjusted earnings per share is expected to be a $1.85 per share at the midpoint of the range.
Please turn with me now to slide 13 where I will highlight the drivers of the full-year expected sales and profit change from last year.
First, organic growth is now expected to add nearly $1.4 billion in sales.
Incremental margins are expected in the mid-20s providing nearly 300 basis points of margin expansion.
Second, as was announced yesterday, the agreement to acquire Modine's automotive liquid cooling business for a dollar has been terminated as we were unable to reach agreement on revised terms that would gain the approval of the German regulator.
As a result, there will be no significant impact from organic growth this year.
However, this was never included in our full-year guidance.
Third, we anticipate the impact of foreign currency translation to now be a benefit of, approximately, $150 million to sales and about $15 million to profit with no material impact to our profit margin.
And finally, we now expect gross commodity cost increases to be about $350 million compared to last year as steel prices have continued to escalate.
We anticipate recovering about $235 million, or just below 70% of the increase, from our customers in the form of higher selling prices leaving a net profit impact of $115 million, which will compress margins by about 170 basis points.
Please turn with me to slide 14 for a look at the second half profit margin implied in our revised full-year guidance and the key drivers of the trend through this year.
Typically, profit margins in the first and second half of the year are relatively flat in our business as sales and profit are higher in the middle of the year, the second and third quarters, and relatively lower in the beginning and end of the year, the first and fourth quarters, as a result of normal production seasonality.
The quarterly sales and profit cadence of our revised full-year guidance for 2021 is atypical where we now expect second-half margins to be about 200 basis points lower sequentially.
A few anomalies are driving this year's trend, including: one, a continued volume deterioration associated with the chip shortage; and two, rapid commodity cost inflation.
At a cursory view of the trend, the first anomaly is only visible by highlighting the second.
Essentially, the increasing raw material cost recoveries included in our sales are masking the sequential volume deterioration and both are having a profound adverse impact on profit and are amplified by the poor condition of the global supply chain.
On the right of the page, you will note the expected sequential deterioration in fourth quarter profit on relatively flat sales.
It's important to note that as we move into next year we continue to anticipate a plateau in commodity cost leading to an eventual decline, which will allow our recovery ratios to gravitate toward normal levels, ameliorating the commodity impact, and the period cost associated with the labor agreement ratification will not recur.
Our full-year outlook for 2022, which we will provide at year-end earnings in a few months, as we normally do, will take both of these sequential improvements into account.
Please turn with me to slide 15 for more detail on how we expect this year's adjusted EBITDA will convert to cash flow.
We now anticipate full-year free cash flow margin to be comparable with last year at about 1%, which represents a modest improvement of about $30 million as $0.25 billion of higher profits are invested in working capital to navigate the current environment and higher capital spending to fuel our future growth.
The downward revision compared to our prior expectation is attributed to the lower profit I just outlined on the last few pages as well as the higher working capital requirements we experienced in the third quarter that will gravitate toward more normalized levels in the coming quarters as production schedules stabilize.
It's worth noting, we are pulling multiple working capital levers to mitigate the cash flow impact associated with the elevated inventory.
Please turn with me now to page 16 for our perspective on the near-term challenges on the backdrop of the long-term outlook for our business.
As Jim outlined at the outset of the call, the current mobility market dynamics are the most challenging they have been in over a decade with robust demand for vehicles and equipment substantially constrained by the supply of materials, logistics, and people, which has led to dramatic cost inflation and substantial profit and cash flow margin compression.
These are all represented by the icons on the left of the page.
As we look to the future, we want to remind all of our stakeholders that as challenging as the current environment is, these forces position Dana for robust and dramatic cyclical recovery this business has seen in quite some time.
This is illustrated by the chart in the upper right of the page where we affirm our conviction that our business will exceed $10 billion of sales in 2023, and this represents 45% growth over three years and will lead to substantial profit and cash flow margin expansion as we progress toward our long-term financial potential.
But the cyclical recovery in our business is only a piece of our growth story.
As we outlined at our Capital Markets Day last month, we're poised to substantially outpace the market growth rate as we capitalize on the secular growth trend that vehicle electrification represents for Dana.
We expect the sales of our electrified products to double in the next two years contributing to the greater than $10 billion of sales in 2023, but then quadruple by the end of the decade to deliver a $3 billion business that will expand our profit and cash flow margins and reposition the business for the future.
This bright future is made possible by the highly skilled and extremely dedicated team of more than 38,000 around the globe who day in and day out embody the spirit of our company, people finding a better way.
| dana q3 adjusted earnings per share $0.41.
q3 adjusted earnings per share $0.41.
q3 sales $2.2 billion.
sees 2021 sales of $8.8 to $9 billion.
|
Today's call is being recorded and supporting materials of the property of Dana Incorporated.
They may not be recorded, copied or rebroadcast without our written consent.
Actual results could differ from those suggested by our comments today.
Additional information about the factors that could affect future results are summarized in our safe harbor statement found in our public filings, including our reports with the SEC.
A quick review of our financial results for the quarter highlights significant improvements over last year's pandemic-impacted second quarter.
In reverse of last year, when we were discussing shutdowns and lower sales, this year's second quarter, we delivered a strong $2.2 billion in sales representing a $1.1 billion improvement as our customers continue to see strong market demand and in many cases, outpaced production as supply chain challenges continue to hamper their operations.
Our adjusted EBITDA for the second quarter was $233 million, a $238 million improvement over last year.
Net profit margin was again tempered by high raw material costs and supply chain challenges.
Adjusted free cash flow was of slight use on the quarter, but was an improvement of $120 million over last year, driven by higher earnings.
Diluted adjusted earnings per share was $0.59 for the second quarter of 2021, an improvement of $1.28 per share compared to 2020.
Moving to the key highlights on the upper right-hand side of the page, we'll provide you an update today on how we're managing through the key challenges facing the mobility industry.
Additionally, we're excited to talk about a few new business wins, including electrification programs.
Lastly, I'll highlight our recent announcement to further accelerate our commitment to reduce greenhouse gas emissions and our adoption of science based targets.
Please turn to page five, and we'll begin our discussion with the ongoing supply chain challenges and how it's impacting the current cycle.
We continue to actively manage through the challenging commodity and supply chain environment as we face four key issues: higher raw material costs; semiconductor shortages impacting the production schedules of our customers; logistics constraints and higher transportation cost; and, of course, labor shortages related to COVID restrictions.
These challenges are not specific to our company but are impacting the entire mobility industry, which is seeing high demand, but production is being constrained, resulting in finished vehicle inventories for our OEM customers.
First, high input costs for commodities such as steel driven by high demand and limited supply are inflating prices across all of our end markets.
We're working to offset and recover these higher costs through our established mechanisms, but the inherent lag in those recoveries is creating a substantial margin headwind until the input costs stabilize and turn the other way.
Jonathan will highlight the financial impacts in just a moment.
Second is the semiconductor shortage that is leading to lower production volume at our OEM customers or reducing model availability, particularly in the light vehicle segment, but more recently in commercial vehicles as well.
However, end customer demand remains strong, leading directly to finished vehicle inventory imbalance.
Shipping delays and higher logistics costs continue to impact the industry and are driving higher input cost.
We're seeing this around the world to varying degrees.
Lastly, all three of the end markets are being affected by labor shortages, leading to production inefficiencies, plant downtime and higher labor cost.
We're taking the necessary actions to capitalize on this unique market dynamic of low inventory and high demand as a future opportunity for a stronger and longer duration recovery, as the input challenges subside.
Moving to slide six.
I'd like to talk to you about how we continue to successfully launch our new business backlog programs despite the challenges facing our industry.
In North America, we're excited to be supplying our Spicer SmartConnect all-wheel-drive system to a new compact pick-up truck, slated to go on sale next year.
Vehicles with our disconnecting all-wheel drive systems are designed to transition to all-wheel drive automatically and seamlessly when the vehicle system predicts slipping.
It not only enables impressive gains in performance and safety, but is also more fuel-efficient and perfect for the growing market for small pickup trucks.
Turning to slide seven.
I want to talk about new partnership for us in the electric commercial vehicles.
Dana announced the signing of a strategic agreement with Switch Mobility, which is an Ashok Leyland subsidiary focused on manufacturing electrified commercial vehicles.
The agreement positions us as their primary supplier of electric drivetrain systems, including e-axles, gearboxes, motors, inverters, software and controls for light commercial vehicles and buses in India and Europe.
Light commercial vehicles continue to present significant opportunities that lead the commercial vehicle segment shift to fully electrified platforms.
We are very excited about the partnership and will enable us to have direct positive impact on the delivery of sustainable urban e-mobility.
Please turn to page eight.
Continuing on the transition to electrified vehicles, slide eight highlights an exciting collaboration with Pierce Manufacturing and Oshkosh airport products on their new revolutionary Volterra platform of electric vehicles.
When the first vehicle rolled off the assembly line, they will feature an electric drivetrain with two Dana TM4 motors, coupled with a Dana-manufactured electromechanical, infinitely variable transmission pictured here in exploded view.
The Volterra platform of electric vehicles is engineered to channel mechanical power and battery power to maximize driving and pumping performance while helping reduce fuel consumption.
Depending on the usage and mission profile, the fuel savings could be significant.
The Volterra platform of electric vehicles not only reduces emissions in EV mode, but more importantly, are designed to help save lives.
Every second matters when responding to an airport emergency and the newly Striker Volterra.
ARFF is capable of achieving 28% improved acceleration when fully loaded with the new EV technology.
As an added benefit, the Striker Volterra vehicle results in 0 emissions driving during entry and exit of the fire station ion EV mode, so that there's no longer a need for expensive ventilation systems, within the station.
During the next several months, despite the Striker Volterra performance hybrid will be showcased at airports across the United States allowing firefighters to experience the firsthand, the revolutionary Volterra technology.
At Pierce Manufacturing, the first Pierce Volterra zero emissions pumper was placed in service in June of 2021 with the city of Madison, Wisconsin Fire Department, making it the first electric fire truck in service in North America.
The Volterra pumper is serving frontline duty at Station 8, the city of Madison's busiest fire station.
To date, the city of Madison has responded to over 500 active emergency calls with this new electric pumper.
This collaboration with Pierce Manufacturing and Oshkosh Airport Products enables Dana to expand our presence in the specialty vocational vehicle market while also opening doors to leverage these capabilities across other markets as well.
This success is in our Power Technologies Group.
Several electrified lifestyle and sport trucks have recently been announced.
Earlier this year, we highlighted our battery cooling technology with a global light vehicle OEM and mentioned that there would be more announcements coming.
To that, we're pleased to be showcasing our capabilities by supplying our advanced battery cooling technology.
Unfortunately, we can't yet mention the name of the OEM.
Our extensive range of long ThermaTEK battery cooling product sets the industry standard for innovation.
The award-winning customer design, cooling -- custom design cooling solutions feature lightweight aluminum construction, resulting in ultra clean products that stabilize the battery temperature and enable faster charging.
Turning to my final slide.
At Dana, we believe that leading the way in sustainability directly aligns with our leadership and vehicle electrification and is critical to supporting our customers as they work to achieve their sustainability goals.
That passion is reflected in our desire to advance our emissions reduction targets by developing new zero-emission technologies, delivering innovative products and driving operational efficiencies around the globe.
That is why earlier this month, we announced plans to reduce our annual Scope one and two greenhouse gas emissions by at least 50% by the year 2030, which is a five year pull ahead of our original target of 2035 that was announced last fall.
To help accomplish this aggressive goal, we signed a commitment letter with the Science Based Target Initiative, or SBTi, which aligns resources and incorporates best practices to accelerate emissions reductions.
This partnership between the Carbon Disclosure Project, United Nations Global Compact, the World Resource Institute and the Worldwide Fund for Nature, focuses on partnering with companies to guide emissions reductions initiatives using the science-based targets.
As we continue our sustainability journey, collaborating with organizations like SBTi will support us as we establish ambitious targets and identify key areas where we can further drive sustainability across our operations and our products that enable zero-emissions mobility.
Now I'd like to hand it over to Jonathan to walk you through our financials.
Please join me on slide 12 for an overview of our second quarter results compared to the same period last year.
In the second quarter of this year, sales topped $2.2 billion, delivering growth of over $1.1 billion compared to the prior year.
The doubling of sales is entirely attributed to the recovery experience across all of our segments from the height of pandemic-related shutdowns last summer, despite continuing to fuel the aftershocks in our supply chain today.
Adjusted EBITDA was $233 million for a profit margin of 10.6%, which represents a dramatic improvement over last year's nearly breakeven results, even as this performance is hampered by dramatic material cost inflation and continued supply chain challenges.
Adjusted net income in the second quarter of this year was $86 million, $185 million higher than the same period of 2020.
The diluted adjusted earnings per share was $0.59, $1.28 improvement from the prior year.
And finally, adjusted free cash flow this quarter was a use of $13 million, an improvement of $120 million over the second quarter of last year as higher profit more than funded increases in working capital and capital expenditures to support the growth.
Please turn with me now to slide 13 for a closer look at the drivers of the sales and profit growth for the second quarter.
The change in second quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here.
First, overwhelmingly, the increase is attributed to the organic growth of nearly $1 billion, as our business laps the trough in sales caused by the onset of pandemic-containment measures last spring and summer.
The incremental conversion of 26% exceeds the decremental conversion from the same period in the prior year by about 200 basis points.
Second, foreign currency translation increased sales by nearly $90 million as the dollar weakened against a basket of foreign currencies, principally the euro.
As is typical, this has no impact on our profit margin.
Finally, steel prices have continued to rise at a rate much higher than anticipated.
Gross commodity cost increased by $70 million, and we recovered $45 million of this in the form of higher selling prices to our customers for a recovery ratio of about 65%.
This remains lower than our normal steady state recovery ratio due to the timing lag caused by the rapid spike in commodity prices.
These increases compressed our profit margin by approximately 180 basis points and represented the primary impediment to achieving 12% margins in the quarter.
Please turn with me to slide 14 for a closer look at how adjusted EBITDA converted to cash flow.
Free cash flow was a slight use in the quarter at $13 million.
This was a substantial improvement of $120 million compared to the same period last year and was entirely attributed to higher profit, which more than funded the higher capital requirements to support the increased volumes.
Please turn me now to slide 15 for a closer look at our revised full year guidance for 2021.
Given strong market demand in the second quarter despite the impact of the chip shortage, we now anticipate full year top line results toward the high end of our guidance range.
This represents a $250 million improvement from the previously indicated midpoint of the range and is driven by higher commodity recoveries, stronger foreign currency exchange and higher demand across all three of our end markets.
However, we still expect profit near the midpoint of our range, implying a margin of between 10.5% and 11% as the additional contribution margin from the higher demand is offsetting the higher commodity cost net of recoveries.
This also implies an adjusted free cash flow margin of approximately 3% of sales.
Diluted adjusted earnings per share is expected to move toward the higher end of our range at $2.45 per share due to lower interest and income tax expenses.
Please turn with me now to slide 16, where I will highlight the drivers of our expected sales and profit changes for the full year.
This chart highlights the key factors driving the change in expected sales and profit for 2021 compared to last year.
First, organic growth is now expected to add nearly $1.6 billion in sales, including our new business backlog of $500 million and the slightly higher end market volume increase mentioned on the previous slide.
Incremental margins are expected to remain strong in the mid-20s, providing about 350 basis points of margin expansion.
Next, we anticipate the impact of foreign currency translation to now be a benefit of approximately $150 million to sales and about $15 million to profit, with no impact to margin.
Finally, we now expect gross commodity cost increases approaching $250 million as steel prices have continued to rise.
We anticipate recovering about $180 million or 70% of the increase from our customers in the form of higher selling prices, leaving a net profit impact of $70 million, which will compress margins by more than 100 basis points.
Please turn with me to slide 17 for more detail on how we expect this year's adjusted EBITDA will convert to cash flow.
We expect full year adjusted free cash flow of about $275 million, representing an improvement of more than $200 million compared to last year.
The growth is entirely driven by the profit I just outlined on the prior page and is partially offset by the higher capital requirements to fuel the sales growth.
Please turn with me now to page 18 for an overview of the debt refinancing we completed in the second quarter.
In April, we were the first major mobility supplier to launch a green bond here in the U.S. The proceeds were allocated to finance green projects, driving our stated sustainability and social responsibility initiatives including; reducing greenhouse gas emissions; expanding the use of energy-efficient production processes; and designing, engineering and manufacturing products that enable the electrification of the world's mobility fleet.
Then in May, we launched our debut bond issuance to the European debt capital markets with a EUR325 million placement to refinance our 2026 dollar notes that had been swapped to euros.
Both of these actions lowered our borrowing costs, extended our maturities and will serve as more permanent components of our debt stack as we deleverage in the coming years.
This hands-on interactive technology experience will be held at our world headquarters in Maumee, Ohio, and broadcast virtually.
The event will feature our industry-leading EV products as well as a selection of electrified vehicles and equipment powered by these systems.
Our goal for the event is to provide further insight into how we see the transition to electrified mobility unfolding in the coming years and how Dana's leadership in this evolution will drive outsized growth and financial returns for our shareholders.
| dana inc q2 adjusted earnings per share $0.59.
q2 adjusted earnings per share $0.59.
|
A little reminder for those of you who may be listening by phone.
If you are unable to listen to our entire call today, the conference call will be archived on the company's website for your review at a later date.
Before beginning, let's take our usual cautionary reminder.
So it's factors can include weather conditions, changes in regulatory policy, competitive pressures, and various other risks that are detailed in the company's SEC reports and filings.
We appreciate your continued support and interest in the company.
Today, I want to give you a quick view of our financial performance supported by commentary on market conditions.
Then I will turn to the global supply chain, which is a subject of strong interest to most industries.
I will then ask David to cover financial and operational matters in great detail.
After that I will return with an update on our green solutions and precision application initiatives.
So at the -- on Slide four here at the end -- as we ended Q2s conference call, we presented a scorecard on how we did in the first half of '21 versus what we had given at the beginning of the year as our target.
So I'm going to update that now through the third and year-to-date through third quarter.
And so with revenue, we were at 25% through the first half through three quarters were exactly still 25%.
With our gross profit margin, we were tracking right on 39% through three quarters last year we had slipped a little to 38%, we're still holding at 39% at this point.
Our operating expenses, you know, we said we would maintain hope to move down slightly if we could as a percent of sales in the first half we had dropped from 35% to 34% and year-to-date, we are now at 33% versus 34%.
Our interest expense is down now at 20%, so we're attracting certainly below 2020 and believe we'll outperform our initial forecast.
On our tax rate, we were 31% versus 23% at -- through the first half, we're now at 27% versus 20% at this point last year.
We do expect that rate to drop in the fourth quarter and certainly to meet or exceed our mid-20% range.
On our debt to EBITDA, you can see we've dropped from 2.5 times to 2.1 times and as we look at it now, we expect to drop further and probably below the 2 times target that we had drawn out.
And as far as net income is concerned, pretty much the same we were at 86% for the three quarters we're at 87% increase.
Definitely a faster rate than our 25% revenue growth and our EBITDA is moving up, as we're now 39% increase from where we were at this time last year.
So our strong performance was across all sectors, but our domestic crop business led the way, we benefited from a combination of factors.
Let me just focus first on commodity prices and I'll start with cotton.
And what we've done is we've measured the price per pound.
This is with macro trends as of September 27th of '20 and then comparing that to September 27th of '21, a pretty dramatic increase, it's about 59% increase.
And so this has prompted growers to invest heavy -- more heavily in corn.
We've benefited from our corn, I mean, from our cotton insecticides Bidrin, which had a very strong third quarter.
In addition, we've had an increase in our cotton defoliant, Folex, which was very strong in the third quarter and we're still seeing orders in -- we saw orders in through October, so that's a big part of our benefit here so far.
Let's get this back up to where we were.
So, soybeans have -- we're at $10.21 a bushel, have increased to $12.85 over that year period, 26% increase.
You may recall that we have improved our soybean portfolio with several herbicides we've acquired over the last three years, and as such, soybeans are moving up as a crop for us.
I think currently or last week we were around 7%, 8%, but -- so it's looking positive for us in that sector.
And then, corn moving from $3.79 a bushel up to $5.42.
And with that, we've seen strong performance with Aztec and our number one corn soil insecticide and IMPACT, which is our number one herbicide -- corn herbicide and we've launched of two new, we had IMPACT C, which was with Atrazine, we've launched off now IMPACT CORE, which is with Seed to [Phonetic] CORE, and SINATE with IMPACT plus glufosinate.
And all four of these are performing well at this point.
So our increase overall in the ag sector was up 38% for US crop.
And so that certainly did lead the way for us and this is despite us having logistics issues for our biggest product normally, which is our soil fumigant products where large volume and certainly impacted by the supply chain disruptions.
On the remaining sectors, OHP continues to see strong performance, particularly in the markets of the horticulture and plants and in greenhouse activity.
AMGUARD again professional pest market that is also recovering well.
AgNova, our Australian business, which is tripled where we were last year.
Agrinos, which is adding incremental new business.
Mexico is performing well as our other two sectors, Brazil and Central America.
Overall, these combine to increase17% versus where they were this time last year.
So I want to take a second to just talk about supply chain.
And I was at an industry meeting last week, where I was asked to talk a little bit about supply chain from a manufacturing side.
And as I was driving from our plant in Alabama up to the conference in Memphis, I was listening to the radio and the COO of Toyota was talking about specifically the jam that's occurred in the Long Beach Harbor, which is where I grew up.
And he was saying that there are currently 540,000 containers and you're looking at boats here that have about 500 containers on them and 540,000 that are sitting at the port today that have not been -- that are backed up waiting to be unloaded.
So that's about 100 vessels and if you go down there, you can see them anchored all up and down the Southern Coast there.
And the current ability to unload at that port is about 18,000 containers a day.
So if you looked at it and said, well, I guess in 30 days, we would be able to unload those 540,000 containers, which is true, but the problem is that 29,000 new containers are arriving each day.
And so we're not going the right way and there doesn't seem to be any real solution at the moment.
So why is this happening?
And I guess, you know, we talk about maybe a perfect storm that's occurred.
We have a shift in buying pattern due to COVID, people got behind, they panicked on certain items.
So things shifted around.
Some items are plentiful, some are short, as you certainly were aware, as you hit your supermarkets or if you try to get a car, anything with circuit boards.
We've been operating with the same port capacity for years and generally, being able to kind of make it through, but we just haven't had this bigger shift in buying pattern.
Same thing with containers, there is limited number of containers and those containers are being delayed as they're sitting waiting to be unloaded or in some cases, the empties are having trouble getting back.
And just a word, we've got products that we were -- we've been trying to ship to Australia and we can't get a truck to take us -- to take it from the 20 miles from our plant down to Long Beach Harbor.
If they get there, they're going to wait eight hours and truckers don't particularly want to do that.
As such -- lot of the empty containers are just winding up on residential streets throughout the harbor area, as truckers are frustrated and they're just dropping the trailers anywhere and moving on.
So, it's created quite a miss and of course, we're dealing with somewhere in that 60,000 to 80,000 truckers short, which makes even once those containers do get offloaded, it gets difficult to actually move them out of the harbor.
So what's to be done?
How do you deal with it?
And I really, kind of, boil this down to three key factors: first is, production itself.
We've got to decide if the product that you're searching for, whether it's intermediate or finished good is going to be produced and when it's going to be produced.
I'll talk a minute about us dependence on China.
But for instance, China has shut down a number of factories for environmental, not necessarily that factor, but production sites.
Also, the government is, kind of, prioritizing energy and certain high energy products are not getting permitted to continue for production.
So that's putting a squeeze that goes across the world.
So first is, can you -- is the product -- can you make that purchase order.
We've had products that we've ordered and they've come back and said, you've got to pay more.
And so we say, OK, and then it's like, well, we're not going be able to ship anything.
So that's certainly the first thing that you've got to identify, are you going to be able to produce or get the product itself?
The second is on logistics, which we talked a little bit about, but those containers that you saw that come over -- last year, we were running about $2,500 to $3,000 per container.
This year they've picked up to $26,000 per container and that's just bringing them into the US.
Once they are here, then you've got to get it moved from there to your factory or your production site and then from that standpoint, you've got to get it delivered and you've got this shortage of truckers and you've got to try to figure out how you're going to get it, and then how much you're going to pay.
So it gets to be sometimes a bidding war.
If you want the product to get to point A, how much we'll pay to do it rather than kind of standard fares.
So that kind all boils down to maybe -- and the most important point is, let's assume you do get your goods, you clearly need to do quick calculations to understand exactly how much those goods are costing.
We're also seeing cost rises in factories as labor wages are going up.
And so we're working with our finance team to look at all SKUs and doing analysis in real-time of what our costs are and making sure that we present those to our commercial product managers, so they have a vision of what's their cost of goods that they're selling.
And so I think the companies that can go through this process will fare the best.
There is no real clear vision as to when this disruption I think will cease.
It will hit other areas harder than others and will be cyclical.
And so I think you just got to be nimble to understand where this is going.
So, on the positive side, again, we're sitting here with six production sites here in North America that gives us the ability to produce and be in a stronger position to handle the instructions.
I mentioned with China about 8% of our portfolio is dependent on materials from China.
Few years ago, we've started the process of second sourcing, if we could, outside of China, due to the tariffs, which were pushing up to 31%.
Second, we manufacture 46% of our portfolio within our six North American factories.
Having these manufacturing facilities gives us both greater independence and the ability to respond quickly to market conditions.
Third, we order goods from overseas on a comparatively sporadic basis.
By contrast, many of our consumer businesses or many of the consumer businesses that's being computing goods, probably and that sort of thing rely upon a steady stream of imported goods.
Nevertheless, we are working closely with our logistics partners to ensure that we can get good from Point A to Point B, and we are ordering good from overseas further and advance sound looking at lesser congested ports, through that means we have been able to manage through the supply chain conditions and at this stage we're optimistic that we will be able to continue to do so without material interruption.
With regard to our public filing, I understand from my controller that we are in the file and the queue to file and so I expect that we will file within the half hour or 45 minutes.
And as I have mentioned in previous conference calls, our industry is one that considered critical in all jurisdictions in which we operate and during the pandemic in 2020 and now throughout the nine months of 2021, our business, our customers, our suppliers have all operated without major disruption throughout, so it's been a good place to be during this difficult time.
And this is our quarterly sales performance, you can see that our sales have increased, as Eric mentioned since the first -- the third quarter of 2020.
Overall, our sales were up about $30 million to a $147 million, that's a 25% increase over the prior year.
Our US sales were up about 33% or $22 million and our international sales were up about 16% or $8 million.
And because of the very strong US performance, despite the strong international performance, our international sales reduced to about 40% of total sales, whereas this time last year there were at about 43%.
And during the third quarter of 2021, our production performance has been much better this was we expected.
And that has an impact on our gross margin performance and when I look at the crop business, our gross margin performance improved by about 50%, including the impact of the recovery of [Indecipherable] in the factory.
And our non-crop business had significant mix changes in 2021 in comparison to the prior year.
With some higher margin business happening earlier in the year in 2020, as compared to this year.
And as a result, our margins have remained comparatively flat in the quarter.
For international sales gross margin improved, as compared to the prior year and is primarily the result of the addition of businesses acquired late in 2020, which generate margins higher than our pre-existing business performance.
I particularly like this graph, because I think it gives a quick way of visualizing the impact of the factory performance has on our results.
And you can see that in the third quarter of 2021, on the far right of the graph, our factories cost is about 1.2% of net sales on the recovery and that compares, if you look back a couple of quarters to the third quarter of 2020, you will see that the cost amounted to 2.5% and that's just a reflection of the kind of activity that we managed to record in the factory in this third quarter.
Operating expenses increased by about 24% and that amounted to $9 million.
Our newly acquired businesses accounted for about 14% of the increase and freight accounted for 17%, and then the balance was incentive compensation linked to financial performance, some legal expenses, and increased marketing costs.
And overall our opex as a percentage of sales remained steady at 33%.
Our operating income in the third quarter was up 112% versus last year.
In addition, we made some immaterial adverse changes in the value of two investments we've had for some time.
As Eric mentioned, our interest expense continues to track about 24% below the prior year.
Our tax rate is a little higher than last year, primarily as a result of the strong taxable income in comparison to the prior year.
And finally, our bottom line is about $5.5 million, which is up 88% in comparison to the prior year.
For the first nine months of 2021, our sales were up 25%.
Gross margin in absolute terms are up 27%.
All our main activities in US crop, US non-crop and international, contributed to this exciting performance.
Our operating expenses increased primarily as a result of the new businesses acquired in the final quarter of 2020, increased performance linked incentive compensation, legal costs, some increases in travel and costs associated with the volume changes, such as freight and warehouse costs.
Overall, operating costs were up 22%, as compared to the net sales increase I mentioned a moment ago of 25%, and operating costs, compared to sales improved 33% in 2021, as compared to 34% last year.
Interest expenses reduced by 23% as a result of cash generated over the last 12 months, and overall, our net income has increased by 87%.
Now, I'd like to turn my attention to the balance sheet.
As you can see from this slide, during the third quarter, we increased cash generated from operations by 56%, as compared to the same quarter of the prior year.
Further, you can see that the movements on working capital was in line with the prior year and this performance includes the expanded scope related to the businesses acquired in the fourth quarter of 2020.
Overall, net cash from operations increased by 34%.
At the end of September 2021, our inventories were about $167 million, as compared to $176 million this time last year.
If for a moment, we exclude the impact of products and entities acquired since December 2019, which accounted for $10 million of inventory at the end of Q3, our base inventory decreased by 11% from this time last year.
So we feel that we have controlled inventory well during this phase of the company's annual cycle.
Our current inventory target for the end of the financial year remains at $155 million that compares with $164 million at the end of 2020.
That target is, obviously, dependent on a few things, including a continued low impact from the pandemic, normal weather patterns, and no more acquisitions this year.
With regard to liquidity, under the terms of the credit facility agreement, the company uses consolidated EBITDA as defined in that agreement to determine leverage.
Our consolidated EBITDA for the trailing four quarters to September 30th, 2021, was $66 million, as compared to $49 million for the four quarters to September 30th, 2020.
This taken in conjunction with outstanding indebtedness translates to borrowing availability amounting to $95 million at the end of September 30th, 2021, as compared to $45 million at the same time last year.
As you can see from this chart, we've been controlling debt well even as we work through the annual cycle and as we continue to invest in the business for the future.
Overall, in summary then, the second -- the third quarter of 2021, we have increased sales by 25%, improved overall margins, we have managed operating expenses, which increased in absolute terms, but declined when expressed as a percentage of sales, our net income increased by 88%.
We have a similar story for the first nine months of 2021, we increased sales by 25%, gross margins by 24%, operating costs have reduced when compared to net sales, our interest expense is down and net income has improved by 87%.
From a balance sheet perspective, accounts receivables increased driven by strong sales, inventories have been well-controlled, working capital has been held flat during the quarter and debt is lower than this time last year.
Despite three acquisitions in the intervening 12-months.
And finally, our liquidity position has improved significantly.
With that, I will hand back to Eric.
And recently, in quarterly earnings calls, we've provided updated information on our two strategic growth initiatives in green solutions and prescriptive application technology.
So let me just go into green solutions.
So we mentioned last time that we have, kind of, grown our technology on the green solutions and we've now -- see that we've got 100 different products in our expanding portfolio.
So in this slide, we break out the functional categories of our offerings.
As you can see, it's a balanced range of solutions with a strong emphasis on bio-fertilizers, bio-stimulants, bio-pesticides, and micronutrients.
These products allow us to offer not only our traditional crop protection, kind of, defensive products but beneficial plant nutrition and soil health amendments, as well and so we've developed quite a balanced and growing portfolio.
So green solutions has posted steady recent growth as seen on this slide.
For Q3, we increased about $10 million, which is 26% increase from Q2.
And I think most of -- a good portion of that growth anyway was attributed to increased sales in LatAm, Brazil, India, and Australia.
Year-to-date, our revenue is at just $27 million and for the full-year, we're up in our forecast from the $32 million to $35 million range.
We're now sticking somewhere in that $35 million to $37 million range.
And of that, about $10 million is coming from.
LatAm, which is our largest so far.
So when you look through what we're focusing on and keeping our eyes on the targets of what we're trying to do in expansion, we've got registrations underway in LatAm, the Columbia business has been transitioned over completed and working well.
We've got a pipeline building for further distribution in Europe and Africa.
We've got our US group that's looked at opportunities now for some significant increases in '22.
And part of that's a result of the 1,500 spot trials we mentioned last time that we were doing in '21, which are basically looking to benefit in the '22 period.
We've also linked this with our SIMPAS trials where we're introducing iNvigorate, which again is a nitrogen fixation product that looks extremely promising.
We've got turf and ornamental, our trials are near completion at this point.
We've got large scale customer demo plots that we're doing.
Again, looking for a pickup for next year.
Within then AMGUARD, we mentioned before, our bioherbicide product that we are looking for both consumer and professional pest use on our way to potentially developing for agricultural use.
This is significant given Bayer's decision to exit the consumer market through -- at least, domestically through Scotts with RoundUp the kind of leading herbicide in that space.
So we see demand for solutions, strong and we think we're well-positioned there.
We think Greenplants, which we acquired as part of Agricenter in the latter part of 2017, we knew we had some strong products with which to expand, but it has taken us a while to work that into our other areas.
And we recently moved product into China, and Colombia.
We have got other areas down in Australia where we think we've got some strong growth potential.
Bi-PA, which is a consortium in Belgium that we became part of six, seven years ago, maybe, David?
And we've got really our first product that's come out of that.
It's a biofungicide that's called Vintec, originally developed in Europe for grapes.
They tried this on grapes and -- but we've seen some very strong activity in almonds, and we received our registration in California recently.
There's over 1 million acres of almonds in California, and we think we've got a nice fit for a biotreatment for canker, a particular disease that hits almonds.
And we're also doing testing in bananas in Central America that also is looking promising and we're hoping to get registrations there as well.
So I guess what we're saying here is, it's a modest change just that we're looking -- kind of moving the needle a few million dollars up in '21 on our target which basically we're looking to double that in the next couple of years and then double that in the next couple of years as well.
So it's an aggressive growth, but given all the products that we have and the development work we're doing, the high demand for solutions in that space, currently, we're feeling that our forecast is looking good.
Shifting over to SIMPAS, again, you guys have seen how this graphic demonstrates how the system works.
During our last call, we've updated our forecast revenue for SIMPAS through '25.
At this point, the forecast remains unchanged.
What we did do since our last call, as we talked about that we were going to be reaching out to progressive retailers to then focus on their precision farmers begin that shift to prescription application of crop inputs.
And so, with this, we've identified a number of retailers that fit this.
We've got over a dozen retailers so far that have entered into agreements for distribution of SIMPAS with us.
We expect that, that number to double over the next few months and we've identified I think there is 26 here mostly in the Midwest, but also we've got five retailers in the South.
So I guess one question is what's in it for a retailer?
Sorry about that, so these retail partners can provide agronomy and prescription software capabilities needed for targeting SIMPAS inputs of crop protection, plant nutrition, and the soil health fertility enhancements.
With this on-the-ground template, SIMPAS can dispense and deposit ingredients that will give the grower maximum yield, minimum cost, elevated return on investment, and beneficial environmental outcomes.
These precision ag services help build a strong bond between the grower and the retailer creating a long-term business loyalty.
Kind of one final point that I want to make as we showed this slide before about the attention of the Ultimus software data retention that's part of SIMPAS, which allows concrete documentation through MDR to beneficial agricultural treatment practices.
As we pointed out in the emerging carbon credit market, the ability to authoritatively validate such beneficial practices can facilitate securing financial compensation that could substantially offset the investment outlay in adopting technologies such as SIMPAS.
So we are working with USDA on sharing this technology, which they were very excited about and they asked us or invited us to apply for a grant and which is under the Agricultural Innovation Center for Program of USDA, and we did get the grant at the end of September.
A decision-making process is somewhere in that two to eight months, so we expect a decision by Q2 of '22.
But this grant that we submitted is for nitrogen reduction by using a SIMPAS Ultimus system, decreasing the use of synthetic fertilizer and in its place applying soil health products.
So Ultimus gives the carbon credit program a way to verify, measure, and validate what the grower is doing to qualify for the credits.
When linked to the permanent ledger, since it's blockchain, Ultimus makes an immutable record of everything that was applied to the field by volume and by location.
As I've mentioned before, we know of no one else in our industry that has climate-friendly technology as comprehensive of our SIMPAS Ultimus system, particularly when used to dispense our green solutions.
So let me end these comments by letting somebody else have the last word.
This quote is from Jason Ore, who is an Ore Farms in Iowa and a happy user, I think he has been in the last year or two with SIMPAS and so his words are, the opportunities are endless.
I can foresee in the future dozens of SIMPAS supplied solutions being applied this way.
This is going to change the way we producers look at in-furrow application.
So with that, I'd like to open it up to any questions you may have.
| compname reports q3 net sales up 25% and net income up 88%.
compname reports improved financial results with third quarter net sales up 25% and net income up 88%.
american vanguard corp - qtrly net sales up 25% to $147 million.
|
As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.
We made excellent progress in the quarter, reducing our cash burn rate, improving our total liquidity and reopening hotels for the eventual recovery.
The second quarter, however, was unlike any in the history of the hotel industry.
When we last spoke in May, we were in the midst of the largest contraction in GDP ever experienced in the U.S. as government restrictions were imposed to curtail the spread of COVID-19 in order to protect the general public.
While some communities were able to reduce the spread of the virus, other locations experienced sudden increases in the transmission of this terrible virus.
Contemporaneously, the concerns over systematic bias in our society led to demonstrations across the United States involving an estimated 15 million to 25 million people.
The overall environment experience in 2020 is the very definition of unprecedented.
Before going any further, I want to recognize the hard work of our hotel operating teams and their dedication to the health and safety of our guests.
I also want to recognize our corporate employees for their agility, creativity and perseverance to ensure that DiamondRock is secure and well positioned for a profitable future.
Let me recap those for you.
One, the second quarter is expected to be the worst period in the year.
The demand recovery will come in stages with leisure demand from drive to resorts coming back first, followed slowly by emerging business transient customers and, finally, by the return of large group meetings likely in 2021.
Supply is going to be constrained going forward as new construction starts to evaporate and obsolete hotels shut their doors for good.
According to F.W. Dodge, rolling three-month hotel construction starts were down 56% in June as compared to the prior year.
Moreover, last quarter, we suggested as much as 10% of the existing supply in Midtown East, New York, may not reopen.
There's reason to believe that our early estimate may be conservative.
Fourth and finally, this is an opportunity to reinvent the operating model by identifying lasting opportunities to increase efficiencies through new best practices, promoting technology adoption like digital check-in and supporting emerging customer priorities such as the green room initiative.
We are optimistic that this could lead to increased profit margins once we return to pre-COVID-19 levels of demand.
Let's talk specifically about the second quarter.
In response to travel demand declining by over 90%, we suspended operations at 20 of our 30 operating hotels, leaving just 10 hotels open at one point in April.
The quick action taken by the team allowed us to realize a 72% reduction in hotel-level expenses excluding wage of benefit accruals.
Impressively, compared to the prior year, second quarter man hours decreased 83% at open hotels and 99% at hotels with suspended operations.
The decision to reopen hotels has been and continues to be dynamic and data driven.
As we articulated in the past, our plan is to reopen hotels if we can lose less money doing so.
Accordingly, starting in May, we prioritized our drive to resorts based on returning demand visible through various channels.
And ultimately, we reopened a total of 12 additional hotels in the second quarter.
The 22 hotels we had opened at the end of the quarter represent 58% of our hotel rooms.
But since the openings were staggered, the math works such that just 43% of our rooms were available in the quarter.
Demand got a little better as the quarter progressed.
Weekly occupancy for our operating hotels, which had bottomed at 6.8% at the end of March, rose steadily to 27.8% by the last week in June.
This trend has continued beyond Q2 with occupancy for operating hotels in July over 200 basis points higher than the full month of June.
Over the course of the quarter, we saw a growing number of hotels achieve breakeven profitability, and we expect that this trend continued in July.
In April, five hotels achieved breakeven profitability on a GOP basis, and this figure grew to seven hotels in May and 10 hotels in June.
On a hotel EBITDA basis, two hotels generated profits in April and account increased to four hotels in May and six hotels in June.
The consistent theme is nearly is that nearly every one of these hotels is among our collection of drive to resorts.
Leisure was clearly the brightest segment during the quarter and certainly a source of strength in DiamondRock's portfolio.
As you might have guessed, weekends were the strongest.
From early May to the end of June, weekend occupancy at our resorts increased from 11% to nearly 56%, with healthy gains in ADR for the majority of the weeks.
For the second quarter, leisure transient ADR was 1.6% higher than in the second quarter of 2019.
The resilience of rate in the leisure category tells us that price is not a gating issue for those customers.
Trends at our resorts in July were encouraging.
The Shorebreak in Surf City Huntington Beach averaged nearly 50% occupancy in July.
Our L'Auberge de Sedona, Orchards Inn and Havana Cabana Key West, each ran occupancy over 60%.
L'Auberge actually had an average rate in July of $553, which was a 14% increase over the prior year.
But our little star of the month was Landing in Lake Tahoe, which had 80% occupancy in July with average rate up nearly $100 a night to over $519.
As for business transient, we are not expecting a significant recovery after this summer.
In fact, we do not expect a true recovery in business transient demand until folks return to the office, which appears drifting toward early 2021 for many major employers.
Nevertheless, there are individuals traveling for business, and we did see a gradual improvement in our room and total revenue activity each month over the course of the quarter.
In April, the weakest month of the quarter, we saw less than $400,000 of revenue from business transient channels, but this grew to $1 million in May and $2.5 million in June.
These are meager beginnings.
But longer term, we are optimistic that as a consequence of more office personnel working from home, there may be increase in hotel meeting activity to plan strategy, conduct training and foster corporate culture.
The group segment has certainly experienced an enormous deferral of business.
Globally, C-Band had two billion RFPs passed through their system in the second quarter of 2020 as compared to six billion in the second quarter of 2019.
Group trends are challenging, and we expect this segment will be the final one to recover.
While DiamondRock does not have the depth of exposure to group, particularly large group as some of our peers, we thought that the limited data points we were seeing could be of value.
Since the start of the COVID impact and through the second quarter, our portfolio experienced approximately $117 million of canceled group revenue.
Over 80% of these cancellations occurred in March and April.
The pace of cancellations was initially as high as $20 million per week in March, but has since slowed to just $2 million to $3 million per week.
We expect cancellations will persist as we move throughout the year.
However, it was encouraging to see 250,000 to 350,000 room nights of group leads generated each month during the second quarter.
Some of the early lead volume was rebooking activity.
Short term, group bookings are increasingly weighted toward SMERF association and wedding events.
We're seeing larger pieces of group business, which are typically corporate, look at dates in 2021 and 2022.
Overall, rate expectations are consistent with pre-COVID levels.
While there have been short-term opportunistic groups booked in 2020, rate parameters for the 2021 and 2022 periods have been normal.
Instead, the main request is around terms for cancellations and rebookings, highlighting that groups do want to meet, but desire flexibility until there is greater visibility.
I want to touch on a few financial items in Q2, address our capital markets activity in the quarter and I'll conclude with an update on our liquidity and cash burn rate.
Total revenue decreased 92.1% in second quarter 2020 as a result of a 92.8% decline in RevPAR.
Total revenues were $3.3 million in April with 10 hotels open, $5.7 million in May with 12 hotels open and $10.9 million in June with 22 hotels open.
Excluding the Sonoma Renaissance, which opened July 1, the same 22 hotels are on pace for nearly $13 million of revenue in July.
As Mark mentioned, we decreased hotel-level operating expenses 72% from $170 million to approximately $48 million, excluding nearly $3 million of accrued benefits for furloughed employees.
We were able to slash variable expenses by 80%.
It is critical to understand that we achieved this level of cost reduction despite over 70% of our hotels partially open during the quarter.
Hotel adjusted EBITDA in the quarter was negative $30.4 million.
Corporate adjusted EBITDA in the quarter was negative $37 million.
Finally, second quarter adjusted FFO per share was negative $0.20.
For CapEx, we have canceled or delayed over 65% of our original capital expenditure plans.
In the second quarter, we restricted capex spending to only $20.7 million, including $8.5 million for Frenchman's Reef to put the project in a position where we could pause work.
Our primary focus remains conserving capital, so we are prioritizing only those expenditures where we have high confidence that they can produce a near-term earnings benefit and high return on investment at minimal cost and complexity.
In this regard, we spent $4.5 million to complete the F&B repositioning initiatives at our Renaissance hotels in Sonoma, Worthington and Charleston as well as the JW Marriott Cherry Creek.
We expect these investments will be earnings contributors in 2021, and the average IRR is forecast to be over 30%.
We remain in a strong liquidity position.
At the end of the quarter, we have $364 million of total liquidity between corporate and hotel level cash and undrawn revolver availability.
I'm also pleased to report that through hard work, we are able to meet our initial expectations for our overall cash burn rate.
At the hotel operating level, we averaged a $10.1 million monthly loss in the quarter, surpassing our initial forecast by 16%.
Including corporate G&A, the average monthly loss was approximately $12 million or 12% ahead of our expectation.
Finally, our total burn rate, including debt service, was approximately $17 million.
Compared to our average pace in second quarter 2020, we expect our burn rate will improve slightly in July, mainly because we had 58% of our rooms open at the end of June as compared to only 43% during the quarter.
Our preliminary estimate for our hotel-level cash burn in July is approximately $9 million to $10 million, which is potentially $1 million or 10% lower than the average monthly pace seen in the second quarter.
Including cash, G&A and debt service, this works out to an overall burn rate of $16 million to $17 million and provides a runway before capex of up to 23 months based upon our total liquidity of $364 million at the end of the quarter.
I want to make a few additional comments on the balance sheet.
The erosion in EBITDA obscures the strong balance sheet DiamondRock wielded before going into the pandemic.
For example, net debt to undepreciated book value as of second quarter 2020 was just 26%.
We ended the second quarter with net debt of only $106,000 per key on a portfolio with a replacement cost in the range of $450,000 per key.
This implies a net debt to replacement cost of less than 24%.
Importantly, DiamondRock's debt is well structured.
It is diversified between nonrecourse CMBS and bank mortgage debt as well as unsecured bank debt.
At the end of the quarter, we had $605 million of nonrecourse mortgage debt at a weighted average interest rate of 4.1%.
We had $550 million of bank debt, comprised of $400 million in unsecured term loans and just under $149 million on our unsecured revolving credit facility.
We finalized an amendment to our credit facility in the quarter.
We had several objectives in this process, but there are three I'd like to highlight.
First, secure a waiver through the end of the first quarter of 2021 and relaxed covenants through year-end 2021.
Covenant tests restart in the second quarter of 2021 using annualized results to wash out 2020 from our financial results.
Second, flexibility for investment.
Collectively, we have $110 million for capital investment, which has proved to be one of the largest capital investment allowances relative to assets or pre-COVID EBITDA.
Third, flexibility for acquisition.
We have no limitation on our ability to pursue equity funded unencumbered acquisitions, and our $300 million limitation on encumbered acquisitions is proportionately larger than the limitation many peers have on total acquisitions.
I think a key competitive advantage that will come into sharper focus in the next year is our maturity schedule.
We have no debt maturities for the balance of 2020.
We have no maturities in 2021, and we have only one loan for $48 million due in 2022 and even that can be extended to 2023 under certain conditions.
Our first significant maturity is our revolver which matures in 2023, but this too can be extended one year into 2024.
The combination of a conservatively leveraged balance sheet, a diversified source of debt capital and one of the best maturity schedule in the sector is a measurable competitive advantage for DiamondRock.
In closing, I want to point out, we've expanded our disclosure to provide monthly detail on hotels open the entire quarter, hotels partially open during the quarter and hotels that remain closed.
It is here that you can see how the hotels progressed as we move through this most difficult period.
Moreover, we provided the number of days each hotel was open to give you context to revenue, expense and EBITDA that each hotel produced.
And on that note, I'll hand the call back to Mark for final comments.
I want to make a few comments about the future.
Although we saw improvement in the second quarter, we expect uncertainty will persist until there is an effective vaccine, improved patient outcomes, broad acceptance of safety protocols such as social distancing and wearing mask or some combination of the above.
Encouragingly, there are already 30 vaccines in human trial.
Because of the wide array in variables related to the resolution of the healthcare crisis, we are not in a position today to provide you with company guidance.
We do expect the balance of 2020 to be difficult, with drive to resorts doing best, only very modest increases in BT business and large group business not meaningfully returning until 2021.
We did want to provide you with some of the ways in which we are positioning DiamondRock for the future.
Let me highlight a few.
One, we have a great portfolio that is increasingly weighted toward drive to resorts.
We have 13 of 31 hotels that are leisure oriented.
This has been a multiyear strategic initiative as seven or last eight hotel acquisitions fit into this category.
We were early to recognize the trend here and remain committed believers.
Two, small hotels have been outperforming.
According to STR, hotels under 300 rooms have shown the best relative performance.
Due to our focus on boutiques and drive to resorts, the median hotel in DiamondRock's portfolio is just 265 rooms.
Three, the portfolio has numerous ROI projects, many with 30% plus IRRs.
These include the just completed rebranding of the Sheraton Key West to the Barbary Beach House resort as well as the upcoming luxury upbranding of our Vail Resort.
Four, while we pause the reconstruction of Frenchman's Reef, we remain excited about its long-term prospects.
Essentially, this is a nugget of future value for our shareholders.
And finally, we have a solid balance sheet to allow us to withstand a substantial downturn and then position us to be offensive at the right time.
We are already seeing some interesting opportunities in the market.
We have great assets, a solid balance sheet, strong industry relationships and an experienced management team that has weathered numerous prior downturns over the last 30 years.
| q2 adjusted ffo loss per share $0.20.
not providing updated guidance at this time.
|
This is Michael Haack.
One, related to the Board's decision to remain a combined company and the other to the reinstatement of our quarterly cash dividend.
To access it, please go to www.
I'll begin today with some perspectives on the quarter, the fiscal year and our outlook.
Our latest results represent a culmination of a decade of sustained topline growth for the company.
While our bottom line has grown by more than 20 fold.
In every respect, fiscal 2021 was an extraordinary year for Eagle Materials.
Our resilient business model and our team's commitment to Eagle's vision and strategic priorities have enabled us to achieve record financial results, integrate the largest acquisition in the company's history, operate all facilities safely during COVID, and quickly rebound from a historic winter storm.
These results would not be possible without the extraordinary talented and dedicated employees of Eagle Materials.
We have long emphasized the favorable cash flow characteristics of Eagle Materials, and this was never more clearly illustrated then during this year.
And in fact, we were able to repay the entire $665 million purchase price of the Kosmos acquisition during the fiscal year, providing us with significant balance sheet firepower and financial flexibility going forward.
A few additional strategic items that I would like to highlight are around our completion of the expansion of our vertically integrated paper mill and some portfolio shaping.
The paper mill expansion added 20% additional capacity, allowing Eagle to set a monthly production record for Wallboard paper in March.
The expansion will also provide cost and value benefits that we expect to realize longer-term.
The business portfolio shaping involve the divestiture of Eagle's profit business and other non-core assets in Northern California.
We found buyers where alternative ownership value exceeded operating value for us.
With regards to operations.
I'm especially pleased with our safety performance in this disruptive pandemic year.
Progress on our relentless focus on safety was confirmed by our leading and lagging safety indicators.
Our safety culture has never been stronger with leading indicators of safety observations increasing by 114%, resulting in all of Eagle's businesses outperforming industry metrics yet again, and this gap is widening.
Another important topic that we are very excited about is our progress on our environmental and social agenda.
We will post an updated environmental and social disclosure report to our website this quarter and it will give a more comprehensive and granular expression of our ESG agenda and to our progress, both of which were a source of pride for us.
ESG is well integrated into our strategic planning and investment decision-making process at Eagle.
Let me now turn to some specifics around our demand outlook and why we believe the underlying demand fundamentals in our markets will continue to be strong -- see strong volume and pricing strength like we saw during the second half of our fiscal year.
Residential construction and repair and remodeling are very closely related and are important demand drivers for Eagle Materials.
These two items drive approximately 80% of the demand for Gypsum Wallboard and about 30% of the demand for cement.
In this regard, the outlook for housing starts, especially single-family starts, which are particularly important for Wallboard demand is strong.
We have been under building against underlying demand in the U.S. for over a decade.
This under building has led to a record shortage of homes, at the same time that household formations are expanding.
As long as mortgage interest rates stay in the lower quartile by historic standards, this demand growth should be largely sustainable through the mid-term.
Now turning to cement.
Approximately half of cement demand is from investments in infrastructure.
Implementation will further challenge U.S. cement supply in many parts of the U.S., which is already straining to meet current demand.
It is also important to remember that the lion's share of funding for infrastructure comes from states, not the federal government.
There was quite a bit of concern about state budgets being impacted by the pandemic, but as we shared in our prior earnings calls, our analysis of sources of state funding suggested the impact would likely not as be as great as some feared, especially in the U.S. heartland states in which we operate.
In fact, remarkably, state and local tax revenue grew by 1.8% in 2020.
This is largely because state and local personal income tax receipts rose 3.4% and state and local property tax receipts were up 3.9%.
On top of the tax revenues, states were provided federal grants as part of President Biden's American rescue plan.
Finally, non-residential demand is the smallest demand driver for Eagle.
We have seen strong demand in distribution centers, warehousing and data centers, but overall this area has been less certain.
As America continues to reopen after COVID, we expect this demand driver to continue to strengthen.
The point of this is that the demand picture is robust for both of our businesses.
The factors driving the strength should be sustainable at least through the mid-term.
Moving from the demand side to the supply side, we have been talking from some years about the diminishing supply of synthetic gypsum in the eastern half of the U.S.
This is due to less burning of coal as power plants change fuel sources from coal to natural gas and from outright closure of coal-fired power plants.
With a diminishing supply of synthetic gypsum, existing synthetic Wallboard plants will be limited in their ability to fully utilize current capacity, increase current capacity or build new capacity.
Conversely, almost all of the Eagle's plants have many decades of raw material supply, which are primarily own natural gypsum deposits.
We are largely insulated from the direct effects of this diminishing synthetic gypsum trend, while our plants are also in a position to indirectly benefit from the supply demand dynamics that this trend creates.
In this way, it is notable that the Gypsum Wallboard industry is increasingly looking more and more like the cement industry.
With respect to our cement business, there are significant regulatory and capital barriers to the U.S. cement capacity expansion, whether it be at existing facilities or through the construction of new ones.
In face of the increasing demand and with industry capacity now nearing full utilization, clinker capacity in the number of cement kilns has not only not expanded since 2010, but clinker capacity in the number of cement kilns has actually been reduced in the U.S.
This trend is why imported cement will increasingly be required, but is increasingly expensive with rising Baltic freight index rates.
Imported cement also carries a much larger carbon footprint than locally produced cement because of the ocean freight and logistics required to get it to the point of views.
Eagle is well positioned in the heartland of the U.S., away from the seaboards, and here too the company will be affected largely indirectly in a positive way by these trends.
In short, favorable demand outlooks, constrained U.S. manufacturing supply capability and a limited practical substitutes for both businesses add up to a very bright future for Eagle Materials.
With this backdrop, I would be remiss if I did not spend a little time on our pricing initiatives.
With regards to Wallboard, subsequent to the quarter, we implemented a price increase effective in April and have announced a further price increase for June.
For cement, we have implemented a price increase in April across our network and announced a second price increase in Texas for mid-summer.
We are continuing to see growing demand in our other markets and we'll update you on future calls on any further price increases we implement later in the year.
And I'm here because I would like to share some perspectives around this decision.
Much has transpired since the separation announcement that has caused the Board to reevaluate the separations merits.
First, the size and financial strength of the combined company with its diversified asset base geographic diversity and robust balance sheet have provided great comfort stability and value to our shareholders, employees, customers and suppliers during an unprecedented and uncertain time.
Second, given the continued consolidation of the industries in which we participate and the company's rigorous examination of a number of strategic alternatives since the announcement of the proposed separation, it has become clear that a combined company with greater financial scale and flexibility will be better positioned to pursue key strategic growth options and enhance shareholder value.
Third, since the announcement of the proposed separation, the company has streamlined its business portfolio, including the divestiture of its Oil and Gas Proppants business and other non-core assets.
There is no question that the company is exceedingly well positioned and is performing as well as at any time in it's history.
Both major business segments continue to post industry-leading metrics on just about every measure.
As a shareholder, I cannot be more pleased with the position of the company.
While the Board will continue to evaluate the merits of a separation on a periodic basis as we have in the past, it is concluded in consultation with external advisors that the combined company is in the best position to create long-term shareholder value.
This is -- this was an important decision for Eagle and for the Board, and one that was very carefully considered.
A second decision that the Board has made relates to our quarterly cash dividend.
This decision is important one in the context of our capital allocation priorities, which I might add, remain unchanged.
We have three capital allocation priorities.
The first to growth investments that meet our strict financial returns criteria and which falls squarely within our strategic focus boundaries.
The second investment priority is organic improvement investments.
These are investments to maintain our facilities in like new condition, strengthen the low-cost producer positions, and to ensure the long-term sustainability of our operations.
The third priority is the return of cash to shareholders.
And this has been primarily through share repurchases.
In fact, over the past three years we have invested just over $625 million in share repurchases and dividends.
This compares with nearly $700 million in growth acquisitions and $300 million inorganic improvement investments over that same time period.
Currently, over 7 million shares remain under the current repurchase authorization.
Now let me turn to the quarterly cash dividend decision.
Pandemic uncertainties urged an abundance of caution broadly around capital allocation at Eagle until we could regain confidence around the sustainability of the recovery.
As part of that cautiousness, we suspended our quarterly cash dividends.
Our confidence in the sustainability of the recovery is now high, while our cash position is very healthy.
As such, I would like to announce that we are reinstating our quarterly cash dividend of $0.25 per share on our common stock.
The dividend will be payable on July 16, 2021 to shareholders of record at the close of business on June 18, 2021.
This amount represents a 150% increase over the quarterly dividends that had been paid preceding the suspension.
We're very pleased to be able to make this decision on behalf of our shareholders.
The reinstatement of the dividend reflects Eagle's strong operational and financial performance, our confidence about the resilience of the business and our commitment to reward shareholders.
Our strong balance sheet, combined with the robust cash flow outlook allows us to pay this dividend, while very importantly, preserving the financial flexibility to continue to grow and improve Eagle and create long-term shareholder value.
With that, now let me pass the baton over to Craig for the regular business of the earnings call with the discussion about the financials.
Fiscal Year 2021 revenue was a record $1.6 billion, up 16% from the prior year.
The increase was driven by contribution from the acquired Kosmos Cement business and increased cement and Wallboard sales volume and pricing.
The Kosmos Cement business contributed approximately $176 million of revenue during the year.
Revenue for the fourth quarter was up 12% to $343 million, reflecting a very strong end to our fiscal year.
Annual diluted earnings per share increased 46% to $7.99, reflecting the contribution from the Kosmos Cement business, improvement in the organic businesses, and a gain of approximately $0.98 per share on the sale of our Northern California businesses during the first quarter.
The fourth quarter earnings per share comparison was affected by the CARES Act, which generated a $37 million or $0.76 per share benefit in the prior year period.
This year's fourth quarter financial results were affected by the disruption of winter storm, Irene.
Prior to and during the storm, we brought down operations at all our Oklahoma and Texas facilities.
This was done in a controlled manner to ensure the safety and security of our employees, communities and assets.
I commend our manufacturing teams for their focus as these facilities ultimately lost utilities, including electricity and natural gas.
Fortunately, we avoided significant damage to our critical equipment and our operations were fully restored by late February.
The total financial impact from the winter storm was approximately $12 million during the fourth quarter.
Most of the impact resulted from higher variable costs, namely higher energy.
However, we also had negative fixed cost absorption, freeze related to repairs and restart costs.
On the flip side, we were able to curtail other operations and sell a portion of our natural gas commitments to offset these higher costs.
These offsets were included in other non-operating income.
Turning now to segment performance.
Let's look at Heavy Materials results for the year highlighted on the next slide.
This next slide shows the results in our Heavy Materials sector, which includes our Cement and Concrete and Aggregates segments.
Annual revenue in the sector increased 19%, driven primarily by the acquired Kosmos Cement business and higher cement sales volume and pricing.
This was partially offset by the divested Concrete and Aggregates business results in the prior year.
Operating earnings increased 27%, again reflecting the acquired business and increased sales volume and pricing.
And margins improved 140 basis points to 23%.
As I mentioned earlier, our Cement and Concrete operations in Oklahoma and Texas were negatively affected by winter storm, Irene.
The impact of this sector was approximately $6 million and mostly reflects higher energy costs.
As Michael mentioned previously, we recently implemented cement price increases across our entire cement network.
The price increases range from $6 to $8 per ton and were effective in most markets in early April.
Moving to the Light Materials sector in the next slide.
Annual revenue in our Light Materials sector increased 5%, reflecting improved Wallboard sales volumes and prices.
Annual operating earnings increased 2% to $193 million, reflecting higher net sales prices, partially offset by higher input prices, namely recycled fiber costs and the impact of starting up the paper mill after the expansion project.
As with the Cement business, our Wallboard plant and paper mill in Oklahoma experienced production curtailments and significant spikes in energy during the February winter storm.
The biggest impact was at our paper mill, which was fully curtailed for the week, and during the shutdown process experienced escalating energy costs.
Again, as Michael highlighted, subsequent to the quarter, we implemented a Wallboard price increase in early April and announced another price increase last week for early June.
Looking now at our cash flow, which remained strong.
During fiscal 2021, operating cash flow increased 61% to $643 million, reflecting earnings growth, disciplined working capital management and the receipt of our IRS refund.
Meanwhile, capital spending declined to $54 million.
The increase in our cash balance combined with debt reduction enabled us to repay the entire Kosmos Cement purchase price during fiscal 2020.
in fiscal 2022, we expect capital spending to increase to a range of $95 million to $105 million as we restart several projects that were delayed because of the COVID-19 pandemic.
And finally, a look at our capital structure.
During the year, we prioritized debt reduction as a primary use of cash, providing us significant financial flexibility in light of pandemic-related uncertainties and potential opportunities.
At March 31, 2021, our net debt to cap ratio was 36%, down from 60% at the end of the prior year, and our net debt to EBITDA leverage ratio was 1.3 times.
We ended the year with $264 million of cash on hand and total liquidity at the end of the quarter was approximately $1 billion, and we have no near-term debt maturities.
We'll now move to the question-and-answer session.
| q4 revenue $343 million versus refinitiv ibes estimate of $333.6 million.
decision to remain a combined company.
decided not to pursue proposed separation of eagle materials.
average net cement sales price for quarter increased 2% to $112.77 per ton.
|
I'm Gabe Tirador, President and CEO.
On the phone, we have Mr. George Joseph, Chairman; Ted Stalick, Senior Vice President and CFO; Jeff Schroeder, Vice President and Chief Product Officer; and Chris Graves, Vice President and Chief Investment Officer.
Before we take questions, we will make a few comments regarding the quarter.
Net income in the second quarter was $228.2 million or $4.12 per share, which includes a $125.2 million of after-tax gains on our investment portfolio.
The rebound in the markets in the second quarter, helped to partially offset first quarter after-tax losses of $198.5 million on our investment portfolio.
Year-to-date, net income was $89 million or $1.61 per share, which includes $73.4 million of after-tax losses on our investment portfolio.
Most of the year-to-date investment losses are mark-to-market adjustments on securities that continue to be held by the Company.
Our second quarter operating earnings were $1.86 per share compared to $0.74 per share in the second quarter of 2019.
The improvement in operating earnings was primarily due to a reduction in the combined ratio from 98.3% in the second quarter of 2019 to 88.2% in the second quarter of 2020.
Catastrophe losses in the quarter was $12 million compared to $9 million in the second quarter of 2019.
The Company recorded $12 million in unfavorable reserve development in the quarter compared to $9 million in the second quarter of 2019.
The improvement in the combined ratio in the quarter was primarily due to improved results in our private passenger auto line of business.
Lower frequency in the quarter as a result of less driving from the COVID-19 pandemic was the primary reason for the improved results.
The lower frequency in the quarter was partially offset by an increase in severity and the give back of $100.3 million of premiums to personal auto customers as a result of less driving from the COVID-19 pandemic.
Partially offsetting the improved results in our private passenger auto line of business were worst results in our commercial auto, homeowners and commercial multi-payer lines of business.
Although our commercial auto line of business also saw a decline in frequency in the quarter, increases in severity, unfavorable reserve development of $7 million and the give back of $5.5 million of premiums to commercial auto customers negatively impacted our commercial auto results in the quarter.
In our homeowners line, both frequency and severity increased in the quarter.
In addition, $3 million of unfavorable reserve development negatively impacted our homeowners results this quarter.
To improve our homeowners results, a 6.99% rate increase in our California homeowners line went into effect in April.
In addition, a 6.99% rate increase was recently approved by the California Department of Insurance.
We expect to implement the recently approved rate increase in October.
California homeowners premiums earned represent about 87% of companywide direct homeowners premiums earned and 15% of direct companywide premiums earned.
Our commercial multi-payer results in the quarter were negatively impacted by a large $5 million fire loss net of reinsurance.
In the second quarter, we launched two new programs.
In June, we introduced our new personal auto usage-based insurance product MercuryGO in Texas.
Early adoption rates are encouraging and above our expectations.
We also introduced Phase 1 of our new commercial multi payroll product and system in California in the second quarter.
The new product and system have been well received by our agents.
We recently completed our catastrophe reinsurance treaty renewal effective July 1, 2020.
The total reinsurance limit purchased increased from $600 million in the prior period to $717 million for the July 2020 through June 2021 period.
In addition, the new reinsurance program has wildfire coverage in all layers.
Our retention remains the same at $40 million.
Total annual premiums on a new reinsurance program are approximately $50 million.
For the prior reinsurance treaty, total premiums were $38 million.
More details of the catastrophe reinsurance treaty renewal will be included in our second quarter 10-Q filing.
The expense ratio was 27.2% in the second quarter of 2020 compared to 24.4% in the second quarter of 2019.
The higher expense ratio in the quarter was primarily due to the reduction of premiums earned of $106 million due to premium refunds and credits to eligible policyholders for reduced driving and business activities as a result of the COVID-19 pandemic.
Excluding the premium refunds and credits, the expense ratio would have been 24.1%.
Premiums written declined 12.5% in the quarter primarily due to the $106 million in premium refunds and credits.
Excluding the $106 million in premium refunds and credits, premiums written declined by 1.2%.
In addition, we plan on returning $22 million of July 2020 monthly premiums to eligible policyholders in August.
Accordingly, we expect third quarter premiums written and earned to be reduced by approximately $22 million.
We will continue to monitor the extend and duration of the economic impact related to COVID-19 and make further adjustments as necessary.
We expect our underwriting and loss adjustment expense ratios to remain elevated in the third quarter as premiums declined from give backs without a proportionate reduction in expenses.
With that brief background, we will now take questions.
| qtrly earnings per share $4.12.
compname posts quarterly net income per diluted share $4.12.
qtrly net income per diluted share $4.12.
qtrly operating income per diluted share $1.86.
|
I'm pleased that you're joining us for DXC Technology's first-quarter 2022 earnings call.
Our speakers on the call today will be Mike Salvino, our president and CEO; and Ken Sharp, our executive vice president and CFO.
In accordance with SEC rules, we provided a reconciliation of these measures to their respective and most comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
Today's agenda will begin with a quick update on our solid Q1 performance, which continues to show that revenue, adjusted EBIT margin, book-to-bill and non-GAAP earnings per share all have a positive trajectory compared to past quarters.
During our Investor Day in June, we gave you additional insights into the steps of our transformation journey, and those steps are: inspire and take care of our colleagues, focus on our customers, optimize costs, seize the market and build a strong financial foundation.
I will give updates on each step, and then hand the call over to Ken to share our Q1 financial results, guidance and more details on how we are building a strong financial foundation.
Regarding our Q1 performance, our revenues were $4.14 billion, and our adjusted EBIT margin was 8%.
This represents the fourth straight quarter of both revenue stabilization and sequential margin expansion, and we expect both trends to continue in Q2.
Book-to-bill for the quarter was 1.12.
This is the fifth straight quarter that we delivered a 1.0 or better book-to-bill, and we expect our success of winning in the market to continue in Q2.
Our non-GAAP earnings per share was $0.84 in the quarter, which is up 300%, as compared to $0.21 that we delivered in Q1 of FY '21.
The positive trajectory of all four of these numbers gives us confidence that our playbook is working.
As a refresher, our playbook has three phases.
The stabilization phase was completed in FY '21.
This phase enabled us to make great progress with our colleagues, customers, on revenue, margin, book-to-bill and reducing our debt.
We are now focused on the foundation phase.
This phase focuses on the steps that will allow us to deliver growth.
The goals of this phase are: first, continue to increase our employee engagement, all while we attract and retain highly talented colleagues; second, stabilize year-on-year organic revenue; third, expand adjusted EBIT margins; fourth, consistently deliver a book-to-bill number of 1.0 or greater, with a nice mix of new work and renewals; and finally, under Ken's leadership, deliver a financial foundation that increases discipline and improves our cash flow and earnings power.
Now I will discuss the good progress we are making on each step of our transformation journey, beginning with inspire and take care of our colleagues.
We are executing a people-first strategy.
Attracting and retaining talent is fundamental to enable our growth.
Our refreshed leadership team has deep industry experience and is delivering.
Brenda, who is our chief marketing officer, is our newest addition.
Brenda is a strategic results-oriented leader who brings deep marketing experience to DXC.
75% of our leadership team is now new to DXC and bringing in talent based on their personal credibility as talent follows talent.
What the team is finding is that the new DXC story is resonating in the market, and new-hires are wanting to join DXC because they see the opportunity to progress their careers with a company that's on the right trajectory.
We mentioned during our investor call that nearly 50% of our vice presidents across the company are new to DXC within the last 22 months.
Also, we are investing in our people.
This quarter, we rewarded high performance by paying annual bonuses that benefited roughly 45,000 of our colleagues.
In Q2, we are planning merit increases that will benefit roughly 77,000 of our colleagues.
In addition to these investments, we are doing a great job of taking care of our colleagues and their families during the pandemic.
This focus on our colleagues is unique and builds trust with them, increases employee engagement, allows us to compete for talent and enables us to deliver for our customers.
Focus on our customers is the second step of our transformation journey.
Our investment in our customers is the primary driver of revenue stabilization.
It was clear from their comments that the new DXC story is resonating with them because we are delivering.
These are all large global companies, and they are saying that their IT estates are important.
In fact, they use the word critical.
Our strategy of delivering ITO services builds customer intimacy and develops trust that when our customers want to further transform their business, they turn to us, and allows us to move them up the enterprise technology stack.
Additional evidence that our strategy is working is the nice progress we have made on our GBS business, along with the cloud and security layer of our GIS business.
All of this gives us confidence that we will deliver on our financial commitments.
Now let me turn to our cost optimization program.
We continue to do well, optimizing our costs and delivering for our customers without disruption.
These levers have helped us expand our margin going from 7.5% last quarter to 8% this quarter.
You will hear from Ken that we expect to continue to expand margins in Q2.
Next, seize the market is where we are focused on cross-selling to our existing customers and winning new work.
The 1.12 book-to-bill that we delivered this quarter is evidence that our plan is working.
In Q1, 57% of our bookings were new work and 43% were renewals.
You will see that we are running specific sales campaigns.
An example of these campaigns is ITO modernization, which is focused on improving the performance of our customers' IT estates.
Another example is our campaign to show our customers how to think about cloud, which combines on-prem, private cloud and public cloud technology.
Our ability to deliver a consistent book-to-bill of 1.0 in each of the last five quarters is evidence that these sales campaigns are working and that we can win in the IT services industry.
This momentum and success in the market gives us confidence that we will deliver another book-to-bill of 1.0 or greater in Q2.
Turning to our financial performance on Slide 12.
For the quarter, DXC exceeded the top end of our revenue, margin and earnings guidance, and continued to deliver a strong book-to-bill.
GAAP revenue was $4.14 billion, $10 million higher than the top end of our guidance range.
Adjusted EBIT margin was 8% in the quarter, an improvement of 380 basis points as compared to the prior quarter.
In Q1, bookings were $4.6 billion for a book-to-bill of 1.12, the fifth straight quarter of a book-to-bill greater than one.
Moving on to Slide 13.
Our Q1 non-GAAP earnings per share was $0.84 or $0.08 higher than the top end of our guidance, benefiting $0.05 from a lower tax rate.
Restructuring and TSI expenses were $76 million, down 58% from prior year.
Free cash flow was a use of cash of $304 million, as compared to a use of cash of $106 million in the prior year.
We expect free cash flow to improve significantly as the year progresses.
As the next slide shows, our Q1 FY '22 performance continues our trajectory as we deliver on our transformation journey.
Starting with organic growth progression, we went from approximately 10% decline in the first three quarters of FY '21 to down 6.5% in the fourth quarter and now down to a decline of 3.7%.
This is a 40% improvement from the prior quarter.
Our previous organic revenue growth calculation was not performed in this manner.
As a result, we have revised the organic growth rates for the prior-year periods in our earnings deck and have further supplemented our organic calculation to include all the information to support the calculation, providing you complete transparency.
This change does not yield a meaningful difference to our historically reported organic revenue growth rates, trajectory or guidance.
Adjusted EBIT margin expanded 380 basis points.
Excluding the impact of dispositions, margin expanded almost 600 basis points.
We continue to market with five consecutive quarters of a book-to-bill greater than one, and lastly, non-GAAP earnings per share quadrupled.
Now moving to our GBS business, composed of analytics and engineering, applications and business process services.
Revenue was $1.9 billion in the quarter.
Organic revenue growth was positive 2% as compared to prior year.
In terms of quarterly progression, organic revenues declined about 6% to 7% in the first three quarters of FY '21, declined 3.4% in the fourth quarter and turned to positive 2% this quarter.
GBS segment profit was $272 million with a 14.4% profit rate, up 450 basis points from the prior year.
GBS bookings for the quarter were $2.4 billion for a book-to-bill of 1.29.
As you have seen for a number of quarters, the demand for our GBS offerings, the top half of our technology stack have been quite robust and now yielding positive organic revenue growth.
Turning to our GIS segment, consisting of IT outsourcing, cloud and security, and modern workplace.
Revenue was $2.3 billion, down 9.1% year over year on an organic basis.
We are seeing the rate of decline moderate this quarter despite the headwinds from our modern workplace business.
GIS segment profit was $131 million with a profit margin of 5.8%, a 480-basis-point margin improvement over the prior-year quarter.
GIS bookings were $2.2 billion for a book-to-bill of 0.97, compared to 0.77 in the prior year.
It is safe to say revenues continue to stabilize and demonstrate that with improved customer intimacy and delivery, our revenue is not running away, allowing us to build our growth foundation.
Now I will break down our segment results, GBS and GIS, into the layers of our enterprise technology stack, starting with GBS.
Analytics and engineering revenues were $482 million, up 12.9% as compared to prior year.
We continue to see high demand for our offerings with a book-to-bill of 1.32 in the quarter.
Applications also continued to demonstrate solid progress with revenue of $1.246 billion, growing organically almost 1%.
Applications also continues its strong book-to-bill at 1.32.
Business process services revenues were $118 million, down 13% compared to the prior-year quarter with a book-to-bill of 1.13.
Cloud and security revenue was $549 million, up 4.9% as compared to the prior year.
The cloud business is benefiting from increased demand associated with our hybrid cloud offerings.
Book-to-bill was 0.85 the quarter.
IT outsourcing revenue was $1.13 billion, down 9% as compared to prior year.
To put this decline in perspective, last year, this business declined almost 20% year over year.
We expect this momentum to continue and organic declines to further abate as the year progresses.
Modern workplace revenues were $577 million, down 19.7% as compared to prior year.
Book-to-bill was 1.0 in the quarter.
As you may recall, modern workplace was part of our strategic alternatives and was not part of our transformation journey until recently.
As a result, we previously disclosed that the performance would be uneven as we invest in the business, enhancing our offerings and innovating the end-user experience.
As our transformation journey takes hold, we expect modern workplace performance to improve similar to the trend we have seen with our ITO business.
One of our key initiatives to drive cash flow and improve earnings power is to wind down restructuring in TSI costs.
We expect to reduce this from an average of $900 million per year over the last four years to $550 million in FY '22 and about $100 million in FY '24.
On Slide 19, we detail our efforts to strengthen our balance sheet.
We are proud of what we achieved on this front, reducing our debt by $7 billion, while improving our net debt leverage ratio to 0.9 times.
Further, we have reached our targeted debt level of $5 billion with relatively low maturities through FY '24.
From our improved balance sheet, let's move to cash flow for the quarter.
First-quarter cash flow from operations totaled an outflow of $29 million.
Free cash flow for the quarter was negative $304 million.
As you likely realize, with Mike's leadership, we will continue to make decisions to better position the company for the longer term, creating a sustainable business.
Certain of these decisions impacted cash flow this quarter.
As our guidance anticipated, we plan to take certain actions that impacted the Q1 cash flow.
We remain on track to deliver our full-year free cash flow guidance of $500 million.
Let's now turn to our financial priorities on Slide 21.
We are working to build a stronger financial foundation and use that base to drive the company forward in a disciplined and rigorous fashion, unleashing DXC's true earnings power.
Our second priority is to have a strong balance sheet.
We achieved our targeted debt level.
We are encouraged by our almost 50% year-over-year interest expense reduction.
We continue to focus on reducing interest expense and are evaluating refinancing options given the advantageous interest rate environment.
Third, we will focus on improving cash flow.
During the quarter, we paid $88 million to draw to conclusion a long-standing $3 billion take-or-pay contract for IT hardware.
These types of contracts are not efficient, and we are reducing our exposure.
Additionally, we paid down $300 million of capital leases and asset financing in order to allow us to dispose of IP hardware purchased under the previously mentioned take-or-pay arrangement and realizing tax deduction once we dispose of the unutilized assets.
Given our relatively low borrowing cost, it makes less sense to enter into capital leases as the borrowing costs are higher and creates other complexities.
We continue to reduce capital lease and asset financing origination from approximately $1.1 billion in FY '20 to $450 million in FY '21 and believe that we will remain at that level or lower for FY '22.
As we continue to curtail capital lease origination, our average quarterly lease payment will reduce from about $230 million a quarter in FY '21 to about $170 million near term.
Our efforts to limit capital leases does create upward pressure on capital expenditures.
Though, on balance, we expect to reduce cash outflows for both capital leases and capital expenditures over time.
Lastly, we terminated our German AR securitization program, negatively impacting cash flow by $114 million for the quarter.
Going forward, this will result in interest savings, strengthen our balance sheet, but more importantly, it will bring us closer to our customers as cash collections is tied to their success.
Fourth, we will reduce restructuring and TSI expense, improving our cash flow.
Fifth, as we generate free cash flow, we will appropriately deploy capital to invest in our business and return capital to our shareholders, all the while continuing to maintain our investment-grade credit profile.
During the quarter, we executed $67 million of stock buybacks to offset dilution, taking advantage of what we believe was an attractive valuation in the market.
I should note, we continue to make progress with our efforts to optimize our portfolio, unlocking value as we divest noncore assets, including both businesses and facilities.
We expect to continue these efforts.
Our results today include the benefit from the sale of assets, partially offset by other discrete items, and the headwind of 30 basis points of margin associated with the disposition of our healthcare provider software business.
Moving on to second-quarter guidance on Slide 22.
Revenues between $4.08 billion and $4.13 billion.
This translates into organic revenue declines of down 1% to down 3%.
Adjusted EBIT margins of 8% to 8.4%.
Non-GAAP diluted earnings per share in the range of $0.80 to $0.84.
As we look forward to the rest of the year, I would note that we expect $175 million of tax payments in Q2 related to the gains on dispositions.
We also updated our FY '22 interest guidance to approximately $180 million, a $20 million improvement; and reduced our full-year non-GAAP tax rate by 200 basis points to 26%.
As noted on Slides 23 and 24, we are reaffirming our FY '22 and longer-term guidance.
Lastly, we expect to see further improvement in the quarterly year-over-year organic revenue growth rates as we move through the year.
Let me leave you with three key takeaways.
First, I couldn't be more pleased with the trajectory of the business.
Our improvement in revenue, margins and earnings per share is evident, and we expect this success to continue.
Second, we have momentum and continue to win in the market.
We expect our progress in driving a book-to-bill of over 1.0 to continue.
Third, our financial foundation is coming together nicely under Ken's leadership.
We have made great progress on debt reduction, reducing our restructuring and TSI expense, and delivering on our capital allocation priorities.
These three key takeaways show that we have good momentum, we are building the foundation for growth, and we are confident that we will deliver on our financial commitments.
| q1 non-gaap earnings per share $0.84.
q1 revenue $4.14 billion versus refinitiv ibes estimate of $4.11 billion.
bookings of $4.6 billion and book-to-bill ratio of 1.12x in q1 fy22.
|
Speaking today will be Jim Herbert, the bank's founder, chairman, and co-CEO; Gaye Erkan, co-CEO and president; and Mike Roffler, chief financial officer.
All are available on the bank's website.
It was another very strong quarter with robust growth in loans, deposits and wealth management assets.
Our client-centric business model is continuing to perform very well across all of our segments and all of our geographic markets.
Since 1985, First Republic's success has been grounded in colleague empowerment and a service culture of taking care of each client one at a time while operating in a very safe and sound manner.
This straightforward and personal approach has led to a very consistent organic growth for 36 years.
The growth is not predicated on mergers or acquisitions.
Let me review for a moment the results of the second quarter.
Total loans outstanding were up 18.9% year to date annualized.
Total deposits have grown 37% year over year.
Wealth management assets were up 55% year over year to a total of more than $240 billion.
This across-the-board, very organic growth drove our strong financial performance.
Total revenue year over year has grown 34% and net interest income was up 27%.
Quite importantly, tangible book value per share increased 15.5% year over year.
The safety and soundness of the First Republic franchise continues to reflect our strong credit quality.
Net charge-offs for the quarter were only $1.2 million, just a fraction of a basis point.
Nonperforming assets at quarter end were only 8 basis points of total assets.
We remain, as always, focused on capital and liquidity.
At quarter end, our Tier 1 leverage ratio was 8.05% and our HQLA was 14.3% of total average assets during the second quarter.
This included higher-than-normal cash levels.
Our clients remain very active as the reopening of our urban coastal markets takes hold.
This is particularly evident in the strong growth of single-family home loans during the quarter and so far this year.
As represented -- this growth represented a substantial portion of the quarter's total loan activities, including both purchase and refinance.
For some perspective on the long-term stability of First Republic's service model, residential loans have remained steady at approximately 60% of our loan portfolio for the entire past two decades.
This is a very safe asset class, particularly with our stringent underwriting standards and is a key to us attracting new households.
During the second quarter, we opened our first banking offices in Hudson Yards.
Clients are responding well to our presence in the area and foot traffic has been actually quite good.
Our other new markets, including Palm Beach and Jackson Wyoming, continue to perform very well.
Overall, it's been a strong and successful first half of 2021.
Before turning the call to Gaye, I would like to take a moment to congratulate her on her appointment as co-CEO.
Gaye has been an inviable contributor to our performance, and I'm really delighted to continue our successful partnership at this new level.
Working together, we intend to ensure the consistency of First Republic's culture, which is particularly important as we emerge from the pandemic.
I'm honored to be appointed co-CEO and continue to serve this truly special organization alongside you and our leadership team.
We will work hard to keep scaling our people-first culture, with an unwavering focus on safety and soundness and doing more of what we do best, delivering exceptional service to our clients.
I'm excited about opportunities ahead and look forward to continue to work with all of our extraordinary colleagues at First Republic.
Turning to our earnings results, it was a terrific quarter that reflects our continued focus on safe, sound, organic growth.
Our top priority as an organization is taking care of our exceptional colleagues and empowering them to provide unparalleled client service.
Our client satisfaction results and exceptionally low client attrition, which, in turn, fuels our growth through repeat business and client referrals.
Happy people lead to happy clients, and the more happy clients we have, the more repeat business we do and the more client referrals we get.
Each year, more than 75% of our safe organic growth comes from these sources.
Over the past several years, we have continued to make strategic investments in technology and risk infrastructure.
These investments allow us to scale our service model, while keeping our bank safe and sound.
Our digital and tech investments are geared toward minimizing transactional time to create more time to build further trust and deepen relationships with clients and to serve our communities.
Let me now provide some additional comments about the quarter.
Loan origination volume was $16.8 billion, our best quarter ever.
I would note that the weighted average loan-to-value ratio for all real estate loans originated during the second quarter remained conservative at 58%.
Single-family residential volume was $8.7 billion, also a record.
Refinance accounted for 49% of single-family residential volume during the second quarter.
A large percentage of refinance activity continues to come from clients with loans at other institutions, which provides us with great opportunities for new client acquisition.
For perspective, throughout the past 10 years across varying interest rate environments, refinance activity has always accounted for at least 40% of single-family volume.
Turning to business banking.
Business loans and line commitments, excluding PPP loans, were up 27% year over year.
Capital call outstanding balances were down quarter over quarter, driven mainly by a reduction in the utilization rate from 40% to 36%.
This is in line with our historic utilization range of mid-30s to low 40s.
In terms of funding, it was an exceptional quarter.
Total deposits were up 37% from a year ago, supported by client activity, as well as a very meaningful impact from both fiscal and monetary policy.
We continue to maintain a diversified deposit funding base.
Checking deposits increased by $5.3 billion in the second quarter and represented 68% of total deposits.
Business deposits represented 61% of total deposits, up modestly from the prior quarter.
The average rate paid on all deposits for the quarter was just 7 basis points, leading to a total funding cost of 20 basis points.
Turning to wealth management, assets under management increased to $241 billion.
This is an increase of $46 billion year to date, of which more than half was from net client inflows.
Year to date, wealth management fees were up 39% from the same period a year ago.
The strength of our integrated model continues to attract very high-quality teams.
Our second-quarter results demonstrate the power of our service model and the dedication of our exceptional colleagues.
Our strong second-quarter results reflect the consistency of our business model.
Revenue growth for the quarter was exceptional, up 34% year over year.
This was driven by strong organic growth across the franchise, including loans, deposits and wealth management assets.
Our net interest margin for the second quarter was 2.68%.
This includes the impact of our elevated cash position from fiscal and monetary policy, which has resulted in significant deposit growth.
We continue to expect our net interest margin for the full-year 2021 to be in the range of 2.65% to 2.75%.
Importantly, net interest income was up a very strong 27.5% year over year.
This is due to the robust growth in earning assets and a stable net interest margin.
We are pleased with our efficiency ratio, which was 62% for the second quarter.
Our expense growth remains proportionate to our revenue growth as we continue to invest in the franchise to deliver outstanding client service.
I would note that our 2020 Net Promoter Score actually increased from the prior year.
We continue to expect our efficiency ratio for the full-year 2021 to be in the range of 62% to 64%.
Let me talk for a moment about CECL, which has been in place for six quarters now.
CECL's formulaic guidelines take into account our loan growth, loan mix and historic credit performance.
In accordance with CECL, our provision for credit loss during the quarter was $16 million, reflecting our continued loan growth.
Since CECL became effective at the start of 2020, we have added $160 million to our reserves, while only experiencing $4 million of losses.
Turning to the tax rate.
Our effective tax rate for the second quarter was 17.4%.
The decline in the tax rate from the prior quarter was due to increased tax benefits resulting from stock awards vesting during the second quarter.
These tax benefits added $0.11 to earnings per share in the second quarter.
This compares to $0.03 in the same quarter last year.
Under current tax law, we continue to expect our tax rate for the full-year 2021 to be in the range of 20% to 21%.
Overall, this was a great quarter in the first half of the year.
Our time-tested quite straightforward business model remains very focused on delivering the highest possible level of client service, doing only what we do best and operating very safely and soundly.
And it continues to work quite well.
Now we'd be delighted to take any questions.
| q2 revenue $1.2 billion versus refinitiv ibes estimate of $1.18 billion.
net interest income $1.0 billion for quarter, up 27.5% compared to q2 a year ago.
|
I'm here today with Pat McHale and Mark Sheahan.
Our conference call slides have been posted on our website and provide additional information that may be helpful.
Sales totaled $439 million for the third quarter, an increase of 10% from the third quarter last year and an increase of 9% at consistent currency translation rates.
Acquisitions added 1 percentage point of growth in the quarter.
Net earnings totaled $114 million for the quarter or $0.66 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises and other non-recurring tax items, net earnings totaled $102 million or $0.59 per diluted share.
The sale of the company's UK-based valve business Alco, was finalized in July of 2020.
Impairment charges totaled $300,000 in the quarter and $35.2 million year-to-date.
No additional impairment charges are expected from the sale.
Our gross margin rate was up slightly compared to the third quarter last year.
Improved factory volumes, lower material cost, the favorable impact of currency and realized pricing more than offset the unfavorable effect of product and channel mix, as sales in the Contractor segment increased, while sales in the Industrial and Process segments declined.
Given the growth in certain products in the Contractor segment, particularly products for the home center channel, factory capacity has strained.
We've managed the increase in demand levels by investing in additional production lines, moving employees from other factories, increasing contract labor and working over time.
We are making progress toward meeting current demand levels and continue to monitor the situation closely.
Operating expenses in the quarter were comparable to the third quarter last year, as reductions in volume and earnings-based expenses offset higher product development costs.
The reported tax rate was 6% for the quarter, down 7 percentage points from last year.
On an adjusted basis, the rate in the quarter was 16% as compared to 20% in the first half of 2020.
The decrease in the rate from the first half is due to the impact of lower foreign earnings and earnings in countries with lower tax rates than the US rate.
Excluding the effect from excess tax benefits related to stock option exercises, and other one-time items, our tax rate is expected to be 18% to 19% for both the fourth quarter and the full year.
Cash flow from operations totaled $263 million year-to-date as compared to $299 million last year, primarily due to lower operating earnings and increases in working capital.
Capital expenditures totaled $46 million year-to-date as we continue to invest in manufacturing capabilities as well as the expansion of several locations.
For the full-year 2020, capital expenditures are expected to be approximately $85 million, including approximately $50 million for facility expansion projects.
A few final comments, looking forward to the rest of the year.
On page 11 of our slide deck, we note our 6-week booking average through October 16th by segment.
I would point out that there is an inherent volatility in order rates reflected in such a short period of time.
Nonetheless, we thought it would be helpful to provide current order rate data, so you can see what we are experiencing heading into the fourth quarter.
Similar to the last two quarters, our Industrial and Process businesses are still experiencing declines from a year ago.
Although less severe than they were in Q2, while our contractor business remains strong.
As the US dollar continues to weaken, the effect of currency translation will continue to be favorable.
At current rates, the impact would have been negligible on sales and earnings for the full year, and have a full -- have a favorable impact to the fourth quarter of approximately 2% on sales and 3% on earnings, assuming the same mix of business as the prior year.
Despite the unusual operating environment, we achieved record quarterly sales, driven by the strength of the North American construction market and a gradually improving Asia-Pacific region.
The Contractor segment, single handedly accounted for the company's sales growth for the quarter.
It's been Graco teamwork on full display.
Contractor grew in all regions during the quarter as customers have responded favorably to our new product offerings, residential construction activity has been solid and the home improvement market has been robust.
The Industrial segment declined low single-digits for the quarter.
Although improved from Q2, business activity remains muted across most of our major end markets.
Access to industrial facilities is limited.
Factory demand in many industries remains well below last year and appetite for capital spending is constrained.
Some specific areas showing signs of life, such as spray foam, electronics and battery, aren't large enough to offset declines elsewhere.
Asia-Pacific improved during the quarter, all those up against an easier comp from last year.
As you'll recall that industrial demand softened in the second half of 2019.
Reduced spending on travel, sound discretionary expense management, good factory performance and solid price realization resulted in improved industrial operating earnings for the quarter, despite the lower sales.
The Process segment declined low teens for the quarter and for the year.
Demand in this segment vary significantly by end market with growth in our semiconductor and environmental businesses more than offset by declines in our diaphragm pump and lubrication businesses.
While it's difficult to predict near-term economic conditions, we expect things to remain challenging for the short term.
As we've done throughout 2020, and through prior downturns, we intend to continue to fully execute against our strategies.
We're full scheme [Phonetic] ahead on our new product development initiatives, continue to make solid ROI capital investments in our factories are adding channel globally and are focused on finding profitable growth opportunities in attractive niche markets whether organically or by acquisition.
We've kept our workforce intact, morale is good and we expect to do well as economic conditions improve.
| qtrly diluted net earnings per common share $0.66.
qtrly diluted net earnings per common share, adjusted $ 0.59.
|
You'll have an opportunity to ask questions after today's remarks by management.
AmerisourceBergen has had a strong start to our fiscal '21 year.
We delivered exceptional results driven by differentiated commercial solutions with revenues of $52.5 billion for the first fiscal quarter, representing growth of 10% year-over-year and our adjusted earnings per share increasing 24% versus the prior year quarter.
Building upon our businesses resilience, our teams executed and leveraged our capabilities to create value throughout the supply chain.
Our purpose driven culture continues to empower our associates to think, plan and act decisively to support all of our partners and to facilitate patient access to critical medical treatments.
In addition to these results, as we announced in January, we entered into a strategic transaction with Walgreens Boots Alliance to acquire the majority with large healthcare business and extend and expand our existing distribution agreement.
As we have said, these agreements are part of the next evolution of enhancing AmerisourceBergen's ability to deliver innovative solutions for our partners, further building on our platform to deliver key distribution capabilities and value-added services to support patient access in new geographies.
AmerisourceBergen's ongoing focus on patient access means providing innovative services and solutions to support our manufacturer partners and provide customers with our differentiated value proposition.
World Courier, for example, is highly sought after for it's expertise in helping manufacturer partners navigate complexities on a global scale.
During the pandemic, World Courier's proven track record as an international leader in specialty logistics have enabled us to support our customers worldwide against the backdrop of changing local restrictions, limited air traffic and additional operational challenges.
We have been able to facilitate direct to patient services and global clinical trials at a time when both demand and complexity for these services was understandably at its peak.
Similarly, we continue to support patient access to vital treatments for COVID-19.
In the U.S., we continue to be the distributor of antiviral and antibody therapies, which are playing an increasingly important role as more and more hospitalized patients are receiving these treatments to help them recover from COVID-19.
In Canada, our Innomar business is partnering with FedEx as the primary distributor for the COVID vaccine.
Our team at Innomar is safety and security storing the vaccines in the storage facilities across Canada and packaging them to support the temperature requirements specified by the manufacturer.
AmerisourceBergen's scale and expertise in specialty as well as our culture of delivering collaborative and innovative solutions, enabled this important work.
We have spent years building on and enhancing our leadership, especially distribution.
This continued investment in and focus on an important part of the pharmaceutical market continues to benefit both AmerisourceBergen and our partners.
And over the last several months, the ability of our sourcing and commercial teams to leverage our expertise and data analytics capability is foundational to our facility to play an important role in providing the specialty distribution solutions for COVID related treatments.
We deliver a clear and differentiated value proposition for our partners in the U.S. healthcare system and continue to focus on building on our strengths in specialty distribution as those capabilities continue to be even more important to all our customers.
AmerisourceBergen's strong portfolio of customers is another important differentiator for us as it is an important driver of growth across our businesses.
Over the years, AmerisourceBergen has made it a priority to have long-term strategic relationships with manufacturers and providers that embrace and appreciate collaboration.
As we announced last month, we have agreed to strengthen our strategic partnership with Walgreens by extending and expanding our commercial agreements.
This extended and expanded partnership in the U.S. will allow us to create incremental growth and efficiency opportunities, enabling each of our enterprises to better serve our respective customers.
Teams from both our companies have already identified new opportunities for enhanced growth and efficiency in the areas of logistics, transportation and distribution.
As we continue to realize the improved capabilities derived from this partnership, these initiatives will enhance our ability to create differentiated value for all of AmerisourceBergen's customers.
One customer group, for whom we have consistently created new incremental value, is our independent pharmacy customers including our more than 5,000 Good Neighbor Pharmacy and Elevate Provider Network members.
These independent pharmacies provide critical care for their communities and their fearlessness and adaptability as entrepreneurs have enabled them to rise to the challenges of the pandemic.
We are proud to have been able to support them with the tools they have needed to connect with their patients and keep them healthy.
We look forward to working as a network administrator on behalf of qualified and eligible pharmacy network partners to support vaccination efforts in their communities when we enter the broader inoculation phase here in the United States.
In the Animal Health segment, our MWI business has moved swiftly to deliver innovative solutions to help our customer succeed in the current environment.
These include ensuring that MWI associates are accessible to our customers 24/7 and bolstering our customers' abilities to offer virtual services to a pet caring clients including innovative client communication solutions and home delivery services of quality medications and pet care products.
AmerisourceBergen's long-term focus on strong customer relationships, leadership in specialty distribution and manufacturing services and our continued ability to support innovation, has solidified our market leadership and business strength over the years.
From this position of strength, we recently took a significant step to power the next evolution of enhancing our ability to provide innovative and global healthcare solutions.
As we announced last month, we've entered into a strategic agreement with Walgreens Boots Alliance to acquire the majority of it's Alliance Healthcare business.
Through this acquisition, we will extend our distribution capability into key new markets; add in depth, breadth and reach, and strengthening our global platform of manufacturer and other value-added services.
With expanded scale and added services, our combined business will be able to better support pharmaceutical innovation through a global footprint of broad leadership and local expertise, which further positions AmerisourceBergen as the partner of choice.
The pandemic has heightened both our public and private partners' awareness of the value of a strong and capable pharmaceutical supply chain and Alliance Healthcare better positions AmerisourceBergen to meet its increasingly global nature as well.
As our global footprint expands, so do the importance of corporate stewardship, AmerisourceBergen understand and appreciate the value of being a responsible enterprise and our recent initiatives, including continue to advance our talent and culture, accelerating workforce diversity inclusion and further investing in and supporting our associates.
We remain vigilant in our efforts to protect the safety and well-being of our associates as the COVID waves effect various regions and teams and the importance of the work we're doing remain unwavering.
Driven by our purpose, we are maintaining our enhanced protection and safety protocols and appropriately compensating frontline associates.
Remote work is still the prevailing policy for all suitable roles, we are watching the situation closely as I'm sure all of you are doing and we'll continue to prioritize the health and safety of our associates.
Underscoring our efforts to support and empower our associates around the world, AmerisourceBergen was recently certified as a Great Place to Work company following the survey of employees around the world.
The survey reveals that our associates reported a consistently positive experience with peers among leaders and in job responsibilities.
We saw high scores for all indicators and our overall score was significantly higher in the typical U.S. based company.
Additionally, for the fourth year in a row, the Human Rights Campaign has recognize AmerisourceBergen as a Best Place to Work for LGBTQ equality awarding us a perfect score on the Corporate Equality Index due to our non-discrimination policies, equitable benefits, support of an inclusive culture and focus on corporate social responsibility.
AmerisourceBergen recognizes the business and personal importance of having a culture that is inclusive and equitable regardless of race, gender, sexual orientation or gender identity and for veterans and people with disabilities as well.
To this end, we are accelerating our diversity and inclusion strategy to become an even more diverse and equitable company.
Over the past months, we have conducted a comprehensive D&I organizational assessment, initiated a global D&I strategy to support among measured and engaged workforce, formed a D&I Council led by a senior C-suite executive and signed the CEO Pledge for diversity and inclusion, which is a commitment to increased diversity and support more inclusive work environments.
AmerisourceBergen strives to ensure that our associates feels a part of a fare inclusive and transparent workplace.
A diverse inclusive and equitable culture is a proven enhancer of business value and these initiatives will ensure that we have the right programs and tools in place in the short term, so we can become a leader in this area in the longer term.
Our success in advancing our progressive culture, one that is fuelled by the passion pride and dedication of our purpose driven associates, is visually embodied by our new brand, which we unveiled last week.
The new brand embodies a spirit of innovation for the design that is energizing, confident and inspiring, while also displaying our unity as an enterprise when we go to market.
As we continue to move our business forward, we remain committed to advancing a differentiated culture that inspires our associates, unites them and helps them develop and achieve their full potential.
Our business strength is a direct result of having engaged, passionate and dedicated associates and our focus on advancing our talent and culture remains a key strategic priority.
We have continued to execute across our business to help us deliver innovative solutions to our partners.
As AmerisourceBergen continues to involve, we are empowered by our purpose and we will build upon our strengths to drive growth across enterprise.
We will further strengthen our portfolio of solutions and customer relationships, enhance our specialty capabilities to support both upstream partners and downstream customers, continue to focus on execution and supporting innovation and enable positive outcomes globally by facilitating market access and supporting pharmaceutical innovation.
I continue to be inspired by, proud of and confident in our themes to rise to the many challenges and complexities that we face with courage and effectiveness.
By being united in our responsibility to create healthier futures, AmerisourceBergen is purpose driven and well positioned to create long-term sustainable growth.
My remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated.
Growth rates and comparisons are made against the prior year December quarter.
As Steve mentioned, we clearly had a strong start to our 2021 fiscal year with growth across our businesses.
As I said back in November, we entered fiscal 2021 with strong momentum and that clearly accelerated in the quarter as our teams executed it across the entire portfolio of AmerisourceBergen businesses.
Guided by our purpose, our teams worked diligently to support pharmaceutical innovation and facilitate patient access to vital medications.
AmerisourceBergen's key differentiators continue to provide a platform for value creation for all our stakeholders, help me provide key solutions for our partners, both upstream and down, to ultimately ensure patient health and well-being.
Throughout my tenure with AmerisourceBergen, I have shared my pride in being part of a company that is driven by purpose, focused on execution and unwavering and our efforts to strengthen our associate experience.
Our associates power our success and AmerisourceBergen continues to protect, support and invest in our talent.
Turning now to discuss our first quarter results.
First, I will review our adjusted quarterly consolidated results and our segment performance.
Second, I will cover the upward revision to our fiscal 2021 guidance.
Beginning with our first quarter results, we finished the quarter with adjusted diluted earnings per share of $2.18, an increase of 24%, primarily due to exceptional operating income growth across our businesses.
Our consolidated revenue was $52.5 billion, up 10%, driven by revenue growth in both the Pharmaceutical Distribution Services segment and Other, which includes our Global Commercialization Services & Animal Health businesses.
Gross profit increased 15% to $1.4 billion, driven by increases in gross profit in each operating segment.
In the quarter, gross profit margin increased 12 basis points from the prior year quarter.
This gross margin improvement is due to growth in a number of our higher margin businesses, and in particular, a significant increase in sales of specialty products.
The margin improvement is also due to the gross profit portion of the tailwind related to exiting the PharMEDium business and additionally, our reversal of reserve taken in the back half of fiscal 2020 associated with forecasted inventory value writedowns that did not materialize.
The PharMEDium comparison and the inventory writedown reversal contributed one-third of the 12 basis point gross profit margin improvement.
Consolidated operating income was $617 million, up $122 million or 25% compared to the prior year quarter.
This increase was driven by the increased gross profit in both the Pharmaceutical Distribution Services segment and our Global Commercialization & Animal Health Group, which I will discuss in more detail when I review segment level performance.
To support our revenue growth while protecting, supporting and appropriately compensating our frontline associates, operating expenses grew 8% to $810 million.
Operating expenses as a percent of revenue was 1.54% which is a 2 basis point decline from the prior year quarter.
Moving now to net interest expense, which increased $3 million to $34 million primarily due to a decrease in interest income resulting from a decline in investment interest rates.
Our effective tax rate was 22%, up from 21%, in the first quarter of fiscal 2020.
Our diluted share count declined modestly to 206.8 million shares.
Regarding free cash flow and cash balance, our adjusted free cash flow was $838 million in the first quarter.
This strong start to the year on cash flow, positions us well after the first quarter and we are on track with our adjusted free cash flow guidance for the year.
We ended the quarter with $4.9 billion of cash of which $1.1 billion was held offshore.
This completes the review of our consolidated results.
Now, I will turn to our segment results.
Beginning with Pharmaceutical Distribution Services, segment revenue was $50.5 billion, up 10%, driven by increased specialty product sales, including COVID-19 therapies, as well as growth at some of our largest customers and broadly across our businesses.
Segment operating income increased about 27% to $496 million with operating income margin up 13 basis points.
As a reminder, the exit of the PharMEDium business represented a $20 million tailwind to the segment's operating income, roughly half of which is in gross profit and the other half in operating expense.
Excluding the PharMEDium tailwind, segment operating income growth would have been up 20%.
The strong operating income performance was driven by continued positive trends across our robust portfolio of customers and broadly across our businesses and, in particular, a significant increase in sales of specialty products.
AmerisourceBergen's leadership in specialty distribution, led by the specialty physician services group, and our capabilities in supporting specialty sales into health systems continue to provide us the platform to deliver differentiated value for our partners through our scale, reach and expertise.
In the quarter, our specialty physician services group continued a strong growth as practices are prepared operationally to continue to treat their patients throughout COVID challenges.
Additionally, our health systems business had significant growth as we're helping to facilitate vital access to antiviral and antibody therapies for COVID-19 patients.
The fundamentals of the health systems business overall continue to be strong particularly as we are now also seeing increased biosimilar utilization in this customer segment.
While biosimilar utilization continues to be strongest and most impactful on the specialty physician side, we are encouraged to see growing adoption trends in health systems.
I will now turn to the Other segment, which includes businesses that focus on Global Commercialization Services & Animal Health, including World Courier, AmerisourceBergen Consulting and MWI.
In the quarter, total revenue was $2.1 billion, up 11%, driven by growth across the three operating segments.
Operating income for the group was up $17 million or 16%, primarily due to growth at MWI and World Courier.
MWI is benefiting from ongoing process initiatives and the strength of its customer relationships, particularly in the companion business where veterinarians are benefiting from increased pet ownership, increasing standards of care and adapting well virtual engagement and limited physical interaction.
World Courier has continued to differentiate itself as the provider of choice in global specialty logistics as their commercial customers navigate increased complexity, the need for cell and gene solutions grows and there is an increased utilization of direct-to-patient capabilities.
Additionally, I will note that World Courier's growth rate in the quarter was augmented by foreign currency exchange rate.
This completes the review of our segment results.
So I will now turn to our fiscal 2021 guidance.
This updated financial guidance does not include any contribution from the proposed Alliance Healthcare acquisition announced in January 2021.
As I've just outlined, AmerisourceBergen delivered exceptional growth in the first quarter and continues to expect positive trends across our business as we move further into fiscal 2021.
We are also updating other financial guidance metrics for fiscal 2021.
Revenue is now expected to be in the high single-digit percent growth range as we have seen better than expected growth in both Pharmaceutical Distribution Services and Other.
Next, operating expenses, we now expect operating expenses to grow in the mid to high single-digit percent range.
We remain committed to investing in, protecting and ensuring the safety and well-being of our associates, especially those on the front lines.
Turning now to operating income; we now expect to grow operating income in the high single-digit percent range.
This is a result of raising our pharmaceutical distribution operating income guidance to the high-single digit range, given the significant operating income growth in the first quarter and continued overall positive trends across the business.
It also reflects our improved expectation for operating income in Other, which we now believe will grow in the mid to high single-digit range as a result of positive trends in our Global Commercialization & Animal Health businesses.
Lastly, regarding shares outstanding.
Given the cash needs associated with the Alliance acquisition, we are narrowing our guidance from a range of 206 million to 207 million and we now expect to finish the year around 207 million shares outstanding.
All other financial guidance metrics for fiscal 2021 remain unchanged.
Regarding our fiscal second quarter earnings per share expectations, while we do not provide quarterly guidance, I will note that the March 2021 quarter will be impacted by a tough comparison to the March 2020 quarter, which added significant pull forward of sales associated with increased customer purchases at the onset of COVID-19.
In closing, our strong customer relationships, focus on execution excellence and commitment to innovation will continue to drive our business forward while enhancing our capabilities to serve our partners and their patients.
AmerisourceBergen is well positioned by our key differentiators and we are excited for how the Alliance Healthcare acquisition will build on our pharmaceutical centric strategy, expanding our reach and further strengthening our global platform for value-added services and solutions.
Our work around the acquisition remains on track and we look forward to welcoming the Alliance Healthcare team.
These past several quarters have proven the importance of pharmaceutical innovation and access and I have spoken in great detail about the resilience of AmerisourceBergen's business.
Clearly, our results and expectations show that the word resilience understates the strength of our business as our purpose driven teams are leveraging our capabilities and expertise to provide important value-added solutions to help contribute to positive patient outcomes globally.
We are making positive contributions to the people, planet and communities where we live and work by being responsible business and in our upcoming Global Sustainability and Corporate Responsibility Report, we will be providing an update on our commitments in these areas to show how our business practices align with many of the leading global sustainability frameworks.
We know that by doing business thoughtfully and with long-term perspective, AmerisourceBergen can drive sustainable growth, while creating value for all our stakeholders and fulfilling our purpose of being united in our responsibility to create healthier futures.
| q1 adjusted non-gaap earnings per share $2.18 excluding items.
updating its outlook for fiscal year 2021.
revenues of $52.5 billion for q1, a 9.7 percent increase year-over-year.
sees fy 2021 revenue growth in high-single digit percent range, up from mid-single digit percent range.
all other previously communicated aspects of co's fiscal year 2021 financial guidance and assumptions remain same.
|
Neil, you may begin.
We are fortunate to have some encouraging news in the macro environment that could provide a tailwind to our team's efforts across the last eight months.
Emerging consensus around the split government removes an area of uncertainty for business and local governments.
And Monday's announcement of a vaccine and other therapeutics, while not a panacea should ultimately be a catalyst for business and international travel.
It will take time to distribute and it will likely be several more months for large companies to encourage travel again, but there is more visibility today than there has been across the last few quarters.
This said, the hotel sector is still has plenty of wood to chop and the seasonally slower fourth and first quarter will make continued gains in RevPAR and reductions in cash burn more challenging.
We continue to plan for a sluggish recovery in 2021, gaining momentum in the back half, followed by a more robust growth in 2022 and 2023.
We are encouraged by the recent news, but remain razor focused on reducing cash burn and shoring up liquidity as we close out this challenging year.
I'm going to touch on operations and capital allocation before turning it over to Ash for a deeper dive on cash burn and liquidity planning.
Last March, we took immediate action to shore up our liquidity and mitigate expenses by temporarily closing hotels.
Our primary goal in the second and third quarter was to minimize cash burn while reopening our hotels.
We achieved this goal as we now have 37 of our 39 wholly owned hotels open and operational with the two remaining closed hotels under contract for sale.
This sets up our portfolio to capture incremental demand through the end of the year and to continue to gain market share during the early stages of the recovery in 2021.
Our ability to stay nimble and leverage our flexible operating model in close connection with our independent franchise operator allowed us to reopen our hotels in a timely and cost-efficient manner.
This relationship coupled with our cluster strategy to maximize revenues and generate marketing advantage and economies of scale has given us the opportunity to reduce our cash burn rates and breakeven levels and sets up our portfolio to generate cash flow earlier than our peers as we continue to navigate this recovery.
It has also yielded positive results over the prior few months.
Of the 28 comparable hotels that were open throughout the third quarter, 21 of these hotels broke even on the GOP line with nine achieving EBITDA breakeven levels.
Leisure travel remained strong post Labor Day.
Weekends at many of our resorts outpaced pre-COVID performance and even provided a base during the week as many travelers have been able to take advantage of remote working and learning, lower gas prices and limited weekend sports engagements and other social activities.
TSA data continues to improve sequentially week over week.
Drive-to resorts have been our strongest performers since the inception of the pandemic and that continued through the typically robust summer months.
Our Sanctuary Beach Resort was the best performing asset again during the third quarter, ending the period at 81% occupancy with a $570 ADR, which led to 16% RevPAR growth.
Success continued in October, despite worries that leisure travel would subside after Labor Day as the resort grew RevPAR by 22% aided by 55% ADR growth and 70% occupancy.
Down the California coast, the hotel Milo in Santa Barbara continued its momentum from the second quarter and finished the summer on a strong note with third quarter ADR in line with last year, aided by a very strong September, which saw 70% occupancy and 11% ADR growth.
Down in Miami in South Florida, the case count escalation in June and July led to beach closures, restaurant and bar restrictions and curfews which stifled demand all summer.
Since Labor Day, drive-to traffic began to return as Miami and Key West have opened beaches and have loosened restrictions on restaurants and bars.
We have been able to win market share and saw an occupancy bump of 1500 basis points versus August for our South Florida portfolio and that momentum continued into October, as our portfolio occupancy grew another 500 basis points for the month.
By the third quarter, we began to see Northeastern and Midwesterners flying to Key West and Miami despite COVID-19 concerns.
This pent-up demand has continued in the fourth quarter as we are seeing positive trends for our portfolio entering the peak travel season for South Florida.
Rates around the holiday week between Christmas and New Year's are already in line with last year and with a strong 30% occupancy already on the books across our South Florida portfolio, we believe demand will continue to pick up as we move through the holiday season.
Pre-COVID our resorts portfolio, all the drive-to from one of our gateway market clusters contributed 25% of our EBITDA.
In 2020, these hotels will be among our top cash flowing hotels.
75% of our portfolio remains gateway urban markets.
These markets have lost not only business, international and group travel but have very few attractions for leisure travelers until cities open back up.
Our teams have done an admirable job reducing cash burn and ramping to breakeven in this very low demand environment.
As we continue to reopen hotels across our markets, we saw a change in traveler walking through our doors.
During the summer, we moved from first responder business to our new normal traveler, elective health-care workers and patients, design and construction teams outfitting offices to become COVID-compliant, professional sports teams quarantining during their abbreviated seasons and personnel related to content and entertainment production on-site around the country as studios remain shut and even the occasional micro wedding or corporate buyout.
Traditional corporate travel didn't return with its usual force post Labor Day, however across our urban markets there were employees staying in our hotels to avoid mid-week commutes, smaller businesses utilizing hotel rooms for office day use and even corporate buyouts for smaller meeting space.
September and October have seen a continued increase in these unique travelers staying in our hotels.
We've been working with local universities, housing students at The Boxer in Boston allocating inventory at our Annapolis Waterfront Hotel approximate to the US Naval Academy and continuing to work with universities in many of our urban clusters for the upcoming spring semester by offering alternatives for the new housing protocols that are likely to persist through the end of the school year in 2021.
In New York we saw success around staycation packages in Brooklyn, production teams in Tribeca hosting virtual Fashion Week events, government census workers in White Plains and a pickup in higher rated corporate business from the leading financial services and consulting firms that stay at our Hyatt Union Square.
In California, our select service hotels in Sunnyvale housed relief business related to the wildfires while in Washington DC, our Capitol Hill Hotel has seen increased bookings from elevated Supreme Court and congressional activity.
On the West End in Washington, our St. Gregory successfully contracted with various media outlets for increased coverage leading up to the election last week.
We've expected that a lodging recovery is likely to be in lockstep with medical investments as it pertains to rapid testing, therapeutics and ultimately a widely distributed vaccination.
Recent developments point to a recovery year in 2021 and we believe the recovery will be most pronounced in our core markets, highlighted by Washington DC, which is a historically strong market following an election year.
New administrations bring jobs, increase lobbying on the hill, the likely return of higher rated foreign delegations and an overall increase in corporate and leisure travel.
The Washington DC market has been an underperformer during the past few years, but we believe that a new administration will spark growth to the region aided by the aforementioned catalysts, reduced supply and the reopening of the city's unique demand generators.
We've seen from prior years that the first quarter, following the election and January specifically, proved to be a very strong period in this market, whether it's an incumbent or a de novo president.
During President Obama's second inauguration in 2013, our portfolio generated 23% RevPAR growth during the quarter.
In the first quarter of 2017, following President Trump's inauguration, our portfolio RevPAR grew by 15% with 57% growth on the night of the inauguration.
The upcoming inauguration is leading to early reservations across our portfolio at rates we have not seen in Washington DC in many years.
We believe our unique portfolio in Washington spanning select service, independent and lifestyle and luxury is very well positioned to capture the increased demand to the market during the first quarter as well as throughout 2021.
The recovery in 2021 is not just predicated on favorable comps and increased travel but also on deteriorating supply.
We have already seen the headlines and consultant forecasts for New York City.
20% of New York's total hotel room count, about 25,000 keys could permanently close and every week we seem to be seeing this forecast come to fruition with another permanent closure.
New York City is dominating the headlines but there are corners of every market filled with distressed assets that were troubled to produce margin growth even before the pandemic.
These assets were functionally obsolete prior to the pandemic and their closures will improve the long-term supply picture in many of our markets.
The other side of the supply picture is the development pipeline.
Recent reports from Smith Travel have showed a large increase in the number of development projects that have moved from either the planning or final planning stages into either the deferred or abandoned buckets.
Industry experts believe this could equate to more than 13,000 rooms.
Year-to-date through September, 211 projects in the US representing 56% decrease in the pipeline over the same period last year.
These are staggering figures that could continue to increase as our industry works through the recovery and even mirror the great financial crisis when the supply pipeline declined from a peak of 212,000 rooms at the end of 2007 to 50,000 rooms in early 2011.
Before Ash takes a deeper dive into expense savings and burn rate reductions I want to spend a few minutes on our capital allocation strategy and sources of additional liquidity.
As a quick reminder we have announced accretive binding sales agreements on four assets in our portfolio with total expected net proceeds of $70 million.
We remain optimistic that these transactions will close but we have provided extensions to the buyers through Q1.
With today's release we announced a fifth disposition, the Sheraton Wilmington, Delaware.
We began this process in the summer and are very pleased with a relatively quick execution in today's environment.
New Castle County of Delaware is acquiring the hotel for an additional $19.5 million in proceeds.
This is about a 2% cap on 2019.
These first five transactions are all smaller, non-core hotels and we are pleased with the pricing within 10% to 20% of pre-COVID values and at a combined 21 times EBITDA multiple on 2019.
Last quarter we discussed exploring additional asset sales if we saw improvement in the transaction environment.
Across the last 90 days, even before the election or the vaccine, there has been a meaningful improvement in the availability of debt for higher quality, lower cash burn hotels.
In addition to private equity firms, there has been an increasing diversity of buyers, credible family offices, international capital and new domestic entrance to hospitality.
We assessed future sale candidates in our portfolio by triangulating buyer interest, capital requirements or age of hotel and expected growth rate.
The additional five hotels we launched for sale in September and October are emblematic of our portfolio and are highly sought after in this environment.
These simple hotels that have remained open throughout the pandemic are unencumbered of management and onerous labor contracts or are even unencumbered of brands and in some cases have assumable financing and are approaching break-even levels.
These characteristics do make these hotels more valuable as visibility increases.
We will see where values come out in the coming months and balance liquidity today with reversionary growth tomorrow.
But judging by early interest, we do expect to complete several more dispositions across the next couple of quarters.
At this time we view hotel sales as the lowest cost alternative for capital today as discounted hotel sales provide relatively quick liquidity and do not encumber our capital structure or permanently dilute our equity.
As you may know, the management and board of Hersha are among its leading shareholders and across this year we have continued to buy our common equity in the open market as we consider it a remarkable value for an exceptional portfolio.
We've constructed a portfolio with high absolute RevPAR, sector leading margins and minimal capex requirements for the foreseeable future, all in the most valuable markets in the United States with few if any encumbrances.
Our portfolio is both attractive to a vast buyer pool and still offers incredible operational and financial leverage to this recovery.
This quarter's successful completion of our hotel reopening strategy that began during the second quarter and concluded with the opening of our two Ritz Carltons would not have been possible without the close working relationship we have with our third-party independent operator.
Due to our focused service strategy we were able to comfortably restart our hotels with the confidence that we can attain GOP breakeven levels within 45 days of reopening.
Results this quarter at our open hotels validated this confidence as the number of hotels that achieved GOP breakeven levels rose over the balance of the quarter.
During July, 21 of our 28 open hotels broke even on the GOP line.
This increased to 22 hotels in August and 25 hotels in September.
Our team's expense saving and revenue management strategies also yielded positive EBITDA results for a portion of our open hotels over the course of the period.
Once again during July, nine of our 28 open hotels achieved break-even EBITDA levels which increased to 11 hotels in August and 16 in September.
Our operational strategy allows us to run our hotels on very lean labor models until demand reaches levels warranting additional staffing.
We're able to do this by applying various cost cutting strategies such as cross utilizing management personnel as well as outsourcing and job sharing within the hotel and across our clusters to lower our overall expense base.
As demand begins to pick back up and occupancy levels start to improve from these low levels, we will begin to phase back in staffing levels and other operating expenses in a very deliberate and calculated manner.
Our model allows us the flexibility to continue to operate our hotels at current staffing levels at our break-even occupancies approximating 35% all the way up to 55% and even 60% at some of our hotels.
With our open portfolio generating 37% occupancy in the third quarter, we estimate that revenue from the next 20 percentage points of occupancy gains should drop down to the GOP line at 75% to 80% flow-through, generating outsized margin gains and highlighting the operating leverage inherent in our portfolio.
We would anticipate seeing these gains in the first half of 2021 as the recovery progresses and margins should continue to see momentum as we get deeper into the recovery in the back half of 2021 and 2022.
We also anticipate labor force headwinds to be much more favorable over the next few quarters with reduced F&B and smaller ancillary service departments such as salons and spas.
This development along with the various expense savings implemented by our asset management and sustainability teams such as grab and go breakfast options, reduced in-room amenities, housekeeping optimization and utility savings should bolster our margins through the recovery and post pandemic.
We estimate that many of these changes will lead to a 10% reduction in housekeeping labor and our preoccupied room cost for items such as breakfast and in-room amenities.
We also believe that there are significant opportunities to reduce our non-housekeeping labor expense.
Through zero-based budgeting we've found ways to operate more efficiently and are confident that these savings will exist even when occupancies return to more normalized levels.
As an example, we currently maintain an average FTE count at our hotels of 21 employees versus 60 FTEs in February of 2020.
Employee counts will increase as occupancies rise but changes in our operating model should allow for additional labor cost reductions in the 5% to 8% range leading to sustainable margin expansion of 150 basis points to 200 basis points post-pandemic.
During the third quarter, steadily increasing occupancies and expense savings enacted during the prior quarter resulted in a reduction of our cash burn across the portfolio.
Our property level cash burn ended the second quarter at $3.4 million and decreased sequentially over the balance of the third quarter with a $2.5 million cash loss on property in July and ending September with a $1.7 million property level cash loss.
This brought total property level cash burn for the third quarter to $5.7 million, 25% below our forecast at the beginning of the period.
At the beginning of the pandemic, our corporate level cash burn which includes all hotel operating expenses, corporate SG&A and debt service was originally projected to be $11 million per month.
Our corporate level burn rate steadily declined over the six-month period ending in September reducing from $10.5 million for April to $6.6 million for July and ending the third quarter with a $5.9 million burn rate in September.
Our corporate cash burn for the third quarter totaled $18.2 million, 32% below our second quarter burn rate and 27% below our initial downside scenario forecast.
Our third quarter and October results which saw occupancies advance over the period despite precarious COVID-19 conditions and fear of a post Labor Day headwind for leisure travel resulted in breakeven levels that improved since our second quarter earnings call.
Based on this quarter's results and our forecast for the fourth quarter, we are comfortable that on a property level basis our entire portfolio breaks-even with a 65% RevPAR decline with occupancies approaching 35% to 40% and a 25% to 30% ADR decrease.
At the corporate level, our RevPAR breakeven occurs at a 45% RevPAR decline factoring in 55% to 60% occupancies at a 20% ADR discount.
Transitioning to an item that is cash flow positive.
After more than two years we've settled our insurance claim related to hurricane Irma which significantly damaged our two largest South Florida hotels the Cadillac and the Parrot Key hotel.
During the fourth quarter, we expect to collect insurance proceeds between $7 million and $8 million which will be recorded in our fourth quarter results.
During the third quarter we spent $5.4 million on capital projects bringing our year-to-date spend to $21.8 million.
We anticipate a significantly reduced capex load for 2021, primarily focused on maintenance capex and life safety renovation, roughly 40% below our 2020 spend.
Since 2017, we've allocated close to $200 million for product upgrades and ROI generating capital projects across more than 50% of our total room count.
Entering 2020 we had substantial built-in growth projections for our portfolio based not only on market demand trends but on these recent capital improvements driving new and loyal customers to our hotels which was unfortunately upended by the pandemic.
The majority of our rooms oriented transient hotels have been renovated to the tastes and preferences of today's traveler and with very minimal capex moving forward, our portfolio will experience very little disruption at the onset and through the recovery.
As of November 1, we've drawn $126 million of our $250 million senior credit facility and ended the quarter with $20.2 million in cash and deposits.
We remain very encouraged by the resiliency of the capital markets throughout this pandemic.
The markets remain open and available at every tier of the capital stack and we've seen the first signs of traditional asset level financing from commercial and regional banks looking to deploy capital into the sector.
We believe there is a significant amount of capital forming both on the debt and equity front that will be seeking attractive opportunities in lodging over the next several years and we're still in the early stages of this capital formation.
We continue to have an active dialogue with our bank group and we plan to accelerate conversations over the next few months regarding the parameters surrounding our covenant waiver test on June 30, 2021.
Until then our lines of communication with our bank group remain open and constructive.
We remain in constant contact with suppliers of the four assets that we announced earlier this year and we recently granted the buyer of the Dwayne Street hotel an extension before in the first quarter of 2021 and this resulted in our receipt of an additional deposit of $500,000 for the transaction.
As none of the buyers need material financing we remain confident these transactions will close in a timely fashion next year.
Over the past week we went under contract for sale for the Sheraton Wilmington in Delaware for $19.5 million and we've received a material hard deposit from the buyer.
We anticipate this sale will close before the end of 2020.
The proceeds from these five transactions will be utilized to pay down our debt and we plan to utilize any additional proceeds received from any of the five assets we currently have on the market for debt pay down and for additional working capital to bolster our liquidity.
As we enter the final months of this unprecedented year for our company and our industry, we look toward our pillars of strength to navigate our passport, our unique owner operator relationship which has yielded significant expense savings over the past nine months, our cluster strategy which maximizes revenues and economies of scale while capturing unique demand opportunities in our market and the more than 20 years of experience in the public markets as a team for Jay, Neil and I. All the while we continue to explore various opportunities to fortify our balance sheet, to give the portfolio extensive runway as we navigate toward stabilized demand over the next several years.
This concludes my portion of the call.
We can now proceed to Q&A, where we're happy to address any questions that you may have.
| suspended its full-year 2020 guidance.
|
Joining me on the call today are Gene Lee, Darden's CEO; and Rick Cardenas, CFO.
We plan to release fiscal 2021 second quarter earnings on December 18 before the market opens followed by a conference call.
And then Rick will provide more detail on our financial results and share our outlook for the second quarter.
As a reminder, all references to the industry benchmark during today's call refer to estimated Knapp-Track, excluding Darden, specifically, Olive Garden and LongHorn Steakhouse.
During our first fiscal quarter, industry same restaurant sales decreased 26%.
Given the ever-changing environment we continue to operate in, I am very pleased with what we accomplished during the quarter.
We are focused on four key priorities.
The health and safety of our team members and guests, in restaurant execution in a complex operating environment, investing in and deploying technology to improve the guest experience and transforming our business model.
The progress we made in these areas combined with our operating results, gave us the confidence to repay the $270 million term loan and reinstate a quarterly dividend.
Let me provide more detail on the four priorities.
First, the health and safety of our team members and guests remains our top priority.
Following CDC guidelines and local requirements, our teams continue to practice our enhanced safety protocols, including daily team member health monitoring.
We also continue to configure our dining rooms with social distancing that create a safe, welcoming environment, while maximizing allowable capacity.
A key part of this work is installing booth partitions to enable us to safely increase capacity where permissible.
At the end of August, we had completed installation in just over 500 restaurants in our total portfolio.
Operating in this environment adds another layer of complexity to an already complex operation, and I'm proud of the commitment our teams make every day to keep our guests and each others safe.
Second, we are laser focused on our back to basics operating philosophy to drive restaurant-level execution that creates guest experience, whether that's in our dining rooms, outdoors on our patios or in their homes, but it's not easy.
Executing at a high level is more complex today due to COVID-19 restrictions that vary by market.
Additionally, the constantly changing mix between on-premise and off-premise, plus expanded outdoor dining that is weather-dependent, leads to unpredictability in sales.
This is why the work we continue to do to streamline our menus and improve our processes and procedures is so important.
Moving complexity from our operations has allowed our restaurant teams to execute more consistently in this unique environment.
Our operators continued to deliver great guest experiences by displaying a high level of flexibility, creativity and passion every day, and I'm thrilled to see that reflected in our guest satisfaction metrics.
Third, we are continuing to invest in and implement technology to remove friction from the guest experience.
This includes providing multiple ways for our guests to order inside and outside the restaurant across our digital storefronts.
Additionally, we are deploying mobile solutions to make it easy for our guests to let us know when they have arrived to dine or pickup curbside order to go.
We are also expanding mobile payment options providing additional convenience for our guests.
For our three largest brands combined, more than 50% of our off-premise sales during the quarter were fully digital transactions where guest ordered and paid online.
Finally and most importantly, we transformed our business model.
Even with the sales declines we are experiencing, our restaurants continue to produce high absolute sales volumes.
Therefore, we made the strategic decision to focus on adjusting our cost structure in order to generate strong cash flows, while making the appropriate investments in our businesses.
This provides us a stronger foundation for us to build on sales as build on sales -- build upon as sales trends improve.
The first step in this process was to reimagine our offerings.
This resulted in simplified menus across the platform driving significant efficiencies in food waste and direct labor productivity.
Additionally, due to capacity restrictions, we significantly reduced marketing promotional spending along with other incentives we have historically used to drive sales.
We will continue to evaluate our marketing promotional activity as the operating environment evolves.
Finally, we have further optimized our support structure which is driving G&A efficiencies.
The results of all these efforts to transform our business model can be seen in the fact that we generated adjusted EBITDA of $185 million for the quarter.
Turning to our business segments.
Olive Garden delivered strong average weekly sales per restaurant of $70,000 while significantly strengthening our business model, resulting in higher segment profit margin than last year.
They were able to capitalize on simplification initiatives that strengthen the business model while making additional investments in abundance and value.
This work was critical to position Olive Garden to drive future profitable top-line sales as capacity restrictions ease.
Olive Garden same-restaurant sales for the quarter declined 28.2%, 220 basis points below the industry benchmark.
Overall, capacity restrictions continue to limit their top-line sales, particularly in key high volume markets like California and New Jersey where dining rooms were closed for the majority of the quarter.
In fact, restaurants that had some level of dining room capacity for the entire quarter averaged more than $75,000 in weekly sales, retaining nearly 80% of their last year's sales.
Given the limited capacity environment during the quarter, Olive Garden made a strategic decision to reduce their marketing spend as well as incentives and eliminate their promotional activity.
They will continue to evaluate their level of marketing activity as capacity restrictions ease.
Additionally, off-premise continue to see strong growth with off-premise sales increasing 123% in the quarter, representing 45% of total sales.
Finally, Olive Garden successfully opened three new restaurants in the quarter, which are exceeding expectations.
LongHorn had a very strong quarter.
Same-restaurant sales declined 18.1%, outperforming the industry benchmark by 790 basis points.
Their strong guest loyalty and operational execution helped drive their outperformance, while they also benefited from their geographic footprint.
In fact, same-restaurant sales were positive for the quarter in Georgia and Mississippi.
Additionally, the LongHorn team made significant investments in food quality and operational simplicity, which led to improve productivity and better execution.
They also took a number of steps to improve the overall guest -- the overall digital guest experience.
Off-premise sales grew by more than 240%, representing 28% of total sales.
Finally, LongHorn successfully opened two restaurants during the quarter.
The brands in our Fine Dining segment are performing better than anticipated.
While weekday sales continued to be impacted by a reduction in business travel, conventions and sporting events, we saw strong guest traffic on the weekends, and believe there will be additional demand as capacity restrictions begin to ease.
And lastly, our other business segment also delivered strong operational improvement with segment profit margin of 12.8%.
This was only 130 basis points below last year despite a 39% decline in same-restaurant sales.
Yard House's footprint in California is impacting same-restaurant sales in this segment.
Finally, I continue to be impressed by how our team members are responding to take care of our guests and each other.
The encouraging trends and performance we experienced toward the end of the fourth quarter continued into the first quarter of fiscal '21.
Furthermore, the actions we took in response to COVID-19 to solidify our cash position, transform the business model, simplify operations and strengthen the commitment of our team members helped build a solid foundation for the future.
These actions and our continued focus on pursuing profitable sales have resulted in strong first quarter performance that significantly exceeded our expectations.
For the quarter, total sales were $1.5 billion, a decrease of 28.4%.
Same-restaurant sales decreased 29%.
Adjusted EBITDA was $185 million.
And adjusted diluted net earnings per share were $0.56.
Turning to the P&L.
looking at the food and beverage line, favorability from menu simplifications more than offset increased To Go packaging costs.
However, beef inflation of over 7%, primarily impacting LongHorn, drove food and beverage expense 20 basis points higher than last year for the company.
Restaurant labor was 20 basis points lower than last year, with hourly labor as a percent of sales improving by over 350 basis points, driven by operational simplifications.
This was mostly offset by deleveraging management labor.
Restaurant expense, including $10 million of business interruption insurance proceeds related to COVID-19 claims submitted in the fourth quarter of fiscal 2020.
Excluding this benefit, we reduced restaurant expense per operating week by over 20% this quarter.
For marketing, we lowered absolute spending by over $40 million, bringing marketing as a percent of sales to 1.9%, 130 basis points less than last year.
As a result, restaurant-level EBITDA margin was 17.8%, 20 basis points below last year, but particularly strong given the sales decline of 28%.
General and administrative expenses were $10 million lower than last year as we effectively reduced expenses and rightsized our support structure.
Interest was $5 million higher than last year, mostly related to the term loan that was outstanding for the majority of the quarter.
And finally, our first quarter adjusted effective tax rate was 9%.
All of this culminated in adjusted earnings after-tax of $73 million, which excludes $48 million of performance-adjusted expenses.
These expenses were related to the voluntary early retirement incentive program and corporate restructuring completed in the first quarter of fiscal '21.
Approximately $10 million of this expense is non-cash and the remaining will be cash outflows through Q2 of fiscal 2022.
This restructuring resulted in a net 11% reduction in our workforce in the restaurant support center and field operations leadership positions.
It is expected to save between $25 million and $30 million annually.
We expect to see approximately three quarters of these savings throughout the remainder of fiscal '21.
Looking at our segment performance this quarter.
Despite a sales decline of 28%, Olive Garden increased segment profit margin by 110 basis points to 22.1%.
This strong profitability was driven by simplified operations, which reduced food and direct labor costs as well as reduced marketing spending.
LongHorn Steakhouse, Fine Dining and the other business segment delivered strong positive segment profit margins of 15.1%, 11.9% and 12.8% respectively despite a significant sales decline experienced in the quarter.
These brands also benefited from simplified operations, keeping segment profit margin at these levels.
In the first quarter, 68% of our restaurants operated with at least partial dining room capacity for the entire quarter.
These restaurants had average weekly sales per restaurant of $69,000 and the same-restaurant sales decline of 21.9%.
And while Olive Garden and the Fine Dining segment had fewer dining rooms opened than our average, these restaurants had the highest average weekly sales per restaurant of almost $76,000 and $90,000 respectively.
At the start of the second quarter, we had approximately 91% of our restaurants with dining rooms opened operating in at least limited capacity.
Now turning to our liquidity and other matters.
During the quarter, as we saw steadily improving weekly cash flows, we gained confidence in our estimated cash flow ranges.
We fully repaid the $270 million term loan we took out in April.
We ended the first quarter with $655 million in cash and another $750 million available in our untapped credit facility, giving us over $1.4 million of available liquidity.
We generated over $160 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 59% at the end of the quarter, well within our debt covenant of below 75%.
Given our strong liquidity position, improvements in our business model and better visibility into cash flow projections, our board reinstated a quarterly dividend.
The board declared a quarterly cash dividend of $0.30 per share.
This dividend represents 53% of our first quarter adjusted earnings after-tax within our long-term framework for value creation.
We will continue to have regular discussions with the board on our future dividend policy.
Our first quarter results were significantly better than we anticipated.
The actions we took to simplify menus and operating procedures and capture other cost savings, along with our choice to pursue profitable sales, have yielded strong results.
And now, with a full quarter operating under this environment, we have even better visibility into our business model.
We anticipate EBITDA between $200 million and $215 million and diluted net earnings per share between $0.65 and $0.75 on a diluted share base of 131 million shares.
In this environment, we continue to focus on building absolute sales volumes week-to-week and quarter-to-quarter.
This may result in variability in sales comparisons to last year as capacity constraints lead to less seasonality than we would have experienced historically.
Said another way, if capacity and social distancing restrictions remained similar to where they are today, it will be challenging to dramatically increase our on-premise average unit volumes.
Our second quarter is typically our lowest average unit volume quarter and our third quarter is typically our highest.
Additionally, as capacity restrictions ease and sales normalized, we will be able to reinvest to drive the top-line and a better overall guest experience.
Based on our strong business model enhancements, we now think we can get to our pre-COVID EBITDA dollars at approximately 90% of pre-COVID sales, while still making appropriate investments in our business.
| sees q2 earnings per share $0.65 to $0.75 from continuing operations.
q1 adjusted earnings per share $0.56 from continuing operations excluding items.
qtrly same-restaurant sales down 28.2% for olive garden.
darden restaurants -reiterated full year outlook for 35-40 net new restaurants and total capital spending of $250 to $300 million.
|
With me on the call today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO.
Actual outcomes may differ materially from those expected or implied.
Both are available on our website.
It's good to be with you today to review our first quarter results.
A solid start to what we expect will be a robust year of growth for Armstrong.
Overall in the quarter, we continue to see sequential improvement and the recovery of our markets.
Our total company daily shipping rate sequentially improved and accelerated through the end of the quarter and that acceleration has continued nicely into April.
This first quarter comparison is against the last of the pre-COVID market conditions as we saw very little impact from our -- from COVID in our base period.
In this first quarter of 2021, adjusted revenue of $253 million increased 2% from prior year, driven by sales of our 2020 acquisitions, which more than offset COVID-driven volume reductions in our organic business.
Adjusted EBITDA of $85 million declined 12% from the prior year driven by COVID-related volume declines, continuing investments in our growth initiatives and the resumption of spending that was deferred when the pandemic hit.
The Mineral Fiber business has started the year as we expected.
Our Mineral Fiber daily shipping rate posted a third consecutive quarter of sequential improvement as people return to work and markets continue to reopen.
Like-for-like pricing exceeded input cost inflation, top-line mix was positive as sales of our premium products continue to outpace the rest of our product offerings and channel mix was once again a headwind, although to a lesser extent driven by relatively strong sales in the lower price point home center channel.
Channel mix as we have experienced during the pandemic has already begun to subside and is not expected to be a headwind going forward.
The territory mix challenges we faced for the past few quarters have diminished as New York City and the other six major metro areas we've recently called out are essentially in line with the rest of the country.
On the operations side, our Mineral Fiber plants ran well with solid productivity despite the challenges created by the winter storms.
And our WAVE joint venture performed well and was able to price ahead of rising steel costs to deliver a strong first quarter.
Our architectural specialty business delivered solid top-line growth of 25% versus prior year quarter driven again by our 2020 acquisitions of Turf, Moz and Arktura.
A real highlight in the quarter was the acceleration in order intake with the sequential organic order intake at a record level that's resulted in a stronger-than-expected backlog.
We continue to be encouraged by our win rates on projects and our ability to differentiate our offering versus our competition.
Given our strong backlog, we remain confident in delivering our 2021 sales outlook of more than 30% growth.
In the quarter, we continued our investment in architectural specialties to further extend our capabilities and our capacity to support our expectation of continuing strong growth in this segment.
Integration of our three new acquisitions continues to go well and I remain excited by the potential for incorporating their technology and design capabilities across the Armstrong platform.
Our acquisition pipeline is robust and continues to grow, and we have the balance sheet, liquidity and appetite to execute additional acquisitions and alliances.
In terms of the overall macroeconomic environment and marketplace conditions, markets have improved and are showing signs of gaining momentum.
I am encouraged by the trends we are seeing in the data and by the tone of the conversations with our customers and distribution partners.
Bidding activity continued to improve through the quarter and more projects delayed last year are being released.
GDP estimates are being revised upwards, which is a positive leading indicator for increasing renovation activity.
CEO confidence is rising and return-to-office statistics are improving signaling a desire for an expectation of return to the marketplace.
There's a strong desire to get students and teachers back in the classroom, where they can be most productive and to get work teams back together, so they can be most effective in collaborating, innovating and networking.
These trends along with the potential for trillions of dollars in government spending on infrastructure, including spending specifically targeted for renovating schools is creating greater optimism and a more favorable economic backdrop.
Along with stronger economic outlook inflationary pressures are ramping up.
The raw material most impacted in our operations thus far has been steel used primarily at our WAVE joint venture in the manufacturing of our suspension systems.
As a result, beginning back in December, we have implemented five price increases totaling more than 40%.
It's been a challenging body of work for both our sales teams and our distribution partners to manage, but they have performed well and as evidenced by WAVE's first quarter results.
We are also experiencing rising input and freight costs in our Mineral Fiber and Architectural Specialties segments.
As a result, we have announced a heavier-than-normal 10% price increase on Mineral Fiber products and pulled the effective date up to May, earlier than normal.
This is on top of the implemented February increase of 7%.
In Architectural Specialties, we have also increased pricing on standard products and are adjusting our quoting processes on custom projects.
With these actions, I remain confident that we will once again deliver like-for-like price realization greater than input cost inflation.
Overall, both segments are operating at a high level.
We have fortunately not experienced any supply chain disruptions, allowing for outstanding service levels.
And because of our recent digitalization initiatives, we are staying more closely connected to our customers and partners than ever before supporting a strong project backlog position.
And our teams are executing well on our price initiatives to stay ahead of inflation.
So with this healthy state of operation, a solid first quarter result and our market outlook for the remainder of the year, we are reiterating the full year 2021 guidance we provided in February.
Today, I will be reviewing our first quarter 2021 results and our guidance for the full year.
On Slide 4, we'll begin with our consolidated first quarter results.
Adjusted sales of $253 million were up 2% versus prior year.
These adjusted sales include approximately $700,000 of purchase accounting adjustments related to our 2020 acquisitions.
This is the last quarter for this adjustment.
Adjusted EBITDA fell 12% and EBITDA margins contracted 520 basis points.
As Vic stated earlier, this contraction was expected given the pressure that persists this quarter from COVID-related demand declines, the investments we continue to make in our growth initiatives and the fact that we have reinstituted the cost we temporarily cut last year.
Furthermore, as a reminder, when you look at our adjusted EBITDA reconciliation in the appendix on slide 12, Q1 of 2020 earnings as reported were significantly impacted by our Q1 pension annuitization.
Adjusted diluted earnings per share of $0.84 were 23% below prior year results.
This result includes $6 million or $0.09 of amortization expense related to our 2020 acquisitions.
Adjusted free cash flow declined by $13 million versus the prior year.
Our balance sheet remains in a strong position as we ended the quarter with $397 million of available liquidity, including a cash balance of $122 million and $275 million of availability on our revolving credit facility.
While net debt of $587 million was $43 million above Q1 2020 results, our net debt-to-EBITDA ratio of 1.9 times as calculated under the terms of our credit agreement remains well below our covenant threshold of 3.75 times.
We have considerable headwind in this measure.
In the second quarter, we repurchased 126,000 shares for $10 million or an average price of $79.60 per share.
Since the inception of our repurchase program in 2016, we have bought back 9.9 million shares at a cost of $616 million for an average price of $62.57 per share.
We currently have $584 million remaining under our repurchase program, which expires in December 2023.
Slide 5 summarizes our Mineral Fiber segment results.
In the quarter, sales declined 5% versus prior year due to the impact of COVID.
Mineral Fiber shipments exited the quarter on a positive note with March shipments flat to prior year on a rate-per-day basis.
Through Friday, April's month-to-date daily ship rate is up 58% versus prior year and higher than 2019.
The positive like-for-like pricing and favorable product mix continued.
But as Vic mentioned channel mix was a headwind in the quarter and affected the fall-through rate.
We expect this will be the last quarter we face this channel mix fall-through rate headwind.
Mineral Fiber segment adjusted EBITDA was down 10% as a result of the COVID-driven volume declines, SG&A spending to support our growth of investments and the reinstitution of the 2020 temporary cost reductions.
The Mineral Fiber plants ran well and drove productivity that fell through to the bottom line.
Input cost inflation was temporarily offset by inventory valuations, but inflation is clearly ramping up and driving our proactive pricing actions.
As Vic mentioned, WAVE has been pricing out ahead of rising steel costs.
Moving to our Architectural Specialties or AS segment on Slide 6.
Adjusted sales grew 25% versus prior year were $13 million as the 2020 acquisitions of Turf, Moz and Arktura contributed $17 million in the quarter and more than offset COVID-driven organic sales decline of $4 million.
EBITDA for our AS segment declined $3 million as EBITDA contributions from the 2020 acquisitions were more than offset by AS organic performance.
Sales for our AS organic business continue to be lumpy as projects were delayed out of the first quarter and we made growth investments in both capacity and capability to support our top line expectations for AS.
We remain confident in our sales guidance for the AS business as a result of the favorable trajectory of order intake in the first quarter that Vic mentioned.
As sales ramp up throughout the year, we expect EBITDA margins to improve.
Slide 7 shows drivers of our consolidated adjusted EBITDA results for the quarter including a breakout of the impact from our 2020 acquisitions.
Sales from our acquisitions essentially offset organic volume declines.
AUV was a positive contributor driven by like-for-like pricing in the Mineral Fiber segment, but was offset by higher SG&A.
Slide 8 shows adjusted free cash flow performance in the quarter versus the first quarter of 2020.
Cash flow from operations was down $13 million driven by lower earnings.
Keep in mind that the first quarter is typically our weakest for free cash flow generation as we build inventory to service the strong summer demand period.
We remain confident that we will deliver the 19% free cash flow margin that we have guided too for the year.
Slide 9 summarizes our guidance for 2021.
We are reiterating our overall expectations to grow sales 10% to 13%; adjusted EBITDA 9% to 13%; adjusted earnings per share 5% to 15%; and deliver free cash flow yield of 19%.
April is off to a good start and we are optimistic with the trends developing in the second quarter.
It is too early to make any adjustments to our annual guidance and we will provide an update on our guidance in July when we have more data.
Slide 10 reiterates the seasonality we expect for sales in 2021.
This is not something we typically share as our seasonality is usually very consistent year-to-year.
However, given the disruptions experienced in 2020, the seasonal pattern of our year-on-year sales will be unusual in 2021, so we've included this page to provide additional insights.
In conclusion, I remain positive about the outlook for 2021, with an improving health and economic backdrop, an evolving portfolio of healthy spaces products, and new digital tools and capabilities, Armstrong is well positioned to advance our value creation model in 2021.
Before we get to some Q&A, I want to touch on a few important initiatives in the company namely ESG, Healthy Spaces, and our new digital platform Kanopi by Armstrong.
On our last call I mentioned that, ESG would be an area of focus for us in 2021 and beyond.
As we build on our history of community engagement and corporate responsibility, it's increasingly important to all our stakeholders and it has a natural fit with our mission, our history, our culture and our strategy.
As many of you have seen earlier this month, we launched a redesigned sustainability section of our website that reflects our three pillars of focus: People, planet and product and establishes our 2030 goals in these areas.
In addition, work is under way and on track to complete our first sustainability report this summer.
This comprehensive report will address the needs of GRI, SASB and TCFD.
And because of the importance of this work, I want to take a moment and recognize the great deal of effort and commitment by our teams that has gone into capturing our achievements thus far, baselining our opportunity for improvement and to developing meaningful long-term goals.
More to come on this total effort as we progress along this important journey, which aligns well with our strategic emphasis on Healthy Spaces.
As Healthy Spaces continues to be a focal point in economic recovery, ceilings are becoming increasingly more relevant.
As the capstone to an interior space, ceilings are critical for managing air flow and providing for optimal ventilation, as well as delivering acoustical performance in design aesthetics.
These trends are revitalizing the ceilings category and making this category more relevant for the current and future need of healthy indoor spaces.
And of course, this suits Armstrong well.
As the longtime category leader, Armstrong is becoming recognized as a thought leader on the importance of holistic space planning, design and construction, and the impact this approach can have on the confidence and well-being of people, while they're in doors, which is where we spend a large majority of our time.
We believe that the growth investments we've made in 2020 will bear fruit in 2021, with gains from new Healthy Spaces solutions and our new digital capabilities.
Our product innovations are on target for what a post pandemic market will demand.
Healthy Spaces is much more than an event-driven opportunity.
It's here to stay.
Healthy Spaces has always been important, but the pandemic has forever changed the definition of healthy and our health and safety expectations for indoor spaces.
Architects, designers, facility managers, business owners are all looking for solutions that bring people back into commercial spaces and make them more suited for future use.
As offices dedensify and expansive collaborative space has become the norm, the need for acoustical performance in ceilings will only increase, as we -- as will the need to better clean and manage air flow.
Ceilings are central to providing these solutions.
Our 24/7 defend family of products including AirAssure, CleanAssure and VidaShield ceiling solutions are designed specifically to help improve air quality and ventilation sustainably.
What's encouraging is that despite being launched just five months ago, 24/7 defend products have been sold into all of our core sectors: office, education, healthcare, retail and transportation.
This clearly demonstrates the broad-based opportunity for Healthy Spaces.
These product innovations timed for the Healthy Spaces catalyst coupled with our new digital platform of Kanopi by Armstrong, positions Armstrong well to capture the evolving market recovery opportunity.
Launched earlier this year, kanopi by Armstrong that's what a small K is online at kanopibyarmstrong.com.
Kanopi utilizes artificial intelligence and machine learning to provide early access and enhanced visibility to a large part of the market opportunity, we were previously unable to efficiently track.
This technology is allowing us to influence an Armstrong solution, and is making purchasing easy.
Kanopi provides facility owners and managers an end-to-end solution, including diagnostic tools, consulting and pre-certified installation services.
Online consumer-friendly and fulfilled by our best-in-class distribution network, kanopi is tapping into pent-up renovation demand in smaller scale commercial spaces and driving Mineral Fiber volume growth.
Early results are encouraging.
We are seeing growth across all our critical metrics website traffic orders, order value and sales.
To date, each month has been significantly better than the last, and I expect this will continue throughout the year.
Again, we are encouraged by the improving market conditions and the increasing relevance of the ceiling category.
And we are especially excited about the market opportunities ahead that Armstrong is so well positioned to capture that will enable us to deliver on our commitment, to deliver strong results for our shareholders, and on our mission to make a positive difference by creating healthier spaces, where we live work learn heal and play.
| maintaining 2021 guidance: net sales of +10% to +13% and adjusted ebitda of +9% to +13%.
|
Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.
Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
These non-GAAP financial measures should be read in conjunction with our GAAP results.
Yesterday, we reported record earnings of $0.76 per share compared with $0.74 in the prior year's quarter and $0.67 sequentially.
The fourth quarter of 2020 included cumulative adjustments to compensation and benefits and income taxes that lowered our compensation to revenue ratio and effective tax rate, respectively.
Revenue was a record $116.6 million for the quarter compared with $109.8 million in the prior year's quarter and $111.4 million sequentially.
The increase in revenue from the third quarter was primarily attributable to higher average assets under management, partially offset by lower performance fees when compared with the third quarter.
Our implied effective fee rate was 57 basis points in the fourth quarter compared with 59 basis points in the third quarter.
Excluding performance fees, our fourth quarter implied effective fee rate would have been 56.3 basis points, and our third quarter implied effective fee rate would have been five point -- 56 basis points.
Operating income was a record $49.4 million in the quarter compared with $47.4 million in the prior year's quarter and $44.2 million sequentially.
Our operating margin increased to 42.4% from 39.6% last quarter.
Expenses were essentially flat compared with the third quarter as lower G&A was offset by higher expenses related to distribution and service fees as well as compensation and benefits.
The decrease in G&A was primarily due to lower professional fees and a reduction in virtually hosted conferences.
The increase in distribution and service fee expense, which as noted earlier, excludes the cost of our new closed-end fund, is primarily due to higher average assets under management in U.S. open-end funds.
And the compensation to revenue ratio for the fourth quarter was 35% lower than the guidance we provided on our last call.
The decrease was primarily due to an adjustment to reflect actual incentive compensation to be paid.
For the year, the compensation to revenue ratio was 36.1%.
Our effective tax rate was 25.8% for the fourth quarter, which included an adjustment to bring the full year rate to 26.65%.
The lower full year tax rate was primarily due to the relationship between a consistent amount of permanent differences relative to higher-than-forecasted pre-tax income.
Our firm liquidity totaled $143 million at quarter end compared with $201.9 million last quarter.
Firm liquidity as of December 31 reflected the payment of approximately $60.2 million for costs associated with our new closed-end fund and a special cash dividend in December of approximately $47 million or $1 per share.
Over the past 11 years, we have paid a total of $14 per share in special dividends.
And we remain debt-free.
Assets under management totaled a record $79.9 billion at December 31, an increase of $9.4 billion or 13% from September 30.
The increase was due to net inflows of $3.9 billion and market appreciation of $6.4 billion, partially offset by distributions of $859 million.
Bob Steers will be providing an update on our flows and institutional pipeline of awarded unfunded mandates.
Now I'd like to briefly discuss a few items to consider as we begin the new year.
With respect to compensation and benefits, we expect to balance anticipated revenue growth from year-end assets under management that exceeded our 2020 full year average assets under management by about 15%, with our focus on controlled investment in order to maintain our industry-leading performance, broaden our product offerings and expand our distribution efforts.
As a result, we expect that our compensation to revenue ratio will decline to 35.5% from the 36.1% recorded in 2020.
Continuing with the theme of investing in our business, we expect G&A to increase by about 6% from the $42.6 million we recorded in 2020.
After finishing last year 8% below 2019, which was largely driven by lower travel and entertainment and a reduction in hosted and sponsored conference costs as a result of COVID conditions, we intend to make incremental investments this year in technology, including the implementation of new systems, cloud migration and upgrades to our infrastructure and security as well as in global marketing, focused on hosting virtual conferences and expanding our digital footprint.
We also expect that travel and entertainment costs will increase as conditions begin to return to normal.
We expect that our effective tax rate will be 27.25% in 2021.
And finally, we will have earned a full quarter and full year of fees from our new closed-end fund.
And so all things being equal, we expect our implied effective fee rate, excluding performance fees, will increase by about one basis point.
Today, I will review our investment performance and provide some perspective on how our largest asset classes are positioned for 2021.
The markets were ebullient in the fourth quarter as investors continued to look beyond the valley of the pandemic, encouraged by progress with the vaccine and anticipating a potential economic recovery, relieved by clarity on our new administration and government and supported by record monetary and fiscal stimulus.
The macro environment in 2020 was unprecedented with the Fed's balance sheet increasing by over 75%, the budget deficit reaching the highest level since World War II, money supply growing 25% and negative yielding debt reaching $18 trillion globally.
Although we had some of the best relative performance ever in 2020, our asset classes, except for preferreds, lagged their market counterparts meaningfully.
Summarizing our performance at a high level, preferreds performed competitively within fixed income.
U.S. and Global REITs and infrastructure significantly trailed the technology-led performance in stocks.
And certain of our strategies with energy allocations underperformed due to concerns about the secular decline in the demand for oil, considering the growing focus on renewables.
Looking at our performance scorecard, in the fourth quarter, five of nine core strategies outperformed their benchmarks.
For the last 12 months, six of nine core strategies outperformed.
As measured by AUM, 84% of our portfolios are outperforming on a 1-year basis, an improvement from 70% last quarter, mostly due to our preferred portfolios.
On a 1- and 3-year basis, 99% are outperforming, which was consistent with last quarter.
Preferreds returned 4.6% in the fourth quarter.
We outperformed in both our core and low-duration preferred strategies.
After a brief stretch of underperformance, we've now outperformed for three consecutive quarters.
Our 12-month figures are beginning to turn positive across our accounts, which led to the improvement in our 12-month outperforming AUM.
While our relative performance was mixed in 2020, we outperformed all peers.
Taking stock of the critical factors for preferreds, unprecedented monetary stimulus has helped to compress credit spreads to near record low levels.
Credit quality should benefit as the recovery progresses.
With 2020 elections over, the expectation for more fiscal stimulus, and potentially, with the bottoming of inflation, treasury yields may be transitioning from declining to rising.
As a result, companies are taking their queue from markets and issuing significant amounts of preferreds at a very low cost of capital.
Taken together, these factors lead us to expect lower returns from preferreds, and we are currently suggesting that investors consider our low-duration strategy.
With that as a starting point, we believe that conditions later in 2021 and 2022 may create good entry points for these asset classes as the vaccine continues to be distributed, businesses reopen and recovery brings back the more cyclical real estate and infrastructure subsectors that have been disproportionately hit.
In the fourth quarter, infrastructure returned 8.4%, which lagged the global stock index return of 14.8%.
While we underperformed our benchmark in the fourth quarter, we exceeded our excess return target for the full year.
Assessing the infrastructure universe's sensitivity to the economic situation and pandemic, we believe that 9% benefits from secular trends, 50% is relatively unaffected by the economy and pandemic, 20% is directly sensitive to the economic recovery, and 21% will be reliant on successful penetration of the vaccine.
Key investment themes for infrastructure include digital transformation of economies, including 5G deployment; decarbonization and development of renewable power; and the potential for recovery in travel.
We continue to see adoption of infrastructure allocations with asset consultants and institutions.
With the new administration and potential for additional fiscal stimulus via infrastructure, we also believe that wealth advisors may have more interest as well.
In fact, our closed-end fund, UTF, is now trading at a premium to its NAV, indicating investor demand and anticipation of recovery.
In the fourth quarter, U.S. real estate returned 8.1% compared with the S&P 500, which was up 12.1%, and global real estate returned 13.2%.
For the year, we outperformed our benchmarks in all strategies by region and style and by amounts that exceed our excess return targets across the board.
In terms of where real estate is headed, all eyes are on the vaccine and the timing of the reopening of the economy.
Currently, some sectors such as apartments are seeing stabilization with rents flattening out, which is a key step in the recovery progression.
The secular winners such as cell towers, data centers and industrial continue to have great fundamentals.
Probably, the biggest unknown relates to return-to-office dynamics and the proportion of occupancy that may be permanently impaired.
Broadly speaking, lenders have been kicking the can down the road, but banks are now beginning to feel pressure to address problem loans.
While pricing transparency for many sectors is opaque, we expect transactional activity to pick up as the economic recovery takes hold.
Overall, on most metrics, REITs are very cheap, as cheap as they were in the depths of the global financial crisis in 2009.
As the recovery unfolds, considering how much REITs have lagged, we would expect a catch-up in performance.
I also want to mention that our real assets multi-strategy portfolio had very good relative performance in 2020, outperforming by 200 basis -- 240 basis points for the year, which puts us in good position with investors who are looking for inflation protection.
Looking backward over a period of low inflation, investors had not felt a need for this portfolio, which includes real estate, infrastructure, resource equities, commodities and short-duration credit.
However, it has the highest inflation sensitivity of all of our strategies, and we are seeing increased interest in inflation protection, perhaps no surprise considering the deficit and monetary statistics cited earlier.
As Matt mentioned, allocating resources to our investment department is always a priority.
This past year has been particularly gratifying as we continue to see the growing return on investments we've made over the past five years in our people, IT, processing strategies and data and quantitative resources.
One example is our transition of U.S. REIT team leadership that we announced in the fourth quarter.
Our current head, Tom Bohjalian, will be retiring in the middle of this year, and our succession plan has been put in place with Jason Yablon assuming leadership in partnership with Matt Kirschner.
It's hard to imagine replacing as a strong a leader and investor as Tom.
But in the spirit of continuous improvement, we expect Jason to give Tom a run for his money.
We'll continue to build the team for depth and succession.
We will never be complacent on performance and innovation, and we will continue to drive our Alpha Mining initiatives.
Last quarter, I noted that we have a stable of -- track record accounts for strategies that have been developed over the past three years, ranging from existing strategy extensions to new ideas generated by our investment teams.
All but one outperformed benchmarks last year.
We'll be adding more track record accounts in 2021, including one in renewables and clean energy.
Our challenge will be to convert these investment ideas into investor allocations.
Our recent hire of Greg Bottjer from Nuveen, who heads Global Product Strategy and Development, will help us bring some of these strategies to market as well as map out real asset strategy extensions for the next phase of growth.
Overall, I'd say the state of our investment department is strong.
And we are optimistic about our ability to capitalize on the investment opportunities that are expected to come along with a post-pandemic economic recovery.
Let me start by stating the obvious.
2020 was a year that all of us would like to forget.
The one-two punch of COVID and political and social upheaval has had a devastating impact on our culture and economy, and we're not out of the woods quite yet.
In contrast to the unprecedented challenges that we faced last year, U.S. equity markets posted remarkably positive returns led by the COVID beneficiary plays as demonstrated by the strength in the FAANG and related stocks, as Joe already touched on.
While most active managers continued to battle the dual challenges of declining fees and net outflows, the equity markets offered them a reprieve with the S&P 500 and NASDAQ up 16.3% and 43.6%, respectively, last year.
While alternative income strategies such as preferred securities also performed well, delivering returns in high single digits, most real asset strategies, notably real estate and infrastructure, did not.
As Joe noted, global and U.S. real estate securities indices actually declined by 9% and 5.1%, respectively, while global listed infrastructure indices also fell by 4.1%.
It's a point of pride for us that unlike our peers in the industry that benefited from market appreciation, we faced significant market headwinds last year, and yet, still generated industry-leading organic growth.
Importantly, our growth was broad-based and -- with almost every region, strategy and channel contributing to record-breaking results.
We ended the quarter with record assets, as Matt said, of $79.9 billion.
Assets under management in each of the open-end fund, closed-end fund and advisory channels also ended the year at record levels.
In the quarter, gross inflows were a record $7.3 billion and net inflows contributed $3.9 billion.
Virtually, all the organic growth in the quarter was derived from the wealth channel.
Our confidence in the new generation of closed-end funds paid off in the quarter, and we added $2.1 billion of net new assets through the IPO of our Tax-Advantaged Preferred Securities and Income Fund.
Although not a record, our open-end fund channel registered $1.7 billion of net inflows, driven mainly by preferred securities and U.S. real estate strategies.
Notably, each of the RIA, BD, DCIO and Bank Trust verticals generated positive net inflows in the quarter.
Our non-U.S. open-end fund showed modest improvement, albeit from low levels, with net inflows of $41 million in the quarter.
We are continuing to build out our EMEA wholesale distribution team and fully expect that these nascent positive trends will improve.
Consistent with more recent trends, Japan subadvisory saw net inflows of $83 million before distributions and $293 million of net outflows after distributions.
And it was a quiet quarter for subadvisory ex Japan with $10 million of net inflows.
While the headline results for the advisory channel of $101 million of net outflows was disappointing, the underlying trends continue to be strong.
five new mandates totaling $297 million, combined with $282 million of inflows from existing clients, contributed $579 million of gross inflows.
Offsetting these inflows was an unexpected $301 million global real estate outflow, stemming from the termination of a relatively new institutional account, along with a global listed infrastructure termination totaling $299 million.
We do expect the balance of the terminated global real estate account of approximately $960 million to be withdrawn in the next quarter or 2.
Lastly, the quarter ended with a record-setting pipeline of $1 billion, but unfunded mandates of $1.7 billion.
The quarter began with a $1.2 billion pipeline.
$400 million was funded in the quarter, and another $280 million has been deferred due to funding uncertainties.
New awards totaled $1.1 billion.
These new awards were diverse both by strategy and region.
Demand for our strategies, especially real assets remained strong, driven by relative performance, attractive valuations and rising concerns regarding future inflation expectations.
As you know, in recent years, our overarching goal has been to achieve positive flows in each of our core strategies and in every channel and region simultaneously.
To accomplish these results, we have invested continuously in our investment teams, IT, existing and new channels of distribution, innovative new investment strategies, and most importantly, in our people and culture.
So while 2020 was a terrible year in so many ways, it was also a year to be proud of at Cohen & Steers.
All of our teams came together under crisis conditions to deliver a cascade of record results.
For the full year, firmwide gross sales were $27.4 billion, which exceeded the prior record achieved in 2011 of $17 billion by 61%.
Open-end fund gross sales of $17.6 billion were 41% above the prior record, and closed-end fund sales of $2.7 billion similarly blew by the prior record by more than double.
Even in the transition year for us in the U.S. institutional market, our advisory channel recorded sales of $4.3 billion, which was more than 100% better than the prior -- the record set in 2018.
Net inflows last year also set a record at $10.8 billion.
While this was only modestly above the prior record set in 2011, it highlights the important progress that we've made in diversifying our sources of organic growth.
In 2011, net inflows were $10.7 billion.
However, subadvisory inflows from Daiwa Asset Management contributed 81% of that amount in one single strategy.
In contrast, last year, six strategies across open-end funds, closed-end funds and advisory contributed $5.4 billion, $2.6 billion and $1.6 billion of net inflows, respectively, and each setting individual channel records and accounting for almost 90% of firmwide totals.
Achieving these results despite significant market declines for most of our strategies is extraordinary and bodes well for the future.
Strong investment performance in our core strategies has helped us to gain significant market share from our active peers and even passive alternatives.
Seeding and launching innovative new strategies, such as low duration and tax-advantaged preferred securities, next-generation real estate and digital infrastructure has been well received, and our product pipeline is robust.
In addition, expanding and improving the delivery of our strategies through the launch of usage funds, CITs, SMAs and closed-end funds has materially broadened our distribution reach and opportunities.
Lastly, our focus on improving underperforming distribution channels such as U.S. Advisory is starting to pay dividends.
Maintaining the current level of organic growth will not only require a continuation of industry-leading investment performance but also the development of the next generation of innovative real asset and alternative income strategies to complement our existing lineup.
We believe that in the current market cycle, a significant shift in asset allocations into real assets, seeking to capitalize on depressed valuations and the potential to hedge against unexpected inflation is taking place.
Current and prospective clients are looking to us to implement their strategies through both listed and private markets.
In response to our clients' needs and to maintain our leadership position in real assets and alternative income strategies, we plan to expand our opportunity set and related capabilities to include non-traded equity and fixed income investments.
In addition, an important point of differentiation for us will be the ability to deliver all of our capabilities through strategically allocated and bespoke solutions.
As always, we're committed to invest as necessary to drive our long-term growth.
With that, I'd like to ask the operator to open up the floor to questions.
| cohen & steers inc - diluted eps, as adjusted, of $0.76 for the fourth quarter.
cohen & steers inc - net inflows of $3.9 billion for the fourth quarter.
cohen & steers inc - quarter end aum of $79.9 billion.
|
In 2020, we had a terrific year despite an extremely challenging operating environment.
We delivered extraordinary results through disciplined execution and resilience.
I am extremely proud of our EMCOR team.
I don't think any of us could have imagined this high level of performance when we started to understand the impact of COVID-19 on our operations in March of 2020.
In 2020, we had $8.8 billion in revenues and set records on an adjusted basis for earnings per diluted share of $6.40, operating income of $490 million and operating income margin of 5.6%.
We also had record operating cash flow of $806 million.
Mark's going to cover all the financials in much more detail and especially the key components of our cash flow performance in his financial commentary, inclusive of the fourth quarter and full year 2020 performance.
We delivered these stellar results because we have diversity and demand for our services.
And we have end markets that have proved resilient and have provided us with opportunities to execute well for our customers.
These results are a testament to our skilled employees and our subsidiary, segment and corporate leadership, who kept focused and resolute through the ever-changing environment in 2020.
Across our company, we worked hard to keep our employees safe, and it was our number one priority throughout the year.
We innovated and found ways to maintain and even improve our productivity.
We became leaner and even more expeditious in our decision-making.
And we're able to leverage technology to connect our leadership effectively to the front lines despite COVID-19 protocols.
We did not let obstacles become excuses.
Instead, we overcame obstacles, and we delivered exceptional results.
I now want to highlight some of our segment performance.
Our Electrical Construction segment performed well with 8.4% operating income margins.
Despite the disruptions in some of our operations from COVID-19 and due to shutdowns, we still posted outstanding results.
These results were driven by excellent execution in the commercial sector driven by data center and telecommunication and really excellent execution across all market sectors.
We've performed the work well and really innovated on the means, the methods and the scheduling so that we can not only keep our employees safe, but enhance our productivity.
Our Mechanical Construction segment had an exceptional year by any measure.
We also had 8.4% operating income margins with exceptional performance across the commercial sector, again driven by telecommunications and data centers.
And we also had strength in warehousing, manufacturing, water and wastewater and the healthcare end markets.
We showed great innovation through increased use of BIM or building information modeling and prefabrication and worked hard to keep our employees safe and productive.
We believe in both of our construction segments that we not only met, but we exceeded our customers' expectations.
Our United States Building Services segment team showed grit and resilience as they faced the COVID-19 disruption in late March, April and May, with many of our customer sites not acceptable, bookings off as much as 40% in some of our subsidiary companies and in some of our product lines and a very cautious resumption of decision-making by our customers to allow us to resume service and projects.
We did rebound robustly from mid-June forward, and we're well prepared to execute project work for our customers that optimize their equipment and control systems, improve the wellness of their facilities through indoor air quality or IAQ solutions and sought to help our customers return to work safely and productively.
We also served as the boots on the ground for our customers to keep lightly occupied buildings, campuses and schools operational, functioning and safe over the past 10 months.
We are well positioned to keep serving our customers as they reopen and seek to make their building safe, efficient and productive for their employees.
Our U.K. Building Services segment mirrored the performance of our U.S. Building Services segment.
We navigated the severe lockdown actions in the U.K. and continued to keep our customers productive, operational and able to conduct their businesses.
We also made organizational changes that enhanced our leaders' responsiveness by making our organization even flatter, more aligned and leaner, which has led to crisper and more efficient decision-making.
Our U.K. team continues to win in the market as we have a culture of innovation and execution.
As you all know, our Industrial Services segment mostly serves the downstream oil and gas or refining and petrochemical markets.
These end markets had a severe dislocation of demand as planes stop flying and people stop driving.
And this segment was also impacted at the beginning of the year with a disruption in the global oil and gas markets.
We cut costs aggressively and maintain profitability on an EBITDA basis.
We are well positioned with demand for our services returns, which is not likely to happen until the fourth quarter of this year.
We expect the larger, more sophisticated, well-capitalized service providers to emerge stronger.
And yes, we are clearly one of them.
We exit 2020 with our remaining performance obligations or RPOs at an all-time high of $4.6 billion, 13.8% higher than the year-ago period.
We have very strong RPOs and are continuing to benefit from the very strong demand for data center construction, logistics and supply chain support, especially with our fire protection trade, healthcare, water and wastewater.
And we expect manufacturing to be as strong also as 2021 progresses.
We expect to benefit from increasing demand for IAQ, that's indoor air quality, and building efficiency projects and solutions.
We depart 2020 with an exceptional balance sheet that allows us the room to grow and build for the future while continuing to return cash to our shareholders through dividends and share repurchases.
2020 was an extraordinary year, and we performed exceptionally well, which is a real testament to our people, our subsidiary leaders, our segment staff and leadership and our corporate staff and leadership.
I will now turn the discussion over to Mark.
Over the next several slides, I will provide a detailed discussion of our fourth quarter results before moving to our full year performance, some of which Tony outlined during his opening commentary.
So let's discuss EMCOR's fourth quarter performance.
Consolidated revenues of $2.3 billion in quarter four are down $122.4 million or 5.1% from 2019.
Our fourth quarter results include $55.4 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's fourth quarter.
Acquisition revenues positively impacted both our United States Mechanical Construction and United States Building Services segments.
Excluding the impact of businesses acquired, fourth quarter 2020 consolidated revenues decreased $177.9 million or 7.4% organically.
Our segment performance was mixed within the quarter, with most of our reportable segments experiencing quarter-over-quarter organic revenue declines.
In general, we have seen reductions in revenues in those geographies or market sectors which are continuing to be most significantly impacted by the COVID-19 pandemic.
However, when we consider the incremental revenue generated from our acquisitions, we were successful in generating fourth quarter revenue growth from three of our five reportable segments.
Specific segment revenue performance for the quarter is as follows: United States Electrical Construction segment revenues of $493.5 million decreased $71 million or 12.6% from quarter four 2019.
Revenues declined across multiple market sectors due to the continuing impact of the COVID-19 pandemic, including the associated containment and mitigation measures as well as the curtailment of capital spending by some of our customers.
Consistent with my third quarter commentary, this segment experienced a significant reduction in revenues from industrial project work within the manufacturing market sector, where certain of our electrical businesses perform services for both midstream and upstream oil and gas customers.
Additionally, the segment's operations that serve the metropolitan New York and California markets continue to face revenue headwinds as these geographies remain some of the most restrictive with regards to COVID protocols.
United States Mechanical Construction segment revenues of $969.4 million increased $73.8 million or 8.2% from quarter four 2019.
Excluding acquisition revenues of $24.2 million, the segment's revenues increased $49.6 million or 5.5% organically.
Revenue growth within the quarter was broad based across most market sectors, with commercial and healthcare representing the most significant period-over-period increases.
These revenue gains were partially offset by a quarterly revenue decline in manufacturing market sector activity due to the completion or substantial completion of certain large projects during the early part of 2020.
This revenue performance represents an all-time quarterly record for our United States Mechanical Construction segment and surpasses the previous record set in 2019's fourth quarter.
EMCOR's total domestic construction business fourth quarter revenues of $1.46 billion increased $2.7 million or less than 0.25%.
United States Building Services revenues of $568.1 million increased $29.1 million or 5.4%.
However, when excluding acquisition revenues of $31.2 million, this segment's quarterly revenues decreased $2.1 million or 40 basis points.
Revenue gains within their mobile mechanical services division resulting from incremental contribution from acquired companies and their commercial site-based services division due to new contract awards or scope expansion on certain existing contracts were partially offset by a quarter-over-quarter revenue decline within the segment's energy services division due to reduced large project activity when compared to 2019's fourth quarter.
Consistent with our United States Mechanical Construction Services segment, revenue performance within our United States Building Services segment represents an all-time quarterly record.
United States Industrial Services revenues of $135.5 million decreased by $163.7 million or 54.7% as this segment continues to be impacted by the negative macroeconomic conditions and uncertainty within the markets in which it operates.
Cost control and cash preservation actions taken by customers of this segment have resulted in the suspension of capital spending programs and the curtailment of maintenance activity, which has severely impacted demand for our Industrial Service offerings.
With the rise in telecommuting and the various restrictions on travel in response to COVID-19, there have been significant reductions in both vehicle miles driven and airline miles traveled, which is further prolonging the weakened demand this segment has been experiencing since late quarter one of 2020.
United Kingdom Building Services segment revenues of $115 million increased $9.4 million or 8.9% from last year's quarter.
Revenue gains for the quarter resulted from strong project activity as well as incremental revenue from new contract awards.
Additionally, fourth quarter 2020 revenues were positively impacted by $2.9 million as a result of favorable foreign exchange rate movement in the period.
Selling, general and administrative expenses of $244.6 million reflects an increase of $3.7 million from quarter four 2019.
The current period includes approximately $4.4 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter decrease of approximately $700,000.
A reduction in salaries expense due to a decrease in head count necessitated by lower organic revenue as well as reduced travel and entertainment expenses due to a combination of cost-avoidance measures as well as restricted company travel were the primary reasons for the organic decline in SG&A.
These decreases were largely offset by an increase in quarterly incentive compensation expense due to EMCOR's actual operating performance exceeding its previously forecasted 2020 full year results.
As a percentage of revenues, selling, general and administrative expenses totaled 10.7% in quarter four 2020 versus 10% in the year-ago period.
The quarter-over-quarter increase can be attributed to the reduction in our consolidated quarterly revenues without a commensurate decrease in certain of our fixed overhead costs, including those of our Industrial Services segment as we do not deem the current operating environment to be permanent.
Our assessment continues to be based on our evaluation of future market opportunities.
And we expect to see some return to normalcy in industrial maintenance and capital spending when we ultimately move beyond the depressed demand caused by the COVID-19 pandemic.
Reported operating income for the quarter of $137.6 million represents a $14.7 million or 12% increase when compared to operating income of $122.9 million in last year's fourth quarter.
This operating income performance eclipses our previously established all-time quarterly record, which was achieved in 2020's third quarter.
Our fourth quarter operating margin was 6%, which compares favorably to the 5.1% of operating margin reported in 2019's fourth quarter.
We experienced the operating margin expansion within each of our reportable segments other than our U.S. Industrial Services segment, which is reporting an operating loss for the fourth quarter and our U.K. Building Services segment, which achieved a consistent margin in each year's quarterly period.
Specific quarterly performance by reportable segment is as follows: our United States Electrical Construction segment had operating income of $43.4 million, which increased by $2.1 million from the comparable 2019 period.
Reported quarterly operating margin is 8.8% and represents a 150 basis point improvement over 2019's fourth quarter.
This increase in both operating income dollars and operating margin is largely attributable to increased gross profit contribution from commercial market sector activities, inclusive of numerous telecommunications construction projects.
These gross profit gains were partially offset by reduced gross profit contribution from the transportation and manufacturing market sectors due to both the closeout of projects in prior periods as well as the continued headwinds attributable to the COVID-19 pandemic.
Fourth quarter operating income of the United States Mechanical Construction Services segment of $100.4 million represents a $31.5 million increase from last year's quarter, while operating margin in the quarter of 10.4% represents a 270 basis point improvement over 2019.
This segment has continued to experience strength in the majority of the market sectors we serve, most notably demonstrated by increased gross profit contribution from project activity in the commercial, healthcare and institutional market sectors.
In addition, our Mechanical Construction segment experienced a more favorable mix of work than in the prior year and benefited from strong performance by our fire protection operations.
Our combined U.S. construction business is reporting a 9.8% operating margin and $143.7 million of operating income, which has increased from 2019's fourth quarter by $33.5 million or 30.4%.
Operating income for United States Building Services of $28 million represents a $3.8 million increase from last year's fourth quarter, and operating margin of 4.9% represents an improvement of 40 basis points when compared to the prior year.
This segment experienced improved gross profit performance from its mobile mechanical services division, inclusive of incremental contribution from acquired companies.
In addition, the segment continues to benefit from reduced levels of selling, general and administrative expenses due to cost-mitigation actions implemented in response to the COVID-19 pandemic.
Our United States Industrial Services segment operating loss of $8.2 million represents a decline of $21.3 million, which compares to operating income of $13.1 million in last year's fourth quarter.
These conditions have resulted in considerable reductions in capital spending by certain of our customers, which has led to a decrease in demand for this segment's service offerings.
This environment was further exacerbated by an active hurricane season, which resulted in the suspension of planned maintenance activities that would have occurred during both quarters three and four of 2020.
United Kingdom Building Services operating income of $4.2 million represents an increase of approximately $300,000 over quarter four of 2019.
Operating margin was 3.7% for both quarter periods.
We are now on slide nine.
Additional financial items of significance for the quarter not previously addressed are as follows: quarter four gross profit of $383.9 million or 16.8% of revenues is improved over last year's quarter by $19.1 million and 160 basis points of gross margin.
Restructuring expenses in 2020's fourth quarter pertain to the realignment of management resources within our combined U.S. construction operations.
Diluted earnings per common share of $1.45 compares to $1.54 per diluted share in last year's fourth quarter.
Adjusting our 2020 quarterly performance for the negative impact on our income tax rate resulting from the nondeductible portion of the noncash impairment charges recording -- recorded during the second quarter of 2020, non-GAAP diluted earnings per share for the quarter ended December 31, 2020, is $1.86, which favorably compares to last year's fourth quarter by $0.32 or nearly 21%.
Our tax rate for quarter four of 2020 is 41.8%, which is significantly higher than the tax rate for the corresponding 2019 period due to the nondeductibility of the majority of the impairment charges just referenced.
My last comment on slide nine is with respect to our $259.5 million of operating cash flow in the quarter, which favorably compares to $178.8 million of operating cash flow in the year-ago period and reflects the continued effective management of working capital by our subsidiary leadership teams.
Our operating cash flow was aided by the organic decline in revenues, which resulted in a contraction in accounts receivable.
Additionally, the deferral of the employer's portion of social security taxes in the United States benefited our cash flow by approximately $35.2 million during the fourth quarter of 2020.
On a full year basis, the social security tax deferrals, coupled with the deferral of value-added tax in the United Kingdom, has favorably impacted our 12-month operating cash flow by approximately $117.3 million.
These amounts will be repaid in 2021 and 2022.
And obviously, we'll have the opposite effect on our operating cash flow in such future periods.
With the fourth quarter commentary complete, I will now augment Tony's introductory remarks on EMCOR's annual performance.
Consolidated revenues of $8.8 billion represent a decrease of $377.6 million or 4.1% when compared to our record annual revenues in 2019 of $9.17 billion.
Our year-to-date results include $269.6 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in the 2019 period.
Acquisitions positively impacted each of our United States Electrical Construction, United States Mechanical Construction and the United States Building Services segments.
Excluding the impact of businesses acquired, year-to-date revenues decreased organically 7.1%, primarily as a result of the significant revenue contraction experienced during quarter two as the majority of our operations were most significantly impacted by the COVID-19 pandemic during such period.
In addition, our annual revenues were negatively impacted by a decrease in demand for certain of our service offerings within our United States Electrical Construction services and United States Industrial Services segments as a result of the adverse conditions experienced within the oil and gas industry.
Discrete segment revenue performance for full year 2020 is as follows: United States Electrical Construction segment revenues of $1.97 billion decreased $243.2 million or 11% from 2019's $2.22 billion of revenues; acquisitions contributed $25.4 million of incremental revenues, resulting in an organic decline of $268.5 million or 12.1%.
Revenue contraction within the majority of the market sectors in which we operate.
Most notably, the commercial and manufacturing market sectors were the primary drivers of this year's year-over-year decrease.
As I mentioned in my commentary on our fourth quarter results, although this segment has a diverse geographic footprint, a number of its operating companies within both the metropolitan New York and California markets were severely impacted by COVID protocols, which resulted in a decrease in the number of short-duration project opportunities as well as various project delays.
These impacts, coupled with the completion or substantial completion of certain large projects in 2019, contributed to the decline in organic annual revenues.
In addition, and as previously referenced, certain of our operations in the segment which are exposed to the upstream and midstream oil and gas sector experienced a significant decline in demand in 2020.
Partially offsetting these revenue reductions were increased revenues from project activities within the institutional and hospitality market sectors during the year.
United States Mechanical Construction revenues of $3.49 billion increased $145.2 million or 4.3% compared to 2019.
Acquisitions contributed $188.8 million of incremental revenues to the segment, which, when excluded, results in an organic revenue decline of $43.7 million or 1.3% from 2020.
This organic decrease can be largely attributed to reduced project volume within the manufacturing market sector with a heavy concentration in the food processing submarket sector as a result of the completion or substantial completion of certain large projects in 2019.
Similar to our United States Electrical Construction segment, this segment additionally experienced the negative effects of the COVID-19 pandemic, which resulted in a reduced number of short-duration project opportunities during calendar 2020.
United States Building Services segment revenues of $2.11 billion increased $3.2 million or less than 0.5%.
Acquisitions contributed $55.4 million of revenues, resulting in an organic revenue decline of 2.5% when compared to full year 2019.
The decrease in project and building controls activities within the segment's mobile mechanical services division, largely as a result of the impact of the COVID-19 pandemic, which resulted in the temporary closure of certain customers' facilities, coupled with the decrease in large project activity within the segment's energy services division were the primary contributors to such organic revenue reduction.
In addition, the segment experienced a decrease in revenues from its government services division as a result of the loss of certain contracts not renewed pursuant to rebid.
These revenue contractions were partially offset by increased customer demand for certain services aimed at improving the indoor air quality within their facilities as well as an increase in revenues within the segment's commercial site-based services division as a result of new contract awards and scope expansion on certain existing contracts.
United States Industrial Services segment revenues of $797.5 million decreased $290.1 million or 26.7% from 2019's $1.09 billion of revenues.
At the risk of sounding repetitive, for most of 2020, the segment has been severely impacted by negative conditions and uncertainty within the markets in which it operates due to the dislocation between crude oil supply and demand resulting from COVID-19 and geopolitical tensions within OPEC.
In addition, during the back half of 2020, the segment experienced suspension and deferral maintenance in capital projects by its customers as a result of hurricane and tropical storm activity in the United States Gulf Coast region.
Revenues of our United Kingdom Building Services segment for 2020 increased 1.7% to $430.6 million, primarily as a result of new maintenance contract awards within the commercial and institutional market sectors.
Revenues were also favorably impacted by $2.3 million as a result of exchange rate movement in the pound sterling year-over-year.
Selling, general and administrative expenses of $903.6 million represent 10.3% of revenues as compared to $893.5 million or 9.7% of revenues in 2019.
Full year 2020 SG&A includes $29.6 million of incremental expenses, inclusive of intangible asset amortization pertaining to businesses acquired.
Excluding such incremental amounts, our SG&A has decreased $19.4 million on an organic basis, primarily as a result of certain cost reductions resulting from our actions taken in response to the COVID-19 pandemic.
As referenced during my quarter commentary, the increase in SG&A as a percentage of revenues is a result of the organic decrease in our revenue without a commensurate decrease in certain of our fixed overhead costs as we do not deem the current operating environment to be permanent.
2020's year-to-date operating income is $256.8 million.
Adjusting this amount to exclude the noncash impairment loss on goodwill, identifiable intangible assets and other long-lived assets recorded in the second quarter, our non-GAAP operating income for the year was $489.6 million.
This compares to operating income of $460.9 million for full year 2019 and represents a $28.7 million or 6.2% improvement year-over-year.
Despite the headwinds experienced in 2020, three of our five reportable segments achieved higher operating income and higher operating margins than that of the prior year.
Of the two segments which did not, United States Building Services is reporting a modest decline of just over 1%, while our United States Industrial Services segment suffered a significant year-over-year reduction, resulting in an operating loss for 2020.
With regard to each segment's discrete performance, I will start with our electrical -- United States Electrical Construction segment.
Their 2020 operating income of $166.5 million represents an all-time segment record, and it is an increase of $4.8 million or 3% compared to the prior year.
Operating margin for 2020 is 8.4%, which is 110 basis points higher than 2019.
This year-over-year improvement in operating income dollars was due to a reduction in selling, general and administrative expenses due to cost-control measures enacted during the course of 2020.
The increase in operating margin for the year was a result of an increase in gross profit margin given favorable project execution and a more profitable mix of work within this segment.
These improvements in gross profit margin were partially offset by an increase in the ratio of selling, general and administrative expenses to revenues as a result of the year-over-year revenue contraction within the Electrical Construction segment.
United States Mechanical Construction operating income of $292.5 million increased $67.5 million or 30% over 2019 levels, and operating margin reached 8.4% versus 6.7% in the prior year.
Acquired companies contributed incremental operating income of $9.3 million, inclusive of $12.7 million of amortization expense associated with identifiable intangible assets.
The increase in operating income for 2020 was primarily due to strong project performance throughout the year in the majority of the market sector served by this segment, resulting in an increase in annual gross profit.
The 170 basis point improvement in operating margin was also a result of our solid project execution and improved gross profit margin, most notably within the manufacturing and commercial market sectors.
These increases in gross profit and gross profit margin were partially offset by an increase in selling, general and administrative expenses, primarily as a result of an increase in incentive compensation expense due to the improved year-over-year operating performance for this segment.
United States Building Services operating income for 2020 of $113.4 million declined by $1.3 million or 1.2% due to a reduction in year-over-year large project activity within the segment's energy services division as well as decreased project and building control opportunities within their mechanical services division due to both temporary closure and restricted access to certain customer facilities impacted by the COVID-19 pandemic.
These reductions were partially offset by incremental operating income contribution from companies acquired, which totaled $4.5 million, inclusive of $3.2 million of amortization expense associated with identifiable intangible assets.
In addition, this segment experienced increased gross profit resulting from greater demand for certain services aimed at improving indoor air quality as various customers made changes to their HVAC systems in advance of their employees returning to work as recommended by the Center for Disease Control.
Operating margin of 5.4% was consistent with the prior year as a reduction in gross profit margin was offset by a decrease in the ratio of selling, general and administrative expenses to revenues due to certain cost-reduction measures taken during 2020.
Our United States Industrial Services segment incurred an operating loss of $2.8 million for 2020 as compared to operating income of $44.3 million in 2019.
This segment implemented significant cost reductions during the year in an effort to mute the year-over-year decline.
However, as previously discussed, this segment's overhead structure includes a significant investment in fixed infrastructure, including plant and equipment.
As we view current market conditions to be -- as to be temporary, that infrastructure is needed to respond to changes in demand patterns once they ultimately recover.
Operating income of our United Kingdom Building Services segment of $20.7 million or 4.8% of revenues compares to operating income of $18.3 million or 4.3% of revenues in the prior year.
The $2.3 million improvement is largely due to an increase in gross profit from new maintenance contract awards, while the 50 basis point expansion in operating margin is attributable to both the increase in gross profit margin as well as a reduction in the ratio of selling and general and administrative expenses to revenues.
SG&A of this segment benefited from various cost-control initiatives implemented by our U.K. team.
We are now on slide 12.
Additional key financial data on slide 12 not addressed during my full year commentary is as follows: year-to-date gross profit of $1.4 billion is greater than 2019's gross profit by $39.5 million, while gross margin of 15.9% is higher than last year's 14.8% by 110 basis points.
Total restructuring costs of $2.2 million are increased from 2019 due to actions taken during 2020 to both realign certain management functions as well as rightsize our cost structure in light of the revenue headwinds we faced.
Diluted earnings per common share was $2.40 compared to $5.75 per diluted share a year ago.
When adjusting this amount for the impact of the noncash impairment charges recorded in 2020 second quarter, non-GAAP diluted earnings per share of $6.40 as compared to the same $5.75 in last year's annual period.
This represents a $0.65 or 11.3% improvement year-over-year.
We are now on slide 13.
As outlined on this slide, EMCOR's liquidity profile remains strong despite the headwinds we faced during the course of 2020.
Our cash balance has increased from $358.8 million at December 31, 2019, to $902.9 million at the end of 2020.
Operating cash flow of $806.4 million, aided by the FICA and VAT cash tax deferrals previously referenced, was the primary driver of this increase.
Operating cash flow was partially offset by cash used in investing activities of nearly $95 million, predominantly representing payments for acquisitions of businesses and capital expenditures as well as cash used in financing activities, which totaled $172 million and consisted of the repurchase of our common stock, net repayments under our credit facility and dividends paid to our stockholders.
Working capital has increased by over $236 million as a result of the increase in our cash balance, partially offset by a reduction in accounts receivable given the lower organic revenue during the period as well as an increase in contract liabilities due to advanced billing on certain long-term construction projects.
Other changes in key balance sheet positions of note are as follows: goodwill has decreased since December 31, 2019, as a result of the noncash impairment charge recognized during the second quarter of 2020, partially offset by an increase in goodwill resulting from businesses acquired or purchase price adjustments made during the year.
Our identifiable intangible asset balance has decreased since the end of last year largely due to $60 million of amortization expense recorded during 2020, which was partially offset by incremental intangible assets recognized as a result of the acquisition of three businesses during calendar 2020.
Total debt has decreased by $35.7 million since the end of 2019, reflecting our net financing activity during the year.
And course, debt-to-capitalization ratio has decreased to 11.9% from 13.2% in the year-ago period.
Lastly, our stockholders' equity has decreased slightly since December 2019 as our net income was offset by share repurchases, dividend payments and postretirement plan liability adjustments made during 2020.
Our balance sheet, in conjunction with the credit available to us, continues to put us in a position to invest in our business and achieve our strategic objectives as we look forward to 2021 and years beyond that.
Hey, Mark, that's a well-deserved drink of water.
And year-end was always the toughest and we've been doing it a long time together.
Remaining performance obligation or RPO by segment and market sector.
I'll go through the numbers briefly and then go deeper to the market trends we are seeing.
As I stated in my remarks, total RPOs at the end of 2020 were a shade under $4.6 billion, up $559 million or 13.8% when compared to the year-ago level of $4.03 billion.
The strength of our RPO and the associated bidding activities surprised us a bit given the uncertainty of the pandemic, economic dislocation and disruptions for the year.
However, as we have said in the past, during uncertain and challenging times, we have often seen a flight to quality and fiscally strong construction and service providers prosper.
It's still a little too early to tell by 2020 and now into 2021.
It sure looked like one of those times.
I should probably repeat.
My mic wasn't on.
So I'm going to go on to page 14, remaining performance obligations by segment and market sector.
Look, they're up $559 million or 13.8% for those that didn't hear it.
And really, there's a flight to quality a lot of times when you move from 2020 into 2021, and this certainly looks like one of those times.
Our domestic construction segments experienced strong project growth in 2020 with RPOs increasing $495 million or 15.2% since the end of 2019 as we continue -- and continue to see demand for electrical mechanical systems, both in new construction and retrofit projects.
Our United States Building Services segment RPOs increased in the quarter as this segment's small project repair service work continue to rebound from its abrupt, almost hard stop at the beginning and the height of COVID-19.
Some of this resumption is a return of regularly scheduled maintenance on mechanical systems and then the return of small project work.
And some is focused, as you'd imagine, around modifications and improvements in IAQ, indoor air quality, which I will discuss in detail in a few slides.
It was quite a recovery from the March, April and May time frame when the segment was hit especially hard as described earlier, with bookings down 40% in many cases.
Over on the right side of the page, we show RPOs by market sector.
Throughout 2020, we experienced strong year-over-year growth in the commercial, healthcare and water and wastewater sectors.
Commercial projects, which make up 41% of that total RPOs, increased $297 million or close to 19% for the year.
As we stated last quarter and continued to experience in the fourth quarter of this year, demand for hyper data -- scale data center construction has high demand, as does high-tech manufacturing, and warehousing and logistics also remain strong.
We are a nationwide leader in this section of the commercial market sector, and quite frankly, I don't see any letup in this activity anytime soon.
We are also in Part one design discussion on several large design build through process opportunities.
For the year, healthcare project RPOs increased $207 million or 56%.
And water and wastewater project RPOs grew similar by 57% to $173 million.
As one might surmise, given the impact of the pandemic, healthcare as a sector of the nonresidential construction market is expected to be slightly higher in 2021 and likely better than that for us as our customers build new facilities and retrofit existing facilities.
By the way, RPOs in these three market sectors are at all-time highs for us since we transitioned to RPO reporting from backlog reporting in March of 2018.
The nonresidential market, as measured by the U.S. Census Bureau for put-in-place activity, remains a very large market, and it was roughly $800 billion at the end of December 31, 2020.
It's down 5% in 2020.
However, it is not a uniform market, given its size and breadth and opportunities still exist.
On the next page, I will discuss how well-thought and patient capital allocation strategy has allowed this growth in our RPO base and growth to occur despite choppy and uncertain overall markets.
And on nonresidential market, they decreased 5%.
I'm now on page 15, capital allocation.
We have long had a major market presence in mechanical and electrical construction services and have continued to allocate capital to fill in the white space, either geographically or by adding capability in these important segments.
Further, we have used our capital to build leading capabilities in HVAC service, building controls and mechanical system retrofit.
We have built that capability and capacity through organic growth and acquisition in a sustained manner over many years.
We are also one of the country's leading life safety contractors.
And this activity mostly resides in our mechanical, and that is the sprinkler fitters and electrical, fire alarm and security installation and upgrades and low-voltage systems construction segments.
Again, these capabilities were built over a long period of time through acquisition and organic investment.
These are concrete examples where we have built successful platforms that allow us to have the capability to serve a broad spectrum of customers with the right products and specialty trade capabilities.
Our investment decisions and patience have allowed us to build and maintain capability through cycles and serve a diverse set of customer opportunities.
We have not only invested in over 20 acquisitions and we spent around $555 million on those acquisitions since 2017 until today, but we also have returned significant cash to our shareholders through share repurchases and dividends.
I'm now on page 16, titled Resilient Markets.
As we discussed on the previous two pages, we have shown that we have very good diversity of demand at EMCOR, and we have used that capital to grow organically and through acquisition to allow us to build upon such diversity of demand and resiliency in our business.
This is not an accident, but it is a part of our long-term capital allocation strategy as discussed on the previous page.
For example, EMCOR's data center capabilities were built enhanced over a very long period of time.
We started building the largest data centers in the country for financial institutions and the original hosting providers almost 20 years ago.
Today, we build data centers that are five times larger to seven times larger than these previous "large data centers".
We have continued to grow that capability over the last five years and expanded through organic investment or acquisition or a combination of both.
We are one of the leaders in the specialty contracting for these complex facilities.
That's all the electrical trades, mechanical trades and sprinkler fitters.
Data center construction is a good market for us, and we expect it to be for the foreseeable future.
It is also a growing part of our maintenance activities.
We have -- we are fortunate to have other markets that have shown resiliency.
We continue to support our customers' e-commerce growth primarily through our life safety services and the construction of large cold storage and other warehouse facilities as our customers transform their warehouse networks to allow for more fast-paced growth.
We continue to believe that we are very well positioned to support our customers as they build more resiliency into their supply chains by reshoring projects.
We also continue to see significant opportunity for large and small design-build food processing clients.
Health care is also a good market for us and has been for a very long period of time.
These are complex facilities that are seeking to become more flexible in the delivery of their care in the long term.
Water and wastewater is a market that we believe will have significant opportunity for us and has significant opportunity for us today and also in the next three to five years, especially in Florida.
And finally, as I have discussed previously, is our position as a leading HVAC services contractor.
We are in a compelling position to provide indoor air quality solutions and services.
We see very strong demand currently and expect this to continue over many years.
We have experienced and are continuing to experience strong demand for upgrading, enhancing HVAC and building control systems for both energy efficiency and flexibility of demand and use.
This has always been a good market for EMCOR for many years, and it spans all market sectors.
As discussed, serving these resilience markets is not by chance.
We've built this capability over many years, and we have some of the best field leadership, trade supervision and skilled trades people in the industry to execute in these markets.
I'm now going to wrap this up on page 17 and 18.
As we enter 2021, we are still in the world of COVID-19 mitigation and restriction.
The oil and gas markets are still depressed, and the nonresidential market is expected to decline by another 3% to 5%.
Despite that less-than-cheery backdrop, we expect to continue to perform well in 2020.
We expect revenues of $9.2 billion to $9.4 billion and expect to earn $6.20 to $6.70 in earnings per diluted share.
2021 should be another year of outstanding performance.
We will have to execute very well to maintain the 2020 record levels of operating income margins of 8.4% in our Electrical and Mechanical Construction segments.
We do expect to increase revenues, which may help us mitigate this challenge.
Underlying this range are the following assumptions: our Industrial Services segment does not materially improve until the fourth quarter but gain strong momentum headed into 2020 as demand for refined products will continue to be challenged during 2021, especially through the end of the second quarter.
The nonresidential construction market will decline modestly.
We will continue to execute well in our more resilient rock market sectors to include manufacturing, commercial driven by data centers and logistics and warehousing, water and wastewater, energy retrofits and healthcare.
Our end market diversity has been and continues to be a real strength of EMCOR.
We do not expect a more restrictive COVID-19 environment than what we are operating in today.
We do expect a more normal pre-COVID-19 operating environment to emerge as the year progresses.
We are operating near 100% capability on our jobs with no meaningful COVID-19-induced issues.
Our leadership and trades people have learned how to work and even prosper under the COVID precautions.
We have learned to plan and execute, but always have the mindset that our employee safety comes first, which is nothing new or novel for us as it is one of our core values.
We expect to continue to help our customers improve their facilities' air quality with indoor air quality solutions, improve energy efficiency through replacement projects and optimizing their systems.
And we are going to help them bring back their employees back to work with an improved piece of mind through our efforts.
Our ability to move to the upper range of our earnings guidance range will depend on the following: the nonresidential market, especially our more resilient markets, are stronger than projected because the bounce back is faster as the U.S. and the U.K. normalizes from COVID-19 restrictions.
Our refining and petrochemical customers begin to gain more comfort with improved demand for rerefined products and increase their scope for this year's work performed by us.
Our momentum in indoor air quality and efficiency projects continues to not only increase but accelerates further, and our productivity stays strong as we transition to more normal operating conditions.
I'm going to talk a little bit about what happened in Texas last week as we have a significant business in Texas.
Clearly, the power disruption in Texas last week affected not only EMCOR's business operations, customer sites, but also more importantly, our employees and their families.
Many of our customers went to skeleton staff for three to five days, and many shut down operations almost completely.
We have mostly resumed operations in our Industrial Services and also our construction services and Building Service customer sites.
We will be there to help our customers complete their planned turnarounds, execute on planned maintenance and repairs related to the storm and to resume project work already under way or that was ready to start in the last few weeks.
We have may -- we may have work that was planned for the first quarter that will now extend into the second quarter that -- and it may have had more activity in the first quarter than it will now have.
We expect to continue to be balanced capital allocators as we have shown on the previous pages.
We have more capital to allocate in balance, but we know how to do that.
And however, our guidance contemplates that we will continue to be disciplined allocators between organic growth investments, acquisitions, share repurchases and dividends.
| q4 earnings per share $1.45.
q4 revenue $2.28 billion versus refinitiv ibes estimate of $2.2 billion.
sees fy 2021 earnings per share $6.20 to $6.70.
q4 non-gaap earnings per share $1.86.
sees fy 2021 revenue $9.2 billion to $9.4 billion.
|
Slides for today's call are posted on our website and we invite you to follow along.
Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, November 4, 2020.
Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings.
The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call, other than through filings made concerning this reporting period.
In addition, today's discussion will include references to non-GAAP measures.
Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance.
Starting on Slide 3.
We delivered exceptional results in Q3.
And I can't say enough about the efforts of our team in driving these outstanding performance.
Since the outset of the pandemic in March, everyone from really the top levels of the organization to our frontline workers have excelled in response to this challenge, and it's truly been a team effort.
At its core, Clean Harbors is a crisis response company and we can still thrive in difficult environments like the one we have all faced over the past eight months.
And the resiliency of our organization and the versatility of our business model clearly were evident here in Q3.
Revenue, while down year-over-year due to the unprecedented market conditions, was up nearly $70 million on a sequential basis.
This growth was driven by an accelerated recovery in several core lines of business in our Environmental Services segment.
At the same time, we also saw a strong sequential pick up within Safety-Kleen.
Adjusted EBITDA of $161.2 million included $13.3 million in government programs, primarily from the revised CEWS legislation in Canada.
The high level of EBITDA supported by controlled capital spending resulted in adjusted free cash flow of $123.5 million, a quarterly record for the company.
Mike will review the P&L in more details in his remarks.
Turning to our segment results on Slide 4.
Environmental Service revenues declined 10% from a year ago but were up 6% from Q2.
As many of our service businesses bounced back from the early days of the pandemic, adjusted EBITDA grew 16%.
This increase was attributable in part to our cost reduction efforts, productivity improvements and a healthy mix of higher margin work.
The two government programs accounted for $10 million of adjusted EBITDA in this segment.
Revenue from our COVID-19 decon work totaled $29 million and our team has now completed a total of more than 9,000 COVID-19 responses.
Though incineration utilization dipped to 80% due to the timing of turnarounds and a production lag from some of our customers, we continue to execute on our strategy to capture high-value waste streams across our network.
This resulted in an average price per pound increase of 5% from the year earlier period.
Landfill volumes declined 6% as strong base business largely offset the lack of remediation and waste project opportunities.
Moving to Slide 5.
Safety-Kleen revenue was down 18% from a year ago, but up 17% sequentially due to the recovery in both the branch and the SK Oil businesses.
The lifting of local restrictions across much of North America led to a sharp increase in vehicle miles driven, generating higher lubricant demand.
The recovery in demand for base oil and lube products enabled us to restart three of our rerefineries during Q3.
Given the declining market value of waste oil, we maintained high charge-for-oil rates used for motor oil and increased our collection volumes to 50 million gallons.
That is 16% ahead of Q2.
Safety-Kleen's adjusted EBITDA declined 15%, mostly due to the lower revenue.
This decline was partly offset by our cost reduction initiatives, as well as the government assistance programs that provided $2.5 million to this segment in Q3.
Parts washer services we're off 10% in the quarter, which was promising given that we originally expected the SK branch business to be at 85% of normal levels in Q3.
Percentages of blended products and direct volumes came in as expected, but at lower volumes overall.
Turning to capital allocation on Slide 6.
In light of the pandemic, our strategy has been more about capital preservation to ensure that we exit this global crisis well positioned for growth, and I am confident that we will.
Capex spend was extremely low in the quarter and we will continue to proceed with caution on every internal dollar spend.
That being said, we continue to invest in certain projects, particularly at our plants that we believe will generate a strong return.
In terms of M&A activity, opportunities are available, and we have been exercising patience, though, as we believe that we can be more opportunistic going forward in light of the pandemic.
In terms of share repurchases and debt repayment, we are active on both fronts in Q3.
Looking ahead, we enter the final quarter of 2020 in great shape.
On the sales side, we are working closely with customers to help drive a measurable recovery in many of our core businesses.
Our national footprint, reputation for safety, and emergency response capabilities have been competitive differentiators for us.
On the bottom line, our prudent cost actions and careful capital spending have helped us generate record margins and cash flow -- free cash flow in the past two quarters.
Our decontamination business continues to serve as a natural hedge against further slowdowns in other parts of our company.
Within Environmental Services, we expect strong incineration utilization in Q4 based on the lower planned turnaround days and the availability of waste in the marketplace.
We anticipate our offerings within Industrial Services and Tech Services to close out the year on an upward trajectory.
Field Services remains on track for a phenomenal year due to the COVID-related revenues, which we expect to exceed $100 million.
Within Safety-Kleen, we remain below normal demand levels, but we've seen a vast improvement from the lows of the April-May timeframe.
We're continuing to monitor and manage the impacts of localized COVID outbreaks.
Obviously, new shelter-in-place mandates could derail our recovery in the Safety-Kleen branch business, but to-date, we have seen nice steady recovery since both the U.S. and Canada reopened.
For Safety-Kleen Oil, our primary rerefineries are all back online, and base oil pricing is stable due to the supply conditions brought about by recent hurricanes along the Gulf Coast.
We continue to actively manage our charge-for-oil rates as we seek to further grow our collection volumes to supply our network.
So in conclusion, we are encouraged about our overall prospects as we enter the final quarter of 2020.
Our Q3 results confirm the resiliency of this company.
Despite the economic uncertainties that all companies are facing in today's environment, we are confident that we have put our company in the best position possible to succeed as we close out 2020.
Our company clearly delivered outstanding results this quarter.
I want to echo Alan's remarks about the organization.
We have an outstanding team that is able to meet the needs of our customers during a crisis like the pandemic in ways most companies cannot.
It's not just the decontamination work where we are heading into locations that others have evacuated for safety reasons.
It is the fundamental DNA of Clean Harbors and how this company measures up to challenges.
We excel at generating new revenue streams, meeting customer needs during times of disruption and improving operational efficiencies, all while doing it safely and under rapidly evolving health protocols.
I said it to open my remarks last quarter and they're worth repeating.
I couldn't be more proud of the way our organization had met the challenges of this pandemic head on.
Turning to Slide 8 and our income statement.
Our third quarter results exceeded the expectations we set when we resumed guidance in August.
Revenue declined 13% year-over-year, but on a sequential basis, was up nearly $70 million.
Preparing for the possibility of a protracted downturn, we have continually -- we have continued to aggressively manage our cost structure.
These comprehensive efforts, combined with assistance we received from government programs, mostly Canada this quarter, resulted in a 310 basis point improvement in gross margins.
Adjusted EBITDA increased to $161.2 million from a year ago.
Excluding the government assistance, adjusted EBITDA would have been $147.9 million, down only 6% year-over-year, despite revenues being 13% lower.
Adjusted EBITDA margins of 20.7% was 310 basis points -- was up 310 basis points from last year's third quarter, which speaks to the effectiveness of our actions.
We have now improved our adjusted EBITDA margins on a year-over-year basis for 11 consecutive quarters.
Given our lower revenue, our SG&A total was down in the quarter, but our performance also demonstrated the benefits of our cost reduction and productivity efforts.
We lowered SG&A by nearly $16 million or 13% in Q3.
Of that total, $2.8 million was related to the impact of CARES and CEWS.
I would like to point out that these programs have been critical to support headcount levels higher than they would have otherwise been both here and in Canada.
In the quarter, we saw the full impact of the series of productivity programs and cost actions we initiated in Q2.
Our ability to rapidly flex down our structure and maintain expenses at a lower level, even as revenues were coming back, was a key factor in our strong third quarter results.
For full year 2020, we are targeting SG&A of approximately 14.5% of revenue, continuing a positive trend that began several years ago.
Depreciation and amortization in Q3 was up slightly at $74.5 million.
For the full year, we continue to expect depreciation and amortization in the range of $285 million to $295 million, which is slightly below last year.
Income from operations increased by 4%, reflecting the higher gross profit and our overall effectiveness at managing the business.
Earnings per share was $0.99 in Q3 versus $0.65 a year ago or $0.90 versus $0.72 on an adjusted basis.
Turning to Slide 9.
We concluded Q3 with our balance sheet in great shape.
Cash and short-term marketable securities at September 30 exceeded $530 million.
Our liquidity increased even though we paid back the remaining $75 million of funds we had drawn on the revolver under the abundance of caution when the pandemic began.
Our payables and receivable balance grew in the quarter, along with the business, but both categories remain well below last year levels and our collections team is doing an outstanding job keeping cash coming in the door.
Our debt obligations decreased to below $1.56 billion with the paydown of the revolver.
Leverage on a net debt basis now sits at 1.9 times for the trailing 12 months ended 9/30, which is our lowest level in nearly a decade.
Our weighted average cost of debt remains at an attractive 4.2% with a healthy blend of fixed and variable debt.
Last week, we renewed our revolving credit facility with our lending group, led by Bank of America, and we're grateful for their continued strong support.
We put a new five-year $400 million lending facility in place.
We typically uses asset-backed loan agreement only for letters of credit.
Turning to cash flows on Slide 10.
Cash from operations in Q3 was nearly flat with prior year at $143.9 million.
Capex, net of disposals, was down more than 60% to $20.4 million, reflecting our COVID response plan to be extremely cost prudent with our capital.
The result was record adjusted free cash flow in Q3 of $123.5 million, which is 35% ahead of 2019.
For the year, we continue to target capex, net of disposals and excluding the purchase of our headquarters, in the range of $155 million to $175 million.
During the quarter, we stepped up our share repurchases as we bought back 400,000 shares at an average price of just over $55 for a total buyback of $22.2 million in Q3.
Year-to-date, we have we repurchased slightly above 700,000 shares.
Of our authorized $600 million share repurchase program, we have $245 million remaining.
Moving to guidance on Slide 11.
Given our performance, and based on current market conditions, we are raising our 2020 guidance.
We now expect 2020 adjusted EBITDA in the range of $530 million to $550 million.
While this guidance assumes continued localized outbreaks of the virus, it does not assume a national shelter-in-place order due to COVID-19.
This also -- this guidance also assume $3 million to $5 million of government subsidy money in Q4.
Here's how our full-year 2020 guidance translates from a segment perspective.
In Environmental Services, we expect adjusted EBITDA to grow in the low-teens percentage above 2019's level of $446 million.
Growth and profitability within incineration, contributions from the expected $100 million-plus of decontamination work, government assistance programs, and a rebound in the majority of our services business and comprehensive cost measures, are driving this positive result.
For Safety-Kleen, we anticipate adjusted EBITDA to decline in the high-teens percentage from 2019's $282 million.
We expect the branch business to remain below pre-COVID levels in Q4, but we -- but continuing to improve from Q2 levels as it did in Q3.
At the same time, we expect SK Oil to continue its recovery from Q2 where we temporarily closed our rerefineries.
We have continued to be successful at aggressively managing the front end of our rerefining spread.
In our Corporate segment, we expect negative adjusted EBITDA to be up a few percentage points from 2019's $188 million due to increases in 401(k) contributions, environmental liabilities, severance and bad debt, mostly offset by lower incentive compensation and cost savings.
Based on our current EBITDA guidance and working capital assumptions, we now expect 2020 adjusted free cash flow in the range of $250 million to $270 million.
We believe this puts us in an enviable position to execute the cost allocation strategy that Alan outlined.
To summarize, the company delivered an exceptional quarter both operationally and financially.
We enter the last quarter of the year with fairly strong momentum across our facilities network, including our rerefineries and within the majority of our service businesses.
For the most part, the macroeconomic end markets we serve continue to improve.
Chemical and industrial production, which paused a bit in Q2, began to resume in Q3.
As more parts of the economy have reopened in the U.S. and Canada, vehicle miles driven has increased.
We see a steady march forward to close out the year, albeit with normal seasonality in some of our businesses.
We also are beginning to see some project and turnaround work pushed out until 2021, along with new opportunities such as PFAS actually benefit us down the road.
But overall, we believe the short term and longer-term trends within both our operating segments favor us.
We look forward to closing out 2020 on a strong note and we are well-positioned as we head into 2021.
| q3 adjusted earnings per share $0.90.
q3 earnings per share $0.99.
|
In addition, a slide deck providing detailed financial results for the quarter is also posted on our website.
This quarter e-commerce data is not included in our category overview as the data is not currently available.
It is uncertain when that data will become available in the future.
Today, I am pleased to share our second quarter 2021 results, which build on the momentum from our first quarter as we benefited from elevated demand, expanded distribution and strong execution, all of which led to robust earnings growth.
As we look specifically at the results for the quarter, we maintained top line momentum with organic sales of 12.7% with strong sales across categories and markets around the globe.
We were able to meet that demand while also demonstrating improved cost control and delivering synergies, which partially offset the inflationary headwinds from transportation, tariffs and product input costs.
Our adjusted earnings per share were $0.77, more than double the prior-year, driven by strong organic sales growth, synergy realization, favorable currencies and lower interest expense.
Given our performance in the first half, we are increasing our full fiscal year outlook to the following.
Net sales growth to 5% to 7% adjusted earnings per share to a new range of $3.30 to $3.50 and adjusted EBITDA to a new range of $620 million to $640 million.
Tim will provide more information on both the quarterly results and the revised outlook in a moment.
Turning to category trends.
Consumer demand in our categories remains elevated.
As a reminder, the category data I'm about to provide does not include e-commerce, as Jackie indicated in our opening comments.
Starting with batteries, few changes in consumer behavior that have emerged since the beginning of COVID drove the battery category globally.
First, an increase in the number of devices on per household; and second, an increase in the amount of time devices are being used, which has led to more frequent battery replacement.
During the three months ending February, our brands grew faster than the category and we gained 2.1 share points globally as we benefited from the previously discussed distribution gains.
In the most recent four weeks through March, in markets like the U.S., Australia and the UK, the category experienced year-over-year declines as we lapped the initial spike in COVID related buy.
We anticipated these year-over-year declines, including a 13.9% decline in the U.S. during that four-week timeframe.
However, if you look at those same markets on a two-year basis, there is robust growth when compared to the pre-pandemic levels.
In the U.S., for example, the category was up 14.1% for that four-week period when you compare 2019 to 2021.
Across both the most recent four weeks and the two-year basis, Energizer significantly outpaced the category.
Looking at the U.S. AutoCare category, in the 13 weeks through February, we saw a healthy category growth of 7.4% as the category experienced both an increase in household penetration and existing consumer spending more on cleaning and maintaining their cars.
Given the seasonality of our portfolio, the cold weather and the short-term constraints on our wipes supply which have recently been resolved, Energizer lag category growth in the U.S. Similar to batteries, we are seeing category growth in the latest four weeks and on a two-year basis with Energizer outpacing the category.
Finally, while we don't have e-commerce category data this quarter, our net sales have increased 70% across our combined portfolio, a reflection of our investments and ongoing focus which are paying off and positioning us to lead well into the future.
The environment remains dynamic and we can't predict the impact of vaccines, the virus variance or the resulting consumer habits.
However, in surveys with consumers, many expect their pandemic influence habits to continue, including the increased use of devices such as home health and home office equipment as well as increased focus on their auto cleaning habits.
During the quarter, we faced inflationary headwinds from transportation, tariffs and input costs.
However, we were able to offset a significant portion of these through the delivery of synergies.
As we look to the future, we do not believe that these costs are transitory and have initiated productivity and revenue management efforts to offset them.
Our revenue management efforts are focused in three main areas.
Channel and mix management across our markets, brands and pack sizes, including leveraging the breadth of our strong battery brands from premium to value.
Resetting our promotional framework, including the frequency and depth of promotion and price increases based on a longer-term outlook of product input costs, our innovation pipeline and currency impacts.
As an example of this work, we've recently announced price increases in the U.S. in our AutoCare portfolio to offset the headwinds we are experiencing.
Going forward, we will evaluate a number of factors including macroeconomic conditions, product input costs, transportation costs, market dynamics, innovation and currency to assess the need for additional pricing actions across the balance of our portfolio.
Our internal initiatives designed to reshape our organization and to ensure we are poised for future growth are all progressing well.
Specifically, we are on track to deliver over $120 million in synergies by the end of fiscal 2021, a portion of which is being reinvested in the business through innovation and brand building activities.
We have significantly increased production in the Indonesian plant that we acquired in the first quarter, which provides us with a source of high-quality products at lower costs.
We have built an impressive innovation pipeline for our AutoCare business and have advanced our international growth plans with International AutoCare organic growth for the second quarter at 24%.
Our global product supply team has made significant strides in reshaping our network, which we expect will result in greater efficiency, effectiveness and supply chain resiliency.
And finally, we have launched project to advance our organization's data and analytics capabilities, creating a seamless data flow which starts with the consumer and ease its way through our organization in a more automated manner, will ensure that we are positioned to meet the demands of consumers in a rapidly changing operating environment.
With that, I will now turn things over to Tim who will dive deeper into our financial performance for the quarter and provide more details about our updated outlook for the fiscal year.
As Mark touched on, as we crossed the halfway mark for the fiscal year, we are pleased with our continued momentum.
Our organic revenue growth of 12.7% combined with synergy realization, cost controls, lower interest expense and favorable currency headwinds resulted in strong adjusted earnings per share of $0.77, up more than double the prior-year second quarter and adjusted EBITDA of $148 million, up 20% compared to the prior year.
Taking a deeper look at the organic revenue growth.
We maintained our top line momentum with strong sales across all of our categories and geographies.
Both of our segments showed organic growth with the Americas up nearly 16% and International up 6%, and our Battery and Auto Care businesses grew benefiting from elevated demand and distribution gains that began last summer.
Adjusted gross margin decreased 110 basis points versus the prior year to 40.5% in line with our adjusted gross margin reported in the first quarter.
This was impacted primarily by increased operating costs that resulted from higher tariffs associated with source product to meet elevated demand, transportation, labor and product input cost, all consistent with inflationary trends in the global market.
Additionally, our gross margin was negatively impacted by the lower margin profile associated with recent distribution gains and acquisitions, synergies of $14.2 million and favorable impacts from currency exchange rates partially offset these negative impacts.
As Mark mentioned, we do expect inflationary headwinds over the balance of the current year and into next year.
At the present time, we are essentially fully hedged on a commodity costs for fiscal year 2021.
Looking beyond this year, we will continue to take actions to offset the impact of these headwinds through continuous improvement efforts and pricing actions.
A&P as a percent of sales was 4% relatively flat compared with the prior year's second quarter.
Consistent with our priorities, we invested on an absolute dollar basis in A&P to support our brands and innovation with total A&P spending of $4 million or 19% over the prior year.
Excluding acquisition and integration costs, SG&A as a percent of net sales was 16.7% versus 18.4% in the prior year, primarily the result of elevated sales experienced in the current year.
On an absolute dollar basis, adjusted SG&A increased $6 million in part because of the higher overheads associated with our top line sales growth and foreign exchange rate impacts.
We realized nearly $20 million in synergies this quarter, bringing the total for that first half of 2021 to $40 million.
Since our Battery and Auto Care acquisitions were completed, we have recognized approximately $109 million of synergies, exceeding our initial targets and we expect to realize an additional $10 million to $15 million over the balance of the year.
As I mentioned last quarter, we've taken advantage of favorable debt markets and refinanced a significant portion of our debt over the last 12 months.
We expect these refinancings to contribute to a $30 million reduction in our 2021 interest expense, of which $8 million was realized in the second quarter.
At the end of the quarter, our total debt was approximately $3.5 billion or 4.8 times net debt to credit defined EBITDA, with nearly 80% at fixed interest rates and an all-in cost of debt of 4.2%.
As a result of our strong organic growth in the first half of the fiscal year, we are updating our full year fiscal 2021 outlook for the following key metrics.
Net sales growth is now expected to be between 5% to 7%, owing in large part to a prolonged elevated battery demand in North America and favorable currency impacts.
Adjusted gross margin rate is expected to be essentially flat on a year-over-year basis in line with our previously provided outlook.
Adjusted earnings per share is now expected to be in the range of $3.30 to $3.50.
Adjusted EBITDA is expected to be in the range of $620 million to $640 million.
And finally, adjusted free cash flow is expected to be at the low end of our previously provided range of $325 million to $350 million due to working capital requirements, mostly related to inventory as we look to rebuild safety stocks.
The revised net sales outlook provided for the full year reflects a low-single digit decline over the balance of the year consistent with our prior outlook.
We began lapping elevated COVID-related battery demand late in the second quarter and we will lap the favorable impacts of weather on our AutoCare business, particularly in refrigerants in the third and fourth quarter.
With respect to gross margin rates, we expect them to remain roughly flat throughout the balance of the year as synergies and the impacts of favorable currency offset inflationary cost pressures and mix shifts.
We will also benefit over the rest of the year as our gross margin in the third and fourth quarter of 2020 was burdened with one-time COVID-related costs of $9 million and $19 million, respectively.
As we turn to the second half of the year, we expect to build on the momentum from the strong first half by executing on our strategic priorities to deliver the full year outlook.
We have had a great first half of fiscal 2021, which is a testament to the efforts of our colleagues around the world to make, ship and deliver the products that our consumers need during this time.
We are focused on winning the day by staying focused on the consumer and delivering for our customers, all while building the foundation to win in the future.
| sees fy adjusted earnings per share $3.30 to $3.50 including items.
q2 adjusted earnings per share $0.77 from continuing operations.
sees fy sales up 5 to 7 percent.
increased full year outlook to 5% to 7% net sales growth.
sees full year adjusted earnings per share $3.30 to $3.50.
|
Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations.
Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today's materials and on our website.
On slide 3, you see our GAAP financial results at the top of the page for the second quarter.
Below that, you see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of core operations and facilitates a more meaningful trend analysis.
As you saw in our release, Ameriprise had another strong quarter and I feel good about how we're performing at this point in the year.
The environment in the US continues to improve as the economy reopens more fully and equity markets remain strong.
Recent spikes in the virus are putting some pressure on Europe's recovery.
But overall, there is a lot to be hopeful for, as we look ahead.
As I consider this landscape, we are executing well across our businesses, driving growth through our lower capital fee-based businesses and freeing up capital to generate shareholder value.
We delivered another quarter of excellent organic growth in wealth and asset management and strong productivity across our system.
This included strong client flows with more than $16 billion of inflows in Wealth Management and Asset Management in the quarter, and we ended with assets under management and administration of 28% to $1.2 trillion, another new high.
With regard to recent strategic moves, we completed the RiverSource Life's fixed annuity reinsurance transaction.
This further advances our mix shift to capital-light businesses and frees up approximately $700 million of excess capital.
And our acquisition of BMO's EMEA asset management business, which we announced in April is on track to close in the fourth quarter.
Let's turn to our adjusted operating results for the quarter.
Momentum in the business continues with revenues coming in strongly at $3.4 billion or 22% fueled by organic growth in markets.
Earnings increased 34% excluding the reversal of the NOL a year ago with earnings per share up 39% reflecting strong business growth and capital return and ROE remains exceptionally strong at 37.5%.
As always, we continue to manage expenses well.
Let's move to Advice and Wealth Management, where we are consistently generating good growth.
Our strategic investments continue to be an important part of what we're doing.
People are coming to Ameriprise for a high-quality advice experience backed by leading-edge technology.
Client satisfaction remains high and clients are engaging with us personally and through our extensive digital capabilities.
Importantly, our advisors are embracing our training, coaching, and powerful suite of tools that are fully integrated with our CRM platform, and we continue to add capabilities, including testing a new e-meeting tool that helps advisors prepare for client meetings in minutes.
Our ongoing investments in the technology ecosystem are helping advisors connect with more clients and prospects and run their practices more efficiently.
This high level of engagement is leading to really good client activity, asset flows, and client acquisition.
Total client inflows were up 54% to $9.5 billion and that continue the positive trends we are seeing over the past several quarters.
Consistent with strong client flows, wrap net inflows were $10 billion continuing a very strong run rate.
Transactional activity also grew nicely, up nearly 30% over last year with good volume across a range of product solutions.
All of this momentum along with positive markets drove nice growth in advisor productivity up 14% adjusting for interest rates to a record of 731,000 per advisor.
On the recruiting front, we had 42 experienced advisors join us in the quarter, a bit below where we've been.
We're hearing that advisors have been focused on all that comes with reopening and some held off on transitioning firms of delayed the start dates.
That said, people are getting back to a more normal rhythm.
We are now hosting in-person meetings that complement our virtual recruiting, and we feel good about our pipeline for the third quarter.
Turning to the bank, total assets grew to $9.7 billion in the quarter, we continue to move additional deposits to the bank, and we have adjusted our investment strategy to extend duration a bit.
We are also seeing a good pickup in demand for our lending solutions.
Loan volumes are steadily increasing led by our pledge product, which represents a nice opportunity for future growth.
Wrapping up, AWM on metrics and financials remain very strong.
Margin increased 380 basis points year-over-year and in the quarter at 21.4% showing consistent expansion since the Fed cut short-term rates a year ago.
Moving to retirement and protection solutions, results were good and we continue to advance our strategic initiatives.
With regard to annuities, we had strong variable annuity sales with total sales up 88% from a year ago.
This was driven by increased demand for both our structured variable annuity product and our RAVA product without living benefits.
Together, this represented over two-thirds of sales in the quarter, a continuation of the shift that we're driving.
On the insurance side,Life and Health insurance sales approximately doubled driven by our VUL product which is appropriate product to this rate environment.
Now let's discuss Asset Management, where we continue to grow the business consistent with our plans.
Assets under management rose to $593 billion, up 25% over last year from strong business results and positive markets.
Regarding investment performance, the team continues to generate excellent performance for clients across equity, fixed income, and asset allocation strategies with more than 80% of funds above median over the longer-term time frames on asset weighted basis.
This quarter, we had net inflows of $6.7 billion, an improvement of $4.1 billion from a year ago.
Excluding legacy insurance partner outflows, net inflows were $8.1 billion.
These results build upon the favorable net flows we saw over the past several quarters.
Global retail net inflows were $4.2 billion, driven by another quarter of strong results in North America.
Engagement with clients and intermediaries remain excellent.
Sales and flows traction is broad based with 15 of our investment capabilities generating over $100 million of net inflows in the quarter and in EMEA, retail sales have been weaker given the risk off environment.
As I said, we're hopeful that EMEA flows will strengthen in the second half as the post pandemic reopening and economic recovery continue.
In terms of Global Institutional, we saw a nice improvement with net inflows of $3.9 billion ex legacy partner outflows with wins across equity and fixed income strategies in both North America and EMEA.
I feel good about our sales pipeline.
Turning to BMO, as we discussed with you, the acquisition will add important capabilities and build on our reach in EMEA.
The business remains in positive flows, and we continue to receive good feedback from clients and institutional consultants.
As I mentioned, we're on track to close in the fourth quarter.
In terms of the balance sheet, our capital management is excellent.
The business continues to generate substantial free cash flow, and we're freeing up additional capital.
In fact, the approximately $700 million of our reinsurance deal largely pays for the BMO acquisition giving us additional flexibility to return capital to shareholders at an attractive rate.
In summary, Ameriprise is in a terrific position.
We are performing well and generating strong results.
Our team is serving more clients and deepening relationships.
We are delivering an excellent organic growth in both Wealth and Asset Management, and the BMO transaction will add an additional growth opportunity, and we're accelerating our business mix shift with the reinsurance of the fixed annuity block.
I'd like to close by talking about our team.
Our people have been coming back to the office a few days a week this summer and reacclimating.
It's been great to be together again in person.
We're looking forward to be in more fully back to school where conditions are safe to do so while maintaining a level of flexibility.
Ameriprise delivered very strong financial results across the firm with adjusted operating earnings per share up 39% to $5.27.
We continue to demonstrate excellent metrics, earnings growth, and margin expansion in our core growth businesses of Advice and Wealth Management and Asset Management.
Sales of our retirement and protection products were up significantly from last year, and we're focused in low risk and higher margin offerings.
We are already seeing a shift in our enforced block and expect this to continue going forward.
As Jim mentioned, in the quarter, we continue to advance our strategic priorities to expand our growth businesses and reduce our risk profile.
We remain on track to close the acquisition of BMO's EMEA asset management business in the fourth quarter, which will expand our core geographic and product capabilities in attractive and growing market segments.
Additionally, we entered into an agreement to reinsure approximately $8 billion of fixed annuities and closed on the RiverSource Life transaction in early July.
As noted, we will free up approximately $700 million of capital, and we will have a marginal projected impact on fixed annuity profitability.
In addition to the reinsurance transaction, we continue to effectively manage our risk profile through product mix shift to lower risk and higher margin retirement and protects solution offerings.
Our diversified model generates robust free cash flow and strong balance sheet fundamentals.
We returned 92% of adjusted op earnings to shareholders in the quarter, aligning us to our projected 90% target for the full year.
In the quarter, Ameriprise's adjusted operating net revenues grew 22% and PTI increased 35%, reflecting continued excellent business performance.
Revenue and earnings in our capital-light businesses of AWM and asset management drove nearly 80% of the total, excluding corporate and other, a significant shift from a year ago even normalizing for the unusually high earnings in RPS last year.
We remain disciplined on expenses.
G&A expenses were well managed, up 6% given the strong business growth in the quarter.
Overall, we delivered another excellent quarter that underscores the strength of the business model that continues to yield robust profitable growth.
Turning to slide 7.
Advice and Wealth Management delivered another quarter of excellent organic growth with total client assets up 28% to $807 billion.
Total client flows were $9.5 billion, the third consecutive quarter of total client flows at or above $9 billion, demonstrating the sustainability of our organic growth.
Our focus is not only on growth, but profitable growth.
In the quarter, our pre-tax adjusted operating margin was 21.4%, an increase of 380 basis points from the prior year and an increase of 70 basis points sequentially despite continued low interest rates.
On page 8, financial results in Advice and Wealth Management were very strong with pre-tax adjusted operating earnings of $423 million, up 56%.
Adjusted operating net revenues grew 29% to 2 billion, fueled by robust client flows and a 29% increase in transactional activity in addition to strong market appreciation.
On a sequential basis, revenue increased nicely to 5%.
Ameriprise Bank continues to grow at a solid pace reaching nearly $10 billion in the quarter after adding $700 million of sweep cash to the balance sheet.
Expenses remain well managed, and we continue to exhibit strong expense discipline.
G&A expense increased 3%, reflecting increased activity and the timing of performance-based compensation expense.
Going forward, we remain committed to managing expense and margin in a disciplined manner.
Turning to page 9, Asset Management delivered another strong quarter, driven by excellent investment performance and sustained inflows, resulting in an outstanding financial results.
Net inflows were 8.1 billion, excluding legacy insurance partners, which is a continuation of an improved solid flow trends.
Adjusted operating revenues increased 32% to $879 million, a result of the cumulative benefit of net inflows and market appreciation.
On a sequential basis, revenues were up 6%.
Our fee rate remained strong at 52 basis points reflecting the strong momentum we are seeing across the board with strength in both equity and fixed income strategies.
Expenses remain well managed and in line with expectation given the revenue environment.
G&A expenses grew 12%, primarily from the timing of compensation expense related to strong business performance as well as foreign exchange translation and higher volume related expenses.
As with AWM going forward, we will manage expense tightly.
Pre-tax adjusted operating earnings grew 79%, and we delivered a 45% margin.
Moving forward, we expect strong financial performance to continue and anticipate that margins will remain in the mid 40% range over the near term driven by current robust equity markets.
Let's turn to page 10, retirement and protection solutions continue to perform in line with expectation in this environment.
Pre-tax adjusted operating earnings were $182 million.
Sales in the quarter were up significantly off a low base in the prior year driven by the pandemic.
Sales were above pre COVID levels resulting in an increase in distribution expense in the quarter.
Additionally, earnings in the prior year were positively impacted by the lower surrenders and withdrawals relating to the pandemic environment.
Importantly, we continue to reduce our risk profile by growing sales of retirement products without living benefits.
Retirement sales increased 88% during the quarter with two-thirds of the sales and products without living benefits.
This has shifted in the overall book and now only 62% of our block has living benefit riders, down over 200 basis points from a year ago.
In protection, sales nearly doubled as we continue to see a meaningful increase and higher margin in VUL and a significant decline in IUL.
This mix shift in both Retirement and Protection products are expected to continue going forward.
Now let's move to the balance sheet on the last slide.
Our balance sheet fundamentals remain extremely strong, including our liquidity position of $3 billion at the parent company and substantial excess capital of $2 billion, which does not include the capital release from the recently announced fixed annuity transaction.
Adjusted operating return on equity in the quarter remained strong at 37.5%.
We returned $585 million to shareholders in the quarter through dividends and buyback, and we are on track with our commitment to return 90% of adjusted operating earnings to shareholders for the year.
| q2 adjusted operating earnings per share $5.27.
quarter-end assets under management and administration were up 28% to $1.2 trillion.
|
Specifically, during the call you will hear references to various non-GAAP financial measures, which we believe provide insight into the company operations.
Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today's materials and on our website.
On slide 3, you see our GAAP financial results at the top of the page for the third quarter.
Below that, you'll see our adjusted operating results followed by operating results excluding unlocking, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis.
We completed our annual unlocking in the third quarter.
Many of the comments that management makes on the call today will focus on adjusted operating results.
And with that, I'll turn over to Jim.
As you saw, Ameriprise delivered another excellent quarter building on a strong year.
We continue to perform extremely well.
The environment in the U.S. is largely positive as the economy continues to show solid growth, equity markets remain strong and have recovered from a weaker September.
Inflation has picked up given demand and there remains some headwinds due to the pandemic.
In Europe, conditions continue to improve.
As you consider this backdrop, we're executing well and consistently generating important organic growth and shareholder value.
Our differentiated results reflect the strategic investments we've made in the business and a culture built on performance and a high level of care for our clients and team.
Our growth businesses are delivering strong client flows and nearly $14 billion of inflows in the wealth management and asset management businesses in the quarter.
So with these positive flows and markets, assets under management and administration are up 21% to $1.2 trillion.
Turning to our financials.
The excellent results we delivered in the quarter reflect the high level of performance we've generated this year.
Adjusted operating results for the quarter excluding unlocking, revenues came in strongly at $3.5 billion, up 17%, fueled by continued organic growth and attractive markets.
Earnings rose 32% with earnings per share up 38% reflecting strong business growth and capital management and ROE is exceptional at nearly 48% compared to 35.5% a year ago.
Let's move to Advice and Wealth Management where we continue to deliver meaningful and consistent growth.
With the strategic investments we've made over many years coupled with our expertise and planning we are delivering a differentiated and referable advice experience.
Clients are actively engaged with us.
They are turning to Ameriprise and our advisors for comprehensive advice and solutions and they are leveraging our extensive digital capabilities to track and achieve their goals.
Our client experience is sophisticated, personalized, and supported by our integrated digital technology and backed by our strong reputation.
In fact, Investor's Business Daily recently named Ameriprise the number 1 most trusted wealth manager.
We've earned this impressive credential based on how consumers rate Ameriprise for how we serve them, the quality of our products and services, our commitment to ethical practices, fair prices and protecting personal data.
To be number one in trust is high praise and we're honored.
This type of recognition and client satisfaction doesn't happen without an industry-leading advisor force that's highly engaged.
Our advisors are benefiting from our training, coaching, and suite of tools to build and deepen client relationships, track prospects, and run and grow their practices through our fully integrated platform.
This positive momentum and engagement are leading to robust client activity, asset flows, and client acquisition.
Our results reflect the traction in our organic growth that we've consistently demonstrated.
Total client inflows were up 64% to $10 billion continuing the positive trend we've seen over the past several quarters.
wrap net inflows were excellent at $9.4 billion, up 65%.
Transactional activity grew for another quarter up nearly 16% over the last year with good volume across a range of product solutions.
Advisor productivity reached another new high up 18% adjusted for interest rates to a record $766,000 per advisor.
I'd highlight that our advisors continued to be recognized across the industry, including in top national rankings from Barrons, Forbes, and Working Mother.
We have long focused on driving productivity growth for advisors and we're generating some of the highest growth rates in the industry.
At the same time, we complement this with targeted recruiting of experienced productive advisors who are attracted to our brand and value proposition.
In the quarter, recruiting picked up nicely and another 104 experienced advisors joined us.
We're getting a great response from our in-person events and virtual recruiting activities and importantly the quality of our recruits is very good.
Let's turn to the bank with total assets grew to nearly $11 billion in the quarter.
The trends we've been discussing with you remain consistent.
We continue to move additional deposits to the bank and we're seeing a growing demand for our recently introduced lending solutions, especially our pledged loan product that is getting good initial traction.
To wrap up Advice and Wealth Management, our metrics and financials are very strong.
Pretax income was $459 million, up 43% and margin was strong at 22.4%, up 320 basis points, which compares very well in the industry.
Now I'll turn to Asset Management, where we continue to build on our momentum and results.
Assets under management increased 17% to $583 billion.
Our outstanding researches quarter our business and our ability to consistently generate excellent investment performance for clients.
That's across equity, fixed income, and asset allocation strategies with more than 85% of our funds above the medium on an asset weighted basis on a 3 year, 5 year, and 10 year basis.
In fact, compared to the broad group of U.S. peers we track, we perform at or near the top of the Lipper rankings for multiple time periods.
Flows remained strong given our excellent investment performance, client experience, and continued support we provide advisors and our partner firms.
We had net inflows of $3.9 billion in the quarter.
This is an improvement of nearly $5.5 billion from a year ago.
Global retail net inflows were $1.8 billion driven by North America, while overall industry sales were a bit weaker in the quarter given the summer months, overall, our flow traction is good.
We continue to have good sales and equity strategies and consistent with our plans, we are gaining traction within fixed income and that's across multiple channels and structures.
I'd note that we expanded our successful suite of strategic beta fixed income ETFs in the quarter with the launch of the Columbia short duration bond ETF.
In EMEA, retail, market conditions remain challenging, and while we experienced some net outflows flows have improved from the second quarter.
In terms of global institutional excluding legacy insurance partners net inflows were $3.5 billion.
The team is working hard to generate wins across equity and fixed income strategies in each of our 3 regions.
In fact, we've seen a number of current clients adding to their positions.
Of course, we recognize there will be shifts in flows quarter to quarter given the size of certain institutional mandates.
Our client service and consulting relation teams have good traction and we're making considerable progress expanding our consultant ratings which position us well for growth.
As I look at the year, thus far for institutional we're making good progress.
That includes expanding our presence in APAC where we announced the opening of our new Japan office that complements our other locations in the region.
Turning to our BMO EMEA acquisition.
We look forward to closing the transaction shortly, pending final regulatory approval.
I feel good about how we're tracking.
We'll be able to provide more details after we close and when we release 4th quarter results in January.
To wrap up asset management, we are serving clients well, while maintaining our attractive organic growth and profitability.
Moving to Retirement and Protection Solutions.
Our results continue to be strong.
These are high quality businesses that generate solid earnings and excellent free cash flow.
We continue to focus on non-guaranteed retirement and asset accumulation protection products that deliver benefits to clients and our shareholders.
Consistent with this strategy, the majority of our annuity sales in the quarter did not include living benefit guarantees.
Sales increased 28% and have shifted to both our structured variable annuity product and our RAVA products without living benefits.
On the insurance side, Life and Health insurance sales increased 77% driven by our VUL product, appropriate given the current low rates.
We've also seen good response to our DI products reflecting our financial planning approach.
To summarize Ameriprise has built a differentiated book of business over many years that deliver superior financial results that are sustainable, it starts with providing clients with solutions that meet their long-term retirement needs, have appropriate benefits and generate good risk-adjusted returns for the company.
Now let me highlight why Ameriprise is clearly differentiated in financial services.
In terms of our balance sheet, our capital management remains the real strength.
Our Advice and Wealth Management and Asset Management businesses are performing very well and generating excellent growth, margins, and returns, we compared quite favorably across the industry and our Retirement and Protection business is valuable and high quality generating good free cash flow and returns.
It's entirely focused on our channel and differentiated from anything else out there.
Listen, we're generating some of the strongest returns in the industry and have been for quite some time and we're able to do it with lower volatility.
Importantly, we've returned capital to shareholders at very attractive levels.
In fact we consistently returned nearly all of our operating earnings to shareholders annually and if you look at that over the last 5 years we reduced our average weighted diluted share count by 28%.
This is all while we're consistently investing in the business and maintaining a sizable excess capital position that gives us flexibility.
In closing, Ameriprise is positioned well, our team is focused on key priorities to drive organic growth and we're delivering for our clients.
In fact, I was just with our top advisors last week to recognize their achievements and discuss our growth priorities.
It was terrific being together.
As I think about all of the enterprise, it's great to have people back in the office more in person again, as we focus on finishing the year strong.
In fact we reached new record levels for revenue, pre-tax adjusted operating earnings and return on equity in the quarter.
We delivered strong flows, earnings growth, and margin expansion in our core wealth and asset management businesses.
Results in the quarter are continuation of the excellent trends we have been seeing this year as we successfully execute our growth strategies.
This is driving our business mix shift with Wealth and Asset Management representing about 80% of earnings.
Retirement and Protection performed well and we remain focused on optimizing our risk return trade-offs in this environment.
We generated robust free cash flow across all our businesses.
Our balance sheet fundamentals are excellent with significant excess capital.
Combined this allows Ameriprise to consistently return substantial capital to shareholders with 95% of adjusted operating earnings returned in the quarter, putting us on track to achieve our 90% target for the full year.
We are seeing excellent AUM growth of 21% to $1.2 trillion from flows and markets.
Flows in these businesses have improved substantially up over 200% from a year ago and up nearly 140% on a year-to-date basis, representing the successful execution of our growth strategies in each of these businesses.
Revenues in Wealth and Asset Management grew 23% to nearly $3 billion with pre-tax operating earnings of $744 million, up 44%.
Importantly, earnings growth from wealth and asset management outpaced revenue growth, demonstrating the operating leverage of the business and the blended margins for these 2 businesses expanded 370 basis points from last year, with wealth management up 320 basis points and asset management up 500 basis points further illustrating our ability to deliver profitable growth.
Turning to slide 8.
This chart clearly illustrates our success executing our growth and business mix shift strategy, specifically the wealth and asset management businesses are driving about 80% of the earnings over the past 12 months.
This is coupled with a stable $700 million contribution from Retirement and Protection Solutions.
With that as an overview, let's review the individual segment performance beginning Wealth Management on slide 9.
The strategies we have in place to support advisors and improve their productivity using integrated industry leading tools, technology, and training has resulted in increased flows and transactional activity.
Total client assets were up over 25% to $811 billion over the past 2 years.
Our advisor force continued to deliver exceptional productivity growth across market cycles.
Revenue per advisor reached a new high of 766,000 in the quarter up 24% over the past 2 years.
Importantly over the past 2 years, the annualized organic growth rate for Wealth Management flows improved to 6% compared to 4% in 2019.
This is coming from advisors penetrating their existing client base and adding new clients complemented by recruiting experienced advisors, and we are pleased that our strategies are translating to this level of organic growth.
On page 10, you can see that we are delivering growth, as well as excellent financial results in Wealth Management, in fact revenue and earnings for Wealth Management also reached record levels this quarter.
Adjusted operating net revenues grew 23% to over $2 billion fueled by robust client flows, a 16% increase in transactional activities and market appreciation.
Wealth management pre-tax adjusted operating earnings increased 43% to $459 million.
Ameriprise Bank is adding to the growth in wealth management primarily by allowing us to pick up incremental spread cash deposits.
In total, the bank has nearly $11 billion of assets after moving in an additional $1.1 billion of sweep cash onto our balance sheet in the quarter.
In the quarter, the average spread on the bank assets was 144 basis points compared to off-balance sheet cash earnings of 28 basis points.
In addition, we are seeing good growth in banking products including pledge lending that has gained substantial traction with our advisor base since the product was launched in the 4th quarter of 2020.
Expenses remain well managed, G&A expense increased 1% as higher activity based expenses and performance-based compensation are largely offset by expense discipline.
In the quarter, our pre-tax adjusted operating margin was 22.4%, an increase of 320 basis points from the prior year and 100 basis points sequentially.
Let's turn to Asset Management on Slide 11 where significant success is also being realized.
Over the past 2 years, asset under management increased 18%.
We also saw a net flow shift from outflows in 2019 to a 5% organic growth rate this year.
As Jim mentioned, we are seeing positive flows across both retail and institutional distribution channels supported by excellent investment performance and like the industry, we saw a bit of a slowdown during the summer months though our relative position among our peers remain strong.
The operating leverage in asset management is significant with margins put a trailing 12 months of 44.6%, up 830 basis points over the past 2 years.
Turning to Page 12, you see these trends generated excellent financial performance in Asset Management.
Adjusted operating revenues increased 24% to $915 million, a result of the cumulative benefit of net inflows, market appreciation, and performance fees on a sequential basis, revenues grew 4%.
Importantly, our fee rate remained strong and stable at 53 basis points, expenses remain well managed in line with expectation giving to revenue growth.
G&A expenses were up 14% primarily from compensation expense and other variable costs related to strong business performance as well as foreign exchange translation.
Pre-tax adjusted operating earnings grew 44% to $285 million and we delivered a 49% margin.
Moving forward, we expect strong financial performance to continue and anticipate that margins will remain in the mid 40% range over the near term driven by the continued flow momentum and equity markets at these levels.
As Jim mentioned, we are on track to close the BMO EMEA transaction in the 4th quarter.
This acquisition will add significant capabilities from a strategic perspective and drive improved business fundamentals going forward.
Let's turn to page 13.
Retirement Protection Solutions continued to reflect excellent on the line business performance, differentiated risk profile and a continued generation of substantial free cash flow.
Pre-tax adjusted operating earnings were $192 million excluding unlocking down from $206 million a year ago.
Current year results reflect lower profitability from increased sale levels whereas results in the prior year benefited from lower sales as well as lower surrenders and withdrawals.
In total unlocking impacts in the quarter were immaterial resulting from consistent client behavior and interest rates that were in line with prior year estimates.
We saw a strong pickup in sales of Retirement and Protection products in the quarter with a continued mix shift toward non-guaranteed retirement products.
During the quarter, the variable annuity sales increased 28% from last year with 72% of sales and products without living benefit guarantees.
Account value with living benefits represent only 62% percent of the overall book now down another 200 basis points in the past year.
We have similar trends in protection with sales up 77% driven by higher margin VUL sales.
This mix in sales and account values for both retirement protection products are expected to continue.
You will observe, that the business continues to perform in line with expectations from a claims perspective, the policy count continues to decline as the book ages and we are garnering additional premium rate increases, now approximately 90% of the book has extensive or substantial credible experience and I will note that we did not incorporate recent improvements in mortality and morbidity related to COVID-19 into our long-term assumptions.
Overall, our actual performance continues to be in line with expectations.
In the quarter, you have seen transactions announced in insurance and annuity space.
In light of these announcement, I thought it would be helpful to provide additional context as it relates to how we view our business.
As Jim has indicated, we believe our I&A business is a highly valuable asset with a client solution driven capability that has generated sustainable and predictable financial results and free cash flow generation coupled with a low risk profile.
The driver of this is our prudent approach in building all aspects of this business, resulting in a proven track record of superior value creation.
The behavior of our clients has been consistent reflecting the nature of the product sale as part of the financial plan.
We have taken a conservative approach to product features including guarantees and crediting rates as well as requiring asset allocation for living benefits.
We have maintained consistent sales level and industry market share over the last decade, avoiding the arms race seen from time to time in the industry.
And our economic hedging program has performed well across market cycles with 97% effect in this over the past 5 years.
Finally, we have taken prudent and appropriate actions to manage the risk profile of the business, for example we stopped sales of LTC in 2002 and have successfully implemented premium rate actions and increased protection with our LTC reinsurance partner.
We also sold our Auto & Home Business, reinsured our fixed annuity businesses and have reduced living benefit sales.
This consistent and prudent approach has resulted in a stable earnings with 24% percent margins and a pre-tax return on capital exceeding 50% with consistent free cash flow generation.
Our balance sheet fundamentals are strong with a high quality investment portfolio and strong risk-based capital ratio.
This performance is best in class in the industry over many years.
We have demonstrated superior return on capital, dividends paid and capital ratios, and our net amount at risk is substantially lower than peers.
In summary, this is a very valuable business and we are well positioned.
It is now only 20% of our earnings, we have demonstrated that the exposure profile is well managed, and we completed our annual unlocking with very minor updates.
With that being said, we will continue to evaluate options from a position of strength to make the best decisions to drive all aspects of shareholder value creation.
Now let's move to the balance sheet, another area we have delivered strong results.
Our balance sheet fundamentals and risk management capability are cornerstones of what we do.
It starts with how we manage the business to generate substantial free cash flow in each of our segments.
We had holding company available liquidity of $3.7 billion, an excess capital of 2.7 billion at the end of the quarter.
We prudently manage credit risk where we maintain an overall AA minus credit quality in our investment portfolio and have a highly effective hedge strategy.
These strong fundamentals allow us to deliver a consistent and differentiated level of capital return to shareholders.
As I mentioned, we returned 95% of earnings to shareholders in the quarter and we are on track to hit our 90% target for the full year.
We have executed our capital return consistently over the years.
Our share count declined 28% over the past 5 years, even with issuing shares to fund share based compensation programs.
Over the past year alone, the share count declined 5%.
In summary, strong fundamentals across our businesses delivered substantial free cash flow.
We manage the balance sheet conservatively and we have substantial liquidity and capital flexibility.
Combined these attributes, position us to continue delivering a differentiated level of capital return to shareholders going forward.
| quarter end assets under management and administration was $1.2 trillion, up 21 percent.
|
Before we begin, I would like to announce our next two investor events.
Also, please mark your calendars for our first quarter earnings conference call, which will take place on Tuesday, April 26.
During today's conference call, we will be making certain predictive statements that reflect our current views about 3M's future performance and financial results.
These changes are a result of discussions we have had with many of you over the last few years, along with recent benchmarking work that we have done.
First, we recognize that dual credit reporting has presented some challenges.
For example, having a clear understanding of the impact of disposable respirator performance over the past two years on our segment results, particularly safety and industrial and healthcare.
Therefore, we have decided to eliminate dual credit reporting and will no longer report dual credit within our business segments starting in Q1 2022.
We will provide a Form 8-K ahead of our February 14 meeting with updated history for the past three years reflecting this change.
And second, we will be providing organic sales change components in aggregate as opposed to reporting separate volume and price components.
With this change, we will also be updating the descriptor to organic sales versus organic local currency sales.
Please note, this change will be reflected in our 2021 Form 10-K filing.
We remain committed to providing strong transparency of reporting our financial performance.
3M delivered a solid performance in the fourth quarter, closing out a strong year as we focused on serving customers in a dynamic external environment.
Our revenue in the quarter finished better than we expected across all businesses, including an increase in respirator demand due to the impact from the Omicron variant.
Organic growth companywide was 1% on top of 6% in last year's Q4, with earnings of $2.31 per share driven by a good December strong execution and a lower-than-anticipated tax rate.
I am pleased with how we effectively managed production operations to meet customer demand despite ongoing logistics and raw material challenges that are impacting many companies.
While focusing on customers, we also saw good benefits from our actions to drive productivity, improve yields and control costs, which helped offset the margin impact of supply chain disruptions, inflation and COVID-19.
In addition, our selling price actions continued to gain traction with a year-on-year increase of 2.6% in Q4 versus 1.4% in Q3.
We expect this to be a tailwind for the full year in 2022.
Overall, demand remains strong across our market-leading businesses, and we are continuing to prioritize growth investments in large attractive markets.
We also took actions to strengthen our portfolio and advance our commitment to sustainability.
I will highlight examples of our progress later in the call.
In summary, we delivered a good finish to the year and are well-positioned to drive growth in 2022.
As Bruce noted, we will provide full year guidance along with strategic updates from our business leaders at our February 14 meeting.
Monish will now take you through the details of the quarter.
Looking back on the fourth quarter, the 3M team continued to manage through a challenging environment.
As Mike noted, revenues for December were better than previously expected across all the businesses, including disposable respirators as the Omicron variant increased near-term demand.
Though manufacturing, raw materials, and logistic challenges persisted throughout the quarter, the 3M team executed well by driving operating rigor and managing costs while continuing to invest in the business.
Turning to the fourth-quarter financial results.
Sales were $8.6 billion, up 0.3% year-on-year or an increase of 1.3% on an organic local currency basis against our toughest quarterly comparison last year.
Operating income was $1.6 billion with operating margins of 18.8% and earnings per share of $2.31.
On this slide, you can see the components that impacted our operating margins and earnings per share performance as compared to Q4 last year.
The biggest impact to fourth-quarter results was the ongoing effects from the well-known global supply chain, raw materials, and logistics challenges, which persisted throughout the fourth quarter.
Our enterprise operations teams continue to work tirelessly through ever-evolving changes in customer demand while navigating these challenges to keep our factories running, serve our customers and protect the health and safety of our employees.
We continue to experience significant productivity headwinds in our factories due to shorter production runs and more frequent production changeovers throughout the quarter as we focused on serving our customers.
As forecasted at the start of last year, we also had higher year-on-year compensation and benefits costs.
These impacts were partially offset through strong spending discipline along with benefits from restructuring and lower legal-related expenses versus last year's Q4.
We also continue to prioritize investments in growth, productivity and sustainability to drive long-term performance and capitalize on trends in large, attractive markets, including automotive, home improvement, safety, healthcare, and electronics.
All in, these impacts lowered operating margins by 2.4 percentage points and earnings per share by $0.33 year on year.
Moving to price and raw materials.
As expected, our selling price actions continue to gain traction as we went through the quarter.
On a year-on-year perspective, Q4 selling prices increased 260 basis points as compared to 140 basis points in Q3 and 10 basis points in Q2.
In dollar terms, higher year-on-year selling prices offset raw material and logistics cost inflation in Q4, which resulted in an increase in earnings of $0.03, however, remained a headwind of 20 basis points to operating margins.
Next, foreign currency, net of hedging impacts, was a headwind of 10 basis points to margins and $0.04 per share year on year.
There were three other nonoperating items that impacted our year-on-year earnings per share performance.
First, a reduction in other expenses resulted in a $0.10 earnings benefit.
This included a $0.06 benefit from non-operating pension, which was similar to prior quarters.
We also have been proactively managing our debt portfolio, including the early redemption of $1.5 billion, which helped drive a $0.04 benefit year on year from lower net interest expense.
Second, a lower tax rate versus last year provided a $0.12 benefit to earnings per share.
Our Q4 tax rate was benefited by geographic income mix and favorable adjustments related to impacts of U.S. international tax provisions.
And for the full year, our tax rate was 17.8%.
And finally, average diluted shares outstanding decreased 1% versus Q4 last year, increasing per-share earnings by $0.02.
Fourth-quarter adjusted free cash flow was $1.5 billion or down 30% year on year, with conversion of 110%.
For the full year, adjusted free cash flow was $6 billion with adjusted free cash flow conversion of 101%.
The decline in our Q4 year-on-year free cash flow performance was driven primarily by lower non-cash legal and restructuring expenses versus Q4 last year, along with higher litigation-related payments and capex investments, which was partially offset by improvements in working capital velocity.
Fourth-quarter capital expenditures were $556 million, up $134 million year on year and $213 million sequentially as we continue to invest in growth, productivity and sustainability.
Looking at the full year, capital expenditures totaled $1.6 billion.
During the quarter, we returned $1.8 billion to shareholders through the combination of cash dividends of $848 million and share repurchases of $938 million.
For the full year, we returned $5.6 billion to shareholders in the form of dividends and share repurchases.
Our strong fourth-quarter cash flow generation and disciplined capital allocation enabled us to continue to maintain a strong capital structure.
We ended the year with $4.8 billion in cash and marketable securities on hand and reduced net debt by $1.2 billion or 8% versus year-end 2020.
As a result, we exited the year with net debt-to-EBITDA of 1.4 times.
Our strong balance sheet and cash flow generation capability, along with disciplined capital allocation, continues to provide us the financial flexibility to invest in our business, pursue strategic opportunities and return cash to shareholders while maintaining a strong capital structure.
I will start with our Safety and Industrial business, which posted an organic sales decline of 1.3% year on year in the fourth quarter.
This result included a disposable respirator sales decline of approximately $110 million year on year, which negatively impacted Safety and Industrial's Q4 organic growth by nearly 4 percentage points.
Our personal safety business declined mid-teens organically versus last year's 40% pandemic-driven comparison.
Looking ahead, we anticipate that COVID-related disposable respirator demand will decline as we move through 2022.
However, we remain prepared to respond to changes in demand as COVID-related impacts continue to evolve.
Turning to the rest of safety and industrial.
Organic growth was led by a double-digit increase in closure and masking.
In addition, the abrasives business was up high single digits.
Industrial adhesives and tapes and electrical markets were each up mid-single digits.
Automotive aftermarket was flat, while roofing granules declined against a strong comparison from last year.
Safety and industrial's fourth-quarter operating income was $543 million, down 22% versus last year.
Operating margin was 17.7%, down 440 basis points versus Q4 last year.
Year-on-year operating margin performance was impacted by a decline in sales volumes, higher raw materials, logistics, and litigation-related costs, manufacturing productivity impacts, along with last year's gain on sale of property.
Partially offsetting these impacts were selling price increases, strong spending discipline, net benefits from restructuring, and a smaller increase to our respirator mask reserve.
Moving to transportation and electronics, which declined slightly on an organic basis due to the continued impact of the semiconductor supply chain constraints.
Our auto OEM business was down mid-teens organically year on year, compared to the 13% decline in global car and light truck builds.
As we mentioned last quarter, we experienced an increase in channel inventory levels with the tier suppliers in Q3 as auto OEM production volumes decelerated from 18.5 million builds in Q2 to 16.3 million in Q3.
During the fourth quarter, OEM production volumes increased to 20.2 million builds or up over 20% sequentially.
This sequential increase in build activity drove a reduction of channel inventory levels with the tier suppliers during the quarter, which negatively impacted Q4 organic growth for our automotive business by approximately 10 percentage points.
For the full year, our auto OEM business was up low double digits, as compared to global car and light truck builds growth of 2%.
Throughout the year, we continued our track record of success of winning with our customers and gaining penetration on new internal combustion and electric vehicle platforms.
Our electronics-related business declined low single digits organically, with declines across consumer electronics, particularly smartphones and TVs.
These declines were partially offset by continued strong demand for our products and solutions in semiconductor and factory automation end markets.
Turning to the rest of transportation and electronics.
Commercial solutions grew low double digits, advanced material was up high single digits, while transportation safety declined high single digits.
Fourth-quarter operating income was $406 million, down 15% year on year.
Operating margins were 17.6%, down 270 basis points year on year.
Operating margins were impacted by higher raw materials and logistics costs, manufacturing productivity impacts along with an increase in comp and benefits costs.
These year-on-year headwinds were partially offset by increases in selling price, strong spending discipline, and net benefits from restructuring actions.
Turning to our healthcare business, which posted a fourth-quarter organic sales increase of 1.6%.
This result included a nearly four-percentage-point drag from the year-on-year sales decline in disposable respirators.
Our medical solutions business declined low single digits organically, which included a six-percentage-point impact from the year-on-year sales decline in disposable respirators.
Fourth-quarter elective medical procedure volumes were approximately 90% of pre-COVID levels, which is similar to Q3 and last year's Q4.
Sales in our oral care business grew low single digits year on year as patient visits continue to be near pre-COVID levels.
The separation and purification business increased high single digits year on year with sustained demand for biopharma filtration solutions for COVID-related vaccines and therapeutics.
Health information systems grew mid-single digits, driven by strong growth in revenue cycle management and clinician solutions.
And finally, food safety increased high single digits despite continued COVID-related impacts of the global hospitality industry.
In December, we announced the planned separation of this business, which will be combined with Neogen.
Health care's fourth-quarter operating income was $536 million, down 2% year on year.
Operating margins were 23.6%, down 50 basis points.
Year on year, operating margins were negatively impacted by raw materials and logistics costs, manufacturing productivity, compensation and benefits costs, and food safety deal-related costs.
These impacts were partially offset by benefits from leverage on sales growth, strong spending discipline, and restructuring actions.
For the quarter and full year, healthcare's adjusted EBITDA margins were strong, coming in at nearly 31%.
Lastly, our consumer business finished out the year strong with organic growth of 4.9% year on year on top of last year's 10% comparison.
Our home improvement business continued to perform well, up low single digits on top of last year's strong double-digit comp.
This business continued to deliver strong growth with our home improvement retail customers in our category-leading Filtrete, Command, and Scotch Blue brands.
Stationery and office, along with the consumer health and safety business, each grew low double digits organically in Q4 as both of these businesses continue to lap last year's COVID-related comparisons.
The holiday season demand drove strong growth for our Scotch-branded products during the quarter.
We also posted strong growth in Post-it-branded products despite workplace reopenings being pushed out due to the resurgence of COVID cases.
And finally, our home care business was up low single digits versus last year's strong COVID-driven comparison.
During the quarter, we took a small portfolio action to divest our flow care business in Europe, which is expected to close in Q1.
Consumer's operating income was $316 million, flat compared to last year.
Operating margins were 21.4%, down 100 basis points year on year.
Operating margins were impacted by higher raw materials, logistics, and outsourced hard goods manufacturing costs, manufacturing productivity impacts, along with increased compensation and benefit costs.
These impacts were partially offset by leverage on sales growth, which included good price performance, strong spending discipline, and net benefits from restructuring actions.
That concludes my remarks for the fourth quarter.
The macro-environment in 2021 was defined by strong but fluid end markets, semiconductor constraints, supply chain, and logistics challenges, along with ever-evolving impacts from COVID-19, particularly on the global healthcare industry.
These dynamics were further compounded by winter storm Uri in mid-February, which led to significant disruptions to raw material supply and logistics availability, which further disrupted global supply chains.
All of these factors collectively helped contribute to broad-based and accelerating inflationary pressures throughout the year.
Against this backdrop, the 3M team kept a relentless focus on serving customers, ensured continuity of raw material supply, managed ever-changing manufacturing production plans, navigated logistic constraints, and delivered strong full-year organic growth of 9%, with all business segments posting high single-digit growth.
We also worked hard to raise selling prices, control spending, and drive improvements in operating rigor through daily management, leveraging data and data analytics while continuing to execute on our restructuring actions.
These actions, combined with strong organic growth, helped to deliver full-year operating margins of 20.8% or down 50 basis points year on year on an adjusted basis.
This result included an 80-basis-point headwind from raw materials and logistics inflation net of selling price actions, along with increased spending to advance our sustainability efforts and higher legal-related expenses.
In addition, we continue to focus on working capital improvement, which helped contribute to another year of robust adjusted free cash flow coming in at $6 billion.
We made good progress in 2021 and are well-positioned for 2022.
And in the spirit of continuous improvement, there is always more we can do and will do.
As I look back at 2021, I am proud of our team and our performance.
Our results demonstrated the strength of the 3M model and our investments in growth, productivity and sustainability advanced our company.
In the face of an uncertain environment, we delivered strong organic growth of 9%, with strength across all business groups, along with margins of 21%.
This drove a 14% increase in adjusted earnings per share.
These results exceeded our original guidance that we communicated in January of 2021 and recent updates to that guidance.
We generated robust free cash flow of $6 billion with an adjusted conversion rate of 101%, enabling us to invest in the business, reduce net debt by $1 billion and return significant cash to shareholders.
All in, 3M returned $5.6 billion to our shareholders through dividends and share repurchases, and 2021 marked our 63rd consecutive year of dividend increases.
We continue to help the world respond to COVID-19 with 2.3 billion respirators distributed last year for a total of 4.3 billion since the onset of the pandemic, while engaging with governments on how to prepare for future emergencies.
We stepped up our commitments to ESG, including sustainability as we made progress on new goals to achieve carbon neutrality, reduce water use, improve water quality and reduce plastics.
As part of our ongoing sustainability commitments, we proactively manage PFAS and deploy capital to make our factories and communities stronger and more sustainable.
As one example, we are on track to complete a new water filtration system in Cordova, Illinois by the end of 2022.
In Zwijndrecht, Belgium, we installed and activated a treatment system last month to reduce PFAS discharges by up to 90%.
This is part of a EUR 125 million commitment to improve water quality and support the local community.
As disclosed in our 8-K in November, we continue to work with local authorities related to a safety measure that shut down certain operations in Zwijndrecht.
We are also appealing and discussing with local authorities a new change to our wastewater discharge permit that if implemented, could have a material impact and potentially interrupt production at the entire site, impacting customers and the supply of material to other 3M factories.
We are actively working to address current and future potential impacts, and we'll update you as appropriate.
With respect to litigation, we reached settlements last year in certain PFAS cases and continue to vigorously defend ourselves on combat arms.
As always, we encourage you to read our SEC filings for updates on these matters.
As we advance our ESG priorities, we also continue to take actions to improve diversity, equity, and inclusion.
This includes multiple programs to make STEM education more available to underrepresented groups and achieve our goal to deliver 5 million learning experiences.
Our businesses have also made commitments.
Safety and industrial, for example, is focusing on access to skilled trades, and we are increasing transparency through an annual diversity, equity, and inclusion report.
At the same time, we are advancing our strategic priorities for long-term growth and value creation.
We are innovating faster and differently, including new ways to collaborate with customers and partners virtually, while investing $3.6 billion in the combination of R&D and capex to strengthen 3M for the future.
To make the most of long-term growth opportunities, we also continue to prioritize investments in large, fast-growing areas like automotive, home improvement, safety, healthcare, and electronics.
In 2021, for example, our automotive electrification platform grew 30% organically, and our biopharma business grew 26%.
Our home improvement business grew 12% on top of 13% growth in 2020, driven by iconic brands, including our Command damage-free hanging solutions and Filtrete home filtration products.
To accelerate our ability to meet increasing demand for Command and Filtrete, last week, we announced a nearly $500 million investment to expand our operations in Clinton, Tennessee, adding nearly 600 manufacturing jobs by 2025.
We look forward to sharing more about how we are capitalizing on growth trends and winning in these markets at our February meeting.
Last year, we also continued to reposition our portfolio to maximize value across the enterprise, including an agreement to divest and combine our food safety business with Neogen, creating a global leader that is well-positioned to capture long-term profitable growth.
We continue to make progress in transforming 3M, accelerating our digital capabilities, and expanding our use of data and analytics to better serve customers and improve our operational agility and efficiency.
This includes the ongoing deployment of our ERP system, which went live in Japan in Q4, and also moving more than 60% of our enterprise applications and global data center infrastructure to the cloud, while streamlining our business group-led operating model.
To help our people be at their best, we also introduced new employee work models rooted in flexibility and trust, along with investments to support their health and well-being.
As we enter 2022, I'm confident we will continue to grow our businesses, improve our operational performance and find new ways to apply science to improve lives, delivering for our customers, shareholders, and all stakeholders who have placed their trust in us.
| qtrly earnings per share of $2.31.
qtrly sales of $8.6 billion, up 0.3 percent year-on-year.
qtrly organic local-currency sales increased 1.3 percent.
effectively managed supply chain disruptions, made good progress on pricing actions and controlled costs.
qtrly health care sales of $2.3 billion, up 0.7 percent in u.s. dollars.
qtrly transportation and electronics sales of $2.3 billion, down 1.5 percent in u.s. dollars.
qtrly consumer sales of $1.5 billion, up 4.1 percent in u.s. dollars.
|
A playback of today's call will be archived in our Investor Relations website located at investors.
dicks.com for approximately 12 months.
And finally, a few admin items.
First, a note on our same-store sales reporting practices.
Our consolidated same-store sales calculation includes stores that we chose to temporarily close last year as a result of COVID-19.
The method of calculating comp sales varies across the retail industry, including the treatment of temporary store closures as a result of COVID-19.
Accordingly, our method of calculation may not be the same as other retailers.
Next, as a reminder, due to uneven nature of 2020, we plan 2021 off of 2019 baseline.
Accordingly, we will compare 2021 sales and earnings results against both 2019 and 2020.
We are extremely pleased to announce yet another quarter of record results as we continued to execute at a very high level and capitalize on incredibly strong consumer demand.
We're in a great lane right now, and 2021 will be our boldest and most transformational year in the company's history.
We believe the future of retail is experiential, powered by technology and a world-class omnichannel operating model.
Importantly, we are reimagining the athlete experience, both across our core business and through new concepts that we have been working on for the past several years, which will collectively propel our growth in the future.
We've recently debuted DICK's House of Sport in Rochester, New York.
It's off to a great start and is on track to become among our highest volume stores in the chain.
We've reimagined virtually everything in the store and believe it sets the standard for sport retailing and athlete engagement.
Our partners who have visited the store all agree there is nothing like it, and we hope everyone has the opportunity to see it in person.
Next we are completely reengineering our Golf Galaxy business.
The game of golf is in great shape.
Our golf business has been tremendous.
With Golf Galaxy comps significantly outperforming the company average in recent quarters, we're leaning into this straight by investing in our Golf Galaxy business and adding TrackMan technology to enhance the fitting and lesson experience.
We are also investing in talent to elevate the in-store service model and are remodeling 18 stores this year.
The new stores we've remodeled are showing promising results.
Looking ahead, we expect golf to have a long runway, and we are committed to leveraging this momentum for future growth within our business.
We've been working on Public Lands for several years and look forward to opening our first two stores later this year.
Based on our research, we think there is an opportunity in the marketplace and believe this new concept will be a great growth vehicle for us.
Importantly, conservation will play a prominent role in our new Public Lands concept.
And we will champion environmental issues as we speak up to protect the planet and our Public Lands.
As a member of the outdoor industry, we have also joined forces with other retailers to advocate for conserving 30% of the U.S. lands and waters by 2030.
We expect to have the same voice and as much impact on these issues as we've had inside the DICK's business, highlighting the youth sports crisis and sensible gun legislation.
We'll be sharing more details about our plans for Public Lands in the weeks and months ahead.
In closing, you can see DICK's is a growth company, and we will continue to invest in our business to grow our lead as the nation's largest sport retailer.
We see significant growth opportunities within DICK's and Golf Galaxy as well as with House of Sport and Public Lands.
We will continue to invest in our vertical brands.
And with our key partners, including Nike, North Face, Callaway, TaylorMade and others, to elevate the athlete experience across the stores and online.
Our Q1 consolidated same-store sales increased 115% as we anniversaried the majority of our temporary store closures from last year.
The strength of our diverse category portfolio, supply chain, technology capabilities and omnichannel execution helped us continue to capitalize on strong consumer demand across golf, outdoor activities, home fitness and active lifestyle.
We also saw a resurgence in our team sports business as kids began to get back out on the field after a year in which many youth sports activities were delayed or canceled.
Our strong comps were supported by sales growth of over 100% within each of our three primary categories; the hardlines, apparel and footwear as well as increases in both average ticket and transactions.
Like others, we also benefited from the recent stimulus checks.
These results combined translate to a 52% sales increase when combined -- sorry, when compared to the first quarter of 2019.
From a channel standpoint, our brick and mortar stores generated significant triple-digit comps, and importantly, delivered an approximate 40% sales increase when compared to 2019 with roughly the same square footage.
Our eCommerce sales increased 14%, which was on top of our 110% online sales increase in the same period last year when the vast majority of our stores were closed for over six weeks.
This represented nearly a 140% increase when compared to 2019.
Within eCommerce, in-store pickup and curbside continued to be a meaningful piece of our omnichannel offering, increasing approximately 500% when compared to BOPIS sales during the first quarter of 2019.
And as a percent of online sales, we saw sequential growth compared to the second half of last year.
These same-day services along with ship from store are fully enabled by our stores which are the hub of our industry-leading omnichannel experience, both serving our in-store athletes and providing over 800 forward points of distribution for digital fulfillment.
During Q1, our stores enabled approximately 90% of our total sales and fulfilled approximately 70% of our online sales through either ship from store, in-store pickup or curbside.
Throughout the quarter, we remained disciplined in our promotional strategy and cadence, and certain categories in the marketplace continue to be supply constrained.
As a result, we expanded our merchandise margin rate by 787 basis points versus 2020 and 312 basis points versus 2019.
This merchandise margin expansion, along with substantial leverage on fixed costs, drove a significant improvement in gross margin.
In total, our first quarter non-GAAP earnings per diluted share of $3.79 not only represented a 511% increase over Q1 2019, but eclipse our full year 2019 non-GAAP earnings per diluted share of $3.59.
During the first quarter last year, we recorded a net loss per share of $1.71 as we temporarily closed our stores to promote the safety of our teammates, athletes and communities.
Looking ahead, we remain very enthusiastic about our business and we're raising our full year sales and earnings guidance.
Our financial outlook balances this enthusiasm with the uncertainties that still exist, particularly as it relates to the second half of the year.
Lee will address our outlook in greater detail within his remarks.
Now let me provide a few updates on our strategic growth drivers.
First, within merchandising, our well defined brand strategy drive differentiation and exclusivity within our assortments as we leverage both our key national brand partnerships and our highly profitable and growing vertical brand portfolio.
During the quarter, our vertical brands continue to be a significant source of strength, posting triple-digit comps with merchandise margin rate expansion that outperformed the company average.
We saw sustained success in DSG, our largest vertical brand as well as in CALIA, our second largest women's athletic apparel brand.
This year we are investing to make our vertical brands even stronger through improved space in-store and increased marketing.
In March, we augmented our men's athletic apparel collection by launching VRST, our new premium apparel brand that serves the modern athletic male.
The team has done a great job with VRST, and it's off to a really strong start.
Next, to increase engagement with our athletes, we're taking steps to dial-up service in our stores and to make our stores more experiential.
As Ed mentioned, we've been very pleased with the early results from our first DICK's House of Sport and are excited for the grand opening of our second location in Knoxville next week.
Virtually everything in House of Sport is new; from our engagement and service models to our merchandising standards, brands and concept shops as well as an adjacent outdoor field to host sports events and promote product trial.
These highly experiential stores are exploring the future of retail and they provide us a great opportunity to test and learn.
We'll continue to refine and grow the House of Sport concept while also rolling the most successful elements into our core DICK's stores.
Beyond House of Sport, we continue to evolve the DICK's athlete experience.
During the quarter, we added more than 30 soccer shops that provide a high level of service from in-store soccer experts who are especially trained to help athletes find the equipment and cleats they need to excel at the game.
The soccer shops also feature a variety of updated in-store elements, including an elevated cleat shop, an expanded selection of licensed jerseys and soccer trial cages in select locations.
We've been pleased with the initial results and plan to add additional shops throughout the year.
As discussed on prior calls, footwear is a key pillar of our merchandising strategy.
And during the quarter, we converted more than 40 additional stores to premium full service footwear.
Over 50 more stores will be converted by the end of the year, taking this experience to approximately 60% of the DICK's chain.
Lastly, as the number one premium golf retailer in the world, we are benefiting from renewed interest in the game.
Participation rates are healthy and energy for the game of golf continues to increase with women, juniors and young adults contributing to the game's growth.
As a result of this robust demand, our golf business has been great at both DICK's and Golf Galaxy with Golf Galaxy comps significantly outperforming the company average in recent quarters.
In 2021, we're investing over $20 million to transform our Golf Galaxy stores via combination of elevated experience, industry-leading technology and unmatched expertise through our certified PGA and LPGA professionals.
As part of this, we've rolled out TrackMan technology to over 80% of the chain to enhance the fitting and lesson experience.
We've also completely redesigned nearly 20 stores.
In addition, we enabled online booking of lessons and club fittings and invested in talent and training to elevate our in-store service model.
We supported these efforts through our first Golf Galaxy specific brand campaign, Better Your Best, across TV, social and in-store.
Now moving to our omnichannel capabilities.
We continue to drive significant improvement in the profitability of our eCommerce channel through fewer promotions, leverage of fixed costs and strong athlete adoption of in-store pickup and curbside.
We're continuing to enhance the curbside experience with new features like proxy pickup as well as through improved inventory availability and reduced pickup wait time for athletes.
During Q1, over 90% of curbside orders were ready within 15 minutes.
And upon checking at the store, 50% were delivered to the athlete's car in under 2.5 minutes.
Looking ahead, we continue to expect curbside pickup will remain a meaningful piece of our omnichannel offering as our athletes turned to this service for speed and convenience.
Along with curbside, our ScoreCard program continues to be a key to our omnichannel offering with more than 20 million active members who drive over 70% of our sales.
We're using data science to drive more personalized marketing and engagement with our athletes, which is resulting in strong retention of the 8.5 million new athletes we acquired last year.
Speaking of new athletes, we acquired nearly 2 million new athletes this past quarter.
And relative to our existing athletes, they continue to skew younger and more female, representing a great opportunity for future growth.
In closing, we are a growth company, steeped in technology and omnichannel experience with a bold path forward.
As we continue to execute against our strategic priorities, we are enthusiastic about our business and confident that our investments will strengthen our leadership position within the marketplace.
I had the pleasure of visiting many of our stores during this first quarter.
Let's begin with a brief review of our first quarter results.
Consolidated sales increased 119% to approximately $2.92 billion.
Including the impact of last year's temporary store closures, consolidated same-store sales increased 115%.
This increase was broad-based with each of our three primary categories of hardlines, apparel and footwear comping up over 100%.
Transactions increased 90%, and average ticket increased 25%.
Compared to 2019, consolidated sales increased 52%.
Our brick and mortar stores comped up nearly 190% as we anniversaried last year's temporary store closures.
And compared to 2019, increased approximately 40% with roughly the same square footage.
Our eCommerce sales increased 14% over last year and increased 139% versus 2019.
As a percent of total net sales, our online business was 20%.
As expected, this decrease from the 39% of net sales in 2020 given last year's temporary store closures, but increased compared to the 13% we had in 2019.
Lastly, in terms of stimulus.
While this can be difficult to quantify, we recognize that our athletes had more cash spend during the quarter and believe we benefited from this during the first quarter.
Gross profit in the first quarter was $1.09 billion or 37.3% of net sales and improved approximately 2,100 basis points compared to last year.
This improvement was driven by leverage on fixed occupancy cost of approximately 1,000 basis points from the significant sales increase and merchandise margin rate expansion of 787 basis points, primarily driven by fewer promotions and a favorable sales mix.
Additionally, last year included $28 million of inventory writedowns, resulting from our temporary store closures, which were subsequently recovered in the second quarter of 2020 due to better than anticipated sales and margin on merchandise nearing the end-of-life upon the reopening of our stores.
The balance of the improvement was driven by lower shipping expense as a percent of net sales due to higher brick and mortar store sales penetration following last year's temporary store closures.
Compared to 2019, gross profit as a percent of sales improved by 795 basis points, driven by leverage on fixed occupancy costs of 475 basis points due to the significant sales increase and merchandise margin rate expansion of 312 basis points, primarily driven by fewer promotions.
SG&A expenses were $608.3 million or 20.84% of net sales and leveraged 940 basis points compared to last year due to the significant sales increase.
SG&A dollars increased $205.1 million, of which $21 million is attributable to the expense recognition associated with changes in our deferred compensation plan investment values.
This expense is fully offset in other income and has no impact on net earnings.
The remaining $183 million is primarily due to normalization of expenses following our temporary store closures last year to support the increase in sales as well as higher incentive compensation expenses due to our strong first quarter results.
SG&A expenses include $13 million of COVID-related safety costs, which in light of the latest CDC guidance, we expect these costs to decline significantly beginning in the second quarter.
Compared to 2019's non-GAAP results, SG&A expenses as a percent of net sales, leveraged 446 basis points from the -- due to the significant sales increase.
SG&A dollars increased $122.3 million due to increases in store payroll and operating expenses to support the increase in sales and hourly wage rate investments and COVID-related safety costs as well as higher incentive compensation expenses.
Driven by our strong sales and gross margin rate expansion, we delivered record quarterly non-GAAP EBT and EBT margin results.
Non-GAAP EBT was $477.1 million or 16.35% of net sales, and it increased $684.8 million or approximately 3,200 basis points from the same period last year.
More relevantly, compared to 2019, non-GAAP EBT increased $396 million or approximately 1,200 basis points as a percent of net sales.
In total, we delivered non-GAAP earnings per diluted share of $3.79.
This is compared to a net loss per share of $1.71 last year and non-GAAP earnings per diluted share of $0.62 in 2019, a 511% increase.
On a GAAP basis, our earnings per diluted share were $3.41.
This includes $7.3 million in non-cash interest expense as well as 9.2 million additional shares that will be offset by our bond hedge at settlement, but are required in the GAAP diluted share calculation.
Both are related to the convertible notes we issued in the first quarter of 2020.
Now looking to our balance sheet, we are in a strong financial position, ending Q1 with approximately $1.86 billion of cash and cash equivalents and no borrowings on our $1.85 billion revolving credit facility.
While our quarter end inventory levels decreased 4% compared to the same period last year, our strong flow of products supported Q1 sales growth in excess of our expectations.
Looking ahead, our inventory is very clean and we continue to expect a robust product flow.
In terms of supply chain expense, we are seeing elevated costs, which we expect to continue, but thus far have mitigated this pressure through higher ticket as a result of being less promotional and increasing prices in select categories.
Turning to our first quarter capital allocation.
Net capital expenditures were $57.2 million and we paid $33 million in quarterly dividends.
During the quarter, we also repurchased just over 1 million shares of our stock for $76.8 million at an average price of $74.59 and we have approximately $954 million remaining under our share repurchase program, and our plan for 2021 continues to include a minimum of $200 million of share repurchases.
Now let me move on to our fiscal 2021 outlook for sales and earnings.
As a result of our significant Q1 results, we are raising our consolidated same-store sales guidance and now expect full year comp sales to increase by 8% to 11% compared to our prior expectation of down 2% to up 2%.
At the midpoint, our updated comp sales guidance represents a 22% sales increase versus 2019 compared to our prior expectation of up 11%.
While we have been very pleased with the start of our second quarter and are highly encouraged about the rest of the year, beginning in June, we will start to anniversary significant comp sales gains from last year.
There is also continued uncertainty around when consumer behavior will normalize and what the new normal will be.
And we are limited in our ability to forecast demand, particularly as it relates to the second half.
Given this, within our updated outlook, we have maintained our Q3 and Q4 performance expectations in line with our original guidance, which assumes comps will decline in the range of high-single to low-double-digits.
Non-GAAP EBT is now expected to be in the range of $1 billion to $1.1 billion compared to our prior outlook of $550 million to $650 million, which at the midpoint and on a non-GAAP basis, is up 142% versus 2019 and up 45% versus 2020.
At the midpoint, non-GAAP EBT margin is expected to be approximately 10%.
Within this, gross margin is expected to increase versus 2019, driven by leverage on fixed expenses and higher merchandise margins.
When compared to 2020, gross margin is also expected to increase driven by leverage on fixed expenses, while merchandise margins are expected to be approximately flat.
This assumes a gradual normalization promotions beginning in the second quarter and modest deleverage on fixed expenses in the second half.
SG&A expense is expected to leverage versus both 2019 and 2020 due to the significant projected increase in full year sales.
As a reminder, at the beginning of 2021, we transitioned last year's premium pay program to a more lasting compensation program, including increasing and accelerating annual merit increases and higher wage minimums.
The impact of these programs has been included within our guidance.
In total, we are raising our full year non-GAAP earnings per diluted share outlook to a range of $8 to $8.70 compared to our prior outlook of $4.40 to $5.20.
At the midpoint and on a non-GAAP basis, our updated earnings per share guidance is up 126% versus 2019 and up 36% versus 2020.
In closing, we are extremely pleased with our Q1 results and remain very enthusiastic about the future of DICK's Sporting Goods.
This concludes our prepared comments.
| compname reports record quarterly earnings in first quarter 2021; delivers 115% increase in same store sales compared to the first quarter of 2020 and raises full year guidance.
sees fy non-gaap earnings per share $8.00 to $8.70.
q1 sales rose 119 percent to $2.92 billion.
115% increase in consolidated same store sales in q1.
qtrly consolidated net income $3.41 per share.
qtrly non-gaap net income $3.79 per share.
plans to repurchase a minimum of $200 million of its common shares in 2021.
for 2021, incurred about $13 million of covid-related safety costs in q1.
expects to relocate 11 dick's sporting goods stores in 2021.
|
For today's call, Jeff will begin by covering a summary of our first quarter results, including new program wins.
Roop will then discuss our detailed first quarter results, including a cash and balance sheet summary and second quarter 2021 guidance.
Jeff will wrap up with an outlook by market sector and progress to-date on our strategic initiatives, including ESG and sustainability.
We will then conclude the call today with Q&A.
Overall, we delivered a solid start to 2021.
Our first quarter results reinforce our commitment to executing the strategy we have laid out and continuing to demonstrate operational excellence.
In Q1 revenues of $506 million were above the midpoint of our guidance for the quarter led by continued global strength in our semi-cap sector, which grew 37% year-over-year.
Our non-GAAP gross margins of 8.3%, non-GAAP operating margins of 2.3% and earnings per share of $0.21 were all in line with our forecast guidance.
We had another strong quarter of working capital results as the cash conversion cycle was in 65 days, which enabled $37 million of operating cash flow and $30 million of free cash flow for the quarter.
Despite some significant disruptions due to COVID that temporarily shut down two of our facilities in Malaysia, our teams did an amazing job of caring for our people, recovering in the quarter, and delivering for our customers.
Our leadership and COVID task force continue to navigate our organization through the challenges of the pandemic, and we are taking actions to encourage vaccinations across our employee population; first here in the US and in other countries as the vaccine is available.
I'm really proud of our team around the world who continue to deliver solid results, while successfully navigating COVID.
In addition to positive results, we had another strong quarter of bookings where the outsourcing and new deal opportunity environment remains strong even in the pandemic.
Our pipeline continues to grow, and our trailing four quarter wins are over $800 million, which is a new record for our organization.
Now I'd like to highlight a few key wins in the quarter.
In the Medical sector, we were awarded new manufacturing programs for insulin infusion pumps, a bacterial diagnostic instrument and a mobile MRI device.
In the A&D sector, we were awarded new programs for RF satellite control electronics, advanced optical manufacturing for night vision applications and a precision machining program for a military application.
We are excited to further expand our world-class machining capabilities into the A&D sector.
In Industrials, I wanted to highlight two customer case studies.
The first is with our customer, Ouster, a leading provider of high-resolution digital LiDAR sensors used in industrial automation, smart infrastructure, robotics and automotive applications.
In our Thailand facility, we are providing complex microelectronics, optics and printed circuit board assemblies for Ouster.
After completion of certifications in 2019, we are now scaling capacity to meet full volume production.
Our team has done an outstanding job meeting the rigorous quality requirements to bring these programs to market, and we look forward to fulfilling volume demands in support of Ouster in the coming years.
The second is with our new customer, Geophysical Technology, Inc., which utilizes seismic systems for measuring the Earth's subsurface for resource extraction, earthquake monitoring, construction and hydrothermal projects.
Benchmark was selected based on our strong reputation for quality and reliability and to assist in near-shoring manufacturing to North America for the next-generation of products.
We're excited to be GTI's manufacturing partner.
In Computing and Telco, we were awarded design services for a new hyperscale Computing product and manufacturing services for new broadband products.
Our new business pipeline remains strong across all of our sectors, and we expect to grow bookings year-over-year.
Roop, over to you.
Total Benchmark revenue was $506 million in Q1, which was slightly above the midpoint of our guidance.
As expected, decreased revenues primarily from A&D were partially offset by increases in Semi-Cap and Telecom.
Medical revenues for the first quarter were relatively flat sequentially from continued lower demand for products involved in COVID therapies and softer demand related to cardio care and other elective surgery devices.
As Jeff will comment later, we do expect an uptick in the second half from new programs.
Semi-Cap revenues were up 12% in the first quarter and up 37% year-over-year from continued demand strength from our wafer fab equipment customers, who are continuing to boost capacity to support greater chip output.
As a reminder, we provide primarily non-electronic precision machining, and electromechanical assembly to these customers.
A&D revenues for the first quarter decreased 19% sequentially from further deterioration in demand from our commercial aerospace customers, with no signs of demand recovery in the near future.
As a reminder, revenues to commercial aerospace customers was approximately 25% of our 2020 A&D sector revenue.
Industrial revenues for the first quarter were slightly down from continued softness in oil and gas infrastructure, primarily building in transportation and new program ramp delays.
Overall, the higher value markets represented 80% for our first quarter revenue.
Revenues from computing and telco sectors, our traditional markets was flat quarter-over-quarter.
Revenue increases in testing products were offset by continued softness in commercial satellite programs.
Our traditional markets represented 20% of first quarter revenues.
Our top 10 customers represented 44% of sales in the first quarter.
Turning to slide seven.
Our GAAP earnings per share for the quarter was $0.22.
Our GAAP results included restructuring and other one-time costs, totaling $1.6 million related to reductions in force and other restructuring activities around our network of sites, $3.4 million of insurance recovery.
For Q1, our non-GAAP gross margin was 8.3%.
This is 10 basis points better than the midpoint of our Q1 2021 guidance and 10 basis points less than our year-over-year comparison, which has stronger higher value market mix.
On a sequential basis, we were lower by 130 basis points, as a result of our lower revenue, reduced absorption, higher discrete medical claims activity and higher variable compensation.
Our SG&A was $30.5 million, a decrease of $1.9 million sequentially due to lower variable compensation costs.
Non-GAAP operating margin was 2.3%.
In Q1 2021, our non-GAAP effective tax rate was 16.9%, as a result of a mix of profits between the US and foreign jurisdictions, Non-GAAP earnings per share was $0.21 for the quarter, which is a $0.01 higher than the midpoint of our Q1 guidance and non-GAAP ROIC was 6.4%.
Turning to slide eight to review our cash conversion cycle performance.
Our cash conversion cycle days were 65 in the first quarter, an improvement of six days from the fourth quarter from the timing of inventory receipts, shipments to customers and collections within the quarter.
Turning to slide nine for an update on liquidity and capital resources.
Our cash balance was $400 million at March 31 with $153 million available in the US.
Our cash balances grew $4 million sequentially because of our strong cash conversion cycle performance, even while we have invested in inventory for future ramps.
We generated $37 million cash flow from operations in Q1 and our free cash flow was $30 million.
At March 31, we had $135 million outstanding on our term loan with no borrowings outstanding on our available revolver.
Turning to slide 10 to review our capital allocation activity.
In Q1, we can pay cash dividends of $5.8 million and use $13.1 million to repurchase 441,600 shares.
As of March 31, we had approximately 191 million remaining in our existing share repurchase authorization.
In Q2, we expect to repurchase shares opportunistically, while considering market conditions.
We expect revenue to range from $515 million to $555 million, which at the midpoint, represents a 9% year-over-year improvement.
We expect that our gross margins will be 8.5% to 8.7% for Q2 and SG&A will range between $31 million and $32 million.
The sequential increase in gross margins is expected due to higher revenues and improved absorption.
We still expect gross margins for the full year to be at least 9%.
Implied in our guidance is a 2.5% to 2.9% non-GAAP operating margin range for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
We expect to incur restructuring and other non-recurring costs in Q2 of approximately $0.8 million to $1.2 million.
Our non-GAAP diluted earnings per share is expected to be in the range of $0.23 to $0.29 for a midpoint of $0.26.
Based on the strength of new bookings, execution of new program ramps and continued growth in our Semi-Cap sector, we are increasing our capex plans for the year to be between $50 million to $60 million.
We estimate that we will generate approximately $80 million to $100 million of cash flow from operations for the fiscal year 2021.
This range contemplates increased working capital investments and inventory to support growth for our customers through the year.
Other expenses net is expected to be $2.5 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q2, our non-GAAP effective tax rate will be between 19% and 21% because of the distribution of income around our global network.
The expected weighted average shares for Q2 are $36.5 million.
As you're aware, the overall demand environment is gaining strength from the macroeconomic recovery, which has outpaced electronic component supply.
Lead times are extending as more components are going on allocation, primarily in semiconductors.
We are maintaining close alignment with our suppliers and distributors to minimize disruptions to existing orders and working to secure supply to support customer demand increases.
In some cases, we are actively working with customers to replan, mix and redesign some products to enable alternate component sourcing.
These actions still give us confidence that we will grow revenue in 2021.
In summary, our guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base, operations or customers.
Guidance also assumes no material changes to end market conditions due to COVID.
Following Roop's comments on our second quarter guidance, I wanted to provide some additional color on our view of demand by sector for the remainder of 2021.
This is on slide 13.
For the second quarter, we expect revenue to be up sequentially by about $30 million.
This strength is led by expected sequential growth in Semi-Cap, A&D and Computing.
In Semi-Cap, the demand outlook continues to build for semiconductor capital equipment and is strengthening in Q2 over our Q1 results.
The strong demand for semiconductors due to the accelerating pace of digital transformation is fueling this growth and we remain well positioned with the industry leaders in this sector.
We believe this wafer fab equipment growth cycle has the potential to continue for several years, not only due to the current severe semiconductor shortages but also driven by government investment to address concerns about supply chain security and overall competitiveness.
With this current demand strength and signals from our customers, we are revising our outlook for this sector upward from 10% growth to greater than 20% revenue growth over 2020 levels.
In A&D, growth in the second quarter is led by increased demand for defense-related communications, radar and security products.
Growth is expected in Q2, even though demand for commercial aerospace programs, which was about 25% of the sector demand in 2020, continues to deteriorate.
As such, we expect the A&D sector will still be flat for 2021.
In the Computing sector, we expect strong revenue growth in 2021 from high-performance computing projects, with expected ramps starting in Q2 and continuing through second half 2021.
In the Medical sector, we're expecting revenue to remain relatively flat in the first half as elective surgery and demand for cardiac related products have not yet returned to pre-pandemic levels.
We are receiving some early indications from our customers that elective surgery demand is strengthening, and this, coupled with a number of new program ramps starting in Q3, point to stronger Medical sector growth in the second half of this year.
We expect 2021 will be another growth year for the Medical sector.
In the Telco market, where we remain highly selective in our engagements, overall demand is stable in Q2 and is improving through second half '21 from broadband infrastructure product growth.
In Industrials, we have yet to see significant demand recovery in our oil and gas, and our building and transportation infrastructure customers.
We are excited about a tremendous number of new program ramps in the industrial space.
Many of these programs are new designs and technologically advanced programs.
And as such, we are experiencing some program delays.
Based on these dynamics, we believe Industrials will now be flat for the year.
Since the February call, our ESG Council has successfully worked to deliver our first SASB fact sheet, which can be found on the sustainability page of our website.
This document highlights our current performance against the technical requirements for the EMS, ODM industry within the SASB framework.
The objective of releasing this fact sheet is to provide continued transparency as we further enhance our performance within the framework of our five key ESG tenets.
Beyond the SASB report, we have also provided further updates on our progress in both our most recent annual report and proxy.
At Benchmark, we value diversity and expect our leaders to embrace all people regardless of gender, race, class or creed, recognizing that greater inclusion fosters better decision-making and increased innovation.
We are strengthening our diversity equity and inclusion programs through a planned set of actions around training, policies and through a revitalized recruiting strategy.
As such, we have engaged a consultant who is leading a DEI perception study to establish a framework for how we listen, learn and act to achieve our goals.
We are very proud to have been awarded a 2021 silver medal from EcoVadis in recognition of our sustainability progress.
EcoVadis is one of the world's most trusted providers of business sustainability ratings, and their assessment covers a broad range of non-financial management systems, including environmental labor and human rights, ethics and sustainable procurement.
This recognition puts us in the top 25% of companies rated.
Looking ahead, we have started both quantitative and qualitative data collection to align reporting to the Global Reporting Initiative or GRI standards.
As we have announced previously, we are a committed partner with Applied Materials and other strategic customers as part of the electronic supply chain ecosystem.
There is tremendous momentum at Benchmark surrounding ESG and sustainability, and I look forward to providing further updates as we continue our journey.
I now want to wrap up the call today with a summary of our progress toward our three strategic initiatives for 2021, on slide 15.
Growing revenue is the top priority at Benchmark.
Through the efforts of the entire Benchmark organization and led by our go-to-market team, we are continuing to see strong new bookings, both with existing accounts and targeted new customers with innovative products aligned to our sector strategies.
We are very focused on helping our customers accelerate their time to market, providing more of the complete solution, which includes both engineering and manufacturing services.
This is reflected in our increased attach rate of design engagements to manufacturing wins and vice versa.
To that point, in Q1, about 50% of our new wins have an engineering component.
Our differentiated offerings in support of the Semi-Cap market and our new program wins have enabled significant growth in the Semi-Cap vertical, which we expect will now grow over 20% this year.
This strength, coupled with new programs and high-performance computing in mid-2021 and additional new program ramps in the higher value markets, gives us confidence that we can achieve greater than 5% growth in 2021.
In order to support our long-term growth and scale objectives, we must also invest in sustainable infrastructure and talent, needed to support our long-term business.
As I discussed earlier, ESGs and sustainability initiatives and advancing diversity and inclusion underpin the foundational imperative.
But they are not our only areas of investment as we are also investing in tools, processes and manufacturing assets to drive further operational effectiveness.
As we evaluate how to best serve our customers, including exploring advances in technology, we are also contemplating incremental capital investments aligned to our strategy, as Roop referenced earlier.
Even though we continue to invest in our business, we are committed to driving an efficient shared services organization and continuing our focus on expense management to maintain our SG&A spend at or below 6% of revenue.
Finally, we expect to grow earnings faster than revenue.
Our model is predicated on revenue growth that enables higher utilization to better leverage our fixed costs.
With revenue growth from increasing demand in new ramps, we still expect to achieve 9% gross margin for the full year.
Given the current supply chain environment, we do expect inventory growth in support of securing component supply for our customers.
While we are still forecasting cash flows from operations for the full year between $80 million and $100 million.
In support of efficient use of capital and returning value to our shareholders, we plan to continue buybacks and our recurring dividend.
All-in-all, 2021 is off to a good start.
I remain energized and excited about our capabilities and the progress we are making in developing our strategic customer relationships.
I look forward to providing further updates on our call in July.
| benchmark sees q2 revenue between $515 million to $555 million.
q1 non-gaap earnings per share $0.21.
q1 gaap earnings per share $0.22.
sees q2 non-gaap earnings per share $0.23 to $0.29 excluding items.
sees q2 revenue $515 million to $555 million.
q1 revenue $506 million.
|
A copy of which is available on our website at www.
During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin, and free cash flow.
With these formalities out of the way, I'm joined today by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
And I think Steve is muted.
It wouldn't be a COVID event if somebody wasn't muted.
So I'm glad to get that out of the way.
As we're saying all the time during COVID, I hope you and your loved ones continue to be safe.
But at least now, I'm hoping as well that you and they are beginning to see the light at the end of this tunnel and at the end of the scourge of COVID is within sight.
Ajay, of course, is going to give you the details of this quarter.
Now Ajay will be careful.
And he will stress that some of these earnings strength this quarter reflect one-time benefits, stuff you can't count on recurring, things like FX, some revenue deferrals being recognized, a lower tax rate, etc.
But even normalizing for all that, as far as I can tell, it is a great quarter.
And more important to me and I hope you, it's another in a large number of great quarters, which to me is not a confirmation of onetime things or transient things but of the fundamental strength of this company, what our people are doing every day to build this business in ways that allow us to help our clients navigate, not only their greatest challenges, but in many cases, their greatest opportunities.
It's a fabulous quarter.
I want to be clear, however, it is not that we've turned all of our businesses into businesses that go up in a straight line.
As we have talked about many times, each of our businesses and the company as a whole can have huge zigs and zags due to market conditions or the winning or losing of a big job.
We're jumping on an opportunity to invest, jumping on an opportunity to invest in a way that can hurt the P&L in the short term but supports future growth.
And even in this great quarter, we saw some of that.
If you look at our restructuring business, it continues to face widespread market slowdown around most of the world.
And although we benefited from some legacy cases during the quarter, that business is certainly off in a big way, in a big way from a year or so earlier.
Now I don't believe anybody thinks this restructuring market has gone away permanently.
So we're continuing to invest in that business, but that's the zag.
Similarly, in Tech, some of the fuel that ignited the incredible performance in the first half of the year, notably second request activity weakened this quarter.
We have enormous confidence in the multiyear trajectory of that business and more important, the people of that team that is driving that multiyear trajectory.
So we have, in the face of that slowdown, continued to hire.
We increased our head count in that business 12.4% year over year.
So even though the revenue went up, the adjusted EBITDA declined.
That's just an example of investing to support the business over the medium term, something that we have committed to do and we will continue to do.
And even in FLC, where we have great strength compared to last year, we've had pockets of weakness.
For example, Asia because borders remain closed and travel restrictions have been extended, which affected our ability to both deliver certain services and reach clients in the market.
Even if we do the right things, our business has zigs and zags, and some of them can be pretty bad zags.
But what I think we've said many times and what I now believe the data fully support is if we do the right things, although there are zigs and zags, over any extended period of time, each of our businesses are growth engines, not only growth engines, but vital and powerful growth engines.
They allow us to deliver on major assignments that make at least me proud and I think many of us proud.
They allow us to attract great people to build their brand.
And therefore, though there are zigs and zags, they become zigs and zags around an upward sloping line.
It doesn't mean you can't have all the zags come in the same quarter or even the same year, but it does mean that over any extended period of time, the zig zags are around an incredibly powerful upward sloping line.
Now that line, I assume, is important to you, our shareholders.
I believe it's equally important for the engine of the firm, our people.
It's that upward sloping line that gives us, and I hope to you, the confidence to invest in great people regardless of whether it's a good quarter or not a good quarter for a particular business.
It allows us to not do layoffs just because some businesses temporarily slow in a quarter.
The strength of conviction we drew on obviously last year and supported our people and is giving us real benefits this year.
It allows us to promote people when they're ready to get promoted versus when, oh, the numbers happen to be good.
It allows us to hire aggressively when the great talent is available versus when it feels convenient according to the P&L.
It allows us to invest in our people's development when they're eager to grow.
My experience is when you do that, you build a firm, you build -- take a powerful firm and you make it ever more powerful.
And you create businesses that are global and diverse and effective and vibrant for your clients and for your people.
My experience is also when you have great people doing great work who feel supported, you end up with fabulous individuals.
Fabulous individuals who are in an environment where they can develop even further.
And you end up with great people outside your firm who want to join you.
And through that, we create businesses.
Through the zigs and zags become sustainable, powerful, resilient, and exciting businesses, and exciting growth engines.
That's the journey we have been on.
It has been a lot of work.
It always is a lot of work.
There's always daily things to struggle with.
A lot of work.
It's also been incredibly rewarding.
That is a journey we look, this great team that I have the privilege of leading to stay on.
Beginning with our third quarter results.
Revenue grew 12.9% with every segment reporting growth.
And we continued making investments in headcount, adding 346 total billable professionals year over year, including 36 senior managing directors.
Earnings per share were also boosted by FX remeasurement gains and lower weighted average shares outstanding, or WASO, resulting in a 45% increase in GAAP earnings per share and a 31% increase in adjusted earnings per share compared to the prior-year quarter.
Overall, we are delighted with these results, which exceeded our expectations.
Revenues of $702.2 million increased $80 million, compared to revenues of $622.2 million in the prior-year quarter.
GAAP earnings per share of $1.96 in 3Q '21 compared to $1.35 in 3Q '20.
Adjusted earnings per share for the quarter were $2.02, which compared to $1.54 in the prior-year quarter.
The difference between our GAAP and adjusted earnings per share in 3Q '21 reflects $2.4 million of noncash interest expense related to our convertible notes, which reduced GAAP earnings per share by $0.06 per share.
In 3Q of '20, we had a special charge of $7.1 million as well as noncash interest expense of $2.3 million, which reduced GAAP earnings per share by $0.14 per share and $0.05 per share, respectively.
Net income of $69.5 million, compared to $50.2 million in the prior-year quarter.
The increase in net income was primarily due to higher revenues, which was partially offset by an increase in compensation, including the impact of a 6.9% increase in billable headcount and higher SG&A expenses.
FX remeasurement gains this quarter versus losses in the same quarter last year also boosted net income.
SG&A of $138.6 million or 19.7% of revenues.
This compares to SG&A of $122 million or 19.6% of revenues in the third quarter of 2020.
The increase in SG&A included higher compensation, outside services expenses, bad debt, software costs, and travel and entertainment expenses.
Third quarter 2021 adjusted EBITDA of $100.3 million or 14.3% of revenues, compared to $90.9 million or 14.6% of revenues in the prior-year quarter.
Our third quarter effective tax rate of 21.6% compared to 22.3% in the prior-year quarter.
Our tax rate for the quarter benefited from discrete tax adjustments related to the release of a valuation allowance on our Australian deferred tax assets because of sustained profitability.
Fully diluted WASO of 35.4 million shares in 3Q '21 compared to 37.1 million shares in 3Q '20.
Our convertible notes had a dilutive impact on earnings per share of approximately 842,000 shares, included in WASO, as our average share price of $138.83 this past quarter was above the $101.38 conversion threshold price.
As I mentioned, billable headcount increased by 346 professionals or 6.9% compared to the prior-year quarter.
Now I will share some insights at the segment level.
In Corporate Finance & Restructuring, revenues of $250.3 million increased 5.8% compared to the prior-year quarter.
The increase in revenues was due to higher demand and realization for our transactions and business transformation services, as well as the recognition of deferred revenue, which were partially offset by lower demand for restructuring services.
Adjusted segment EBITDA of $55.6 million or 22.2% of segment revenues compared to $56.2 million or 28 -- or 23.8% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to increased compensation, including the impact of a 6% increase in billable headcount and higher SG&A expenses.
In the third quarter, we continued to grow our transactions and business transformation practices globally.
Not only are we growing these practices, but also we are able especially at junior levels to leverage professionals across practices.
This quarter, once again, a number of our junior professionals, who typically would support restructuring assignments, worked on transactions-related engagements.
On a sequential basis, revenues increased $19.4 million or 8.4% as the segment benefited from continued growth in our business transformation and transactions businesses and recognition of prior deferred revenue.
Adjusted segment EBITDA for the third quarter increased $15.5 million.
Revenues of $145.3 million increased 22% relative to a weak quarter in the prior year.
The increase in revenues was primarily due to higher demand for our investigations, disputes, and health solutions services.
Adjusted segment EBITDA of $16.6 million or 11.4% of segment revenues compared to $13.6 million or 11.4% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by higher compensation, which includes 7.7% growth in billable headcount as well as higher SG&A expenses compared to the prior-year quarter.
Sequentially, revenues decreased $5.5 million, primarily due to lower demand for investigations and health solutions services.
Adjusted segment EBITDA decreased $1.4 million.
Our Economic Consulting segment's revenues of $172.5 million increased 11.3% compared to the prior-year quarter.
The increase was primarily due to higher demand for non-M&A-related antitrust and financial economic services, which was partially offset by lower demand for our M&A-related antitrust services compared to the prior-year quarter.
Adjusted segment EBITDA of $29.9 million or 17.3% of segment revenues compared to $25.7 million or 16.6% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by higher compensation, which includes the impact of 5.1% growth in billable headcount.
Sequentially, revenues decreased $10.8 million or 5.9%, which was driven by decreased demand for M&A-related antitrust services, primarily due to the conclusion of a large matter in the quarter.
In Technology, revenues of $64.7 million increased 10.4% compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand for litigation, investigation and information governance services, which was partially offset by lower demand for M&A-related second request services compared to the prior-year quarter.
Adjusted segment EBITDA of $7.8 million or 12.1% of segment revenues compared to $11.9 million or 20.4% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was due to higher compensation, which includes the impact of a 12.4% increase in billable headcount, as our Technology segment continues to make investments in talent, particularly at the senior levels to bolster our capacity and expertise globally across data risk, compliance, privacy and information governance, as well as higher SG&A expenses.
Sequentially, revenues decreased $14 million or 17.8%, primarily due to decreased demand for M&A-related second request services.
Adjusted segment EBITDA declined $10.7 million sequentially.
Record revenues in the Strategic Communications segment of $69.4 million increased 31.1% compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand for corporate reputation and public affairs services.
Adjusted segment EBITDA of $15.5 million or 22.3% of segment revenues compared to $8.4 million or 15.9% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues.
Sequentially, revenues increased $1.6 million, primarily due to higher demand for financial communications and corporate reputation services.
Adjusted segment EBITDA increased $2 million sequentially.
Let me now discuss key cash flow and balance sheet items.
We generated net cash from operating activities of $196.9 million, which increased by $85.3 million compared to $111.6 million in the third quarter of 2020.
The year-over-year increase was largely due to an increase in cash collected resulting from higher revenues, which was partially offset by an increase in compensation-related costs and other operating expenses.
We generated free cash flow of $172.2 million in the quarter.
Total debt net of cash decreased $160.7 million sequentially from $159.4 million on June 30, 2021 to a negative net debt position of $1.3 million on September 30, 2021.
The sequential decrease was primarily due to an increase in cash and cash equivalents and repayment of borrowings under our senior secured bank revolving credit facility.
Turning to our guidance.
In light of our record financial performance during the first nine months of 2021, we are raising the low end of our previous full year 2021 guidance range for revenues of between $2.7 billion and $2.8 billion to expected revenues of between $2.75 billion and $2.8 billion.
We are raising our full year 2021 guidance ranges for GAAP earnings per share of between $5.89 and $6.39 and adjusted earnings per share of between $6 and $6.50 to GAAP earnings per share of between $6.39 and $6.64 and adjusted earnings per share of between $6.50 and $6.75.
The $0.11 per share variance between earnings per share and adjusted earnings per share guidance for full year 2021 includes the estimated impact of noncash interest expense of $0.20 per share related to our 2023 convertible notes and the second quarter 2021 $0.09 per share gain related to the fair value remeasurement of acquisition-related contingent consideration, which are not included in adjusted EPS.
Our updated guidance after our record year-to-date performance is shaped by four key considerations.
First, restructuring activity remains subdued.
As credit markets remain in an accommodative mode and the number of stressed and distressed issuances remains low, Standard & Poor's is now forecasting that the trailing 12-month U.S. speculative rate -- default rate -- corporate default rate will fall further in the first half of 2022, reaching 2.5% by June 2022, which compares to 3.8% in June 2021 and 6.6% in January 2021.
Second, global M&A activity, which drives demand in our Economic Consulting and Technology segments as well as our transactions business in Corporate Finance & Restructuring, has been at record levels year to date.
There is no certainty that M&A activity will continue at this pace.
Third, we are a large jobs firm.
And when large engagements end, they may not be immediately replaced.
As Steve and I have both mentioned today, we saw several large jobs end or significantly wind down in the last two quarters across our Economic Consulting, Technology, and Corporate Finance & Restructuring businesses.
Fourth, the fourth quarter is typically a weaker quarter for us because of a seasonal business slowdown at the end of the year.
Before I close, I want to reiterate four key themes that underscore the strength of our company.
First, our results show that while continuing to dominate our traditional areas of strength, we have demonstrably grown our adjacencies and footprint, which also have the added benefit of making us less susceptible to the business cycle.
Business transformation and transaction services, which represented 36% of total segment revenues in Corporate Finance in Q3 of last year, contributed 59% this quarter.
Non-M&A-related antitrust services have steadily grown to represent 32% of our Economic Consulting revenues this quarter, which compares to 23% in Q3 of last year.
Our Australian business has grown to 31 senior managing directors from 19 two years back.
And our Middle East business has grown to 16 senior managing directors from five two years back.
And EMEA represented 30% of revenues this quarter with us only recently ramping up in Germany and Spain.
Second, we count among our staff, arguably, some of the leading experts in the world in areas such as antitrust, financial arbitration and economic analysis, restructuring, technology and data analytics-based investigations, and corporate reputation and communications.
Third, in many industries around the world, the pace of change is accelerating.
And we have the surge capacity to help our clients when they face their greatest challenges and opportunities.
And finally, our strong balance sheet continues to give us the flexibility to make sustained investments toward growing our business globally.
| compname reports q3 earnings per share of $1.96.
q3 adjusted earnings per share $2.02.
q3 earnings per share $1.96.
q3 revenue rose 13 percent to $702.2 million.
raises fy adjusted earnings per share view to $6.50 to $6.75.
raises fy earnings per share view to $6.39 to $6.64.
|
With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer.
Actual results may differ materially.
Nearly one-year ago today, I joined 3D Systems as Chief Executive Officer.
My reasons for joining were very simple.
First, I believe that this industry was beginning to enter an exciting growth phase, driven by both maturing of the technologies as well as receptivity of the customer base to industrial scale additive manufacturing.
Second, I saw the potential for 3D Systems to be a leader in the industry, one that could not only be at the forefront of this industrial renaissance but instrumental in making it happen.
As excited as I was a year ago when I arrived, those feelings are dwarfed by the enthusiasm I feel today.
Rather than opening the call with a recap of our financial performance as I usually do, today I'm simply going to let our Q1 results speak for themselves, with Jagtar providing more color for you in a few moments.
Having taken all these responsibilities last summer, they have performed magnificently, making significant changes in the organization and in the underlying processes that we follow and delivering for our customers each day.
And doing so while facing unprecedented headwinds from the ongoing COVID crisis, the impact of which is still being felt today.
So, given that this is my one-year anniversary, I think it's an appropriate time to ask how did we get here.
And much more importantly, how will we sustain this momentum going forward?
Our journey started last summer by first establishing a clear strategic purpose for the company, which is to be leaders in enabling additive manufacturing solutions for applications in growing markets, the demand high reliability products.
We then laid out a simple four-stage plan, which would allow us to live into this purpose.
They began with reorganization of the company into two business units, Healthcare and Industrial Solutions within restructured operations to gain efficiencies and began the process of divesting non-core assets.
Then, as these elements gained momentum, we systematically increased our focus on investing for accelerated growth and profitability.
By focusing intensely on execution of our plan, by the time we entered the New Year, we have returned to growth.
We were profitable, we were generating cash from operations and we're in a net cash position on the balance sheet.
And then, the real fun began.
As we began moving through Q1, the US economy began to reopen, our new products and applications gained momentum and our organic growth accelerated markedly.
And our profitability and cash from operations increased dramatically as we leveraged our streamline operations.
Based upon this progress and our long-term outlook, we've set a goal of sustained double-digit organic revenue growth, 50% gross margins and 20% adjusted EBITDA margins, all of which we think are attainable in the years ahead.
But in an increasingly competitive industry, why should you believe in our future success?
Well, in addition to delivering on our commitments, which I think we demonstrated again this quarter, what I can tell you is that there are three things that inspire my confidence in our future.
And I believe they should inspire yours as well.
First, we clearly by far have the broadest technology portfolio in the industry.
It includes a full range of metal and polymer printing systems, industry-leading software platforms and an outstanding portfolio of materials for both human and industrial system applications.
These capabilities, which are so vital to our customer's success, distinguish us from virtually all of our competitors.
And with our ongoing R&D investments, they're stronger and better than ever.
Second, I'm convinced that we have the brightest and most creative application engineers in the industry.
This group of very talented people provide exceptional value to our customers as they work hand-in-hand to introduce advanced systems and components that capitalize on additive manufacturing.
These applications range from unique medical devices and personalized implants that are so vital to improving patient outcomes in healthcare to unique components that enable the newest generation of commercial rockets for space travel, a revolutionary equipment for the manufacture of semiconductor chips, just to name a few.
And that list of new applications is growing rapidly every day.
Third, as one of the largest and most experienced companies in the industry, we have the scale and the infrastructure to not only support our customer's needs when they initially implement additive manufacturing, but also sustain them over the lifetime of their equipment by providing key services and consumables that are vital to their ongoing business success.
How do we know this formula works?
Well, as always, the proof is in the numbers.
Today, our technologies are used to print approximately 0.75 million production components per day 365 days a year.
That equates to over 250 million components per year and climbing.
This experience is invaluable as we invest more than ever into our core technologies and drive relentlessly to enable our customer's success.
In short, at 3D Systems, our goal is to inspire your confidence in us each day, first by delivering on our near-term commitments on growth and profitability, as demonstrated in our numbers today, while setting aggressive but realistic targets for the future.
As an investor, you need not invest based solely on promises about next year's growth through the one thereafter.
The market for industrial scale additive manufacturing is here today.
It's real and it's growing at an exciting rate, particularly as the headwinds from COVID recede.
So, as I said at the outset of the call, I have never been more excited about our future than I am today.
Now before I hand off to Jagtar to talk about the quarter, let me spend just a few minutes talking about the investments we're making for growth, some of which were described in our announcements last week.
First, as you can see in our numbers for Q1, we're seeing rising demand for new applications, particularly in our Healthcare business.
To meet this demand forecast, we're expanding our Denver, Colorado location by roughly 50%.
For more than a decade, this operation has supported a range of customers from large industry-leading customers to innovative start-ups and delivering a diverse portfolio of groundbreaking precision healthcare applications and medical technologies.
From this location, we have supported more than 100 CE marked and FDA-cleared products.
We've collaborated with surgeons to plan and guide more than 140,000 patient-specific procedures.
And we've manufactured over 2 million medical device implants in our advanced manufacturing group.
Through this next phase of investment, which includes putting in place some of our most advanced metal and polymer printing systems and software tools, we'll be able to reduce time to market for new medical applications, continue expanding our product offerings and better support the holistic needs of our growing healthcare customer base.
The scale we have now obtained in our Healthcare business in Denver provides a marvelous platform for growth, allowing us to maintain our industry-leading solution offerings that target patient-specific applications in growing markets like cranial maxillofacial surgical solutions and an expanding range of orthopedic surgical aids and implants.
In addition to supporting healthcare-specific growth, our Denver investment will expand the overall capabilities and capacity of our Application Innovation Group.
As I discussed earlier, this group of application engineers is in the central element of our solutions-oriented approach to customers.
With deep expertise in hardware, software and materials, this team of engineers helps customers not only demonstrate feasibility of new high value component solutions, but also design the overall workflows necessary to validate the economics of the process, gain regulatory approvals and then moving to full-scale production.
With expanded customer-facing engineering resources armed with a broad array of technologies and supporting infrastructure, we are well positioned to continue the strong momentum and expanded application development and early stage manufacturing that our customers are seeking.
In addition to our Colorado investment plans, last week we also announced the acquisition of two technology companies, Allevi and Additive Works.
These acquisitions have an important role to play in meeting our current and future growth objectives.
Let me start with the Additive Works acquisition.
They are a small but extremely talented group of German software engineers and physicists that have developed unique software that simulates the key steps of the additive manufacturing workflow from setup during the component design phase through post-print processing.
Their sophisticated physics-based algorithms are extremely fast and effective in optimizing the part orientation, the support structure and thermal conditions during printing.
The result has dramatically reduced setup times and post processing requirements, in conjunction with improved product performance yield and yield.
Historically, much of this optimization work was done empirically and requiring highly skilled process engineers and operators to optimize the process for each new component.
The Additive Works simulation software reduces or even eliminates the need for this intensive effort, allowing for a much more rapid introduction of new components and improved economics, performance and reliability of the resulting product.
The Additive Works software, sold under the name Amphyon, interfaces seamlessly with leading CAD systems as well as our 3DXpert software platform and other major print platforms, which we will continue to support.
Integrating Additive Works products and expertise into 3D Systems will further enhance our software portfolio and innovation capacity, driving accelerated adoption of additive manufacturing across the industrial and healthcare markets that we serve.
We expect the deal to close by the third quarter paced by normal German regulatory requirements.
Moving then to one of the areas that I'm increasingly excited about, the emerging field of regenerative medicine.
You may remember, on our last earnings call, we talked about the incredible progress our development team under Chuck Hull, working in close partnership with the wonderful folks in United Therapeutics, has made toward the printing of solid human organs.
While not yet a reality, the promise of this technology is truly extraordinary, offering the hope of meeting the needs for thousands of patients who are desperately waiting on the availability of new lungs, kidneys, livers, hearts and other organs.
Our commitment to this effort with United Therapeutics continues unabated.
As an outgrowth of this program, we also announced last quarter that given our strong technology foundation in this emerging field, we would expand our efforts pursuing additional applications for the human body such as printing of bones, arteries and soft tissue, just to name a few.
We've increased application support this year to pursue these partnerships and hoping the intermediate term to bring these extraordinary products to market.
In addition to these direct human applications, I'm very excited to announce a further expansion of our focus to include the rapidly emerging market for laboratory applications of bioprinting technology.
These laboratory applications are being driven by two major objectives; one is the study of regenerative medicine itself in a lab setting, which is increasingly of interest to researchers at major universities and renowned medical institutions around the world.
The other driver and one that we believe bring substantial growth opportunities for us is with pharmaceutical laboratories who wish to utilize the unique three-dimensional cellular structures produced by bioprinting to accelerate the development of new drugs and drug therapies, some of which may eventually be optimized to accommodate an individual's unique genetic framework.
In addition to drug development, bioprinting offers unique advantages in the development of cosmetics and other skincare treatments in that human interactions can be directly assessed using three-dimensional bioprinted human tissue constructs, instead of relying upon simulations or animal studies, which are often less effective and bring with them difficult social issues.
In short, bioprinting for laboratory studies offers the potential for better, faster and safer and more humane development pass for a wide range of human applications.
For all of these reasons, we're excited to expand our efforts to include these rapidly emerging laboratory applications, which we believe potentially represent a multi-billion-dollar market opportunity that will become available to us over the next several years.
In support of this effort to expand our regenerative medicine focus into the lab, we were very pleased last week to announce our acquisition of Allevi, a Philadelphia-based developer of bioprinting solutions comprising bioprinters, biomaterials, also known as bioinks, and specialized laboratory software.
Allevi has established a strong technology base, brand and distribution network for this rapidly emerging market with a presence today in over 380 medical and pharmaceutical laboratories in over 40 countries.
As a complete solutions provider, Allevi's business model aligns well with 3D Systems and positions us to leverage the technology we've developed for in-vivo applications as well as leveraging the overall scale of our Healthcare business to meet these emerging laboratory application needs.
When viewed in totality, with the Allevi acquisition completed last week, we're now well positioned across a broad market spectrum ranging from near-term laboratory applications, medium-term human applications and longer-term human solid organ applications in the exciting emerging field of regenerative medicine.
So, to bring this full circle, let me end by saying how very proud I am of our team's performance in the first quarter of the year as we continue to execute on our four-phase plan that we launched last summer.
More than ever, I believe that additive manufacturing will play a key role in transforming the way components can be designed and manufactured for critical applications ranging from complex space systems to the human body.
With our extensive portfolio of additive manufacturing systems, material science, software and domain expertise, 3D Systems is uniquely positioned to help our customers benefit from this transformation.
For the first quarter, we reported revenue of $146.1 million, an increase of 7.7% compared to the first quarter of 2020.
Our organic revenue growth, which excludes businesses divested in 2020 and 2021 was 16.6% in Q1 2021 versus Q1 2020.
We experienced strong product revenues across the portfolio, including printers, both plastics and metals, materials and software.
We believe this growth emphasizes the strategic nature of our portfolio breadth and validates our solution strategy.
We reported a GAAP income of $0.36 per share in the first quarter of 2021 compared to a GAAP loss of $0.17 in the first quarter of 2020.
Driving this improvement was a $32.9 million gain from the sale of the Cimatron and GibbsCAM software business as well as a tax benefit of $8.9 million as a result of the favorable ruling from the IRS regarding a FIN 48 reserve.
Turning to non-GAAP results.
We reported non-GAAP income of $0.17 per share in the first quarter of 2021 compared to a non-GAAP loss of $0.04 per share in the first quarter of 2020.
The exceptional non-GAAP result reflects our strong revenue growth combined with the restructuring and cost optimization activities that we have previously announced.
Now, we will discuss revenue by market.
Our Healthcare business had a strong quarter with revenue growing 38.7% year-over-year.
This growth was fueled by an increase in hardware and material sales in our dental business.
The large hardware volume, like we saw in Q1, may fluctuate on a quarterly basis, but drives the recurring higher margin material and services revenue, which is a focus of our long-term financial goals.
Excluding dental applications, revenue for medical applications grew by 9% as we continue to see increased demand for personalized health services and advanced manufacturing of medical devices.
We recently announced a planned expansion in Denver, Colorado that is intended in part to support the future growth of this business.
Revenue in our Industrial segment, when we exclude the businesses divested in 2020 and 2021, was up approximately 1% year-over-year as compared to year-over-year declines in prior periods.
The revenue trend turnaround in our Industrial segment was across our sub-segments such as jewelry and automotive with no single segment driving the results.
This is a reflection of global economies continuing to recover, albeit at an inconsistent pace from the pandemic-related shutdowns.
We expect this inconsistency to continue in 2021.
So while we see a path to full-year double-digit organic revenue growth in our core business, excluding businesses divested in 2020 and 2021, macroeconomic risks such as further COVID-19 impacts, inflation concerns and supply chain shortages in certain critical components like semiconductor chips, continue to create uncertainty.
Now, we turn to gross margin.
During the first quarter of 2021, we identified certain costs that have historically been shown as cost of products that actually relate to cost of services.
Our reported gross profit margins reflect an update to properly present these costs.
While this resulted in a small movement of cost between products and services, the change not affects our gross profit, bottom line results, consolidated balance sheets or statement of cash flow.
For Q1 2021, we reported gross profit margin of 44% in the first quarter of 2021 compared to 42.1% in the first quarter of 2020.
Non-GAAP gross profit margin was 44% compared to 42.7% in the same period last year.
Gross profit increased year-over-year as a result of higher sales volume mix, including software sales and the impact of our cost reduction activities.
We are quite pleased with our improved margin performance in Q1, especially when you consider that we divested a relatively high gross margin software business at the beginning of the year.
In our last earnings call, we said we expect non-GAAP gross profit margins in the range of 40% to 44% for 2021.
We continue to expect to be in that range on a full-year basis.
Operating expenses for the quarter were 66.2% on a GAAP basis, a decrease of 12.1% compared to the first quarter of 2020, including a 11.6% decrease in SG&A expenses and a 13.7% decrease in R&D expenses.
Our non-GAAP operating expenses in the first quarter were $51.2 million, an 18.7% decrease from the first quarter of the prior year as we saw the benefits from our restructuring efforts as well as the impact of divested businesses.
The primary differences between GAAP and non-GAAP operating expenses are $13.4 million in amortization of intangibles and stock-based compensation.
Continuing the theme of year-over-year improvement, adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $19.8 million or $13.6% of revenue compared to $2.2 million or 1.6% of revenue in the first quarter of 2020.
The improvement is due to stronger gross margins as well as the results from our restructuring efforts.
We are very pleased with the trend of our EBITDA margins over the past several quarters.
Driving improvements to margins, adjusted EBITDA and revenue growth is the impetus behind targeted acquisitions like Additive Works and Allevi.
While they will not be material to 2021 results, these and future acquisitions will be a key component of our long-term strategy to reach double-digit revenue growth, gross profit margins of 50% and adjusted EBITDA margins of 20%.
Now, let's turn to the cash flow statement and balance sheet.
Cash on hand increased $48.2 million during the first quarter.
This increase was primarily driven by the net proceeds from divestitures of $54.7 million and cash generated from operations of $28.5 million, offset by a debt repayment of $21.4 million and other financing and investing uses of cash, including capital expenditures.
Note that our cash from operations of $28.5 million included the use of approximately $6.6 million of cash for withholding taxes related to the Cimatron sale.
When factoring together, it is of note that we have substantially improved cash from operations compared to the $2.3 million of cash used in operations in Q1 2020.
We ended the quarter with a strengthened balance sheet with $133 million of cash and cash equivalents, no debt and nearly full capacity on our $100 million undrawn revolving credit facility.
We have made a very strong turnaround from this time last year.
3D Systems is now growing profitably, generating cash and maintaining available liquidity.
Our combination of growth and profitability is unique to our industry and positions us well to continue to invest in high growth areas that will support our long-term financial goals.
Our solid financial profile makes us the partner-of-choice for customers that are considering as solutions provider for their most critical manufacturing processes.
We are excited about the opportunity for our business and our plans to deliver against our long-term objectives.
To continue to provide more detail to the investment community on our strategy, we plan to hold an Investor Day in the Denver, Colorado area on September 9.
We'll provide more details as we get closer to the event.
Again, I just want to say how pleased I am with our results and our return to year-over-year growth, our continued profitability improvements, the strength of our balance sheet and our strong cash generation performance.
With intentional action taken on our four-phased plan, we're reinforcing our leadership in this exciting industry.
We plan to continue looking for opportunities to optimize our resources, divesting or investing as needed to support sustained exciting growth and profitability.
Kevin, let's open it up.
| 3d systems q1 non-gaap earnings per share $0.17.
q1 non-gaap earnings per share $0.17.
q1 gaap earnings per share $0.36.
q1 revenue $146.1 million versus refinitiv ibes estimate of $136.6 million.
|
As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website.
It is now my pleasure to hand the call over to our CEO, David Hult.
Though our new car inventory levels continue to be challenged due to the chip shortage, our team delivered strong results and enabled us to deliver an impressive gross margin of 20%, an all-time record and an expansion of 180 basis points versus the third quarter last year.
These results demonstrate the resilient strength of the franchise model with its full suite of services through the car ownership journey from sales to service contributing to sustained profitability.
We've also stayed disciplined in managing expenses, resulting in adjusted SG&A as a percentage of gross profit of 55.3%, a 580 basis point improvement versus prior year.
Our total revenue for the quarter was up 30% year-over-year, and total gross profit was up 43%.
Due to this record performance and strong cash flow, our balance sheet remains strong.
Our net leverage ratio ended this quarter at 1.2 times.
A quick update on our five-year strategic plan.
Same store revenue growth, assuming 2020 annualized revenue for Park Place, is up 10% and is exceeding expectations.
Regarding Clicklane, our unit sales are pacing ahead of our projection for year one.
And we've made great strides this quarter on our acquisition pillar.
As announced, we expect to close on the transformative acquisition of the Larry H. Miller Dealerships and Total Care Auto in the fourth quarter.
With their strong name and brand mix in the right states and our aligned cultures, we look forward to jointly deploying our capabilities and growing together.
In addition, we closed two acquisitions recently.
Greeley Subaru in the Denver market and Kahlo Chrysler Jeep Dodge in Indianapolis and are on schedule to close Arapahoe Hyundai Genesis in the Denver market today.
With another acquisition still under contract and expected to close in the fourth quarter as well, in total, in 2021, we anticipate that we will close on $6.6 billion of annualized revenue from acquisitions.
With these results, we maintain full confidence in the execution of our growth strategy, and we will update our five-year plan during our Q1 earnings call in 2022.
He brings his vast knowledge of the auto retail business, along with his broad experience in finance.
We worked together at Group one for many years, and I'm excited to be working with him again.
And finally, I would like to address all of my teammates at Asbury.
Our ability to add quality stores, who like us care about serving our guests and being highly engaged in our communities could not have happened without you.
You all have given us the ability to thoughtfully grow our core business, because you align behind our vision and you are executing each and every day.
People make the difference in any organization and you are making us the best place to work, do business and grow your careers.
I will now hand the call over to Dan to discuss our operating performance.
My remarks will pertain to our same store performance compared to the third quarter of 2020, unless stated otherwise.
Looking at new vehicles.
Based on current market conditions, we continue to be focused on being opportunistic with our inventory and improving grosses to maximize profits.
Our new average gross profit per vehicle was $4,808 up $2,369 or 97% from the prior year period.
All segment margins were up significantly from the prior year period.
At the end of September, our total new vehicle inventory was $121.9 million, and our day supply was at 12 days, down 35 days from the prior year.
With still no clear understanding of when production will return to a normal level, we expect the day supply to remain low throughout the remainder of the year and into 2022.
Turning to used vehicles.
Our used retail volume increased 27%, while gross margin was 8.4%, representing an average gross profit per vehicle of $2,402.
As a result of our performance, our gross profit was up 45%.
Our used vehicle inventory ended the quarter at $236.4 million, which represents a 28-day supply, down seven days from the prior year.
Our used to new ratio for the quarter was 113%.
Our strong, consistent and sustainable growth in F&I delivered an increase of $155 to $1,955 per vehicle retail from the prior quarter.
In the third quarter, our front-end yield per vehicle increased $1,400 per vehicle to an all-time record of $5,487.
Turning to parts and service.
Our parts and service revenue increased 10% in the quarter.
Though warranty revenue dropped 18%, our customer paid revenue continues its healthy recovery, posting a 13% growth.
Overall, our total fixed gross profit increased 10%, while total fixed margin was 60.9%.
And now I would like to provide an update on our omnichannel initiatives.
Our digital marketing team continues to do an outstanding job generating traffic to our websites.
Our commitment years ago to Google organic search continues to drive efficiencies in times where inventory is shrinking, allowing us to increase traffic without spending media dollars.
In Q3, we had over 6.3 million unique visitors, a 12% increase versus Q3 2020.
Another initiative is to increase online service appointments.
We achieved over 143,000 online service appointments, an all-time record and a 12% increase versus Q3 2020.
This component positively impacts service retention and increases the dollars per repair order.
Now with two full quarters of Clicklane at all stores under our belt, we would like to share some performance metrics.
We sold 6,000 vehicles through Clicklane in Q3, of which 47% of them were new vehicles and 53% used.
93% of our transactions this quarter were with customers that were new to Asbury's dealership network.
Average transaction time continues to be consistent with previous quarter, eight minutes for cash deals and 14 minutes for finance deals.
Total front-end yield of $5,400.
Average credit score is higher than the average credit score at our stores.
Total front-end yield of $4,396 on trades taken through Clicklane.
We continue to expect annualized volume through Clicklane of approximately 30,000 vehicles by year-end.
As expected, Clicklane customers are converting at greater rates than traditional Internet leads.
We remain quite excited about the performance of Clicklane thus far as it is tracking ahead of its target.
All of you have built tremendous organizations that properly align with our North Star of being the most guest-centric automotive retailer.
Our future is bright, and I look forward to meeting all of you.
Your depth of knowledge in the automotive business is already making a significant impact on our company.
I am enjoying working with you and look forward to growing Asbury together.
I will now hand the call over to Michael to discuss our financial performance.
I'm excited to be part of the Asbury team and have the opportunity to work with David again.
I look forward to working with the team on our growth journey.
I would like to provide some financial highlights, which marked another record quarter for our company.
Overall, compared to the third quarter of last year, our actions to manage gross profit and control expenses resulted in a third quarter adjusted operating margin of 8.5%, an increase of 109 basis points above the same period last year and an all-time record.
Adjusted operating income increased 69% to $204.5 million, a third quarter record.
And adjusted net income increased 81% to $143.6 million, another third quarter record.
Net income for the third quarter 2021 was adjusted for acquisition expenses of $3.5 million or $0.13 per diluted share and a gain on dealership divestitures of $8 million or $0.31 per diluted share.
Net income for the third quarter of 2020 was adjusted for a gain on dealership divestiture of $24.7 million or $0.96 per diluted share, acquisition costs of $1.3 million or $0.05 per diluted share and $700,000 or $0.03 per diluted share for a real estate-related charge.
Our effective tax rate was 23.7% for the third quarter of 2021 compared to 24.8% in 2020.
Floor plan interest expense for the quarter decreased by $1.5 million over the prior year, driven by lower inventory levels.
With respect to capital deployed this quarter, we acquired a Subaru store in Colorado, utilizing approximately $16 million of our cash on the balance sheet.
In addition, we spent approximately $15 million on capital expenditures, and we repaid approximately $9 million of debt.
Also as part of our strategy to optimize our portfolio, we divested of our BMW store in Charlottesville, resulting in proceeds of $18 million, net of its mortgage payoff.
As a result of our operational performance, our balance sheet is quite healthy as we ended the quarter with approximately $780 million of liquidity comprised of cash, floor plan offset accounts and availability on both our used line and revolving credit facility.
Also, at the end of the quarter, our net leverage ratio stood at 1.2 times, well below our targeted net leverage of three.
With our announced acquisitions under contract, we are working toward financing the exciting growth at Asbury.
As announced in late September, we plan to raise the combined -- a combination of permanent debt and equity financing prior to the closing of Larry H. Miller acquisition.
We are working with our supportive lender group to upsize our credit facility and syndicate the real estate mortgage financing with plans to close both ahead of our acquisition of Larry H. Miller Dealerships later this year.
Although the transaction is initially expected to take our net leverage above our targeted range of three times, we believe that we can deleverage approximately three times during 2023, given the highly accretive nature of the deal combined with strong free cash flow generation.
As we look forward to the remainder of 2021, we anticipate similar conditions to what we have seen this quarter.
New vehicle inventory supplies will likely remain low and unpredictable into the next year.
I look forward to working with you and continue to build on the strong cultures that you are bringing to Asbury.
| asbury automotive group - reported total revenue for third quarter of $2.4 billion, up 30% from prior year period.
qtrly total revenue on a same-store basis was up 16% from the prior year period.
qtrly same-store used vehicle retail revenue increased 47%.
|
Questions will be limited to analysts and investors.
[Operator instructions] If we are unable to get to your question during the call, please call our investor relations department.
Joining us on our call today are Craig Menear, chairman and CEO; Ted Decker, president and chief operating officer; and Richard McPhail, executive vice president and chief financial officer.
These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission.
Reconciliation of these measures is provided on our website.
As you know, this is my last earnings call, and it has been a blessing and an honor to serve our customers, associates, shareholders, and communities for the last seven and a half years as CEO.
I'm extremely proud of the progress this team has made together, but perhaps our greatest accomplishment has been nurturing the culture of our company, which I believe is a competitive advantage.
I am confident that this leadership team will effectively guide The Home Depot through its next phase of growth.
But before we talk about that, let's first discuss our results for the year.
Fiscal 2021 was another record year for The Home Depot as we achieved the milestone of over $150 billion in sales.
We have continued to navigate a challenging and fluid environment with agility.
This resulted in double-digit comp growth for fiscal 2021 on top of nearly 20% comp growth that we delivered in fiscal 2020.
We've grown the business by over $40 billion over the last two years.
For context, prior to the pandemic, it took us nine years from 2009 to 2018 to grow the business by over $40 billion.
So to achieve that level of growth in two years' time is truly a testament to our investments, our teams, and their exceptional execution.
None of what has been accomplished over the past two years would have been possible without our orange-blooded associates.
Our associates have maintained their relentless focus on the customer while simultaneously navigating the ongoing pandemic, industrywide supply chain disruptions, inflation, and a tight labor market.
The tenure and strength of our relationships with our supplier and transportation partners has also been key to our success.
Our respective teams have worked tirelessly to build depth in key product categories and flow product to stores and distribution centers as quickly and efficiently as possible.
Their extraordinary efforts in fiscal 2021 resulted in record Success Sharing, our bonus program for our hourly associates.
We finished the year with another exceptional quarter as home improvement demand remained strong.
Sales for the fourth quarter grew approximately $3.5 billion to $35.7 billion, up 10.7% from last year.
comps of positive 7.6%.
During the fourth quarter, all our regions and merchandise departments posted positive comps.
Departments of comps above the company average were plumbing, electrical, building materials, millwork, decor, and storage and paint.
Our kitchen bath department was in line with the company average.
And hardware tools, lumber, flooring, appliances, and our garden departments were positive but below the company average.
During the fourth quarter, our comp average ticket increased 12.3%.
Comp transactions decreased 3.8%.
The growth in our comp average ticket was driven primarily by inflation across several product categories.
Core commodity categories positively impacted our average ticket growth by approximately 185 basis points in the fourth quarter driven by inflation in lumber, building materials, and copper.
Lumber prices remain volatile.
For example, in the fourth quarter alone, the pricing for framing lumber ranged from approximately $585 to over $1,200 per 1,000 board feet, an increase of more than 100%.
On a two-year basis, both comp average ticket and comp transactions were healthy and positive in the fourth quarter.
Big-ticket comp transactions or those over $1,000 were up approximately 18% compared to the fourth quarter of last year.
We saw continued strength in both our Pro and DIY customers.
During the fourth quarter, Pro sales growth outpaced DIY growth.
Sales growth for both our Pro and DIY customers accelerated in the fourth quarter relative to the third quarter and showed strong double-digit growth on a two-year basis for both customer groups.
Sales leveraging our digital platforms grew approximately 6% for the fourth quarter and approximately 9% for the year.
Over the past two years, sales from our digital platforms have grown over 100%.
Our focus on delivering a frictionless, interconnected shopping experience is resonating with our customers as approximately 50% of our online orders were fulfilled through our stores in fiscal 2021.
We feel great about our position as the No.
1 retailer for home improvement, and we look forward to serving our customers in the busy spring selling season.
Over the last year, we faced a number of challenges, including rising cost pressures, disruptions throughout the supply chain, and the ongoing pandemic.
We're extremely grateful for the way our cross-functional teams work with our partners to mitigate these challenges while staying focused on serving our customers and communities.
In the fourth quarter, total sales were $35.7 billion, an increase of approximately $3.5 billion or 10% -- 10.7% from last year.
Our total company comps were positive 8.1% for the quarter with positive comps of 7.3% in November, 10.2% in December, and 7% in January.
were positive 7.6% for the quarter with positive comps of 7.2% in November, 10.9% in December, and 5.4% in January.
Our results in the fourth quarter were once again driven by broad-based strength across the business and our geographies.
All 19 U.S. regions posted positive comps, and Canada and Mexico, both posted double-digit positive comps in the fourth quarter.
For the year, our sales totaled a record $151.2 billion, with sales growth of $19 billion or 14.4% versus fiscal 2020.
For the year, total company comp sales increased 11.4%, and U.S. comp sales increased 10.7%.
In the fourth quarter, our gross margin was 33.2%, a decrease of approximately 35 basis points from last year.
And for the year, our gross margin was 33.6%, a decrease of approximately 30 basis points from last year, primarily driven by product mix and investments in our supply chain network.
During the fourth quarter, operating expenses were approximately 19.7% of sales, representing a decrease of approximately 120 basis points from last year.
Our operating leverage during the fourth quarter reflects comparisons against significant COVID-related expenses that we incurred in the fourth quarter of 2020 to support our associates, the anniversarying of $110 million of non-recurring expenses related to the completion of the HD Supply acquisition in the fourth quarter of 2020, and solid expense management for the quarter.
During the fourth quarter of fiscal 2021, we also incurred approximately $125 million of COVID-related expenses.
For the year, operating expenses were approximately 18.4% of sales, representing a decrease of approximately 170 basis points from fiscal 2020.
Our operating expense leverage in fiscal 2021 reflects a decrease in our COVID-related costs compared to last year, partially offset by wage actions taken at the end of 2020 as well as throughout 2021.
Our operating expenses for the year included a consistent level of investment in our business, which we intend to continue.
For the year, we are very pleased with the operating expense leverage we were able to deliver.
Our operating margin for the fourth quarter was approximately 13.5% and for the year was approximately 15.2%.
Interest and other expense for the fourth quarter was essentially flat with last year.
In the fourth quarter, our effective tax rate was 25.5% and for fiscal 2021 was 24.4%.
Our diluted earnings per share for the fourth quarter were $3.21, an increase of 21.1% compared to the fourth quarter of 2020.
Diluted earnings per share for fiscal 2021 were $15.53, an increase of 30.1% compared to fiscal 2020.
During the year, we opened seven new stores and added 14 new stores through a small acquisition, bringing our store count to 2,317 at the end of fiscal 2021.
Retail selling square footage was approximately 241 million square feet at the end of fiscal 2021.
Total sales per retail square foot were approximately $605 in fiscal 2021, the highest in our company's history.
At the end of the quarter, merchandise inventories were $22.1 billion, an increase of $5.4 billion versus last year.
And inventory turns were 5.2 times, down from 5.8 times from the same period last year.
Moving on to capital allocation.
During the fourth quarter, we invested approximately $830 million back into our business in the form of capital expenditures.
This brings total capital expenditures for fiscal 2021 to $2.6 billion.
During the year, we paid approximately $7 billion of dividends to our shareholders.
We look to grow our dividend every year as we grow earnings.
And today, we announced our board of directors increased our quarterly dividend by 15% to $1.90 per share, which equates to an annual dividend of $7.60.
And finally, during fiscal 2021, we returned approximately $15 billion to our shareholders in the form of share repurchases, including $4.5 billion in the fourth quarter.
Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 44.7%, up from 40.8% in the fourth quarter of fiscal 2020.
Now I'll comment on our outlook for 2022.
The broader housing environment continues to be supportive of home improvement.
Demand for homes continues to be strong, and existing home inventory available for sale remains near record lows, resulting in support for continued home price appreciation.
On average, homeowners' balance sheets continue to strengthen as the aggregate value of U.S. home equity grew approximately 35% or $6.5 trillion since the first quarter of 2019.
The housing stock continues to age, and customers tell us the demand for home improvement projects of all sizes is healthy.
While we are encouraged by the consistent and resilient demand we've seen for home improvement, broader uncertainty remains with respect to the impact of inflation, supply chain dynamics, and how consumer spending will evolve through the year.
Given these factors establishing full year 2022 guidance based on macroeconomic fundamentals remains challenging.
We adjust this dollar run rate for our historical seasonality to calculate our sales outlook for 2022.
Based on this approach and assuming there are no material shifts in demand, we calculate that sales growth and comp sales growth will be slightly positive for fiscal 2022.
We expect our 2022 operating margin to be flat to 2021.
And we would expect low single-digit percentage growth in diluted earnings per share compared to fiscal 2021.
Over the course of fiscal 2022, we plan to invest approximately $3 billion back into our business in the form of capital expenditures, in line with our annual expectation of approximately 2% of sales going forward.
We believe that we have positioned ourselves to meet the needs of our customers in any environment as evidenced by our results.
The investments we've made in our business have enabled agility in our operating model.
As we look forward, we will continue to invest to strengthen our position with our customers, leverage our scale and low-cost position to drive growth faster than the market, and deliver shareholder value.
With that, I'll hand it back to Craig.
And again, let me congratulate the team on an exceptional year.
In a few moments, Ted and Richard will share their thoughts on the next phase of growth for our company.
The leadership team has spent a lot of time over the past year talking about what's next for The Home Depot, and I have never been more excited about the opportunities that are ahead of us.
While change is constant in our business, our strategic priorities remain consistent: deliver the best customer experience in home improvement and extend our low-cost provider position.
Our objectives to grow market share and deliver exceptional shareholder value are also unchanged.
And as Ted will detail, the investments we have made and will continue to make in differentiated capabilities throughout the business will unlock the opportunity to deliver a value proposition that we believe is unique in our industry.
We are well-positioned to leverage our distinct competitive advantages to capitalize on a compelling growth opportunity in our space.
We have a world-class leadership team who have the vision and experience to guide our company to new heights.
We have a team of approximately 500,000 associates who are committed to the culture that our founders instilled in our business over 40 years ago.
These associates have demonstrated exceptional execution and an unwavering commitment to our customers regardless of the operating environment.
I believe that the greatest days for The Home Depot are ahead of us.
Let me take a moment to express my sincere appreciation for all that you have done for this company throughout your 25-year career.
You're a tremendous steward of our culture, ensuring our values guide every decision we make as a leadership team.
You led us through a transformational period and positioned us well for the future.
I believe that Home Depot is an organization unlike any other.
Our success is driven by our orange-blooded associates, unique culture, customer focus, and operational excellence.
This is the power of The Home Depot and why we are the No.
1 retailer for home improvement.
I'd like to spend some time talking about the future, what's next for this great company.
We've seen several inflection points in our company's history, all spurred by a desire to maintain the growth mentality and entrepreneurial spirit created by Bernie and Arthur when they revolutionized the home improvement industry over 40 years ago.
Over the years, we have used these inflection points to adapt to changing market conditions and customer expectations.
Approximately 15 years ago, we pivoted from new stores as a driver of growth to growth driven by productivity.
Years later, we began building capabilities to better enable a multichannel shopping experience through an end-to-end approach.
In recent years, we focused on a customer-back approach to deliver the best interconnected shopping experience in home improvement.
Customer expectations continue to evolve, and there is little tolerance for any friction in the shopping journey.
So we will continue to adapt to stay ahead of the customer.
We have seen a tremendous amount of growth in the past decade.
We could have never predicted the more than $40 billion in growth since the end of 2019.
With this growth, we are reimagining new milestones for the business.
Our objectives to grow market share and deliver exceptional shareholder value are unchanged.
Aligned with these objectives, our goals are: first, to grow the business to $200 billion in sales, which represents incremental growth of approximately $50 billion from where we are today; and second, and just as importantly, deliver best-in-class operating profit dollar growth and return on invested capital.
We believe that we will achieve these goals through what we are confident is the winning formula for our customers, our associates, and our shareholders.
We intend to provide the best experience in home improvement, extend our position as the low-cost provider and be the most efficient investor of capital in home improvement.
Over the last two years, as we've grown by over $40 billion in sales, our addressable market has also grown.
We now estimate that our total addressable market in North America is greater than $900 billion.
We have invested in capabilities that improve our competitive positioning and allow us to pursue opportunities we could not meaningfully address in the past, which provides significant growth opportunities with both consumers and Pros.
We estimate that each of these respective customer groups represent about 50% of the total addressable market.
We also estimate that each of these important customer groups represent approximately 50% of our total sales.
For Pro, we believe this addressable end market is over $450 billion.
Within this end market, we believe our addressable maintenance, repair, and operations, or MRO space, has expanded to over $100 billion.
So while we are the No.
1 home improvement retailer across all of our geographies, we represent a relatively small part of a large and fragmented total addressable market that has expanded significantly over the past two years.
To support our growth objectives, we have a straightforward approach to capital allocation that will also remain unchanged.
Investing in the business is our primary capital allocation priority, and we have learned that it is critical to invest in a more consistent and agile way.
Our investment cadence has become more real time, allowing us to pivot more quickly, giving us the ability to move faster when we see positive results.
After investing in the business, it is our intent to return excess cash to shareholders through a balanced approach of paying a healthy dividend and making share repurchases.
While there is more to do as we fine-tune new go-to-market strategies and refine our processes to better serve our customers, we believe what we are creating will extend our leadership position.
We intend to leverage our unmatched scale as we continue to optimize assets and capabilities to compete in a more disruptive way.
The macroeconomic environment is supportive, the opportunity in front of us is compelling, and our capital allocation principles will continue to create value for our stakeholders.
We have a powerful foundation and distinct competitive advantages.
First, as I mentioned earlier, our unique culture and values as well as our knowledgeable associates will remain a competitive differentiator.
Second, our stores are the hub of our business and will always be important in the future of home improvement retail.
We have a premier real estate footprint that provides convenience for the customer.
Third, we believe we have the most relevant brands and products and are continuously driving innovation in the marketplace.
Fourth, we have a best-in-class supply chain and have demonstrated our ability to operate with agility and navigate any environment.
And finally, we have consistently improved the interconnected shopping experience as our customers increasingly blend physical and digital worlds for their projects.
We continue to invest and strengthen these advantages to ensure the best experience for our customers.
While there is more work to do, we've made important strides in removing friction from the customer experience.
Let me give you real examples of how the investments we've made across the business are earning us more share of wallet with our customers.
Let's take the example of one of our Pro customers in the Dallas market.
Years ago, this large-scale repair/remodeler primarily shop with us in our stores for their unplanned immediate need purchases, largely out of convenience.
Over time, their in-store spend increased and they were signed a dedicated Pro Account Representative, or PAR, to deepen our relationship with them.
As we invested across the interconnected experience, this customer engaged with us more often and occasionally used us for job site delivery.
At this point, we saw their spend with The Home Depot grow to more than $100,000 annually but still for mostly unplanned immediate need purchases in store.
Fast forward to today, this customer now utilize the number of new and/or improved capabilities.
Last year, this customer downloaded our mobile app.
Their mobile orders increased.
They joined our Pro loyalty program and authenticated with us via our B2B website.
We began offering personalized pricing on certain products.
And they took their first deliveries from several of our new fulfillment centers, including one of our new flatbed distribution centers.
As a result, we've seen spend with this customer more than triple to over $300,000 annually.
While this is one example, we see that customers increase spend with us as they build confidence in our capabilities.
While we continue serving this customer for their unplanned immediate-need purchases, we now believe our capabilities are beginning to satisfy important planned purchase occasions.
We believe the ability to serve our Pros' planned and unplanned purchase occasions will be an important driver of growth as we work toward a $200 billion sales milestone.
And while Pro is an important driver of growth going forward, removing friction from the DIY customer is equally important.
Let's take the example of a customer we'll call Geena, a DIY customer tackling a bathroom remodel four years ago and compare that with the same shopping experience today.
Four years ago, she would have relied heavily on our stores and website for helping completing her project.
Geena's engagement on our digital applications is a little more difficult.
The mobile experience wasn't as intuitive, search results weren't as relevant, and associated recommendations were limited.
As a result, she likely made multiple trips to the store for items didn't know she needed.
And when she did go to the store, buy online pick up in store, or BOPUS, was essentially the only option outside of the traditional cash-and-carry model for collecting whatever tools and materials her project required.
Today, Geena's experience would be meaningfully different as her shopping journey is met with a lot less friction.
As Geena begins her project online, improvements in search provide her with more relevant results.
We also have a better understanding of the intent of her shopping journey and can make recommendations supporting her whole project.
And we know these product-relevant recommendations matter.
Over the last four years, we've seen a significant increase in sales driven by product recommendations.
When Geena comes to our stores, our recently updated mobile app and improved signage help her more easily navigate our aisles.
We've made investments in the front end to improve her checkout experience.
And as always, our knowledgeable associates are there to help Geena throughout her project.
If Geena chooses to place an order online for pickup in the store, she has multiple fulfillment options.
She can pick up her items at the service desk, grab those items from a locker or have them brought to her car with curbside pickup.
Geena can also receive same- or next-day delivery on thousands of items.
We have seen customers like Geena increase their spend with The Home Depot as a result of our improved in-store experience, more robust and personalized online shopping journey and greater delivery and fulfillment options.
We are also shifting our mindset to deliver a truly seamless interconnected experience.
The flywheel we are building goes beyond retail's traditional channel mindset to an ecosystem of capabilities and operational efficiencies working together to remove friction at every step of the customer shopping journey.
For example, while we believe the supply chain network we are building is transformational, it's just not about the buildings themselves.
The value lies in their connection to the overall fulfillment and store ecosystem in the improved customer experience.
The new fulfillment centers enable us to expand our assortment and inventory depth as well as offer faster and more reliable delivery options.
In addition, these new facilities removed some fulfillment pressures historically placed on stores, creating a better in-store shopping experience and freeing up associates to help drive additional sales.
Our intention is to build an unrivaled delivery network for home improvement goods.
While early days, we continue to develop our capabilities, and we are encouraged as we see a measurable lift in sales with a more interconnected shopping experience.
As we move forward toward this next phase of growth, we will remain focused on driving productivity, a long-standing hallmark of The Home Depot.
Enabled by technology, we are focused on eliminating unnecessary tasks and making our processes more efficient while also making our shopping experience the best in home improvement.
When I think about our stores, I think about the tremendous amount of productivity over the years, all of which helped us achieve over $600 in sales per retail square foot in 2021.
As we set our sights on our goal of $200 billion in sales, we have many opportunities to improve freight flow throughout the store and drive further space optimization in SKU productivity.
The productivity initiatives don't reside solely in our stores, we see many opportunities across the business.
When our founders started The Home Depot over 40 years ago, they transformed an industry.
We are continuing that legacy but doing so in an interconnected way.
We believe that the interconnected ecosystem we are building will increase our ability to capture share.
We intend to disrupt traditional business models with new go-to-market strategies.
The opportunity in front of us is exciting today as it was when we first opened our doors, and I am honored to help lead this company into the next phase of growth.
| compname announces fourth quarter and fiscal 2021 results increases quarterly dividend by 15 percent provides fiscal 2022 guidance.
compname announces fourth quarter and fiscal 2021 results; increases quarterly dividend by 15 percent; provides fiscal 2022 guidance.
q4 earnings per share $3.21.
q4 sales rose 10.7 percent to $35.7 billion.
fiscal 2022 guidance assumes run-rate of dollar demand it has observed over last two quarters continues through fiscal 2022.
sees 2022 sales growth and comparable sales growth to be slightly positive.
sees 2022 operating margin approximately flat with fiscal 2021.
qtrly comparable sales in u.s. increased 7.6 percent.
qtrly comparable sales for q4 of fiscal 2021 increased 8.1 percent.
sees 2022 diluted earnings-per-share-growth to be low single digits.
announced that its board of directors approved a 15 percent increase in its quarterly dividend to $1.90 per share.
|
Today we will be reviewing our fourth quarter and full year 2020 financial results and providing investors with an update on our transformation.
Further information can be found in our SEC filings.
Let's begin on Slide 3.
We started 2020 enthusiastic for a strong year of commercial execution, launching new products and continuing to simplify our business.
I'm pleased that despite the unforeseen pandemic challenges, we still managed to do all of those things and achieved remarkable results.
For the full year, we delivered higher profitability at lower net sales, while expanding gross margins and reducing SG&A expense.
We also achieve breakeven cash flow by prudently managing working capital with a special emphasis on reducing inventory.
At the same time, we strengthened our financial flexibility by retiring debt and extending the maturity of a significant portion of convertible notes.
It was another great year of new products.
Our innovation team added great new products expected to drive incremental sales and improved profitability.
We also manage through challenging global supply chain disruptions and took steps to optimize our manufacturing network.
We did this while quickly adapting to a new work environment to safety measures for our associates and creative ways to engage our customers.
Our ability to conduct virtual training and support our customer's non-contact clinical assessment and the unique ability of many of our products to perform remote programing and diagnostics really put us ahead.
For the best of best of these to widen our competitive advantage in the future.
2020 has made our business stronger.
Invacare participates in durable, healthy markets and serves a persistent need for its products with a tremendous opportunity to grow by commercializing new products and servicing pent-up demand for purchases.
We continue to simplify the business, so we can better serve our customers and make transactions easier.
At the same time, we have a great team of people, working to drive efficiency and financial performance.
After strong results in a challenging 2020, I have even more confidence about the bright future ahead of us.
On Slide 4, you'll see the fourth quarter, we delivered stronger operating income with a substantial increase in free cash flow.
This was the result of overall good sales performance, cost containment measures and less restructuring in the period.
As guided, in the fourth quarter, we achieved improvement in sequential consolidated net sales of 5.7%, in constant currency sequential net sales increased by 4.2%, driven by continued strength in respiratory products, increased sales of lifestyle products and growth in North America mobility and seating.
These results were consistent with our expectations about the lessening of pandemic restrictions in the periods.
Compared to prior year, operating income increased by $5 million and free cash flow increased by nearly $12 million.
I'm pleased with the continued progress in the business and the improved financial results achieved during the quarter.
Turning to Slide 5, with fourth quarter, adding to the strong results from the three prior quarters, full-year operating income increased by $21.7 million and adjusted EBITDA grew by over 11% to nearly $32 million.
During the year we launched new products, improved gross profit margin and effectively managed SG&A expense to achieve these results.
Importantly, after years of improvements, North America returned to profitability with more than $17 million increase in operating income and modest growth in constant currency net sales.
As mentioned previously, we generated breakeven free cash flow as a result of prudent working capital management.
I'm pleased with the significant improvement in our key metrics.
This demonstrates our strategic initiatives are working and that we have built a strong business foundation.
As demonstrated on Slide 6, having a full pipeline of compelling new products with meaningful innovation is at the core of our growth strategy.
In 2020, our innovation and commercial efforts continued unabated.
We launched new power wheelchair products in adults and smaller sizes, active manual, passive manual and Bariatric wheelchairs, folding compact power wheelchairs, power add-on beds, lifts and hygiene products.
It was really a great year, adding to our portfolio, which will help us find more ways to engage with clinicians, and help them engage with end users looking for the latest solutions for independence and great healthcare aids.
In 2020, we also introduced the Pico Green product line, the first shower chair made using renewable materials from sustainable products and which eliminates 99% of surface bacteria, particularly maintaining a safer patient environment.
These products come in many varieties and will help us engage with customers to provide better solutions for 24 hours of care.
This is the kind of pipeline we expect to continue in the future.
Also in 2020, we completed the previously announced structural business improvements.
We outsourced all of our IT infrastructure and began deploying our modernized IT system in the first stage in Canada and New Zealand.
We're pleased with the system's new functionality and look forward to using these new systems to improve our customers' experience transacting with us, and to providing our associates with modern tools to simplify their work and improved results.
Additionally, in December, we successfully completed the German plant consolidation, which is anticipated to generate approximately $5 million in annual cost savings, starting in 2021.
In 2021 we'll turn our attention to further optimizing operations and our manufacturing facilities, into working with our logistics partners, which should further improve results.
In summary, 2020 was a good year in both results and from fundamental improvements that will help us grow and improve in the future.
On Slide 7, I'd like to take a brief moment to address how our ESG initiatives support our mission and enhance shareholder value.
At our core, Invacare is a company focused on our mission of inclusion.
After all our products are designed to maximize the person's independence and to help people achieve the best lifestyle and outcome in any setting they choose.
Our business results are what we do every quarter and ESG guides us on how we achieve -- as an employer and community number, it's important for us to align our mission-driven purpose that yields great healthcare solutions for people and to do that in a way that engages all of us that work with us.
Three years ago we began a concerted effort to ensure Invacare is a responsible environmental steward, with employment practices and community outreach that engage with us.
You can see the areas we're focused on to leverage our efforts to reduce waste, consume energy responsibly and engage with social purpose.
Turning to Slide 9, during the fourth quarter, while constant currency net sales decreased compared to the prior year, revenues increased sequentially as healthcare restrictions began to loosen.
During the early days of the pandemic, there was no playbook and now every day we learn how to be more effective in this new environment.
We achieved a higher gross profit margin, both year-over-year and sequentially, despite continued supply chain challenges with the benefit of previous initiatives and product mix.
To offset lower sales, we took actions to reduce SG&A expense and improved operating income by $5 million.
As we will discuss later, some of the reduction in SG&A expense was a result of lower sales and related business activities.
However, of the available actions we implemented, many of them are durable.
That said, as revenue grows back, we expect that selling expenses like commissions will return, but this is a good thing and will allow us to scale against our SG&A expense.
At the end of the year, free cash flow was helped by the increase in third quarter sales that were collected in the fourth quarter.
In addition, our colleagues around the globe were diligent in managing down inventory, which peaked in the second quarter as sales declined faster than fulfillment levels could be reasonably adjusted.
I am pleased with how quickly we were able to adapt.
Turning to Slide 10, while the pandemic had little to no impact on sales in the first quarter, by late March to early April the whole world had gone into a simultaneous and hermetic shutdown, which lasted throughout mid-summer.
Access to healthcare was oftentimes limited to only pandemic related or urgent care, with elective care suspended or delayed.
As a result, consolidated net sales declined significantly in the second quarter and have continued to improve throughout the year, but have not yet returned to pre-pandemic level.
Each of the product lines was impacted differently, which I'll address in more detail on the next slide.
Despite lower revenues, gross profit as a percentage of sales improved by 60 basis points, due to favorable sales mix and prior actions taken to expand margins.
As mentioned previously, we executed both temporary and durable actions to reduce SG&A expense to match the lower sales level.
As a result in 2020, we managed to grow operating income, reversing course from an operating loss in 2019, a significant turnaround in results.
In addition, adjusted EBITDA improved over 11% from 2019 and free cash flow exceeded our expectations.
Turning to Slide 11, as Matt discussed in the previous two quarters, the pandemic had a different impact on each one of our product lines.
Mobility and Seating product sales began to see early signs of recovery as consolidated sequential net sales improved modestly.
North America's sequential sales growth of 3.3%, was more than offset by weakness in Europe as more stringent public health restrictions imposed during the fourth quarter continued to limit access to our customers and end users.
As our products mainly serve chronic conditions, we believe these sales are generally non-perishable and these delayed sales will be fulfilled in 2021.
Our new Mobility and Seating products are beginning to contribute as well, and we expect their contributions in 2021 to help lift the category even higher.
Lifestyle Products grew sequentially, driven by Europe, with strong demand in all product categories, primarily bed and bed related products.
Respiratory, which continue to experience elevated demand globally, increased by over 75% compared to the prior year, and also grew sequentially, driven by sales of stationery oxygen concentrators used for the COVID-19 response.
Global supply chain issues that were almost insurmountable during the second quarter have improved considerably, but still impact our ability to meet the outsized demand.
We continue to experience global demand in excess of our ability to supply, currently impacted by transportation and logistics delays.
Turning to Slide 12, Europe constant currency net sales during the fourth quarter decreased compared to the prior year, as growth in respiratory was more than offset by lower sales of Mobility and Seating and Lifestyle products.
Sequentially, reported net sales increased 10.8%, driven by increases in Lifestyle and Respiratory products.
Europe continues to be impacted by more recent pandemic related measures, which may limit our end users ability or willingness to obtain healthcare, although our customers generally remain open.
As a result of the lower sales both gross profit and operating income declined, and we incurred unfavorable manufacturing variances from the lower volume.
For the full year, although we saw sequential improvement in net sales in both the third and fourth quarter, overall sales were limited by the pandemic.
Historically, the second half of the year is seasonally stronger due to higher sales of Mobility and Seating products, primarily scooters in Europe, which are popular during the warmer months.
Strict health restrictions in many of our key markets dampened sales as our end users had limited opportunity to enjoy being outside or travel freely.
As a result, we saw the same impact on gross profit and operating income for the full year as we did in the fourth quarter.
Turning to Slide 13.
In North America we achieved higher constant currency net sales in both the fourth quarter and the full-year, driven by two primary factors.
First, we saw a tremendous growth in sale of respiratory products primarily stationary oxygen concentrators.
Not only did we see higher unit volumes, we also realized a favorable mix shift toward higher acuity products.
Although, sales increased significantly, fulfilling these orders was not easy.
We had to battle multiple global supply chain challenges early on when our suppliers were closed due to not being deemed essential businesses, had difficulties assembling our workforce and inefficiencies driven by the scarcity of transportation and logistics.
While most of these issues have resolved themselves, we feel an impact today.
The second factor is that the individual states in the U.S. never fully shutdown cohesively as the countries in Europe.
As long-term care facilities closed their doors to new residents, we saw a shift toward home healthcare, an area where we have a strong presence.
With improved sales, we were able to expand gross profit, which improved 510 basis points for the quarter and 260 basis points for the full year.
This was largely driven by favorable sales mix and lower freight and material costs.
Importantly, operating income improved by $4 million for the quarter and by $17 million for the year, as we realize the benefit of transformation initiatives, which return the segment to profitability.
I'd like to commend the team on all their hard work, which led to such great results.
Turning to Slide 14, we made great progress in Asia-Pacific, as constant currency net sales improved year-over-year and sequentially.
In the fourth quarter, constant currency net sales increased 16.2%, driven by all product categories with a nearly 36% improvement in mobility and seating sales.
Sequentially, reported net sales increased 11.5%, driven by mobility and seating sales.
Operating loss for all other improved, driven by higher operating profit in the Asia-Pacific business and decreased SG&A expense related to corporate stock compensation expense.
Moving to Slide 15.
As of December 31, 2020, the company had approximately $273 million of total debt and approximately $105 million of cash on its balance sheet.
In 2020, we took proactive steps to improve our financial flexibility by retiring approximately $25 million of convertible notes in 2021.
In addition, we extended the debt maturities to November of 2024 of a significant portion of our convertible notes, which were due in 2021 and 2022.
As a result of these actions, the remaining balance of $1.3 million of the 2021 notes will be settled in cash this month.
As always, we will continue to assess opportunities to further optimize our capital structure.
Let's shift from talking about strong results in 2020 and talk about the future as we provide our outlook for the company's expected performance in 2021.
We now know so much more about operating in a pandemic and we anticipate it's going to have a heavy influence in 2021, both in restricting access to healthcare and affecting supply chain and logistics, much like it did in 2020.
We also have a view on improvements we're going to make in 2021 to make another great year.
On Slide 16, we show guidance with expected operating results for the full year 2021 to consist of the following.
Constant currency net sales growth in the range of 4% to 7%, we're giving a range of revenue, reflecting good growth over 2020 with the range providing for variations in sales by product line and in key markets depending on how the pandemic unfolds.
Given these assumptions, this is expected to result in a 41% improvement in adjusted EBITDA, taking us to $45 million, and free cash flow generation of $5 million.
Based on the healthcare restrictions currently in place, especially severely in Europe, consolidated reported net sales in the first quarter maybe down slightly to mid-single-digit, compared to prior year, which was not impacted by the pandemic.
We're bullish for the full year, expecting a strong uplift in the second half with public health restrictions are lifted.
While, it's impossible to project the exact path of the pandemic in 2021, we remain confident that as weather gets warmer in the Northern Hemisphere, where we do most of our sale, and as people desire to get outside and as vaccines become more widely available, we'll see strong sales growth, driven by new products and pent-up demand from 2020.
As I mentioned earlier, we expect some increase in SG&A expense, primarily to support increased sales, although it should remain below 2019 spending.
Not yet factored into guidance is the anticipated benefit related to improved customer experience and efficiencies from the IT modernization initiative as it's rolled out in North America.
Finally, free cash flow is expected to be lumpy in the quarters, especially in the first half, if we fund seasonal inventory early in the year and payments for 2020 programs like severance from the German plant consolidation and deferred taxes.
Our guidance demonstrates the continued confidence we have in our strategic plan and our ability to drive future growth.
While we could not have predicted the pandemic, the test of the result of our customers, suppliers, associates and the people who rely on our products every day, I am incredibly proud of all we accomplished.
This would not have been possible without the inspired and tireless support of our associates who battled through global supply challenges, found creative ways to engage with our customers and end-users and adapted quickly to a new working environment, all while ensuring the health and safety of our colleagues.
Looking ahead, we have clear objectives with the focus on delivering sales growth and generating gains in our key markets, which we expect will result in significant improvement in profitability and free cash flow.
We're confident the long-term economic potential for Invacare remains strong.
Later this year, we'll provide an update on the timing of our longer-term targets, which we believe will achieve according to our prior and ongoing strategic initiatives as they continue to gain traction and as consequences of the pandemic sub-side.
We will now take questions.
| sees 2021 constant currency net sales growth in range of 4% to 7%.
sees 2021 adjusted ebitda improvement of 41%, to $45 million.
|
As Tekilamentioned, I'm Christine Cannella, vice president, investor relations with Fresh Del Monte Produce.
Joining me in today's discussion are Mohammad Abu-Ghazaleh, chairman and chief executive officer; and Eduardo Bezerra, senior vice president and chief financial officer.
You may also visit the company's website at freshdelmonte.com for a copy of today's release as well as to register for future distribution.
In the first quarter of 2021, we delivered strong profits across all of our business segments while net sales were slightly lower year over year.
Gross profit increased 53% from last year's first quarter.
Net income increased 228% to $43 million or diluted earnings per share of $0.90, compared with net income of $30 million or diluted earnings per share of $0.27 a year ago.
We believe that these results reflect the resilience of our company and are a demonstration of the initiatives we implemented in 2020 to further strengthen our operating model and improve working capital.
I assume you all know what is happening in the global markets.
The structure of the economy has changed.
We recognize the new economic reality and market challenges we face.
Specifically, the inflationary pressure we are facing on all fronts which is forcing us to increase our prices.
We intend to continue to proactively manage and anticipate these challenges as we have done in the past by taking decisive actions to counterbalance any adverse conditions to our business.
As we move forward, we intend to continue to operate with agility so that we can quickly respond to market changes as they come.
What you see today is only the beginning of our potential.
We also dealt with rising inflationary pressures during the first quarter.
Now let's review our first quarter of 2021 results.
Net sales decreased $29.7 million or 3% to $1.88 billion, compared with the prior year period with favorable exchange rates benefiting net sales by $16 million.
The decrease was primarily attributable to lower net sales in our fresh and value-added and banana business segments.
Adjusted gross profit increased 39% to $107 million, and our adjusted gross profit margin increased to 10%, compared with 7% in the prior year period.
We benefited from increased profitability in our fresh and value-added business segment, partially offset by higher fruit production, procurement, and distribution costs.
However, I would like to point out that if you apply the adjusted gross profit margin for the fresh and value-added produce segment of 8.7% to the $19 million of net sales impacted by COVID-19 in this segment, we estimate we would have delivered an additional $1.7 million in adjusted gross profit.
Adjusted operating income increased 140% to $58 million compared with the prior year period, mostly driven by increased gross profit.
And adjusted net income increased 154% to $42 million compared with the prior year period.
We achieved a diluted earnings per share of $0.90, compared to diluted earnings per share of $0.27 in the prior year period.
Excluding nonoperational and nonrecurring items, we delivered adjusted diluted earnings per share of $0.88, compared with adjusted diluted earnings per share of $0.34 in the prior year period.
Adjusted EBITDA increased 61%, and adjusted EBITDA margin increased 300 basis points when compared with the prior year period.
Let me now turn to segment results, beginning with our fresh and value-added produce segment.
For the first quarter of 2021, net sales decreased $30 million or 5% compared with the prior year period.
The primary drivers of the variance were lower sales volumes of melons as a result of the hurricanes in Guatemala; the impact of COVID-19 to net sales in January and February in our fresh-cut vegetable and vegetable product lines; an increase in avocado volume, which was offset by lower per unit sales price that impacted the industry; an increase in pineapple volume in most of our regions; and an increase in net sales in our prepared food products line due to higher per unit sales prices.
For the quarter, adjusted gross profit in our fresh and value-added product segment increased 9% to $55 million, and adjusted gross profit margin increased 100 basis points.
During the quarter, we began to benefit from the actions we took in 2020 to optimize our operations, primarily in the following product lines: fresh-cut fruit, melon, avocados and our prepared food products.
Fresh-cut fruit margins recovered back to double digits.
Rationalization in our domestic melon operations and higher per unit sale prices helped offset the damage from the hurricanes.
Avocado gross profit margin doubled during the quarter and achieved the double digits.
Prepared food products margins achieved the high teens.
We also pursued volume expansion during the quarter in the following product lines: pineapple volume increased 22% and avocado volume increased 12%.
Gross profit in our non-tropical product line decreased primarily in rates as a result of damage caused by severe rainstorms to some of our farms in Chile, which resulted in a $3.1 million inventory write-off.
Our Mann Packing business was impacted by lower sales volume in our food service distribution channels, which drove higher per unit product costs.
Net sales in our banana segment decreased $9 million to $418 million while adjusted gross profit increased 93% or $23 million during the quarter, primarily driven by lower net sales in North America and the Middle East, mainly as a result of decreased sales volume, partially offset by strong demand in Asia.
Overall volume decreased 8%.
Pricing increased 7%, which offset an increase in production and procurement costs due to the impact of hurricanes Eta and Iota in Guatemala as well as inflationary pressure on cost of goods sold.
Now moving to selected financial data.
Selling, general, and administrative expenses decreased $4 million to $49 million, compared with $53 million in the prior year period.
The decrease was primarily due to cost-saving initiatives in our North America region that resulted in reduced promotional expenses and lower selling and marketing costs.
The foreign currency impact at the gross profit level for the first quarter was favorable by $13 million, compared with an unfavorable effect of $6 million in the prior year period.
Interest expense net for the first quarter at $5 million was in line with the prior year period.
The provision for income taxes was $11 million during the quarter, compared with the income tax of $300,000 in the prior year period.
The increase in the provision was due to -- sorry, the increase in the provision for income tax of $10.7 million is primarily due to increased earnings in certain jurisdictions.
During the quarter, we generated $47 million in cash flow from operating activities, compared to $2 million in the prior year period.
The increase was primarily attributable to higher net income and higher balances of accounts payable and accrued expenses, principally due to our optimization efforts associated with working capital.
As it relates to capital spending, we invested $34 million in the first quarter, compared with $17 million in the prior year period.
Our investments were mainly related to our new refrigerated container ships, one of which was received during the first quarter and expansion and improvements to facilities in North America and Asia.
As of the end of the quarter, we received cash proceeds of $42.4 million in connection with our asset sales under the asset optimization program of which approximately $40 million was received in 2020.
The gain during the first quarter of 2021, primarily related to a gain on the sale of a refrigerated vessel.
We believe we're on track to achieve the $100 million program by the first quarter of 2022.
We paid down our long-term debt by $8 million, resulting in a total debt balance of $534 million.
And based on our trailing 12 months, our total debt to adjusted EBITDA ratio stands at 2.4 times.
This concludes our financial review.
| fresh del monte produce q1 earnings per share $0.90.
q1 adjusted earnings per share $0.88.
q1 earnings per share $0.90.
|
While we are making those statements in good faith, we do not have any guarantee about the results we will achieve.
Descriptions of the risk factors are included in the documents we filed with the SEC.
Also, we will be discussing some non-GAAP financial measures.
References to adjusted items, including organic net sales, refer to measures that exclude items management believes impact the comparability for the period referenced.
Today, Dave and I will discuss our results for the quarter, our updated outlook for the remainder of the year and why we believe that Conagra continues to be well positioned for the future.
I'd like to start by giving you some context for the quarter.
First, as you all know, the external environment has continued to be highly dynamic.
But our team remained extremely agile in the quarter and executed the Conagra Way playbook.
We navigated the ongoing complexity and delivered strong net sales growth anchored in elevated consumer demand that continued to exceed our ability to supply, inflation-driven pricing actions and lower-than-expected elasticities.
While our net sales exceeded our expectations, margin pressure in the second quarter was also higher than expected driven by three key factors.
First, while we anticipated elevated inflation during the second quarter, it was higher than our forecast.
Second, we experienced some additional transitory supply chain costs related to the current environment.
And third, in the face of elevated consumer demand that continue to outpace our ability to supply, we elected to make investments to service orders and maximize product availability for our consumers.
We expect margins to improve in the second half of the fiscal year as a result of the levers we pulled and continue to pull to manage the impact of inflation.
We'll always look to our cost savings programs to offset input cost inflation.
However, given the magnitude of the cost increases, our actions also include additional inflation-driven pricing.
We communicated pricing to customers again in December.
For the year, we're once again reaffirming our adjusted earnings per share outlook, but our path to achieve that guidance has evolved.
We're increasing our organic net sales guidance based on stronger-than-expected consumer demand and lower-than-anticipated elasticities.
We're also updating our margin guidance given the increase in our gross inflation expectations for the year and the timing of the related pricing actions.
Taken together, we continue to believe that elevated consumer demand, coupled with additional pricing and cost savings actions, will enable us to deliver adjusted diluted earnings per share of about $2.50.
So with that as the backdrop, let's jump into the agenda for today's call.
We'll start with an overview of the quarter before going into more detail on our outlook for the second half of the fiscal year.
I'll also share some of our thoughts on the structural changes we're seeing in consumer behavior, particularly with younger consumers.
We believe these changes are further evidenced in the long-term potential of Conagra Brands.
Let's dig into the quarter.
As you can see on Slide 7, our team delivered solid Q2 results.
On a two-year CAGR basis, organic net sales for the second quarter increased by more than 5% and adjusted earnings per share grew by nearly 1%.
As I noted earlier, we delivered these results in the face of a highly dynamic and challenging operating environment.
Input cost inflation came in higher than expected in the quarter.
In addition, we made some strategic decisions to service the heightened consumer demand we continue to experience.
As the entire industry incurred transitory costs associated with labor shortages, supply issues on material and transportation costs and congestion challenges during our Q2, we chose to invest in our supply chain and service orders.
This deliberate decision ensured we could deliver food to our customers and consumers especially during the holiday season.
Maintaining physical availability is an important part of building trust with customers and maintaining consumer loyalty.
The bottom line is that amid the supply disruption seen across the industry, we remain focused on building for the long term.
While the net result of these factors was a negative impact on our margins during the quarter, we're confident that our purposeful approach better positions our portfolio for the future.
They've been resilient in navigating this environment, allowing us to remain agile and deliver for our customers and consumers.
I continue to be impressed by our team's commitment and I'm grateful for their ongoing dedication.
Looking at Slide 10.
You can see that our strong performance in the second quarter was broad based.
Total Conagra retail sales were up 14.8% on a two-year basis in the quarter, with double-digit growth in each of our domestic retail domains frozen, snacks and staples.
Household penetration was also up this quarter, building upon the significant number of new consumers we've acquired over the past two years.
Total Conagra household penetration was up 59 basis points on a two-year basis and our category share increased 41 basis points.
In addition to increasing household penetration and acquiring new consumers, we are retaining our existing consumers, as demonstrated by our repeat rates.
Shoppers continue to discover our incredible products and their tremendous value proposition.
As the chart on the right of Slide 11 shows, our consumers keep coming back for more.
As we execute our Conagra Way playbook, innovation remained a key to our success across the portfolio in Q2.
Slide 12 highlights the impact of our disciplined approach to delivering new product and modernizing our portfolio.
During the second quarter, our innovation outperformed the strong results we delivered in the year ago period.
We continue to invest in new product quality and it's supporting our innovation launches with deeper, more meaningful consumer connections.
Once again, our innovation rose to the top of the pack in several key categories, including snacks, sweet treats, sauces and marinades and frozen vegetables.
Slide 13 demonstrates how our ongoing investments in e-commerce continued to yield strong results.
We again delivered strong quarterly growth in our $1 billion e-commerce business and e-commerce accounted for a larger percentage of our overall retail sales than our peers.
We outpaced the entire total edible category in terms of e-commerce retail sales growth during the second quarter, just as we did in the first quarter of 2022 and throughout fiscal 2021.
As we mentioned earlier, our strong net sales growth was driven by elevated consumer demand, favorable elasticities and inflation-driven pricing actions.
On Slide 14, you can see the extent of our pricing actions in the first half of the fiscal year.
During this period, our on-shelf prices rose across all three domestic retail domains.
And, as Dave will discuss shortly, the pricing flowed through the P&L.
As you can see on Slide 15, price elasticity has been fairly low.
It's been favorable to our expectations.
Consumers continued to see the tremendous value of our products relative to other food options, a concept I will elaborate on in a few minutes.
Now, let's turn to the path ahead.
You can see on Slide 17 we currently expect gross inflation to be approximately 14% for fiscal 2022 compared to the approximately 11% we anticipated at the time of our first quarter call.
This is a large increase and we're taking actions to offset the increase while still investing in the long-term health of our business.
To help manage our increasing inflation, we're taking incremental pricing actions, including list price increases and modified merchandising plans.
Many of these actions have already been announced to our customers.
As a reminder, there is a lag in timing between the impact of inflation and our ability to execute pricing adjustments based on that inflation.
As a result, the incremental price increases will go into effect in the second half of the year with the most significant impact during the fourth quarter.
While it's easy to get caught up in the quarter-to-quarter impact of inflation and pricing, it's important to keep focused on the big picture.
The long-term success of our business is driven by how consumers, particularly younger consumers, respond to our products.
And when you take a step back to evaluate the broader environment and how our portfolio delivers against the needs of the modern consumer, we believe that Conagra is uniquely positioned for the future.
As we've detailed many times before, Conagra's on-trend portfolio filled with modern food attributes is winning with younger consumers.
And our confidence is underpinned by the many changes we're seeing in consumer behavior that are proving to be structural, especially given that these changes are driven by younger consumers that represent the most significant opportunity for long-term value creation.
Younger consumers represent a large and growing part of the U.S. population and they want to optimize the value that they get for the money they spend on food.
A large part of optimizing their food spending includes shifting more dollars from eating away from home to eating at home.
As they make that trade, they're choosing national brands.
And we believe Conagra is ideally positioned to experience an outsized benefit from these behaviors given the relationship our brands are forming with younger consumers.
Overall, Conagra is delivering superior relative value to consumers compared to both away-from-home options and store brands.
Let's take a closer look at these trends, starting with the population changes.
Millennial and Gen Z consumers are a large and growing cohort.
These consumers are starting to settle down, buy homes and start families.
As we presented in the past, when people enter the family formation phase, they increase the amount of food they eat at home with an outsized increase in the consumption of frozen foods.
And what we find particularly important about reaching Millennial and Gen Z consumers is that we believe they will remain more value focused than their predecessors.
First, let's talk about the near term.
As you can see in the chart on the left, Millennial and Gen Z consumers are earlier in their careers and earning less than the older generations of working-age people.
This is natural, but it bodes well for food-at-home trends in the shorter term.
We believe that even as foodservice bounces back, younger consumers will be value conscious in their food choices.
Fewer younger consumers are expected to achieve the financial success of the generations before them.
The data on the right suggests that Millennials are more likely to earn less than their parents.
We believe this means that these savvy consumers will look to stretch their food dollars further even as they age.
The data also shows that younger consumers are already eating more at home.
Compared to the population as a whole, Gen Z and Millennials have decreased restaurant visits more and sourced a larger percentage of their meals at home.
As these younger consumers have made the shift to at-home eating, the data shows that they're finding comfort in the quality, reliability and familiarity that national brands provide.
We believe this makes a lot of sense.
National brands provide value while replicating many of the on-trend flavors and modern food attributes that consumers are used to experiencing in away-from-home dining.
When consumers make trades like away-from-home to in-home eating, trust is paramount.
In short, national brands, particularly modernized brands like those in our portfolio, deliver on this trust imperative and that's because they offer superior relative value versus other food options.
As consumers seek to stretch their household balance sheets in the face of broad-based inflation, one of the single largest levers available to them is the reduction in spending on food away from home as food-away-from-home prices are typically over three and a half times more expensive than food-at-home prices.
This trade will likely become even more important for consumers as food-away-from-home prices have already increased faster than at-home prices in calendar 2021 and they are expected to increase at nearly twice the rate as at-home prices in calendar year 2022.
Our aggressive modernization of the Conagra portfolio over the past several years has put us in a strong position to capitalize on these structural shifts.
Our portfolio has shown its competitive advantage with excellent trial, depth of repeat and share gain performance.
Overall, we believe Conagra is well positioned to leverage these shifts to create meaningful value for shareholders.
And Slide 25 shows you the data to support our claim.
Conagra is attracting more younger consumers than our peers and getting them to repeat at more attractive rates.
By appealing to younger consumers now, we're building superior consumer lifetime value.
Importantly, the data shows that these new, younger buyers are stickier across our portfolio.
We believe this comes back to the investments we've made and continue to make in our products and our brands.
The Conagra Way has positioned us to win.
As I discussed earlier, we're reaffirming our adjusted earnings per share guidance of approximately $2.50 for the full year with a few updates on how we expect to get there.
We're increasing our organic net sales guidance to be approximately plus 3%, up from approximately 1%.
We're slightly adjusting our adjusted operating margin guidance to approximately 15 and a half percent, down from approximately 16%.
And we're updating our gross inflation guidance to about 14%, up from approximately 11%.
I'll start by going over some highlights from the quarter shown on Slide 28.
As Sean mentioned earlier, there were a number of factors that influenced our results this quarter.
First, we were encouraged to see that consumer demand for our products remain strong.
And second, elasticities were better than anticipated.
However, we also continued to see inflation rise across a number of key inputs and the dynamic macro environment created challenging conditions for the supply chain.
The team remained agile in response to these dynamics, including the decision to make additional investments during the quarter to meet the elevated demand and maximize the food supply to our consumers.
Overall, our actions favorably impacted our top line during the quarter with organic net sales up 2.6% compared to the year ago period.
An important part of the top line success we've realized throughout the pandemic is our ongoing commitment to the Conagra Way.
We've remained focused on building and maintaining strong brands across the portfolio.
We continued these efforts in the second quarter with continued product innovation and by further increasing our spending on advertising and promotion, primarily focusing on e-commerce investments.
We show a breakdown of our net sales on Slide 29.
The 4.2% decline in volume was primarily due to the lapping of the prior-year surge in demand during an earlier stage in the COVID-19 pandemic as volume increased approximately 1% on a two-year CAGR.
The second quarter volume decline was more than offset by the very favorable impact of brand mix and inflation-driven pricing actions we realized this quarter, driving an overall organic net sales growth of 2.6%.
On last quarter's call, we noted that the domestic retail pricing actions were just starting to be reflected on shelves at the end of the first quarter.
Those increases were reflected in our P&L this quarter, driving the 6.8% increase in price mix.
The divestitures of our H.K. Anderson business, the Peter Pan peanut butter business and the Egg Beaters business resulted in a 70-basis-point decline and foreign exchange drove a 20-basis-point benefit.
Together, all these factors contributed to a 2.1% increase in total Conagra net sales for the quarter compared to a year ago.
Slide 30 shows our net sales summary by segment both on a year-over-year and on a two-year compounded basis.
As you can see, we continue to deliver strong two-year compounded net sales growth in each of our three retail segments, which resulted in a two-year compounded organic net sales growth of 5.3% for the total company.
You can see the puts and takes of our operating margin on Slide 31.
We drove a 6.2 percentage point benefit from improved price mix, supply chain-realized productivity, cost synergies associated with the Pinnacle Foods acquisition and lower pandemic-related expenses.
Netted within the 6.2% are the additional investments we made to service orders and maximize product availability.
These investments reflect the dynamic environment and actions we've taken to respond to it.
This includes decisions to utilize more third-party transportation and warehousing vendors for some of our frozen products, incurring incremental cost to move product around our distribution network to better align with customer order patterns and delaying a plant consolidation productivity program to maximize current production.
The 6.2% also includes transitory supply chain costs such as higher inventory write-offs and increased overtime to support operations.
The 6.2 percentage point benefit was more than offset by an inflation headwind of 11 percentage points.
The second quarter gross inflation rate of 16.4% of cost of goods sold was approximately 100 basis points or $20 million higher than expected, driven by higher-than-anticipated increases in proteins and transportation, which are both difficult to hedge.
The combination of the favorable margin levers, our choiceful supply chain investments and inflation headwinds resulted in adjusted gross margin declining by 483 basis points.
Our operating margin was further impacted by 20 basis points due to our increased A&P investment during the quarter, as I mentioned earlier.
You can see how these elevated costs impacted each of our reporting segments on Slide 32.
While each segment was impacted, our Refrigerated & Frozen segment was impacted the most with adjusted operating margin down 707 basis points primarily due to outsized materials inflation and the additional investment incurred to service orders and get food delivered to consumers.
We are confident that we will improve overall operating margins in the second half as we execute our additional pricing actions to offset the higher inflation rates.
As you can see on Slide 33, our second quarter adjusted earnings per share of $0.64 was heavily impacted by the input cost inflation across our portfolio.
Even though the benefits of our first quarter pricing flowed through the P&L this quarter, the incremental inflation we incurred in the second quarter created an additional headwind.
In response, we announced additional pricing to customers in early Q3 during December.
Although we have yet another lag before this pricing benefits the P&L, we expect to realize benefits from these pricing actions in late Q3 with most of the impact in Q4.
Also, our Ardent Mills joint venture had another good quarter and delivered earnings per share benefit versus the prior year.
We realized lower net interest expense and a slightly lower average diluted share count due to our share repurchases in prior quarters.
Turning to Slide 34.
I want to unpack how Q2 adjusted earnings per share landed versus our expectations.
Our second quarter adjusted earnings per share came in lower than we originally had anticipated due to two main factors.
First, as previously mentioned, inflation came in higher by approximately 100 basis points of cost of goods sold or approximately $0.02 to $0.03 of EPS.
While we have announced additional pricing actions for the second half to offset the incremental inflation, the timing of these benefits is naturally lagging behind the higher inflation.
Second, the cost we elected to incur to service orders, coupled with the additional transitory supply chain costs I described earlier, led to another $0.02 to $0.03 impact on our adjusted EPS.
We are forecasting these service and transitory cost dynamics to improve as the second half progresses.
Looking at Slide 35, we ended the quarter with a net debt-to-EBITDA ratio of 4.3x, which is in line with the seasonal increase in leverage expected for the second quarter.
We expect to generate strong free cash flow in the second half of the fiscal year and expect to end the year with a net leverage ratio of approximately 3.7 to 3.8 times.
We remain committed to a longer-term net leverage target of approximately 3.5 times and to maintaining an investment-grade credit rating.
I'll start by saying that we remain confident in our ability to achieve approximately $2.50 in adjusted earnings per share for the full fiscal year.
As the macro environment continues to be very dynamic, our expectations for the path to achieve that target have shifted.
We are increasing our organic net sales growth guidance to approximately 3% to reflect our stronger-than-expected performance year-to-date as well as our incremental pricing actions in the second half.
We are lowering our adjusted operating margin guidance to approximately 15 and a half percent.
We expect the incremental sales and pricing actions in the second half to offset the dollar impact of the incremental net inflation and other supply chain costs.
We have increased our gross inflation expectations to approximately 14%, largely driven by higher estimated costs versus the previous estimate for proteins, transportation, dairy and resin.
We will continue to monitor these input costs closely and will be quick to respond using all available margin levers.
As Sean detailed, price elasticity has been favorable to our expectations so far.
As we have explained previously, there is a lag in timing between when we experience inflation, take actions, including pricing, to offset the dollar impact of the inflation and when we see those actions flow through our financial results.
With respect to the additional pricing actions we have announced for the second half of fiscal '22, we expect to realize a small amount late in the third quarter and the full benefits from these price increases in the fourth quarter.
We therefore expect our third quarter margins to be roughly in line with second quarter margins with an increase in operating margins in Q4 as the pricing catches up with inflation and the impact of the lag is reduced.
Our guidance also assumes that the end-to-end supply chain will continue to operate effectively as the COVID-19 pandemic continues to evolve.
Before turning it over to the operator for Q&A, I would like to reiterate that confidence in our ability to reach our earnings goal is based on the strength of our business at its core to manufacture and deliver foods that people enjoy.
| q2 adjusted earnings per share $0.64.
reaffirms adjusted earnings per share guidance.
increases organic net sales guidance.
2022 organic net sales growth is expected to be approximately +3% versus prior guidance of approximately +1%.
|
Please note that the information presented is preliminary and based upon data available at this time.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
For the first quarter, Hilltop reported net income of $120 million or $1.46 per diluted share, representing an increase from the first quarter 2020 of $71 million or $0.91 per diluted share.
Return on average assets for the period was 2.9% and return on average equity was 20.6%.
These results do include a $5.1 million reversal of provision compared to the first quarter of last year when we had a provision expense of $34.5 million as we introduced CECL and the outlook for credit and the economy look to be deteriorating.
Much of the momentum around mortgages from 2020 continued into this first quarter.
Notwithstanding higher long-term interest rates and refinance volumes slowing, the overall mortgage market remains strong, and our origination business was able to deliver $6.2 billion in volume, a 71% increase from Q1 2020.
Driven by PPP loan balances, the bank's average loans for the first quarter increased 7% from prior year.
And average deposits grew by $2.4 billion or 26% from prior year as well.
While pre-tax margin at the broker-dealer was down slightly from Q1 2020, we did see growth in the structured finance business, which also benefited from a strong mortgage market.
In the public finance business, efforts to improve productivity and growth are showing positive returns as net revenue increased 8% from the first quarter 2020.
During the period, Hilltop returned $50 million to shareholders through dividends and share repurchases.
The $5 million of shares repurchased are part of the $75 million share authorization the Board granted in January.
Liquidity and capital remained very strong, with a Tier 1 leverage ratio of 13% and a common equity Tier 1 capital ratio of 19.6% at quarter end.
We continue to see improvement in economic trends.
And during the quarter, we had payoffs and a return to contractual payments for a large portion of the modified loan portfolio.
This portfolio, which at the end of June 2020 was $968 million, is now down to $130 million as of March 31.
Notably, all COVID-19 modified retail and restaurant loans are now off deferral program.
Our allowance for credit losses as of March 31 totaled $144.5 million or 1.98% of the bank's loan portfolio.
This reflects a reduction in the reserve balance of $4.5 million from the fourth quarter, which was driven primarily by positive shifts in the economic outlook.
While the general economic outlook for the Texas economy has improved, the bank remains cautious and in constant communication with borrowers and certain higher risk segments of our hotel and office portfolios.
These segments were more severely impacted by the pandemic and will take longer to recover.
Moving to Slide 4.
PlainsCapital Bank had a solid quarter with a pre-tax income of $65 million, which includes the aforementioned provision recapture of $5.1 million, also contributing to the increased pre-tax income from Q1 2020 was higher net interest income from lower deposit costs and PPP loan fees and interest income.
Our bankers continue to work with small business customers on PPP program.
and as of March 31, had funded approximately 1,100 loans totaling $178 million as part of the second round, bringing the total PPP loan balance to $492 million at period end.
PrimeLending had another outstanding quarter and generated pre-tax income of $93 million, an increase of $53 million from Q1 2020.
That was driven by both a $2.6 billion increase in origination volume and a gain on sale margin of 388 basis points.
While rates increased toward the end of the quarter and margins tightened, we remain encouraged by the demand for mortgages across the country and by the PrimeLending team that continues to perform exceptionally while actively recruiting quality loan originators.
For HilltopSecurities, they had a good quarter with pre-tax income of $18 million.
The structured finance business had a strong start to the quarter with favorable volumes and spreads, then the sudden rise in interest rates adversely impacted net revenue in March.
Net revenue grew in public finance services compared to prior year from a modest increase in national insurance and recruiting efforts.
The fixed income services and wealth management businesses generated modestly lower net revenues than Q1 2020 levels.
Overall, for Hilltop, this was an excellent quarter and a great start to the year.
We believe our balance sheet is strong and our credit quality is sound.
We are excited about the strategic direction and growth potential of our three businesses, and we are grateful for the talented leadership and dedicated teams we have across Hilltop.
I'll start on Page 5.
As Jeremy discussed, for the first quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $120 million, equating to $1.46 per diluted share.
During the first quarter, revenue related to purchase accounting was $4.9 million and expenses were $1.3 million, resulting in a net purchase accounting pre-tax impact of $3.6 million for the quarter.
In the current period, the purchase accounting expenses largely represent amortization of other intangible assets related to prior acquisitions.
During the first quarter, provision for credit losses reflected a net reversal of $5.1 million and included approximately $600,000 of net recoveries of previously written off credits.
The improvement in the current macroeconomic environment as well as the outlook for continued improvement in key economic metrics positively impacted allowance for credit losses during the quarter.
Hilltop's quarter-end capital ratios remain strong with common equity Tier 1 of 19.63% and Tier 1 leverage ratio of 13.01%.
I'm moving to Page 6.
Net interest income in the first quarter equated to $106 million, including $7.5 million of previously deferred PPP origination fees and purchase accounting accretion.
Versus the prior year quarter, net interest income decreased by $4.7 million or 4%.
Further, net interest margin declined versus the fourth quarter of 2020 by 2 basis points.
In the current period, net interest margin benefited from the recognition of deferred PPP origination fees, higher yields in stock loan and lower deposit cost.
Offsetting these benefits were lower loan HFI and HFS yields, driven by market pricing and absolute yield levels in the mortgage market.
Further, PCB's excess cash levels held at the Federal Reserve increased by $365 million from the fourth quarter, putting an additional 5 basis points of pressure on net interest margin.
During the quarter, new loan commitments including credit renewals, maintained an average book yield of 4%.
This was stable with the fourth quarter of 2020.
Total interest-bearing deposit costs declined by 8 basis points in the quarter as we continue to lower customer deposit rates and returned broker deposits during the first quarter.
We expect continued consumer CD maturities and additional broker deposit declines in the coming quarters, both of which support a continued steady decline in interest-bearing deposit costs.
Given the current market conditions, we expect net interest income and net interest margin will remain pressured as overall market rates remain low, putting pressure on held for sale and commercial loan yields and that competition could remain aggressive over the coming quarters as we expect new loan demand will remain below historical levels.
Turning to Page 7.
Total noninterest income for the first quarter of 2021 equated to $418 million.
First quarter mortgage-related incoming fees increased by $131 million versus the first quarter of 2020.
During the first quarter of 2021, the environment in mortgage banking remained strong, and our business outperformed our expectations in terms of origination volumes, principally driven by lower mortgage rates which drove improved demand for both refinance and purchase mortgages.
Versus the prior year quarter, purchase mortgage volumes increased by $561 million or 24% and refinance volumes improved substantially, increasing by $2 billion or 156%.
While volumes during the first quarter were strong relative to traditional seasonal trends, gain on sale margins did decline versus the fourth quarter of 2020 as a combination of lower linked-quarter market volumes, principally purchased mortgage volumes, competitive pressures and product mix yielded a gain on sale margin of 388 basis points.
We expect pressures on margin to persist throughout 2021, and we continue to expect full year average margins to move within a range of 360 to 385 basis points contingent on market conditions.
Other income increased by $12 million, driven primarily by improvements in the structured finance business as the prior year period included a $16 million negative unrealized mark-to-market on the credit pipeline.
As we've noted in the past, the structured finance and capital markets businesses can be volatile from period-to-period as they are impacted by interest rates, origination volume trends and overall market liquidity.
Turning to Page 8.
Noninterest expenses increased from the same period in the prior year by $85 million to $367 million.
The growth in expenses versus the prior year were driven by an increase in variable compensation of approximately $63 million at HilltopSecurities and PrimeLending.
This increase in variable compensation was linked to strong fee revenue growth in the quarter compared to the prior year period.
The balance of the increase in compensation and benefits expenses is related to higher payroll taxes, salaries and overtime expenses.
Looking forward, we expect that our revenues will decline from the record levels of 2020, which will put pressure on our efficiency ratio.
That said, we remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage fixed cost while we continue to further streamline our businesses and accelerate our digital transformation.
I'm moving to Page 9.
Total average HFI loans grew by 5% versus the first quarter of 2020.
Growth versus the same period of the prior year was driven by growth in PPP loans and higher balances in the mortgage warehouse lending business.
In the period, banking loans, excluding PPP, and mortgage warehouse lending have declined modestly versus the prior year period as commercial loan demand has remained tepid throughout the pandemic.
As we've noted on prior calls, we are planning to retain between $30 million and $50 million per month of consumer mortgage loans originated at PrimeLending to help offset soft demand from our commercial clients.
During the first quarter of 2021, PrimeLending locked approximately $146 million of loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 287 basis points and an average FICO and LTV of 779 and 61%, respectively.
I'm moving to Page 10.
First quarter credit trends continue to reflect a slow but steady recovery in the Texas economy as the reopening of businesses continues to provide improved customer cash flows and fewer borrowers on active deferral programs.
As of March 31, we have approximately $130 million of loans on active deferral programs, down from $240 million at December 31.
Further, the allowance for credit losses to end of period loan ratio for the active deferral loans equates to 13.4% at March 31.
As is shown in the graph at the bottom right of the page, the allowance for credit loss coverage, including both mortgage warehouse lending as well as PPP loans at the bank, ended the first quarter at 1.98%.
We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time.
Excluding mortgage warehouse and PPP loans, the banks' ACL to end-of-period loans held for investment ratio equated to 2.38%.
Turning to Page 11.
First quarter average total deposits were approximately $11.4 billion and have increased by $2.4 billion or 26% versus the first quarter of 2020.
Throughout the pandemic, we continue to experience abnormally strong deposit flows from our customers, driven by government stimulus efforts and shifting client behaviors as customers remain cautious during these challenging times.
Given our strong liquidity position and balance sheet profile, we are expecting to continue to allow broker deposits to mature and run off.
At 3/31, Hilltop maintained $639 million of broker deposits that have a blended yield of 34 basis points.
Of these broker deposits, $284 million will mature by 6/30 of 2021.
These maturing broker deposits maintain an average yield of 47 basis points.
While deposits remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through the sales of our commercial treasury products and services, and we remain focused on driving higher client acquisition efforts.
I'm moving to Page 12.
During the first quarter of 2021, PlainsCapital Bank generated solid profitability, producing $65 million of pre-tax income during the quarter.
The bank benefited from the reversal of credit losses of $5.2 million and the recognition of $7.5 million in previously deferred PPP origination fees.
During the quarter, the bank's efficiency ratio dropped below 50% as the focus on managing expenses, improving fee income streams through our treasury management sales efforts and working diligently to protect net interest income is proving to be a successful combination.
While we do not expect that the efficiency ratio will remain below 50%, we do expect that the bank's efficiency will operate within a range of 50% to 55% over time.
Moving to Page 13.
PrimeLending generated a pre-tax profit of $93 million for the first quarter of 2021, driven by strong origination volumes that increased from the prior year period by $2.6 billion or 71%.
Further, the purchase percentage of the origination volume was 47% in the first quarter.
While refinance remained above our expectations during the first quarter, we expect that the market will begin to shift toward a more purchase focused marketplace during the last three quarters of 2021.
As noted earlier, gain on sales margins contracted during the first quarter, yet we continue to expect the full year average range of 360 to 385 basis points is appropriate given our outlook on production, product mix and competition.
During the first quarter, PrimeLending closed on a bulk sale of $53 million of MSR value.
Somewhat offsetting the impact of the bulk sale, the business continued to retain servicing at a rate of approximately 50%, which yielded a net MSR value at 3/31 of $142 million, roughly stable with 12/31 levels.
We expect to continue retaining servicing at a rate of 30% to 50% of newly created servicing assets during 2021, subject to market conditions.
And we will be looking to potentially execute additional bulk sales throughout the year if market participation remains robust.
Moving to Page 14.
HilltopSecurities delivered a pre-tax profit and margin of $18 million and 16.2%, respectively in the first quarter of 2021, driven by structured finance and the public finance services businesses.
While activity was strong in the quarter, we have continued to execute on our growth plan, investing in bankers and sales professionals across the business to support additional product delivery, enhance our product offerings and deliver a differentiated solution set to municipalities across the country.
Moving to Page 15.
In 2021, we're focused on remaining nimble as the pandemic evolves to ensure the safety of our teammates and our clients.
Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile and delivering long-term shareholder value.
Given the current uncertainties in the marketplace, we're not providing specific financial guidance but we are continuing to provide commentary as to our most current outlook for 2021 with the understanding that the business environment, including the impact of the pandemic, could remain volatile throughout the year.
That said, we will continue to provide updates during our future quarterly calls.
| hilltop holdings q1 earnings per share $1.46 from continuing operations.
q1 earnings per share $1.46 from continuing operations.
|
Total revenues for the second quarter of fiscal 2021 of $143.6 million increased $29.8 million or 26% compared to $113.8 million in the same quarter last year.
Net earnings for the quarter were $11.9 million or $1.08 per diluted share compared to net earnings of $5.5 million or $0.51 per diluted share in the prior year.
Irrigation segment revenues for the second quarter of $118.6 million increased $25.1 million or 27% compared to the same quarter last year.
North America irrigation revenues of $80.2 million, increased $13.1 million or 19% compared to last year.
The increase resulted primarily from higher irrigation equipment sales volume and higher average selling prices.
This increase was partially offset by lower engineering services revenue of approximately $10.5 million related to a project in the prior year that did not repeat.
In the International Irrigation markets, revenues of $38.4 million increased $12 million or 45% compared to the same quarter last year.
The increase resulted from higher irrigation equipment sales volumes in several international markets.
The overall impact of foreign currency translation differences was insignificant for the quarter.
Total Irrigation segment operating income for the second quarter was $18 million, an increase of $7.9 million or 79% compared to the same quarter last year and operating margin improved to 15.2% of sales compared to 10.8% of sales in the prior year.
Improved margins were supported by higher irrigation equipment sales volume.
However, this improvement was tempered somewhat by the impact of higher raw material and freight costs.
As Randy mentioned in his comments, we have implemented multiple price increases to pass along the escalating costs.
However, we have experienced margin compression as we work through the backlog of orders received prior to the effective dates of our pricing actions.
We expect this margin pressure to continue into the third quarter, until increased cost pass-throughs are fully realized.
Feedback received from our dealers, indicates that Lindsay has consistently led the industry in proactively implementing price increases and other than timing differences, the pricing environment has remained rational.
Infrastructure segment revenues for the second quarter of $25 million, increased $4.7 million or 23% compared to the same quarter last year.
The increase resulted primarily from higher Road Zipper System sales and lease revenue, while global sales of road safety products were relatively flat compared to the prior year.
Infrastructure segment operating income for the second quarter was $6.3 million, an increase of $400,000 or 8% compared to the same quarter last year.
Infrastructure operating margin for the quarter was 25.4% of sales compared to 29% of sales in the prior year.
Positive margin mix from higher Road Zipper sales and lease revenue was partially offset by the negative impact of higher raw material and other costs.
In addition, the prior year included a gain of $1.2 million sale of a building that had been held for sale.
Turning to the balance sheet performance and liquidity.
During the quarter, we had capital expenditures of $11 million which included $8.5 million to exercise a purchase option for the land and buildings related to our manufacturing operation in Turkey.
This facility is well positioned strategically and geographically and the purchase provides us greater flexibility to take advantage of future growth opportunities in the EMEA region.
Our total available liquidity at the end of the second quarter was $180.3 million, with $130.3 million in cash and marketable securities and $50 million available under our revolving credit facility.
Our total debt was $116.3 million at the end of the second quarter, almost all of which matures in 2030.
Additionally, at the end of the quarter, we were well within the financial covenants of our borrowing facilities, including a gross debt-to-EBITDA leverage ratio of 1.4 compared to a covenant limit of 3.0.
| q2 earnings per share $1.08.
q2 revenue $143.6 million versus refinitiv ibes estimate of $131.1 million.
in infrastructure business, expect continued coronavirus-related delays in road construction activity and projects.
|
Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer.
Our actual results may differ from those projected due to risks and uncertainties with the Company's business.
Additional information regarding these factors can be found in the Company's SEC filings.
Also, as a reminder, during today's question-and-answer session, we ask that you please limit yourself to two questions to allow time for everyone who wishes to participate.
Please requeue with any follow-up questions thereafter.
I am very pleased to report another outstanding quarter.
Demand continues to be strong across our footprint driving significant margin expansion as we maintain record occupancy, strong pricing power and disciplined cost control.
With this strong demand, we achieved average quarterly occupancy that was 420 basis points higher than last year.
We grew occupancy 170 basis points during the second quarter.
This has allowed us to be more aggressive with rates, which has helped to drive an increase in net effective rates by more than 50% through the end of June.
Our footprint continues to expand through both acquisitions and third-party management as we leverage our deep relationships.
The vast majority of our acquisitions were off market, including 13 stores from our third-party management portfolio through the first half of 2021.
We closed on a record $534 million of wholly owned acquisitions through the first half of this year, already matching our total acquisition volume of last year.
These acquisitions are expected to generate a blended year one cap rate of 4.5% and represent a nice mix of markets and maturity with almost one-third in lease-up and roughly 70% in the Sunbelt region.
In addition to $22 million of closed acquisition subsequent to the quarter end as well as an additional $80 million currently under contract, we have a strong late-stage pipeline of attractive opportunities that our team continues to work on.
Our third-party management portfolio totaled 340 stores at quarter end and we added 19 more stores in July as owners and developers are attracted to our operating performance and innovative technology platforms.
Our team has evaluated a record number of management opportunities this year and the pipeline continues to grow.
We also continue to show strong progress in Warehouse Anywhere.
Including rental income associated with these business customers, Warehouse Anywhere's year-to-date revenue is up almost 30% to a $14 million run rate including $9 million of annualized fee income.
Our tech-enabled enterprise and Lightspeed products have growing pipelines of companies in search of inventory management and last mile logistics support.
Many of these businesses would unlikely be using self-storage if it were not for the solutions provided by Warehouse Anywhere.
With the strong demand and performance, we exceeded our expectations substantially for the quarter and are therefore once again increasing our guidance for the remainder of the year.
We have increased the midpoint of our estimated adjusted funds from operations per share 8.5% to $4.74 this year, which would be 19.4% growth over 2020.
And with that, I will hand it over to Andy to provide further details on the quarter and revisions to our guidance.
Last night, we reported adjusted quarterly funds from operations of $1.20 per share for the second quarter, an increase of 27.7% over the same period last year.
Second quarter same-store revenue accelerated significantly to 14.7% year-over-year, more than double the 7.3% growth produced in the first quarter.
Revenue performance was driven by a 420 basis-point increase in same-store average quarterly occupancy.
That occupancy contributed to very positive rent roll-up and substantially lower discounting on the new rentals.
In the quarter, our same-store move-ins were paying almost 16% more than our move-outs.
This pricing power, along with our ability to push rates on existing customers, contributed to an 8.3% year-over-year growth of same-store in-place rates for the second quarter, up from just 1.3% growth in the first quarter of this year.
Discounts as a percentage of same-store rental revenue declined 60% year-over-year to 1.4% in the quarter.
Same-store operating expenses grew only 3.9% year-over-year for the quarter.
The largest negative variance during the quarter occurred in repairs and maintenance and real estate taxes.
The increases were partially offset by an 11% decrease in Internet marketing expenses.
The net effect of the same-store revenue and expense performance was a 320 basis-point expansion in our net operating income margin resulting in 20.2% year-over-year growth in same-store NOI for the second quarter.
Our balance sheet remains strong.
We supported our acquisition activity and liquidity position by issuing approximately $148 million of common stocks via our ATM program in the second quarter.
Our net debt to recurring EBITDA ratio decreased to 5 times, and our debt service coverage increased to a healthy 5.3 times at June 30th.
At quarter end, we had $360 million available on our line of credit, and we have no significant debt maturities until April of 2024 when $175 million becomes due.
Our average debt maturity is 6.2 years.
We have substantial liquidity available to continue growing our asset base with investment opportunities that provide our shareholders with attractive risk-adjusted returns.
Regarding 2021 guidance, we've substantially increased our same-store forecast, driven primarily by higher expected revenues and unchanged expense expectations.
Specifically, we expect same-store revenue to grow between 10.5% and 11.5%.
Excluding property taxes, we continue to expect other expenses to increase between 2.25% and 3.25%, while property taxes are expected to increase 6.75% to 7.75%.
The cumulative effect of these assumptions should result in 13.5% to 14.5% growth in same-store NOI.
We have also increased our anticipated acquisitions by $325 million to between $800 million and $1 billion.
Based on these assumption changes, we anticipate adjusted FFO per share for 2021 year to be between $4.69 and $4.79.
| q2 adjusted ffo per share $1.20.
|
Melinda will open and close the call and Bob 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 now turn over the call to Melinda Whittington, La-Z-Boy's President and CEO.
What a difference a year makes.
When we started the fiscal year, the world was still in the early stages of COVID-19 and things seemed pretty dire.
We had just restarted our plants after a month-long shutdown, and most retailers were still closed or just beginning to reopen.
Then as the year progressed, we experienced unprecedented demand for our products.
We strengthened our business by significantly expanding production capacity in response to this demand, enhanced our retail platform, acquired the Seattle-based La-Z-Boy Furniture Galleries and turned Joybird profitable, all while navigating a multitude of challenges, including multiple supply chain disruptions, raw material price increases and macroeconomic uncertainties.
Through it all, our highest priority was and continues to be the health and safety of our employees and our consumers.
The global pandemic tested everyone in just about every way.
And I am so proud of the La-Z-Boy team for it's unbelievable perseverance, dedication and resiliency; qualities that enabled us to deliver excellent results even in the midst of these historic challenges.
And I want to take this opportunity to express my sincere gratitude to everyone of our employees and business partners, all of whom contributed to our success.
Turning to our financial results.
Full fiscal year consolidated sales grew to $1.7 billion and consolidated GAAP operating margin increased to 7.9%.
Non-GAAP operating margin reached 9%, the highest margin level achieved in recent history.
Over the year, we generated $310 million in cash from operations and returned $61 million to shareholders through share repurchases and dividends; truly outstanding results, particularly considering the challenges of the fiscal year.
Specifically in the fourth quarter, consumer demand across all business units continued to be robust, reflecting the ongoing allocation of consumers' discretionary dollars to the home, the strength of our brands in the marketplace where we are disproportionately winning and excellent execution from our retail and sales teams.
For the quarter, record sales of $519 million led to all-time record profits, driven by increased production capacity, excellent performance by our company-owned La-Z-Boy Furniture Galleries and continued profit growth at Joybird.
Additionally, our cash generation enabled us to return $50 million to shareholders through dividends and share repurchases in the quarter.
And fiscal '22 is off to a great start with continued strong written order rates and a record backlog setting us up well for a strong year of shipments ahead.
Written sales momentum continued to be very strong in the fourth quarter.
Across the La-Z-Boy Furniture Galleries network, written same-store sales doubled, increasing 100% in the quarter versus a year ago.
And to provide some additional context, written same-store sales for the quarter increased 29% compared with our pre-COVID fiscal 2019 fourth quarter for a compound annual growth rate of about 14% over the two years.
As I turn to the discussion of our segments, my remarks will detail our non-GAAP numbers, which we believe better reflect underlying operating trends, and Bob will cover the non-GAAP adjustments.
Starting with our Wholesale segment, which includes our upholstery and casegoods companies as well as our international business, delivered sales for the quarter grew 40% to $384 million compared with prior year quarter, which was impacted by COVID-related shutdowns.
Sequentially, sales increased 9.5% from fiscal '21's third quarter as we continued to increase production capacity.
Non-GAAP operating margin for the Wholesale segment was a healthy 10.2%.
Disciplined cost management on advertising helped offset higher raw material and freight costs as well as expenses to expand production capacity to service record backlog.
Also, last year's fourth quarter benefited from a one-time $16 million rebate of previously paid tariffs, partially offset by higher bad debt expense.
We continued to expand capacity to service demand.
However, continued strong written growth is still outpacing production increases, translating to an expansion of backlog and lead times for the La-Z-Boy-branded business.
For perspective, today, our backlog is about 8 times higher than in pre-COVID and 16 times higher than at the end of last fiscal year.
Our supply chain team has demonstrated great agility over the past year and has been relentless in taking actions to increase capacity, including adding manufacturing cells, second shift, overtime and weekend production at our U.S. plants; temporarily reactivating a portion of our Newton, Mississippi assembly plant; adding manufacturing cells in available for space at our cut-and-sew center in Mexico; opening a new manufacturing facility in Mexico in San Luis Rio, Colorado or SLRC where production started in December and continues to increase as new cells are added and new employees are trained; and recently opening an additional fabric-sewing site in Paras, Mexico with plans to increase capacity over time.
Our supply chain team has done excellent work establishing new capacity.
And given continued strong product demand, we are increasing the number of cells at these new locations to shorten lead times, which today range between four to nine months for the La-Z-Boy-branded business, depending on the product category versus our normal four to six weeks.
Beyond capacity challenges, we continue to face raw material price increases due to supply and demand trends and supply chain disruptions.
Input materials such as foam, steel and plywood are up 2 to 4 times their pre-pandemic prices.
While we have taken several rounds of pricing in new written -- on new written orders, as cost have continued to escalate, our significant backlog results in taking several quarters for pricing actions to flow through to delivered sales and our financials.
And as we continue to monitor costs, and we'll take further actions when and if necessary, we've taken additional pricing just last week.
Our procurement team is also actively managing product availability challenges, including shipping container issues that have delayed deliveries of finished products to our international and casegood businesses and component part availability, such as electrical components for our higher margin power units.
Despite continuing supply chain disruptions, the team has done a great job keeping us in stock for major raw material inputs, including wood, foam and steel.
While we actively focus on increasing production and managing supply chain challenges, our demand remains very strong.
The La-Z-Boy brand continues to meet the test of time with enduring attributes of comfort and quality.
Over the past year, all product categories have performed well with sectionals and modular sofas continuing to be very strong.
At the most recent High Point Furniture Market, we announced that La-Z-Boy has teamed up with Tempur Sealy to create a proprietary material unlike ordinary memory foam called TEMPUR-Response that is specifically designed for our seating and sleeper mattresses.
With two iconic brands banding together, we have seen great interest from our customers.
And on the marketing side, with Kristen Bell as our brand ambassador, we are seeing increased consideration for La-Z-Boy among younger consumers, underscoring her broad appeal to both our core and target consumer.
Now let me turn to the Retail segment, which produced excellent results.
For the quarter, delivered sales increased 39% to a record $194 million and delivered same-store sales increased 35% versus year ago, on strong execution by the team.
Non-GAAP operating margin increased to 12.2% from 10.8% in last year's comparable quarter, primarily driven by fixed cost leverage on higher delivered sales volume.
Last year's fourth quarter was marked by a reduction in sales due to COVID-related store closures in the last four weeks of the quarter.
Written same-store sales for the company-owned La-Z-Boy Furniture Galleries stores more than doubled, increasing 114% in the quarter, reflecting positive trends across all sales metrics, including traffic, conversion and average ticket.
For perspective, against the fiscal 2019 fourth quarter when we were in a pre-COVID environment, written same-store sales increased 40%.
That's about an 18% compound average growth rate over the two years, which again demonstrates the strength of our business and brand in the marketplace and that consumers feel safe shopping in our stores.
Our primary focus is to service and delight consumers at all touch points, providing them with a great end-to-end experience every time.
As part of this, we are committed to enhancing our omnichannel presence to offer an easy and comprehensive experience to meet consumers wherever they want to shop, whether online, in store or a combination of both.
As we invest in technology enhancements to make the online experience more robust and engaging, we will continue to invest in the La-Z-Boy Furniture Galleries store system to provide consumers with modern, bright and inspiring stores.
For fiscal '22, approximately 30 projects, including new stores, remodels and relocations, will be completed across the network, with two-thirds of the projects within our company-owned portfolio.
Also, in addition to the Seattle acquisition that closed last September, this week, we signed an agreement to acquire three stores in the vibrant Long Island, New York market.
I'll now spend a few minutes on Joybird, which turned in a great quarter.
Delivered sales for the period, which are reported in Corporate and Other, more than doubled, increasing 144% to $38 million, reflecting strong end-to-end execution.
Written sales increased 125% in the quarter versus the prior year period, reflecting ongoing strong order trends and the strength of the brand in the online marketplace.
Joybird again delivered profitable growth and improved its gross margin.
Our Joybird team continues to do an excellent job in terms of marketing effectiveness.
We've increased our marketing spend to drive consumer acquisition, bringing the right consumer to the site and providing an excellent online experience leading to improved conversion.
As a reminder, we present our results on both GAAP and non-GAAP basis.
For the full fiscal 2021 year, non-GAAP results exclude purchase accounting charges totaling $17 million pre-tax or $0.33 per diluted share, primarily due to a write-up for the Joybird contingent consideration liability based on forecast performance.
Two, a change of $3.8 million pre-tax or $0.07 per diluted share related to the company's business realignment initiative announced in June of 2020.
And finally, income of $5.2 million pre-tax or $0.08 per diluted share for employee retention payroll tax credits the company qualified for under the CARES Act.
Now on to our results.
My comments from here will focus on our non-GAAP reporting, unless specifically stated otherwise.
On a consolidated basis, fiscal '21 fourth quarter sales increased 41% to a record $519 million, reflecting strong demand and a comparison to the fiscal '20 fourth quarter, which was impacted by COVID-related plant and retail closures.
Consolidated non-GAAP operating income increased to $52 million.
And consolidated non-GAAP operating margin improved to 10% versus 9.3%.
Non-GAAP earnings per share was $0.87 per diluted share in the current year versus $0.49 in last year's fourth quarter.
Strong operating margins in the quarter benefited from disproportionate growth in fixed cost leverage in the Retail segment and at Joybird as well as reduced marketing, advertising and administrative spend as a percentage of sales, which more than offset rising commodity costs in the quarter.
Moving on to full year results for fiscal 2021.
Sales increased 1.8% to $1.7 billion, a strong result given the slow start to the fiscal year, with many retailers closed, including most of our company-owned La-Z-Boy Furniture Galleries and our plants just restarting production at limited capacity.
For the year, non-consolidated -- I'm sorry, excuse me.
For the year, consolidated non-GAAP operating income increased to $157 million and consolidated non-GAAP operating margin reached 9%, an all-time high in recent history.
Non-GAAP earnings per share increased to $2.62 per diluted share versus $2.16 in fiscal 2020.
Consolidated gross margin for the full fiscal '21 year increased 10 basis points versus the prior year.
Changes in our consolidated sales mix, driven by the growth of Retail end Joybird, which carry a higher gross margin than our Wholesale businesses, drove the biggest change in margin.
Additionally, Joybird experienced a significant improvement in gross margin, primarily resulting from product pricing actions, an increase in average ticket, favorable product mix and synergies as Joybird was integrated into our broader supply chain.
Partially offsetting these gross margin increases were higher costs related to expanding our manufacturing capacity across the company, a shift in product mix related to those capacity increases and rising raw material costs.
It's important to note that last year's gross margin was positively impacted by rebates on previously paid tariffs, which provided 100 basis point benefit to gross margin.
SG&A as a percentage of sales decreased 70 basis points for fiscal '21 versus fiscal '20, primarily reflecting cost reduction initiatives taken throughout the year, including lower marketing and advertising spend given strong demand trends.
Fiscal year '20 results included bad debt expense due to the Art Van bankruptcy in fiscal '20 as well as a provision for credit losses last year due to the uncertain economic environment caused by COVID.
Partially offsetting these decreases were increased incentive compensation costs related to the company's performance and changes to our consolidated sales mix due to the growth of our Retail segment and Joybird, which both carry higher SG&A costs than our Wholesale businesses.
Our effective tax rate on a GAAP basis for fiscal '21 was 26.3% versus 31.4% in fiscal '20.
Impacting our effective tax rate for fiscal '20 was a net tax expense of $4 million, primarily from the tax effect of a non-deductible goodwill impairment charge related to Joybird and tax expense of $1.3 million from deferred tax attributable to undistributed foreign earnings no longer permanently reinvested.
Absent discrete adjustments, the effective tax rate in fiscal '20 would have been 26.4%.
For the year, we generated $310 million in cash from operating activities, reflecting strong operating performance and a $140 million increase in customer deposits from written orders for the company's Retail segment and Joybird.
We ended the period with $395 million in cash and no debt, up from $264 million in cash at the end of fiscal '20 and $75 million drawn on our credit facility.
In addition, we held $32 million in investments to enhance returns on cash compared with $29 million last year.
As we have managed the business through COVID-19, we've been conservative with cash, and in the process, have strengthened our resources to capitalize on future value-creating opportunities to grow out of the pandemic.
During the year, we invested $38 million in capital, primarily related to machinery and equipment, improvements to select retail stores, cost for new production capacity in Mexico and upgrades to our Dayton, Tennessee manufacturing facility, which have now been completed.
Regarding cash return to shareholders, for the year, we paid $16.5 million in dividends to shareholders and spent approximately $44 million, purchasing 1.1 million shares of stock in the open market under our existing authorized share repurchase program.
This leaves $3.4 million -- 3.4 million shares of purchase availability in this program.
Our capital allocation strategy remains to first invest in the business to deliver long-term results followed by returns to shareholders through a consistent dividend and share repurchases.
Before returning the call to Melinda, let me highlight several important items for fiscal 2022.
We expect our non-GAAP adjustments for fiscal '22 will include purchase accounting adjustments for previous acquisitions estimated to be at $0.01 to $0.03 per diluted share.
This excludes any further adjustments that may be made to the Joybird contingent consideration liability depending on updated estimates of Joybird's ongoing business trajectory.
Regarding seasonality, incoming order rates and a large backlog will mitigate the usual seasonal slowdown associated with the first quarter.
However, as usual, the first quarter is limited to 12 weeks of production and shipments to enable our shutdown week in July for maintenance for most of the company's plants compared to the usual 13 weeks of production shipments in quarters two and four.
Regarding production capacity, demand trends remained strong across the business with backlog at record levels, providing for a long tail.
We anticipate ongoing incremental increases in capacity through fiscal 2022 as new assembly cells are added and efficiencies improve, which will result in continued incremental progress on delivered sales.
However, we expect temporary significant pressures on profit margins in the first half of fiscal '22 compared to the very strong profit margin of this Q4.
We expect to face ongoing global supply chain disruptions and escalating raw material and freight costs, which will cause volatility in results and will eventually be offset by our already announced pricing actions in the back half of the year as we work through our backlog.
Further, we intend to continue investing in our business to ensure we play offense and strengthen the business and its brands for the long-term even as we weather these short-term challenges.
The full impact of these factors may result in a temporary impact to profit, which could be in the range of 300 basis points in the first two quarters compared to our very strong Q4 levels, but still in line with or above our historical levels for the summer months.
Finally, as we make investments in the business to strengthen the company for the future, we expect capital expenditures to be in the range of $55 million to $65 million for fiscal 2022.
Spending will support updating our La-Z-Boy Furniture Galleries stores, updating and expanding our plants and investments in technology solutions across the organization.
The dynamics of the past year have been profoundly challenging, but also educational.
These events affirm our prudent financial culture which served us well during this uncertain period, and our strong cash position provides opportunities for investment in our next chapter of growth.
That said, we are stepping back and evaluating our strengths and our opportunities and we are investing in the company to emerge stronger in a post-pandemic environment and even more able to deliver long-term profitable growth.
Although this is not an easy time, it is truly an exciting one; marked by change, incredibly strong demand and the ability to play offense.
We'll begin the question-and-answer period now.
Melinda, please review the instructions for getting into the queue to ask questions.
| q4 non-gaap earnings per share $0.87.
anticipates ongoing incremental increases in manufacturing capacity throughout fiscal 2022 that will enable higher delivered sales.
incoming order rates and backlog will mitigate usual seasonal slowdown associated with q1.
|
Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer.
Our actual results may differ from those projected due to risks and uncertainties with the company's business.
Additional information regarding these factors can be found in the company's SEC filings.
I am pleased to report another outstanding quarter.
It has been a very active quarter on a number of fronts.
First, I am pleased to announce that we celebrated a significant milestone during the quarter when we crossed the 1,000 store threshold.
Second, I am proud to announce that for the fourth consecutive year, Newsweek has recognized our team for best customer service among storage centers.
And third, we continue to perform at record levels with record occupancy for this time of year and exceptionally strong pricing power.
With regards to external growth, we are on pace to achieve record acquisition volume with over $1.7 billion of wholly owned acquisitions, either closed this year or currently under contract and expected to close by year-end.
This represents 115 additional stores and nearly 20% growth in our wholly owned portfolio.
These acquisitions represent a nice mix of both markets and maturity with roughly 1/3 still in lease-up and approximately 75% in the Sunbelt states.
We continue to expand in key markets such as Austin, Atlanta, Tampa, Miami, Phoenix, San Diego, Seattle and Greater New York City.
Despite 1/3 in lease-up, we still expect the blended year one cap rate to be in the mid-four range as we remain focused on finding both strategic and FFO accretive opportunities.
Our third-party managed portfolio totaled 357 stores at quarter end and is proving to be the robust acquisition pipeline that we anticipated.
Specifically, 27 stores acquired this year were managed by Life Storage, representing 30% -- 36% of our closed acquisition volume so far this year.
And we continue to onboard additional managed stores at a rapid pace, including 30 in the third quarter alone as owners and developers are attracted to our operating performance and innovative technology platforms.
Our team has evaluated a record number of management opportunities this year, and the pipeline continues to grow.
With this strong performance, we are once again increasing our guidance for 2021.
We have raised the midpoint of our estimated adjusted funds from operations per share to $4.94 this year, which would be a 24% growth over 2020.
We have also nearly doubled the upper end of our acquisition guidance from $1 billion to nearly $2 billion.
This report highlights our many ESG initiatives, including our expanded solar, diversity and inclusion and community engagement programs.
The report is available on the Sustainability page of our Investor Relations website.
So with that, I will hand it over to Andy to provide further details on the quarter and revisions to our guidance.
Last night, we reported adjusted quarterly funds from operations of $1.37 per share for the third quarter, an increase of 35.6% over the same quarter last year.
Third quarter same-store revenue accelerated significantly again to 17.4% year-over-year, up from 14.7% in the second quarter.
So we've begun to see somewhat of a return to normal seasonal trends in the past couple of months.
We remain highly occupied with average same-store occupancy up 220 basis points compared to the same quarter last year.
This elevated occupancy has allowed us to continue to be more aggressive with rates on new and existing customers, which has driven a significant increase in our in-place rates per square foot, which were up 14% year-over-year in the third quarter, representing substantial acceleration from the 8% in the second quarter and the 1% in the first quarter.
Same-store operating expenses grew only 3.5% for the quarter versus last year's third quarter.
The largest negative variances occurred in repairs and maintenance and real estate taxes.
The increases were partially offset by a 5% decrease in Internet marketing expenses and slightly lower payroll and benefits.
The net effect of the same-store revenue and expense performance was a 390 basis point expansion in net operating income margin to 70.7%, resulting in 24.3% year-over-year growth in same-store NOI for the third quarter.
Additionally, we increased our dividend 16% in October as we continue to share growth in FFO with our shareholders.
This increase follows our 4% dividend bump this past January, and the 7% growth in our dividend last year.
Our balance sheet remains strong.
We supported our acquisition activity and liquidity position by issuing equity securities and pricing a bond offering during the third quarter.
Specifically, we completed an underwritten public offering of common stock, generating approximately $350 million and issued an additional $130 million of common stock via our ATM program.
The company also issued roughly $90 million of preferred operating partnership units as part of the consideration for our portfolio acquisition during the quarter.
Finally, we issued $600 million of 10-year 2.4% senior unsecured notes that priced in late September and closed in early October.
Our net debt to recurring EBITDA ratio was 3.9 times at quarter end and 5.1 times following the completion of the notes offering in October.
Our debt service coverage increased to a healthy 6.3 times at September 30, and we had $500 million available on our line of credit at quarter end.
We have no significant debt maturities until April of 2024 when $175 million becomes due.
And our average debt maturity is 6.3 years.
We have substantial liquidity available to continue growing our asset base with investment opportunities that provide our shareholders with attractive risk-adjusted returns.
Regarding 2021 guidance, we increased our same-store forecast again driven primarily by higher expected revenues and slightly reduced expense expectations.
Specifically, we expect same-store revenues to grow between 12.5% and 13.5%.
Excluding property taxes, we expect other expenses to increase between 1.75% and 2.75% while property taxes are expected to increase 6.75% to 7.75%.
The cumulative effect of these assumptions should result in 17% to 18% growth in same-store NOI.
We have also increased our anticipated acquisitions by $900 million to between $1.7 billion and $1.9 billion.
Based on these assumption changes, we anticipate an adjusted FFO per share for 2021 to be between $4.92 and $4.96.
| q3 adjusted ffo per share $1.37.
q3 ffo per share $1.37.
|
Before beginning, let me cover the formalities.
Such factors are detailed in the company's SEC filings and last night's news release.
It cannot be recorded or rebroadcast without our express permission.
[Indecipherable] today are Nick Stanage, our Chairman, CEO and President; and Kurt Goddard, our Vice President of Investor Relations.
The purpose of the call is to review our fourth quarter and full-year 2020 results detailed in the news release issued yesterday.
After reading our news release last night, I'm sure you'll agree that clearly we've had a seismic shift in the business, our demand, our volume, and our financial metrics.
I also hope that we recognize how Hexcel has moved quickly and robustly in response to the market challenges arising from the pandemic.
The results we are sharing with you today reflect the strong and decisive actions that we took swiftly in response to the substantial impact of the pandemic on all those involved in the aerospace industry in 2020.
The actions which are ongoing include approximately a 35% reduction in global headcount; temporarily idling assets; cutting discretionary expenditures; prioritizing the most critical projects, including capital expenditures; and rightsizing working capital to generate strong cash flow.
So I'm glad that 2020 is behind us.
At the same time, it's amazing what you learn about yourself and your organization during such challenging times.
I learned how extraordinarily strong, resilient, and action-oriented Hexcel employees are.
Throughout the year, and despite the uncertainties and the difficult decisions we took, our team accepted and embraced the challenges we faced, quickly developing options and taking decisive actions.
They knew what needed to be done and they did it.
Although 2020 is over, the pandemic headwinds will continue to test us into 2021.
As I mentioned in our news release last night, this first quarter of 2021, along with Q3 and Q4 of 2020 are anticipated to be our most challenging quarters during this pandemic.
We expect continued inventory destocking into the first part of 2021, which will continue to impact sales volumes and mix.
Growth for both our customers and for Hexcel is contingent on a healthy return to air travel following a successful vaccine rollout.
We are guardedly optimistic for a steady recovery in our business as 2021 progresses.
2021 is going to be yet another unusual year as the world gradually emerges from the pandemic, and remaining disciplined will be vital for our success.
We will not drop the ball or our guard in relation to health and safety of our employees.
We will continue to work with our customers to provide innovative solutions to meet their needs, while at the same time maintaining our focus on delivering operational excellence and cost control, and not allowing waste and inefficiency in any areas of our business.
We will remain disciplined in relation to cash management and maintain an optimal level of working capital throughout our business and control inventory levels to match our customer demand requirements.
2021 will be another challenging year, but I can assure you that Hexcel is ready.
Our teams are focused, and we are optimistic that the actions we have taken and continue to take during the pandemic are laying the foundation for another period of robust growth in the years ahead.
Now let me turn to our results.
First, I'll cover the fourth quarter results and then full year 2020.
Fourth quarter sales of almost $296 million were in line with our forecast.
Adjusted fourth quarter diluted earnings per share was a negative $0.18 compared to a positive $0.86 last year.
Our focus on cash management has been unwavering throughout this pandemic, and in the fourth quarter we generated another $104 million, resulting in $214 million of free cash flow for the year.
Turning to our three markets.
Fourth quarter aerospace sales were down 66% compared to Q4 2019.
All of our major programs were down substantially with the largest sales impact being related to the A350 widebody.
Build rate reductions driven by the pandemic combined with the 737 MAX grounding and significant supply chain inventory destocking led to the reduced sales levels.
Sales to other commercial aerospace, which includes regional and business aircraft, fell almost 60% year over year.
Again, the decline was from lower demand resulting from the pandemic.
On a positive note, space and defense sales increased almost 4% compared to Q4 2019.
Growth in this segment is broad-based across several defense and space programs, particularly US military rotorcraft.
Industrial sales declined approximately 29% when compared to Q4 2019.
As you know, wind energy sales are our largest industrial submarket, and those sales declined 42% in constant currency.
During the year, we saw a decline in demand for wind energy materials in the United States by our largest wind energy customer Vestas.
That led us to close our prepreg production facility in Windsor, Colorado in November.
The decline is attributable in part to the commoditization and outsourcing of blades with a changing technology from prepreg to infusion wind energy remains a good business for Hexcel, and we are adjusting to the changing market dynamics and introducing new innovations to support our customers.
Vestas continues to be a great customer and manufacturing continues at our plants in Neumarkt, Austria; and Tianjin, China.
Now let's turn to some specifics in our full-year 2020 results.
2020 sales were $1.5 billion, down 36% year over year.
Adjusted diluted earnings per share for the year was $0.25.
Our full-year results were bolstered by the pre-pandemic Q1 2020 results, which were the strongest of the year.
Free cash flow came in strong at $214 million compared to $287 million in 2019.
Our liquidity position remains robust, and we have managed working capital tightly during this pandemic.
2020 commercial aerospace sales were about $822 million compared to $1.6 billion in 2019, a decline of almost 50% [Indecipherable] an unprecedented decline in demand driven by lower build rates across all programs, including the 737 MAX, was compounded by inventory destocking across the supply chain.
Sales to other aerospace declined by one-third.
Space and defense sales for 2020 grew nominally to $448 million compared to $445 million in 2019.
Select programs have been impacted by pandemic-induced disruptions, although we feel these are temporary impacts that we -- that will be recovered over time.
Moreover, space and defense is traditionally a strong and attractive market for Hexcel, now enhanced by our ARC Technologies acquisition where we continue to be pleased with the excellent performance and sales growth.
Finally, turning to industrial, sales were $232 million in 2020, which was 26.5% lower year over year.
We have good wind energy demand continuing from the European and Asian markets as we enter 2021, and we are encouraged by growing demand for composites in automotive, marine, and sports applications where we have opportunities for growth.
Our technical innovations in strength and light-weighting have led to increased composites penetration in these markets.
They were challenged in 2020 in ways we never could have imagined.
Despite all the uncertainty, distractions, and sacrifices, they performed well for our customers and shareholders, and I couldn't be prouder.
Our employees accepted the challenge of wearing face masks all day, constantly distancing themselves from one another, dealing with additional concerns about their own health and family's well-being in the midst of a pandemic, and they did this while continuing to deliver the high standards we set.
In this context, we achieved our best-ever safety rate performance in 2020.
That's just phenomenal and illustrates our deeply rooted safety culture.
I also want to take a moment to reassure you that not even a pandemic, such as we are experiencing, has altered our commitment to continued innovation and customer intimacy.
All of our R&D sites are considered essential businesses, and these teams kept up their work in our labs throughout 2020.
They've continued to advance new technologies that will lead to new and optimized product offerings and improved manufacturing performance.
Our advanced composites technology leads our industry, and we're proud that we have been able to continue to work for our customers during the pandemic.
Finally, I want to mention that in Q4 we were pleased to expand our contract with Safran to include our HexTow IM7 Carbon Fiber for the GE9X engine that powers the 777X as well as positioning Hexcel for next-generation engines being developed by Safran.
This expansion also includes our advanced composites for Safran Cabin, Seats, and Aerosystems.
Our relationship with Safran spans more than 35 years, and we are proud to partner with this key customer providing our high-performance materials that support the strength, efficiency, and reliability in their products.
To briefly summarize the quarterly results, our 2020 sales were negatively impacted by lower build rates and continued destocking as we expected and communicated last quarter.
Our aggressive cost-reduction actions are starting to have an impact, which we've demonstrated by sequential margin improvement compared to the third quarter of 2020.
Further, we continue to generate free cash flow and deleverage with particularly strong and disciplined management of working capital.
We have increased our liquidity by $239 million at December 31st, 2020, compared to the end of the first quarter of 2020.
As a reminder, the year-over-year comparisons are in constant currency.
The majority of our sales are denominated in dollars.
However, our cost base is a mix of dollars, euros, and British pounds as we have a significant manufacturing presence in Europe.
As a result, when the dollar strengthens against the euro and the pound, our sales translate lower, while our costs also translate lower leading to a net benefit to our margins.
Accordingly, a weak dollar, as we are currently facing, is a headwind to our financial results.
We hedge this currency exposure over a 10-quarter horizon to protect our operating income.
Quarterly sales totaled $295.8 million.
The sales decrease year over year reflects production rate decreases by our commercial aerospace customers in response to the pandemic combined with continued commercial aerospace supply chain destocking.
Turning to our three markets, commercial aerospace represented approximately 43% of total fourth quarter sales.
Commercial aerospace sales of $126.7 million decreased 67% compared to the fourth quarter of 2019 as destocking continued to impact our sales.
We expect continued destocking in the first quarter of 2021 at a similar level to what we witnessed in the third and fourth quarters of 2020.
Destocking is then forecast to wind down during the second quarter of 2021.
We then expect to generally be at a steady-state entering the second half of 2021, with destocking largely behind us and realizing a substantial portion of the cost takeout benefits we have implemented and continued to work on.
Space and defense represented 40% of the fourth quarter sales and totaled $119.7 million, an increase of 2.5%, compared to the same period in 2019.
U.S. military rotorcraft was strong in the fourth quarter.
We remain bullish for the outlook for our space and defense business globally.
Industrial comprised 17% of fourth quarter 2020 sales.
Industrial sales totaled $49.4 million, decreasing 31% compared to the fourth quarter of 2019 on weaker wind and recreation markets, partially offset by strengthening automotive.
We closed our Windsor, Colorado wind energy facility during the fourth quarter as previously disclosed.
Recreation markets remained soft due to the pandemic, particularly for winter sports.
In contrast, the fourth quarter of 2020 generated the strongest automotive sales since mid-2019.
On a consolidated basis, gross margin for the fourth quarter was 10.3% compared to 26% in the fourth quarter of 2019.
As we discussed at our last earnings call, we continued to temporarily idle select carbon fiber capacity during the fourth quarter, and this is continuing in 2021 as we maintain alignment with customer demand.
The sales mix, particularly lower sales of carbon fiber products, continued to be an earnings headwind.
Our view of forward demand continues to be consistent with what we communicated at our last earnings call in October, with Q3 and Q4 2020 along with Q1 2021 being the low point of the pandemic downturn.
We are staying close to our customers and maintaining our focus on operational excellence with process improvements and cost realignment actions across the business.
Fourth quarter selling, general, and administrative expenses decreased 29.2% in constant currency or $9.9 million year over year as a result of headcount reductions and continued tight controls on discretionary spending.
Research and technology expenses decreased 21.4% in constant currency.
We are an innovative material science company and continued research and technology funding is critical to our future growth.
So we have been very selective with our cost reduction actions in this area of the business.
The other expense category reflected severance costs, primarily in Europe.
We continue to target eliminating $150 million of annualized overhead costs, including indirect labor.
We expect that a significant portion of these cost-out actions will be completed as we enter the second half of 2021.
Adjusted operating loss in the fourth quarter totaled $6.1 million, reflecting the lower sales volume and overhead headwinds combined with the negative sales mix.
The year-over-year impact of exchange rates was negative by approximately 40 basis points.
Now turning to our two segments.
The composite material segment represented 76% of total sales and generated a negative 6.2% operating margin compared to 18.8% margin in the prior year period.
The engineered products segment, which is comprised of all structures and engineered core businesses, represented 24% of total sales and generated an 8.6% operating margin, compared to 16.9% in the fourth quarter of 2019.
The tax benefit for the fourth quarter and year-to-date periods of 2020 was $12 million and $61 million, respectively.
The tax benefit was primarily due to losses incurred in various jurisdictions due to the impacts of COVID-19.
The 2020 tax benefit was also impacted by discrete tax items of $55 million, primarily composed of a valuation allowance released in the third quarter of 2020.
The pandemic and consequent mix of results across the countries in which we operate is expected to continue to have an impact on the company's overall effective tax rate throughout 2021.
Net cash provided by operating activities was $107.1 million for the fourth quarter and $264.3 million for 2020.
Working capital was a source of cash of $87.7 million in the last quarter of the year.
Capital expenditures on an accrual basis was $3.2 million in the fourth quarter of 2020, compared to $30 million for the prior year period in 2019.
Accrual basis capital expenditures were $42.5 million for the full 2020 year.
We continue to tightly manage capital expenditures and look for innovative ways to optimize the flexibility of our existing capacity to support new business opportunities in the future.
Free cash flow for the fourth quarter of 2020 was $104.3 million and $213.7 million for the year.
We remain focused on generating and preserving cash as we deleverage.
We increased our liquidity by $108 million as of 31st -- December 31st, 2020, compared to September 30th, 2020, further strengthening our balance sheet.
Our total liquidity at the end of the fourth quarter of 2020 was $875 million consisting of $103 million of cash and an undrawn revolver balance of $772 million.
We have no near-term debt maturities.
Our revolver matures in 2024 and our two Senior Notes mature in 2025 and 2027, respectively.
Our leverage as of December 31st, 2020, is measured on a net debt basis and was 3.6 times compared to 3.25 times at September 30, 2020, which at that time was measured on a gross debt basis.
The increase in the leverage ratio was due to the lower 12-month trailing EBITDA as net debt actually decreased $108 million at December 31, 2020, compared to September 30, 2020.
We remain within covenant conditions.
Our revolver facility has leverage covenants based on a debt to trailing 12-month EBITDA.
During the third quarter of 2020, we worked with our bank group to temporarily amend the covenant from a gross debt measurement to a net debt measurement and to increase the maximum allowable leverage for a period of four quarters.
While we comfortably remained in compliance with the amended Covenant's December 31st, 2020, we recognized that the trailing 12-month EBITDA is decreasing more than we had forecast early in the third quarter of 2020.
This reflects our projections based on our latest customer demand requirements along with our belief that the aerospace supply chain destocking will now run through the second quarter of 2021 compared to our previous thinking that it would be largely completed by the end of 2020.
We are currently in discussions with our bank group regarding our revolver facility, and we are extremely confident that a mutually agreeable solution will be reached soon to ensure continued covenant compliance.
Our share repurchase program remains suspended and is also restricted by the previously referenced revolver amendment.
Our board will continue to regularly evaluate capital allocation priorities.
To summarize full-year 2020 results.
Total sales decreased 36%, adjusted operating income was $72 million, and adjusted diluted earnings per share was $0.25.
We delivered $214 million of free cash flow during the year, which we used to deleverage.
As our earning release states, we are not providing financial guidance at this time, but I would like to share the following.
Our current market outlook, considering the strong pre-pandemic first quarter of 2020, is that we expect 2021 annual sales to be lower than 2020.
We expect the aerospace chain destocking to largely come to an end during the second quarter of 2021.
Consistent with prior years, selling, general, and administrative expenses are forecast to be higher in the first quarter of 2021 compared to following quarters due to the timing of recording stock-based compensation expenses.
Some additional restructuring costs are anticipated primarily in the first half of 2021 based on labor actions already initiated.
Capital expenditures in 2021 will continue to be managed very tightly and are expected to be at a similar level to 2020.
We expect to generate free cash flow in 2021 and to further reduce debt levels.
The tax assumption is more complicated than normal, but we expect the rate to be approximately 24% to 25% in 2021.
This change from prior rates is due to a mix of the jurisdictions where we expect to generate income.
Over time, we expect the tax rate to return to pre-pandemic levels.
While it seems as though everything is changed, in reality, nothing has changed about who we are as a company.
We still have the broadest technology portfolio in our industry, with leading positions on the world's largest aerospace programs with our advanced composites materials.
We continue to generate cash and further strengthen our balance sheet.
We are taking this opportunity to strengthen our foundation, especially in the areas of cost control, realigning the business for lower demand for a period of time, and cash management, to name a few.
The great job our team has done puts us in a position to return to growth with strong leverage once this pandemic is behind us.
Clearly, there is still uncertainty.
While air travel has increased from the 2020 lows, it remains weak.
So the next couple of quarters will be challenging.
However, we can see a path forward toward a return to stability, and we view 2021 as a transition period that sits between the trough of the second half of 2020 and a return to growth in 2022.
This year, one of our primary objectives is to continue to stay close to, aligned with, and responsive to our customers' needs.
Global demand for advanced composites technology for lighter weight will grow, and our technology and products remain unrivaled in our industry.
The potential for a significant upturn in 2022 and beyond continues to look promising.
The actions we have taken and will continue to take will ensure that Hexcel emerges from this pandemic stronger than ever, strategically positioned for growth to support the future of aerodynamics and sustainability in the markets we serve.
We continue to be disciplined and ready for the year ahead.
| compname reports q4 adjusted loss per share $0.18.
q4 adjusted loss per share $0.18.
q4 sales $295.8 million versus refinitiv ibes estimate of $298.7 million.
continues to withhold financial guidance due to market uncertainties.
|
Before we begin, I'd like to remind everyone that Earl joined less than a month ago after the fiscal year end; and although quickly acclimating himself to the business, should you have any questions after today's call, please follow-up with Investor Relations accordingly.
It's hard to believe we're already at the close of 2020 and covering our fourth quarter results.
On the other hand, we're about to discuss only the second full quarter of COVID-19's impact on our financials.
In Q4, we reported revenues of approximately $1.5 billion for the quarter.
This represents a 9.9% decline versus last year and a considerable sequential improvement when comparing to our more than 15% decline in Q3.
Once again, our diversified client base demonstrates the resilience of our business.
Our Technology & Manufacturing industry group grew almost 7% and Business & Industry as well as Education posted revenue results that were only slightly down.
As one would expect, our Aviation segment drove the majority of our organic decline versus last year.
Technical Solutions also saw a large revenue decline and continued to see challenges in site access, which affected churn rates.
Positively, the backlog of committed work in Technical Solutions is healthy and the pipeline for '21 is robust.
So all things considered, it was a good revenue story for the quarter.
From a profit perspective, there was sustained demand for higher margin COVID-related work orders and our enhanced cleaning program, particularly in Business & Industry and Technology & Manufacturing.
Our financial performance was protected by our variable labor model and our ability to dynamically adjust staffing based on demand, and we continue to see profit arbitrage by efficiently managing labor as we scaled and consolidated staff during the quarter.
This has been one of the key contributors of our financial performance through the pandemic.
As a result of all of these factors, we grew earnings on both the GAAP and an adjusted basis versus last year.
Income from continued operations grew to $53.1 million or $0.78 per share.
On an adjusted basis, we delivered $46.7 million or $0.69 per share.
Adjusted EBITDA margin rose to 6.2% versus 5.6% last year.
Even more compelling, these results incorporate a non-cash reserve we took for an entertainment-related project within our Technical Solutions segment.
This was a unique circumstance in client, and not a reflection of our broader project portfolio within Technical Solutions.
This had 120 basis point impact on our adjusted EBITDA margin as well as our earnings.
So even when including this distinctive event, quarter-after-quarter, our performance continues to demonstrate consistent strength and execution.
In so many ways, 2020 will stand out as a pivotal year for ABM.
The pandemic has created a shift in the public mindset as professional Class A janitorial services are now unquestionably viewed as an essential and non-discretionary service.
Facility owners must demonstrate that they are providing clean, healthy and safe spaces that their occupants can trust.
Not only will this be required, but it will be a reflection of their brand.
Our response with our EnhancedClean service, gives our clients the peace of mind that comes with studied protocols and practices that keep facilities safe, and this offering creates even more distance between us and our competitors.
As a company that's been around for more than 110 years, ABM has withstood and grown during many global events.
But 2020 tested us in historic ways and I've never been more inspired by our organization.
I want to take a moment to recap some of our team's accomplishments more specifically.
Since March, we have been on the frontlines battling a pandemic that has disrupted nearly every industry.
While navigating a constantly evolving environment as we learn more about the virus, we prioritized the health and safety of our employees and our clients above all.
And when it came to PPE and our global supply chain, our procurement team did not disappoint when others in our space did, as they couldn't accommodate surging demands.
Also, we partnered with large cleaning contractors to form the Cleaning Coalition of America to represent our industry which played a critical role in restoring our country.
The Coalition plans to press for vaccine priority for our industry and developed a focused campaign on awareness around what differentiates best-in-class providers.
At ABM, we were particularly proud of how we proactively developed our own expert-backed certified programs to answer our client's needs with disinfection protocols, such as specialized training and signage, electrostatic spraying of disinfectant and air filtration.
And all of this is being supported by one of the most comprehensive marketing campaigns we've ever developed.
What shouldn't be minimized is the fact that we mobilized multiple cross-functional task forces across all the critical areas of our business that elevated our adeptness and will endure long past the pandemic.
These task forces led to improved operating procedures for labor management, sales and financial activities.
As an example, our approach to collections led us to generate more than $450 million in cash flow from operations and $420 million in free cash flow, both records for the firm.
This translates to nearly $1 billion of liquidity, including $400 million of cash, which is an extremely powerful position to be in during still uncertain times.
As we move into 2021, our intention is to capitalize on the momentum and shift from defense to offense.
Beginning with our executive team, we recently announced several appointments to further align our internal organizational structure to our business strategies.
Earl is a seasoned finance executive joining us from Best Buy, a leading Fortune 500 provider of consumer technology products and services with 125,000 employees in North America.
Earl held several executive positions across finance and most recently he was responsible for leading enterprise capital project planning plus transformation and procurement as well as supporting digital and technology and global real estate.
During his tenure at Best Buy, Earl also spearheaded several strategic initiatives targeting labor and logistics.
Earl joined less than three weeks ago but is quickly immersing himself in our business.
I'm also excited that Rene Jacobsen has been promoted to Chief Operating Officer and will lead all of our client-facing industry groups.
Since joining ABM eight years ago, Rene has consistently driven our operational performance and service excellence and his leadership was unquestionably instrumental in our successful navigation of 2020.
As COO, he will provide strategic guidance for our operations and drive our financial results across all of our platforms.
Rene will also continue to work with Sean Mahoney our new President of Sales and Marketing.
Since Sean's arrival in ABM in 2017, we've broken sales records each succeeding year and we achieved another record in 2020 with new sales at $1.2 billion, an amazing accomplishment for any year but especially in a year when so much of the economy was paused.
With both Rene and Sean's leadership, our operations and sales teams proved to be a powerful combination in 2020 and will undoubtedly exceed our expectations in 2021.
Speaking of 2021, later in the year, we will be sharing our refresh business strategy which builds on the positive changes and the acceleration we saw with our 2020 vision.
At that time, we will be reviewing our technology plan and path toward a digital platform for our employees and clients.
In fact, just as I discussed last quarter, some of our near-term investments are reengagements of IT projects that were put on hold due to the pandemic, like our ERP system and data management roadmap.
Other investments will be new given the opportunities that arose as a result of the pandemic such as EnhancedClean and the associated build of that program.
On that front, from a payback standpoint, we concluded the year with over $300 million in sales for our EnhancedClean program and COVID-related activities.
And we have some really exciting sales and marketing plans lined up over the next few months to continue accelerating and differentiating ourselves in the marketplace.
Of course, we will be responsible for our investment approach given how smooth the operating environment is but we recognize that we must plan for the long-term while also keeping our maniacal focus on what the near term may bring.
There's no doubt that conditions remain uncertain, particularly as we operate over the winter months.
COVID cases continue to rise throughout the country and I'm sure you've seen or experienced various stages of closures in your own communities.
Unfortunately, the operating environment isn't any more predictable than it was last quarter.
Clients are still generally managing for the shorter term as they react to resurgences, which caused occupancy volatility and they don't yet have the ability to predict when the workforce at large will return.
While vaccine news is encouraging, the widespread availability and use is also unknown today, which could impact the timing of recoveries and reopenings.
Therefore, our visibility remains limited and, as you would expect, we are not providing guidance for the full fiscal year in 2021.
However, we are going to share our near-term expectations for the first fiscal quarter.
This is the only time we anticipate guiding to such a short-term view, given the uniqueness of the moment.
For the first quarter, we expect GAAP earnings per share of $0.53 to $0.58 in earnings per diluted share or adjusted earnings per share of $0.60 to $0.65 per diluted share.
These ranges compare to last year's $0.41 and $0.39 respectively, both considerable increases on a year-over-year basis.
We also expect adjusted EBITDA margin in the range of 6.1% to 6.4%, expanding from 4.3% last year.
At this time, we believe we may have seen the bottom in revenue compression as a result of COVID-19.
Sequentially, we could see similar to slightly better organic declines than what we saw in Q4.
We also anticipate good demand for pandemic-related work orders and EnhancedClean to continue throughout Q1.
The investments I discussed earlier should also continue into Q1, which you will see in both our segment profit and corporate lines.
In general, investments will continue throughout fiscal 2021 but the magnitude and cadence will be determined by both our long-term strategy and where we see the broader recovery going.
Earl will go through more detail on some of the assumptions for the quarter and year, which is obviously still dynamic.
Should we have better line of sight for the full year by Q2, we would anticipate providing full year guidance at that time.
This purpose has never meant more than it does today.
Our value to clients has risen because our teams have been the ambassadors of our brands and demonstrated the operational excellence that sets ABM apart from our competitors.
Nine months ago, we couldn't have imagined how 2020 would culminate for ABM.
We not only exceeded our pre-COVID expectations, but actually accelerated into a long-term EBITDA margin range of 5.5% to 6%.
Our 2020 vision journey has come to a climactic transition, leading us into the next phase of growth and excellence and building on a strong foundation to propel us into the future.
Next year, we'll also mark our 50th anniversary on the New York Stock Exchange and we look forward to celebrating this milestone at ABM's history.
So, while last year was certainly a memorable one for our organization, I'm now looking forward to the opportunities that lie ahead and I am more excited than ever.
Now, to Earl, who'll cover our financial results.
I am so excited to be part of the ABM team.
I recognized early on that the culture here is so special and unique.
Even in just my first few weeks here, I have witnessed an exceptional drive to collaborate and execute that clearly sets ABM apart.
As I spend the next several months diving into the business, I look forward to developing and sharing my perspectives on our financial strategies over future calls.
Now, onto our quarterly results.
Revenue for the quarter were $1.5 billion, a total decrease of approximately 9.9% compared to last year, reflecting our second full quarter of COVID-19 revenue declines, particularly in the Aviation and Technical Solutions segment.
Partially offsetting this revenue decline was continued demand for higher margin work orders that we have been providing for our clients through the pandemic, particularly within business and industry and technology and manufacturing.
GAAP income from continuing operations was $53.1 million or $0.78 per diluted share compared to $48.1 million or $0.71 last year.
These results reflect the continuation of favorable claims trend related to health insurance reserves.
We saw a benefit of $21.3 million in self-insurance adjustments, of which $6.2 million was related to the current year.
On an adjusted basis, income from continued operations for the quarter increased to $46.7 million or $0.69 per diluted share compared to $44.7 million or $0.66 last year.
Similar to the third quarter, our GAAP and adjusted earnings growth versus last year was driven primarily by a significant increase in higher margin work orders as clients respond to COVID-19 as well as the continued management of direct labor to align with the demand environment for legacy services.
Partially offsetting these results was a $17.6 million reserve for notes receivables for a project related to a unique family entertainment customer within the Technical Solutions segment.
We are currently working with the client to resolve this issue.
In addition, operational investments in such areas as our EnhancedClean program continued, which was embedded in our operating segment results.
We also reengaged certain corporate projects such as investments in IT, that were previously put on hold as we prioritized business continuity during the pandemic.
This amount was approximately $10 million for the quarter.
On a year-over-year basis, the fourth quarter also experienced one less workday which equates to approximately $6 million in labor expense savings.
I'll speak about the cadence of our working days for fiscal 2021 later in the call.
But the number of days in the fourth quarter of fiscal 2021 will be comparable at 65 days.
Our overall performance during the quarter led to adjusted EBITDA of approximately $92.5 million at a margin rate of 6.2% compared to $93 million or 5.6% last year.
Now, for a discussion of our segment results.
As a reminder, these results reflect the ongoing impact of COVID-19 on revenue.
Operating profit reflects the mix shift toward higher margin work orders, labor modulation on legacy service demand, as well as operational investments such as EnhancedClean.
B&I revenues were $794.3 million, down just 1.6%.
We're encouraged by the sequential top line improvement compared to a decline of 6.3% last quarter.
The pandemic's negative impact on our parking and sports and entertainment business continued this quarter, similar to Q3.
Offsetting this COVID compression and the loss of some lower margin business, we had consistently strong demand for higher margins pandemic-related work orders.
This led to a more favourable mix of B&I business that led to operating profit growth of more than 65% to $84.7 million with a margin rate of 10.7%.
Another very resilient segment for us during the pandemic has been our T&M business.
Revenues were $245.5 million for the quarter, up 6.7% versus last year.
Operating profit grew more than 30% to $23.5 million for an operating margin of 9.6%.
This segment is particularly comprised of essential service providers such as biopharma, logistics and industrial manufacturing.
As a result, demand has been driven by work order and EnhancedClean work, more than offsetting any COVID-related and other account losses throughout the year.
In education, we reported revenue of $212.2 million, reflecting the new school season and the adoption of hybrid models across our K-12 and higher education portfolios.
Operating profit of $15.1 million or 7.1% margin reflects labor-related savings as a result of modified staffing at site locations during the pandemic.
As many of us are likely experiencing today with our own children, there remains a great deal of variability in this segment as different cities respond to resurgences, particularly ahead of the holiday season.
We continue to monitor developments and partner with our clients to address both day-to-day cleaning and disinfection needs, as well as longer term budget constraints, where our technical solutions offering can be compelling.
Aviation reported revenues of $141 million, and an operating profit of $3.5 million, clearly demonstrating how the pandemic continues to have a dramatic impact on the industry.
However, as discussed last quarter, our goal was to achieve a breakeven position or better by the fourth quarter.
We are pleased to have closed the year in a profitable position.
And now onto Technical Solutions, which reported revenues of $123.1 million compared to $175.5 million last year.
As a reminder, this segment experienced phenomenal growth last year, exceeding 25% during Q4 of fiscal '19.
In addition to tougher compare, site access has been disrupted by the pandemic.
Backlog remains in our healthy zone, which we've historically defined as above the $150 million.
We are actively monitoring our ability to churn through these projects.
The operating loss of $3.6 million was driven by a reserve of notes receivables related to a single entertainment customer and associated with the client increasing credit risk resulting from the pandemic, which we continue to pursue.
Turning to cash and liquidity.
During the quarter, we generated a record $198.7 million in cash flow from operations and free cash flow of $189.6 million for the quarter.
This led to $457.5 million in cash flow and $419.5 million of free cash flow for the year.
As a reminder, these results include $101 million in deferred U.S. payroll taxes as a result of the CARES Act, which will be due in 2021 and 2022.
Even excluding this, these are records for the year.
Due to our strong cash position, we ended the quarter with total debt, including standby letters of credit of $883.4 million and a bank adjusted leverage ratio of 2.1 times.
Additionally, we ended the quarter with cash and cash equivalents of $394.2 million.
During the quarter, we paid our 218th consecutive quarterly cash dividend for a total distribution of approximately $12.3 million.
Now, for a quick recap of our annual results.
Total revenues were approximately $6 billion, a decrease of 7.9% versus last year.
The decrease in revenues was attributable to the COVID-19 pandemic's impact on business operations, predominately during the third and fourth quarters of this year.
Our GAAP income from continuing operations for fiscal 2020 was $0.2 million.
On an adjusted basis, income from continuing operations for the year was $163.5 million or $2.43 per diluted share.
Adjusted EBITDA for the year increased 6.6% to $361.9 million and we ended the fiscal year with an adjusted EBITDA margin of 6%.
Now, turning to our guidance outlook.
We are providing guidance for the first quarter of fiscal 2021.
At this time, we expect GAAP earnings per share to be in a range of $0.53 to $0.58 and adjusted earnings per share to be in a range of $0.60 to $0.65.
Adjusted EBITDA margin is anticipated to be between 6.1% to 6.4%.
This guidance outlook assumes organic growth will be sequentially flat to slightly improved versus the fourth quarter of fiscal 2020.
We anticipate a higher margin work orders and labor efficiencies to continue into the first quarter.
And as Scott discussed extensively, we are planning to invest in fiscal 2021.
The first quarter will see the same level of investments that we saw during the fourth quarter of fiscal 2020 of approximately $10 million.
The first quarter will also have one less working day versus last year, which could lead to approximately $6 million in lower labor expense.
However, we are preparing for the potential for higher payroll taxes beginning in January for SUI, FUI, as well as federal taxes such as FICA.
With respect to interest, based on our operating expectations for the first quarter and our current cash position, we do not anticipate an increase in borrowings compared to the fourth quarter.
Therefore, sequentially, interest expense should decrease slightly due to the continuing amortization of our term loan.
The tax rate for the quarter is anticipated to be approximately 30%.
This rate excludes discrete tax items such as the work opportunity tax credit and a tax impact of stock-based compensation awards, the total impact of which we currently expect will be under $1 million in Q1.
With respect to cash flow, we assume government-related benefits in the U.K. and U.S., such as the CARES Act, will not recur.
This should be considered when ascertaining free cash flow for the new fiscal year.
However, we drove higher free cash flow as a result of sharper operational practices in response to the pandemic.
And we intend to continue to uphold these standards and disciplines.
Lastly, related to taxes, in fiscal '20, our full-year impact for the Work Opportunity Tax Credit was $4 million, reflecting the pandemic's impact on traditional hiring practices.
Currently, WATSI [phonetic] is expected to expire on December 31 of this calendar year.
However, we are actively monitoring Congress for related action, including an extension on WATSI.
On the heels of such strong results for 2020, I look forward to sharing more with you over the coming quarters.
| q4 adjusted earnings per share $0.69 from continuing operations.
q4 gaap earnings per share $0.78 from continuing operations.
q4 revenue $1.5 billion versus refinitiv ibes estimate of $1.43 billion.
sees q1 adjusted earnings per share $0.60 to $0.65 from continuing operations.
sees q1 gaap earnings per share $0.53 to $0.58 from continuing operations.
expects its on-going operational and corporate investments will extend into fiscal 2021.
|
It continues to be a somewhat uneasy road.
But our partners have shown amazing resilience and grace.
Operating through the pandemic has been different from any other cycle in the history of our industry.
During the '08, '09 financial crisis, certain levers could be pulled while waiting out a return to normalcy.
Similar levers do not exist in this current cycle.
By now, you have read news reports or heard earnings calls of other healthcare REITs citing squeezed margins, moving the challenges, labor exhaustion, decreasing length of stay, home healthcare growth, and holds on elective surgeries, all creating challenges to operators.
We do believe that the industry census is close to or has hit bottom.
As the current vaccines and hopefully a third from Johnson & Johnson become more widely available and utilized, visitation opens up, communities and facilities continue to aggressively market their services and consumer confidence in these settings improves, we should see the current census stabilize and even improve.
However, visibility to these events remains low.
So we can't predict when that might happen or when the industry will be able to fully recover from the effect of the pandemic.
Because LTC has built a conservative foundation with a strong and flexible balance sheet, we can continue to provide support to our operators if needed and take advantage of investment opportunities as they arise without placing undue strain on LTC.
The need for senior care hasn't abated and states in which we have some of our highest concentration of properties are also states with the highest projected increases in the 80-plus population cohort over the next 10 years.
Government support for our industry remains vitally important and our industry associations have successfully lobbied and are continuing to lobby for much-needed ongoing aid and support.
With the new administration likely comes more spending on and attention to the COVID crisis.
It remains to be seen how much additional aid and with it, additional governmental regulation will be forthcoming and when it will arrive.
We believe this extra support is necessary.
Last month, the federal public health emergency declaration related to the corona's pandemic was extended through April 20, keeping in place the temporary 6.2% increase in federal Medicaid matching funds, including the three-day hospital stay waiver.
We believe a further extension is likely.
Additionally, a bipartisan bill was drafted to help ensure that senior care communities and facilities can maintain adequate staffing levels by allowing temporary nurse aids to retain their certification status after the COVID-19 emergency declaration has been lifted.
In addition to the new stimulus package being negotiated, about $30 billion of prior earmarked aid remains unallocated, which will hopefully provide some incremental support to operators in the industry.
Moving now to more LTC-specific discussion, I'll start with rent deferrals and abatements.
Fourth quarter rent and mortgage interest income collections were strong at 98%.
As previously disclosed, we provided partial relief to all eligible operators in the form of reduced 2021 rent escalations.
We thought it was prudent to proactively offer relief to our partners, so that they had additional funds early in 2021.
The rent credit is expected to have an approximate $530,000 impact on our 2021 GAAP revenue and an approximate $1.3 million impact on our 2021 FAD.
As we noted when we announced this program, our Board discussed various ways for LTC to provide support while balancing our fiduciary responsibilities to shareholders.
So while FAD will be reduced, we are focusing efforts on replacing the funds with accretive transactions this year.
We will evaluate requests for additional support from operating partners, as we receive them and we'll review them on a case-by-case basis with careful evaluation of each operator's ongoing operations, rent coverage, corporate financial health, and liquidity.
Pam will provide additional color shortly.
Next, I'll discuss our Senior Lifestyle portfolio, which is currently a main area of focus for us as we work to transition the 23 communities they have operated for LTC.
So far in the first quarter, we have transitioned 11 assisted living communities to two operators.
One operator is new to LTC and the other is an existing partner and our goal is to complete all SLC-related transitions by the end of the second quarter.
Clint will spend some time on the specifics.
The M&A market remains challenging for the industry.
While there are deals being done, we do not plan to relax our underwriting standards, opting instead to wait until we can complete deals that provide accretive growth for our shareholders.
We do not expect to engage in any large transactions for the foreseeable future, but we are seeing interesting opportunities to participate in growth through structured finance deals with reduced risk profiles and strong returns, especially for development projects that are not dependent for success on immediate lease-up or current census.
When the market begins to open up, we plan to use our considerable balance sheet to provide a wide range of regional operating partners with the financing they need to help grow their businesses.
Until then, we will continue to develop new relationships and solidify existing ones, so that we're ready to act when we see appropriate opportunities.
Right now, we see too many uncertainties in 2021 and we feel we cannot reasonably provide guidance at this time.
Total revenue declined $190,000 compared with last year's fourth quarter.
Impacting our results were abated delinquent and deferred rent granted in 2020, a reduction in property tax revenue, and lower rental revenue from the sale of the Preferred Care portfolio in 2020.
Additionally, in the fourth quarter of 2019, we collected past due rent from Senior Care.
Partially offsetting the decline was rent from acquisitions and completed development projects, higher rent payments from anthem, and contractual rent increases.
Mortgage interest income increased $226,000 due to the funding of expansion and renovation projects.
Interest expense decreased $490,000 due to lower outstanding balances and interest rates under our line of credit in the fourth quarter of 2020 and scheduled principal payments on our senior unsecured notes.
Property tax expense decreased $809,000, primarily due to the timing of Senior Lifestyle property tax escrow receipts and the payment of related taxes.
G&A expense increased $675,000 compared with the fourth quarter of 2019 due to the reimbursement of legal fees from Senior Care in the prior-year period as well as the timing of certain expenditures.
Income from unconsolidated joint ventures decreased $270,000 due to a dissolution in 2019 of a preferred equity investment in a joint venture, offset by two preferred equity investments we made in 2020.
During the fourth quarter of 2020, we recorded a $3 million impairment charge associated with a memory care community in Colorado operated by Senior Lifestyle, the impairment related to our release efforts of this property.
During the fourth quarter of 2019, we recognized a $5.5 million impairment charge related to the Senior Lifestyle joint venture.
The four properties comprising the JV were sold in the second quarter of 2020.
Accordingly, we received liquidation proceeds of $17.5 million and recognized a loss on liquidation of unconsolidated joint ventures of $620,000.
During the fourth quarter of 2020, we recognized an additional loss of $138,000 related to the final liquidation of this unconsolidated joint venture.
In the fourth quarter of 2019, we recognized a $2.1 million gain from insurance proceeds related to a close skilled nursing center in Texas.
This property sustained hurricane damage and rather than rebuild it, we sold it and two other properties in the fourth quarter of 2019, resulting in a cumulative loss of $4.6 million.
We provided Senior Lifestyle deferred rent in the amount of $394,000 in April of last year.
While this amount has since been fully repaid, they failed to pay full rent during the second quarter of 2020.
As a result, we wrote off a total of $17.7 million of straight-line rent receivable and lease incentives related to this master lease and transitioned rental revenue recognition to a cash basis effective July 2020.
During the fourth quarter of 2020, we applied their letter of credit and deposits totaling $3.7 million to accrued second quarter 2020 rent receivable of $2.5 million and notes receivable of $125,000 with the remaining $1.1 million to third and fourth quarter 2020 rent.
At December 31, 2020, Senior Lifestyle's unaccrued delinquent rent balance was $1 million.
Net income available to common shareholders for the fourth quarter of 2020 increased by $5 million, primarily resulting from acquisitions and completed development projects, rent increases, lower interest expense, the prior year's loss on sale, and the fourth quarter of 2019's $5.5 million impairment charge.
Offsets included the $3 million impairment charge, decreased rent related to the Preferred Care property sales, abated and deferred rent net of repayment, a decrease in property tax revenue, the 2019 receipt of 2018 past due rent from Senior Care, and the fourth quarter 2019 gain from insurance proceeds.
NAREIT FFO per fully diluted share is $0.78 in the fourth quarter of 2020 and $0.81 in the prior-year fourth quarter.
Excluding the gain from insurance proceeds in the fourth quarter of 2019, FFO per fully diluted share was $0.76.
The $0.02 increase in FFO excluding the gain was due to lower weighted average shares outstanding in 2020, resulting from the purchase of shares in the first quarter of 2020 under our share buyback program.
Moving now to our investment activity, during the fourth quarter of 2020, we invested $5 million under our previously announced $13 million preferred equity commitment related to the development of a 267 unit independent and assisted living community in Vancouver, Washington.
Our investment earns an initial cash rate of 8% and a 12% IRR.
We expect to fund our remaining $8 million investment before the end of the first quarter of 2021.
The preferred equity investment is accounted for as an unconsolidated joint venture.
We also funded $6.3 million in development in capital improvement projects at a weighted average rate of 8% on properties we own and paid $22.4 million in common dividends.
Our 2020 FAD payout ratio was 77%.
We currently have remaining commitments under mortgage loans of $1.7 million related to expansions and renovations on three properties in Michigan.
We also paid $7 million in regular scheduled principal payments under our senior unsecured notes.
Subsequent to the end of the quarter, we borrowed at $9 million under our unsecured line of credit.
Including this borrowing, we have $7.8 million in cash, $501.1 million available on our line of credit, under which $98.9 million is outstanding, and $200 million under our ATM program, providing LTC with liquidity of approximately $709 million.
As a reminder, we have no significant long-term debt maturities over the next five years.
At the end of the 2020 fourth quarter, our credit metrics remained favorably compared with the healthcare REIT industry average, with net debt to annualized adjusted EBITDA for real estate of 4.3 times and annualized adjusted fixed-charge coverage ratio of 5.3 times and a debt to enterprise value of approximately 30%.
I'll conclude my remarks with a discussion of rent deferrals and abatement.
We collected 98% of fourth-quarter rent and mortgage interest income including the application of Senior Lifestyle's letter of credit and deposit.
Of the rent not collected, $360,000 related to rent abatements and $369,000 related to rent deferral, net of repayment, which were provided to three private pay operators Clint mentioned on our previous earnings call.
As I mentioned earlier, Senior Lifestyle remains delinquent in their 2020 contractual rent by $1 million, and they have paid no rent so far in 2021.
For all of 2020, we collected 98% of contractual rent including the application of Senior Lifestyle's letter of credit and deposits.
Of the 2% we did not collect, 0.7% was abated, 0.7% was net deferred, and the remaining 0.6% was delinquent.
To date so far in 2021, rent deferrals totaled $689,000, net of $14,000 of deferred rent repayments.
These deferrals relate to the same three private pay operators previously mentioned.
Excluding the rent credit related to the rent escalation reduction already discussed, abated rent to date in 2021 is $360,000.
We did receive rent from the operators who transitioned former SLC operator communities to date.
Clint will provide more detail.
Now, I'll turn things over to Clint.
I'll start my discussion with Senior Lifestyle.
As Wendy said earlier, thus far in the first quarter of 2021, we have transitioned 11 of the 23 assisted living communities under their master lease.
Six of these communities were transferred to Randall Residence, a current LTC operator; and five were transitioned to Encore Senior Living, an operator new to us.
The Randall communities, five of which are located in Ohio and one in Illinois, were transferred on January 1.
Combined, these communities contain 344 units.
We first began working with Randall in 2019 when we acquired two properties in Michigan, and they are now the operator of eight LTC Properties.
Randall already operates properties in Ohio and Illinois and has a strong regional presence in the Upper Midwest.
The six properties were added to an existing master lease with Randall.
Terms of the amended master lease were extended by one year with nine years remaining.
Incremental cash rent under the amended lease is $2.7 million for the first year, $3.7 million for the second year, and $3.9 million for the third year, escalating by 2% annually thereafter.
On February 15, we transferred five communities, all in Wisconsin with a total of 374 units to Encore Senior Living.
Encore, founded in 2011, is a major player in the Wisconsin market, operating 34 locations [Indecipherable] these communities.
The new master lease covers a 10-year period with three five-year renewal options.
Cash rent under the lease is $2.6 million for the first year, $3.3 million for the second year, and $3.4 million for the third year, escalating by 2% annually thereafter.
Partnering with regional operators is an important part of LTC's long-term strategy and expanding our relationship with Randall while building a new one with Encore are great examples of our ability to partner with operators with a solid presence in their local markets and regions.
There are now 12 buildings remaining in the Senior Lifestyle portfolio.
Of those, we will be transferring five and selling three and continue to evaluate options for the remaining four properties.
Of the five that will be transferred, four are expected to be transferred by the end of Q1 and the fifth by the end of Q2.
The three properties we intend to sell are under contract with an expected closing at the end of the second quarter subject to timely completion of due diligence.
The four remaining properties have a net book value of approximately $4.5 million.
One of those properties is being closed and would be sold for an alternative use and we are evaluating our options for the remaining three.
Now I'd like to quickly update you on our most recent development projects to come online.
Weatherly Court, which is located in Medford, Oregon, and operated by Fields Senior Living, began accepting residents last September.
As of February 15, occupancy was 23%, up from 10% on October 23.
The opening of this community was delayed due to the pandemic.
As a result of the delay and because as a newly opened property, Fields was not eligible for government stimulus money.
We have agreed to provide them $1.3 million of additional free rent.
Ignite Medical Resort in Blue Springs, which is located in Independence, Missouri, began welcoming patients last October.
At February 15, occupancy was 64%, up from 23% on October 20.
Last quarter, we discussed Genesis and its disclosed doubt regarding its ability to continue as a going concern.
Genesis remains current on all of its lease obligations to LTC.
They operate six properties for us; five in New Mexico, and one in Alabama.
Brookdale master lease matures on December 31, 2021.
The first renewal option is for a four-year period.
The notice period for the renewal option began on January 1, 2021, and ends on April 30, 2021.
In 2020, we extended a $4 million capital commitment to Brookdale, which is available through December 31, 2021, at a 7% yield.
To date, we have funded $2 million of this commitment.
Of note, aside from the Brookdale lease renewal, we have only one other lease that expires in 2021.
The SNF [Phonetic] operated under this lease is under contract for sale with closing expected in the second quarter.
Next, I'll discuss our portfolio numbers.
As a reminder, given the pandemic and the challenging environment it has created, we don't believe coverage is a good indicator of future performance at this time and are focused mainly on occupancy trends, which I'll discuss shortly.
Q3 trailing 12-month EBITDARM and EBITDAR coverage using a 5% management fee was 1.14 times and 0.94 times respectively for our assisted living portfolio.
These metrics are the same with and without stimulus funds as no operators allocated these funds to their P&L statements.
Excluding Senior Lifestyle from our assisted living portfolio, EBITDARM and EBITDAR coverages would increase to 1.25 times and 1.04 times, respectively.
For our skilled nursing portfolio, EBITDARM and EBITDAR coverage was 1.85 times and 1.39 times, respectively.
Excluding stimulus funds, EBITDARM coverage was 1.58 times and EBITDAR coverage is 1.23 times.
Now for some occupancy trends in our portfolio, which is as of January 31.
As a reminder, for our private pay portfolio, occupancy is of that date specifically and for our skilled portfolio, occupancy is the average for the month.
Because our partners have provided January data to us on a voluntary and expedited basis, the information we are providing includes approximately 71% of our total private pay units and approximately 93% of our skilled nursing beds.
Private pay occupancy was 79% at September 30%, 72% at December 31, and 71% at January 31.
For skilled nursing, average monthly occupancy for the same time periods respectively was 70%, 66%, and 66%.
We cannot predict when occupancy might begin trending upward.
Regarding 2021 growth, when we are confident that we can complete deals at the right price for the right return, we will use our liquidity to provide strong regional operators with the growth capital they need.
Until that time, we will focus on smaller investments with what we believe to be a better risk-reward profile using vehicles such as mezzanine and preferred equity financing while building new and existing relationships that will serve us far into the future.
Preferred equity transactions we announced last quarter validate our ability to successfully transact in this market.
The pandemic has caused considerable disruption within our industry and we can't determine exactly when things will begin to return to pre-pandemic levels.
The rollout of the COVID vaccines, a new administration that is focused on getting the country through the pandemic, and an industry that is working hard to stabilized occupancy and restore consumer confidence give us hope that things are starting to turn and will continue to get better.
As a company that has always viewed its operators as partners and a company that has worked hard to build a balance sheet capable of withstanding the very type of crisis through which we have been managing, LTC is ready and able to continue enhancing its portfolio, diversifying its investments and generating new opportunities to allow us to continue to serve as a growth partner of choice as a REIT done differently.
| compname reports q4 ffo per share $0.78.
q4 ffo per share $0.78.
|
Today, I'm joined by; Brian Tyler, our Chief Executive Officer; and Britt Vitalone, our Chief Financial Officer.
Brian will lead off, followed by Britt, and then we will move to a question-and-answer session.
We are pleased to be reporting a strong start to our fiscal 2022, which reflects continued operating momentum across our businesses despite the fact that our markets are still recovering from the impacts of COVID-19.
We're also making significant progress against our strategic priorities and our commitment to do what's in the best interest of you, our shareholders.
Before we get to our first quarter results, I want to provide an update on the progress made toward a broad resolution of governmental opioid-related claims.
On July 21, we announced that McKesson, along with two other distributors, negotiated a comprehensive proposed settlement agreement, which, if all conditions are satisfied, would result in a settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities.
This broad resolution if this broad agreement becomes effective, the agreement reached between the distributors and the state of New York and its participating subdivisions to settle opioid-related claims will become part of this broader settlement agreement.
Under the negotiated proposed settlement agreement and subject to final state territorial and political subdivision participation, McKesson will pay up to $7.9 billion over a period of 18 years.
Over the next several months, we will monitor participation of the eligible governmental entities to determine, if participation levels are sufficient to proceed.
This is an important development, and I am pleased with the progress, we've made after years of negotiations.
If we're able to reach a final settlement, it would provide immediate relief to thousands of communities across the United States that have been impacted by this public health crisis.
While we strongly dispute the allegations made in these lawsuits, we believe that bringing resolution to these outstanding claims is in the best interest of those impacted by this crisis.
We also believe resolution is in the best interest of our shareholders, and will allow us to further focus on the business and our role in protecting the safety and the integrity of the pharmaceutical supply chain.
We remain committed to doing our part to fight against the opioid epidemic, through efforts to continuously enhance our anti-diversion programs and to advocate for reform at the state and national level.
If the settlement cannot be finalized or plaintiffs instead choose to pursue their claims in court, we are prepared to litigate against those claims, and we remain confident in our defenses.
We also recently announced that we entered into an agreement to sell several of our McKesson Europe businesses to the PHOENIX Group, who we believe is the right and natural successor to McKesson and the ideal leader of these European businesses going forward.
The agreement includes our McKesson Europe businesses in France, Italy, Ireland, Portugal, Belgium and Slovenia, as well as our German AG headquarters in Stuttgart, our shared service center in Lithuania, our German wound care business and our equity stake in our joint venture in the Netherlands.
This transaction is expected to close in fiscal 2023, subject to customary closing conditions, including the receipt of required regulatory approvals.
Our remaining European businesses in the UK, Norway, Austria and Denmark were not included in this transaction and will continue to be operated by McKesson.
However, we are exploring strategic alternatives for these remaining businesses as we align future investments to our growth strategies outside of Europe.
We believe fully exiting Europe is another step toward becoming a more streamlined and efficient organization.
Let me turn now to our performance in the quarter.
We are continuing to see the operating momentum we discussed on our fourth quarter fiscal 2021 earnings call.
Today, we're reporting adjusted earnings per diluted share of $5.56 ahead of our original expectations, resulting from the strength across our businesses and our roles in the COVID-19 response efforts across the geographies in which we operate.
Our US and international distribution businesses are playing an integral role in the pandemic response and our operational excellence and capabilities continue to be highlighted through our evolving partnership with the US government's COVID-19 vaccine distribution efforts.
Through July, our US Pharmaceutical business has successfully distributed over 185 million Moderna and J&J COVID-19 vaccines to administration sites across the United States, and our medical business has now assembled enough kits to support the administration of more than 785 million doses for all vaccine types.
Also in the quarter, the US government asked McKesson to support their mission of sending millions of COVID-19 vaccines to countries in need all around the globe.
We are picking and packing Moderna and Johnson & Johnson COVID-19 vaccines into temperature-controlled coolers and preparing these vaccines for pickup by international partners, all with the direction of the US government.
McKesson is not managing the actual shipments of vaccines to other countries.
Through July, we successfully prepared over 65 million COVID-19 vaccines for shipment abroad.
We are humbled and honored to serve the US government in this expanded role.
Our roles in Europe and Canada are also continuing to evolve, and we're partnering with local governments to distribute and administer COVID-19 vaccines there as well.
Through July, we've distributed over 45 million vaccines to administration sites in select markets across these geographies.
Based on our first quarter results, our evolving roles in the COVID-19 response efforts and our confidence in our outlook for the remainder of our fiscal 2022, we are raising our adjusted earnings per diluted share guidance to $19.80 to $20.40 from a previous range of $18.85 to $19.45.
We're simplifying the portfolio and increasing our focus on areas where we have deep expertise and that are central to our long-term growth strategy.
Our progress to date is underpinned by execution against our top company priorities.
The first is a focus on the people and the culture.
The second is our commitment to strengthen the core pharmaceutical and medical supply chain businesses.
The third, our intentional efforts to simplify and streamline the business, and finally, we continue to invest to advanced our differentiated oncology and biopharma services ecosystems.
Let me now touch briefly on the progress we're making across each of these priorities.
First and foremost, we're prioritizing our people and advancing our company's culture as we strive to be recognized as an impact-driven organization and the best place to work in healthcare.
We've been hard at work to transform and energize our company's culture.
Our ICARE and ILEAD values serve as the foundation as we work toward our common goal, advancing health outcomes for all.
As an organization, we're committed to advancing diversity, equity and inclusion.
For the sixth consecutive year, McKesson was named a Best Place to Work for Disability Inclusion.
McKesson earned a top ranking score of 100 on the 2021 Disability Equality Index.
Our second company priority is to strengthen our core distribution businesses where we have market-leading scale and capabilities across North America.
Success in the core enables strong cash flow generation, which we in turn use to reinvest in the business and to return capital to our shareholders.
In addition to our work to help our customers and government partners and their pandemic response efforts, our pharmaceutical and medical surgical distribution businesses are continuing to improve, and the recovery from the effects of the COVID-19 pandemic has been in line with our expectations.
Elective procedures and primary care visits have improved throughout our first quarter and prescription volume trends are showing signs of improvement as well.
Also, positive are the trends we've seen across specialty and oncology patient visits, which were at or above pre-COVID baselines in the first quarter.
And distribution volumes to our specialty provider customers continue to drive and support our growth.
In our Canadian distribution business, our operational excellence and scale was recently recognized through a new partnership with one of Canada's largest retailers as a primary distribution customer.
This is a testament to the strength of our supply chain in Canada.
Over the past several years, we've committed to transforming our operating model.
We've centralized back-office functions across North America and Europe to further rationalize costs through a reduction of our owned retail pharmacy footprint and a commitment to lower spend across the organization.
Throughout our enterprise, there's an initiative we called Spend Smart, which helped us achieve our three-year cost reduction target of $400 million to $500 million of annual cost savings by the end of our fiscal 2021.
Over time, we've identified businesses that are not central to McKesson's current strategic priorities or direction, as was the case in our exit of our position in Change Healthcare and the creation of a German wholesale joint venture with Walgreens Boots Alliance.
We will continually review our portfolio to ensure tight and focused alignment to our strategy.
All of this work has enabled us to focus our time and investments on our strategic growth pillars, where we're working to build connected ecosystems in the growth areas of oncology and biopharma services, which serve to advance our already differentiated positions.
We continue to be confident in the long-term outlook of businesses that operate in these high-growth markets.
Starting with oncology, an ecosystem that McKesson has strategically built over a period of nearly 15 years, beginning with our acquisition of oncology therapeutics network all the way back in 2007, which added at that time, core specialty distribution capabilities.
10 years ago, we deepened the breadth and the depth of our offering with the acquisition of US Oncology Network, which gave us practice management, site management for research and the iKnowMed EHR, which is one of the foundational pieces of Ontada.
Fast-forward to today, and we're now supporting over 14,000 specialty physicians through distribution and GPO services.
We're also the leading distributor in community oncology space and have over 1,400 physicians in the US oncology network spread over approximately 600 sites of care in the US.
As innovative specialty therapies come to market, our leading position in oncology distribution enables us to grow our connected oncology ecosystem in parallel.
As we grow our non-affiliated and our US oncology provider basis, we accelerate the growth of our oncology assets, such as GPO services, practice management, site management for clinical research, specialty pharmacy and our value proposition for Ontada, where we're providing real-world insight to both manufacturers and providers.
Although in its infancy, Ontada's value is being recognized through expanded partnerships with manufacturers such as Amgen, and its leading role in a large-scale real-world research study known as Mylan, which aims to improve treatments and outcomes for non-small cell lung cancer.
New therapies coming to market can also provide additional challenges for patients, providers and our biopharma partners.
Our Prescription Technology Solutions business invests in innovation and aims to provide access, adherence and affordability solutions for over 500 brands across nearly every therapeutic area.
Our connectivity to over 50,000 pharmacies, 750,000 providers and 75% of EHRs in the US helps enable over five billion prescription -- $5 billion of prescription savings for patients each year.
Prescription Technology Solutions ended fiscal 2021 with solid momentum.
In the first quarter of fiscal 2022, we saw organic growth in the business and encouraging signs that patient engagement levels and prescription volume trends are continuing to improve.
Our market-leading technology offerings are helping patients get access to therapies they need more quickly and efficiently and stay on those therapies longer to get better health outcomes.
In closing, we believe that we've made significant strides against our strategic priorities of strengthening the core, simplifying the business and investing in our growth areas of oncology and biopharma services.
Announcing the proposed opioid settlement agreement is an important development.
In addition, our strategic intent to exit the European region positions us to become a more focused and agile company.
We believe both are in the best interest of our employees, in the best interest of our customers and in the best interest of our shareholders.
While it's early in the fiscal year and the pandemic continues to present unknowns, I'm confident in the fundamentals of the business and believe we are positioned well for long-term growth, and we'll look to build upon this momentum over the remainder of our fiscal 2022.
I'm pleased to speak with you today about our strong first quarter results, which reflect the importance of the products and services McKesson delivers, the execution and momentum across our business, which includes supporting the US government's COVID-19 domestic and international vaccine and kitting efforts, and the recovery of prescription volumes and patient visits impacted by the COVID pandemic in the prior year.
I'll begin my remarks today by sharing an update on our European businesses, followed by our first quarter results, and I'll close with an update to our fiscal 2022 outlook.
In early July, we announced an agreement to sell our European businesses in France, Italy, Ireland, Portugal, Belgium and Slovenia to the PHOENIX Group.
This transaction includes our German AG headquarters in Stuttgart and our European shared service center in Lithuania.
The purchase price for the transaction was approximately US$1.5 billion.
The ultimate proceeds for this transaction are subject to certain adjustments under the agreement.
Therefore, the proceeds may differ from the purchase price.
The assets involved in this transaction contributed approximately $12 billion in revenue and $75 million in adjusted operating profit in fiscal 2021.
We've determined that this transaction shall not qualify for discontinued operations.
The net assets included in the transaction we've classified as held for sale.
The held-for-sale accounting was effective at the start of our second quarter of this fiscal year.
We will remeasure the net assets to the lower carrying amount or fair value, less cost to sell, and we estimate that this will result in a GAAP-only charge of between $500 million to $700 million in our second quarter of fiscal 2022.
Due to held-for-sale accounting treatment, we'll discontinue recording depreciation and amortization on the assets involved in the transaction.
As a result of the held-for-sale accounting, we would guide to approximately $0.26 adjusted earnings accretion in fiscal 2022.
This will be included in our updated outlook, and I'll outline those later in my remarks.
McKesson will operate these businesses and record revenue and income until the transaction is closed, which is expected to occur in fiscal 2023.
We're committed to exploring strategic alternatives for our remaining European businesses, and we'll provide details on the plans for the remaining businesses as they become available.
Exiting Europe at this time is the right course of action for McKesson and our shareholders, and it will sharpen the focus on our growth strategies of oncology and biopharma services as we develop and grow our connected ecosystem.
Let me now turn to our first quarter results.
Before I provide more details on our first quarter adjusted results, I want to point out two items that impacted our GAAP-only results in the quarter.
First, during the June quarter, we committed to donate certain personal protective equipment and related products to charitable organizations to assist in COVID-19 recovery efforts.
In the quarter, we recorded $155 million of pre-tax inventory charges within our Medical Surgical Solutions segment for inventory which we no longer intend to sell and will instead direct the previously mentioned charitable organizations.
And secondly, on our May six earnings call, we outlined an initiative to rationalize office space in North America to increase efficiencies and support increased employee flexibility.
These actions will result in the realization of annual operating expense savings of approximately $60 million to $80 million when fully implemented.
Our guidance does not assume a material benefit in fiscal 2022.
In the June quarter, we reported approximately $95 million of charges associated with this initiative.
Moving now to our adjusted results for the first quarter, beginning with our consolidated results, which can be found on slide seven.
First quarter adjusted earnings per diluted share was $5.56, an increase of 101% compared to the prior year.
This result was driven by the recovery in prescription volumes in primary care patient visits from the COVID-19 pandemic, as we lap the most significant pandemic impacts and lockdowns in Q1 of fiscal 2021.
It also included a lower tax rate and the contribution from COVID-19 vaccine distribution and kitting programs with the US government.
Consolidated revenues of $62.7 billion increased 13% to the prior year, driven by growth in the US Pharmaceutical segment, largely due to higher volumes from retail national account customers and price increases on branded and specialty pharmaceuticals, which is partially offset by branded to generic conversions.
Adjusted gross profit was $3.1 billion for the quarter, up 19% compared to the prior year.
Adjusted operating expenses in the quarter increased 6% year-over-year, led by higher operating expenses to support growth in our core businesses and strategic investments, partially offset by the contribution of our German wholesale business to the joint venture with Walgreens Boots Alliance.
Adjusted operating profit was $1.1 billion for the quarter, an increase of 55% compared to the prior year, which reflects double-digit growth in each segment.
Interest expense was $49 million in the quarter, a decline of 18% compared to the prior year, driven by the retirement of approximately $1 billion of long-term debt in fiscal 2021.
Our adjusted tax rate was 11.3% for the quarter due to discrete tax items that were recorded during the quarter.
Our full year adjusted effective tax rate guidance of 18% to 19% remains unchanged.
And our first quarter diluted weighted average shares were 158 million, a decrease of 3% year-over-year driven by $1 billion of shares repurchased in the first quarter.
Moving now to our first quarter segment results, which can be found on slides eight through 12, and I'll start with US Pharmaceutical.
Revenues were $50 billion, an increase of 12% and driven by higher volumes from retail national account customers and price increases on branded and specialty pharmaceuticals, partially offset by branded to generic conversions.
Adjusted operating profit in the quarter increased 16% to $682 million, driven by the contribution from COVID-19 vaccine distribution and growth in specialty products distribution, to our providers and healthcare systems, which was partially offset by higher operating costs in support of the company's oncology growth initiative.
Turning to Prescription Technology Solutions.
We're very pleased with the strong growth and scale that we're building in this higher-margin segment.
The drivers for our Prescription Technology Solutions businesses continue to move in the right direction.
First, we're seeing expansion in many of our services businesses as we continue to add more manufacturing partners and programs for our existing solutions such as electronic prior authorization, our access and adherence services and 3PL.
Second, our technology-based platforms, like Relay Health support, 19 billion clinical and financial transactions annually, from claims routing in the growing discount card market to alerts and edits to make the practice of pharmacy clinically safer and administratively more efficient.
And we continue to invest and innovate to build a connected ecosystem of biopharma services, our next-generation access and adherence solution, AMP, is showing accelerated adoption and growth with new brands.
This year, AMP is bringing its network-enabled approach to hub services to support our oncology and specialty drugs covered under the medical benefit.
We also continue to expand our clinical decision support capabilities in provider office workflow across every major EHR.
Our technology network spans every touch point in the patient journey, from doctor's office to benefit verification to dispensing pharmacy, which allows us to address barriers in the patient journey by adding unique automation that accelerates time to therapy and lowers patients out-of-pocket costs.
In the June quarter, revenues were $881 million, an increase of 34%.
And adjusted operating profit increased 62% to $139 million, driven by higher volumes of technology and service offerings to support biopharma customers, organic growth from access and adherence solutions and recovery of prescription volumes on the COVID-19 pandemic.
Moving now to Medical-Surgical Solutions.
Revenues were $2.5 billion in the quarter, up 40%, driven by improvements in primary care patient visits and increased sales of COVID-19 tests.
The contribution for our contract with US government to prepare and distribute ancillary supplies, related to the COVID-19 vaccine provided a benefit of approximately $0.25 in the quarter and were above our original expectations.
For the quarter, adjusted operating profit increased 107% to $257 million, driven by improvements in primary care patient visits and the contribution from kitting and distribution of ancillary supplies for the US government's COVID-19 vaccine program.
Next, let me speak about International.
Revenues in the quarter were $9.2 billion, an increase of 8% year-over-year.
Excluding the impact from the divestiture of our German wholesale business, Segment revenue increased 28% year-over-year and was up 14% on an FX-adjusted basis.
Revenue was primarily driven by the contribution of our German wholesale business to the joint venture with Walgreens Boots Alliance, which was completed during the third quarter of fiscal 2021, and the recovery of pharmaceutical distribution and retail pharmacy volumes from the COVID-19 pandemic.
First quarter adjusted operating profit increased 133% year-over-year to $170 million.
On an FX-adjusted basis, adjusted operating profit increased 107% to $151 million, led by the recovery of pharmaceutical distribution and retail pharmacy volumes from the COVID-19 pandemic, and distribution of COVID-19 vaccines and test kits in Europe and Canada.
Moving on to Corporate.
For the quarter, adjusted corporate expenses were $154 million, a decrease of 7% year-over-year, driven by decreased opioid litigation expenses.
We reported opioid-related litigation expenses of $35 million for the first quarter.
We continue to estimate fiscal 2022 opioid-related litigation expenses to approximate $155 million.
I would remind you that, while we've negotiated a comprehensive proposed settlement agreement, until we know the scope of participation in proposed settlement, we are not in a position to revise our opioid litigation expenses outlook.
Let me now turn to our cash position, which can be found on slide 14.
We ended the quarter with a cash balance of $2.4 billion.
During the quarter, we had negative free cash flow of $1.8 billion.
As a reminder, our working capital metrics and resulting free cash flow vary from quarter-to-quarter and are impacted by timing, including the day and the week that marks the close of a given quarter.
We made $159 million of capital expenditures in the quarter, which includes investments in technology, data and analytics to support our strategic initiatives on the -- of oncology and biopharma services.
As our business performed at a very high level, we were also able to return $1.1 billion of cash to our shareholders in the June quarter.
This included $1 billion of share repurchases, pursuant to an accelerated share repurchase program, which resulted in an initial delivery of 4.3 million shares in the quarter.
Additionally, we paid $69 million in dividends.
We have $1.8 billion remaining on our share repurchase authorization, and we're updating our guidance for diluted weighted shares outstanding to range from $154 million to $156 million for fiscal 2022, which incorporates plans to repurchase an additional $1 billion of stock over the remainder of the fiscal year.
Let me transition and speak to our outlook for the balance of fiscal 2022.
I'll begin by reiterating a couple of key macro level assumptions that underpin our fiscal 2022 outlook.
We expect prescription and patient engagement volumes will demonstrate steady improvement from the levels at the end of our fiscal 2021 through the first half of our fiscal 2022 and returned to pre-COVID levels in the second half of our fiscal 2022.
For fiscal 2022, our updated guidance for adjusted earnings per diluted share is a range of $19.80 to $20.40, up from our previous range of $18.85 to $19.45, approximately equally split between our first and second half of the fiscal year.
Our updated outlook for adjusted earnings per diluted share reflects 15% to 18.5% growth from the prior year, and our guidance assumes core growth across all of our segments.
In the US Pharmaceutical segment, we now expect revenue to increase 5% to 8% and adjusted operating profit to deliver 4.5% to 7.5% growth over the prior year.
Our US Pharmaceutical segment continues to exhibit stable fundamentals.
Our outlook for branded pharmaceutical pricing remains consistent with the prior year from mid single-digit increases in fiscal 2022.
And the generics market remains competitive yet stable as volumes have shown signs of recovery.
COVID-19 vaccine contribution contributed approximately $0.30 in the first quarter of fiscal 2022.
We are updating our full year outlook to approximately $0.45 to $0.55.
The $0.45 to $0.55 range reflects anticipated contribution of earnings for the fair value of services performed as the US government's centralized distributor of COVID-19 vaccines, including work preparing vaccines for international missions.
Our current outlook remains aligned to the volume distribution schedule provided by the CDC and the US government, which excludes booster shots and vaccines for pediatrics, which have not been approved by the FDA.
We will continue to invest in our leading and differentiated position in oncology.
These investments will represent an approximate $0.20 headwind in fiscal 2022.
Normalizing for the COVID-19 vaccine distribution and our ongoing growth investments, we continue to expect approximately 5% to 8% core adjusted operating profit growth.
In our Prescription Technology Solutions segment, we see revenue growth of 20% to 25% and adjusted operating profit growth of 17% to 22%.
This growth reflects the opportunities we see to accelerate service and transaction contributions benefiting from our technology platforms.
Now transitioning to Medical Surgical.
We continue to partner with the US government under our contract for the kitting and distribution of ancillary supplies, and are updating our outlook to $0.35 to $0.45 of contribution in the segment related to kitting and distribution.
This program's scope and duration is evolving, and our updated assumptions reflects the current outlook provided by the US government.
Our revenue outlook assumes a 3% decline to 3% growth, and adjusted operating profit to deliver 6% to 12% growth over the prior year.
We continue to expect year-over-year core adjusted operating profit growth of approximately 10% to 16%.
Finally, in the International segment, our revenue guidance was a 1% decline to 4% growth as compared to the prior year.
And as a reminder, this reflects the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance.
For adjusted operating profit, our guidance has growth in the segment of 26% to 30% due to the previously mentioned benefit from the discontinuation of depreciation and amortization, which followed the announcement of our agreement to sell certain European assets.
Our strong performance in the first quarter and the contribution from COVID-19 vaccine distribution in the segment.
Turning now to the consolidated view.
Our guidance assumes 4% to 7% revenue growth and 7% to 10% adjusted operating profit growth compared to fiscal 2021.
And we continue to expect corporate expenses in the range of $670 million to $720 million.
Let me now turn to cash flow and capital deployment.
We were pleased to recently announce the completion of a cash-funded upsized tender offer.
This successful tender offer resulted in the early retirement of $922 million of our outstanding debt.
Additionally, we announced the early retirement of a 600 million note for a total reduction in debt of approximately $1.6 billion.
These actions occurred during the beginning of our second quarter.
It further strengthened our balance sheet and financial position and they are in line with our previously stated intent to modestly delever.
And as a result of these actions, we're updating our interest expense guidance for fiscal 2022 to $180 million to $200 million.
We're also reiterating our free cash flow guidance of approximately $3.5 billion to $3.9 billion, which is net of property acquisitions and capitalized software expenses.
Last quarter, I mentioned that we anticipated a use of cash to purchase shares in McKesson, Europe through exercises of a put rate option available to non-controlling shareholders that expired in June of fiscal 2022.
The remaining put rate options resulted in payments of approximately $1 billion in the quarter, which was generally in line with our expectations.
As a reminder, this is reflected in the financing activity section of our cash flow statement.
As a result of this activity, McKesson holds approximately 95% of McKesson Europe's outstanding common shares, and we anticipate income attributable to non-controlling interest in the range of $175 million to $195 million in fiscal 2022.
Our commitment to return cash to shareholders through dividends and share repurchases was recently highlighted by our Board's approval of a 12% increase to our quarterly dividend to $0.47 per share.
And our fiscal 2022 guidance continues to include share repurchases of approximately $2 billion for the full year.
In closing, we're pleased with the strong results of our first quarter.
We remain focused on driving growth as we invest against the strategic high-growth opportunities in oncology and biopharma services.
This focus, combined with our commitment to further evolve the portfolio, will drive significant value to our customers, shareholders and patients.
Our outlook for fiscal 2022 reflects this focus and execution with healthy adjusted operating profit and adjusted earnings-per-share growth and return of capital to our shareholders.
In the interest of time, I ask that you limit yourself to just one question to allow others an opportunity to participate.
| qtrly total revenues of $62.7 billion increased 13%.
qtrly adjusted earnings per diluted share of $5.56 increased 101%.
board of directors increased the quarterly dividend by 12% to $0.47 per share.
|
I'm Patrick Burke, the company's head of investor relations.
We are pleased to be with you today to discuss our Q3 results, results that have exceeded our expectations, and strengthened our confidence in the future.
With recently announced plans to merge with Topgolf, we are naturally anticipating further questions on that subject as well.
Having said this, and turning to Page 6, let's now jump into our results.
We were pleased with our results in virtually all markets and business segments.
Our golf equipment segment has been experiencing unprecedented demand globally as interest in the sport and participation has surged.
We saw strong market conditions in all markets globally.
According to Golf Datatech, U.S. retail sales of golf equipment were up 42% during Q3, the highest Q3 on record.
U.S. rounds were up 25% in September, and are now showing full-year growth despite the shutdowns earlier this year.
We also believe there will be a long-term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport.
Golf retail, outside of resort locations, remains very strong at present and barring a shutdown situation has not been sensitive to the upticks in COVID cases.
Inventory at golf retail is at all-time lows and is likely these low inventory levels will continue into next year.
Callaway's global hard goods market shares remained strong during the quarter.
We estimate our U.S. market share is roughly flat year over year.
Our share in Japan is up slightly, and our share in Europe is down slightly.
On a global basis, I believe we remain the leading golf company in terms of market share and total revenues, and the No.
In the U.S., third-party research showed our brand to once again be the #1 club brand in overall brand rating as well as the leader in innovation and technology.
Over the last several years, we have shown resilience with these important brand positions.
We have also started to show our 2021 product range to key customers and are receiving strong feedback.
Turning to our soft goods and apparel segment, with total revenue only down 3.4% year over year, the segment also experienced a rapid recovery in demand during the quarter.
The speed and magnitude of the recovery exceeded our expectations.
Like our golf equipment business, this segment appears to be well-positioned for both the months and years ahead, both during the pandemic and after.
Looking at individual businesses in this segment, both our TravisMathew and Callaway branded businesses experienced significant year-over-year growth during the quarter.
Jack Wolfskin was down year over year but only 16% on a revenue basis with improved trends continuing into October.
The hero of the soft goods and apparel segment is certainly e-com, a channel that was strengthened by investments we've made over the last several years.
As a result of these investments, we were able to deliver a 108% year-over-year growth in this channel during the quarter.
E-com is now a significant portion of the channel mix of this segment.
We believe our expanded capabilities and strength here will bolster this business growth prospects and profitability going forward.
Long term, we continue to expect our apparel and soft goods segment to grow faster than our overall business, and with that growth to deliver operating leverage and enhance profitability.
And although the pandemic delayed our efforts, we still believe we'll be able to deliver $15 million of synergies in this segment over the coming years.
During the quarter, we also made good progress on key initiatives, including the transition to our new 800,000 square-foot Superhub distribution center located just outside of Fort Worth, Texas.
We are now completely consolidated into this new facility.
We also made further progress in our Chicopee golf ball facility modernization with productivity rates in this plant ramping positively during the quarter.
The primary investment phase on both of these significant projects is behind us now.
Looking forward, we are in a strong financial position and are pleased with the pace of our recovery and the business trends we have seen.
With the resurgence in the virus, there clearly could be some volatility over the next few months.
Portions of Q4 are likely to be at least partially impacted by the increase in restrictions being put into place globally.
Fortunately, for us, either low impact months for our golf equipment business, and we currently expect to continue to benefit from increased year-over-year demand.
In our apparel and soft goods segment, the impact will be larger than our golf equipment business.
But these businesses, too, are fortunate to be well-positioned in this environment and also benefit from strong e-com capabilities, which should offset some portion of any potential negative impacts in markets where in-store shopping might be constrained.
We also benefit from global scale and diversity across all of our segments.
As demonstrated by our Q3 results, we are fortunate in that our principal business segments are well-positioned for consumer needs and trends, both during the pandemic and afterward.
In addition, we are confident that we have both brands, human capital, and financial strength necessary to not only weather this storm but to also perform well during it and to emerge stronger than when we entered the crisis.
In closing, while we are pleased with our recent results and outlook, the safety and health of the company's employees, customers, and partners continue to be paramount in our minds.
As we operate our businesses, we are careful to follow appropriate protocols for social distancing, in-office capacity management, personal protective equipment, and other safety precautions.
In addition, our thoughts and prayers continue to go out to those directly impacted by the virus and those diligently working on the front line to protect, serve, and care for the rest of us.
Brian, over to you.
We are happy to report record net sales and earnings for the third quarter of 2020.
We feel fortunate that both our golf equipment and soft goods businesses are recovering faster than expected as both businesses support healthy, active outdoor lifestyles and activities that are compatible with social distancing.
This faster-than-expected recovery has placed us in a position of strength.
Our available liquidity, which includes cash on hand plus availability under our credit facilities increased to $630 million on September 30, 2020, compared to $340 million on September 30, 2019.
We are also excited about our prospective merger with Topgolf, which also provides a healthy, active, outdoor activity that is compatible with social distancing.
And Callaway Topgolf merger is a natural fit.
With the significant overlap in golf consumers, there should be significant advantages to both businesses through increased consumer engagement, marketing, and sales opportunities and faster growth than could be achieved on a stand-alone basis.
And the best part is that these synergies provide upside to the financial model we provided.
The financial returns of this transaction are so compelling, we did not need the synergies to justify the transaction.
Growing the Topgolf Venue and Toptracer businesses alone will create significant shareholder value.
We look forward to discussing the Topgolf business further during the virtual investor conference on Thursday.
In evaluating our results for the third quarter, you should keep in mind some specific factors that affect year-over-year comparisons.
First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred nonrecurring transaction and transition-related expenses in 2019.
Second, as a result of the OGIO, TravisMathew, and Jack Wolfskin acquisition, we incurred non-cash amortization in 2020 and 2019, including amortization of the Jack Wolfskin inventory step-up in the first quarter of 2019.
Third, we also incurred other nonrecurring charges including costs related to the transition to our new North American distribution center in Texas.
Implementation costs related to the new Jack Wolfskin IT system and severance costs related to our cost reduction initiatives.
Fourth, the $174 million non-cash impairment charge in the second quarter of 2020 is nonrecurring and did not affect 2019 results.
Fifth, we incurred and will continue to incur non-cash amortization of the debt discount on the notes issued during the second quarter of 2020.
We have provided in the tables to this release as scheduled breaking out the impact of these items on the third quarter and the first nine months' results, and these items are excluded from our non-GAAP results.
With those factors in mind, I will now provide some specific financial results.
Turning now to Slide 10.
Today, we are reporting record consolidated third quarter 2020 net sales of $476 million, compared to $426 million in 2019, an increase of $50 million or 12%.
This increase was driven by a 27% increase in the golf equipment segment, resulting from a faster-than-expected recovery and the strength of the company's product offerings across all skill levels.
The company's soft goods segment is also recovering faster than expected, with third-quarter 2020 sales decreasing only 3.4% versus the same period in 2019.
Changes in foreign currency rates had an $8 million favorable impact on third-quarter 2020 net sales.
Gross margin was 42.2% in the third quarter of 2020, compared to 44.9% in the third quarter of 2019, a decrease of 270 basis points.
On a non-GAAP basis, gross margin was 42.7% in the third quarter, compared to 44.9% in the third quarter of 2019, a decrease of 220 basis points.
This decrease is primarily attributable to a decline in gross margin in the soft goods segment due to the impact of COVID-19 on that business, including our proactive inventory reduction initiatives, partially offset by favorable changes in foreign currency exchange rates, an increase in e-commerce sales, and a slight increase in overall golf equipment gross margins.
Operating expenses were $137 million in the third quarter of 2020, which is a $14 million decrease, compared to $151 million in the third quarter of 2019.
Non-GAAP operating expenses for the third quarter were $135 million, a $12 million decrease compared to the third quarter of 2019.
This decrease is due to decreased travel and entertainment expenses and the actions we undertook to reduce costs in response to the COVID pandemic.
Other expense was $6 million in the third quarter of 2020, compared to other expense of $7 million in the same period of the prior year.
On a non-GAAP basis, other expense was $3 million in the third quarter of 2020, compared to $7 million for the comparable period in 2019.
The $4 million improvements were primarily related to a net increase in foreign currency-related gains period over period, partially offset by a $1 million increase in interest expense related to our convertible notes.
Pretax earnings were $58 million in the third quarter of 2020, compared to pre-tax earnings of $33 million for the same period in 2019.
Non-GAAP pre-tax income was $65 million in the third quarter of 2020, compared to non-GAAP pre-tax income of $37 million in the same period of 2019.
Diluted earnings per share were $0.54 on 96.6 million shares in the third quarter of 2020, compared to earnings per share of $0.32 on 96.3 million shares in the third quarter of 2019.
Non-GAAP fully diluted earnings per share were $0.60 in the third quarter of 2020, compared to fully diluted earnings per share of $0.36 for the third quarter of 2019.
Adjusted EBITDA was $87 million in the third quarter of 2020, compared to $57 million in the third quarter of 2019, a record for Callaway Golf.
Turning now to Slide 11.
The first nine months of 2020 net sales are $1.2 million, compared to $1.4 million in 2019, a decrease of $174 million or 13%.
The decrease was primarily driven by the COVID-19 pandemic, partially offset by an increase in our e-commerce business.
The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 7%, and our soft goods segment, which decreased 21%.
This decrease also reflects a decrease in all major regions and product categories period-over-period due to COVID-19.
Change in the foreign currency rates positively impacted first nine months 2020 net sales by $2 million.
Gross margin was 42.7% in the first nine months of 2010 compared to 45.8% in the first nine months of 2019, a decrease of 310 basis points.
Gross margins in 2020 were negatively impacted by the North America warehouse consolidation and in 2019 were negatively impacted by the nonrecurring purchase price step-up associated with the Jack Wolfskin acquisition.
On a non-GAAP basis, which excludes these recurring items -- excuse me, nonrecurring items, gross margin was 43.3% in the first nine months of 2020 compared to 46.6% in the first nine months of 2019, a decrease of 330 basis points.
The decrease in non-GAAP gross margin is primarily attributable to the decrease in sales related to the COVID-19 pandemic, costs associated with idle facilities during the government-mandated shutdown, and the company's inventory reduction initiatives.
The decrease in gross margin during the first nine months was partially offset by an increase in the company's e-commerce business.
Operating expense was $592 million in the first nine months of 2020, which is a $111 million increase compared to $481 million in the first nine months of 2019.
This increase is due to the $174 million non-cash impairment charge related to the Jack Wolfskin goodwill and trade name.
Excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for the first nine months of 2020 were $410 million, a $58 million decrease, compared to $468 million in the first nine months of 2019.
This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses as well as a reduction in variable expenses due to lower sales.
Other expense was approximately $7 million in the first nine months of 2020, compared to other expense of $28 million in the same period in the prior year.
On a non-GAAP basis, other expense was $3 million for the first nine months of 2020, compared to $24 million for the same period of 2019.
The $21 million improvements is primarily related to a $22 million increase in foreign currency-related gains period over period, including the $11 million gain related to the settlement of the cross-currency swap arrangement.
Pretax loss was $80 million in the first nine months of 2020, compared to pre-tax income of $127 million for the same period in 2019.
Excluding the impairment charge and other items previously mentioned, non-GAAP pre-tax income was $113 million in the first nine months of 2020 compared to non-GAAP pre-tax income of $155 million in the same period of 2019.
Loss per share was $0.92 on $94.2 million in the first nine months of 2020, compared to earnings per share of $1.13 on 96.2 million shares in the first nine months of 2019.
Excluding the impairment charge and the items previously mentioned, non-GAAP fully diluted earnings per share was $0.98 in the first nine months of 2020, compared to fully diluted earnings per share of $1.35 for the first nine months of 2019.
Adjusted EBITDAS was $175 million in the first nine months of 2020, compared to $216 million in the first nine months of 2019.
Turning now to Slide 12.
I will now cover certain key balance sheet and cash flow items.
As of September 30, 2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand was $637 million compared to $340 million at the end of the third quarter of 2019.
This additional liquidity reflects improved liquidity from working capital management, our cost reductions, and proceeds from the convertible notes we issued during the second quarter.
We had a total net debt of $498 million, including $443 million of principal outstanding under our term loan B facility that was used to purchase Jack Wolfskin.
Our net accounts receivable was $240 million, an increase of 7%, compared to $223 million at the end of the third quarter of 2019, which is attributable to record sales in the quarter.
Day sales outstanding decreased slightly to 55 days as of September 30, 2020, compared to 56 days as of September 30, 2019.
We continue to remain very comfortable, if not pleasantly surprised with the overall quality of our accounts receivable at this time.
Also displayed on Slide 12, our inventory balance decreased by 5% to $325 million at the end of the third quarter of 2020.
This decrease was primarily due to the high demand we are experiencing in the golf equipment business, partially offset by higher soft goods inventory related to COVID-19.
Our teams have done an excellent job being proactive with regard to managing inventory as soon as COVID hit us.
They continue to be highly focused on inventory on hand as well as inventory in the field.
We are very pleased with our overall inventory position and the inventory at retail, particularly on the golf side of the business, which remains low at this time.
Capital expenditures for the first nine months of 2020 were $31 million, compared to $37 million for the first nine months of 2019.
We expect our capital expenditures in 2020 to be approximately $35 million to $40 million, up slightly from the estimate we provided in May but down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions.
Depreciation and amortization expense was $203 million for the first nine months of 2020.
On a non-GAAP basis, depreciation and amortization expense, excluding the $174 million impairment charge, was $29 million for the first nine months of 2020 and is estimated to be $35 million for the full year of 2020.
Depreciation and amortization expense was $25 million for the first nine months of 2019 and $35 million for full-year 2019.
I'm now on Slide 13.
As we previously reported, we are no longer providing other specific financial guidance at this time due to continued uncertainty surrounding the duration and impact of COVID-19.
Although we expect some level of continued volatility due to the ongoing pandemic, third-quarter trends have thus far continued into the fourth quarter.
Perhaps more importantly, all of our business segments as well as the Topgolf business support an outdoor, active, and healthy way of life that is compatible with the world of social distancing.
And we now appreciate even further that all of our businesses are likely to be favored in both the realities of the current environment as well as anticipated consumer trends post-pandemic.
These circumstances, along with our increased liquidity will allow us to weather the pandemic and emerge in a position of strength to the benefit of our businesses and the Topgolf business post-merger.
As Chip mentioned in his remarks, due to time constraints, the primary focus of the Q&A should be the Callaway business, and we have scheduled a virtual conference on Thursday to discuss the Topgolf business further.
Operator, over to you.
| compname posts q3 non-gaap earnings per share $0.60.
q3 non-gaap earnings per share $0.60.
q3 earnings per share $0.54.
q3 2020 net sales of $476 million, a 12% increase compared to q3 of 2019.
is not providing financial guidance for q4 of 2020.
callaway golf - golf business now experiencing unprecedented demand, soft goods business is recovering significantly more quickly than expected.
|
Our consolidated earnings for the second quarter of 2020 were $0.26 per diluted share, compared to $0.38 for the second quarter of 2019.
For year-to-date, consolidated earnings were $0.98 per diluted share for 2020, compared to $2.14 last year.
Now, I'll turn the discussion over to Dennis.
We hope everyone is staying safe and healthy during these uncertain times.
It's hard to believe that we've been managing through the COVID-19 pandemic for five months now.
And every day, I continue to be inspired by how our employees continue to rally on all fronts to respond to the crisis.
I couldn't be more proud of how we're staying vigilant and adapting across the organization to the new policies and procedures that can quickly change in the states where we serve.
I appreciate their patience, their persistence and professionalism, as we all navigate through these unchartered waters to seek out our new normal, all while still providing the energy that is so essential to our customers.
As always, our top priority is to preserve the health and safety of our customers, our employees, contractors and our communities.
As the regional economies across the areas we serve move forward with fits and start, we're doing our best to support those customers, who we know are struggling.
You may have seen recently the Avista Foundation provided more than $500,000 to support 37 different organizations throughout our service area.
And so far in 2020, our foundation has provided more than $1.5 million to help those in need.
Although the majority of our employees are still working from home, it hasn't impacted our ability to complete important work across our business.
Wildfires continue to be an important topic for our industry and our company, especially this time of year.
Before the wildfire season arrived, we enhanced our 10-year wildfire resiliency plan to expand our current safeguards for preventing, mitigating and reducing the impact of wildfires to help minimize the possibility of wildfires and the related service disruptions.
Our team spent the last year developing our plan through a series of internal workshops, industry research and engagement with state and local fire agencies.
The plan has certain key areas that include grid hardening, vegetation management, situational awareness, operations and emergency response and worker and public safety.
In total, we expect to spend approximately $330 million implementing the plan components over the life of the 10-year plan.
We're also excited for construction to be completed on the Catalyst Building and the Scott Morris Center for Energy Innovation.
We can hardly wait for the buildings to open next month and when they do, Scott Morris' vision to create the five smartest blocks in the world will become a reality.
Avista will be able to continue to innovate and test new ideas about how to share energy in a shared economy model.
And what we learn could not only shape how the grid of the future will operate, but also could provide a transformative new model for the entire utility industry.
Last year, we established a goal to serve our customers with a 100% clean electricity by 2045 and a 100% carbon-neutral resources by 2027.
Consistent with our goal and our 2020 Integrated Resource Plan, we are seeking proposals from renewable energy project developers, who are capable of constructing, owning and operating up to 120 average megawatts.
Our intent is to secure the output from the renewable generation resources, including energy, capacity and associated environmental attributes.
This will allow us to offset market purchases and fossil fuel thermal generation, which is a key step to achieving our goals.
With respect to results, our second quarter consolidated earnings were in line with expectations and we are on track to meet our 2020 earnings guidance at Avista Utilities, AEL&P and our other businesses.
As such, we are confirming our 2020 consolidated earnings guidance, a range of $1.75 to $1.95 per diluted share.
And finally, one last point.
Our Senior Vice President, Chief Legal Counsel, and Corporate Secretary, Marian Durkin, just retired on August 1.
During her tenure, Marian defined our business needs and -- to build our legal department from the ground up to the robust team that it is today.
As the focus and scrutiny on compliance has grown across many different industries, Marian also centralized the company's compliance efforts and has taken our compliance department to a new level.
Also, under Marian's leadership, earlier this year, Avista was named as one of Ethisphere's World's Most Ethical Companies.
I have big news for you.
I'm very excited about that.
The Blackhawks, because of the pandemic, made the playoffs and we're currently 1-1 with Edmonton with a game tonight.
So, those on the East Coast, it's a 10:30 game, but I'd like you to stay up and route for my Blackhawks.
For the second quarter of 2020, Avista Utilities contributed $0.26 per diluted share, compared to $0.32 in 2019.
Compared to the second quarter of 2019, our earnings decreased due to lower electric utility margin and from higher power supply costs and decreased loads related to COVID-19, which was partially offset by rate relief and customer growth.
We also had lower operating expenses in the second quarter of 2020.
The Energy Recovery Mechanism in Washington was a small benefit in this year of $0.4 million, compared to a much larger benefit in 2019 of $6 million.
For the year-to-date, we recognized a pre-tax benefit of $5.6 million in 2020, compared to $3.5 million in 2019, all with respect to the ERM.
With respect to the COVID-19 impacts on our results, we recorded an incremental $3.3 million of bad debt expense for the year-to-date and we expect the incremental amount to be $5.7 million for the full-year, including the first quarter as -- first half, as compared to our original forecast.
In July, the Idaho Commission issued an order that allows us to defer certain costs, net of any decreased costs and other benefits related to COVID-19.
During the second quarter, we deferred $1.1 million of bad debt expense associated with this order.
Compared to normal, in the second quarter there was a -- our loads, there was a decrease of approximately 6% on overall electric loads, which consisted of approximately 10% decrease in commercial and a 14% decrease in Industrial, which was partially offset by about 4% increase in our residential loads.
These loads decreased earnings by about $0.03 in the second quarter and we expect to have continued lower loads throughout most of the year, with a gradual recovery toward the end of the year.
We expect to be able to mostly offset the lower utility margin through our cost management activities, and this is reflected in our consolidated guidance.
We do expect a gradual economic recovery, but prolonged high unemployment that will depress load and customer growth into 2021.
We have decoupling and other regulatory mechanisms, which help mitigate the impact of these load changes on our -- the impact on our revenues for residential and certain commercial customers.
Over 90% of our utility revenue is covered by regulatory mechanisms.
During the second quarter, we began experiencing some supply chain delays due to the effects of the COVID-19 pandemic, with delays ranging from a couple of weeks to up to six weeks in some cases.
However, we do not expect this to have a significant impact on our planned projects and we continue to be committed to investing the necessary capital in our utility infrastructure and expect our spending in 2020 to be still be about $405 million.
With respect to liquidity, at June 30, we had $160 million of available liquidity under our $400 million line of credit and we had $100 million in cash from our term loan.
In the second quarter, we extended our line of credit agreement a year to April 2022.
We expect to issue this year approximately $165 million of long-term debt and up to $70 million of equity, and that includes $24 million that we've issued through June.
As Dennis mentioned earlier, we are confirming our 2020 guidance, with a consolidated range of $1.75 to $1.95.
We're expecting that COVID-19 impacts at Avista Utilities of increased operating expenses include bad debt expense, reduced industrial loads and increased interest will be mostly offset by expected tax benefits from the CARES Act and other efforts to identify cost reduction opportunities that we have implemented.
We have filed for deferred accounting treatment in each of our jurisdictions.
And as I said earlier, in Idaho, the Idaho Commission issued an order that allows us to defer certain costs related to COVID-19, net of any decreased costs and other benefits.
The Idaho Commission will determine the appropriateness and prudency of any deferred expenses when we seek recovery.
We continue to expect -- to experience regulatory lag until 2023, we filed the general rate case in Oregon in March of 2020 and continue to anticipate filing in Washington and Idaho in the fourth quarter of this year.
We expect our long-term earnings growth after 2023 to be 4% to 6%.
Now, with the specifics on the ranges for each segment.
We expect Avista Utilities to contribute in the range of $1.77 to $1.89 per diluted share.
The midpoint of our range does not include any expense or benefit under the ERM and our current expectation is that we will be in a benefit of a 90/10 sharing band, which is expected to add $0.06 per diluted share.
Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures and hydroelectric generation for the remainder of the year and we have implemented the cost reduction measures to help mitigate the impacts of costs related to COVID-19.
For 2020, we expect AEL&P to contribute in the range of $0.07 to $0.11 per share and our outlook for AEL&P assumes, among other variables, normal precipitation and hydroelectric generation for the remainder of the year.
And we continue to expect our other businesses to have a loss of between $0.09 and $0.05 per diluted share.
Our guidance generally includes only normal operating conditions and does not include any unusual items; such as settlement transactions or acquisitions and dispositions until the effects are known and certain.
We cannot predict the duration or severity of the COVID-19 global pandemic.
And the longer and more severe economic restrictions and business disruption, the greater the impact on our operations, results of operations, financial condition and cash flows.
| compname reports q2 earnings per share $0.26.
q2 earnings per share $0.26.
reaffirms fy earnings per share view $1.75 to $1.95.
|
Joining me on the call today are Tim Gokey, our Chief Executive Officer; and our Chief Financial Officer, Edmund Reese.
A summary of these risks can be found on the second and third page of the slides and a more complete description on our annual report on Form 10-K.
We will also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Broadridge's underlying operating results.
I'll begin with an overview of our key messages and an update on our third quarter results, including our performance against our strategic objectives.
It's an exciting time to be at Broadridge, and we have a lot to cover, so let's get started.
I'm pleased to share that Broadridge delivered strong third quarter results.
Recurring revenues and adjusted operating income both rose 8%.
Our results in both ICS and GTO are being propelled by long-term trends, including increasing digitization, mutualization and the democratization of investing.
These trends are driving strong new business growth, record growth in the number of shareholders and higher trading volumes.
We're also executing well against our strategic growth plan across governance, capital markets and wealth and investment management.
I'll highlight some of those initiatives in a few minutes.
A combination of those strong results and continued execution against our growth plans is giving us the confidence to continue to invest in our business.
We've continued to fund attractive investments in our products, platforms and people, including the pending acquisition of Itiviti.
We're also substantially increasing our guidance for fiscal year 2021 on both the top and bottom line.
We now expect recurring revenue growth of 8% to 10% and adjusted earnings per share growth of 11% to 13%.
While the new guidance reflects the impact of Itiviti, the bulk of this raise is organic, as Edmund will discuss.
The net result of all these points, our strong third quarter results, our continued internal and M&A investment and our outlook for fiscal 2021 is that Broadridge is executing well and is on track to deliver at the higher end of our 3-year financial objectives, including 8% to 12% adjusted earnings per share growth.
We remain focused on delivering long-term growth driven by secular trends and consistent investment across our governance wealth and capital markets businesses and, in turn, generate consistent, sustainable top quartile shareholder returns.
Broadridge's ability to generate those attractive returns is driven by executing on our clear long-term growth plan.
So let me update you on some highlights of our recent progress on Slide five.
I'll start with ICS.
Recurring revenues rose 11% to $586 million driven by revenue from new sales and very strong equity record growth.
The biggest driver of ICS' strong growth was revenue from new sales, and I'm pleased to see the impact of recent investments on our results.
Let me share two examples of our focus on product investment and strong execution are translating directly into increased revenue growth.
The first is the Shareholder Rights Directive II.
Over the past two years, we've created a shareholder communications hub, linking millions of investors across the EU and with hundreds of wealth managers, winning almost 300 new clients along the way.
Now as we enter proxy season, we're starting to see those efforts translate into new revenues helping to drive 80-plus percent growth in our international proxy business.
Virtual shareholder meetings continue to be a great example of product investment translating into new revenues.
Over the past year, we've upgraded our VSM capabilities to include the latest in virtual meeting capabilities, including state-of-the-art video and audio technology, improved Q&A functionality, one-click shareholder authentication and seamless proxy voting.
Those upgrades have helped retain our existing clients and have driven additional growth.
We are now on pace to serve almost 1,900 virtual shareholder meetings this proxy season, up from 1,400 last spring.
The second factor driving ICS was very strong equity record growth, which was 20% for the quarter.
It's clear, the move to reducing trading commissions has triggered a significant expansion in the number of market participants, which contributed to the increase in equity record growth.
That strong growth has been broad-based across our broker clients but has been most pronounced at the online brokers.
It has also been broad-based across issuers with 20% growth across both widely held stocks and those with more medium-sized shareholder bases.
We did see large increases at a handful of names, including so-called meme stocks like GameStop.
But those increases only contributed one point of the overall growth.
Commission-free trading is the latest step in a long-term trend.
It includes the rise of ETFs, lower trading costs across all participants and changes in investor interfaces that helps propel high single-digit equity and fund record growth over the past decade.
Broadridge has invested to scale its capabilities to meet that rise in demand, increase the digitization of critical regulatory communications and ensure that both new and existing investors get the information they need to understand the risks and participate in the governance of their investments.
Looking forward, we expect strong record growth to extend into the fourth quarter with our testing indicating 25% stock record growth for Q4.
To close off on governance.
Let me touch briefly on regulatory.
I want to congratulate Commissioner Gensler on his confirmation as SEC Chairman.
As we have with every chair and administration of both parties over the past 40 years, we look forward to assisting by investing in the next generation of technology, to help the SEC achieve its mandate to better inform and protect investors, all while reducing cost for registers and creating a fair return for our shareholders.
Let's turn now to our capital markets franchise.
Capital markets' recurring revenues slipped by 1% as steady international growth was offset as expected by lower license revenues.
We anticipate this period of flattish revenue to continue through the fourth quarter before picking up again in fiscal '22 as we onboard our very healthy backlog.
On the strategic front, our planned acquisition of activity represent a significant enhancement of our ability to drive value to our clients.
For those who may have missed our call a few weeks ago, let me remind you why we think this transaction is such an exciting step forward for our global capital markets franchise.
As a leading provider of order management and trade execution technology and connectivity solutions for financial institutions, Itiviti gives Broadridge a compelling opportunity to extend our capital market service offering.
The combination of Itiviti's front-office trading solutions, with Broadridge's leading post-trade back-office capabilities, will allow us to serve our client's entire trade life cycle from order to settlement.
With increasing high frequency and algorithm trading, it's increasingly important to serve clients across traditional boundaries.
This combination will bring critical data from the back to the front office to improve trading decisions, and it will enable our clients to simplify and improve their front-to-back technology stack and operating model.
The combination also strengthens our joint capabilities across equities, exchange-traded derivatives and fixed income, and it substantially extends our global reach, creating significant cross-selling opportunities and enhancing our relationships with blue chip clients.
The acquisition virtually doubles our business in APAC and further expands our reach in Europe.
That expanded footprint and scale positions us to take advantage of growing mutualization trends in both EMEA and Asia.
Itiviti adds more than $6 billion to Broadridge's total addressable market and will drive stronger growth, margins and earnings, as Edmund will discuss in his remarks.
Early feedback from our clients has been overwhelmingly positive, giving us added confidence that our front-to-back thesis and our near-term medium growth outlook are sound.
Also of note in our capital markets franchise is the continued development of our LTX fixed income trading platform.
LTX recently completed the first-ever multi-buyer digital block trading.
Enabling a single seller to simultaneously access the aggregated liquidity for multiple buyers is a milestone for the fixed income market, and I hope one of the many steps toward creating a more liquid corporate bond market.
To date, 10 dealers and over 40 asset managers have joined the LTX platform.
And an additional 14 institutions are signed in the onboarding process, including one of the world's largest fixed income managers.
Let's turn next to our wealth and investment management business, where revenues grew by 7%, driven by new client additions and higher equity trading volumes.
A key part of our growth strategy is to expand our sales of component solutions.
So it's terrific to see new client onboardings across a full range of our wealth and investment management products.
We also continue to make progress on building our industry-leading wealth management platform, which will help clients with the digital transformation of their wealth business.
We're already live with our average daily balance billing solution and industry milestone.
We're currently in active testing of our phone office workstation with select advisors, setting the stage for a period of extensive testing of the broader platform before going live.
Our sales and marketing efforts with several new clients to this platform are advancing well.
Clients see that using the Broadridge wealth platform to drive digitization by seamlessly connecting the back office functions we already provide, with additional select front and middle office capabilities, will drive a stronger top and bottom line by bringing new capabilities to advisors and clients while digitizing financial advisor, branch and back office interactions.
Another important part of our wealth strategy is developing a robust partner network to ensure that we can integrate cutting-edge capabilities from innovative partners.
Recent partnerships include Fligoo for predictive analytics and Anchor Bank for securities-based lending; and, a wealth management fintech accelerator.
These partnerships and others represent ongoing steps in building a network that will enable our clients to rapidly adopt new technologies.
When I spoke to you at the close of our fiscal third quarter a year ago, the economic outlook was deeply uncertain and from the New York area and much of the world was locked down.
My remarks at that time were focused on the steps we were taking to keep our associates safe and meet the needs of our clients in an unprecedented time.
Today, after 12 long months, there remains significant challenges and thinking, in particular, of our more than 3,000 associates in India and of their families and friends.
But the global outlook is unquestionably brighter, with increasing economic growth marching, hand-in-hand with rising vaccination rates.
The pandemic has also accelerated many long-term trends, including digitization, mutualization and next-generation resiliency.
And the lower cost and friction for investing is bringing in millions of new investors.
These changes are clearly having a significant impact across wealth management, governance and capital markets.
They're causing financial services leaders to rapidly adopt next-generation technologies.
And Broadridge is building the suite of capabilities that will help them navigate and win this period of change.
We do so from a position of strength.
We started the fiscal year last July expecting 2% to 6% recurring revenue growth and 4% to 10% adjusted earnings per share growth.
Our focus then was on driving enough expense savings to assure that we could continue to fund critical growth investments.
Fast forward nine months, and we are poised to deliver 8% to 10% recurring revenue growth, driven by a combination of strong new sales and healthy financial markets.
After achieving our expense targets, we're now investing heavily in new product capabilities, enhancing our global post-trade platform and building next-generation capabilities across digital communications, wealth management and fixed income trading, among other investments.
We're also adding talent and investing in our people to make Broadridge the best place for the most talented associates in our industry.
Last but not least, we're on the brink of closing our $2.5 billion acquisition of Itiviti, expanding our capital markets franchise and further strengthening our global footprint.
And yet even after those investments and the near-term dilution from Itiviti, we're positioned to deliver 11% to 13% adjusted earnings per share growth.
Broadridge is at its front foot and leaning into the opportunities we see ahead.
It has been a remarkable year.
Looking further ahead, we're on track to achieve the higher end of our 3-year growth objectives, driving strong recurring revenue and double-digit adjusted earnings per share growth.
We see long-term trends continuing to drive demand for our services.
And our investments are creating new avenues for growth long beyond our current 2-year objectives.
The future of Broadridge is brighter than ever.
We've asked a lot of our team over the past 12 months, and they're delivering.
They stayed focused on clients, and through them are helping to build better financial lives for millions.
As you can see from the Q3 financial summary on Slide seven, Broadridge delivered another strong quarter.
Recurring revenue grew 8% to $900 million.
Adjusted operating income also grew 8% to $284 million.
Margins declined 60 basis points to 20.4% as we successfully made the investments that we discussed last quarter in our technology platforms, in our products, our people.
Our operating income was partially offset by a higher tax rate in Q3 '21 as we grew over discrete tax benefits in Q3 '20.
So our adjusted earnings per share grew to $1.76 in the quarter, up 5% over Q3 '20.
Now let's turn the slide and get into the details of the quarter, starting with recurring revenue growth.
As I said, recurring revenue grew 8% in the quarter, powered by 7% organic growth, and comfortably within our historic mid- to high single-digit growth performance.
demonstrating the strength of our sustainable recurring revenue growth model.
As a result of that strong organic growth and an increase in our outlook for the fourth quarter, we're raising our guidance for recurring revenue growth to 8% to 10% for the full year, up from our prior guidance of growth at the higher end of 3% to 6%.
Now let's look at this quarter's recurring revenue growth by business on Slide nine.
I'll start with our ICS segment, where revenues grew by 11% to $586 million.
Regulatory revenues rose 20% to $290 million driven by the 20% equity record growth, higher mutual fund and ETF communications volumes and net new sales, including from our Shareholder Rights Directive II solution that Tim highlighted earlier.
We expect strong regulatory revenue growth to continue in the fourth quarter with, our current testing indicating 25% equity record growth.
After a strong 12 months, we now have significant penetration of our VSM solution across the S&P 500, and we expect issuer revenue growth to ease going forward as we start to lap the increase of VSM activity that began in Q4 '20.
Fund solutions revenue was flat as double-digit growth in data and analytics was offset by lower interest income from custodied accounts in our funds processing business.
Customer communications revenues were also flat with double-digit growth in our high-margin digital products, offset by lower print volumes due in part to the pandemic-depressed activity levels.
We expect growth in both our data-driven solutions and customer communications business to pick up in the fourth quarter as these headwinds ease.
Wealth and investment management revenues rose 7%, driven by the onboarding of new component sales and higher retail trading.
Capital markets revenues fell 1% of strong growth from international sales, was offset by $6 million in lower license revenues, which declined as expected.
As we said last quarter, this flat revenue growth will continue in the Q4 '21 before picking up in fiscal year '22.
Let's turn to Page 10, where we show more detail on volume trends.
Broadridge's recurring revenue growth benefits from underlying volume growth trends, including stock record growth.
Over the past decade, record growth across equity, mutual funds and ETF has grown 6% to 8%.
Recently, equity record growth has accelerated to 11% in Q4 '20 and continued to increase through the year to 20% in Q3 '21, surpassing the estimates from our January testing.
As I said, we expect these growth trends to continue and reach 25% in Q4 '21.
Mutual fund and ETF record growth picked up as well to 7%, more in line with our historical growth rates.
We are modeling a return to more moderate mid-single-digit growth across both equity, mutual fund ETF records for fiscal year '22, with stronger growth in the seasonally smaller first half and more moderate growth in the second half.
Touching briefly on trade volumes, which you'll see on the bottom of this slide.
This is the fifth consecutive quarter of aggregate double-digit volume growth.
This growth reflects the increase in volatility in retail investor engagement over the past year, which continued to be quite strong well into the third quarter.
More recently, trading volatility subsided during the second half of March, and we expect tougher trading volume comps in Q4.
Let's move to Slide 11 for a closer look at the drivers of our recurring revenue.
Organic growth at a very healthy 7% continues to be the largest component of our recurring revenue growth, and new sales remains the biggest driver with strong growth contribution from both ICS and GTO.
We also continued our long track record of revenue retention above 97%.
Internal growth contributed another three points as growth in ICS regulatory volumes more than offset the decline in GTO license revenue.
We've now fully lapped all of our fiscal year 2020 acquisitions.
Looking ahead to the fourth quarter, we expect Itiviti to add three points to fourth quarter recurring revenue growth.
Total revenue growth this quarter was stronger than usual, reaching 11%, with distribution revenue contributing three points due to the increased mailings that correspond with the high record growth and the increased event-driven activity this quarter.
Moving forward, we continue to expect the low to no-margin distribution revenue to decline over time as we focus on increasing higher-margin digital revenue across our governance business.
Event-driven communications remain an integral part of our client offering.
Event-driven revenues have climbed over the past four quarters to be more in line with our historical norms of about $50 million a quarter and reached $74 million in the third quarter, well above last year's unusually low $39 million.
Broadridge benefited from an increase in mutual fund proxy activity as well as a rebound in proxy contest volumes and capital markets transactions.
We expect fiscal '21 event-driven revenue to be more in line with the average that we've seen over the past seven years.
For modeling purposes, we're assuming $50 million to $60 million of event-driven revenues in the fourth quarter.
Turning to Slide 13.
Adjusted operating income grew by 8%.
Our adjusted operating income margin declined by 60 basis points, reflecting the continued investments that we're making in our technology platforms and product capabilities that we highlighted on our last quarterly call.
These investments, which support our long-term growth, have a short-term impact on margin expansion, but we remain on track to deliver approximately 50 basis points of margin expansion for the full year, right in line with our fiscal year '21 guidance and 3-year growth objectives.
This formula, forgoing near-term margin expansion and consistently investing in our technology platforms and products to drive long-term sustainable recurring revenue growth, will continue to be an important part of how we manage our business.
As a Chief Financial Officer focused on long-term growth, it's encouraging to see us making these types of investments across all of our product lines, giving us momentum toward future growth.
Our $124 million closed sales year-to-date are in line with our performance over the same period last year.
We continue to see strong demand for our ICS solutions, including regulatory and issuer communications and data solutions.
We remain on track to achieve our full year guidance of $190 million to $235 million for closed sales, which implies a fourth quarter range of $66 million to $111 million.
Historically, the closed sales performance in the last quarter of the year has been impacted by the timing of larger deals.
A handful of larger signings could propel us to the top end of our guidance range, and conversely, delays could put us at the lower end.
And I'll also note that we continue to feel good about our recurring revenue backlog, which was 12% of our fiscal '20 recurring revenues as of Q4 '20 and gives us great visibility into our top line growth.
Moving to capital allocation on the following slide.
We generated $136 million of free cash flow year-to-date, up $54 million over the first nine months of fiscal year '20 driven by higher earnings and strong working capital management.
During the first nine months of the fiscal year, we invested $205 million in building out our industry platforms and another $71 million in capex and software spending.
Our M&A investment through the first nine months of the year was 0, but that will change with our announced $2.5 billion acquisition of Itiviti, which I'll touch on in a moment.
Even after completing the Itiviti acquisition, Broadridge will remain committed to a balanced capital allocation policy, which prioritizes internal investment, growing our dividend, M&A and returning excess capital to shareholders.
Importantly, we are also committed to maintaining an investment-grade credit rating, which means we'll prioritize debt paydown over share repurchases and expect to limit ourselves to smaller tuck-in M&A opportunities over the next several quarters.
Given our strong free cash flow, we believe that we can comfortably achieve our new 2.5 times leverage target by the end of fiscal year '23.
Turning to capital returns on the right-hand side of the slide, our dividend has grown and remains in line with our historical 45% payout ratio.
On Slide 16, we are on track to close the Itiviti acquisition in the coming weeks.
So let me take a moment to give you some additional clarity about the expected impact that Itiviti will have on our financial performance.
I'll start with fiscal year '21.
We expect Itiviti to add $25 billion to $30 billion or one point to our full year recurring revenue growth, which equates to three points to our fourth quarter growth.
And the acquisition is expected to be modestly dilutive to our adjusted earnings per share growth.
In fiscal year '22, we expect Itiviti to add approximately $250 million or about eight points to our recurring revenue growth.
And we expect the acquisition to be accretive by approximately two to three points or roughly $0.10 to $0.15 to adjusted earnings per share growth.
Please note that Itiviti's results in both fiscal year '21 and fiscal year '22 will be negatively impacted by the accounting treatment of acquired revenue, which will reduce revenue recognition by approximately $30 million in total with 2/3 of that impact in fiscal '22.
This revenue haircut is incorporated in the numbers that I just shared with you.
Finally, I want to reiterate the commentary that I gave you when we announced the deal, about the impact on our 3-year growth objectives.
We expect Itiviti to add 2.5 to three points to our 3-year recurring revenue growth CAGR and, after interest, more than two points to our 3-year adjusted earnings per share CAGR.
Now turning to guidance on Slide 17.
We are raising our outlook for fiscal '21 recurring revenue growth to 8% to 10% from the higher end of 3% to 6%, and that includes one point of growth from Itiviti.
We are raising our guidance for total revenue growth to 8% to 10% from the higher end of 1% to 4%.
We continue to expect our adjusted operating income margin to expand to approximately 18%, up from 17.5% in fiscal year '20 as we balance near-term returns with continued investments to sustain long-term growth.
We expect adjusted earnings per share growth of 11% to 13%, up from the higher end of 6% to 10%, and that includes a 1-point drag from Itiviti.
Finally, as I noted earlier, we continue to expect closed sales in the range of $190 million to $235 million.
The Broadridge Financial model is working.
We are on track to deliver strong 8% to 10% recurring revenue growth.
That growth is fueling our ability to both invest and expand margins.
At the same time, our strong free cash flow business model enables us to pursue balanced capital allocation, commit to a rising dividend, fund investments in our platform and products and step up and make a significant M&A investment to grow our capital markets franchise.
The end result is that we're on track to deliver at the higher end of our 3-year financial objectives of 7% to 9% recurring revenue growth and 8% to 12% adjusted earnings per share growth.
It's a great example of how we manage our business to drive sustainable revenue growth, steady and consistent adjusted earnings per share growth and historically top quartile TSR.
| q3 adjusted earnings per share $1.76.
sees 2021 total revenue growth of 8% - 10%.
sees 2021 non-gaap adjusted earnings per share growth 11% - 13%.
|
Dan Malone, our CFO, will begin our call with a review of our financial results for the first quarter of 2021, and I will then provide a few more comments on the results.
The key takeaways from our first quarter 2021 results are.
Record first quarter net income and earnings per share up over 12% from the prior first quarter on a GAAP basis and up nearly 3% on an adjusted basis.
First quarter sales down 1% from the prior year first quarter.
First quarter operating income essentially flat to the adjusted prior year result.
First quarter and trailing 12-month EBITDA also flat to the comparable adjusted prior period performance.
First quarter cash flows reflected working capital needs driven by high order backlog and a record order backlog of $453 million, up 95% over the prior year quarter and up nearly 28% since year-end 2020.
First quarter 2021 net sales of $311.2 million were 1% lower than the prior year first quarter.
While we continue to see 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, delaying some shipments.
Industrial division first quarter 2021 net sales of $211.9 million represented a 7.9% decrease from the prior year first quarter due to pandemic-related impact on customer demand and disruptions to our supply chain and operations.
Agricultural division first quarter 2021 sales were $99.3 million up 17.5% from the prior year first quarter.
During the quarter, we continued to see strong organic sales growth across this division.
The immediate top line benefit of the surge in customer demand was somewhat constrained by the negative impact of the pandemic on inbound supply chain and manufacturing efficiencies, as previously mentioned.
Net income for the first quarter 2021 was $17.5 million or $1.47 per diluted share, up over 12% from the prior year first quarter.
Excluding the Morbark inventory step-up expense from the prior year result, first quarter net income was up 2.9% over the adjusted prior year result.
Lower interest expense, favorable income tax provision adjustments and lower operating expenses more than offset the nonrecurrence of prior year foreign currency and property disposition gains to produce this result.
Operating income for the first quarter 2021 was $25.4 million or 8.2% of net sales, which is up from $23.9 million or 7.6% of net sales in the prior year period but essentially flat to the adjusted prior year result that excludes the $2 million of Morbark inventory step-up expense.
Lower operating expenses were enough to offset an unfavorable gross margin comparison.
Gross margin for the first quarter of 2021 was $76.4 million or 24.6% of net sales compared to $78.9 million or 25.1% of net sales in the prior year first quarter.
Excluding the Morbark inventory step-up expenses, the prior year first quarter gross margin was $80.9 million or 25.7% of net sales.
In the first quarter of 2021, we saw a compression of gross margins due to rising material costs that were not fully offset by favorable product mix and pricing actions.
Also, an expected positive impact from higher customer demand on operating leverage has been somewhat limited by the uneven distribution and timing of new order growth across our business units as well as COVID-19 operational and supply chain disruptions, as previously discussed.
First quarter 2021 EBITDA was $36.7 million, down slightly from the prior year first quarter adjusted EBITDA.
Trailing 12-month EBITDA was $145 million was essentially flat to adjusted 2020 EBITDA.
First quarter 2021 EBITDA was 11.8% of net sales, which is also flat to the prior year first quarter adjusted results.
Favorable product mix, pricing actions and other cost containment measures offset material cost inflation and the negative pandemic impacts.
During the first quarter 2021, we saw an $8.6 million net use of cash for operating activities compared to a $5.6 million net provision of cash from operations in the prior year first quarter.
While a first quarter build in working capital is seasonal for many of our business units, high current year order backlogs will continue to drive higher working capital investment to support the top line growth.
We ended the first quarter with a record $453 million in order backlog, an increase of 95% since the prior year first quarter and nearly 28% higher than year-end 2020.
During the quarter, we saw an acceleration of customer demand across the entire range of our industrial and agricultural products.
We finished the first quarter of 2021 with order backlogs well above prior year quarter levels in both divisions and for all of our business units.
To recap our first quarter 2021 results, record first quarter net income and earnings per share, up over 12% from the prior first quarter on a GAAP basis and up nearly 3% on an adjusted basis.
First quarter sales down 1% from the prior year quarter.
First quarter operating income essentially flat to the adjusted prior year result.
First quarter and trailing 12-month EBITDA also flat to the comparable adjusted prior period performance.
First quarter cash flows reflected working capital needs driven by high order backlog.
And a record order backlog of $453 million, up 95% over the prior year first quarter and up nearly 28% since year-end 2020.
I appreciate the financial update.
There's an old Chinese curse that I think says "may you live in interesting times".
And so I mean, we are certainly living in interesting times.
But I'm glad that for Alamo Group, we actually are managing our way through this nicely and as our first quarter results showed, where we had strong sales and record earnings.
But there are certainly many challenges that are ongoing.
Many of these -- most of these are the repercussions from the ongoing COVID pandemic, which is still very much an unresolved issue that is affecting our company, our workforce and the world economy in general.
And the many other issues we are facing, including supply chain challenges, logistical disruptions and inflationary pressures, are basically almost extensions of the pandemic.
We are certainly not alone in this as nearly all industrial manufacturing companies that we know of are facing these same issues.
But despite these issues and distractions, we're very pleased with the way our company has performed in this environment, and we remain diligent in managing these issues to deliver ongoing solid results.
We're glad to see that the markets for our products are holding up well and have mostly returned to pre-pandemic levels and in some cases, even better.
This is most evident in our bookings and backlog, which are at record levels.
And even though if not for these challenges, we could have shipped more in the first quarter, but we would have still finished the quarter with record backlog.
Like I said, I think if we didn't have quite as many supply chain issues, our sales would have been a record for the first quarter instead of being down 1%.
But even with that, we would have still finished with record backlogs.
Certainly, our agricultural division showed the strongest results in the first quarter 2021 as this market not only remains steady, that market has actually remained steady throughout most of this COVID situation and has further benefited from some pent-up demand in the farming sector as a result of several years of weak market conditions and low farm incomes.
And this current market strength has also been aided for us by sort of lower levels of dealer inventories going into this time and above-average farm subsidies in the U.S. And even with -- even if subsidies aren't quite as strong this year as they were last year, we think higher agricultural commodity prices and strong demand for equipment will continue to be good.
The fundamentals of the market are good for not only the rest of 2021, but the next several years as well look very promising.
And even though supply chain issues, logistical problems and inflationary pressure, all limited our results in the first quarter in our ag sector and continue to impact us today, these should impact us a little less than the second half of the year based on our pricing and the input we're getting from our suppliers.
So we're pleased that the outlook is improving.
We are also pleased that while our North American ag units are certainly performing the strongest, it is very reassuring to note that our European units are all showing improvement as well as are our Brazilian and Australian operations.
So with a good market, record backlogs, the outlook for Alamo's agricultural division is very positive.
The same can actually be said for Alamo's industrial division.
While our results were not quite as good in the first quarter of 2021 as our ag division on a relative basis, it was still a solid quarter.
It started off weak in January as budget issues continued to constrain governmental entities, which is our single biggest market for this division's infrastructure maintenance equipment.
But momentum built during the quarter, and we ended with very strong results in March that are continuing on into the second quarter of 2021 as well.
We are continuing to benefit by improved governmental budgets as revenues at city, county and state levels, all of which seem to be showing better-than-anticipated results.
And our bookings and backlog in this sector reflect these improved fundamentals with governmental budgets and with basically the financial health of our customers.
As with our agricultural division, our industrial results were constrained by COVID-related operational challenges internally and with the supply chain and logistical issues, preventing ourselves from reaching the record levels, which they could have been without this.
However, we believe these issues will be less evident again in the second half of 2021 and feel optimistic that the full year results for the -- for our industrial division should be at record levels for Alamo Group.
Certainly, getting operations back to pre-pandemic levels is key to this outlook.
But getting -- but we're also really -- a big contributor is getting the full benefit of the high level of acquisitions we completed in 2019.
This is what really should drive the record results that we anticipate.
These acquisitions of Morbark, Dutch Power and Dixie Chopper have all performed well, but we have really -- due to the pandemic of 2020, we have really not achieved their full potential.
And with that, I mean, we feel very -- on a combined basis, very optimistic about Alamo Group.
And it's good to see that in general, business is returning to more normal levels of activity, among other things, including things such as our acquisition activities, which were definitely curtailed for most of the last 12 months.
I mean we're actually starting to see opportunities and look at opportunities.
So which -- since acquisitions are definitely key part of our ongoing strategy, I think it's -- we're glad to see that.
We also -- I mean, during the last year, we really constrained our capital spending as we focused on cost control and paying down debt, which we're very pleased both were very successful initiatives.
But with the strong bookings and record backlog, we need to improve our operational capabilities.
And we are starting to invest more in better manufacturing technologies that will allow us to be more efficient and grow our margins and meet this increased demand as evidenced by our bookings and backlogs.
So while we are optimistic about the outlook for Alamo Group, we are also very cognizant that the COVID pandemic is still not fully resolved.
It is certainly good to see the growing availability of vaccines, but unfortunately, the number of new cases is still a concern.
And while we are pleased our markets are showing steady improvement, the supply chain and logistical challenges are ample evidence that COVID is still affecting us all.
We hope this situation and feel it will continue to show steady improvement, but we will continue to monitor our operations and monitor our markets and remain ready to respond to changes, good or bad, that could affect our company.
And actually, we believe this responsiveness has helped us navigate through this and other periods of economic upheaval and are committed to reacting quickly as conditions warrant.
And really, that is why we feel optimistic about the outlook for Alamo Group.
There are always challenges, and we certainly are living in interesting times.
But by staying focused on our strategy, we feel we can prosper even in challenging times and continue to grow at above-market rates over the long term.
And lastly, while, as most of you know, I will soon be retiring as CEO of Alamo Group, I remain very optimistic about the outlook for the company.
My replacement, Jeff Leonard, and the whole Alamo team are more than capable to continue along the path of success we have followed.
And I look forward to following their continued progress and staying active as a member of the Board of Directors.
It's certainly been a great trip.
| q1 sales fell 1 percent to $311.2 million.
q1 earnings per share $1.47.
|
Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent annual report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.
Our strategic effort to transform Kohl's into the leading destination for the active and casual lifestyle continues to gain traction.
We delivered another outstanding performance in the third quarter, continuing our momentum from the first half of the year.
During today's call, I want to leave you with three things.
First, we achieved record Q3 earnings and raised our full year outlook, resulting in an all-time high earnings per share for the company.
Q3 sales increased 16% to last year, and our operating margin was a nine-year high of 8.4%, benefiting from our actions to structurally improve our profitability.
Second, our efforts to reposition Kohl's are working.
Active sales growth accelerated in the quarter, led by our key active national brands.
And we launched several new transformational brand partnerships across the business including the rollout of the first 200 Sephora at Kohl's stores.
While having very little impact to this quarter given the timing of the launches, we are pleased with the early results and what this means going forward.
And third, we are accelerating our share repurchase activity, reinforcing our commitment to driving shareholder value, and now expect to repurchase $1.3 billion for the year.
We see a lot of value in our company and believe repurchases are a great mechanism to return capital to shareholders, given our promising outlook and formidable cash position of $1.9 billion.
All of the pieces of our strategy are coming together, and we remain incredibly confident in our future.
As we look ahead, we are focused on building on this year's success.
We are positioned to exceed most of our 2023 goals this year, and we look forward to sharing an updated financial framework at our Investor Day on March 7, 2022.
Now I'll cover a high-level overview of our third quarter performance, an update on the progress we're making against our strategy, and our approach to the holiday season.
Jill will then discuss our Q3 results in more detail and updated 2021 financial outlook.
Let me add a little more color to our Q3 results.
Our 16% sales increase was the result of strong performance across both stores and digital.
We continue to be encouraged with how the channels reinforce each other, together delivering an exceptional customer experience through a seamless omnichannel integration of offerings and conveniences.
Store sales increased double digits and continue to be the principal channel for new customer acquisition.
And we're very excited by the significant growth we are seeing in omnichannel customers, which are the most productive customers.
Digital sales remained strong in the quarter, growing 6% to last year and increasing 33% on a two-year basis.
As a percentage of total sales, digital was 29% in the quarter.
From a category perspective, our investments in active continue to pay off.
This is most evident in the broad strength we are seeing across our differentiated portfolio of national and private brands.
Active sales significantly outpaced the company, growing more than 25% to last year and more than 20% on a two-year basis.
We're seeing strength across the board in men's, women's, and children's apparel as well as in footwear.
Of note with active apparel, we are especially pleased with the traction we are gaining in athleisure and inclusive sizing.
From a brand perspective, our key national brands of Nike, Under Armour, adidas, and Champion all delivered exceptional growth.
In addition, our more value-oriented active private brands also continue to perform very well.
Tek Gear achieved solid double-digit growth, and we continue to be pleased with the customer response and sales of our new athleisure brand, FLX, which we expanded to more stores late in the third quarter.
Active is now one of our largest areas of business, representing 26% of our Q3 sales, and we remain confident in our ability to maintain our growth momentum.
Looking ahead, we expect active will continue to benefit from increased in-store space and its front-of-store positioning in locations with Sephora at Kohl's shops.
We also continue to experiment with new merchandising to elevate the active category in our stores.
Some of our other highlights in the quarter include men's sales increasing more than 30% to last year and footwear and accessories both up more than 20%, and children's up low double digits, driven in part by strong demand for toys.
We saw a very strong growth on both a one- and two-year basis for many of our key private brands and national brands across all categories.
For our private brands, these included Sonoma, SO, Apartment 9, and Jumping Beans.
And notable performers beyond active and our national brands include Levi's, Vans, Haggar, Ninja, Shark, Koolaburra by UGG and Hurley.
I will now provide an update on the progress we are making against our strategy.
As I indicated, all the pieces of our strategy are coming together.
Our investments to strengthen our product assortment and enhance the shopping experience have improved our relevancy with core customers and are driving new customer acquisition.
Let me start with Sephora.
As we've said from the beginning, this is a game-changing partnership for us.
Consistent with our strategy, Sephora adds tremendous credibility to Kohl's as a more useful upscale and modern retailer.
We are thrilled with the early response we are seeing from our initial opening of 200 Sephora at Kohl's shops.
I know many of you are interested in hearing more specifics on how the shops are performing, so I'm happy to provide you with some preliminary results.
In short, Sephora at Kohl's is working.
First, Sephora is driving extraordinary growth in our beauty business.
Second, we're seeing an incremental mid-single-digit sales lift to the overall store sales where we have launched.
Third, we are bringing in new customers.
More than 25% of Sephora at Kohl's shoppers are new to Kohl's.
They are younger and more diverse, and we are successfully driving loyalty sign-ups.
Fourth, we're pleased to see customers purchasing across a wide range of beauty categories and price points, the assortments resonating.
And lastly, customers are shopping across the store.
Roughly half of our customers buying Sephora are attaching at least one other category in their purchase across all of our lines of business.
We've already started to see customers return, which is encouraging and is expected to build as they get to know Kohl's.
From the outset, this partnership was structured to drive joint success, and we couldn't be happier with how our teams are collaborating.
These early results are very encouraging.
And as we build out the fleet, this initiative will have a significant positive impact on our growth trajectory and brand relevance.
Looking ahead, we will build on our success as we continue the store rollout.
Planning is underway for the additional 400 Sephora at Kohl's openings beginning in late spring 2022.
In addition, we will open 250 in 2023.
As we renovate our stores for the Sephora build-outs, we are also making investments to elevate the overall store environment.
This includes reflowing our categories to deliver against our new strategy as an active and casual destination, better use of space for mannequins and storytelling and overall updates to the store.
As we rolled out this updated experience to our first 200 stores, the customer feedback has been extremely positive.
As part of this, we are injecting more discovery, leveraging flexible space behind the Sephora shop, which showcases a rotating assortment of emerging brands.
Yummy Sweaters are currently positioned in the space for holiday, and we are excited to use this space to debut an exclusive Draper James capsule collection this spring, a brand founded by Reese Witherspoon.
I now want to share a quick update on our recent new brand introductions of Calvin Klein, Tommy Hilfiger, and Eddie Bauer.
We introduced Calvin Klein basics and loungewear in 600 stores in mid-September.
And added Tommy Hilfiger men's sportswear in 600 stores in early October.
And in late October, we began offering Eddie Bauer in 500 stores, expanding our presence in the outdoor category and building on our investments and momentum with Columbia and Lands' End.
While it's early, we are extremely pleased with the initial results of these new brands.
Collectively, they are exceeding expectations and customers are delighted to be able to get these iconic brands at Kohl's.
I now want to provide a quick update on women's.
As we've discussed on prior calls, we are deeply committed to reigniting growth in our women's business and have implemented a number of bold actions.
We completely reset the brand portfolio to improve overall clarity and shopability.
And strengthened our differentiation by amplifying key private brands like Sonoma while selectively introducing relevant national brands.
We are pleased with the leading indicators and the underlying trends.
Customers are responding very well to our go-forward key brands and metrics such as sell-through, inventory turn and margin are at multiyear highs.
However, receipt delays have impacted the women's business disproportionately, hindering our ability to drive overall growth to our expectations.
So let me touch on these supply chain challenges and what we are doing to address them.
Like many, our business has been impacted by extended transit times, resulting in inventory receipt delays and significantly higher transportation costs.
The most visible evidence of this can be seen in our inventory level at the end of Q3, down 25% on a two-year basis.
While we planned inventory to be down this year as compared to 2019 aligned with our strategy to drive margins and turnover, our levels remain below that original plan.
We have aggressively implemented a number of measures throughout the supply chain to mitigate and minimize production and transit delays.
We also made sure that we protected new brand receipts and inventory tied to key promotional events.
While it will take time for our inventory to rebuild, I am confident that the team is doing everything they can to mitigate the supply chain challenges as effectively as possible.
And as Jill will speak to later, this is incorporated into our outlook.
As a result of these actions, we are well-positioned for the holiday season with fresh receipts continuing to flow to support anticipated customer demand.
Now let me touch on some of our holiday plans.
We are once again excited to deliver an inspiring and welcoming shopping experience for our customers this holiday season, knowing it will look and feel a little more normal.
Friends and families are planning more in-person celebrations, which has influenced how we are approaching our holiday strategies this year.
From a product perspective, we are focused on amplifying key areas where we already have momentum: active and cozy for the entire family, home, toys, and discovering and gifting are already in high customer demand.
We have also positioned our holiday gifting area at the front of the store and the majority of our chain to better capitalize on traffic.
In addition, we are pleased to offer Sephora and many of our other new brands to our customers for the first time this holiday season.
Kohl's is known for providing great holiday value, and this year will be no different.
We officially kicked off the holiday season with our Black Friday preview event in early November, and we're very pleased with the results.
So we are off to a great start this quarter, and we are looking forward to continuing to engage our customers by bringing both product and promotional newness throughout the holiday season.
We will also support anticipated strong digital demand with our best-in-class omni capabilities, including an expanded number of drive-up parking spots for customer pickup and continuing to leverage our stores to help fulfill digital orders over the holiday season.
Before I hand it off to Jill, let me summarize my comments today.
As you've heard, we are making great progress against our strategy and navigating what continues to be a unique operating environment.
Q3 represented another outstanding quarter for the company, continuing our momentum from the first half of the year.
And our updated annual guidance positions us to exceed most of our 2023 goals two years ahead of plan and achieving an all-time record earnings per share.
Over the past 12 to 18 months, we have executed a major transformation of the Kohl's operating model, repositioning the business for sustainable future growth and improved profitability.
We're making tremendous progress in enhancing the relevance of the brand.
We have strengthened our product portfolio with the addition of many highly regarded national brands and have elevated our private brands with more clarity.
We launched an industry-renowned beauty partnership with Sephora, and we improved the overall customer experience through merchandising enhancements and new omni capabilities.
Looking ahead, we are in a very strong financial position and are incredibly confident in our future.
This is evident in our actions to continue accelerating share repurchases.
Our business has momentum, and we are focused on building on it as we move through the fourth quarter and into next year.
In closing, I want to express my sincere gratitude to all of our associates for their unwavering commitment to our company.
We appreciate all that you have done to prepare us for this key holiday season and all that you do every day to deliver a great experience to the millions of customers who choose Kohl's.
I want to start by reiterating Michelle's sentiment.
We delivered another great quarter and continue to gain traction on our strategic initiatives.
I am incredibly proud of our actions to reposition the business for future growth and drive improved profitability.
For today's call, I'm going to review third quarter results, discuss our capital allocation actions and then provide details on our updated 2021 guidance outlook.
For the third quarter, net sales increased 16% to last year and were slightly ahead of 2019, driven by growth in both our stores and digital businesses.
Other revenue, which is primarily credit revenue, increased 17% over last year.
Turning to gross margin.
Q3 gross margin was 39.9%, up 408 basis points from last year driven by our inventory management efforts and our pricing and promotion optimization strategies, offset partially by incremental transportation costs related to the constrained global supply chain.
Now let me discuss SG&A.
In Q3, SG&A expenses increased 6% to $1.4 billion driven by the double-digit to top-line growth.
As a percentage of revenue, SG&A expenses leveraged by 273 basis points to last year as we continue to deliver against our efforts to drive marketing and technology efficiency.
And improved store labor productivity, which more than offset increased wage pressure across our stores and distribution centers.
Our strong margin and SG&A performance translated into an 8.4% operating margin.
This was a nine-year high for the third quarter and represented an increase of 734 basis points to last year and an increase of 403 basis points to 2019.
Last, let me touch on some additional financial items.
Interest expense was $12 million lower than last year due to lower average debt outstanding during the quarter.
Net income for the quarter was $243 million, and earnings per diluted share was a Q3 record of $1.65.
Turning to the balance sheet.
We continue to be in a strong financial position.
In late October, we made our final move to return our balance sheet to its pre-pandemic structure by migrating back to a $1 billion unsecured cash flow-based revolving credit facility.
We ended the quarter with $1.9 billion of cash and cash equivalents and no outstanding balance on our revolver.
Inventory at quarter end was 1% higher than the prior year and down 25% to 2019.
However, our available-for-sale inventory was down more than this given higher in-transit inventory, with Women's disproportionately impacted.
The industrywide supply chain challenges continue to impact our ability to rebuild inventory to desired levels.
On the positive side, our inventory composition remains very clean and turnover marked a 10-year high.
Turning to cash flow.
Year to date, we have generated operating cash flow of $1.8 billion and free cash flow of $1.3 billion.
Capital expenditures were $426 million year to date, driven by in-store investments related to the Sephora build-out, refreshes and other customer experience and sales-driving enhancements as well as a new e-commerce fulfillment center opened earlier this year.
In addition, we continue to expand our small-format store concept, opening four new stores at the beginning of the fourth quarter.
Based on our current outlook, we now expect capex spend to come at the high end of our $600 million to $650 million range.
Now let me discuss our capital allocation actions.
During the third quarter, we accelerated our share repurchase activity, repurchasing more than 10 million shares for $506 million.
Year to date, we have repurchased 15.6 million shares for $807 million.
We plan on continuing our accelerated share repurchase activity with an additional $500 million in Q4, bringing our total for the year to $1.3 billion.
As announced last week, our Board of Directors declared a cash dividend of $0.25 per common share.
The dividend is payable on December 22 to shareholders of record at the close of business on December 8.
Taken together, we have returned a total of $921 million to shareholders through share repurchases and our dividends during the first three quarters of 2021.
Turning to our guidance outlook for 2021.
Based on our strong third quarter performance, we are raising our full year outlook and are guiding as follows: net sales to increase in the mid-20s percentage range, up from our prior expectation of low 20s percentage increase.
Operating margins to be in the range of 8.4% to 8.5%, up from our prior expectation of 7.4% to 7.6%.
This positions us to exceed the high end of our 2023 operating margin goal of 7% to 8%, two years ahead of plan.
And earnings per share to be in the range of $7.10 to $7.30.
This guidance represents an all-time earnings per share high for our company.
Let me provide some additional context on our implied guidance for fourth quarter.
For sales at the midpoint of our full year 2021 guidance, it implies that a fourth quarter sales increase in the low double-digit percent range relative to 2020.
For operating margins, our full year 2021 guidance implies a fourth quarter operating margin of approximately 6.6%, which is an increase of 140 basis points, compared to 5.2% last year.
Embedded in our guidance, our incremental headwinds totaling more than 350 basis points as compared to the same period in Q4 2019.
These include higher digital penetration, freight and holiday surcharges, and higher wages and incentives.
Lastly, as a reminder, for comparison purposes, last year's fourth quarter 2020 earnings per share included $1.15 per share of incremental tax benefit driven by the tax planning strategies.
In summary, we are really pleased with our third quarter results and the progress we are making against our strategy.
As you've heard today, our business has clear momentum, and we look to build on it as we close 2021 and enter the new year.
We will review our overall strategy and update our long-term financial framework given that our strong performance in 2021 positions us to exceed many of our current 2023 goals.
| sees fy adjusted earnings per share $7.10 to $7.30 excluding items.
q3 earnings per share $1.65.
raises full year 2021 financial outlook.
fy 2021 net sales is now expected to increase in mid-twenties percentage range.
fy 2021 adjusted earnings per share is now expected to be in range of $7.10 to $7.30.
plans to repurchase $1.3 billion of shares in 2021.
ended quarter in a strong financial position with $1.9 billion in cash.
|
Today, I am joined by Charles Tyson, our President and Chief Executive Officer; and Nancy Walsh, our Chief Financial Officer.
During today's conference call, management will be discussing results on an adjusted basis.
In addition, during today's call, we will be discussing our financial performance on both a one and two-year basis given that the second quarter of last year was severely impacted by COVID-19 closures.
Now, I am pleased to introduce, President and CEO, Charles Tyson.
We delivered strong second quarter sales and profitability growth, with comp sales up 31.3% versus last year and up 10% on a two-year stack basis.
A strong comp growth was driven both by increasing traction on our transformation initiatives as well as the reopening of the economy compared to the COVID-19 shut down in effect for much of the second quarter of last year.
We believe our second quarter sales could have been higher if not for the global supply chain disruption that are having widespread impact.
Second quarter operating margin of 5.5% was up 290 basis points versus the second quarter of last year and up 600 basis points on a two-year basis.
Underscoring the great work and execution of our merchant and sourcing teams to mitigate higher tariffs, materials and transportation cost, and the organization disciplined expense management.
On an adjusted basis, operating margin of 5.6% increased 280 and 440 basis points respectively versus the second quarter of '20 and 2019.
We were pleased to report diluted earnings per share of $0.41, which was up $0.32 versus 2020 and up $0.51 versus 2019.
Adjusted earnings per diluted share of $0.41 was up $0.31 versus 2020 and up $0.38 versus 2019.
Nancy will go into more details on the financial results during her remarks, including what we have done to strengthen our balance sheet and pay down all of that debt.
Taking a closer look at what drove affecting to a quarter sales, we were pleased with the increasing traction we're seeing from our investments and improving the customer experience.
These investments helped to grow our sales with pro, install and DIY customers.
First pros, growing our business to drove is a key component of our long-term growth strategy.
We primarily work with flooring focused products such as remodels, property managers, install and builders, and pros working in public spaces.
We were very pleased to report that our pro comp sales growth during the quarter exceeded total company comp sales growth on both a one and two-year basis.
We attribute the performance in pro sales growth to a combination of execution on our strategic pillar of improving the customer experience.
As well as achieving more balanced growth across each of the types of pro customers we serve due to the reopen of the economy.
We continue to build on the foundational program we launched in the third quarter of 2020 to create stronger relationships with pros and better understanding the business, so we can provide better service and support them as a true partner.
This relationship approach has been consistently reinforced for that field and it's beginning to drive meaningful result.
We were pleased with the results we are seeing from our dedicated outside pro account rep pilot.
And we continue to monitor this program throughout 2021.
Building on that in early June, we reconfigured our national account rep program, so that our inside sales reps are now better aligned geographically with the field, are now focused on building relationships with our pros and driving incremental growth.
In March 2021, we introduced everyday competitive pricing for pros.
And we allow pros to extend that pricing to their customers through a referral program.
This pricing and referral program is delivered by our dedicated web experience we launched for pros in April 2021.
The online experience also gets pros access to real-time inventory levels at nearby stores.
We've received very positive feedback on these two new important value drivers for pros and we're continuing to build awareness for these services.
We plan to continue to enhance the pro web experience with additional services in the months ahead.
We believe the combination of how we align and focus our sales organization to better serve the pro, combined with introducing new valuable services dedicated to the pro will help us build richer and deeper relationships and grow our business with these important customers.
In addition to our success with pros, our second quarter results were driven by a 107% increase in net services sales, which are largely comprised of installation sales.
The increase in installation sales versus last year primarily reflects consumers' comfort with having professional enter their homes compared to the severe shutdown due to COVID-19 in the second quarter of last year.
On a two-year basis, net service sales were up 10%, demonstrating the benefit from our investments in improving the installation customer experience.
We believe offering our customers a complete solution from inspiration to installation is a core competitive advantage for us.
We offer delivery and in-home installation services through select third party installers for customers who purchase outdoor.
We plan to grow our installation sales by attracting new customers and automating much of the installation experience to improve both the customers' experience and increase store productivity.
This automation started in the second quarter of 2020 when we launched an independent installer portal.
Using this tool, our installation partners and better manage schedules, financial, estimates and other workflow items.
This management tool helped many of our installers successfully grow their business while beyond their original expectation.
Building on that, in December 2020, we rolled out an in-store portal to enhance visibility to our customers installation projects, increase efficiency for our store associates and reduce turnaround time for our customers when quoting new jobs.
We plan to continue to add capabilities to the in-store portal to make it a seamless path and easiest possible could conduct installation business with us.
We also grew sales for DIY customers in the second quarter versus last year.
Our strategy to grow business with DIY customers is to deliver convenient, superior and high-touch guided shopping experience.
That's both affordable and accessible.
Buying flooring is a complex transaction.
We provide an end-to-end solution that starts with helping customers to select the floor itself for the underlayment and matching accessories.
And finally the installation services to complete a project.
Transformation initiatives supporting our DIY growth strategy include improving the customer experience in driving traffic and transactions.
More specifically, generating demand with a brand that represents quality, a guided experience and a trend right assortment.
Making it easy for retail customers to do business with us through engaging digital tools and educational online content, and creating a more convenient and engaging in-store customer experience.
In May, we launched our new Floor Love brand campaign, which repositions the LL Flooring brand to highlight our expertise and high quality trend right assortment.
The campaign reinforces our dedication to guiding customers through the entire flooring journey with the tag line from inspiration to installation, get the floors you love only at LL Flooring.
In July, we began the broad scale rebranding of our stores, which we expect to be largely completed by the end of 2021.
A new rebranded store format includes both new store experience and interior assignments that creates an appealing environment, which better showcases the quality of our products and the expertise of our people.
We also further enhanced our on-trend design product portfolio with the launch of new innovative wide width and water resistant flooring.
During the second quarter vinyl plank and solid hardwood were again our top performing categories.
We now offer more than 500 flooring SKUs that customers can easily discover through our e-commerce site including a completely virtual online experience or in our stores.
A digital experience is an important part of bringing more customers into the flooring journey.
During the second quarter, our web sales were down 32% versus the second quarter of last year when COVID shutdowns were at the peak.
But were up over 140% on a two-year stack basis.
Customers were very engaged with our Picture It!
and Floor Finder tools, which make it easy to imagine how the floor will look in their homes.
We plan to continue to enhance our digital experience, and drive traffic to our e-commerce site and stores through effective digital marketing.
What also making it more convenient to shop with us by expanding our store footprint.
During the second quarter, we opened four new stores bringing our total store count to 416 at the end of June.
In addition to opening traditional stores, we have further enhancing customer convenience and reinforcing our LL Flooring brand proposition by piloting a test of showroom-only locations.
We have three locations scheduled to open during the second half of 2021, and convenient and attractive retail corridors.
And we look forward to sharing more on these pilots on future calls.
Including the three showroom-only locations, we are on track to open 12 to 15 new stores in 2021.
Turning to our people and culture initiative, building a strong company culture is critically important and provides the foundation for all that we do for our customers.
We've embraced diversity, equity and inclusion as a core value.
And we're building a scalable program to ensure that these values permeate throughout the organization, including our recently completed diversity, equity and inclusion workshops.
We are also investing into attracting and retaining talent.
We're creating an attractive professional development and career path for our associates in order to establish LL Flooring as an employer of choice.
This includes new learning and development programs that are helping our associates to deliver both an outstanding customer experience as well as develop leadership skills that can take them to the next level within the company.
At the end of June, we launched a new program to increase our investment in our field team including increasing store staffing level and raising wages.
We believe all of these actions are critical components of our goal of building a high performing company culture that attracts and retains top talent and reinforces our value.
As we look ahead, we are encouraged by the traction we are gaining on the each of our strategic pillars; people and culture, improving the customer experience, driving traffic and transactions, and improving profitability.
We believe these pillars will enable us to win with customers and drive sustainable long-term growth.
From a consumer demand perspective, we remain encouraged by potential multi-year tailwind supported of consumer spending on hard surface flooring.
Additionally, existing home sales have been an important driver of flooring projects.
In June, the inventory of existing home sales to sale was $125 million representing a 2.6-month supply, which was a slight improvement from May.
We are monitoring tight how the inventory and affordability on continued existing home sales.
That said, the new more flexible work environment post COVID-19 may motivate more consumers to remodel their existing homes but they cannot move.
So, we are also monitoring the positive work from home impact of flooring remodeling projects.
In addition, we're monitoring the potential impact of a shift in consumer spending patterns in the second half of 2021.
Since May, the US is seeing consumers shift spending from durable goods to services as they prioritize lesser activities of a home improvement project.
In addition, inflationary pressure could cause consumers to postpone big ticket projects until affordability improves.
Finally, recently that delta variant of COVID-19 has caused an increase in cases in the US and abroad.
And we're monitoring the potential impact of this on suppliers as well as consumer demand and their willingness to have contracted in their homes.
Turning now to the supply chain.
During the second quarter, we believe we could have captured more sales if the inventories have been higher.
Our supply chain teams continue to do a great job bringing in new inventory and allocating it effectively across our stores to help our customers complete their flooring projects.
In addition, consistent with our strategy of being a leader in delivering a trend right assortment, we currently offer over 500 SKUs, and we'll continue to introduce new and innovative products sourced from across the world to help satisfy demand.
We believe our high level of service, selection and expertise is a key competitive advantage that allows us to win with customers in this challenging supply chain environment.
We expect the supply chain to remain constrained for the foreseeable future potentially continuing to limit inventory availability and increased materials and transportation costs.
From an international perspective, some of our sourcing partners across Southeast Asia have experienced temporary shutdowns due to COVID-19 outbreak, which limited production and delayed international shipping.
We also continue to navigate general limited international container availability and higher container costs.
Domestically, we do not expect the solid domestic hardwood supply to normalize until 2022 at the earliest.
We also continue to see availability constraints on domestic trucking, which is impacting our transportation costs.
We will look to continue to mitigate higher material and transportation costs through pricing and promotional strategy, while monitoring the market to inform and guide our decisions.
We will also continue to execute disciplined expense management, increasing efficiency and productivity while investing in our strategic growth pillars.
In summary, we demonstrated strong sales and profitability improvement in the second quarter on both a one and two-year basis.
Underscoring the traction we're gaining on our transformation initiatives, particularly pleased with pro sales growth outpacing our overall growth and we look forward to building on this momentum.
While the near-term operating environment poses challenges, we believe our transformation strategy will position us well for the long term.
In the second quarter, net sales of $301.4 million increased $71.1 million or 30.9% versus the second quarter of 2020 due to a 23.6% increase in net merchandise sales and 106.8% increase in net service sales.
We saw a 29.4% increase in our average ticket reflecting a greater mix of installation sales as well as higher merchandise average ticket and a 2% increase in transaction count compared to the same period in 2020.
When comparing to the second quarter of 2019, net sales increased 4.4% driven by 3.5% higher merchandise sales, and 10.4% higher net service sales.
Average ticket improved 11.3% and transactions were down 1.3%.
As Charles noted, second quarter 2021 comparable store sales increased 31.3% versus the second quarter of 2020 and 10% on a two-year stack basis.
We achieved these strong results despite continued supply chain constraints.
We feel good about the underlying demand for our flooring based on our customer deposits, and our teams are doing a great job managing customer expectations and inventory across our network to fulfill customer orders.
Turning now to gross profit.
Gross profit increased 27.7% in the second quarter of 2021 to $112.7 million from $88.3 million in the comparable period of 2020, an increase to 10% from $102.5 million in the second quarter of 2019.
Gross margin of 37.4% in the second quarter of 2021 compared to 38.3% in the second quarter of 2020 and 35.5% in the second quarter of 2019.
The 90 basis point decrease in gross margin versus last year primarily reflects higher tariffs on certain goods imported from China, and higher materials and inbound transportation costs, which were partially offset by pricing, promotions and sourcing strategies.
The second quarter of 2021 and 2020 had no non-GAAP adjustments to gross margin.
During the second quarter of 2019, gross margin included a $780,000 favorable adjustment for HTF duty categorization in prior periods.
When excluding that adjustment, gross margin was 35.2% for the second quarter of 2019.
The 220 basis point improvement in the second quarter of 2021 adjusted gross margin versus 2019 is particularly impressive given that the cost of merchandise sold on certain products imported from China included 25% tariff rates in the second quarter of 2021 compared to only 10% in the second quarter of 2019.
Turning now to SG&A.
SG&A expense for the second quarter with $96.1 million or 31.9% of sales leveraging 380 basis points compared to $82.3 million or 35.7% of sales in the second quarter of 2020.
SG&A expense for the second quarter of 2019 was $103.9 million or 36% of sales.
SG&A in each quarter included certain costs related to legal matters and settlements.
When excluding these items from all periods, adjusted SG&A expense for the second quarter of 2021 was $95.8 million compared to $81.8 million in 2020 and $98.1 million in 2019.
The higher adjusted SG&A expense in 2021 compared to 2020 reflected substantial adjustments made last year to address the COVID-19 pandemic.
When compared to 2019, the lower SG&A expense reflected more efficient marketing spend and disciplined expense management under the company's profit improvement initiative.
Even with the rigorous cost controls, we continue to invest in our growth initiatives that fuel our top line performance.
As a percent of sales, adjusted SG&A of 31.8% improved 370 basis points from 35.5% of sales in the second quarter of 2020 and improved 220 basis points from 34% of sales in the second quarter of 2019.
For the second quarter of 2021, we delivered operating income of $16.6 million, an increase of $10.6 million compared to $6 million in the second quarter of 2020 and an operating loss of $1.4 million in the second quarter of 2019.
Adjusted operating income in the second quarter of 2021 was $16.9 million, up $10.4 million from $6.5 million for the prior year period and up $13.3 million from 2019.
Adjusted operating margin for the second quarter of 2021 was 5.6%, up 280 basis points from 2.8% in the second quarter of 2020 and up 440 basis points from 1.2% in 2019.
The higher operating income and margin reflect good progress on our profit improvement initiatives with our merchant and sourcing teams implementing strategies to mitigate tariffs and higher transportation material costs.
Our marketing teams deploying more efficient and effective marketing spend and our overall organization driving disciplined expense management.
In the second quarter of 2021, we reported other expenses of $490,000 compared to other expense of $1.1 million for the three months ended June 30, 2020.
The decrease of $600,000 was driven by lower interest and fees on our credit agreement due to the amendment in April 2021 and the paying down of our outstanding debt during the second quarter of 2021.
In the second quarter of 2021, we recognized income tax expense of $4.1 million or an effective tax rate of 25.6% compared to income tax expense of $2.2 million or an effective tax rate of 45.7% for the second quarter of 2020.
The variability of our tax rate in 2020 reflects the impact of the CARES Act last year.
For the second quarter of 2021, net income increased by $9.4 million to $12 million compared to net income of $2.6 million for the second quarter of 2020.
We reported a net loss of $2.9 million in 2019.
Adjusted earnings for the second quarter of 2021 were $12.2 million compared to adjusted earnings of $3 million for the second quarter of 2020 and $820,000 in 2019.
Finally, earnings per diluted share were $0.41 for the quarter versus earnings per diluted share of $0.09 in the year ago quarter and a loss of $0.10 in 2019.
On an adjusted basis, second quarter earnings per diluted share of $0.41 compared to adjusted earnings of $0.10 for the second quarter of 2020 and adjusted earnings of $0.03 in 2019.
Turning to the balance sheet.
Inventory at the end of the second quarter was $224 million compared to $225 million at the end of March 2021 and $249 million at the end of June 2020.
The 10% year-over-year reduction in inventory was primarily driven by supply chain constraints on replenishment and strong sales that kept inventory below our targeted level.
Our balance sheet and liquidity are strong.
We ended the quarter with cash and cash equivalents of $112 million compared to $170 million as of December 2020.
During the second quarter, we repaid all $101 million of our outstanding credit facility debt consistent with the plans we shared on our last call.
Net cash provided by operating activities was $53 million for the six months ended June 30, 2021 primarily due to positive changes in working capital reflecting continued inventory supply constraints as well as $23 million of net income.
We continue to work toward rebuilding our inventory to optimal levels.
As we are able to do so, we would expect that to have an unfavorable impact on working capital and cash provided by operating activities.
As of June 30, 2021, we had $241 million of liquidity comprised of $112 million of cash and cash equivalents, and $129 million of excess availability under the credit agreement.
This represents an increase in liquidity of $55 million from June 30, 2020.
Turning now to the remainder of 2021, in the face of a dynamic operating environment.
our team remains dedicated to our transformation, driving growth and improving profitability.
I would like to expand on some of the details that Charles touched on at a high level.
We are pleased with the traction we are gaining on our transformation initiatives.
That said, given the combination of increasingly challenging supply chain constraints on inventory replenishment, potential consumer demand shift and the potential impact of the COVID-19 delta variant, we believe it is prudent to plan for slowing comparable sales on a two-year stack basis for the second half of 2021 compared to the 10% we delivered in the second quarter.
We remain concerned that higher transportation material costs will persist in the second half and we look to offset higher costs through pricing and promotion strategies while monitoring the market to inform and guide our decision.
As we saw in the second quarter, we expect installation sales to return to a pre-COVID mix in 2021 as we execute our initiatives to attract more customers and as our customers are more comfortable having people enter their home.
This will benefit gross margin dollars, but lower the gross margin rate.
With respect to SG&A, during the second half of 2021, we would expect adjusted SG&A spending to increase as a percent of sales compared to the second quarter.
This is due primarily to be increasing investments in our field organization that Charles discussed as well as continued investment in our strategic initiatives to support our growth over the long term.
We still expect CapEx investments of approximately $24 million to $28 million in 2021 primarily for the broad scale rebranding of our stores, the opening of 12 to 15 new stores, and investments in digital.
During the second quarter, we opened four new stores.
In April, we opened our Exton, Pennsylvania store.
In May, we opened a new store in Medford, New York.
And in June, we opened new stores in Hattiesburg, Mississippi and Beckley, West Virginia.
The new stores have the LL Flooring branding and we are excited about the opportunity to drive additional sales and profitability growth through these new location.
In summary, we delivered strong sales growth and profitability in the second quarter on both a one and two-year basis, demonstrating solid progress on our transformation initiatives.
Our entire organization remains focused on driving growth and profitability in 2021.
And our strong balance sheet and liquidity provide us with the financial flexibility to fund our strategic growth initiatives and position LL Flooring for long-term success.
With that, I'll ask the moderator to open the call for question.
| compname says ll flooring posts q2 earnings per share $0.41.
q2 earnings per share $0.41.
q2 sales $301.4 million versus refinitiv ibes estimate of $296.8 million.
qtrly total comparable store sales increased 31.3% versus same period last year.
during q2, company opened four new stores, bringing total stores to 416 as of june 30, 2021.
not providing financial guidance at this time.
prudent to plan for slowing comparable sales on a 2-yrstack basis for h2 2021 versus 10% 2-year stack delivered in q2.
|
As for the content of today's call, Kevin will start with a discussion of the business and Robert will follow with a recap of Dolby's financial results and provide our first quarter and fiscal 2022 outlook.
Our Q4 earnings per share came in above our midpoint, while revenue came in toward the low end of our guidance range.
Looking at the full year, we had a strong fiscal 2021 with 10% revenue growth and our highest operating margin since fiscal 2014, and we created considerable momentum across many of our growth initiatives, that will allow more people to be entertained by premium Dolby experiences.
Consumers can now easily record, edit and share their videos in Dolby Vision with their Apple iPhone.
Music in Dolby is being enjoyed by a significantly larger audience, with the launch of Dolby Atmos on to Apple Music, and we have the first partners, who will enable the Dolby Atmos music experience in the car, with Mercedes-Benz and Lucid Motors, and gamers can now play some of their favorite titles in Dolby Vision for the first time, on the latest Xbox.
During FY '21, our revenues benefited from robust increases in consumer device shipments, combined with increased adoption of Dolby Atmos and Dolby Vision, partially offset by a decrease in the cinema related revenues.
As we enter FY '22, we are expecting revenue growth in the mid to high single digits, as we anticipate a shift in those factors, with accelerating growth of Dolby Atmos and Dolby Vision and a partial recovery in cinema related revenues, offset by a macro slowdown in consumer device shipments.
It has been a dynamic environment.
Before Robert takes you through the numbers in more detail, including a discussion on our licensing end markets, I want to walk you through some of the most important factors, as we think about long-term revenue growth.
Our foundational audio technologies, increased adoption of Dolby Atmos and Dolby Vision and our opportunity to expand our addressable market with initiatives like dolby.io.
Let's start with our foundational audio technologies, which include Dolby Digital Plus, AC-4 and our audio patent licensing.
These foundational technologies made up roughly three quarters of our licensing business in FY '21, and have high attach rates across a diverse set of devices and end markets.
In FY '21, our foundational audio technologies grew about 11% year-over-year, due largely to robust global shipments of DCs and higher TV volumes, particularly in North America and Europe.
We also benefited from higher than normal true ups coming into the year.
As we look ahead to FY '22, industry analysts' reports indicate that we will not see the level of market growth we saw in the previous year, noting uncertainties around global supply constraints and consumer spending.
Of course, we partner with OEMs across multiple device categories, across all geographies and each of them is impacted differently.
When we take all of this into account, we expect a decrease in the low single digits for our foundational audio revenues.
Over the long term, we expect our foundational licensing revenue to generally reflect market trends and device shipments, driven by our strong presence across a wide set of consumer devices and markets, with opportunities to increase adoption in certain areas like mobile and automotive.
The remainder of our licensing revenue includes Dolby Atmos, Dolby Vision and our Imaging Patent Technologies, where growth is being driven primarily by new adoption and new licensees.
This portion of our licensing revenue also includes Dolby Cinema, where we expect strong year-over-year growth, as box office recovers from low attendance throughout FY '21, driven by the pandemic.
In total, this portion is approaching one quarter of our licensing revenue and grew nearly 20% in FY '21.
We see this growth accelerating to over 35% in FY '22.
Our continued momentum with Dolby Vision and Dolby Atmos is a key driver here, and I'd like to take a few minutes to highlight our progress in these areas.
Let me start with Dolby Atmos Music; the response from artists and consumers is clear.
Dolby Atmos creates a whole new way to enjoy music.
The engagement continues to build, with some of the world's most popular music artists like Justin Bieber and The Weeknd, describing the Dolby Atmos music experience as “game-changing,” and “an immersive world where you can feel every detail”.
We also recently launched a new venue, Dolby Live at Park MGM, where concert attendees will be able to enjoy their favorite artists with the ultimate Dolby Atmos Music experience, and then seek the experience in all the ways they enjoy music.
Amazon Music recently announced that they are making Dolby Atmos Music experiences more broadly available to their subscribers.
The music in Dolby experience significantly increases the value that Dolby brings, across a wide range of devices, including mobile, PC and speaker products.
Our growing presence in music has created a new value proposition for Dolby in the automotive space.
Mercedes-Benz announced last month, that they are adopting the Dolby Atmos Music experience in two of their top luxury cars, the Mercedes Maybach and the Mercedes-Benz S-Class.
And just yesterday, Chinese electric-car maker NIO, announced they are including Dolby Atmos in their ET7 model.
We are excited that these new partnerships add to our early momentum within automotive, that started with Lucid Air earlier this year, which is now on the road in the U.S.
We are just at the beginning of the significant opportunity we see ahead in this space.
This quarter, the launch of the iPhone 13 lineup again highlighted the capability to enable consumers to record and share their videos in Dolby Vision.
With a significant increase to the amount of Dolby Vision content being created through the iPhone, we are seeing a range of content platforms, now enabling support for Dolby Vision for the first time.
This quarter, Bilibili, one of China's largest social video sites, began to support the upload and sharing of user generated Dolby Vision content.
More recently, Vimeo became the first all-in-one platform to support playback of Dolby Vision content for the Apple ecosystem.
With more content platforms supporting Dolby Vision content to broader audiences and used cases, we look to drive increased adoption of Dolby Vision playback and capture across more devices, particularly in mobile and PC.
We are also building momentum to enable more live broadcast events in Dolby.
Comcast delivered the 2021 MLB World Series and playoff games in Dolby Vision on Fox Sports.
Thursday night football games will be available in Dolby Vision through Fox, and NBC will be delivering select college football games in Dolby Vision.
Growing the number of Dolby content experiences, especially live content with dedicated followings, provides more impetus for greater adoption of Dolby Vision and Dolby Atmos.
Gaming in Dolby Vision is now available on the Xbox series X and S, marking the first time gamers can enjoy playing in the combined Dolby experience.
Microsoft also expanded their support of the combined experience, by adding Dolby Vision to their Surface devices.
In the living room, we see our partners like Amazon, Xiaomi, TCL and Sky, highlight the combined Dolby Vision and Dolby Atmos experience in their latest TV launches, and we continue to garner support from streaming services with Hulu, adding Dolby Vision this quarter.
The newer soundbar products from LG and Sonos showcase support for Dolby Atmos, and in mobile, we saw new Android phones and tablets this quarter from Samsung, Xiaomi and Realme with Dolby technologies.
With a solid foundation and increasing adoption of Dolby Atmos and Dolby Vision, we are able to broadly address the world of premium content experiences like movies, TV and music, and are confident in our ability to drive continued growth.
With Dolby.io, our developer-first API platform, we see an opportunity to greatly expand our addressable market, by focusing on use cases that benefit from Dolby's unique experience in media and communications.
While our platform has broad applicability across a range of use cases, we are focusing where we think we can offer the most differentiation, virtual live performances, online and hybrid events, social audio, premium education, gaming and content production.
Each of these verticals represents an opportunity of hundreds of billions of minutes annually.
And collectively, we estimate the addressable market to be about $5 billion and growing.
With the breadth and depth of our expertise, we are enabling higher quality capture, processing and playback capabilities compared to what is currently available in the market.
Last quarter, we released a major platform update, which puts us in a position to address more of our potential customers' needs, by making our APIs more competitive on the number of concurrent users we can support.
As we focus on our target use cases and learn from our engagement with developers, we continue to introduce new APIs and features that address the needs of developers and improve the overall developer experience.
With these recent improvements, we are beginning to see increased self-service activity.
And with our new leadership in place, we are focused on increasing awareness and building the pipeline.
This quarter, we saw a number of new music distribution services, including UnitedMasters, integrating our music mastering API and enabling their users to create high-quality music tracks.
Also, Cloudinary recently launched an integration of Dolby.io's audio enhance APIs with their MediaFlows product, allowing their customers to easily improve the audio quality of their videos.
While we are still in the early days of Dolby.io, we are excited about the significant opportunity ahead.
Before I wrap up, let me spend a minute on our operating model.
We significantly increased operating margins in FY '21, due to a combination of gross margin improvements and reduced spending levels due to COVID.
We anticipate a partial return of some of these operating expenses in FY '22, like travel and events, as well as a few specific items like our 53rd week of payroll.
At the same time, on the strength of our operating model, including our improved gross margins, we will continue to generate higher operating margins, as compared to our pre-pandemic levels, while investing in our growth areas.
So in summary, we have a strong foundation and fiscal 2021 was highlighted by significant wins like Dolby Atmos on Apple Music, the first cars that will support Dolby Atmos and enabling Dolby Vision across a wider range of content, from live events to gaming to the user-generated content.
We see much of the opportunity ahead, as we drive broader adoption across more content and more devices, even as we seek to significantly expand our addressable market with Dolby.io.
All of this gives us confidence in our ability to drive long-term revenue and earnings growth, as we look to FY '22 and beyond.
Robert is an experienced leader, with a track record of guiding companies through growth, while delivering operational excellence and accountability.
Robert has been onboard for about four weeks now.
We are excited to have his expertise, as we work toward Dolby's next phase of growth.
And with that, I will hand it over to Robert, to take us through the financials in more detail.
I am very excited to be here and join the Dolby team.
I hope that in the near term I get a chance to meet you all, if not in person, at least virtually.
So let's go through the numbers for Q4 and full year 2021, and then I will take you through our outlook for fiscal year '22.
Total revenue in the fourth quarter was $285 million, which was within the total revenue guidance range we provided, and also included a favorable true-up of about $3 million for Q3 shipments reported, that were above the original estimate.
Revenue landed toward the low end of our guidance range, due to timing of the deal that pushed out of the quarter, and is now anticipated to result in revenue in fiscal year 2022.
With our Q4 results, full year 2021 revenues were $1.28 billion compared to $1.16 billion in fiscal year 2020, generating 10% year-over-year growth.
Within that, licensing revenue was $1.21 billion, while products and services revenue was $67 million.
On a year-over-year basis, fourth quarter revenue was about $14 million above last year's Q4, as we benefited from greater adoption of Dolby Vision and Dolby Atmos and higher cinema-related revenues, partially offset by lower true-ups.
Q4 revenue was comprised of $266 million in licensing and $19 million in Products and services.
Let's discuss the full year and year-over-year quarterly trends in licensing revenue by end market, and I will also highlight the key factors, as we look ahead to fiscal '22.
Broadcast represented about 39% of the total licensing in fiscal year 2021.
Our full year revenues grew by $36 million or 8% on a year-over-year basis, driven by higher adoption of Dolby Vision and Dolby Atmos in TVs and set-top boxes.
We also saw higher foundational audio revenues due to increased TV shipments in North America and Europe compared to fiscal 2020.
In Q4, we saw broadcast revenues decline from prior year's Q4, as we saw lower true-ups for foundational audio revenues on a year-over-year basis, partially offset by higher revenues from Dolby Vision and Dolby Atmos.
As we look out to fiscal 2022, we currently anticipate broadcast revenues to grow in the low single digits from fiscal '21, driven by higher adoption of Dolby Vision, Dolby Atmos and growth in our imaging patent programs.
These growth factors are projected to be partially offset by lower foundational audio revenues, as we see lower recoveries and lower true-ups on a year-over-year basis, and industry analysts are projecting TV shipments to be flat to down low single digits.
Mobile represented approximately 22% of total licensing in fiscal 2021.
Mobile revenue increased by $34 million or 15% compared to fiscal 2020, as our foundational audio revenues benefited from timing of revenues, and we saw higher Dolby Vision revenues from increased adoption.
Our Q4 mobile revenues were up about 2% compared to the prior year, due to higher adoption of Dolby Vision and Dolby Atmos.
In fiscal year '22, we anticipate that mobile revenues could grow mid to high single digits, driven by increasing adoption of Dolby Vision and Dolby Atmos, as well as growth in our imaging patent programs.
These factors will be partially offset by lower foundational audio revenues, due to timing of revenues under contract.
Consumer electronics represented about 15% of total licensing in fiscal year 2021.
On a year-over-year basis, CE licensing increased by $29 million or 19%, driven by higher foundational audio revenues, as a result of increased unit volumes in soundbars and AVRs, as well as higher recoveries.
We also saw growth from higher adoption of Dolby Atmos and Dolby Vision across CE devices.
Our Q4 CE revenues increased 28% compared to prior year, which was in line with full year growth drivers of both higher foundational audio revenues and growing adoption of Dolby Atmos and Dolby Vision.
As you look ahead to fiscal year '22, we see CE revenues relatively flat year-over-year.
We expect to see higher revenues from Dolby Vision and Dolby Atmos adoption, as well as increasing contributions from our imaging patent programs.
These growth drivers will be partially offset by lower foundational audio revenues, as industry analysts are estimating unit volumes in DMAs and soundbars to decrease year-over-year and we anticipate lower CE recoveries.
PC represented about 12% of total licensing in fiscal year 2021.
Our fiscal year '21 PC revenues were higher than prior year by about $10 million or 7%, driven by higher foundational audio revenues, as a result of strong PC shipments throughout the year and growing revenues from Dolby Atmos and Dolby Vision.
These growth factors were partially offset by lower recoveries compared to fiscal year '20.
Our Q4 PC revenues were about 7% higher compared to prior year Q4, driven by increased Dolby Vision and Dolby Atmos revenues.
As we look ahead to fiscal year '22, we see low to mid single digit growth in our PC revenues, as more PCs continue to adopt Dolby Vision and Dolby Atmos, as well as growth in our imaging patent programs.
Other markets represent about 12% of total licensing in fiscal year 2021.
They were up about $26 million or 21% year-over-year, driven by higher revenues from gaming, due to the console refresh cycle and higher foundational revenues related to patents.
In Q4, we saw other markets grow about 26% year-over-year due to increased Dolby Cinema revenues as theaters reopen, and higher revenues from gaming.
As we look ahead to fiscal '22, we anticipate that other markets revenues could grow at an even higher rate of over 25%, as we estimate Dolby Cinema revenues to continue momentum from Q4, as more people are able to return to the movies and we also see continued growth in gaming.
Beyond licensing, our products and services revenue was $67 million in fiscal year '21, compared to $83 million in fiscal year 2020.
Prior year included about two quarters of pre-pandemic activity related to our cinema products business, and included revenues for our communications hardware business, which we exited in early fiscal year '21.
Products and services revenue in Q4 was $19 million compared to $14 million in last year's Q4.
The year-over-year increase reflects higher demand in the cinema industry.
Total gross margin in the fourth quarter was 89.2% on a GAAP basis and 90% on a non-GAAP basis.
Operating expenses in the fourth quarter on a GAAP basis were $214 million.
Operating expenses in the fourth quarter on a non-GAAP basis were $189.9 million, compared to $176.5 million in the prior year.
Operating expenses were at the low end of our guidance for Q4.
Operating income in the fourth quarter was $40.4 million on a GAAP basis or 14.2% of revenue, compared to $30.1 million or 11.1% of revenue in Q4 of last year.
Operating income in the fourth quarter on a non-GAAP basis was $66.6 million or 23.4% of revenue, compared to $54.3 million or 20% of revenue in Q4 of last year.
On a full year basis, operating income was $344.4 million on a GAAP basis or about 26.9% of revenue, compared to $218.7 million or 18.8% in fiscal 2020.
Full year operating income in fiscal '21 on a non-GAAP basis was $450.7 million or about 35.2% of revenue compared to $317.9 million or 27.4% in the prior year.
Income tax in Q4 was minus 3% on a GAAP basis and 13% on a non-GAAP basis.
Our tax rate benefited from a number of discrete items, including return provision true-ups.
Net income on a GAAP basis in the fourth quarter was $44.2 million or $0.42 per diluted share compared to $26.8 million or $0.26 per diluted share in last year's Q4.
Net income on a non-GAAP basis in the fourth quarter was $60.4 million or $0.58 per diluted share, compared to $45.8 million or $0.45 per diluted share in Q4 of last year.
During the fourth quarter, we generated $110 million in cash from operations compared to $113 million generated in last year's fourth quarter.
We ended the fourth quarter with about $1.3 billion in cash and investments.
During the fourth quarter, we bought back about 1 million shares of our common stock and ended the quarter with about $291 million of stock repurchase authorization available going forward.
We also announced today a cash dividend of $0.25 per share, an increase of $0.03 or 14% compared to the prior quarter.
The dividend will be payable on December 8, 2021, to shareholders of record on November 30, 2021.
Now let's turn to guidance for fiscal '22.
We currently estimate total fiscal year '22 revenues could range from $1.34 billion to $1.4 billion.
This would result in about 5% to 9% of year-over-year growth as compared to the $1.28 billion in fiscal year 2021.
Within this, licensing revenue could range from $1.260 billion to $1.315 billion compared to $1.214 billion in fiscal year '21, which would result in a 4% to 8% year-over-year growth.
As I referenced earlier, discussing our revenue by end market, we expect strong growth in our other markets for increased Dolby Cinema and gaming revenues, as well as growth in mobile, PC and to a lesser extent, broadcast, due to increasing adoption of Dolby Vision and Dolby Atmos and growth in our imaging patent programs, partially offset by lower foundational audio revenues.
For products and services revenues, we anticipate this could range from $75 million to $90 million for fiscal year '22, with improvements in cinema products and growth in Dolby.io.
Gross margin for fiscal year '22 are expected to be relatively consistent with fiscal year '21.
Let me shift to operating expenses; we have several factors that impact our year-over-year expectations.
First, fiscal 2022 is a 53-week fiscal year for us, and that results in an extra week of payroll in Q1.
As Kevin mentioned, we also see a return of some expenses like travel and events that were lower during the pandemic.
In addition to normal annual merit increases that will typically go in effect in fiscal Q2.
Lastly, we continue to invest in areas like Dolby Vision, Dolby Atmos and Dolby.io.
With these considerations, we are estimating operating expenses for fiscal 2022 could range from $869 million to $889 million on a GAAP basis and between $750 million to $770 million on a non-GAAP basis.
With all of this, our business model remains very strong, as we expect to deliver operating margins between 24% to 26% on a GAAP basis, and between 34% and 36% on a non-GAAP basis.
Based on the factors above, we estimate that full year diluted earnings per share will range from $2.53 to $3.03 on a GAAP basis and $3.52 to $4.02 on a non-GAAP basis.
Let me shift to how that translates and what we see for fiscal Q1.
For Q1, we see total revenues ranging from $345 million to $375 million.
Within that, licensing revenues will range from $330 million to $355 million.
Note that in the prior year Q1, we benefited from a significant favorable true-up of over $21 million for Q4 fiscal '20 shipments, that was larger than normal, given the volatility of conditions during the pandemic.
Last year's Q1 also benefited from recoveries and timing of revenue under contract.
This was partially offset by increasing adoption of Dolby Vision and Dolby Atmos, and growth in our imaging patent programs.
Q1 products and services revenue could range from $15 million to $20 million.
Let me move on to the rest of the P&L outlook for Q1.
Q1 gross margin on a GAAP basis is expected to be 90% to 91%, and the non-GAAP gross margin is estimated to be about 91% to 92%.
Operating expenses in Q1 on a GAAP basis are estimated to range from $221 million to $231 million.
Operating expenses in Q1 on a non-GAAP basis are estimated to range from $190 million to $200 million, which contemplates the impact of the 53-week fiscal year.
Other income is projected to range from $1 million to $2 million for the first quarter.
And our effective tax rate for Q1 is projected to range from 18% to 19% on both a GAAP and non-GAAP basis.
Based on the combination of the factors I just covered, we estimate that Q1 diluted earnings per share could range from $0.71 to $0.86 on a GAAP basis and from $0.98 to $1.13 on a non-GAAP basis.
With that, let's move on to Q&A.
Operator, can you please queue up the first question.
| q4 non-gaap earnings per share $0.58.
q4 gaap earnings per share $0.42.
q4 revenue $285 million versus $271.2 million.
sees fy 2022 total revenue to range from $1.34 billion to $1.40 billion.
sees q1 2022 total revenue in the range of $345 million to $375 million.
sees fy 2022 diluted earnings per share to range from $2.53 to $3.03 on a gaap basis.
sees q1 diluted earnings per share in the range of $0.71 to $0.86.
sees fy 2022 diluted earnings per share to range from $3.52 to $4.02 on a non-gaap basis.
sees q1 non-gaap diluted earnings per share $0.98 to $1.13.
|
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 the 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, H.B. Fuller reported strong fourth quarter results, including 15% year-over-year revenue growth, a $134 million of EBITDA at the high end of our guidance and $1.09 of adjusted EPS.
Organic revenue was up 15% versus 2020 and increased 20% compared with the pre-COVID fourth quarter of 2019.
We had double-digit organic revenue growth in all three segments as a result of our innovation efforts, pricing strategies and service levels.
We also saw significant margin recovery with gross margin up 340 basis points versus the third quarter as a result of decisive pricing actions taken during the year.
And we continue to pay down debt in the quarter to substantially reduce our debt-to-EBITDA ratio to 3.3 times from 4.1 times a year ago.
We delivered on our commitments in the quarter as we have all year, despite a rise in virtually every cost associated with serving our customers and unprecedented supply chain challenges.
Our global team of 6,500 employees again demonstrated outstanding operational execution in this environment.
At the beginning of 2021, we set three operating priorities: volume growth, pricing to value and improved productivity and operational capacity.
We delivered on all three of these priorities throughout the year.
Volumes are up, productivity has improved.
And in the fourth quarter, we saw significant benefits from our strategic pricing actions.
We took swift actions early and throughout the year, as persistent inflation impacted our raw materials.
And in the fourth quarter, our pricing actions enabled us to catch up with material inflation and restore our margins.
In 2021, we implemented over $450 million of annualized price adjustments overcoming the annualized value of raw material cost inflation.
While inflation and supply chain management have been important drivers of the results this year, it's the overall strategy, the culture and the organizational capability that we've built that is enabling the company's success.
Our strategy is to deliver innovative adhesive solutions to customers faster than our competition, to collaborate effectively within our technical teams and with our global suppliers, to solve challenges and serve customers first and fastest.
And to do that while consistently demonstrating H.B. Fuller's values and principles as a great place to work.
It is this culture and strategy that is enabling our success.
Our ability to execute today is a result of the organization we've built and designed over the last several years.
In 2019, we reorganized into three global business units centered on 30 end markets, each focused on the needs of customers within that segment.
We invested in our supply chain and manufacturing systems to promote flexibility, and we streamlined the organization, better aligning all employees with our strategic objectives.
Because of these actions, our agility, speed to market and operational efficiency have increased, enabled us to successfully navigate widespread inflationary pressures, shipping disruptions, raw material shortages and numerous COVID-related impacts.
Shortages still persist for many, especially chemical raw materials, for plastic and metal packaging and shipping containers, but we continue to effectively leverage our global footprint and our sourcing capabilities to deliver for our customers.
Most importantly, we continue to capture new opportunities and gain share across end markets by delivering innovative adhesive solutions to meet new consumer needs and greater demand for sustainable goods.
Fuller roofing adhesives led the way to a 29% increase in this segment sales over the fourth quarter last year as we help customers deal with labor shortages.
Our innovative sprayable bonding roofing solutions increases installation speed with more efficiency and is approved for use in all VOC regulated markets.
Our new level-setting products, ready-to-use grouts, mortars and pressure-sensitive adhesive products enable new flooring to be installed more quickly and more reliably.
In 2021, we won significant new business in engineering adhesives with our solutions in support of sustainable markets, including electric vehicles, energy-efficient insulated glass, automotive electronics and solar panels.
And in hygiene, health and consumable adhesives, we are delivering innovation to meet increasing demand for more efficient and environmentally friendly packaging.
In 2021, we launched new adhesives that decompose with no residue or microplastics, while at the same time, managing demand spikes, supply chain delays and raw material shortages to deliver record levels of adhesives for our customers.
Now let me move on to Slide 4 to discuss fourth quarter segment performance in a little more detail.
Strong performance continued in our hygiene, health and consumables segment, where organic revenues increased by 13% year over year with double-digit growth in most of our end markets and very strong results in packaging applications, tapes and labels, tissue and towel and health and beauty.
HHC organic revenues also increased 18% versus the pre-coated fourth quarter of 2019, demonstrating strong underlying consumer demand and share gains.
HHC segment EBITDA margin of 13.6% reflected the absorption of significantly higher raw material costs, as well as increased variable compensation compared with last year, offset by strong pricing.
EBITDA margin was up 160 basis points sequentially versus the third quarter, as strong pricing gains are driving higher margins as we exit the year.
Construction adhesives had an extremely strong quarter, with organic revenues up over 29% versus the prior year and up 31% compared with Q4 of 2019.
Year-over-year performance improvements in all three construction end markets were driven by volume growth associated with improving market conditions and share gains, as well as outstanding pricing execution.
Construction adhesives EBITDA margin of 16.3% increased significantly year over year, up by 390 basis points.
CA's EBITDA margin also improved by 390 basis points over the third quarter of this year, driven by volume leverage and pricing gains.
The construction adhesives team drove extensive operational improvements in 2021.
They have met strong demand in an extremely challenging environment and the business is positioned with strong momentum as we enter 2022.
Engineering adhesives delivered another strong quarter of results.
Organic revenue increased 13% year on year, led by strong double-digit growth in new energy, recreational vehicles, insulated glass, woodworking, technical textiles and footwear.
Engineering adhesives EBITDA margin remained strong at over 15% and up slightly versus Q3 on strong pricing execution, offset by higher raw material costs and higher variable compensation expense.
Looking ahead to 2022, we will pursue continued growth opportunities and share gains in a business environment where we believe that underlying demand remains strong and that cost inflation will persist.
We anticipate the continued solid demand for hygiene and health products, packaging, paper tissues and towels will continue into 2022.
And we anticipate construction adhesives end markets will show strong improvements for the first half of 2022, with commercial activity improving throughout the year and residential activity remaining solid.
And we believe that engineering adhesives end market demand will also remain strong given a backlog of consumer demand for electronics, vehicles and durable goods.
In total, our base case planning assumptions are for organic growth in the low-teens, driven by pricing and modest volume growth.
Our current outlook is for raw material costs to continue to increase in 2022 versus the fourth quarter 2021 exit rate.
The inflation we're seeing in Q1 is sizable, though less than the fourth quarter of 2021.
We expect the raw material increases to be broad-based across the businesses and relatively consistent by region, with Asia showing less inflation to start the year at EMEA and the Americas.
We will continue to price the value and will remain vigilant regarding raw material inflation.
We have over $100 million in pricing actions taking effect in Q1, and we will take whatever pricing actions are necessary in 2022 to fully offset raw material cost increases and enable us to restore margins.
Against a challenging economic backdrop, our performance in 2020 and in 2021 demonstrated that our business is diverse and resilient, our operations are nimble and we are executing our strategy well.
And we expect to continue to outperform our end markets again in 2022 as we face the challenges ahead.
I'll begin on Slide 5 with some additional financial details on the fourth quarter.
For the quarter, revenue was up 15.4% versus the same period last year.
Currency had a positive impact of 0.5%.
Adjusting for currency, organic revenue was up 14.9%, with volume up 1.4% and pricing having a favorable impact of 13.5% year on year in the quarter.
Adjusted gross profit margin was 27.1%, down 40 basis points versus last year as pricing more than offset raw material increases from a dollar standpoint in the quarter, but not from a margin standpoint.
However, gross profit margin was up 340 basis points versus the third quarter of this year, driven by pricing execution.
Adjusted selling, general and administrative expense was up year on year, reflecting higher travel and other investments to support growth, as well as higher variable compensation related to the company's strong fiscal 2021 performance.
For the full year, adjusted SG&A as a percentage of revenue was 17.2%, down by 130 basis points versus 2020.
Adjusted EBITDA for the quarter of $134 million was up 9% versus last year and at the high end of our planning assumptions for the quarter, reflecting strong top-line performance, driven by good pricing execution and construction adhesives market share gains.
Adjusted earnings per share were $1.09, up versus the fourth quarter of 2020, despite a higher tax rate in Q4 2021, which drove a negative year-on-year impact of about $0.10 per share.
Our results for the full fiscal year were also very strong.
Full year organic revenues grew 15% versus fiscal 2020.
Adjusted EBITDA increased by 15% year on year, and adjusted earnings per share was up 22%.
For the year, cash flow from operations continued to be strong, while absorbing higher working capital requirements to support the significant sales growth and higher raw material costs throughout 2021.
And we continued to reduce debt in the quarter, paying off about $40 million of debt driving our net debt to EBITDA to 3.3 times as of the end of the year.
With that, let me now turn to our guidance for the 2022 fiscal year.
Based on what we know today, we anticipate full year double-digit organic revenue growth in the range of 10% to 15%, and we estimate that currency will have a negative impact on revenue of about 2% to 3%.
We expect adjusted EBITDA to be between $515 million and $535 million, representing a 10% to 15% year-on-year increase, as pricing leverage and operational efficiencies more than offset higher raw material costs.
We expect our 2022 core tax rate to be between 27% and 29%, compared to our 2021 core tax rate of about 27%.
We expect full year interest expense to be between $65 million and $70 million and the average diluted share count to be about 55 million shares.
These assumptions would result in full year adjusted earnings per share in the range of $4 to $4.25.
All of this guidance reflects the fact that H.B. Fuller will have one additional reporting week in fiscal 2022 compared to 2021.
We estimate that the extra week will have a favorable impact on full year revenues of approximately 2% compared with full year 2021 and a favorable impact on full year EBITDA of approximately $8 million to $10 million versus 2021, all occurring in the fourth quarter.
Taking the extra week into consideration, as well as the typical seasonality of the business, we expect to realize 20% to 21% of full year EBITDA dollars in the first quarter.
After we reported strong fiscal 2020 results a year ago, I said that investors should continue to expect differentiated performance from H.B. Fuller.
I can say confidently today that we have demonstrated this in 2021: significant volume growth, rigorous execution of our price-to-value strategy and greater productivity and operational capacity enabled us to deliver a record level of revenue, volume and profit performance in 2021.
In 2022, we are positioned to again deliver double-digit organic revenue growth and nearly 20% earnings per share growth as we build upon the momentum we created in the last couple of years.
2020 Demonstrated the resiliency of our diversified portfolio of market-leading solutions in difficult end market conditions.
While 2021 showcased our ability to grow faster than our competitors and seize growth opportunities through our agile customer-centered collaborative business model.
Full year 2021 organic revenue increased by 15%, led by 10% volume growth and strong contributions from pricing.
Full year EBITDA dollars also increased 15% as we mitigated bottom-line impacts from the extreme raw material inflation.
Our momentum accelerated in the fourth quarter as margins expanded, which positions us well for another strong year in 2022.
In 2021, we also continued to increase the share of high-value adhesives in our portfolio.
We did this by pursuing and winning high-growth opportunities, including new wins in electric vehicles, sustainable buildings, compostable packaging, e-commerce packaging, solar panel sealants and new medical adhesives.
These wins exemplify the innovation that has driven the strategic repositioning of our portfolio over the last decade toward specialized, higher-margin adhesive solutions.
In 2010, we were a $1.3 billion company with a sizable portion of our sales in non-specified applications.
In 2021, we're a $3.3 billion company with less than 10% of our sales in non-specified applications.
Growth in specialized adhesive products in our portfolio has driven compounded double-digit growth in EBITDA dollars and a significant EBITDA margin improvement over that time period.
In 2022, we will continue to invest in innovation and organically expand our portfolio of specialized adhesive applications.
And where appropriate, we'll also make inorganic investments.
We have a strong track record of acquisitions and are viewed as a sought-after buyer within the industry, given our scale and proven integration strategy.
While we have an improved balance sheet and an exciting pipeline of opportunities, we will remain disciplined buyers and committed to our strategic balance sheet target of debt-to-EBITDA below three times.
2021 was a remarkable year with enormously complex global supply issues and volatile inflationary headwinds.
And H.B. Fuller lived up to the challenge: we served our customers, supported our employees and delivered consistently for our shareholders under exceptional business environment.
We've made tremendous strides in our business over the last decade, and we accelerated our performance in 2021 with double-digit top and bottom-line growth.
2022 is positioned to be another record year for H.B. Fuller with both the top and bottom line projected to grow double digits again.
Our company strategy and our execution capability is leading to year-over-year growth and margin expansion, which has us well-positioned to continue this performance beyond '22 into the years ahead.
Operator, please open the call so we can take some questions.
| q4 adjusted earnings per share $1.09.
sees fy adjusted earnings per share $4.00 to $4.25.
q4 revenue rose 15.4 percent to $897 million.
sees fy2022 double-digit organic revenue growth of 10% to 15% including strong contribution from pricing.
sees fy2022 adjusted ebitda of $515 to $535 million; up between 10% and 15% year over year.
capital investments are planned to be in the range of $100 to $110 million for fiscal 2022.
|
Mark Keener, our vice president of investor relations, is also in the room today.
As Ellen mentioned, I'll make a few opening comments, and then Bill will address a few details about this quarter's results.
And then we'll begin the Q&A session.
Obviously, financial and operating results were outstanding, but the context for describing them as notable meant something different.
For the past year, we've been integrating Concho, improving underlying metrics across the business and creating the most competitive E&P for the energy transition.
The significance of this quarter's performance is that it represents the post Concho go-forward baseline for the company.
On a run rate basis, the integration is essentially complete.
We've captured the announced $1 billion of synergies and savings from actions the company took in connection with the transaction, all ahead of schedule.
We're unhedged, but even more importantly, our torque to upside is helped by having high conversion of revenue to income and cash flow.
The core executables of our global operating plan are delivering as expected.
We'll close out 2021 as a stronger company compared to any time in the past decade.
Every aspect of our triple mandate is moving in the right direction.
Our underlying portfolio cost to supply is improving.
Our overall GHG intensity is lower.
Our emissions intensity reduction targets are more stringent.
Underlying margins are expanding, and our trailing 12-month return on capital employed is headed toward an estimated 14% by year-end, reflecting the benefit of more than just stronger commodity prices.
Between now and year-end, our top priority is closing the Shell transaction, which we expect to occur in the fourth quarter.
Once we close, we will be working diligently to integrate these properties and capture efficiencies in a similar fashion to what we've achieved through the Concho integration.
In addition to layering in these properties on top of our existing high-performing platform, we're continuing to high-grade our portfolio and optimize the business drivers everywhere.
The setup for next year is, well, notable.
We're now in the process of setting our 2022 capital plans, which we expect to announce in early December.
Directionally, we don't anticipate a significant departure on capex from what we included in our June update excluding Shell.
In June, we provided an outlook based on a roughly $50 per barrel price that included a modest ramp in the Lower 48 to reactivate our optimized plateau plans, some incremental base Alaska investment and some longer-cycle low cost of supply investments in Canada, the Montney and in Norway.
Since June, we see some inflation pressures, especially in the Lower 48.
However, at this point, we'd expect to adjust scope modestly in order -- in response to maintain our base capital at a level that is roughly consistent with our June update.
And then, of course, we'll add capex for the Shell properties once we've brought them into the portfolio.
As we finalize our 2022 plans, we're watching the macro closely, keeping an eye on inflation and potential OBO pressures and undertaking our typical capital high-grading processes.
It goes without saying the market certainly appears to be more constructive, but we must always remember that this is an incredibly volatile business.
But there's more to come on that in December.
We believe we're entering a very constructive time for the sector, but even so, we know that there will be relative winners.
The relative winners will be companies with the lowest cost of supply investment options, peer-leading delivery of returns on and of capital and visible progress on lowering emissions intensity.
That's what we offer.
Our third quarter represents a glimpse and a strong jumping-off point to what you can expect from ConocoPhillips going forward.
To begin, adjusted earnings were $1.77 per share for the quarter.
Relative to consensus, this performance reflects production volumes that were slightly above the midpoint of guidance, better-than-expected price realizations and lower-than-expected DD&A.
As for the better realizations, we captured a higher percentage of Brent pricing in our overall realized prices.
And as Ryan mentioned, we're unhedged so we're getting full exposure to the current higher prices.
As for DD&A, we're trending lower compared to the previous guidance as a result of positive reserve revisions due to higher prices.
You saw in today's release that we lowered full year 2021 DD&A guidance from $7.4 billion to $7.1 billion.
Excluding Libya, production for the quarter was 1,507,000 barrels of oil equivalent per day, which represents about 2% underlying growth.
Lower 48 production averaged 790,000 barrels a day, including about 445,000 from the Permian, 217,000 from the Eagle Ford, and 95,000 from the Bakken.
At the end of the quarter, we had 15 operated drilling rigs and seven frac crews working in the Lower 48.
Across the rest of our operations, the business ran extremely well.
In particular, our planned seasonal turnaround activity across several regions went safely and smoothly.
This reflects the impact of a decision we're making to convert Concho two stream contracted volumes to a three-stream reporting basis as part of our ongoing efforts to create marketing optionality across the Lower 48.
We expect to convert the majority of our contracts in the fourth quarter.
Reported production is expected to increase by approximately 40,000 barrels a day, and both revenue and operating costs will increase by roughly $70 million.
In other words, this conversion is earnings neutral.
Besides DD&A and production, there were no other changes to 2021 guidance items.
Now, once we've closed the Shell acquisition and can see where the ongoing US tax legislation conversation lands, we'll provide an updated earnings and cash flow sensitivities that consider such factors as projected 2022 price ranges and how those ranges might impact our cash taxpaying position in various jurisdictions around the globe.
Coming back to third quarter results.
Cash from operations was $4.1 billion, which was reduced by about $200 million for nonrecurring items, so a bit higher than the average of external estimates on an underlying basis.
Free cash flow was almost $3 billion this quarter, and on a year-to-date basis, this is about $6.5 billion.
Through the first nine months of the year, we've returned $4 billion to shareholders, and we're on track to meet our target of returning nearly $6 billion by the end of 2021.
This is through a combination of our ordinary dividend and buybacks.
So to summarize, as Ryan said, it was a notable quarter.
The company is running exceptionally well, and we've achieved a significant reset of the base business post Concho.
That creates a powerful platform for entering next year.
We're focused on closing the Shell Permian acquisition so that we can begin the work of getting those properties fully integrated into the business, setting our capital plans for 2022, maintaining a leading position of returns on and of capital and lowering our emissions intensity.
That's the triple mandate.
That's what ConocoPhillips is all about.
And we look forward to providing additional information in December.
| q3 adjusted earnings per share $1.77 excluding items.
|
I'll begin with a few highlights for the quarter.
Through these uncertain times the employees of American States Water once again delivered solid results.
Our consolidated results for the third quarter were $0.72 per share as compared to adjusted earnings of $0.69 per share for the third quarter of 2019, an increase of $0.03 per share or 4.3%.
The adjusted earnings for the third quarter of 2019 exclude a $0.07 per share retroactive adjustment booked in that quarter for the August 2019 electric general rate case decision for periods prior to the third quarter of 2019.
I'm pleased to report that in July of this year, the Company's Board of Directors approved a 9.8% increase in the quarterly cash dividend from $0.305 per share to $0.335 per share.
This increase is in addition to dividend increases of 10.9% in 2019 and 7.8% in 2018.
Along with providing essential services and assistance to our customers and communities to get through the pandemic, we are working our way through some regulatory processes with the California Public Utilities Commission or CPUC which I'll discuss later on.
In addition, we continue to pursue new military base contracts and our service levels remain high for all three of our subsidiaries.
Now that we're going on month eight of the COVID-19 pandemic, I wanted to reflect on the achievements of our personnel across the United States, both customer facing and those who provide support in a remote working environment.
Since March, our field personnel have worked tirelessly to keep the water, electricity and wastewater services operating smoothly for over 1 million customers, including 11 military bases.
They've embraced more stringent safety protocols as we look to keep our employees and customers healthy, while doing this, we've kept our commitments to strengthen our infrastructure for the short and long-term benefit of our customers.
For the nine months ended September 30, 2020, our water and electric utility segments spend $82.3 million in Company-funded capital expenditures.
On track to spend $105 million to $120 million for the year, barring any scheduling delays resulting from COVID-19.
This would be about 3.5 times our expected annual depreciation expense.
While we hope for a return to normal sooner rather than later, I'm proud of the resiliency that our people have shown.
Let me start with a more detailed look at our third quarter financial results on slide 7.
As Bob mentioned, consolidated earnings for the quarter were $0.72 per share compared to $0.69 per share as adjusted for the same period in 2019.
Earnings at our water segment increased $0.04 per share for the quarter.
There continues to be volatility in the financial markets due at least in part to COVID-19 pandemic.
This volatility resulted in an increase in gains on investments held to fund one of Golden State Water's retirement plan contributing a $0.02 per share increase in the water segment's earnings for the quarter.
The remaining increase in the water segment's earnings for the third quarter of 2020 was due to a higher water gross margins from new water rates partially offset by increase in operating expenses, interest expense and the effective income tax rate as well as lower interest income earned on regulatory assets.
Excluding the $0.07 per share retroactive impact front August 2019 CPUC decisions, our electric segment's earnings for the third quarter was $0.04 per share as compared to $0.03 per share as adjusted for the third quarter of 2019 largely due to an increase in the electric gross margins, resulting from new rates authorized by the CPUC partially offset by increases in legal and other outside service costs.
The final August 2019 decision also approved a recovery of previously incurred incremental tree trimming costs totaling $302,000 which resulted in a reduction in maintenance expense that was recorded in the third quarter of last year.
It was no equivalent item in 2020.
Earnings from our contracted services segment were $0.10 per share for the third quarter of 2020 as compared to $0.12 per share for the same period in 2019.
There was an overall decrease in construction activity resulting from weather delays and slowdowns in permitting for construction projects and government funding for new capital upgrades caused in part by the impact of COVID-19.
The Company expect construction activity to pick up during the fourth quarter relative to the first three quarters barring any further delays due to the weather condition.
This decrease was partially offset by increase in management fee revenue and lower travel related costs.
Water revenues increased $3.5 million during the third quarter of 2020 due to full second -- full second year step increases for 2020 as a result of passing earnings test.
The decrease in electric revenues were largely due to $3.7 million in retroactive revenues recorded in the third quarter of 2019 for periods prior to that.
Contracted services revenue for the quarter decreased to $500,000 for the reasons previously discussed.
The decrease was partially offset by increases in management fee due to the successful resolution of various economic price adjustments.
Looking at slide 9, our water electric supply costs were $32.3 million for the third quarter of 2020 as compared to $31.8 million for the third quarter of 2019.
Any changes in the supply cost as compared to the adopted supply costs are tracked in balancing account for both the water and electric segments.
Total operating expenses excluding supply costs increased $1.5 million versus the third quarter of 2019.
There was an increase in construction costs at our contracted services business, American States Utility Services or ASUS due to higher cost incurred on certain projects as well as increases in depreciation expense and property and other taxes as a result of additions of utility plant and fixed assets at all of our business segments.
There was also a $302,000 reduction to maintenance costs to reflect the CPUC's approval in August of 2019 for recovery of previously incurred tree trimming as previously mentioned.
There was no similar reductions in 2020.
Interest expense, net of interest income and other including investments held in a trust to fund the retirement benefit plan decreased $1.1 million due to higher gain because of the recent market condition.
This was partially offset by lower interest income on regulatory assets and lower interest income earned on certain as ASUS construction projects.
Slide 10 shows the earnings per share bridge, comparing the third quarter of 2020 with the same quarter of 2019.
The slide reflect our year-to-date earnings per share by segments.
Fully diluted earnings for the first nine months of 2020 or $1.79 per share as compared to $1.79 per share as adjusted for the same period of 2019.
The 2019 adjusted earnings exclude a $0.04 per share retroactive impact, book the last year, resulting from the August 2019 electric TRC decision for the full year of 2018, which is shown on a separate line in the table on this slide.
In terms of the Company's liquidity, net cash provided by operating activities for the first nine months of 2020 was $87.8 million as compared to $84.3 million for the same periods in 2019.
The increase was largely due to a $7.2 million refund to the water customers in 2019 related to the 2017, tax law changes.
Partially offset by a decrease in cash flow from higher accounts receivable from utility customers due to the economic impact of COVID-19 and the suspension of service disconnections of customers for non-payment.
Our regulated utilities invested $82.3 million in Company-funded capital projects during the first nine months of 2020, while the utilities capital program has been somewhat affected by COVID-19 resulting in certain project delays.
However, our regulated utility is still trying to spend $105 million and $520 million in Company-funded capital expenditures for the year, further delays due to the pandemic.
As we mentioned in the last quarter, Golden State Water issued unsecured private placement notes totaling $160 million in July and repaid a large portion of its intercompany note issued to AWR parent.
Currently American States Water has a credit facility of $200 million to support water and contracted services operations.
We also put in place a separate three year $35 million revolving credit facility for the electric segment that is not guaranteed by the parent.
At this time, we do not expect American States Water to issue additional equity.
I'd like to provide an update on our recent regulatory activity.
In July, Golden State Water filed a general rate case application for all of its water regions and the general office.
This general rate case will determine new water rates for the years 2022, 2023 and 2024.
Among other things, Golden State Water requested capital budgets in this application of approximately $450.6 million for the three-year rate cycle and another $11.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
A decision in the water general rate case is scheduled for the fourth quarter of 2021 with new rates to become effective January 1, 2022.
On August 27, 2020, the CPUC issued a final decision in the first phase of the CPUC's order instituting rule making evaluating the low income payer assistance and affordability objectives contained in the CPUC's 2010 Water Action Plan which also addressed other issues, including matters associated with the continued use of the water revenue adjustment mechanism or RAM by California water utilities.
The final decision also eliminates the modified supply cost balancing account or MCBA which is a full cost balancing account used to track the difference between the adopted and actual water supply costs including the effects of changes in both rates and volume.
Based on the language in the final decision, any general rate case application filed by Golden State Water and the other California water utilities after the August 27, 2020 effective date of the decision may not include a proposal to continue the use of the RAM or MCBA but may instead include a proposal to use a limited price adjustment mechanism called the Monterey style Ram and an incremental supply cost balancing account.
This decision will not have any impact on Golden State Water's RAM or MCBA balances during the current rate cycle, which runs from 2019 through 2021.
In addition, the language in the decision supports Golden State Water's position that it does not apply to its general rate case application filed in July of this year, which will set new rates for the years 2022 through 2024.
At this time, we cannot predict the potential impact of this decision, if any, on the pending water general rate case.
On or prior to October 5, 2020 Golden State Water, three other California water utilities and the California Water Association filed separate applications for rehearing on the decision in the low income proceeding.
As you know there are water utilities in the state that have been under the Monterey-Style RAM and incremental supply cost balancing account since 2008 and they seem to be able to successfully manage the effects of these mechanisms.
While we are disappointed by this PUC decision, we believe we are well positioned to strategize and adapt to the new requirements.
As you'll see from this slide, the weighted average water rate base as adopted by the CPUC has grown from $717 million in 2017 to $916 million in 2020 which is a compound annual growth rate of 8.5%.
The rate base amounts for 2020 do not include the $20.4 million of advice letter projects approved in Golden State Waters last general rate case.
Let's move on to ASUS on slide 17.
ASUS' earnings contribution for the quarter was $0.10 per share versus $0.12 per share in the year prior.
The decrease was mainly due to a reduction in construction activity due to weather delays as well as slowdowns in permitting for construction projects and in government funding for new capital upgrades that has occurred throughout 2020.
Company expects construction activity to be stronger in the fourth quarter relative to the first three quarters barring any further delays due to weather conditions, but because of the previous delays, we now estimate ASUS' 2020 earnings contribution to be at the low end of the $0.46 to $0.50 per share range we have previously provided.
In light of continued uncertainty associated with the effects of COVID-19, we project ASUS to contribute $0.45 to $0.49 per share for 2021.
We are still involved in various stages of the proposal process at a number of military bases considering privatization of their water and wastewater systems.
The US government is expected to release additional bases for bidding over the next several years.
While we are disappointed that ASUS was not awarded with the most recent military base water and wastewater privatization contract, we are confident that we will win a fair share of the future awards.
I would like to turn our attention to dividends outlined on slide 18.
We believe achieving strong and consistent financial results along with providing a growing dividend allows the Company to continue to attract capital to make necessary investments in the utility infrastructure for the communities and military bases that we serve and return value to our shareholders.
American States Water has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 66 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result.
Company's current dividend policy is to achieve a compound annual growth rate in the dividend of more than 7% over the long term.
| q3 earnings per share $0.72.
|
Gary Norcross, our ChaInvestor Relationsman and Chief Executive Officer, will discuss our operating performance and review our strategy to continue accelerating revenue growth and maximizing shareholder value.
Woody Woodall, our Chief Financial Officer, will then review our financial results and provide updated forward guidance.
Bruce Lowthers, President of FIS, will also be joining the call for the Q&A portion.
Turning to Slide 3.
Also throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share and free cash flow.
These are important financial performance measures for the company but are not financial measures as defined by GAAP.
We achieved very strong start to the year, exceeding our expectations across the board in the fInvestor Relationsst quarter.
As shown on Slide 5, we realized accelerating revenue growth, exceptionally strong new sales and significantly expanded margins across all our operating segments.
Our Worldpay revenue synergies are also accelerating through increased cross-selling as well as ramping volumes on prior synergistic sales.
As a result, we are increasing our 2021 and 2022 revenue synergy targets to $600 million and $700 million, respectively.
During the quarter, we leveraged our continually strong free cash flow to begin buying back stock, fund our increased dividend and make strategic investments in intriguing new companies that are accelerating new capabilities and pushing the boundaries of financial technology.
I'm also pleased to share that we divested our remaining minority position in Capco in April, netting a very positive return for our shareholders in over $350 million in proceeds for our remaining stake.
These exceptional results demonstrate the strength of our business model, the success of our client-centric focus and our disciplined capital allocation strategy.
Given that focus, we consistently invest in platform and solution innovation in the areas of greatest demand.
As a result, FIS is the most modern scale provider in market with a unique suite of solutions that enable our clients to transform theInvestor Relations envInvestor Relationsonments, grow theInvestor Relations businesses and engage with theInvestor Relations customers in dynamic new ways.
We are quickly becoming one of only eight companies in the S&P 500 with revenues approaching $14 billion, growing more than 7% with an already high and expanding mid-40s EBITDA margins.
We believe there is no one in our industry better positioned.
With our strong start to the year, we expect accelerating organic revenue growth and strong earnings throughout 2021, giving us the confidence to raise our full year guidance.
Turning to Slide 6.
In banking, new sales grew 17% year-over-year, reflecting a 24% CAGR since the fInvestor Relationsst quarter of 2019 as our investments in new solutions continue to yield impressive results not only in our traditional business but in emerging areas as well.
For example, Green Dot, the world's largest prepaid debit card company with over $58 billion in annual volume, chose to expand our relationship this quarter to now include one of our B2B solutions to support theInvestor Relations commercial customers as well as our online chat and social media solution for customer care to serve theInvestor Relations mobile digital bank.
In addition, we are helping large financial institutions to upgrade theInvestor Relations legacy technology by moving to our next-generation cloud-based solutions.
BMO Harris selected the modern banking platform this quarter, making them our 11th large win.
And I'm pleased to share that 40% of our earlier wins are already live due to our software's elegant and modular design.
This rapid onboarding continues to give us confidence in our accelerated revenue growth outlook for the remainder of the year.
BMO chose to partner with us because of our open cloud-native and scalable platform, which will help them modernize the services they provide to theInvestor Relations customers, speed new products to market and increase theInvestor Relations operational efficiency.
Vietnam's largest bank, BIDV, also chose FIS to upgrade theInvestor Relations core banking software to harness the power of our global reach and world-class scale.
With this win, we are now the core processor of Vietnam's two largest banks.
As we think about continuing to increase our growth, we have several new solutions in our banking segment that we've launched recently and more in the pipeline to be released later this year.
To highlight a few examples, PaymentsOne is the newest and most modern card issuing platform in the market, delivering an agile and frictionless payments experience across all card types on one unified platform.
We spent the past year migrating more than 1,000 of our issuing clients to this platform and have also seen strong demand from new clients where we've already installed more than 300 new financial institutions since the launch of this solution.
RealNet is another innovative new solution being launched, which enables account-to-account transactions over real-time payment networks across the globe.
This cloud-native SaaS platform will function as a network of networks, allowing our clients to seamlessly leverage multiple payment types to transact effortlessly around the world and cross borders in real time.
RealNet is proof of our strategy to support the global movement of money across the entInvestor Relationse financial ecosystem for our clients in banking, merchant and capital markets.
We've also launched an industry-fInvestor Relationsst cryptobanking solution, which we created in partnership with NYDIG.
Traditionally, consumers and corporations had to go outside of theInvestor Relations existing banking relationships to acquInvestor Relationse Bitcoin.
Once an FIS core banking client enables this capability, theInvestor Relations customers will be able to view and transact theInvestor Relations Bitcoin holdings alongside theInvestor Relations traditional accounts in a single view.
Our new solution taps into the advanced functionality of Digital One to provide consumers with a user-friendly in-app experience.
It will also allow our banking clients to grow theInvestor Relations businesses through a new source of income by providing Bitcoin services through a seamless, easy-to-use digital experience.
Each of these new launches reflect the power of our technology innovation and deep domain expertise.
Turning to Merchant on Slide 7.
We revamped our go-to-market strategy, significantly improving new sales results as evidenced by our exceptional 76% growth.
Our new sales success doesn't just reflect easy comps.
New sales were up 39% over the fInvestor Relationsst quarter of 2019, translating to an 18% CAGR over the past two years.
We continue to successfully expand our financial institution partner program to serve SMBs.
As an example, we formed an exclusive merchant referral partnership with CIT Bank this quarter.
In this strategic takeaway, we will cross-sell merchant processing to CIT's over 45,000 customers, expanding on an already successful relationship with our banking segment.
We also continue to expand our leading ISV partner network, adding 20 new ISVs in the U.K. this quarter as well as several more in the U.S. and Canada that span a diverse range of verticals from retail, hospitality, salons and spas to event ticketing, education, property management and many others.
As we look at large enterprise and leading global brands, we are the provider of choice due to our unique omnichannel capabilities, expansive global reach and best-in-class authorization rates.
As an example, we won 80 new global e-commerce clients this quarter, more than doubling our new sales from last year.
To keep pace with the demand, we are investing to grow our sales force by over 300 more professionals this year.
We also won a diverse set of marquee clients such as Intercontinental Exchange; BetBull, a premier online sports betting company; and The Nature Conservancy, a preeminent global conservation organization.
We continue to consistently win share in travel and aInvestor Relationslines, including Norwegian Cruise Lines this quarter, and expect leading companies like this to accelerate rapidly as the industry recovers.
As we think about newly formed high-growth sectors, FIS is the leading acquInvestor Relationser for cryptocurrency, with revenue from this vertical growing by 5 times over last year.
OKCoin, a leading cryptocurrency exchange, selected FIS this quarter to help them grow theInvestor Relations business.
We serve five of the top 10 digital asset exchanges and brokerages globally, including innovators like Coinbase and BitPay.
The results of our investment in new and modernized merchant technology is certainly showing in our sales success throughout our various merchant verticals.
During the quarter, we successfully completed the final client migrations to our next-generation acquInvestor Relationsing platform, also known as NAP, which enables us to offer a more agile experience and modular offering while still providing tailored solutions for our clients.
We processed over 1.8 billion transactions on NAP during the fInvestor Relationsst quarter and continue to expect accelerating growth now that we are aggressively selling in market.
In addition to our new fully launched acquInvestor Relationsing platform, we have seen tremendous success with the launch of our new gateway.
Through our new simple APIs, merchants can go live on our platform faster while still benefiting from our full global breadth and sophisticated solutions.
Our new APIs provide a seamless, easy-to-integrate single point of access for our clients, and transactions are ramping exponentially, ending the fInvestor Relationsst quarter at more than four million transactions per day.
This represents more scale than all but two of our largest e-com competitors in less than two years post launch.
All of this shows that FIS is increasingly differentiated by our ability to bring innovation at scale that is enterprise ready from day one in a way that few can claim or offer today.
In addition to leveraging our innovative portfolio of technology assets, our clients are also relying on us to support theInvestor Relations expansion into new geographic markets.
This quarter, we expanded our services into South Africa, Nigeria and Malaysia, and we plan to bring online several more countries later this year.
Since the combination with Worldpay, FIS has now brought acquInvestor Relationsing to nine new countries.
Turning to Slide 8.
In Capital Markets, we have made remarkable progress since acquInvestor Relationsing SunGard in 2015.
We completely changed the revenue growth profile from persistent declines to accelerating top line growth.
And I'm pleased to say that we are now consistently growing faster than our peers.
We simultaneously improved margins and moved the business to over 70% reoccurring revenue.
During the fInvestor Relationsst quarter, average deal size increased 36% with new logos representing 30% of new sales, clearly showing that we are winning share.
New sales of our SaaS-based reoccurring revenue solutions are also very strong, increasing by 57% this quarter.
For example, our differentiated solutions and deep treasury expertise are motivating the leading corporate, like GlaxoSmithKline, to select FIS to power theInvestor Relations treasury management systems.
In addition, our comprehensive suite of solutions, strong track record and speed of implementations is very attractive to emerging fintechs like Acorns and Robinhood.
These two fintechs are utilizing our solutions to further drive financial inclusion.
As another example, Futu is a next-generation online broker-dealer who selected FIS this quarter to help power theInvestor Relations growth in securities, finance and trading.
Securian Financial is a great example of a diversified financial services company who partnered with us this quarter to deliver a leading cloud-based risk modeling and management platform.
They selected FIS because they needed a partner who could support theInvestor Relations growth and scale, while at the same time being nimble enough to help them quickly respond to changing regulatory requInvestor Relationsements.
The consistent execution of our strategy is driving our success.
Ongoing investments in new solutions, advanced technology and expanding distribution are generating strong new sales and competitive takeaways while accelerating revenue growth across all our operating segments.
Our relentless focus on achieving efficiency and scalability through automation and integration continues to enhance our profitability and margin profile.
Lastly, we see our exceptional free cash flow generation as a competitive advantage.
It allows us to consistently invest for growth and to generate superior shareholder returns through return of capital and M&A.
In summary, our strategy is continuous transformation, pivoting to growth while simultaneously driving efficiency and scale through the strategic allocation of capital.
Starting on Slide 11, I will begin with our fInvestor Relationsst quarter results, which exceeded our expectations across all metrics to generate an adjusted earnings per share of $1.30 per share.
On a consolidated basis, revenue increased 5% in the quarter to $3.2 billion, driven by better-than-expected performances in each of our operating segments.
Adjusted EBITDA margins expanded by 10 basis points to 41%.
Strong contribution margins and synergy achievement within each of our segments more than offset increased corporate expenses from unwinding last year's COVID-related cost actions.
We continue to make excellent progress on synergies exiting the quarter at $300 million in run rate revenue synergies, an increase of 50% over the fourth quarter's $200 million, accelerating revenue synergy attainment driven primarily by ongoing traction and ramping volumes within our bank referral and ISV partner channels as well as cross-sell wins related to our new solutions and geographic expansion.
Given our progress to date and robust pipeline, we're increasing our revenue synergy target for 2021 by 50% or $200 million to $600 million; and for 2022 by $150 million to $700 million.
Our achievement of cost synergies has also been very successful.
We have doubled our initial cost synergy target of $400 million, exiting the quarter with more than $800 million in total cost synergies.
This includes approximately $425 million in operating expense synergies.
Our backlog increased mid-single digits again this quarter as strong new sales more than offset our recognition of revenue in the quarter.
Turning to Slide 12 to review our segment GAAP and organic results.
As a reminder, the only difference between GAAP and organic revenue growth for our operating segments this quarter is the impact of currency.
Our Banking segment accelerated to 7% on a GAAP basis or 6% organically, up from 5% growth last quarter.
These strong results were driven primarily by ramping revenues from our recent large bank wins, recurring revenue and issuer growth.
Our issuing business grew 10% in the quarter, driven primarily by revenue growth from PaymentsOne, increased network volumes and economic stimulus.
We expect both of these tailwinds to continue, driving accelerated growth into the second quarter in support of our outlook for mid- to high-single-digit organic revenue growth for the full year.
Capital Markets increased 5% in the quarter or 3% organically, reflecting strong sales execution and growing recurring revenue.
The Capital Markets team is driving a fast start program for the beginning of 2021 and appears to be trending toward the higher end of our low to mid-single-digit organic growth outlook for the year.
In Merchant, we saw a nice rebound, with growth of 3% in the quarter or 1% organically, accelerating 10 points sequentially as compared to the fourth quarter.
Merchant's fInvestor Relationsst quarter performance was driven primarily by strength in North America and e-commerce, including significantly ramping volumes on our new acquInvestor Relationsing platform.
COVID impacts on travel and aInvestor Relationslines as well as continued lockdowns in the U.K. drove a 5-point headwind in the fInvestor Relationsst quarter.
Slide 13 shows the significant ramp in volumes and revenue that the Merchant business generated throughout the quarter.
Importantly, as volumes rebounded, yields grew significantly.
We ultimately exited the quarter generating approximately 70% revenue growth during the last week of March, including five percentage points of positive yield contribution.
We expect this positive revenue yield tailwind to continue to expand in the second quarter and continue throughout the remainder of the year.
Based on March exit rates and second quarter comparisons, we expect merchant organic revenue growth of 30% to 35% in the second quarter.
The expanding investments we are making in merchant technology platforms and global sales execution will yield long-term benefits for our clients and significant new wins for our business.
As Gary highlighted, we are very pleased with the execution of our segments.
With accelerating revenue growth and strong new sales, each of them are winning market share.
Turning to Slide 14.
We returned approximately $650 million to shareholders in the quarter through our increased dividend and share repurchases.
Starting in March, we bought back approximately 2.8 million shares at an average price of $143 per share.
Beyond this return of capital, we also successfully refinanced a portion of our higher interest rate bonds, which extended our average duration by a year and lower expected interest expense for the year by about $60 million to approximately $230 million.
Total debt decreased to $19.4 million -- $19.4 billion for a leverage ratio of 3.6 times exiting the quarter, and we remain on track to end the year below 3 times leverage.
Turning to Slide 15.
I'm pleased to be able to raise our full year guidance so early in the year based on our strong fInvestor Relationsst quarter results and second quarter outlook.
For the second quarter, we expect organic revenue growth to continue to accelerate to a range of 13% to 14%, consistent with revenue of $3.365 billion to $3.39 billion.
As a result of the high contribution margins in our business, we expect adjusted EBITDA margin to expand by more than 400 basis points to approximately 44%.
This will result in adjusted earnings per share of $1.52 to $1.55 per share.
For the full year, we now anticipate revenue of $13.65 billion to $13.75 billion or an increase of $100 million at the midpoint as compared to our prior guidance driven primarily by accelerating revenue synergies.
We continue to expect to generate adjusted EBITDA margins of approximately 45%, equating to an EBITDA range of $6.075 billion to $6.175 billion.
With our improved outlook, successful refinancing and share repurchase to date, we are increasing our adjusted earnings per share guidance to $6.35 to $6.55 per share, representing year-over-year growth of 16% to 20% and an increase of $0.15 at the midpoint above our prior guidance.
By all measures, this was a great quarter for FIS.
The investments we're making in driving strong new sales -- are driving strong new sales and accelerating our revenue growth profile.
As a result, we remain confident in meeting or exceeding our increased outlook for 2021.
| q1 adjusted earnings per share $1.30.
q1 revenue rose 5 percent to $3.223 billion.
|
Today we reported earnings of $211 million, an increase of 87% over the second quarter.
Our customers continue to act prudently, conserving cash and adjusting their operations, driving a reduction in loans and taking deposits to a new record.
Lower loan balances along with strong credit metrics and an improving yet uncertain economic path resulted in the allowance for credit losses remaining near 2% and a provision of $5 million.
As far as revenue, the impact from lower interest rates waned, card fees remained robust and other fee income categories began to recover.
Expenses are well controlled and included a $4 million increase in charitable contributions.
ROE returned to double-digits at nearly 11% and our book value per share grew to $53.78, the seventh consecutive quarterly increase.
We remain focused on continuing to enhance shareholder value.
Based on recent conversations I've had with employees and customers, sentiment appears to be modestly better, reflecting cautious optimism and a sense of hope for the future based on our country's overall economic resiliency.
We've begun to see some signs of improving conditions.
However, it is very difficult to predict the pace of the recovery.
This is reflected in our loan portfolio, where overall, we are starting to see some positive trends.
Balances begin to grow mid-quarter and increased modestly month-over-month in September.
Also, our pipeline has begun to rebuild, although it remains well below pre-COVID levels.
On a full quarter average basis, loans decreased $1.5 billion in the third quarter.
The largest contributor was a $910 million drop in average National Dealer loans in conjunction with significant decline in dealer inventory levels in the second quarter, which have yet to recover.
This is due to supply backlogs following the manufacturing shutdown combined with the rebound in sales activity.
We anticipate loans will rebound next year as auto inventory returns to normal levels.
Deposits continue to show strong broad-based growth with average balances increasing $4.5 billion, including $3.2 billion and non-interest-bearing deposits.
Government stimulus programs have provided tremendous liquidity.
In addition, as we've seen in other times of economic uncertainty, our relationship-based customers are maintaining a building cash in safety or their Comerica accounts.
The resulting increase in liquidity drove our total average assets to a record $84.3 billion.
As expected, net interest income declined $13 million as lower interest rates had a $15 million impact.
In this ultra-low rate environment, we continue to carefully manage loan and deposit pricing to attract and maintain customer relationships.
Comerica has a strong credit culture with conservative credit underwriting which has served us well in times of economic stress.
During the current period of unprecedented disruption, our portfolio has performed well, and we believe this will continue to be a differentiator for us in the industry.
Criticized loans remained stable and non-performing assets are well below historic norms.
Also, net charge-offs decreased only 26 basis points.
However, given the difficulty in predicting the path of economic recovery, our credit reserve remains at over $1 billion.
We are staying close to our customers in addressing their needs.
At the current level, we believe our reserves are appropriate and that we are well positioned.
Non-interest income increased as customer activity began to rebound, including continued strong contribution from our card platform.
Of note, following robust activity in the second quarter, derivative income declined $10 million.
We have continued to maintain our expense discipline.
Excluding the impact of deferred comp and an increase in charitable contributions, expenses declined.
Our capital remained strong with an estimated CET1 of 10.3%.
We remain focused on deploying our capital to support growth, while maintaining our very attractive competitive dividend.
Turning to Slide 4.
Average loans decreased $1.5 billion, which compares favorably to results for the industry as indicated by the H8 data for large banks.
As Curt mentioned, National Dealer declined $910 million due to low inventory levels impacting floor plan loans.
As far as corporate banking, you may recall that large companies drew on lines earlier this year to build liquidity buffers in a time of great uncertainty.
This resulted in an increase of nearly $800 million in second quarter average balances.
Corporate banking line utilization has returned to pre-pandemic levels with average balances down nearly $500 million in the third quarter.
General middle market loans declined about $400 million, while deposits increased nearly $2 billion.
Customers have been prudently cutting cost as well as reducing working capital and capex requirements to improve their cash flow in this challenging environment.
For the portfolio as a whole, line utilization decreased to 47% at period end.
On the other hand, with full quarter effect of PPP, loans grew in business banking and the small business segment captured in retail banking.
Also, our Mortgage Banker business, which serves mortgage companies, was at an all time high, increasing over $300 million due to very robust refi and home sale activity.
Loan yields were 3.13%, a decrease of 13 basis points from the second quarter.
Lower rates were the major driver.
One month LIBOR, the rate we are most sensitive to, declined 19 basis points.
This was partly offset by pricing actions we are taking, particularly adding LIBOR floors when possible as loans renew.
A mix shift in balances, including the full quarter impact of lower yielding PPP loans, also had a negative impact on yields.
Deposits increased 7% or $4.5 billion to a new record of $68.8 billion, as shown on Slide 5.
The larger driver continues to be non-interest-bearing deposits and growth has been broad-based with increases in nearly every business line.
As Curt mentioned, customers are conserving and maintaining excess cash balances.
Period end deposits increased over $700 million.
The largest contributor was technology and life sciences as robust fundraising added liquidity and customers reduced cash burn.
With strong deposit growth, our loan-to-deposit ratio decreased to 76%.
The average cost of interest-bearing deposits was 17 basis points, a decrease of nine basis points from the second quarter.
Our prudent management of relationship pricing in this low rate environment, our large proportion of non-interest-bearing deposits as well as the floating rate nature of our wholesale funding drove our total funding cost only 14 basis points for the quarter.
As you can see on Slide 6, we've put some of our excess liquidity to work by increasing the size of the portfolio.
We added $1.75 billion in treasuries and $500 million in mortgage-backed securities.
In addition, we continue to reinvest prepays, which remained elevated at around $1 billion for the quarter.
Yields on recent purchases have been around 140 basis points.
The additional securities combined with lower rates on the replacement of prepays resulted in the yield on the portfolio declining to 2.13%.
Of note, we have not seen a significant impact on the portfolio's duration or the unamortized premium, which remains relatively small.
Turning to Slide 7.
Net interest income declined $13 million to $458 million and the net interest margin was 2.33%, a decline of 17 basis points relative to the second quarter.
The major factors were lower rates, which had a negative impact of $15 million or seven basis points in the margin, and the increase in excess liquidity reduced the margin by nine basis points.
Taking a look at the details.
Interest income on loans declined $26 million and reduced the margin 13 basis points.
Lower interest rates on loans alone had an impact of $21 million and 11 basis points in the margin.
Lower balances had a $14 million impact, and the mix shift in portfolio, including the full quarter of lower yielding PPP loans had a four basis point impact on the margin.
Partly offsetting this were higher loan fees in the margin, primarily PPP-related as well as one additional day in the quarter.
As discussed on the previous slide, we had lower yields and higher balances in our securities portfolio, which together had a $2 million and two basis point negative impact.
Higher deposits of the Fed added $1 million, but had a negative impact of nine basis points on the margin.
Deposit cost declined by $5 million and added three basis points to the margin, primarily a result of a prudent management of deposit pricing, as I previously mentioned.
Finally, with a reduction in balances and lower rates, wholesale funding cost declined by $9 million, adding four basis points to the margin.
We received the full quarter benefit of debt repayments we made in the second quarter, and we prepaid $750 million in FHLB advances in July and August.
As a reminder, given the nature of our portfolio, our loans reprice very quickly.
So the bulk of the impact from lower rates has now been absorbed.
Also, we continue to closely monitor the competitive environment and our liquidity position as we manage deposit pricing.
Overall, credit quality was strong, as shown on Slide 8.
Net charge-offs were $33 million or 26 basis points, including recoveries of $20 million.
Criticized loans remained relatively stable with an increase of only $27 million and comprised 6.5% of the total portfolio.
Non-performing loans remained low at 62 basis points, and the bulk of the $54 million increase in the third quarter was attributed to energy loans.
In summary, we are leveraging our experience and expertise working closely with our customers and carefully reviewing their current and projected financial performance.
We have adjusted risk ratings as appropriate.
We started this cycle from a position of strength with very low non-performing and criticized loans, and migration so far has been manageable.
Turning to Slide 9.
The economy began to improve to the quarter.
However, the path to full recovery remains uncertain due to the unprecedented impacts of the COVID-19 pandemic.
For this reason, our CECL modeling in late third -- in the third quarter did not significantly change and included the recession that we have been experiencing, followed by a slow recovery.
More severe assumptions were used to inform the qualitative adjustments made for certain segments.
This combined with the reduction in loan balances, resulted in a slight decrease in our allowance for credit losses, which remains above $1 billion.
Our credit reserve ratio was 2.14%, excluding PPP loans.
Our credit reserve coverage for NPLs was strong at 3.2 times.
Again, we are well positioned with a relatively high credit reserve and low non-performing assets, as illustrated.
We believe our disciplined underwriting and diverse portfolio are assisting us in managing through this pandemic recession.
Energy loans are outlined on Slide 10.
They decreased $251 million to $1.8 billion at quarter end and represent 3.5% of our total loans.
E&P loans make up nearly 80% of the energy portfolio.
And energy services, which is considered the riskiest segment, was only $46 million.
The allocation of reserves to energy loans remained above 10%.
While non-accrual loans increased, criticized loans decreased $102 million and net charge-offs decreased to $9 million.
Charge-offs are net of $14 million in recoveries, which are unlikely to repeat in the near-term.
Fall redeterminations are just beginning, and we expect a small increase in the borrowing bases as higher energy prices were offset by lower production inventory.
With more than 40 years of serving this industry, we have deep expertise and remain focused on working with our energy customers as they navigate the cycle.
Slide 11 provides detail on segments that we believe pose higher risk in the current environment.
Note, we continue to review the portfolio refining our assessment.
As a result, we have removed casinos and sports franchises from this group as we no longer see elevated risk.
That aside, period end loans in the social distancing segment decreased $145 million or 5%.
As expected, criticized loans increased $102 million, yet remained manageable at 10% of the segment and non-accruals remained very low.
We believe we are well reserved as we have applied a more severe economic forecast to the segment.
We have deep expertise and a long history of working in the cyclical automotive sector.
Production has been ramping back up and auto sales have rebounded.
Similar to the social distancing segment, while loans decreased about $250 million, the criticized portion increased, yet non-accruals decreased and remained low.
Our leverage loans tend to be with middle market relationship-based customers with sponsors, management teams and industries we know well, and we avoid the covenant-light deals.
Balances increased to $85 million and criticized and non-accrual loans were slightly higher.
As far as payment deferrals, they provided a cushion as customers adjusted to the environment.
Now that they've acclimated, initial deferrals have expired, a new request of a nominal.
Total deferrals at September 30 dropped only 70 basis points of total loans.
Non-interest income increased $5 million, as outlined on Slide 12.
Improved economic conditions had a positive impact on deposit service charges and card fees.
Deposit service charges were up $5 million with increased cash management activity.
Also, card fees remained very strong and increased $3 million due to higher consumer volumes and merchant activity spurred by the economic stimulus as well as changes in customer behavior related to COVID.
Commercial lending fees grew with increased syndication activity and unutilized line fees.
As expected, customer derivative income declined following very robust activity in the second quarter, which related to the rapid decline in interest rates and volatile energy prices that have since stabilized.
Derivative income also included a $6 million unfavorable credit valuation adjustment compared to an unfavorable adjustment of $3 million in the second quarter.
Securities trading income decreased $2 million, but remained at an elevated level and reflects fair market adjustments for investments we hold related to our technology and life sciences business.
Similarly, investment banking fees declined, yet continue to be relatively strong.
Deferred comp asset returns were $8 million, a $6 million increase from last quarter, which is offsetting non-interest expenses.
Also, bank-owned life insurance increased with the receipt of the annual dividend.
Turning to expenses on Slide 13.
Salaries and benefits increased $8 million.
This included the increase in deferred comp of $6 million that I just mentioned as well as seasonally higher staff insurance.
A catch up on maintenance projects, which we expect to continue in the fourth quarter as well as seasonal taxes resulted in an increase in occupancy costs.
As previously announced, we increased our charitable contributions to assist businesses and communities impacted by the pandemic.
Since early March, Comerica, together with Comerica Charitable Foundation, has distributed over $9 million to over 150 non-profit and other community service organizations.
Outside processing decreased $4 million, primarily related to lower PPP loan initiation volumes.
In addition, operational losses and legal-related costs declined $3 million.
Our expense discipline is well ingrained in our company and is assisting us in navigating this low rate environment as we invest for the future.
Our capital levels remained strong, increasing to an estimated CET1 of 10.26%, as shown on Slide 14.
We were focused on maintaining our attractive dividend and deploying our capital to drive growth, while we maintain strong capital levels with the CET1 target of 10%.
In addition, the dividend is supported by strong holding company cash.
Slide 15 provides for our outlook for the fourth quarter relative to the third quarter.
We are assuming a continued gradual improvement in GDP and unemployment.
Also, while we do expect to see some modest forgiveness in PPP loans by the end of the year, there is a great deal of uncertainty.
Therefore, we exclude any impact from forgiveness on loans, net interest income and expenses from this outlook.
Starting with loans, we expect National Dealer balances to increase as auto inventory levels begin to rebuild.
Mortgage Banker is expected to decline somewhat from its record high with seasonally lower purchase and refi volumes.
In addition, we believe the recent stabilization of balances that we've seen in certain business lines, such as the middle market, large corporate and energy, should continue.
However, on a quarter-over-quarter basis, average balances in these businesses are expected to be lower.
We expect average deposits to remain strong and stable as customers continue to carefully manage their liquidity.
This expectation includes -- excludes the benefit from any further government stimulus programs.
Overall, net interest income is expected to be relatively stable.
As we've already absorbed the bulk of the effect from the decline in rates, we estimate the net effect of lower rates alone will be $5 million or less.
The impact from reduced loan balances, lower interest rates on loans and lower yields on securities is expected to be mostly offset by additional rate floors on loans, a decrease in deposit rates to an average of 14 basis points, as well as the full quarter benefit of third quarter actions to increase our securities portfolio and reduced wholesale borrowings.
Again, this outlook excludes any benefit from PPP loan forgiveness.
Credit quality is expected to be solid with net charge-offs increasing from the low third quarter level, which did include strong recoveries.
Although the pace of the economic recovery remains uncertain, with our credit reserve at about 2% of loans in the third quarter, we believe we are well positioned to manage through it.
We expect non-interest income to decline as we do not expect the third quarter levels of deferred comp, securities trading income or BOLI to repeat.
We believe several customer-driven fee categories should grow with improving economic conditions.
But this is expected to be offset by card volume decreasing as recent elevated activity receipts.
As far as expenses, we expect a rise in technology costs as we catch up on initiatives that were delayed due to COVID.
We are committed to investing in our futures that we are well positioned coming out of the pandemic.
In addition, we expect an increase related to seasonal staff insurance.
Mostly offsetting these increases, charitable giving should revert to a normal level, and we do not expect the level of deferred comp to repeat.
We continue to focus on controlling expenses as we closely manage discretionary spending.
Finally, our capital levels are healthy, and we remain focused on managing our capital with the goal of providing an attractive return to our shareholders.
I will close with Slide 16.
Over our 170-year history, Comerica has successfully managed through many challenging times.
Using our experience and expertise to help our customers and communities navigate stressful situations and achieve long-term success is at the heart of Comerica's relationship banking strategy.
The unwavering dedication of our team to assist our customers as well as support each other and our communities continues to be a source of pride.
Our long-standing corporate mission is to attain balanced growth and profitability by providing a higher level of banking.
Fundamental to our success in accomplishing this mission is our key strengths, which are outlined here.
We have long-tenured employees who have deep expertise in the industries they serve.
We have a strong presence in the major metropolitan areas of Texas, California and Michigan, and these markets provide significant growth opportunities along with customer diversity.
There are abundant collaboration opportunities among our three divisions; Commercial Banking, Retail Banking and Wealth Management.
Our robust leading-edge cash management suite continues to evolve to meet the ever-changing needs of our customers.
We have a strong credit culture.
Our consistent conservative underwriting approach and prudent customer selection resulted in superior credit performance through the last recession.
It also -- it is also assisting us in weathering the current environment, as evidenced by our strong credit metrics this quarter.
We are committed to maintaining our expense discipline while investing for the future.
Finally, our capital position is strong.
And our first priority is to use it to support growth, while providing an attractive return to our shareholders.
Now we'd be happy to take questions.
| third quarter 2020 net income of $211 million, $1.44 per share.
qtrly net interest income decreased $13 million to $458 million versus q2.
qtrly provision for credit losses decreased $133 million to $5 million versus q2.
sees q4 net interest income relatively stable versus q3.
|
Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved.
So as we begin our prepared comments, first and foremost, all of us at Brandywine sincerely hope that you and yours continue to be safe, healthy, and as engaged as possible during this challenging time.
This pandemic continues to disrupt all of our lives and as a result [Indecipherable] in a new landscape for everyone, including every business.
The duration of this crisis is increasingly unclear.
On our April 23rd earnings call, we did expect a return to the workplace environment by mid-summer.
Given the events of recent weeks, however, that timeline has been extended.
We are continually assessing COVID-19's impact on every element of our business and based on this detailed review, we remain confident in our ability to execute all components of our 2020 business plan.
Additional details on our approach to this crisis are outlined in our COVID-19 Insert, that is found on pages 1 to 5 of our supplemental package.
So during our prepared comments, as we always do, we'll review second quarter results and an update to our 2020 business plan.
We'll also review the announced joint venture of our -- on our One and two Commerce Square properties in the central business district of Philadelphia.
Tom will then summarize our financial outlook and update you on our strong liquidity position.
So I'm looking at the second quarter, we continue to execute on every component of our 2020 business plan.
For spec revenue, we are 99% complete, with only 69,000 square feet and $300,000 remaining to achieve our spec revenue target for the year.
We had good second quarter leasing activity that 400,000 square feet of both new and renewal activity, with strong rental rate mark-to-market of 19.4% on a GAAP basis and 10.3% on a cash basis.
Same-store numbers had been tracking in line with our business plan, but the delayed opening of Philadelphia resulted in about a $2 million NOI decline from our parking operations for the balance of the year.
Our parking operations are included in our same-store pool and as such, this NOI decline has reduced our cash and GAAP ranges by about 100 basis points each.
Office operations are progressing in accordance with our business plan.
Our cash collection rates continue to be extremely good, and we have collected over 99% of our second quarter billings and our July collection rate tracks very well, also with about 98% collected as of yesterday.
Capital costs were at the low end of our targeted range.
And we have lowered our estimated full-year 2020 capital ratio by 100 basis points, down to a 11% to 12%, really reflecting the experience we're having with generating short-term extensions that require minimal capital at with outlays and I'll touch on that in a moment.
Retention was only 37%, which was mainly driven by known -- the known move out of SHI in our Austin portfolio as they began occupying their newly owned building that we built for them at our Garza Ranch project.
As noted previously, we have backfilled 80% of their space, which will commence later this year at a 19% cash mark-to-market.
And look, well, SHI was the primary driver in our occupancy decline, we had several other tenants expirations.
All of those move-outs were known and part of our plan.
And of the known move-outs, a 183,000 or 51% has already been relet and will recommence in 2020.
I should also note that about 70 basis points of our occupancy decline were due to removing Commerce Square from our same-store pool.
Most importantly though, we do expect occupancy returning to our targeted range of 92% to 93% by the end of this year.
We did post FFO of $0.34, which is in line with consensus and Tom will amplify that in during his comments.
And then looking at our 2020 business plan, as we talked about on our last call, this crisis really embodies both danger and opportunities for our company.
Our clear priority has been to assess all elements of risk and institute plans to effectively mitigate and anticipate any adverse impact.
We do remain focused forward on opportunities to enhance our business plan execution, whether that'd be by lease, early lease renewals, margin improving, rebidding programs or working with institutional partners to seek investments where we can create growth opportunities.
And just a quick recap of our COVID-19 key components.
We have maintained in accordance with all local, state and CDC guidelines, a door is open and lights on approach to our building operations.
While it's a little bit difficult to quantify in some of our buildings.
We estimate the current occupancy range of our buildings is around 5% to 10% in CBD Philadelphia, up to about 20% our DC assets, Austin is around 10% with some pullback in that given the situation down there, and the Pennsylvania suburban operations seem to be around 15%.
Secondly, the stability of our operating platform remains a top priority with particular attention on rent collections and rent deferrals, all of which were amplified on page one of our supplemental package.
One of our real top priorities has been a strategic outreach to all of our tenants.
So we are in extremely close touch with all of our tenants, understanding their concerns, listening to their transition plans and providing help wherever we can, so we fully understand their objectives.
As such as part of that program, while we've reached out to our entire tenant base, our particular focus has been on those tenants whose [Phonetic] spaces role in the next two years.
The results of those efforts are framed out on page three of our supplemental and have resulted in 73 active tenant discussions totaling about 950,000 square feet that to date have resulted in 28 tenants, totaling about 216,000 square feet, executing leases since March 15th.
These leases have an average term of 24 months with a 4.2% cash mark-to-market and a 5% capital ratio.
On the construction front, all of our markets are allowing construction activities.
And we've not programmed any additional pull back in construction activity delays this year.
On a positive front, we are beginning to see downward pressure in select [Technical Issues] upon construction cost, hard construction costs, as well as some soft costs as the overall forward construction pipeline continues to shrink.
Our leasing pipeline stands at 1.5 million square feet and we've actually had better than expected progression in that pipeline during the quarter.
Once again, our team has been in an extensive touch with every prospect and the breakdown of the 1.5 million [Phonetic] is as follows: deals progressing but execution uncertain -- timing of that uncertain and we're targeting in the next 90 days that 24% or 354,000 square feet.
Deals progressing, but too early to tell when they would actually could execute it about 900,000 square feet or over 60% of the pipeline.
And that's really the noticeable change.
Since April's call, many more deals have advanced from the on-hold due to COVID, which right now comprises about 14% of that current pipeline into the deal progressing but too early to call.
So tenants are slowly beginning to refocus their attention on their office space requirements.
On the capital front, we're really delighted to announce a joint venture on our One and Two Commerce Square buildings in Philadelphia.
The joint venture is with an extremely high-quality global institutional investor, who is making their first office investment in Philadelphia, which from our perspective, further demonstrates the attractiveness of our Philadelphia market to institutional investors and really validates investors perception on Brandywine's ability to create value.
Our investor has requested that we do not disclose their name and certain terms of the agreement at this point in time.
But the general framework of the venture meets many, many of our key objectives.
It's a $115 million preferred equity investment, which represents 30% of the venture's capitalization at a total value of $600 million or $316 per square foot, which we believe is exceptionally strong pricing.
The going-in cap rate is 5.1%, that cap rate improves based upon the rollover, but we really view that it's simply a data point due to the pending level of vacancy and the value creation opportunity.
So right now over 97%, that does drop to 70% over the next 18 months.
After providing for payments for transitional leases and closing costs, Brandywine received over $100 million of net proceeds, which as Tom will amplify added to our excellent liquidity position.
The transaction is a 70-30 joint venture with shared control on decisions.
And while we can't close some of the specific terms, we can share that our partners targeted rate of return on an all-in basis is in the very low-double digits.
So we view it as very effectively priced capital.
It provides for the same level of returns on preferred equity with a liquidation preference upon a capital event to our partner and in return for that preference, Brandywine receives a significant promote structure upon a capital in that [Phonetic].
Both Brandywine and our partner had each committed $20 million of incremental capital to reposition the properties and retenant known vacancies.
We will continue to manage and lease the property.
Frankly, due to the leasing status and the price, the transaction will have minimal dilution, less than $0.01 a share on '20 [Phonetic] earnings primer and will improve our net debt-to-EBITDA ratio by approximately between 3 and 4 turns between now and the end of the year.
The transaction does reduce our Ford [Phonetic] rollover exposure by 1.8 million square feet in our wholly owned portfolio.
And Brandywine will also recognize a gain of about $270 million on this transaction.
Very important point to note in the structure, given the state of the debt markets and the near-term rollover profile of this property, we closed the venture with the existing $221 million mortgage in place at selling at 37% loan to value.
As leasing progresses and the debt markets continue their recovery, we plan to refinance at a higher LTV, thereby affording both Brandywine and/or partner and other opportunities to generate liquidity.
And speaking of liquidity, the company is in excellent shape, as outlined on page four of our supplemental package.
We are projecting to have a $500 million line of credit availability at year-end 2020.
And if we refinance rather than pay off an $80 million mortgage later this year, that liquidity increases to $580 million.
We have only one $10 million mortgage that matures in 2021.
We have no unsecured bond maturities until 2023.
We anticipate generating $55 million of free cash flow after debts and payments for the second half of '20.
And our dividend remains extraordinarily well covered with a 56% FFO and 75% CAD payout ratio.
So with those items addressed, let me just spend a few moments on our development set.
First of all, all of our production assets that's Garza and Four Points in Austin, 650 Park Avenue in King of Prussia and 155 in Radnor are all fully approved, fully documented, fully ready to go, subject to identifying pre-leasing.
And as we've noted previously, these are near-term completions that we can complete within four to six quarters and there are individual cost range between $40 million and $70 million.
As you might expect, we didn't really make any significant advancement in our deal pipeline of almost 600,000 square feet during the quarter and frankly don't really anticipate any significant advancement of some of these major discussions until the crisis begins to abate and there is more focus on return to the workplace.
And looking at our existing development projects on 405 Colorado, look, this exciting addition to Austin skyline remains on track for completion in the first quarter of '21, at a very attractive 8.5% cash-on-cash yield.
We have a pipeline of 125,000 square feet.
But frankly, as I noted on the production assets, we don't expect any significant decision-making to occur until after the crisis begins to abate.
On the board and building, delighted to report that's now been placed in service at 94% occupancy and 98% leased.
The property will stabilize on schedule in the fourth quarter of 2020.
3000 Market Street is a 64,000 square feet life science renovation that we undertook and within Schuylkill Yards.
As noted last quarter, we did sign a lease with one of our existing life science tenant Spark Therapeutics who has taken the entire building on a 12-year lease.
We expect that lease will commence in the third quarter of next year and deliver a development yield slightly north of 9%.
Quickly looking at Broadmoor and Schuylkill Yards.
At Broadmoor, we continue fully advancing our development plans on Block A, which is 360,000 square feet of office and 340 apartment units.
And we've gotten through a final design in pricing and we'll be in a position to have all of that ready to go by the end of Q3 this year, subject to financing and pre-leasing.
Schuylkill Yards, within Schuylkill Yards, we really continue a very, very strong life science push.
The overall master plan for Schuylkill Yards provides with at least 2.8 million square feet can be life science space.
So we really do view that we have a tremendous opportunity to establish a full ecosystem.
3000 Market in the Bulletin Building conversions, I just mentioned, to life science really evidence is the first part of that pivot to create a life science hub.
We are also well into the design, development and marketing process for a 400,000 square foot life science building with the goal of being able to start that by Q2 '21, assuming market conditions permit.
Finally, we are converting several floors within our Cira Center project to accommodate life science use that the aggregate square footage for that converted space is 56,000 square feet, and we have a current pipeline of 137,000 square feet for that space.
Schuylkill Yards West, our residential office tower is fully approved to go and ready, subject to finalizing our debt and equity structure.
We have also modified the design of the office component to accommodate some level of life science use.
As I mentioned in the last quarter and I'll mention again this quarter, the COVID-19 crisis has clearly had a big impact upon the timing of moving forward this project and getting the financing in place.
We continue to work with our preferred equity partner, but the crisis clearly slowed the pace of procuring and finalize both at equity piece as well as the debt piece.
We do remain optimistic that we'll get this across the finish line as soon as the situation returns to some level of normalcy.
In general, we do continue to maintain a very active dialog with a broad cross-section of institutional investors and private equity firms.
In addition to our Commerce Square announcement, we continue to explore other asset level of joint ventures that will both improve our return on invested capital and continue to enhance our liquidity and provide growth capital for our development pipeline.
These discussions are active and ongoing and they certainly encompassed both our Broadmoor and Schuylkill Yards projects.
Based on the current uncertain business climate, we will not provide that 2020 guidance as part of our third quarter call, but we do plan on issuing guidance no later than our fourth quarter earnings cycle.
Now, I'll turn the mic over to Tom, who will provide an overview of our financial results.
Our second quarter net income totaled $3.9 million or $0.02 per diluted share and FFO totaled $57.7 million or $0.34 per diluted share.
Some general observations regarding the second quarter results.
Operating results were generally in line with our first quarter guidance with a couple of items to highlight.
On our portfolio, operating income, we estimated 8 million -- $80 million in portfolio NOI [Phonetic] and we were $1.1 million higher than that.
While we did have parking being about $1 million below our anticipated reduced parking level, primarily due to the transit and monthly parking.
We did have lower physical occupancy and therefore, sequential operating expenses were lower and we experienced higher operating margins in 2Q '20, offsetting the lower parking income.
Interest expense improved by $0.8 million primarily due to lower interest rates than forecast.
Our second quarter fixed charge and interest coverage ratios were 3.4 times and 3.7 times, respectively.
Both metrics were similar to the second quarter of 2019.
As expected, our second quarter annualized net debt-to-EBITDA increased, the increase to 7.0 times was primarily due to the lower anticipated sequential EBITDA outlined in the prior quarter.
Adjusting for the Commerce Square transaction on a pro forma basis for the second quarter, that 7.0 were decreased to 6.7.
Two reporting items to highlight for the second quarter, cash collections, as reported, overall collection rate for the second quarter was a very strong 99.6% based on actual quarterly billings.
However, if we did include the second quarter deferred billings, our core portfolio collections rate would still have been a very strong 97%.
In addition, cash same-store as outlined on page one of our supplemental, we have included $2.3 million of rent deferrals in our second quarter results.
Looking then to third quarter guidance.
Looking forward, we have portfolio operating income will total approximately $74 million and will be sequentially lower by $7.1 million.
This decrease is primarily due to Commerce Square JV.
The joint venture will result in deconsolidation of the property and that will lower the NOI by $7.5 million.
One good pick up on the other side, if there is $1.2 million of incremental income for the Bulletin Building, which has been placed into service in June and the building is now 94% occupied.
FFO contribution from our unconsolidated joint ventures with total $6.5 million for the third quarter, which is up $4.1 million from the second quarter and that's primarily due to Commerce Square joint venture, which has been deconsolidated effective [Indecipherable] with our earnings yesterday.
For the full-year 2020, the FFO contribution is estimated to be $19 million.
G&A for the third quarter will total 7.3 [Phonetic] and will be sequentially $1 million lower than this -- than the second quarter.
This is primarily due to lower compensation award amortization and it's pretty consistent with prior years.
Full-year G&A expense will approximate $31 million.
Interest expense will be $1.5 million sequentially compared to the second quarter and will total $18 million for the third quarter with 94.5% of our balance sheet debt being fixed rate at the end of the second quarter.
The reduction in interest expense is primarily due to the $100 million of net proceeds received from the Commerce Square joint venture paying off our line of credit at Commerce Square mortgage debt.
And then also the Commerce Square mortgage debt will now be deconsolidated.
Capitalized interest will approximate $1 million for the third quarter and full-year interest expense were approximately $76 million.
We extend -- we plan to extend our Two Logan mortgage beyond the August 1st maturity date, and we are looking to either pay that off or have an extended and we'll be working on that during this quarter.
Termination and other fee income.
We anticipate terminations and other income totaling $2.2 million for the second -- for the third quarter and $10.5 million for the year.
Net management, leasing and development fees will be $4 million and will approximate $10 million for the year.
We have no planned land sales and tax provisions of any significance.
No anticipated ATM or additional share buyback activity.
And our guidance for investments, we have only the two -- the one property in Radnor, Pennsylvania that we will acquire for $20 million and that is scheduled for redevelopment.
So we know generating of earnings of any kind in 2020.
Looking at our capital plan, as we outlined, we have two development projects in our 2020 capital plan with no additional developments plan for the balance of the year.
Based on that, our CAD range will remain at 71% to 78%.
And uses for this year will total $285 million, $67 million of development, $65 million of common dividends, retained -- revenue creating will be $25 million, revenue maintain will be $27 million, mortgage amortization of $1 million.
We are including the $80 million pay-off of the mortgage at Two Logan and the acquisition of 250 King of Prussia Road, sources for all those uses.
Our cash flow from after interest payments $115 million [Phonetic].
$100 million of net proceeds from Commerce Square joint venture, when you use the line of credit for $39 million, cash on hand of $21 million and land sales of $10 million.
Based on the capital plan outlined, we are in excellent position on our line of credit and liquidity.
We also project that our net debt will range between 6.3 and 6.5.
It will likely be at the low end of that range as a result of the Commerce Square joint venture, which has reduced our leverage in the second quarter.
In addition, our net debt -- our debt to GAV will approximate 38%, which is down from 43%, primarily again due the joint venture improvement in that metric.
In addition, we anticipate our fixed charge ratio will continue to approximate 3.7 on an interest coverage basis and 4.1 -- 3.7 on a debt service coverage and interest coverage would be 4.1.
With that, wrapping up.
As we always do, we ask that in the interest of time you limit yourself to one question and a follow-up.
| q2 ffo per share $0.34.
qtrly earnings per share $0.02.
do not plan on providing our 2021 guidance during q3 earnings cycle.
|
Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
First and foremost, all of us at Brandywine sincerely hope that you and yours continue to be safe, healthy and engaged.
The pandemic continues to disrupt all of our lives and has resulted in a new landscape for everyone and certainly every business and its duration unfortunately remains unclear.
At the time of our Q2 earnings call in July, we did anticipate a return to the workplace commencing after Labor Day and into the fall.
Given the recent headlines over that timeline for many of our tenants has been extended into 2021.
And as we noted in our SIP our portfolio is about 15% occupied with variances between the different operations but we can certainly provide more color on that during the Q&A.
Additional details on our approach to this crisis are outlined in our COVID-19 insert found on Pages 1 to 4 of the supplemental package.
During these prepared comments we'll review third quarter results, an update to our 2020 business plan.
Tom will then summarize our financial outlook and update you on our strong liquidity position.
After that Dan, George and Tom and I are certainly available to answer any questions.
So looking at the quarter, we continue to execute on every component of our business plan.
We're certainly pleased that most of our 2020 objectives have been achieved.
We are 100% complete on our speculative revenue target.
And while the volume of executed leases was down a bit quarter-over-quarter, as you might expect, during the summer it -- regardless of the pandemic, our overall pipeline increased by over 330,000 square feet.
For the third quarter, we also posted very strong rental rate mark-to-market of 17.1% on a GAAP basis and 9% on a cash basis.
In addition, the core portfolio did generate positive absorption of 102,000 square feet, which includes 47,000 square feet of tenant expansions.
Also included in those absorption numbers was the full building delivery of our 426 Lancaster Avenue redevelopment in Pennsylvania suburbs, that was 55,000 square feet and 112,000 square feet of the occupancy backfilling of the SHI space again in Austin, Texas.
We did experience during the quarter 58,000 square feet of COVID-related terminations.
The primary one of that was Philadelphia Sports Club in our Radnor complex of 42,000 square feet and a couple other small hospitality and medical offices.
Our full year 2020 same store numbers are tracking in line with our revised business plan.
For this quarter, the numbers were consistent with our business plan and were primarily driven, as you might expect, by the 9/30/2019 move out of KPMG in 183,000 square feet and the SHI move out on 3/31/20.
Cash collection rates continue to be among the best in the sector.
We've collected over 99% of our third quarter billings and our October collection rate continues to track very, very well with over 97% of office rents collected as of yesterday.
Our capital costs were in line with our targeted range as we continue to experience very good success in generating short-term lease extensions that require minimal capital outlay.
Retention was 60% and slightly above our full year range.
And based on fourth quarter scheduled lease commencements we will be within our stated occupancy range.
As Tom will articulate in more detail, we did post FFO of $0.35 per share, which is in line with consensus estimates.
And taking a broader look at our '20 business plan, as we mentioned in the last call, any crisis embodies a level of danger and opportunity.
So our first plan of attack was to fully assess risk to our business and we believe we have instituted plans to either mitigate or anticipate any adverse impacts.
We do remain focused on growth, whether that's through our early lease renewal program or margin improving rebidding programs, we're continuing to work with institutional sources of equity to seek investments and opportunities where we can create earnings and value accretion.
But just looking at the risk factors that we face as part of the pandemic, first, and consistent with all applicable state, local and CDC guidelines, we did maintain a doors open, lights on approach to our buildings during the entire breadth of the pandemic thus far.
Now, certainly for a variety of factors primarily, public policy, employer liability concerns, mass transit, virtual schooling and other safety concerns most tenants in our portfolio, particularly the larger ones anticipate a phased return after the New Year.
That certainly remains fluid and we're tracking, but it seems like the larger tenants won't be phasing back in until next year.
Second, we focused on portfolio stability as a top priority with particular focus on these items, rent collections already talked about and I think we're doing fairly well.
Rent deferrals, we did frame that on Page 1 of our SIP we had a total $4.5 million of deferrals with $4.1 million scheduled to repay those deferrals within the next 18 months.
Now interestingly, to-date we've already collected 14% or $536,000 of those deferrals, including a $100,000 of early prepayments.
So we certainly think that we're making some good progress there.
Another key focus for us is strategic tenant outreach.
Information, as you may expect is key right now, and we have an outstanding on-the-ground team of property and leasing professionals in all of our operations.
Their top priority is being in close touch with our tenants, understanding their concerns, their transition plans and seeing where we can provide help.
As such, we've reached out to our entire tenant base with a particular focus on those tenants whose spaces roll within the next two years.
The results of those efforts are framed out on Page 2 of the SIP and have resulted in 82 active tenant renewal discussions totaling over 920,000 square feet, that to-date have resulted in 45 tenants totaling 300,000 square feet executing renewals.
These leases had an average term of 24 months with about a 2.6% cash mark-to-market and a sub 5% capital ratio.
We certainly hope that as we get more clarity on the pandemic that over the next couple of months we can convert some of those ongoing discussions to executed renewals.
From a construction standpoint, nothing really more to update from last quarter.
We continue to have construction activity in all of our markets.
We have not programmed any further construction delays in our numbers and we are beginning to see with the exception of lumber and pressure-treated wood some downward pressure on construction costs as we're starting to see an overall shrinkage of forward construction pipelines.
And speaking of pipelines, our leasing pipeline stands at 1.6 million square feet including approximately 400,000 square feet in advanced stages of lease negotiations.
As I mentioned, the overall pipeline increased by 331,000 square feet.
This -- the expansion of the pipeline was driven by over 444,000 square feet of tours during the quarter, which as we noted is up 115% from last quarter.
So signs in the market reawakening a bit.
From a liquidity and dividend standpoint, Tom will certainly talk about it some more detail, but the company is in excellent shape from a liquidity and capital availability standpoint as we've outlined on Page 3.
After factoring in the full repayment of the Two Logan Square mortgage, we're still projecting to have about $530 million of our line of credit available by year end.
We're also anticipating paying off the small mortgage during the fourth quarter of $9 million.
We have no maturities in '21 and no unsecured bond maturities until '23 and have a very good 3.75% weighted average interest rate.
Dividend remains incredibly well covered with a 56% FFO and a 76% cap ratio.
And given those mortgage prepayments, we do anticipate that by the end of this year we will have a completely unencumbered portfolio with no wholly owned secured mortgages and no wholly owned mortgages going into '21.
Now to quickly look at our development investment opportunities.
First of all, on the development front, all four of our production assets that's Garza and Four Points in Austin, 650 Park Avenue and 155 in Pennsylvania are all fully improved, fully documented, fully ready to go subject to pre-leasing.
We are still actively marketing those, we have a good pipeline on those production assets.
As you might expect, that's moving a bit slow, but tenants continue to look at new construction and upgrading their stock as part of their workplace return strategy.
405 Colorado remains on track for completion in Q2 of next year at a very attractive 8.5% cash-on-cash yield.
We have a pipeline of almost 200,000 square feet on that project, again moving slow, but again we're pleased with the breadth of that pipeline.
But we really don't expect a lot of significant decision-making to occur until we get more clarity on what's happening with the pandemic.
3000 Market, that's the 64,000 square foot life science conversion that we're doing within Schuylkill Yards, construction is under way.
That building will -- is fully leased to Spark Therapeutics on a 12-year lease commencing later in the second half of 2021 at a development yield of 8.5%.
And looking at Broadmoor and Schuylkill Yards for just a moment.
We are advancing Block A, which is a mixed-use block consisting of a 350,000 square foot office building and 340 apartment units that's going through final design and final approvals from the City of Austin.
And we expect all those have to be accomplished by year-end.
Within Schuylkill Yards, we continue a very strong push to the life science space.
As mentioned last quarter and we've outlined in more detail in the supplemental package, the overall master plan for Schuylkill Yards is we can do at least 2.8 million square feet of life science space, so we have an excellent long-term opportunity to really create a scalable life science community.
3000 Market and the Bulletin Building were the first steps and their conversions to create a life science hub.
We are also well into the design development and marketing process for a 500,000 square foot life science building located at 3151 Market Street.
We have a leasing pipeline on that project totaling about 580,000 square feet and our goal is to be able to start that by Q2 '21 assuming of course market conditions permit.
Our Schuylkill Yards West project, which is our life science, office and residential tower is fully approved and ready to go, subject to finalizing our debt and equity structure, that project consists of 326 apartments and a 100,000 square feet of life science and office space.
We currently have an active pipeline of over 300,000 square feet for those in commercial uses and based on this level of interest, we are contemplating starting that projects without a pre-lease.
Similar to our approach on 3000 where we looked at existing assets, we have commenced the construction and conversion of three -- floors three through nine within Cira Center to accommodate life science uses, that will be done in two phases.
We have 34,000 square feet already pre-leased and we currently have a pipeline of 125,000 square feet.
Another interesting point on both Schuylkill Yards and Broadmoor that we can't lose sight of is that based on current approvals and the master plans in place between those two sites, they can accommodate about 5,000 multi-family units.
On the equity financing front, we have an active ongoing dialog with a broad cross section of institutional investors and private equity firms.
We continue to explore other asset level joint ventures in sales to both improve our return on invested capital, generate additional liquidity and provide growth capital for our development pipeline and these discussions, as you might expect, encompass both Broadmoor and Schuylkill Yards but also some of our existing assets.
Let me close on this one final point.
As you know our normal practice for many, many years was to provide next year guidance during our third quarter earnings call.
But these are not normal times, and as we discussed in our July call, we are not providing '21 guidance at this time.
Although our Company's overall rent collections remained very strong, we have increasing visibility into our existing portfolio and even with the rent collections being the highest in the sector, we believe it's prudent to delay our '20 -- '21 earnings guidance and business plan until we have better visibility on the duration of the COVID-19 pandemic and its impact on the macro economy and in particular our markets.
Tom will now provide an overview of our financial results.
Our third quarter net income totaled $274.4 million or $1.60 per diluted share and FFO totaled $60 million or $0.35 per diluted share.
Some general observations regarding the third quarter results.
The results were generally in line with our second quarter guidance with the following highlights.
Core -- property operating income we estimated $74 million, it came in slightly above that at $74.4 million, which was a good result.
Termination and other income.
We expected that -- it ended up at 1.3 below projections, primarily due to the timing of certain anticipated transactions that we believe will occur in the fourth quarter.
And then interest expense was also lower by $1.7 million over forecast, primarily due to the interest expense reduction from the loan assumption recapitalization of Two Logan Square, which resulted in a one-time non-cash reduction in interest expense totaling $2 million.
Our third quarter fixed charge and interest coverage ratios were 3.5 and 3.8 respectively.
Most met -- both metrics improved sequentially as compared to the second quarter, primarily due to the Commerce Square joint venture.
Both metrics exclude the one-time interest deduction -- reduction noted above.
As expected, our third quarter annualized net debt-to-EBITDA started to decrease to 6.7, was primarily due to the sequential EBITDA remaining similar to the second quarter and the reduced debt levels from the Commerce Square joint venture.
Two additional reporting items.
As Jerry mentioned, cash collections were 99%.
Additionally, if we included third quarter deferrals, our core portfolio would have been very strong 97%.
Collections for October are currently 97% however, one vendor payment anticipated to be received in the next day or so will bring us up to 95% -- 99%.
Write-offs in the quarter were approximately $0.005 and primarily due to retail-related tenants.
Same store, as outlined on Page 1 of our supplemental, we have included $1.1 million and $3.8 million of rent deferrals in our third quarter and year-to-date results.
Looking at the fourth quarter guidance.
We have the following general assumptions.
Property level operating income will total about $74 million and will be sequentially lower by about $500,000.
The decrease is primarily due to the Commerce Square being in our numbers for part of the third quarter and they will not be in our numbers for the fourth quarter that totals about $1.5 million.
Offsetting that decrease is a sequential increase in the portfolio, which will improve NOI by $1 million.
FFO contribution from our unconsolidated joint ventures will total $7.5 million for the quarter, which is up $0.3 million from the third quarter, primarily due to the full quarter inclusion of Commerce Square, offset by reduced NOI at our MAP joint venture.
For the full year 2020, the FFO contribution is estimated to be about $20 million.
G&A will be about $7 million for the fourth quarter and full year will be about $31 million.
Interest expense will be sequentially higher by $0.8 million compared to the third quarter and will total $17 million for the fourth quarter.
Capitalized interest will be $1.1 million for the fourth quarter and full-year interest expense will approximately $74 million.
Of note, we repaid our mortgage at Two Logan during October.
The mortgage payoff was approximately $79.8 million.
That loan had an interest coupon of 3.98%.
We anticipate an early prepayment of a wholly owned mortgage at Four Tower Bridge with an effective interest coupon of 4.5%.
With those payoffs, we now have no maturities scheduled on our wholly owned books until 2023 -- 2022 for the term loan, I'm sorry.
Termination and other income, we anticipate that to be $4.5 million for the fourth quarter.
That's up from $0.9 million in the third quarter.
And net income leasing and development fees, quarterly NOI will be $2.6 million and will approximate $8.5 million for the year.
There will be $0.5 million in the fourth quarter as it relates to land sales while we -- our $272 million gain represented 100% of the gain for reporting purposes, we only recognized 30% of that gain for tax purposes, and with some tax planning, we will not require a special dividend in 2020.
We have no anticipated ATM, additional share buyback activity scheduled.
For the investments' guidance, no more incremental sales activity.
With the acquisition of the land parcel being anticipated fourth quarter, we only have the building acquisition located at 250 King of Prussia Road for $20 million.
It is scheduled to be acquired in the fourth quarter and held for redevelopment.
No NOI will be generated in 2020.
Looking at our capital plan.
As outlined, we have two development, redevelopment projects in our 2020 capital plan with no additional plans scheduled for the balance of the year.
Based on the above, our 2020 CAD will remain in a ratio of 71% to 76% as lower capital will offset deferred rent that is repaid beyond 2020.
Uses for the remainder of the year is $185,000, comprised of $25 million in development and redevelopment, $33 million of common dividends, $8 million in revenue maintaining capital, $10 million in revenue creating capital and the repayment of the mortgages at Two Logan and Four Tower Bridge as well as the acquisition of 250 King of Prussia Road.
Primary sources will be cash flow after interest of $45 million, use of the line of $68 million, use of our current cash on hand at the end over the quarter of $62 million, and $10 million in land sales.
Based on the capital plan outlined above, our line of credit balance will be about $68 million.
We also project that our net debt-to-EBITDA will remain in a range of 6.3 to 6.5.
In addition, our net debt-to-GAV will approximate 38%, which is down sequentially from the 43% in the prior quarter primarily due to the Commerce Square joint venture.
In addition, we anticipate our fixed charge ratio will continue to approximate 3.9 on interest coverage and will be 4 -- 3.9 on debt service fixed charge and 4.1 on interest coverage.
So these are really not normal times as we all know.
So let us close with a couple of key takeaways.
First, our portfolio and operations are in solid shape with really increasing visibility into our tenants, their thought process, and what they're thinking about in terms of their return to the workplace.
Secondly, with -- our deal pipeline continues to increase as those tenants begin to really think about their workplace return and us staying in touch with those tenants is key.
Us outreaching to a lot of existing or new prospects is also very much a key part of our business plan.
So we're happy to see our pipeline really increase during a pandemic and during the slow months of the summer.
In other observations, and we're hearing this directly from tenants both large and small, safety and health both in design and execution are rapidly becoming tenants' top priorities.
And we believe that new development and our trophy-quality stock will benefit from that trend.
And we're seeing the beginnings of that in the existing pipeline.
Look, private equity and the debt markets have stabilized and are becoming increasingly competitive and strong operating platforms like Brandywine are really gaining significant traction for project-level investments.
And then we'll end where we started, which is that we really do wish all of you and your families remain safe during these interesting times.
And we ask that in the interest of time, you'll limit yourself to one question and a follow-up.
| q3 ffo per share $0.35.
q3 earnings per share $1.60.99.5% of total cash-based rent due received from tenants during q3.
through oct 20, about 97% of total cash-based rent has been received.
do not plan on providing 2021 guidance during q3 earnings cycle.
|
As always, we appreciate your interest in Central Pacific Financial Corp.
I'd like to start with an update on the COVID-19 pandemic response by the State of Hawaii and our company.
The infection rate in the State of Hawaii continues to remain very low with roughly 1,800 cases as of July 28.
Hawaii continues to have the lowest per capita infection rate in the nation.
Our residents are abiding by government orders including required quarantine, face mask usage and social distancing.
The state's local economy reopened in June and we will be reopening out of state tourism on September 1 through visitors that provide evidence of a negative COVID-19 test.
We believe this is a balanced way to reopen out of state tourism while managing COVID infections.
While the tourism reopening will be at a gradual process it will help to start bringing back the much-needed business to our local economy.
Travel bubbles between Hawaii and other countries of low infection rates continue to be discussed by our government leaders.
At Central Pacific we continue to prudently manage through the pandemic.
In the credit area we have thoroughly reviewed our loan portfolio.
Adjusted risk ratings were warranted and determined that our credit risk is manageable.
Our portfolio is conservative, well diversified and well collateralized.
We continue to proactively work with our customers to help them through the pandemic as demonstrated by our significant Paycheck Protection Program or PPP loan originations and loan payment deferral programs.
Overall, we remain committed to supporting the needs of our customers and community during this time while providing the excellent service that we are known for and maintaining a safe environment.
Our RISE2020 initiative are continuing and making good progress despite the COVID-19 pandemic.
The revitalization of our building headquarters is in full steam with major parts of the construction under way and on track for an opening date in January 2021.
In the area of digital, we are in the final stages of pilot testing our new online and mobile banking platforms and are excited for the public launch in late August.
Finally, we continue to rollout our newly upgraded ATMs throughout our branch network.
We continue to see a decline in branch transaction activity and our digital initiatives have been well timed to meet the changing needs of our customers.
Our pandemic preparedness plan continues to be in place and we have not had any disruption in our business.
We have recently reopened several of our branches that were temporarily closed and are implementing a gradual phase-in return-to-office plan that includes a portion of the workforce continuing with flexible remote work schedules.
Safety remains our utmost priority.
Therefore we have made appropriate changes to our branch and office setup to ensure proper social distancing and hygiene practices.
The actions that we've taken, we believe will continue to enable us to provide a safe environment for both our employees and customers.
The CBD Foundation continues to be active in helping the community with relevant and timely programs.
During the second quarter we ran a Mahalo Meals initiative that provided 1,500 meals to local first responders and frontline heroes.
Additionally, we recently launched a program called bricks to bites, which is helping local businesses through the crisis by providing free services to take their business online and more digital.
We also are continuing communication and engagement with visitors particularly from Japan to keep Hawaii top of mind and encourage their return to Hawaii once the pandemic end and recovery occurs.
Finally, we are continuing to work with government leaders to reopen the Hawaii economy safely with temperature screening and COVID contact tracing program.
The second quarter was highlighted by the company's successful PPP loan origination efforts as well as solid mortgage banking performance.
We originated over 7,200 PPP loans totaling over $550 million to both existing and new customers.
This was a tremendous effort that involved employees throughout the bank.
We were very pleased that our efforts not only supported our customers, but also the broader business community during these unprecedented times.
We are preparing to launch our PPP forgiveness portal and expect to begin the process of assisting our customers that are applying for forgiveness from the SBA in the near future.
Given the low business rate environment, residential mortgage demand was strong, which enabled the company to grow our residential mortgage portfolio by $25 million and generate $3.6 million of mortgage banking income during the second quarter.
Overall for the second quarter, the company grew total loans by $491 million or 10.9% sequential quarter.
This included $526 million in PPP loans and $25 million in residential mortgage as I mentioned earlier, partially offset by declines in other loan categories.
We're also able to grow core deposits by $719 million or 16.7% sequential quarter augmented by the PPP loan funds that were deposited with the bank.
Additionally, we believe part of the increase was a result of a fight to safety by our customers.
Given the volatility in the markets and the current operating environment we were successful in reducing the average cost of total deposits by 16 basis points to 20 basis points.
Our teams continue to be focused on expanding banking relationships with segments less impacted by COVID-19 and we continue to stay in close contact with our customers through increased find outreach efforts given the current operating environment.
Providing best-in-class digital technology remains a key priority for us.
We experienced increased customer usage of digital channels over the last several months due to COVID-19 pandemic with mobile deposit transactions up over 90% and mobile banking enrollments up nearly 15% on a year ago.
The increased digital channel activity creates strong momentum as we prepare to launch our new mobile and online platforms.
In addition, we rolled out new ATMs with enhanced functionality to half of our branches through June 30.
New ATMs at the remaining branches are scheduled to be installed before the end of the year.
During the second quarter we continued with our rigorous approach to reviewing our commercial loan portfolio and actively worked with our customers to determine ongoing financial impact, if any, as well as provided support and guidance through the ongoing uncertainty in the marketplace.
We proactively assisted many of our customers in providing loan payment deferrals, as well as in the application and approval of PPP.
The volume of loan payment deferrals printed peaked in May at $605 million in total loan balances and have since declined to $568 million or 12.7% of our total loan portfolio excluding PPP balances at June 30.
Our consumer loan payment deferrals totaled $66 million and residential loan payments forbearances totaled $177 million.
We continue to support our consumer and residential customers with a second 90-day loan payment deferral or forbearance as needed.
We expect that a majority of our consumer customers who took a first 90-day loan payment deferral has taken or planning to take a second 90-day deferral due to their continued unemployment status.
The majority of the residential mortgage forbearances were still in their initial 90-day forbearance period at June 30, but we are starting to see some borrowers resume payments and come off of forbearance with the total accounts dropping from a peak of 467 at May 31 down to 350 at June 30.
In our commercial and commercial real estate loan portfolio we provided loan payment deferrals of $318 million in total loan balances.
The highest amount was in the real estate and rental and leasing category of $167 million or 3.7% of the total loan portfolio, excluding PPP balances and comprised of 129 loans.
The majority of the loans in this category are investor commercial real estate loans supported by seasoned real estate investors and strong loan-to-value ratio.
We have not begun a second round of loan payment deferrals yet in the commercial and commercial real estate loan portfolio but expect to do so at a lower volume and on a case-by-case basis.
Additional details on our loan payment deferrals can be found on slides 13 and 14.
During the quarter special mention loans increased by $6.8 million sequential quarter to $116 million or 2.6% of the total loan portfolio excluding PPP balances.
The largest exposure is in the real estate and rental and leasing category, which totaled $59 million or 1.3% of the total loan portfolio excluding PPP balances.
The loans in this category were downgraded primarily due to the temporary closure of tenants in commercial properties.
However, we have strong sponsorship and seasoned investors with strong loan-to-value ratios and are confident these borrowers will be able to weather through the economic downturn.
Approximately 24% of special mentioned balances also received PPP loans.
Additional details on our special mention portfolio can be found on slide 15.
Classified loans increased approximately $21 million sequential quarter to $47 million or 1% of the total loan portfolio excluding PPP balances.
The increase during the quarter was due primarily to two loans that were experiencing challenges prior to COVID-19.
Approximately 10% of classified balances also received PPP loans.
We continue to feel very good about our residential home equity and commercial real estate loan portfolio.
The weighted average origination loan to values in these portfolios are 61%, 63% and 60% respectively.
These loans comprise of approximately $3.4 billion or 76% of our total loan portfolio excluding PPP balances.
Overall, we believe our disciplined approach to credit and our diversified loan portfolio will help us weather through these unprecedented times.
Net income for the second quarter of 2020 was $9.9 million or $0.35 per diluted share.
Return on average assets in the second quarter was 0.61% and return on average equity was 7.34%.
Our earnings continue to be impacted by higher provision for credit loss expense due to the current COVID-19 pandemic.
Our pre-tax pre-provision earnings for the second quarter was $23.5 million, which increased by $3 million or 15% sequential quarter.
Net interest income for the second quarter was $49.3 million, which increased by $1.4 million on a sequential quarter basis.
The increase includes $2.5 million in PPP net interest income and net loan fees.
The net interest margin decreased to 3.26% in the second quarter compared to 3.43% in the prior quarter.
The decrease was due to lower yielding PPP loans as well as the lower interest rate environment.
The second quarter NIM normalized for PPP was 3.31%.
Second quarter other operating income totaled $10.7 million compared to $8.9 million in the prior quarter.
The increase was primarily due to higher mortgage banking income of $3.2 million and higher BOLI income of $1.4 million.
This was partially offset by lower service charge and fee income.
Other operating expense for the second quarter was $36.4 million, which was relatively flat to the prior quarter.
In the current quarter PPP loan origination cost of $2.2 million was capitalized and deferred, which reduced salaries and benefits.
This was offset by higher commissions and bonuses, as well as higher deferred compensation expense due to stock market volatility.
Net charge-offs in the first quarter totaled -- in the second quarter totaled $2.9 million compared to net charge-offs of $1.2 million in the prior quarter.
The charge-offs primarily came from the Hawaii consumer loan portfolio and the C&I portfolio.
At June 30, our allowance for credit losses was $67.3 million or 1.35% of outstanding loans.
Excluding the PPP loan portfolio, which is guaranteed by the SBA, our allowance for credit losses was 1.50% of total loans.
The efficiency ratio improved to 60.8% in the second quarter compared to 63.9% in the previous quarter.
The decrease was primarily due to higher net interest income and other operating income.
The effective tax rate decreased to 23% in the second quarter due to higher tax exempt bank-owned life insurance income.
Going forward, we expect the effective tax rate to be in the 24% to 26% range.
Our liquidity and capital positions remained strong and we continue to perform robust stress testing.
Our Board declared a quarterly cash dividend of $0.23 per share, which will be payable on September 15 to shareholders of record at the close of business on August 31.
Finally, we decided to consolidate four branches on the Island of Oahu later this year into existing nearby branches.
This decision was driven by increased customer adoption of online and mobile banking and our RISE2020 commitment to best-in-class digital banking technology.
As a result of these consolidations we expect annual expense savings of approximately $1.8 million.
We also expect to incur one-time charges associated with the consolidations of approximately $0.3 million in the third quarter and $1.4 million in the fourth quarter.
In summary, Central Pacific continues to manage well through the COVID-19 pandemic.
We have a solid financial credit, liquidity, and capital position to enable us to weather the storm.
As the economic recovery gradually begins we remain committed to providing support to our employees, customers and the community.
At this time, we'll be happy to address any questions you may have.
| central pacific financial corp q2 earnings per share $0.35.
q2 earnings per share $0.35.
net interest income for q2 of 2020 was $49.3 million, compared to $45.4 million in year-ago quarter.
|
As always, we appreciate your interest in Central Pacific Financial Corp.
The state of Hawaii, as well as our company, continues to manage well through the COVID-19 pandemic.
While the state of Hawaii experienced an uptick in infections in the late summer, which led to a second government mandated shutdown, the infection rate has recently dropped with the latest seven-day average number of infection and positivity rate of 54 and 2.2%, respectively as of October 26.
After several delays to initial targeted days, the state of Hawaii reopened out-of-state tourism on October 15 for visitors that provide evidence of a negative COVID-19 test.
This is a key step in the process of Hawaii's economic recovery.
In the first week after reopening, we've been pleasantly surprised by the daily air arrival numbers, which have been in the 5,000 to 8,000 range per day compared to less than 2000 per day since March and 30,000 per day pre-pandemic.
Additionally, on October 22, Oahu made progress by moving the Tier 2 of its recovery plan as it met the requirement of having the seven-day average COVID cases at less than 100 and positivity rate of less than 5%.
Tier 2 allows Oahu to further reopen certain parts of the economy.
At Central Pacific, we continue to push forward with our key RISE2020 strategy, while at the same time prudently managing through the pandemic.
In August, we launched our new online and mobile banking platforms, which includes many industry-leading features and functionality.
The new digital platforms have been very well received by the market with an Apple mobile app rating of 4.8 out of 5.
Additionally, we continue to replace our entire ATM network and full function machines and implemented this quarter an ATM Hawaii Time cut-off for same-day ATM deposit processing, the latest cut-off time of all banks in the state.
The revitalization of our building headquarters is progressing well and is on track for an opening date in January 2021.
We continue to thoroughly review and regularly monitor our loan portfolio to appropriately manage the credit risk in the pandemic environment.
During the third quarter, our total balance of loans on payment deferral decreased by nearly 50% as a significant portion resumed payment.
At the end of the quarter, our loans on deferral was down to only 6% of total loans, excluding PPP loans.
Last week, we announced that we successfully completed a $55 million private placement subordinated note offering.
We believe this will also -- excuse me, we believe this will allow the bank to continue to support our customers and community, while also providing future capital flexibility.
Our pandemic preparedness plan continues to be in place and we have not had any disruption in our business and we have 28 branches open to fully serve our customers.
Four more branches remain temporarily closed due to the pandemic.
During the third quarter, we consolidated three in-supermarket branches into our larger neighboring branches as the end market branches were too small to allow for adequate social distance.
We are on track for consolidating the fourth previously disclosed branch in the fourth quarter.
Much of our back office teams continue to work flexible remote schedules and all employees are required to complete a daily online health questionnaire prior to starting each workday.
We believe the actions taken will continue to enable us to provide a safe environment for both our employees and customers.
The CPB Foundation continues to be active in helping the community with relevant and timely program.
Third quarter, our foundation was one of the two presenting sponsors of the Made in Hawaii festival, featuring more than 200 Hawaii small businesses and 10,000 products.
The festival, previously held at our local Honolulu arena, pivoted quickly to become an online marketplace this year, attracting over 100,000 unique visitors over the three-day launch weekend, contrast to the 60,000 attendees for the festival in person that recorded in earlier years.
The online festival enables struggling small businesses to sell their Hawaii-made products year round to a wide base of local, national and international shoppers, bringing in much needed revenue during the current challenging environment, and is a good step forward to economic diversification through exporting.
We are glad that our foundation was able to provide support toward this successful initiative.
In the third quarter, we were able to grow our loan portfolio by $27 million despite the tough operating environment.
Growth was broad-based, including residential mortgage, home equity, commercial mortgage and construction loans.
Growth in these loan categories was partially offset by declines in our consumer and C&I loan portfolio.
Driven by a record low interest rate environment, our residential lending team continue to outperform with record levels of production, resulting in $4.3 million in mortgage banking income for the quarter with more than double the income from the same quarter a year ago.
During Q3, our bankers continue to engage our business customers that we assisted through the Paycheck Protection Program.
Most importantly, we continue to advocate for the broader business community impacted by COVID-19.
We recently launched our PPP forgiveness portal and have begun the process of assisting our customers applying for forgiveness from the FDA.
As expected, as businesses spent their PPP funding, we saw a quarter-over-quarter decline in our core deposit balances of $109 million.
Despite that, our core deposit balances remain up over $650 million year-to-date.
Additionally, our cost of total deposits declined by 7 basis points to 13 basis points.
Providing best-in-class digital technology remains a key priority for us.
In Q3, we launched our new consumer mobile platform and are nearly complete with the rollout of our new ATM fee, as Paul mentioned earlier.
We are seeing strong adoption and utilization of both digital channels.
Our ATM deposit volume has substantially increased from a year earlier due primarily to the enhanced deposit functionality now available through our ATMs, and deposit volume has also increased for our new consumer mobile platform from a year earlier.
As we move into the fourth quarter, our bankers will continue to remain vigilant, given the tough operating environment but laser focused to support our customers by exploring and engaging new opportunities to expand our customer base during this unprecedented time.
At September 30, the loan portfolio totaled $5.03 billion with 54% consumer and 46% commercial.
During the quarter, we continued monitoring the loan portfolio and provided support to our customers as they navigated through the uncertainty in the marketplace.
We assisted our customers in providing a second loan payment deferral if needed, and we were pleased to see a significant number of borrowers resume their monthly payment.
At quarter end, the total balance of loans on payment deferrals declined to $291 million or 6.5% of our total loan portfolio, excluding PPP balances.
Our redeferral rate was 31% and was primarily driven by consumer, small business and residential loans.
These loans were initially granted a three-months deferral followed by a second three-months deferrals.
While a significant number of customers have returned to making loan payments, we expect some consumer customers will require a loan payment modifications due to the continued elevated unemployment rate.
In the commercial and commercial real estate loan portfolio, we provided loan payment deferral for $133 million in total loan balances.
The two highest exposures by industry is real estate and rental and leasing, totaling $47 million or 1% of the total loan portfolio, excluding PPP balances, and foodservice totaling $46 million or 1% of the total loan portfolio, excluding PPP balances.
The majority of the loans in the real estate category are supported by low loan-to-value ratios and in the foodservice category are supported by owner with good liquidity and access to capital.
We expect some of our borrowers will need a loan modification at the end of their second loan payment deferral, which will be evaluated on a case-by-case basis.
Loan payment deferral for our high-risk industries totaled $66 million or 1.5% of the total loan portfolio, excluding PPP balances.
Additional details on our loan payment deferrals can be found on Slides 20 and 21.
During the quarter, criticized loans increased by $34 million sequential quarter to $197 million or 4.4% of the total loan portfolio, excluding PPP balances.
Special mentioned loans increased by $33 million to $149 million or 3.3% of the total loan portfolio, excluding PPP balances.
And classified loans increased by $1.5 million to $48 million or 1.1% of the total loan portfolio, excluding PPP balances.
Loan downgrades were the result of our continued assessment of borrower risk, based on the borrower's near-term strategy and outlook, management strength and actions they've taken, overall financial condition, and external funding and [Technical Issues].
Approximately 12% of special mentioned balances and 5% of classified balances also received PPP loans.
Additional details on loans rated special mention and classified can be found on Slide 22 and 23.
Overall, we continue to believe our proactive and disciplined approach to credit and our diversified loan portfolio will allow us to remain strong through these unprecedented times.
Net income for the third quarter of 2020 was $6.9 million or $0.24 per diluted share.
Return on average assets in the third quarter was 0.42% and return on average equity was 4.99%.
Our earnings continue to be impacted by higher provision for credit loss expense due to the current COVID-19 pandemic.
Importantly, the third quarter increase in our provision was largely driven by the economic forecasts and not an increase in actual loan losses.
Additionally, our pre-tax, pre-provision earnings for the third quarter was $23.7 million, which increased slightly from the prior quarter.
Net interest income for the third quarter was $49.1 million, which remained relatively flat on a sequential quarter basis.
Net interest income included $3.4 million in PPP net interest income and net loan fees.
The net interest margin decreased to 3.19% in the third quarter compared to 3.26% in the prior quarter.
The decrease was due to lower yielding PPP loans, as well as the lower interest rate environment.
The net interest margin normalized for PPP was 3.26% in the third quarter compared to 3.31% in the prior quarter.
Third quarter other operating income totaled $11.6 million compared to $10.7 million in the prior quarter.
The increase was primarily due to higher mortgage banking income of $0.8 million.
Additionally, in the current quarter, we reinstated certain service charges that were temporarily suspended due to the pandemic.
This resulted in an increase in service charges on deposit accounts and other service charges and fees.
Other operating expense for the third quarter was $37.0 million which was an increase of $0.5 million compared to the prior quarter.
The increase was driven by increases in several expense line items and also included branch consolidation costs of $0.3 million related to the three in-store branch closures, previously noted.
Net charge-offs in the third quarter totaled $1.3 million compared to net charge-offs of $2.9 million in the prior quarter.
The charge-offs primarily came from the consumer loan portfolio and the C&I portfolio.
At September 30, our allowance for credit losses was $80.5 million or 1.79% of outstanding loans, excluding PPP loans.
This compares to 1.50% as of the prior quarter end.
The efficiency ratio remained relatively steady at 60.9% in the third quarter compared to 60.8% in the prior quarter.
The effective tax rate increased to 24.3% in the third quarter due to lower tax-exempt bank-owned life insurance income.
Going forward, we expect the effective tax rate to continue to be in the 24% to 26% range.
Our liquidity and capital position remains strong and we continue to perform robust stress testing.
The recently completed subordinated note offering strengthens our capital ratios, which further allows us to support our customers and the communities during the pandemic, and positions the company well for the future.
The subordinated notes are considered Tier 2 capital and is anticipated to increase our CPF total risk-based capital ratio by approximately 120 basis points.
Our Board declared a quarterly cash dividend of $0.23 per share, which will be payable on December 15 to shareholders of record at the close of business on November 30th.
In summary, Central Pacific continues to make positive forward progress on our strategies, while at the same time manage well through the COVID-19 pandemic.
We have a solid financial credit, liquidity and capital position that enable us to weather the storm.
As the economic recovery gradually begins, we remain committed to providing support to our employees, customers and the community.
At this time, we will be happy to address any questions you may have.
| compname reports q3 earnings per share $0.24.
q3 earnings per share $0.24.
|
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 will be discussing certain non-GAAP financial measures.
In recognition of the efforts and the unique challenges posed by the pandemic, we invested over $100 million in incremental financial assistance for our frontline hourly associates in the quarter, which brought our total COVID-related support for hourly associates to over $900 million for the year.
We remain laser-focused on our highest priority, which has always been protecting the health and safety of our associates and communities.
And in the quarter, we invested $65 million in support of store safety protocols and our communities.
For the year, we invested nearly $1.3 billion in COVID-related support for our associates, store safety and our communities.
Now turning to our results.
For the quarter, we delivered total company comparable sales growth of 28% over the prior year and 41% growth in adjusted diluted earnings per share to $1.33.
Those results cap off a fiscal 2020 where comp sales increased 26% and adjusted earnings per share grew 54% to $8.86.
Looking at the fourth-quarter results from a geographic perspective in the U.S., growth was broad-based, with comparable sales growth exceeding 19% across all 15 geographic regions and exceeding 25% for all U.S. divisions.
On lowes.com, sales grew 121% as customers shifted more of their shopping online, especially over the holiday season.
We continue to enhance our omnichannel retailing capabilities in store operations, on Lowes.com and across our supply chain, with our goal to meet customer demand to shop however, whenever and wherever they choose.
Once again, DIY comps outpaced Pro comps in the quarter, driven by consumer mindset that remains focused on the home.
During the pandemic, the home has come to serve four primary purposes: a residence, a home school, a home office and the primary location for recreation and entertainment.
In addition to the strength in the DIY customer, our continued focus on the Pro is a very important component of our total home market share acceleration strategy.
And Pro continues to show strong momentum, evidenced by the mid-20s comp in the quarter and nearly a 20% comp for the year.
Part of our Q4 success in Pro was driven by our steps to tailor our service offering for these busy customers, even redesigning the footprint of our stores to facilitate a fast, intuitive shopping experience for our small and medium-sized Pro.
Pros are rewarding our efforts with their repeat business, returning to shop our stores over and over again.
Looking forward, we're focused on further enhancing our service levels, both in-store and online, to meet the needs of our new and existing Pro customers.
Joe will discuss our efforts to grow market share in Pro later on the call.
Now turning to Canada.
We delivered comp growth in the mid-teens despite several COVID-related operating restrictions that went into effect during the quarter.
The new Canadian leadership team made tremendous progress in 2020 and remains focused on improving operational efficiency by executing a retail fundamentals playbook to drive greater labor productivity and improve gross margins.
And as I mentioned earlier, we're gaining traction with our new Total Home strategy, which is our commitment at Lowe's to provide everything a customer needs for their home.
As an example, during the quarter, we quickly pivoted from a successful holiday Season of Savings event to launch two events to support our Total Home strategy in January, a home organization event and a bath event.
During the home organization event, we provided our customers with storage solutions for their home and garages, freeing up valuable space for other activities.
The bath event helped our customers find everything they need from paint to fixtures to toilets and tubs and even towels to upgrade their bathrooms.
And for the customers who didn't want to do-it-yourself, we provided installation services.
Truly a total home solution for a dream bathroom.
Both events helped us to close out the fourth quarter with very strong sales in January.
Looking forward, I am confident we're making the right investments to leverage our Total Home strategy, while we shift our focus from retail fundamentals to accelerating our efforts to gain market share.
As a reminder, our Total Home strategy will drive market share acceleration by enhancing our investments in Pro, online, installation services, localization and elevating our product assortment.
We are confident that these initiatives will allow us to drive sustainable market share growth as we deliver a total home solution for our Pro and DIY customers.
Before I close, I'd like to once again extend my heartfelt appreciation to our associates for their dedication to serving our communities in this time of need.
Doing the most challenging personal and professional year in many of our lives, our associates made enormous sacrifices for our customers and communities.
And I'm very pleased that the marketplace is taking notice as reflected by Fortune magazine recently recognizing Lowe's as the No.
1 Most Admired Specialty Retailer, bestowing that honor on Lowe's for the first time in 17 years.
We're humbled by the recognition, but we also know that 2021 will be a very unpredictable year.
and Canada, we continue to grapple with numerous challenges presented by COVID-19.
And although the business environment remains uncertain, we're confident that we will continue to drive market share gains and operating efficiency.
Also, our newly developed operational agility allows us to quickly respond to a wide range of potential macro outcomes in 2021.
And we will not lose focus on our No.
1 priority, which is supporting the health and safety of our associates and our customers.
We delivered U.S. home improvement comparable sales growth of 28.6% in the fourth quarter.
And consistent with the trends we've seen since the second quarter, growth was broad-based across both DIY and Pro customers, in-store and online and across all merchandising departments.
In fact, all 15 merchandising departments generated positive comps of over 16%.
Great execution, combined with our compelling product offering of well-known national brands, balanced with high-value private brands, ensured that we were well positioned to meet the continued elevated demand for home-related projects during the quarter.
Lumber was once again the top performer, driven by strong unit demand across Pro and DIY customers, as well as commodity inflation.
Our merchants and our supply chain teams did an exceptional job in working with our vendor partners to keep up with demand and to ensure that our stores were stocked with job lot quantities.
Several other categories posted comps above 30%, including building materials, which was driven by strong demand for roofing and gutters.
An improved level of in-stock and an exceptional customer service have allowed us to continue to grow our Pro business in these Pro-focused building product categories.
Our seasonal and outdoor living, lawn and garden and paint categories also delivered comps above 30% in the quarter, reflecting the consumers' continued focus on the home.
Our seasonal and outdoor living team delivered a successful holiday season with a holiday trim a tree program that exceeded the customers' expectations.
The team also leveraged our selection in key brands to drive strong sales in grills, patio heaters and fire pits, as these categories were strong throughout the quarter as consumers continue to enjoy their outdoor spaces.
Outdoor power equipment was driven by sales of chore-related product, such as snowblowers, generators and pressure washers, as customers navigated the weather and worked to maintain their outdoor areas.
Continuing the theme of enhancing the outdoors, we saw strength in lawn and garden, with notable outperformance in holiday-related live nursery, along with growth in hardscapes, outdoor planters and cleaning products.
And finally, our paint category also continued its strong performance with both interior and exterior stains delivering strong comps as the weather early in the quarter remained favorable.
Now turning to our online results.
As Marvin mentioned, we delivered sales growth of 121% on lowes.com, our third consecutive quarter with over 100% comps online.
And during the quarter, we continued to enhance the user experience as we simplified the search and checkout features to speed up the process for customers shopping online.
And we are also now working on replatforming LowesForPros to the cloud to be completed in the first half of this year, which will significantly enhance the features that we offer to these time-pressed customers and then further build out our loyalty with the Pro.
As we discussed last quarter, we have been resetting the layout of our U.S. stores with approximately 95% of our resets now complete.
We expect to drive greater sales productivity per square foot by achieving three key objectives with this investment.
First, driving Pro sales through a more intuitive and faster shopping experience as we've now placed relevant products adjacent to each other and added a Pro flex area for grab-and-go products at the front of the store.
Second, increasing our localized product assortment by eliminating unproductive bays without planograms or what we call junk bays, which now opens up space for new products, better tailored to the local market.
And then finally, third, driving more transactions by moving the basket-building category of cleaning products to the main power aisle of the store.
We're confident that our stores are now easier to shop for both Pro and DIY customers, which positions us well to accelerate our market share gains.
I'd like to offer my sincere appreciation to all the teams across the company who work so diligently to execute on this strategic initiative in such a short period of time.
We also continue to elevate our brand and product offerings.
We are continuing to build on our position as the leading appliance retailer in the U.S. with the addition of Midea and Hisense appliances to our stores.
And Lowe's will soon become the exclusive home improvement provider of Mansfield plumbing products.
This addition will make Lowe's the only home improvement retailer to offer customers the top three toilet brands in the U.S.: Kohler, American Standard and Mansfield.
As we transition to spring, we're in a great position to safely serve customers, and our teams have already been preparing by completing our new spring sets as we anticipate the arrival of the season around the country.
Leveraging our leading position in outdoor power equipment, we have a wide selection from EGO, the top-selling brand in battery-powered OPE, to John Deere, CRAFTSMAN, Husqvarna, Honda and Aaron's.
In addition, we will have a terrific selection of patio furniture, including our refreshed allen + roth patio program, complemented by a wide array of grills as we continue to leverage the two leading brands in outdoor grilling, Weber and Char-Broil.
We're confident that our products will inspire customers that are looking to upgrade their outdoor space, which we think will continue to remain a retreat for many this spring season.
We're continuing to make changes to improve traffic flow within our outdoor garden centers to ensure social distancing while shopping, as well as showcasing inspirational vignettes and utilizing enhanced vendor support, all of which will drive a great spring season in lawn and garden.
And finally, we are excited to deliver new innovation in flooring with the launch of Pergo WetProtect technology available in laminate, engineered wood and rigid luxury vinyl, and offering guaranteed protection for both the flooring and subflooring.
This new level of total moisture protection is a great Lowe's exclusive product that will provide peace of mind for consumers and further differentiate our flooring offering.
This spring, we will demonstrate to consumers that we provide everything they need to make their homes and backyards functional and safe, a reflection of our Total Home strategy.
I'm looking forward to sharing more with you about our reimagined approach to spring on our next call.
This past year presented challenges that few of us could have imagined.
Lowe's has always been at the forefront in responding to crisis in our communities, and our associates rose to the challenge once again in 2020.
In recognition of the outstanding efforts of our associates, in January, we announced a bonus of $300 for each full-time associate and $150 for each part-time associate.
This $80 million bonus brought the total COVID-related assistance to our associates to over $900 million in 2020.
And I could not be more pleased to announce today that for the fourth quarter in a row, 100% of our stores are under "Winning Together" profit-sharing bonus totaling $90 million.
And because of their efforts, once again exceeded expectations, this represents an incremental $30 million over the target payment level.
And we're supporting our communities again through hiring as we bring on more than 50,000 seasonal and full-time retail associates this spring to ensure that our customers get the exceptional service they expect from Lowe's.
This builds on the more than 90,000 associates hired into permanent roles over the past year.
2020 changed the way the customers shop with Lowe's.
Nowhere is this more evident than the 111% sales growth on Lowes.com for the year.
And with roughly 60% of these online orders fulfilled in our stores, we needed to dramatically expand our fulfillment capabilities to support this increased demand.
We began by rapidly rolling out curbside pickup in the first quarter, and then we began to launch touchless BOPIS lockers in our stores a few months later.
We now have BOPIS lockers in over 1,200 stores with the goal of rolling out lockers to all U.S. stores by April.
Providing multiple contactless pickup options for our customers, we are meeting consumer demands to shop Lowe's in whatever way they choose.
And we've continued to enhance the mobile app to improve the customer pickup experience.
This quarter, we began rolling out geofencing technology that alerts our stores when customers are on their way to pick up their orders, enabling quicker fulfillment when they arrive at the store.
Last quarter, we announced that we were standing up dedicated fulfillment teams to handle all in-store fulfillment orders.
All of these enhancements from the easy-to-use BOPIS lockers and the new geofencing technology, to the focus on the fulfillment teams, have already driven improvements in customer satisfaction and speed of service.
Importantly, the fulfillment teams are also improving productivity as they leverage enhancements that we've made to the picking app.
This is evidenced by a dramatic reduction in the number of hours needed to fulfill orders for pickup.
In fact, we can now fulfill orders six times faster on average than one year ago.
Now let's turn to our performance with the Pro.
As Marvin mentioned, we delivered mid-20s comps in the fourth quarter.
We continue to enhance our Pro loyalty offering by providing Pros with the tools they need to get the job done.
This time of the year, our Pros are focused on not only their project pipeline, but they also need to close their books just like any other business.
As a true partner to the Pro, we are now providing our Pro loyalty members with a $100 discount on TurboTax.
Our Pro loyalty members can also export up to 24 months of transaction history, expediting their year-end close process.
It's value-added offers like these that truly differentiate our Pro loyalty offering.
Throughout 2020, we continue to raise the bar on our offering for the Pro, with better service levels, the right brands and products and the job lot quantities they need.
Every day, we are demonstrating that Lowe's is executing our commitment to be the new home for Pros, which is reflected in the strong repeat rates that we're earning from new and existing customers.
And I'm looking forward to building on this momentum as we continue to grow our Pro penetration.
And one way that will drive greater Pro penetration is through our newly launched Pro customer relationship management, or CRM tool.
Rolled out to all stores in late January, this new technology provides our Pro desk with the tools to manage, grow and retain Pro accounts through consistent and data-driven selling actions.
We will also be able to associate any transaction regardless of tender type to a specific Pro account, allowing us for better record-keeping for their business.
Store associate training is currently under way, and we expect that the targeted outreach enabled by this tool will facilitate stronger and more personal relationships with our Pro customers.
Over the past few years, the store operations team has made considerable strides in improving productivity in our stores, with technology enhancements that free up our associates to spend more time in the aisles serving customers.
As we move into 2021, we are kicking off a new productivity initiative in-store operations that we are calling our perpetual productivity improvement, or PPI.
This key productivity initiative will play a critical role in our continued multiyear improvement in operating profit.
Through PPI, we will leverage new processes and technology to deliver continuous productivity enhancements.
Some of the most significant technology initiatives under PPI are modernized checkout infrastructure, industry-leading in-store workforce management tools, new touchscreen POS, expanded rollout of digital signs, incremental functionality deployed to the handheld devices and enhanced store inventory management systems, to name a few.
These perpetual productivity improvements will help us to move toward our multiyear goal of achieving $2.5 billion to $2.7 billion in store opex productivity that we set at the December investor update.
I look forward to updating you on the progress we are making toward these important productivity initiatives on future calls.
In fiscal 2020, we generated $9.3 billion in free cash flow driven by outstanding operating performance, and we returned $6.7 billion to our shareholders through both a combination of share repurchases and dividends.
During the fourth quarter alone, we paid $452 million in dividends at $0.60 per share.
We also repurchased 21.1 million shares for $3.4 billion at an average price of approximately $160 a share.
This brings the total to $5 billion in share repurchases for the year.
We have approximately $20 billion remaining on our share repurchases authorization and plan to utilize our strong cash flow to drive significant long-term shareholder value.
Capital expenditures totaled $619 million in the quarter and $1.8 billion for the full year as we invest in the business to support our strategic growth initiatives.
We ended 2020 with $4.7 billion of cash and cash equivalents on the balance sheet.
And along with $3 billion in undrawn capacity on our revolving credit facility, we have immediate access to $7.7 billion in funds.
We remain confident that we have ample liquidity to navigate any unforeseen circumstances.
At the end of the fiscal year, our adjusted debt-to-EBITDA ratio stands at 2.2 times.
Now I'd like to turn to the income statement.
In Q4, we generated GAAP diluted earnings per share of $1.32 compared to $0.66 last year, an increase of 100%.
In the quarter, there was a very modest impact on operating income related to the previously announced Canadian restructuring.
Now my comments from this point forward will include certain non-GAAP comparisons where applicable.
In Q4, we delivered adjusted diluted earnings per share of $1.33, an increase of 41% compared to the prior year.
These results were driven by higher-than-expected sales volume reflecting a continued consumer focus on the home, a modest benefit from the next round of government stimulus checks as well as strong execution across our operations.
Operating margin improved in the quarter as our strong focus on cost control and productivity continued to pay dividends.
Q4 sales were $20.3 billion, driven by a comparable sales increase of 28.1%.
This was due to comparable store average ticket growth of 14.2% and transaction growth of 13.9%, with strong repeat rates from both new and existing customers.
Commodity inflation drove a benefit of approximately 300 basis points to comps in the quarter as lumber continues to experience rising prices.
U.S. comp sales were up 28.6% in the quarter.
And consistent with our results for the past few quarters, growth was well balanced across both DIY and Pro customers, selling channels, merchandise departments and geographies.
Our U.S. monthly comps accelerated through the quarter, were 23.8% in November, 28% in December and 35.7% in January.
As Marvin mentioned, the company pivoted quickly from a strong holiday selling season in late December to launch bath and home organization events in early January.
January sales also benefited modestly from the second round of government stimulus.
Adjusted gross margin was 31.8%, down eight basis points from last year.
Despite cycling over significant improvements last year in our process to more effectively manage product margin, product gross margin rate improved 125 basis points driven by continued execution on our pricing, cost management and promotional strategies.
We took a less promotional stance across all categories, including our focus on EDLP and appliances, which benefited margin in the quarter.
In addition, strong demand from holiday products led to good sell-through and minimal seasonal write-offs in Q4.
These benefits to adjusted gross margin were offset by 40 basis points of pressure from inventory shrink, 40 basis points of pressure from supply chain cost, 35 basis points of pressure from lumber installation and 20 basis points of pressure from lower credit revenue.
Adjusted SG&A of 22.3% levered 42 basis points to 2019.
As we anticipated, we incurred approximately $165 million of COVID-related expenses.
These investments included approximately $100 million in financial assistance for our frontline associates and approximately $60 million related to cleaning and other safety-related programs, as well as approximately $5 million in charitable contributions.
These $165 million of COVID-related expenses negatively impacted SG&A leverage by approximately 80 basis points.
As expected, we incurred approximately $150 million in the U.S. stores reset project, which negatively impacted SG&A leverage by approximately 75 basis points.
As Bill mentioned, the resets have been completed in approximately 95% of our stores.
These incremental costs were offset by payroll leverage of approximately 105 basis points related to higher sales volume and improved store operating efficiencies, occupancy leverage of approximately 30 basis points and advertising leverage of approximately 25 basis points.
Adjusted operating income margin of 7.6% of sales for the quarter was up 41 basis points to the prior year as operational productivity improvements were offset somewhat by significant investments in our stores and supply chain to drive long-term growth.
In addition, increasing investments in short-lived technology and store fixture assets is resulting in higher levels of depreciation versus our historical run rate.
The adjusted effective tax was 25.8%.
The tax rate was slightly lower than expected due to better-than-anticipated performance of our Canadian business in Q4.
We continue to build up our inventory levels throughout the quarter to meet the sustained high levels of customer demand.
At year end, inventory was $16.2 billion, and lumber inflation increased inventory values by approximately $240 million.
Now before I close, let me talk about our current trends and how we're planning our business in '21.
Although February is the easiest comp this year, we are encouraged that the strong broad-based sales trends that we saw in the fourth quarter have continued this month, apart from the impact of the recent winter storms.
Looking at the balance of the year, our approach to 2021 remains consistent with how we outlined our planning at our December investor update.
Like many companies, we have limited visibility into future business trends.
It remains unclear when there will be a widespread availability of the COVID vaccine and whether there will be additional COVID-related restrictions like we're experiencing in the Canadian business today.
Given the near-term uncertainty, at our December investor update, we outlined three different market-based scenarios on how the mix-adjusted home improvement market might perform, be it weak, moderate or robust performance levels.
Keep in mind that our business is more heavily weighted in DIY and less penetrated in online than the broader market, both of which create modest downward pressure on the Lowe's home improvement market outlook.
These three market scenarios would result in total sales expectations ranging from $82 billion to $86 billion for the year.
While each scenario represents a top line decline from 2020 as we cycle this unprecedented industry growth, we continue to expect that our sales result will outperform the market as our initiatives are focused on delivering market share gains.
Additionally, in each scenario, we expect our adjusted operating margin to increase year over year, ranging from 11.2% to 12%, depending upon the demand environment.
And consistent with my comments at the investor update in December, embedded in each of these scenarios are the incremental investments in frontline associate wages and equity programs that totaled $1.4 billion through 2019 and 2020.
At the same time, we have implemented a slate of perpetual productivity initiatives that Joe mentioned earlier.
And we are investing to drive operational efficiencies in our business.
We will also lap significant nonrecurring spend from 2020.
While it's still very early in the year, we are seeing market trends essentially in line with the robust market scenario.
This scenario assumes the relevant home improvement market will experience a modest contraction this year, and our sales would approach $86 billion.
We will remain agile to react rapidly to any changes in the market, and we are able to quickly flex store labor, advertising and incentive comp expenses.
And consistent with what we outlined at Investor Day, we are expecting $9 billion in share repurchases this year.
Our repurchases activity should be roughly ratable by quarter but a little more concentrated in the first half of the year, given the robust cash flow generation driven by our spring selling season.
And we are planning for approximately $2 billion in capital expenditures in '21.
So in closing, we remain extremely excited about the future of our business and its ability to continue to deliver sustainable shareholder value.
| q4 adjusted earnings per share $1.33.
q4 earnings per share $1.32.
q4 sales $20.3 billion versus refinitiv ibes estimate of $19.48 billion.
'delivered very strong financial results in q4 of 2020, with continued sales momentum in february'.
reiterating perspectives provided at december 9, 2020 investor update.
planning for $9 billion in share repurchases and $2 billion in capital expenditures in 2021.
qtrly total comparable sales increased 28.1 percent.comparable sales for u.s. home improvement business increased 28.6 percent for q4.
|
I'm Rubun Dey, Head of Investor Relations.
And with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President, Chief Financial Officer and Treasurer.
During todays call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for our investors.
We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2022 slides.
We are now on slide four.
As always, Lloyd and I are pleased to share our latest financial results and to represent the great work of the more than 28,000 people of Booz Allen.
Our industry, in fact, the entire economy is transitioning to more in-person work as we recover from the COVID-19 pandemic.
And at Booz Allen, we are excited about the opportunities this presents to our people and clients.
After my remarks, I will give Lloyd the floor to cover the financials in more depth.
Let me start with an overview of the quarter.
On our last call in late May, we talked about our near and midterm priorities and our fiscal year 2022 outlook.
We said we expect another year of significant revenue growth with strong earnings growth, continued cash generation and strategic deployment of capital.
At the same time, we noted that the pattern for the year would likely look different from recent years with lower revenue growth in the first half and significant acceleration in the second half.
This pattern is due to several factors, including the recovery from the pandemic, the implementation of a new financial system and our acquisition of Liberty IT Solutions.
As such, we are pleased to reaffirm our guidance for the full fiscal year.
Operationally, we continue to move back to pre-pandemic business rhythms.
In our Defense and Civil businesses, we are aligned to our governments top priorities, have a robust pipeline and several great wins in the quarter.
These two parts of our portfolio represent three quarters of our revenue, and they continue to deliver solid growth.
In our intelligence business, hiring is going well, and the portfolio reshaping we have done has yielded some important wins.
The first quarter decline in revenue was largely due to low billable expenses, and we continue to expect a growth year in this business.
Global Commercial represents 2% of our revenue.
Continued declines are tied to our portfolio reshaping and the impact of the pandemic.
We do expect to see year-over-year growth in the second half of the fiscal year.
Taken together, our entire portfolio of business produced low single-digit revenue growth year-over-year, as we expected.
The relatively slow growth was driven primarily by a return to more normal staff utilization and PTO trends compared to the first quarter of first quarter of last fiscal year, when the country was largely in lockdown.
At the bottom line, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted earnings per share were ahead of our expectations.
Book-to-bill for the quarter was also strong.
And we are excited about the quality mission center work we are winning.
Cash from operations came in light, primarily driven by one-time costs related to the Liberty transaction.
Lloyd will discuss all the numbers in detail in a few minutes.
As you may remember, on our last call, we spoke about a set of near and midterm priorities that are critical to our success.
The main reason for our optimism about the year is the great progress we have made to-date.
Let me go through them briefly.
Our top priority is recruiting.
And in the first quarter, we began to see results from our laser focus in this area.
We are seeing sequential month-over-month growth and believe momentum will build over the remainder of the year.
Second, the reshaping of our intelligence and global commercial portfolios continues.
We believe the tactical and strategic moves we are making will yield year-over-year growth.
Third, we are very pleased to have completed the Liberty acquisition in mid-June.
Our teams are working side-by-side and everything we have seen since the closing confirms that this was a great deal for Booz Allen and for Liberty.
We are very excited about the strategic opportunities we have to augment each others strengths.
Fourth, the NextGen financial system successfully launched on April 1st and is running very well to the great credit of the team.
After more than three years of preparation, launching the system and executing the first quarter closed without any major disruptions were critical milestones.
And fifth, we continue to invest in our people and capabilities as we carefully manage the transition to a post-COVID environment.
Consistent with that creating the best possible experience for our talent is a constant area of focus for us.
In that vein, I would like to take a few minutes today to share with you how Booz Allen is thinking about the future of work.
We are cautiously optimistic that the worst of the pandemic is behind us in the United States and most places that Booz Allen operates.
As such, we are preparing to fully reopen our offices the day after Labor Day, provided that health and safety allow it.
As we move toward that reopening, we intend to take the best of what we have learned over the past 16-months and create ways of working that better serve our talent, our clients and the critical missions we are part of.
Going forward, our workforce will have three operating models.
First, we have always had a small group of employees who are purely remote, and we expect that to continue and for that group to remain relatively small.
Second, we have a group of people who work full time at government and our facilities.
And that too will continue, although we expect it to proportionately decline from historical levels.
Our clients have shown a great deal of creativity over the course of the pandemic.
And based on this experience, many are interested in flexible models that better serve their missions while reducing the number of people who are 100% on-site.
The third workforce model is a hybrid.
And we expect overtime for this to be a majority of our people.
Employees in this group will spend less time in Booz Allen and client offices than previously and instead have a mix of telework and in-person collaboration.
This gives people much more flexibility in their personal and family lives while at the same time preserving our culture and the close connection to clients, our firm and each other.
What is most exciting about the future of work conversations we have been having internally and externally is the opportunity everyone sees for greater flexibility.
In fact, there is an expectation that we need to work in new ways because the technology allows it and the competition for talent simply requires it.
To succeed, today and in the future, employers, whether they are in the government or the private sector must foster a workforce that is more distributed, more digital and certainly more diverse.
Booz Allen is a leader in this area, working with our government clients to help them rethink and reshape the way they accomplish critical missions.
Many clients believe that the reality of todays world and the needs of the next decade demand fundamental change in how federal agencies execute their business on behalf of all of us.
And consistent with who we are we will lean into those change opportunities proactively.
And so as we look toward the fall and beyond, our firm has a lot to be optimistic and excited about.
We are working very hard to take care of our people, build our business, serve clients and position Booz Allen for the future.
As always, our overriding goal is to continue to create near and long-term value for our investors and all our stakeholders.
And with that Lloyd, over to you.
Before I jump into the financials, I want to note that this has been a truly busy quarter for us.
A few of the major highlights included closing our acquisition of Liberty and launching the integration process, replenishing our balance sheet through the bond market.
Investing in latent II, a highly strategic, rapidly growing company in the AI ML space.
Doubling down on our recruiting and hiring efforts with promising results.
Implementing our NextGen financial system.
And, of course, engaging across the firm on our strategic review and our next investment thesis.
We are energized by the pace of activity and look forward to sharing more in the months to come.
Now on to first quarter performance.
As we noted in May, we expected some early year choppiness in our top-line results as we move into a post-pandemic operating rhythm.
However, we were able to maintain strong performance at the adjusted EBITDA and ADEPS line through disciplined cost management.
Additionally, we are encouraged by our solid bookings performance as well as our pace of recruiting.
Operating cash flow was light of our initial forecast, but we view most of the moving pieces as either one-time or transitory.
Altogether, today s results are in line with the expectations we laid out last quarter, and we remain confident in our plan for the full fiscal year.
At the top-line, in the first quarter, revenue increased 1.7% year-over-year to $2 billion.
Liberty contributed approximately $16 million to revenue growth.
Revenue excluding billable expenses grew 1.9% to $1.4 billion.
Revenue growth was driven by solid operational performance, primarily offset by higher-than-normal staff utilization in the comparable prior year period.
Top-line performance for the quarter was in line with our expectations.
As a reminder, we forecast constrained low single-digit top-line growth in the first half of the year, driven by four dynamics: First, the need to ramp up on contracts and hiring; second, a more normalized utilization rate in the first half of this fiscal year compared to the high staff utilization in the first half of fiscal year 2021, which we believe to be worth roughly 300 basis points of growth.
Third, high PTO balances coming into the fiscal year with an expectation that our employees will take more time off; and fourth, minor timing differences in our costing of labor, resulting from implementation of our new financial system.
As we noted before, we expect growth to accelerate throughout the year.
Now let me step through performance at the market level.
In defense, revenue grew 4.4%, with strong growth in revenue ex billable expenses, partially offset by significant materials purchases in the prior year period.
In Civil, revenue grew 6%, led by strong performance in our health business and the addition of Liberty.
We expect momentum to build throughout the year.
As more administration priorities ramp up and we continue to capture opportunities, building on our strong win rates.
Revenue from our intelligence business declined 6.4% this quarter.
Revenue ex-billable expenses grew in line with our expectations, but were more than offset at the top-line by lower billable expenses.
We are excited by a number of critical recent wins in the portfolio.
And we believe we have the right leadership and strategic direction in place to execute a growth year.
Lastly, revenue in Global Commercial declined 27.4% compared to the prior year quarter.
We anticipate year-over-year growth in the second half, an outcome that is largely dependent on hiring additional talent to capitalize on growing demand as well as moving past challenging prior year comparables in international.
Our book-to-bill for the quarter was 1.3 times, while our last 12-months book-to-bill was 1.2 times.
Total backlog grew 16.5% year-over-year, including Liberty, resulting in backlog of $26.8 billion, a new record.
Funded backlog grew 1.6% to $3.5 billion.
Unfunded backlog grew 91% to $9 billion and price options declined 3.7% and to $14.3 billion.
We are proud of our bookings performance in the first quarter, coming off a seasonally strong fourth quarter results.
We believe that the stability of our longer-term book-to-bill demonstrates continued strong demand for our services as well as the high value placed on our understanding of client missions.
Pivoting to headcount as of June 30th, we had 28,558 employees, up by 1,177 year-over-year or 4.3%.
Accelerating headcount growth to meet robust demand for our services is our top priority for the year.
We are encouraged by how we closed the first quarter, and we expect to see progress throughout the year.
Moving to the bottom line, adjusted EBITDA for the quarter was $238 million, up 11.8% from the prior year period.
This increase was driven primarily by our ability to again build for fee within our intelligence business as well as the timing of unallowable expenses within the fiscal year.
Those items, along with continued low billable expenses as a percentage of revenue pushed our adjusted EBITDA margin to 12%.
We expect billable expenses and unallowable spend to pick up as we move throughout the year.
First quarter net income decreased 29% year-over-year to $92 million, primarily impacted by Liberty transaction-related expenses of approximately $67 million.
Adjusted net income was $146 million, up 12.3% from the prior year period, primarily driven by the same factors driving higher adjusted EBITDA.
Diluted earnings per share declined 27% to $0.67 from $0.92 in the prior year period.
And adjusted diluted earnings per share increased 15% to $1.07 from $0.93.
These increases to our non-GAAP metrics which exclude the impact of the transaction-related costs noted were primarily driven by operating performance and a lower share count in this quarter due to our share repurchase program.
Turning to cash, cash flow from operations was negative $11 million in the first quarter.
This decline was driven primarily by lower collections largely attributable to timing around receivables associated with the integration of our new enterprise financial system.
As our employees and clients adapt to the new invoicing system, we expect to return to a more typical collections cadence over the coming months.
Operating cash flow was negatively impacted by approximately $67 million of transaction costs paid in the first quarter, which includes approximately $56 million of cash payment at closing of the Liberty acquisition.
These cash payments represent a reallocation of a portion of the overall $725 million purchase price prior to adjustments from investing cash flows into operating cash flows.
Capital expenditures for the quarter were $9 million, down $11 million from the prior year period, driven primarily by lower facility expenses.
We still expect capital expenditures to land within our forecast range for the year.
During the quarter, we issued $500 million of 4% senior notes due 2029.
Additionally, we extended the maturity of our Term Loan A and revolving credit facility to 2026 and increased the size of our revolver by $500 million to $1 billion of total capacity.
Those moves are in support of our disciplined capital deployment strategy.
We will continue to use our balance sheet as a strategic asset.
During the quarter, we paid out $52 million for our quarterly dividend and repurchased $111 million worth of shares at an average price of $83.91 per share.
In total, including the close of the Liberty acquisition, we deployed $889 million.
Today, we are announcing that our Board has approved a regular dividend of $0.37 per share, payable on August 31st to stockholders of record on August 16th.
As our actions this quarter demonstrate, we remain committed to preserving and maximizing shareholder value through a disciplined balanced capital allocation posture.
Please move to slide seven.
Today, we are reaffirming our fiscal year 2022 guidance.
As we discussed last quarter, the first half, second half dynamics we laid out are still the guiding framework for our full-year growth expectations.
We expect total revenue growth to be between 7% and 10%, inclusive of Liberty.
Our contract and hiring ramp will determine where we land within that range.
We continue to expect revenue growth to accelerate throughout the year.
We expect adjusted EBITDA margin in the mid-10% range.
We expect adjusted diluted earnings per share to be between $4.10 and $4.30 based on an effective tax rate of 22% to 24% and 134 million to 137 million weighted average shares outstanding.
ADEPS guidance is inclusive of both Liberty and incremental interest expense from our $500 million bond offering.
We expect operating cash flow to grow to $800 million to $850 million, inclusive of the aforementioned $56 million of cash payments related to the Liberty transaction.
Due to these one-time payments, we expect to end the year at the lower end of our range, with partial offset through a combination of working capital management and operational performance.
And finally, we expect capex in the $80 million to $100 million range.
In summary, we are starting off the year just as we expected and look forward to a great year.
We were ambitious in trying to execute both a major acquisition and a companywide rollover of our financial systems in the same quarter.
With that, Rubun, let s open the line to questions.
Operator, please open the line.
| booz allen hamilton qtrly earnings per share $0.67.
qtrly earnings per share $0.67.
qtrly adjusted earnings per share $1.07.
reaffirms fiscal 2022 guidance.
|
I always mention strong and consistent cash flow and explain how we use that cash flow to pay a healthy and growing dividend, internally fund our expansion capex needs, keep our balance sheet strong and opportunistically buy back our shares I believe our shareholders understand and appreciate the strength of our cash flow even if there are varied positions on what we should do with it.
But in a broader sense, if we examine what owning a share of KMI really amounts to, I've come to believe, as the largest shareholder, that we are receiving a very good and growing yield on our investment, while at the same time, getting an amazing optionality on future developments.
Let me explain that optionality.
We have entered the energy transition field with what I consider to be solid investments that Steve and the team will discuss further, and our cash flow gives us the ability to pursue those opportunities in size if and only if the investments achieve a satisfactory return.
And I believe that if we so desire, we will be able to attract new partners at a time of our choosing, whether public or private, to participate in those opportunities with us on terms favorable to KMI.
I also firmly believe that there is still a long runway for fossil fuels around the world, particularly for natural gas.
If you read carefully the latest studies from the IEA, OPEC, and from various other energy experts, you will see projections that fossil fuels will continue to supply the majority of our energy needs for at least the next quarter century, and that natural gas will be at the forefront of fulfilling those needs.
If these projections are anywhere close to accurate, a company like Kinder Morgan with significant free cash flow will find significant opportunities to invest in this core business where we have substantial expertise and a huge network that can be expanded and extended.
So this is another option that you receive as a KMI shareholder.
I would add that the events of this fall throughout Europe, Asia, and North America demonstrate that the transition to renewables is going to be a lot longer and more difficult than many of its proponents originally thought.
In short, while the world makes the transition, the lights need to stay on, homes need to be heated, and our industrial production needs to be sustained.
Finally, we always have the option of returning dollars to our shareholders through selective stock repurchases, in addition to the healthy return we are providing through our dividend.
This is why I say that an investment in KMI provides you with a nice locked-in return with this dividend and then provides really good optionality for the future.
I'll give you an overview of our business and the current environment for our sector as we see it.
Then our president, giving will cover the outlook and segment updates.
Our financial principles remain the same.
First, maintaining a strong balance sheet.
A strong balance sheet helps us withstand setbacks and enables us to take advantage of opportunities.
Over the last two years, we've seen both sides of that coin.
Coming into 2020, we were better than our leverage target, and that helped us when we were hit with the pandemic-related downturn.
Then this year, we saw the other side where our extra capacity, created as a result of our outperformance in the first quarter, gave us the ability to take advantage of two acquisition opportunities.
We see both of those acquisitions as adding value to the firm.
Second, we are maintaining our capital discipline through our elevated return criteria, a good track record of execution, and by self-funding our investments.
We are also maintaining our cost discipline.
We have always been lean, but last year at this time, we were completing an evaluation of how we were organized and how we could work even more efficiently.
We implemented changes resulting in an estimated full-year run rate efficiencies of about $100 million a year.
In that effort, we were aiming for something beyond efficiency, greater effectiveness.
And we can see that coming through in the functions we centralized under the leadership of our chief operating officer, James Holland.
We are already seeing the benefits in project management and other functions.
Finally, we are returning value to shareholders with the year-over-year dividend increase to $1.08 annualized, providing an increased but well-covered dividend, strong balance sheet, capital and cost discipline, returning value to shareholders.
Those are the principles we operate by, and we have done so regardless of what is in fashion at the moment.
We have accomplished some important work so far in 2021, which I believe will lead to long-term distinction.
First, we're having a record year financially, attributable to our outperformance in the first quarter.
And we have continued to find new opportunities with a small net increase in our backlog this quarter.
Second, we completed the two important acquisitions, the larger one, Stagecoach, showing our confidence in the long-term value of our natural gas business and taking our total operated storage capacity to 700 Bcf.
We believe in the long-term value of flexibility and deliverability in the gas business.
That was demonstrated last winter, and we are seeing it with the recent tightening in the natural gas markets here and abroad and in our rates on storage renewals.
Third, we've continued to advance the ball on the ongoing evolution in energy markets and in our ESG performance.
As things stand today, 69% of our backlog is in support of low-carbon infrastructure.
That includes natural gas, of course, but it also includes $250 million of organic projects supporting renewable diesel in our products and terminals business units and our renewable natural gas projects.
Repurposing and building assets at our current terminal locations to support the energy sources of the future.
Importantly, too, that 69% is projected to come in at a weighted average 3.6 times EBITDA multiple of the expansion capital spend.
So we're getting attractive returns on these investments.
Further, our DAS team has now concluded three responsibly sourced gas transactions.
Those are low emissions along the chain from the producer through our transmission and storage business.
We'll soon be publishing our ESG report, including both Scope 1 and Scope 2 emissions, we have incorporated ESG reporting and risk management into our existing management processes, and the report will explain how.
In the meantime, Sustainalytics has us ranked No.
1 in our sector for how we manage ESG risk, and two other rating services have us in the top 10.
This is increasingly a point of distinction with our investors, our regulators, and our customers.
With all of this, our projects, these commercial transactions, and our ESG reporting and risk management, we continue to advance the ball on ESG and the evolution in energy markets without sacrificing returns.
We continue to focus on the G governance in ESG as well.
These things are all important to our long-term success, and we have advanced it all significantly on all three in 2021.
We believe the winners in our sector will have strong balance sheets, low-cost operations that are safe and environmentally sound and the ability to get things done in difficult circumstances.
As always, we will evolve to meet the challenges and opportunities.
And so I'm going to start with the natural gas business unit for the quarter.
Transport volumes were up about 3% or approximately 1.1 million dekatherms per day versus the third quarter of '20.
And that was driven primarily by increased LNG deliveries and the PHP in service.
And then some -- those increases were somewhat offset by declines on our West pipes due to the declining Rockies production, pipeline outages, and contract expirations.
Physical deliveries to LNG facilities off of our pipeline averaged 5.1 million dekatherms per day.
That's a 3.3 million dekatherm per day increase versus the third quarter of '20 when there were a lot of canceled cargoes.
Our market share of deliveries to LNG facilities is approximately 50%.
Exports to Mexico were down in the quarter when compared to the second quarter of '20 as a result of a new third-party pipeline capacity added during the quarter.
Overall, deliveries to power plants were down, as you might expect with the higher natural gas prices.
Our natural gas gathering volumes were down about 4% in the quarter compared to the third quarter of '20.
But for gathering volumes, I think the more informative comparison is the sequential quarter.
So compared to the second quarter of this year, volumes were up 5%, with nice increases in the Eagle Ford and the Haynesville volumes, which were up 12% and 8%, respectively.
In our products pipeline segment, refined product volumes were up 12% for the quarter versus the third quarter of 2020.
And compared to the pre-pandemic levels, which we used the third quarter of 2019 as a reference point, road fuels were down about 3% and jet fuel was down about 21%.
You might remember that in the second quarter, road fuels were basically flat versus the pre-pandemic number.
So we did see some impact of the Delta variant during the quarter.
Crude and condensate volumes were down about 7% in the quarter versus the third quarter of 2020.
And sequentially, they were down about 4%.
In our terminals business segment, our liquids utilization percentage remains high at 94%.
If you exclude tanks out of service for required inspection, utilization is approximately 97%.
Our rack business, which serves consumer domestic demand, are up nicely versus the third quarter of '20, but they're down about 5% versus pre-pandemic levels.
Now if you exclude some lost business and a rack closure, so trying to get volumes on an apples-to-apples basis, volumes on our rack terminals slightly exceeded pre-pandemic levels.
Our hub facilities in Houston and New York, which are more driven by refinery runs, international trade, and blending dynamics, have shown less recovery than our rack terminals versus the pre-pandemic levels.
In our marine tanker business, we continue to experience weakness.
However, we've recently seen increased customer interest.
On the bulk side, volumes were up 19%, so very nicely, driven by coal, steel, and petcoke.
Bulk volumes overall are still down about 3% versus 2019 on an apples-to-apples comparison.
But if you just look at coal, steel, and petcoke on a combined basis, they're essentially flat to pre-pandemic levels.
In our CO2 segment, crude volumes were down about 6%.
CO2 volumes were down about 5%.
But NGL volumes were up 7%.
On price, we didn't see a benefit from the increase in crude price due to the hedges we've put in place in prior periods when crude prices were lower.
We do, however, expect to benefit from higher crude prices in future periods on our unhedged barrels and as we layer on additional hedges in the current price environment.
We did see NGL price benefit in the quarter as we tend to hedge less of these volumes.
Compared to our budget, we're currently anticipating that both oil volumes and CO2 volumes will exceed budget, as well as oil, NGL, and CO2 prices.
Better oil production is primarily driven by reduced decline in the base production and better project performance at SACROC.
So overall, we're seeing increased natural gas transport volumes primarily from LNG exports.
Seeing increased gas gathering volumes in the Eagle Ford and the Haynesville on a sequential basis.
Product volumes are recovering versus 2020.
However, road fuels were down about 3% versus pre-pandemic levels versus flat with pre-pandemic levels last quarter as we likely saw an impact from the Delta variant.
Versus our budget CO2, crude oil production is outperforming and we're getting some nice help on price.
We're still experiencing weakness in our Jones Act tankers and the Bakken has been a little slower than we anticipated in bringing on new wells.
But our producer customers have indicated that they'll continue bringing on new production with some wells being pushed into 2020.
So for the third quarter of 2021, we're declaring a dividend of $0.27 per share, which is $1.08 annualized and 3% up from the third quarter of last year.
This quarter, we generated revenues of $3.8 billion, up $905 million from the third quarter of 2020.
We had an associated increase in cost of sales with an increase of $904 million, both of those increases driven by higher commodity prices versus last year.
Our net income for the quarter was $495 million, up 9% from the third quarter of '20.
And our adjusted earnings per share was $0.22, up $0.01 from last year.
Moving on to our segment and distributable cash flow performance.
Our natural gas segment was up $8 million for the quarter.
Incremental contributions from Stagecoach and PHP were partially offset by lower contributions from FEP where we've had contract expirations and lower usage and parking loan activity on our EPNG system.
The product segment was up $11 million, driven by continued refined product volume recovery, partially offset by some lower crude volumes in the Bakken.
Terminal segment was down $13 million, driven by weakness in our Jones Act tanker business, partially offset by the continued refined product recovery volume -- or excuse me, volume recovery we've seen there.
Our G&A and corporate charges were higher by $28 million due to lower capital spend, resulting in less capitalized G&A this quarter versus a year ago, as well as cost savings we experienced in 2020 as a result of the pandemic.
Those are partially offset by cost savings we experienced this year due to our organizational efficiency efforts, as well as lower noncash pension expenses this year versus last.
Our JV DD&A was lower by $30 million, primarily due to lower contributions from Ruby Pipeline.
Interest expense was favorable $15 million, driven mostly by lower debt balance this year versus last.
Our cash taxes were favorable $37 million, and that was due -- mostly due to 2020 payments of taxes that were deferred into -- in the second quarter into the third quarter.
For the full year, cash taxes are expected to be just slightly unfavorable to 2020 and slightly favorable to our budget.
Sustaining capital was unfavorable this quarter, $64 million, driven by spending in our natural gas segment.
And that's only slightly more than we budgeted for the quarter, though for the full year, we expect to be about $65 million higher than in budget with most of that variance coming in the fourth quarter.
Total DCF of $1.013 billion or $0.44 per share is down $0.04 from last year.
Our full-year guidance is consistent with what we provided last quarter, with DCF at $5.4 billion and EBITDA at $7.9 billion.
Moving on to the balance sheet.
We ended the quarter at 4.0 times net debt to adjusted EBITDA, and we expect to end the year at 4.0 times as well.
This level benefits from the largely nonrecurring EBITDA generated during the first quarter during the winter storm Yuri event.
And our long-term leverage target of around 4.5 times has not changed.
Our net debt ended the quarter at $31.6 billion, down $424 million from year-end and up $1.423 billion from the end of the second quarter.
To reconcile that change in net debt for the quarter, we generated $1.013 billion of Bcf.
We paid out dividends of $600 million.
We closed the Stagecoach and Kinetrex acquisitions which collectively were $1.5 billion.
We spent $150 million on growth capex and JV contributions.
And we had a working capital use of $175 million, mostly interest expense payments in the quarter.
And that explains the majority of the change for the quarter.
For the change from year-end, we've generated $4.367 billion of DCF.
We paid out $1.8 billion of dividends.
We spent $450 million in growth capex and JV contributions.
We had the $1.5 billion Stagecoach and Kinetrex acquisitions.
We have $413 million come in on the NGPL sale.
And we've had a working capital use of $600 million, mostly interest expense payments.
And that explains the majority of the change year to date.
And that completes the financial review.
So back to you, Steve.
And then if you have more, get back into queue and we will get around to you.
| kinder morgan q3 earnings per share $0.22.
q3 earnings per share $0.22.
consistent with guidance in q2 currently anticipate generating 2021 dcf of $5.4 billion and adjusted ebitda of $7.9 billion.
qtrly terminals segment earnings were down compared to the third quarter of 2020.
kinder morgan - contributions from the products pipelines segment in quarter were up compared to the third quarter of 2020 as demand recovery continued.
|
With that out of the way, let me just say that like a broken record, each quarter, I open our call with comments on the strong cash flow we're generating and how we're using and intend to use that cash flow.
Whether you look at our cash flow for the second quarter, for year-to-date, or our projections for the full year, it's apparent that we continue to be a strong generator of cash flow.
It's also apparent that we continue to live comfortably within that cash flow.
The question investors should ask on a continuous basis is whether we are wise stewards of that cash.
We have said repeatedly that we would use our funds to maintain a strong balance sheet, pay a good and growing dividend, invest in new projects or acquisitions when they met our relatively high return hurdle rates and opportunistically repurchase our shares.
This quarter, we announced two fairly significant acquisitions.
The first was our purchase of the Stagecoach natural gas storage and pipeline assets in the Northeast for approximately $1.2 billion.
These assets expand our services to our customers by helping connect natural gas supply with Northeast demand areas.
The acquisition is immediately accretive to our shareholders, and I believe it will be an important and profitable asset for KMI for many years to come.
Our second acquisition is to make an attractive platform investment in the rapidly growing renewable natural gas market by purchasing Kinetrex for approximately $300 million.
Steve will talk about this acquisition in detail.
We believe there is a bright future for this business and other related energy transition businesses; that we are exploring.
Now, let me conclude with two important points.
Both of these acquisitions meet our hurdle rates that I referred to earlier, and both are being paid for with our internally generated cash.
I believe both fit within the long-term financial strategy that I speak to each quarter, and I can assure you that our board looks at all alternatives in a manner completely consistent with that financial strategy.
On the Stagecoach, storage and transportation assets drew $1.2 billion.
We closed that transaction earlier this month.
It adds 41 Bcf of certificated and pretty flexible working gas storage capacity and 185 miles of pipeline.
We're excited about this transaction for several reasons.
As we discussed on the first-quarter call, we think storage value is going to increase over time.
Its value was certainly revealed during Winter Storm Uri, and we've seen that start to show up in our commercial transactions.
Storage will also become more valuable as more intermittent renewable resources are added to the grid.
The Stagecoach assets are well interconnected with our Tennessee Gas Pipeline system, as well as other third-party systems in a part of the country that is constrained from an infrastructure standpoint, and frankly, where it is difficult to get new infrastructure permitted and built.
We're excited about this transaction and believe it will pay off nicely for our shareholders.
The second transaction, which we announced at the end of last week, was accomplished by our newly formed Energy Transition Ventures Group.
We put that together in the first quarter of this year.
We're acquiring Kinetrex, a renewable natural gas business, subject to regulatory approval and a couple of other closing conditions.
At signing, Kinetrex had secured three new signed development projects that we will build out over the next 18 months, resulting in a purchase price plus capital at a less than six times EBITDA multiple by the time we get to 2023.
With Kinetrex, we're picking up a rare platform investment in a highly fragmented market.
It gives us a nice head start on working on hundreds, if not thousands, of potential renewable natural gas project candidates in the U.S. A few more points on this deal.
As several of you pointed out in your comments post announcement, the value is dependent on RINs value.
You don't make money on the gas sale, with an important exception that I'll get to in a minute.
Importantly, the particular RINs that this business generates are D3 RINs, which can be used to satisfy other RINs obligations as well.
D3s are for advanced biofuels and promoting more of those in the transportation fuel market has had bipartisan support and even more support from the environmental community than conventional ethanol.
Having said that, we believe we'll have the opportunity to mitigate our exposure to RINs pricing volatility.
Based on conversations with potential customers, not signed deals yet but conversations so far, there is significant interest in renewable natural gas in the so-called voluntary market.
These are customers who are outside of the transport fuel market who are interested in reducing their carbon footprint and we believe would transact on a long-term fixed price basis.
There are also potential customers interested in sharing the risk and reward of the RINs value.
So we will look for appropriate ways to lock in the value of the environmental attributes on attractive terms.
When we talked about our Energy Transition Ventures Group in the past, we've talked about transacting on attractive returns for our shareholders, not loss leaders and not doing things for show.
This deal is a great example of that.
In the team's short existence so far, they've acted on an attractive opportunity, and they continue to work on a number of other specific project opportunities.
So very good progress in a short period of time.
These two deals illustrate a couple of key points, broader points, about our business.
The larger deal, Stagecoach, is a further investment in our existing natural gas business, where we own the largest transportation and storage network in the country.
That reflects our view that our existing business will be needed for decades to come.
Hydrocarbons, and especially natural gas, have very stubborn advantages and will play an essential role in meeting the growing need for energy around the world.
That's something we are well positioned for with our assets and especially considering our considerable connectivity with export markets, especially in natural gas but also in refined products.
At the same time, we do see opportunities in the energy evolution, I'm putting emphasis on evolution, and we're positioning ourselves there as well.
We're doing this in our base business, where our gas delivery capability provides the needed backup for renewables at far lower cost and longer duration than batteries.
We're doing it in responsibly sourced, that is low methane emissions, natural gas.
We had our second such transaction this quarter.
We're doing it in our refined products businesses where we handle renewable transportation fuels, and we are actively developing additional business in that part of our business as well.
The Kinetrex transaction, while relatively small, positions us to develop a new business line in the renewable energy space at attractive returns and with a bit of a head start.
The takeaway from all of this is that we continue to see strong long-term value in the assets and service offerings we have today while also pivoting in an appropriate and value-creating way to the faster-growing parts of the energy business.
First, I'm going to start with our business fundamentals, and then I'll talk very high level about our forecast for the full year.
Starting with the natural gas business fundamentals for the quarter.
Transport volumes were up 4% or approximately 1.5 dekatherms per day versus the second quarter of 2020.
And that was driven primarily by LNG, Mexico exports, and power demand on TGP, the PHP in-service, higher industrial and LNG demand on our Texas intrastate system, and then higher deliveries to our Elba Express LNG facility.
These increases were partially offset by lower volumes on CIG.
And that's due to declines in Rockies production and Fayetteville Express contract expirations.
Physical deliveries to LNG off of our pipeline averaged approximately 5 million dekatherms per day.
That's a huge increase versus the second quarter of 2020.
LNG volumes also increased versus the first quarter of this year by approximately 8%.
Our market share of LNG export volumes is about 48%.
Exports to Mexico were up about 20% versus the second quarter of 2020.
Our share of Mexico volumes is about 54%.
Overall, deliveries to power plants were relatively flat.
Deliveries to LDCs were down slightly, while deliveries to industrial facilities were up 4%.
Our natural gas gathering volumes were down about 12% in the quarter compared to the second quarter of '20.
For gathering volumes though, I think the more informative comparison is the sequential quarter.
So compared to the first quarter of this year, volumes were up about 6%.
And here, we saw nice increases in Hiland volumes, which were up about 10%, and the Haynesville volumes, reports were up about 13%.
In our products pipeline segment, refined products were up 37% for the quarter versus the second quarter of '20.
Volumes are also up about 17% versus the first quarter of this year.
So we saw substantial improvement both year over year and quarter over quarter.
Compared to the pre-pandemic levels, and we're using the second quarter of 2019 as the reference point, road fuels, and that's gasoline and diesel combined, are essentially flat, and jet fuel is still down about 26%.
Crude and condensate volumes were up 6% in the quarter versus the second quarter of '20, and sequentially, they were up very slightly.
In our Terminals business segment, our liquids utilization remains high.
If you exclude the tanks out of service or required inspections, approximately 98% of our tanks are leased.
Most of the revenue that we receive comes from fixed monthly charges we receive for tanks under lease, but we do receive a marginal amount of revenue from throughput, and we saw throughput increase significantly, about 22% in total on our liquids terminals, 26% if you're just looking at refined products.
But that still remains a little bit below 2019, up 6% on total liquids volumes, 5% when you're just looking at gasoline and diesel.
We continue to experience some weakness in our marine tanker business.
But as we said last quarter, we expect that this market will improve, but it may take until late this year as the charter activity tends to lag the underlying supply and demand fundamentals.
On the bulk side, volumes increased by 23%, and that was driven by coal and steel.
Mill utilization of our largest steel customer exceeded pre-pandemic levels.
Coal export economics improved for both met and thermal coal.
In the CO2 segment, crude volumes were down about 9%.
CO2 volumes were down about 10% year over year.
Increased oil and NGL prices did offset some of the volume degradation.
But if you compare to our budget, we're currently anticipating the oil volumes will exceed our budget by approximately 5%, and that's driven primarily by some nice performance on SACROC.
CO2 volumes, we also expect to exceed our budget.
So overall, we're seeing increased natural gas volumes and demand from LNG and Mexico exports, as well as industrial demand on the Gulf Coast.
We're seeing increased gathering volumes in the Bakken and the Haynesville and nice recovery of refined products volumes.
Crude oil volumes are above our expectations in our CO2 segment, and we're getting some price help.
We still experienced some weakness in our Jones Act tankers, and the Eagle Ford remains highly competitive.
Now, let me give you a very high-level update of our full-year forecast.
As we said in the release, we're currently projecting full-year DCF of $5.4 billion.
That's above the high end of the range that we gave you last quarter.
The range we gave you last quarter was $5.1 billion to $5.3 billion.
The outperformance versus the high end of the range is driven by our Stagecoach acquisition, higher commodity prices and better refined products volumes.
For the second quarter of 2021, we're declaring a dividend of $0.27 per share, which is $1.08 annualized, and that's up 3% from the second quarter of 2020.
This quarter, we generated revenue of 3.15 billion, which is up 590 million from the second quarter of 2020.
We also had higher cost of sales with an increase there of 495 million.
So netting those two together, gross margin was up 95 million.
This quarter, we also took an impairment of our South Texas gathering and processing assets of 1.6 billion.
So with that impact, we generated a loss -- net loss of 757 million for the quarter.
Looking at adjusted earnings, which is before certain items, primarily the South Texas asset impairment this quarter and the midstream goodwill impairment a year ago, we generated income of $516 million this quarter, up $135 million from the second quarter of 2020.
Moving on to the segment EBDA and distributable cash flow performance.
Natural gas -- our natural gas segment was up $48 million for the quarter, and that was up primarily due to favorable margins in our Texas Intrastate business, greater contributions from our PHP asset, which is now in service; and increased volumes on our Bakken gas gathering systems.
Partially offsetting those items were lower volumes on our South Texas and KinderHawk gathering and processing assets and lower contributions from FEP due to contract roll-offs.
Our product segment was up $66 million driven by a nice recovery in refined product volume.
Terminals was up 17 million, also driven by the nice refined product volume recovery, partially offset by lower utilization of our Jones Act tankers.
Our CO2 segment was down $5 million due to lower crude oil and CO2 volumes and some increased well work costs.
Those are partially offset by higher realized crude oil and NGL pricing.
Our G&A and corporate charges were lower by $7 million.
This is where we benefited from our organizational efficiency savings, as well as some lower noncash pension expenses, partially offset by some lower capitalized G&A costs.
Our JV DD&A category was lower by $27 million primarily due to Ruby.
And that brings us to our adjusted EBITDA of $1.670 billion, which is 7% higher than the second quarter of 2020.
Interest expense was $16 million favorable, driven by our lower LIBOR rates benefiting our interest rate swaps, as well as a lower debt balance and lower rates on our long-term debt.
And those are partially offset by lower capitalized interest expenses versus last year.
Our cash taxes for the quarter were unfavorable $40 million, mostly due to Citrus, our products Southeast pipeline and Texas margin tax deferrals, which were taken in 2020 as a result of the pandemic, just timing.
And for the full year, our cash taxes are in line with our budget.
Our sustaining capital was unfavorable $51 million for the quarter driven by higher spend in our natural gas, CO2 and Terminals segments, but that higher spend is in line with what we had budgeted for the quarter.
Our total DCF of $1.025 billion is up 2%, and our DCF per share of $0.45 per share is up $0.01 from last year.
On our balance sheet, we ended the quarter at 3.8 times debt-to-EBITDA, which is down nicely from 4.6 times at year-end.
Kim already mentioned that we updated our full-year guidance, which now has DCF and EBITDA above the top end of the range that we provided in the first quarter.
For debt-to-EBITDA, we expect to end the year at 4.0 times.
That includes the acquisitions of Stagecoach, which we closed on July 9, and Kinetrex, which we expect to close in the third quarter.
As a reminder, that level -- our year-end debt-to-EBITDA level has the benefits of the largely nonrecurring EBITDA generated during Winter Storm Uri earlier in the year, and our longer-term leverage target of around four and a half times has not changed.
Onto reconciliation of our net debt.
The net debt for the quarter ended at 30 billion, almost 30.2 billion, down 1.847 billion from year-end and about $500 million down from Q1.
Our net debt has now declined by over $12 billion or about 30% since our peak levels.
To reconcile the change in the quarter in net debt, we generated 1.025 billion of DCF.
We paid out approximately 600 million of dividends.
We spent approximately $100 million of growth capital and contributions to our joint ventures.
And we had $175 million of working capital source of cash flows, primarily interest expense accrual.
That explains the majority of the change for the quarter.
For the change year-to-date, we generated $3.354 billion of distributable cash flow.
We spent $1.2 billion on dividends.
We've spent $300 million on growth capex and JV contributions.
We received $413 million on our partial interest sale of NGPL.
And we have experienced a working capital use of approximately $425 million, and that explains the majority of the change for the year.
[Operator instructions] All right, Missy, let's open it up.
| expects to declare dividends of $1.08 per share for 2021.
expects to meet or exceed top end of range provided last quarter for dcf and adjusted ebitda.
anticipate generating 2021 dcf of $5.4 billion and adjusted ebitda of $7.9 billion.
now expects to end 2021 with a net debt-to-adjusted ebitda ratio of 4.0.
approved a cash dividend of $0.27 per share for q2.
upgrade project, agawam, massachusetts expected to be placed in service in nov 2021.
cash dividend of $0.27 per share represents a 3% increase over q2 of 2020.
acadiana expansion project anticipated to be placed into commercial service as early as q1 of 2022.
kinder morgan - as of june 30, had over $3.9 billion of borrowing capacity under $4 billion credit facility, over $1.3 billion in cash, equivalents.
kinder morgan - borrowing capacity, current cash on hand, cash from operations more than adequate to manage cash requirements through 2021.
|
We hope that everyone listening continues to be safe and healthy as we work through the challenges related to the pandemic.
It is impossible to review ARI's 2020 performance or discuss current market conditions and the implications for ARI's future strategic priorities without acknowledging the initial and ongoing impact of the pandemic.
Ultimately, the real estate market resides at the intersection of the economy and the capital markets.
To frame my comments in the appropriate context, it is important to note that despite initial concerns expressed by those who viewed the pandemic through the lens of the Global Financial Crisis, over the past 11 months the capital markets have remained functioning and experienced an historically rapid recovery.
However, overall economic performance is recovering slowly, and the ultimate trajectory of the economy will depend on the pace at which fiscal and regulatory policies and capital investment are able to minimize the impact of the pandemic and the ongoing vaccination efforts enable the reopening of as much of the pre-pandemic economy as possible.
Unlike every other year-end earnings call in ARI's history when we would typically highlight origination volume, growth in the capital base and portfolio as well as capital efficiency, we believe ARI's performance in 2020 is best measured by the company's balance sheet durability and effective proactive asset management.
During the year, the in-place strength of the balance sheet was enhanced through effective liquidity management predicated on strong relationships with each of our lenders as well as opportunistic and well-priced asset sales.
ARI's asset management efforts benefited from our ongoing investment in both talent and systems and our historic practice of keeping originators involved with their transactions, which facilitates dialogue with and information flow from our borrowers.
The tremendous skill set of Apollo's commercial real estate debt team and the resources, thought leadership and relationships that come from being part of the broader Apollo organization were instrumental to ARI's achievements in 2020 and continue to differentiate ARI in the marketplace.
Importantly, the net result of our 2020 efforts was ARI's continued ability to pay a well-covered dividend to our shareholders.
The onset of the pandemic immediately led to concerns over liquidity throughout the real estate sector and heightened security of balance sheet strength and bank lending relationships across mortgage REITs.
In managing ARI's balance sheet, we have always focused on implementing a leverage strategy consistent with our asset mix, balancing the use of leverage with return targets, not relying on max leverage on any one asset to generate a target return and maintaining an unencumbered pool of loans.
We have consistently maintained strong relationships with our lenders, always seeking to keep an open and candid dialogue and ensuring that ARI fully benefits from the One Apollo approach to managing relationships with key financial partners.
This approach was validated during 2020, as we materially increased ARI's short-term liquidity without the need for any form of rescue capital or having to access the capital markets from a position of weakness during the peak of capital markets volatility.
Beyond ARI's basic financial strategy, we also chose to opportunistically sell loans at attractive pricing, generating excess liquidity and eliminating some of our construction and future funding commitments.
During 2020, ARI sold approximately $634 million of loans at a weighted-average price of 98.1% of par, generating net proceeds of $208 million.
Given the significant amount of capital searching for yield, the market for loan sales remains active, and when and if appropriate we may consider additional sales on behalf of ARI.
Another highlight of 2020 was ARI's considered use of its share repurchase plan.
In growing ARI, we have maintained our commitment to only issue common stock above book value.
In 2020, we remained thoughtful with respect to how our capital allocation could positively impact book value given the pandemic-driven downward pressure on our common stock price.
As such, we determined repurchasing ARI's common stock would achieve the best risk-adjusted return on equity for our excess capital.
As a result, we repurchased over $128 million of common stock at an average price of $8.61, resulting in approximately $0.61 per share of book value accretion.
I also want to highlight that yesterday we announced our board of directors authorized a $150 million increase to ARI's share repurchase plan, providing us with total capacity of $172 million.
Pivoting to the portfolio, ARI's focus for 2020 was proactive asset management.
Our efforts were greatly enhanced through the access to the resources of the Apollo platform, providing our team with extensive real-time data and information.
In prior quarters, we have spoken extensively about the challenges within various property types or specific assets in our portfolio.
Given the underlying LTV of our loans, the ongoing dialogue with our borrowers and the measured recovery in the economy, I am pleased to report that there are no material changes to the credit quality of the portfolio or to our credit outlook since the last call.
Anecdotally, with respect to our loans underlying the hospitality assets, we continue to see steady improvement within the roughly 65% of our portfolio which are resort or destination locations, while business-oriented hotels continue to face challenges.
With respect to the Anaheim hotel that was foreclosed upon and is being carried as REO, the hotel is under contract to be sold, and a hard deposit has been posted.
Lastly, with respect to two of our largest focused loans, we have had positive momentum at both the Miami Design District loan and the Fulton Street loan.
With respect to Miami Design, since the last earnings call we entered into a partnership with an extremely well regarded local developer who is converting the space into an open-air marketplace and working on leasing the existing space, while retaining the option to redevelop the property at a later date.
On Fulton Street, we partnered with a best-in-class New York developer to redevelop the site into a multifamily property.
The one additional loan I want to discuss is our first mortgage secured by an urban retail property in London.
The property is located in one of the most trafficked locations on Oxford Circus in London, and it houses Topchop's and Nike's flagship stores.
Last quarter, Topshop's parent company, Arcadia, filed for bankruptcy.
This was an outcome we considered when we underwrote the loan, as we were extremely familiar with the credit.
The property is currently being marketed for sale, and the initial feedback from the process indicates the proceeds will be well in excess of our loan.
The loan is currently accruing interest, including default interest, and we believe we are well covered.
As we look ahead, we believe ARI is well positioned to capitalize on the significant increase in real estate transaction activity which began in the latter part of 2020 and has continued in 2021.
The commercial real estate market is benefiting from the low interest rate environment and record amounts of dry powder in real estate funds, which is leading to increased deal activity.
ARI entered 2021 with excess capital on its balance sheet and is positioned to deploy that capital into attractive risk-adjusted return opportunities.
Also, given the current strength of the capital markets, we believe ARI will be repaid on some of its existing loans, thereby providing additional capital to be invested.
Apollo's real estate credit platform remained active throughout 2020 and continues to see a tremendous amount of transaction flow, which has enabled ARI to thoughtfully build a pipeline of potential new deals.
Importantly, ARI's lenders have indicated their willingness to provide ARI with financing for new transactions, and we are confident that levered returns achievable today are consistent with the returns on the capital we are expecting back this year.
As always, our focus on capital allocation will remain on generating the most attractive risk-adjusted ROE.
We will remain steadfast to our credit-first methodology, and we will be prudent in our capital management in funding new business.
We recently committed to our first transaction in 2021, a large first mortgage loan in Europe, and the pipeline continues to build.
This was achievable even with excess liquidity on our balance sheet through most of 2020.
Our common stock offers investors in excess of an 11-plus percent dividend yield, which we believe is extremely attractive in this current low yield environment.
Before we review earnings, I wanted to discuss our secured financing arrangements.
From March 15 of last year, total deleveraging on our $3.5 billion financing arrangements were $190 million, which is less than 6% of our outstanding balance.
Our strong relationships with key counterparties were beneficial as we navigated volatility in the capital markets throughout the past 11 months.
We also proactively worked with our financing partners and availed ourselves of the benefits of the broader Apollo platform to ensure adequate liquidity and term-out financing.
I want to highlight that beginning of this quarter we will use the words "distributable earnings" instead of "operating earnings," with no change to the definition.
For the fourth quarter of 2020, our distributable earnings prior to realized loss on investments were $51 million, or $0.36 per share of common stock.
Distributable earnings were $21 million, or $0.15 per share, and the realized loss on investments was comprised of $25 million in previously recorded specific CECL reserves and $5 million on loan sales and restructurings.
GAAP net income available to common stockholders was $33 million, or $0.23 per share, and the common stock dividend for the quarter was $0.35 per share.
As of December 31, our General CECL Reserve remained relatively unchanged, declining by three basis points to 68 basis points, and our total CECL reserve now stands at 3.24% of our portfolio.
Moving to book value.
GAAP book value per share prior to the General CECL Reserve was $15.38, as compared to $15.30 at the end of the third quarter.
The increase was primarily due to the accretive share repurchases Stuart mentioned earlier.
Since the end of the first quarter of last year, our book value prior to General CECL Reserve increased by $0.44 per share.
At quarter-end, our $6.5 billion loan portfolio had a weighted-average unlevered yield of 6.3% and a remaining fully extended term of just under three years.
Approximately 90% of our floating-rate U.S. loans have LIBOR floors that are in the money today, with a weighted-average floor of 1.46%.
We completed $109 million of add-on fundings during the quarter for previously closed loans, bringing our total add-on fundings to $413 million for 2020.
And lastly, with respect to our borrowings we are in compliance with all covenants and continue to maintain strong liquidity.
As of today, we have $250 million of cash on hand, $30 million of approved undrawn credit capacity and $1.1 billion in unencumbered loan assets.
| compname reports q4 earnings per share $0.23.
q4 earnings per share $0.23.
apollo commercial real estate finance - company's board of directors authorized increase of $150 million to existing share repurchase plan.
|
This is the 11th hour of the 11th month of the year like no other, and the good news is that our business has rebounded dramatically.
Revenue was up 27% sequentially to $435 million.
And our earnings and profitability, they were both very good, with $66 million of adjusted EBITDA, and a 15.2% adjusted EBITDA margin.
I'm also pleased with the work we did to ensure a strong balance sheet and position of liquidity.
This has served us well, not only weathering the pandemic storm, but being able to invest back into the recovery that we've seen.
I'd attribute these results to what I'm calling the three Rs.
First, the actions, strategy, solutions and messages we've taken have resonated in the marketplace.
Secondly, our clients have responded.
And third, our colleagues have been resilient through a year that none of us have experienced in our lifetimes.
Yeah, it's a testament to our strategy, but it's really about the resiliency of our colleagues across the globe.
I couldn't be more proud.
And while I'm pleased with the progress in the path we see ahead, there is no question that the magnitude of the humanitarian economic impact brought on by this pandemic will continue to permeate and shape the global landscape for quite some time.
And as we've said since early March, I do believe there will be more change in the next two years than in the last 10 years, and that brings tremendous opportunity, real tangible opportunity for Korn Ferry.
Almost every company on the planet is, and will have to reimagine their business.
Quite simply, different work needs to get done and work needs to get done differently.
And to get work done differently, companies will need to rethink their organizational structure, roles and responsibilities, how they compensate, engage and develop their workforce, let alone the top, the type of agile talent they hire, and how they hire talent in a virtual world, which will depend to a greater extent on assessment.
And these are Korn Ferry's businesses and that's real opportunity for our Company.
As an organizational consulting firm, we enable people and organizations to exceed their potential.
And to exceed potential, people need an abundance of opportunity, development and sponsorship, which is foundational to our service offerings.
We've also affirmed that changes people's lives.
As previously mentioned, I'm very proud to say, we're launching Leadership U for Humanity, a non-profit venture of the Korn Ferry Charitable Foundation, focused on developing the total mosaic, inside communities and within corporations.
One of our partners will include the Executive Leadership Council, a preeminent organization, whose mission is to develop and increase the number of successful black executives.
Across the globe, our goal is to take our expertise in IP and develop 1 million new leaders from diverse backgrounds, using our Korn Ferry Advance and Leadership U platforms.
We'll also be offering this to all of our colleagues.
We're also using this time of change as an opportunity to reimagine our business.
For example, we're moving from analog to digital delivery of our assessment in learning business, which represents about 23% of the Firm's revenue in FY '20 in a way that makes our IP more relevant and scalable.
To give you some perspective on how far we've come, at the start of the pandemic, we flipped the switch almost overnight, with nearly all of our assessment capability converting to a digital environment.
And on the recruiting side, we're further refining our platform processes such as AI, video and technology.
More and more, search will not simply about discovering and validating with someone who has gone, but finding out who they are.
We have this capability to differentiate our strategy.
And our strategy is absolutely taking hold and we see that payoff with our approach to clients as we create loyal, repeatable, sustaining relationship with clients who scale, and that's where we're moving our business.
That's our true north.
We have about 300 marquee and regional accounts, representing about 34% of global revenue, which we'd like to increase to 40% or so.
As such, we'll continue to develop account leaders from within, as well as hire from the outside.
So forget the new normal.
It's nearly nine months since the pandemic was declared.
And as I've said before, it's not just a marathon, but an Ironman triathlon of endurance, agility and change.
Embracing this change, we absolutely can make tomorrow better than today.
I truly feel we have the right strategy, with the right people, at the right time to accelerate through the turn.
And as we enter 2021, we will continue our strategic commitment to build the preeminent global organizational consultancy.
I look forward to what the new calendar year brings us.
As Gary said, the rebound in our business has been tremendous.
The sharp improvement in fee revenue in our fiscal second quarter is more than a result of improved global market conditions.
In fact, it really attributed to the resilience of our diverse mix of product and service offerings, our disciplined client management activities, and the growing relevance our solutions have in today's business environment.
Coming to the last nine months of economic upheaval, we now have a number of proof points that our strategy is succeeding.
The business we have today is less economically cyclical, with the time to recovery shorter and the trajectory of our recovery even steeper.
Our operating experience through the COVID-19 recession, thus far, demonstrates a number of important points.
First, our more diversified business is clearly demonstrating greater resilience than in the Great Recession, where fee revenue in the quarter, immediately following the trough quarter, was approximately 43% less than the prior peak quarter.
For the current COVID-19 recession, the decline in fee revenue from the peak quarter to the quarter immediately following the trough is only 16%.
So you can see a very dramatic improvement.
Gary mentioned our marquee and regional account programs.
These are client relationships that continued to deliver less cyclical, more resilient revenue than the rest of our portfolio.
And we achieved this result by actively managing the accounts with global account leaders who use a disciplined talent management strategy.
Through the first six months of fiscal '21, we saw our marquee and regional account fee revenue decline approximately 14% year-over-year, which compares favorably to the decline in the rest of our portfolio, which was down 23%.
In our digital business, we continue to see meaningful progress selling subscription-based solutions.
Our FY '21 Q2 subscription base fee revenue was $22.7 million, which was up 43% year-over-year, and up 7% quarter sequential.
Subscription-based new business also improved in the second quarter, reaching $29 million, which was up 39% year-over-year, and 25% quarter sequential.
While the shift to more subscription-based fee revenue will have a short-term negative impact on fee revenue growth, it clearly positions us with more durable fee revenue for the long-term.
In our consulting business, we continue to see success with our effort to capture larger engagements.
And as we said in the past, those that are valued at 500,000 and more.
These engagements provide us with incrementally better visibility in a more durable stream of revenue.
In FY '21, our Q2 consulting new business was pretty steady with the prior year, despite last year's number being an all-time high, which included a single non-recurring engagement of $12 million.
And these large engagements are also driving rapidly growing consulting backlog, which again enhances our revenue visibility and durability.
And last, our RPO business continues to enjoy great success, especially as companies increasingly look to outsource and variabilize their cost base.
RPO new business in the second quarter was $120 million, which is just shy of an all-time high.
So as I said when I started, we now have real proof points that our strategy is working.
Now turning to our quarterly results.
In the second quarter, all of our business segments were up sharply from the trough of the first quarter, with a significant improvement from the rate decline that we saw in the first quarter.
For the second quarter of FY '21, our fee revenue was $435 million, which was up $91 million or 27% sequentially, and down only 12% measured year-over-year.
Fee revenue declines improved consecutively year-over-year each month of the quarter.
On a quarter sequential basis, fee revenue in the second quarter for exec search was up 23%, RPO and pro search was up 25%, with pro search being up 20%, and RPO up 27%, consulting was up 28%, and digital was up 34%.
More importantly, as fee revenue has improved, we've been able to drive higher earnings of profitability by leveraging the cost-saving actions we recently put in place, as well as the productivity and cost efficiencies resulting from our emerging digital and virtual delivery processes.
Adjusted EBITDA in the second quarter was up $56 million sequentially to slightly over $66 million, with an adjusted EBITDA margin of 15.2%.
Our adjusted fully diluted earnings per share were also up in the second quarter, reaching $0.54, which was up $0.73 sequentially.
Our balance sheet and liquidity remained very strong.
At the end of the second quarter, cash and marketable securities totaled $774 million.
When you exclude amounts reserved for deferred comp arrangements and for accrued bonuses, our investable cash balance at the end of the second quarter was approximately $458 million.
Finally, during the last couple of quarters, we have discussed a number of restructuring and cost-saving initiatives designed to help the Firm through the trough of the COVID-19 crisis.
Some of these cost-saving actions, like salary cuts, were highlighted as being temporary in nature.
And it is important to note that based on our Q2 performance, we have in the second quarter made an accrual to pay all of our employees 100% of their salaries for the second quarter.
And therefore, our cost structure in this quarter is fully loaded as it relates to current compensation expense.
Starting with our digital segment.
Global fee revenue for KF Digital was $75 million in the second quarter and up 34% sequentially, and up approximately $9.3 million or 14% year-over-year.
The subscription and licensing component of KF Digital fee revenue in the second quarter was approximately $23 million, which was up 7% sequentially, and up $7 million or 43% year-over-year.
Global new business in the second quarter for the digital segment was up approximately 17% year-over-year.
Adjusted EBITDA for the second quarter of KF Digital was up $15.1 million sequentially to $23.1 million with a 30.8% adjusted EBITDA margin.
Now turning to consulting.
In the second quarter, consulting generated $126.7 million of fee revenue, which was up approximately 28% sequentially, and down approximately 12% year-over-year.
Demand for our consulting services continues to strengthen, enhanced by our growing virtual delivery capabilities.
And in particular, growth was strong in some of our virtually delivered solutions in leadership and professional development, and assessment and succession, which were up sequentially 53% and 38%, respectively.
New business in the second quarter for our consulting services was also up sharply.
In the second quarter, consulting new business was up approximately 17% sequentially, with growth in North America, Europe and APAC.
Adjusted EBITDA for consulting in the second quarter was up $13.5 million sequentially to $20.1 million, with an adjusted EBITDA margin of 15.9%.
RPO and professional search generated global fee revenue of $85.6 million in the second quarter, which was up 25% sequentially and down 10% year-over-year.
RPO fee revenue was up approximately 27% sequentially, and professional search fee revenue was up approximately 20% sequentially.
With regards to new business in the second quarter, professional search was up 9% sequentially, and RPO was awarded a near record $120 million of new business, consisting of $59 million of renewals and extensions, and $61 million of new logo work.
Adjusted EBITDA for RPO and professional search in the second quarter was up approximately $7.8 million sequentially to $13.8 million, with an adjusted EBITDA margin of 16.1%.
Finally, for executive search, global fee revenue in the second quarter of fiscal '21 was approximately $148 million, which was up approximately 23% sequentially with growth in every region.
Sequentially, North America was up approximately 32%, while EMEA and APAC were up approximately 5% and 21%, respectively.
The total number of dedicated executive search consultants worldwide in the second quarter was 512, down 73 year-over-year, and up two sequentially.
Annualized fee revenue production per consultant in the second quarter was $1.16 million, and the number of new search assignments opened worldwide in the second quarter was 1,331, which was down approximately 15% year-over-year, but up 19% sequentially.
Executive search also benefited from cost reductions, productivity enhancements, and streamline virtual delivery processes in the second quarter, as adjusted EBITDA grew approximately $20 million sequentially to $28.2 million, with an adjusted EBITDA margin of 19.1%.
Globally, our monthly new business trends continue to improve throughout the second quarter.
Excluding new business awards for RPO, our global new business in the second quarter measured year-over-year was down only approximately 7% and that was from record-high new business in the second quarter of fiscal '20.
With the year-end holidays approaching, both November and December are typically seasonally slower months for new business.
However, on a month-to-date basis, what we're seeing in November is that it is in line with last month and last year.
With our typical seasonal patterns hold this year, we would expect January to be our high month of new business in the quarter.
Now approximately three months have passed since our last earnings call, and while our advances have been made in the science, societal and economic impacts of COVID-19, there remains significant uncertainty about the ultimate consequences.
Now on the positive side, there have been several announcements regarding vaccines that have greater than 90% effectiveness.
In addition, the world has adopted new ways of working and interacting with substantial acceptance of business being conducted virtually.
On the negative side, there are number of unanswered questions regarding the capacity to manufacture the vaccines at scale, as well as how they will be distributed and administered to the population at large.
In addition, we are seeing governments reinstating lockdowns as the number of COVID-19 cases and hospitalizations reach all-time highs.
With also an unprecedented nature of what we are currently experiencing, combined with so many unanswered questions and ever-changing data points that does continue to cloud near-term predictability of our business.
So consistent with our approach for the prior three quarters, we will not issue any specific revenue or earnings guidance for the third quarter of FY '21.
Despite November new business, again, that is as of today, in line with prior months and year ago levels, we would remind you that our third quarter is our seasonally low quarter due to time of around the year-end holidays.
Typically, what you would see is the sequential decline from second to our third quarter, does range sort of 3% to 5%.
Ignoring any incremental impact from COVID, we would expect that pattern to be the same in the current year.
But what we're not able to determine the levers if the -- if and when to what extent there will be any incremental impact from COVID-19, which potentially could have the effect of exacerbating our typical sequential decline.
We'd be glad to answer any questions you may have.
| compname reports q2 adjusted earnings per share of $0.54.
q2 adjusted earnings per share $0.54.
will not issue any specific revenue or earnings guidance for q3 of fy'21.
|
This is the first call of the calendar year and before we talk about where we're going, I want to step back for a moment and discuss just how far we've come.
It was almost a year ago, the great uncertainty filled the world, and I predicted that we would see more change in sealing two years than in the past 10.
And as a leading global organizational consulting firm Korn Ferry is now right at the center of that stage.
During this time, our colleagues have shown incredible resilience.
Resiliency in purpose, resiliency in hope and resiliency in serving our clients.
And the success is deeply rooted in our vision, our values, how we see the world, how the world sees us and how we've been translating all of this into executing our strategy.
To fulfill our vision and position our company for accelerated growth in long-term success, we focused on a few key strategic pillars.
We're driving an integrated solutions based go-to-market approach that facilitates growth and enduring partnerships with our marquee and regional accounts that are central to more scalable and durable revenues.
We continue to advance Korn Ferry as the premier career destination to attract and retain top talent.
In the last two quarters, we've brought on about 70 senior commercial colleagues to strengthen our bench of talent across the globe.
And as we look forward, we're focused on opportunities that will strengthen our solutions and create shareholder value.
The focused execution of our strategy has transformed our business into a more efficient profitable, growth-oriented organization.
We are far less economically cyclical today than in any point in our history.
The time to recovery much shorter.
The trajectory of the recovery much stable.
Our revenues more visible and scalable.
Our client solutions more impactful.
Our people is the absolute best in the industry and our data and IT, it's deep, rich and absolutely best-in-class.
An important part of what differentiates us is we're the only consulting firm to combine Org strategy, leadership and professional development, assessment and succession, rewards and talent acquisition, and we're taking integrated approach across these categories to help clients execute on their strategy in a increasingly digitally enabled world.
Underpinning all of our offerings and solutions is our world-class IT, putting us in an unparallel position of strength.
As I think about it, we've got more than seven decades of experience data and innovation.
At the end of the third quarter we hold rewards data for over 20 million people, over 70 million assessments have been taken.
We've got organizational benchmark data on 12,000 entities.
We have 3,900 individual success profiles covering almost 30,000 job titles.
Our proprietary recruiting AI tool has compiled more than 550 million profiles of potential candidates across the globe.
Every year we train and develop nearly 1 million professionals.
And certainly last but not least each business hour we place a candidate in a new job every three minutes.
The best way to demonstrate all this goes through our performance.
During this last quarter our third fiscal quarter, we delivered results that were substantially higher than in prior cycles.
Our business rebounded dramatically.
Revenue was up 9% sequentially to $475 million and our earnings and profitability reached record highs with about $97 million of adjusted EBITDA and a little over a 20% adjusted EBITDA margin.
And the sharp improvement that we saw in fee revenue in our fiscal second quarter continued in the third.
And it just -- it doesn't just reflect improved global market conditions, these results are directly attributable to our strategy, and I'd like to share a few proof points from the quarter that highlights how far our long-term strategy is taking hold.
Our diversified business exhibited more resilience now than in the great recession.
Back then, our fee revenue in the quarter immediately following the peak quarter was down approximately 43%, two quarters out it was still down 32%.
Now if we fast forward a few years and look at the COVID-19 recession, the decline in fee revenue from the peak quarter was only 16%, in two quarters out, we're only down 8%, that's a substantial improvement from the great recession.
When looking more closely at our go-to-market strategy, we are seeing measurable progress in selling subscription-based solutions in our digital business.
Year-to-date subscription base fee revenue grew 27% while our third quarter new business that was subscription based was up a 123% year-over-year and almost 48% sequentially.
And we're also, as we've talked about, we're continuing to see success in capturing larger consulting engagements, we would classify those that have a value of $500,000 or more and these engagements are absolutely driven by our integrated solution strategy that provide us with more enduring client relationships of scale.
Year-to-date large new business consulting engagements were up 23%.
And these large engagements are also driving a growing backlog of 24% year-over-year which obviously enhances revenue visibility and durability.
As I mentioned earlier, our marquee and regional account programs continue to deliver less cyclical, more resilient new business in revenue than the rest of the portfolio.
In the third quarter, our marquee and regional account fee revenue declined only 2% year-over-year, while the rest of the portfolio was down about 11% and on a year-to-date basis, our marquee and regional accounts, they've have been relatively aggressive.
It's up 1% year-over-year, while the rest of the portfolio declined 13%.
And our cross line of business referrals again validates our strategy.
it is about three years ago, our cross referrals were about 15% of our portfolio.
Today that number stands at 26%.
We're proud of what we've accomplished and how we've continued to extend, elevate and recast the Korn Ferry brand, both externally and for our colleagues.
Our brand absolutely embodies the way the world sees us, understands us and wants to be a part of what we're doing.
We've never been more committed to helping people exceed their potential with an abundance of opportunity.
We're changing people's lives.
The work of our D&I practice is absolutely breaking barriers, which is one of the top areas of focus for our clients and we're the leader in that area.
I'm also very proud of the launch of Leadership U for humanity, a non-profit venture of the Korn Ferry charitable foundation, focused on developing the total mosaic inside communities and within corporations.
Our long-term goal is to take our expertise in IP and develop 1 million new leaders from diverse backgrounds using our Korn Ferry Advance and Leadership U platforms.
I've always said that it's our people first, clients next and everything else will follow.
That's why we're also offering Leadership U for Korn Ferry to develop our own colleagues from all backgrounds, providing them with opportunities to grow in advance.
It's this commitment and focus that made Korn Ferry a career destination, accelerating the development colleagues across the firm.
No doubt the pandemic has caused seismic changes in society and in business.
Different work is absolutely getting done and that work is getting done differently and Korn Ferry is at the center of that transformation.
We know that problems are never solved in the absence of people.
Solutions will only emerge by cultivating a workforce that is diverse, collaborative and motivated.
Looking ahead, it's about leveraging our data and IP, delivering larger more impactful consulting engagements, addressing the mega-trends that are reshaping the corporate landscape and driving accelerated revenue growth for the firm.
I truly feel we have the right focus, with the right people, at the right time to accelerate through the turn.
In calendar 2021, we will continue our commitment to build the pre-eminent global organizational consultancy.
As Gary said, we're very proud of our third quarter results.
We view them as a testament to the efforts of our Korn Ferry colleagues.
They also represent validation that we have successfully transformed into a less cyclical firm with more resilient and durable based fee revenue that will generate more sustainable, scalable earnings.
Gary made reference to mega-trends that are changing the corporate landscape items like accelerating digital transformation driven by the pandemic, calls for long overdue social change and increased corporate emphasis on ESG issues.
Our comprehensive set of solutions informed by a deep rich collection of data in intellectual property are highly relevant and aligned to help our clients needs in each of these areas.
And importantly, they serve as a real point of differentiation for Korn Ferry.
Now let me turn to some of our third quarter results.
As Gary mentioned, fee revenue in the third quarter was $475 million.
Now, that growth was broad based with fee revenue improving sequentially for the second consecutive quarter in each of our business units.
Additionally, fee revenue growth in the third quarter, this is measured year-over-year, was up 7% for RPO.
It was flat for North American executive search, which is actually seeing business activity back at pre-pandemic levels.
We also saw a substantial improvement in Consulting and that was only down 3% year-over-year, and in Professional Search, that was only down 2% year-over-year.
More importantly, earnings and profitability surged to record highs in the quarter.
Our adjusted EBITDA grew $31 million or 46% sequentially to $97 million and our adjusted EBITDA margin improved 510 basis points to 20.3%.
Adjusted fully diluted earnings per share also reached a record level in the third quarter, improving to $0.95, now that was up $0.41 or 76% sequentially and up $0.20 or 27% year-over-year.
Now, it's important to note that full employee salaries have been reinstated effective January 1, 2021.
In addition, we booked accruals for November and December to pay all employees their full salaries for both of these months.
So similar to the second quarter, our cost structure in the third quarter reflects 100% of all employees compensation costs.
Now let me turn to new business, that also continue to improve in the third quarter.
On a consolidated basis, our new business awards excluding RPO were down only 1% year-over-year.
On a sequential basis, the new business growth in the third quarter also showed broad-based improvement.
Consulting was up 8%, digital was up 14%, executive search was up 8% and professional search was up 31%.
Our balance sheet and liquidity remained very strong.
At the end of the third quarter, our cash and marketable securities totaled $897 million.
Now, if you exclude amounts reserved for deferred comp and accrued bonuses, our investable cash balance at the end of the third quarter was approximately $534 million, which is up $73 million sequentially and up $112 million year-over-year.
Our balance sheet strength is due in large part to the steps we took in late 2019 to refinance our debt with long tenured public debt securities and we also restructured our credit facility in anticipation of a potential downturn.
And we did that because we wanted to position ourselves to be able to weather the storm and invest into the recovery.
Now to date, obviously, we have successfully managed in the depth at our business to the changing environment and we are now investing back into the recovery, as Gary mentioned by hiring 70 senior commercial colleagues over the past two quarters.
Starting with our digital segment.
Global fee revenue for KF Digital was $76 million in the third quarter.
Consistent with the second quarter, the subscription and licensing component of KF Digital fee revenue in the third quarter was $23 million.
Global new business in the third quarter for the Digital segment grew 14% sequentially to $100 million, the best quarter of new business since the beginning of the COVID recession.
Additionally, 43% of new business in the third quarter was subscriptions and licenses, which is the highest portion of any quarter to date.
Adjusted EBITDA in the third quarter for KF Digital was up $4 million sequentially to $27.1 million with a 35.8% adjusted EBITDA margin.
Now turning to Consulting.
In the third quarter, Consulting generated $136.3 million of fee revenue, which is up approximately $9.5 million or 8% sequentially and down only 3% measured year-over-year.
Growth in each of our solution areas improved in the third quarter, enhanced by our virtual delivery capabilities.
Consulting new business also improved in the third quarter.
Sequentially global new business was up 8% with growth in every region.
Adjusted EBITDA for Consulting in the third quarter was up $7.3 million sequentially to $27.5 million with adjusted EBITDA margin of 20.2%.
RPO and Professional Search global fee revenue improved to $95.2 million in the third quarter, which is up 11% sequentially and up 4% year-over-year.
RPO fee revenue was up approximately 4% sequentially and professional search fee revenue was up approximately 24% sequentially.
As previously mentioned, measured year-over-year, RPO fee revenue was up 7% in the third quarter.
With regards to new business, in the third quarter, professional search was up 31% sequentially and RPO was awarded another $44 million of new contracts, consisting of $12 million of renewals and extensions and $32 million of new logo work.
Adjusted EBITDA for RPO and Professional Search in the third quarter was up approximately $5.8 million sequentially to $19.6 million with an adjusted EBITDA margin of 20.6%.
Finally for executive search, global fee revenue in the third quarter was $168 million, up $20 million or 14% sequentially with growth in every region.
Sequentially, North America was up approximately 16%, while EMEA and APAC were up approximately 14% and 4% respectively.
The total number of dedicated executive search consultants worldwide at the end of the third quarter was 522 which was up 10 sequentially.
Annualized fee revenue production per consultant in the third quarter improved to $1.3 million and the number of new search assignments opened worldwide in the third quarter was 1,300.
In the third quarter adjusted EBITDA grew approximately $13.4 million sequentially to $41.7 million with an adjusted EBITDA margin of 24.8%.
Over the past two quarters, the volatility challenged our visibility into monthly new business activity has subsided.
In addition, the global business environment appears to be becoming more stable.
We're now in a position to identify trends and how it will impact our business and as a result of that we've decided to reinstate guidance.
Historically, the fourth quarter has been our strongest quarter in any fiscal year.
If current new business activity continues in the normal seasonal patterns hold, we expect that new business in our fourth quarter will remain pretty strong.
Considering this and assuming no new major pandemic related lockdowns, changes in worldwide economic conditions financial markets and foreign exchange rates, we expect our consolidated fee revenue in the fourth quarter of fiscal '21 to range from $475 million to $500 million, and our consolidated diluted earnings per share to range from $0.95 to $1.05.
Our third quarter reported and our fourth quarter expected adjusted EBITDA margin -- margins are benefiting from elevated levels of profitability flow through due to our top line recovering faster with a trajectory that is much steeper.
However, our current execution capacity is pretty stretched.
Our current levels of utilization are not sustainable to support new business growth.
To that end, we are in the process of adding additional resources.
Further, we want to take advantage of the opportunity in front of us and as previously discussed, we've recently begun to aggressively invest back into our business, making a number of key consultant hires.
And we plan to continue such hires going forward.
With that as you think about our near-term operating boundary for our adjusted EBITDA margin, think about it along the following line.
If you go back prior to the pandemic, we were essentially a $2 billion business within adjusted EBITDA margin of around 15% to 16%.
As we return to the pre-pandemic levels of fee revenue, our business will benefit from previously mentioned structural changes and we're going to add around 200 basis points to our adjusted EBITDA margin, and as a result, we expect near-term consolidated margins beyond the fourth quarter to range from 17% to 18%.
We've taken significant steps in recent years to strengthen our business model, enhance our financial profile and really position Korn Ferry for success.
The sharp acceleration in our financial performance in the second and third quarters, gives us tremendous confidence that our strategy is working, that we have the right initiatives in place to continue to increase our market share and deliver sustainable value to all of our stakeholders.
With that I'll conclude remarks and we'd be glad to answer any questions you may have.
| revenue and earnings guidance being reinstated starting with q4 fy'21.
sees q4 earnings per share $0.95 to $1.05.
q3 adjusted earnings per share $0.95.
q4 fy'21 fee revenue is expected to be in range of $475 million and $500 million.
|
At this time, all participants are in a listen-only mode.
Please note that this conference is being recorded and will be available for replay.
For information on how to access the replay, please visit our website at mdcholdings.com.
These and other factors that could impact the companys actual performance are set forth in the companys third quarter 2021 Form 10-Q, which is expected to be filed with the SEC today.
It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures.
MDC generated net income of $146 million or $1.99 per diluted share in the third quarter of 2021, driven by a combination of strong revenue growth, continued price increases and improving overhead leverage.
Our home sales gross margin of 23.5% represented a 300 basis points improvement over the prior year period as our new home pricing stayed ahead of cost inflation.
We also made further improvements to our fixed cost leverage as our SG&A expense fell 80 basis points year-over-year to 9.6%.
We are extremely pleased with our financial results this quarter, particularly in light of the supply chain issues that continue to affect our industry.
Order activity remained healthy during the quarter at 4.1 sales per community per month.
This represents the second highest third quarter order pace for the company in the last 15 years.
Buyers continue to be drawn to our more affordable price new home offerings, which allow for personalization through our build-to-order strategy.
We believe this operating model is a more prudent and capital-efficient way to run the business and leads to better risk-adjusted returns over time.
We also believe that results in fewer cancellations as homebuyers naturally become more invested in their purchase when they played an active role in designing and furnishing their home.
This is an important differentiator for our company, particularly in light of the lengthening cyclical times.
From a capital standpoint, MDC continues to be in great financial shape.
We ended the quarter with a debt-to-capital ratio of 39.7% and a net debt-to-capital ratio of 23.7%.
During the quarter, we issued $350 million of senior notes due in 2061 [phonetic] 0:05:40 at an interest rate of 3.966 and made a tender offer for over $120 million of our senior notes due 2024, which carry an interest rate of 5.5%.
And while the early retirement of debt resulted in a $12.2 million charge this quarter, we now have a lower cost of capital and a debt maturity schedule that extends out 40 years.
Our total liquidity position at the end of the quarter stood at just over $2 billion, giving us plenty of capital to scale our operations in the coming years.
It will also allow us to continue paying our industry leading dividend, which currently stands at $2 per share on an annualized basis.
As Larry mentioned, we continue to see robust demand for our homes across our geographic footprint.
With the West region posting the best order pace during the quarter at 4.9 homes per community per month, followed by the East at 3.7 and our Mountain region at 3.0.
Pricing remained firm within our communities, and we did not win this any widespread use of incentives or discounting in our markets as each of the segments posted home sales gross margins in excess of 20%.
As our existing operations continue to thrive, we have started to move into new markets that exhibit similar strong housing fundamentals.
Earlier this year, we announced our expansion to Boise and Nashville.
And in this quarter, we are pleased to announce our entry into Austin, Texas and Albuquerque, New Mexico.
We have land deals in place in both markets and look forward to establishing profitable operations in the years to come.
As we head into the end of the year, MDC is focused on delivering homes and backlog while setting the stage for additional growth in 2022.
Our lots owned and controlled at the end of the third quarter increased by 37% year-over-year, giving us a great opportunity to capitalize on the positive housing fundamentals in our markets.
We have several new communities scheduled to open in the coming quarters, which Bob will give in more detail in a moment.
While we expect the current supply chain issues to persist for the foreseeable future, we also expect the current demand drivers to remain in place as well, giving us a great opportunity to finish the year on a high note and build on our success in 2022.
As a result, we are optimistic about the future of our company.
During the third quarter, we generated net income of $146 million or $1.99 per diluted share, representing a 48% increase from the third quarter of 2020.
Home sale revenues grew 26% year-over-year to $1.26 billion, while gross margin from home sales improved by 300 basis points.
The growth in home sale revenues and margin expansion resulted in a 62% increase in pre-tax income from our homebuilding operations to $165.2 million.
As Larry mentioned, we accelerated the retirement of $123.6 million of our unsecured notes due in January 2024 through a cash tender offer during the quarter.
The retirement resulted in a loss of $12.2 million, which is included in homebuilding pre-tax income.
Financial services pre-tax income increased 13% year-over-year to $27.5 million.
All of our financial services companies benefited from the increased volume of our homebuilding operations during the quarter.
Our mortgage company also benefited from a $3.5 million gain recognized on the sale of conventional mortgage servicing rights during the period.
This increase was mostly offset by increased competition in the primary mortgage market, increased compensation-related costs and a temporary decrease in our capture rate.
Our tax rate increased from 21.5% to 24.3% for the 2021 third quarter.
The increase in rate was primarily due to a decrease in tax windfalls recognized upon the vesting and exercise of equity awards, which was partially offset by a year-over-year increase in home energy tax credits.
For the remainder of the year, we currently estimate an effective tax rate of approximately 24.5%, excluding any discrete items and not accounting for any potential changes in tax rates or policy.
Homes delivered increased 13% year-over-year to 2,419 during the third quarter, driven by an increase in the number of homes we had in backlog to start the quarter.
Our ability to convert backlog and closings continues to be negatively impacted by increasing permitting times and labor and material shortages.
As a result, we saw cycle times increase by approximately two weeks sequentially from the second to third quarter of 2021.
The number of homes delivered during the quarter was below our previously estimated range of 2,500 to 2,700 units and was a direct result of the extended cycle times that we experienced.
The average selling price of homes delivered during the quarter increased 12% to about $520,000.
The increase was a result of price increases implemented across the majority of our communities over the past 12 months.
For the fourth quarter, we are anticipating home deliveries to reach between 27,300 units, with an average selling price between $530,000 and $540,000.
Gross margin from home sales improved by 300 basis points year-over-year to 23.5%.
We experienced improved gross margin from home sales across each of our segments, with our West segment showing the largest increase year-over-year as well as having the highest absolute level overall.
These improvements were driven by price increases implemented across nearly all of our communities over the past year, which have been partially offset by increased building material and labor costs.
While we have seen lumber prices decrease in recent months, we continue to experience cost pressures on other building materials and labor costs.
Gross margin from home sales for the 2021 of fourth quarter is expected to increase to between 23.5% and 24%, assuming no impairments or warranty adjustments.
Our total dollar SG&A expense for the 2021 third quarter increased by $16.5 million from the 2020 third quarter, driven primarily by increased general and administrative expenses.
Our SG&A expense as a percentage of home sale revenues decreased 80 basis points year-over-year to 9.6%.
General and administrative expenses totaled $59.9 million during the third quarter due to increases in compensation related expenses, including increased bonus and stock-based compensation accruals.
We currently estimate that our general and administrative expenses will grow to between $65 million and $70 million for the fourth quarter of 2021.
Marketing expenses increased $900,000 as a result of increased master marketing fees relating to increased closings volume.
However, marketing expenses as a percentage of home sale revenues were down 50 basis points year-over-year as we were able to continue limiting advertising expenses in this high demand environment.
Our commission expense as a percentage of home sale revenues decreased 60 basis points year-over-year as we have taken steps to control these costs during this period of strong demand for new housing.
The dollar value of our net orders decreased 21% year-over-year to $1.31 billion due to a 32% decrease in unit net orders.
This decrease was driven by a 33% year-over-year reduction in our monthly sales absorption pace.
Our sales absorption pace for the third quarter of 2021 was a healthy 4.1 orders per community per month.
While this represented a year-over-year decrease from the third quarter of 2020, it was a 14% increase from the pre pandemic levels experienced in the third quarter of 2019.
The year-over-year decrease in our sales absorption pace was due to the return of more normal seasonal patterns as well as our efforts to moderate sales activity, as we have mentioned on prior calls.
Overall, we believe demand levels remained highly favorable during the third quarter.
Were also pleased with the start of the fourth quarter from a demand standpoint based on the net orders weve seen to this point in October.
The average selling price of our net orders increased 16% year-over-year as we have raised prices across most of our communities over the past 12 months.
While price increases slowed during the third quarter, pricing remained firm and continues to more than offset the higher input costs related to building materials and labor.
Looking at backlog metrics on slide 11.
The dollar value of homes in backlog increased 38% year-over-year despite the decrease in third quarter activity.
While cycle times remain the biggest challenge to our backlog conversion efforts, we believe we are well positioned entering the fourth quarter with construction started on 84% of our backlog and 42% at frame stage of construction or beyond.
We approved 5,892 lots for acquisition during the quarter, representing a 54% increase year-over-year.
This brings the total number of lots approved for acquisition during the year to 15,978 lots and marks the third time in the last four quarters, our approval activity exceeded to 5,000 lots.
We closed on 3,214 lots during the third quarter, which included about a 100 finished lots within our first subdivision in Austin, Texas.
Total land acquisition and development spend for the quarter was $420 million.
As a result of our land acquisition and approval activity, our total lot supply to end the quarter was nearly 37,000 lots, representing a 37% increase from the prior year quarter.
In addition, 34% of our lot supply was controlled via option as of period end.
We believe that this lot supply, combined with the continued lot approval and acquisition activity, provides us with a solid platform for growth in 2022 and beyond.
Our active subdivision count was at 203 to end the quarter, up 5% from 194 a year ago.
We saw an increased number of active subdivisions in both the East and West segments with the East segment experiencing the largest increase.
Active subdivisions in the Mountain segment were down 8% year-over-year.
Were actively selling out of our first Boise subdivision as of quarter end.
And with the acquisition of finished lots in Austin during the third quarter, we expect to be open for sales in this new market by the end of the year.
New community openings remain challenging in the current environment due to delays in municipal approvals and the strain on the available resources to complete development work.
Also, we have a number of legacy communities on the verge of closing out, as you can see from the number of soon to be inactive communities as of September 30, 2021.
This indicates that our active subdivision account could decrease over the next few months as we work to open and begin selling out of our new communities.
Due to this potential short-term volatility in our active subdivision count, we are not reiterating any year-end guidance for this metric.
However, we do expect to see an increase from our 203 active communities at the end of the third quarter before we reached the end of the 2022 first quarter in time for the spring selling season.
While we expect further active subdivision growth from that point through the end of 2022, we will wait to provide further guidance until we have more visibility as to the timing of these community openings.
In summary, we are pleased with our financial results for the third quarter and believe the housing backdrop remains favorable.
While we expect the current supply chain issues to continue in the near term, our current backlog and land position have us poised for continued growth into 2022.
Our financial position remains strong with over $2 billion of total liquidity and a net debt-to-capital ratio of 23.7% as of quarter end, providing us with the ability to continue to grow our business and invest in our new markets.
Without their efforts, we would not be in the position we are today, poised to deliver more than 10,000 new homes to our homebuyers for the 2021 full year.
| compname says q3 home sale revenue up 26% to $1.26 bln.
qtrly home sale revenue increased 26% to $1.26 billion from $1 billion.
qtrly average selling price of deliveries up 12% to $519,900.
qtrly dollar value of net new orders decreased 21% to $1.30 billion from $1.65 billion.
q3 earnings per share $1.99.
quarter-end dollar value of ending backlog up 38% to $4.24 billion from $3.08 billion.
sees projected home deliveries for 2021 q4 between 2,700 and 3,000.
sees average selling price for 2021 q4 unit deliveries between $530,000 and $540,000.
|
I'm joined by Christa Davies, our CFO; and Eric Andersen, our president.
Our strong performance in 2021 is the direct result of deliberate steps we've taken that are enabling us to win more, do more and retain more with clients.
We're driving top and bottom-line results and are exceptionally well positioned to continue to deliver ongoing performance in 2022 and over the long term.
Most important, we want to express deep gratitude to our Aon colleagues around the world for their performance and results this year and for everything they've done for clients and for each other.
Our colleagues delivered a fantastic Q4 and a very strong finish to an outstanding year.
We achieved organic revenue growth of 10% in the fourth quarter, with double-digit growth in commercial risk and reinsurance, driven by net new business generation and client retention.
In commercial risk, we saw strength across the world, driven by net new business and retention in the core.
We also saw strength in more discretionary areas of the portfolio as economic growth and client activity continued to increase, including double-digit growth in project-related work and in transaction solutions as our teams responded to M&A deal flow and increased client demand.
Within health and wealth solutions, we saw double-digit growth in priority areas that we've been disproportionately investing in in the last several years, including voluntary benefits in health solutions and in delegated investment management in wealth solutions, which remains an essential part of our portfolio.
Our full year organic revenue growth of 9% reflects the strength and momentum of our Aon United strategy, which is designed to drive top and bottom-line results.
To that point, operating income increased 17% year over year.
Full year operating margins expanded 160 basis points to 30.1%, with margins of 32.8% in the fourth quarter, reflecting ongoing efficiency improvements, net of investment and long-term growth.
Earnings per share increased 22% for the full year, free cash flow exceeded $2 billion and we completed $3.5 billion of share buyback in 2021, a strong indication of our confidence in the long-term value of the firm.
Looking forward to 2022 and beyond, we continue to expect mid-single digit or greater organic revenue growth, margin improvement and double-digit free cash flow growth.
Looking back on the year, we would offer three observations that drove performance in '21 and reinforce our continued strong momentum in 2022.
First, as complexity and uncertainty has increased around the world, clients are demanding a partner capable of providing them greater clarity and confidence to make better decisions that will protect and grow their businesses.
In 2021, organizations and individuals continue to face the ongoing challenges of COVID and resulting effects in supply chain, growing concerns over climate change, commercial property, retirement readiness, regulatory changes, cyber and workforce resilience.
Against that backdrop, our decade-plus focus on Aon United and the content capability it allows us to deliver has never been more relevant.
Second, our colleagues feel that relevance and they take great pride in our ability to deliver existing and new sources of value to clients.
They recognize that these external challenges facing our clients create opportunity for them to bring better solutions and grow professionally.
We know this is what engages our colleagues and why they're feeling more relevant, more connected and more valued.
And we're seeing the impact of this focus.
In our recent all-colleague survey, engagement levels remain at all-time highs, in line with top-quartile employers.
Ultimately, we know that by creating an exceptional colleague experience or ensuring a better client experience, both of which translate into better performance for the firm.
And third, we continue to accelerate our innovation strategy by using our Aon United operating model to replicate successful solutions and applying those capabilities to new client bases, paving the way for innovation at scale.
We're incorporating our data, analytics and insight to direct existing capabilities to previously unmet client needs.
This allows us to serve existing clients in new and customized ways, bring existing solutions to new clients and expand our addressable market.
Let me highlight a few examples that demonstrate how we scale innovation to help our clients, both in new ways and from new sources.
Historically, you heard us talk about Aon Client Treaty, pre-underwritten insurance capacity we established at Lloyd's that we used to offer clients more easily and efficiently access capital for their placements.
When we designed this program over five years ago, we analyzed every historic placement, quantified the risk parameters around business replacement on Lloyd's and then prearranged capital to back those risks.
Aon Client Treaty provides more efficient access to capital for clients and insurers and we see ongoing opportunity to apply this concept to different geographies and risk classes using the same proprietary data and analytics backbone supported by Aon Business Services.
One new offering derived directly from this capability is a solution the team designed called Marilla, which enables reinsurers and investors to invest across our global reinsurance client portfolio.
This provides a broad entry point into global reinsurance risk that benefits our clients by enabling capital to access markets more efficiently.
This first of its kind solution could not have been designed without a proprietary analytic capability and we see important opportunities to build on this platform for future growth across Aon.
Another example to highlight is within voluntary benefits, where we're developing innovative solutions at scale and driving double-digit growth.
The offering combines user insight around enrollment from our active healthcare exchanges and capabilities from acquisitions like Univers and Farmington.
Our analytics platform and dashboards assess and illustrate planned features, product usage, claims experience and overall plant performance, providing insight into employee demand and satisfaction.
This work has been formed by 20 years of enrollment data from over 4 million participants, which enables us to rapidly develop bespoke solutions for our clients that strengthen their total rewards offering and reinforce their human capital strategy at a time when this has never been more essential.
These examples demonstrate how we help our clients access capital end markets in ways that never existed before.
Within that backdrop of increasing and changing risk, we're not only bringing our clients better solutions, we're also working more closely with them to understand their biggest challenges which in turn guides further innovation.
Our focus on building innovative capabilities that scale across Aon to better meet our clients' needs is also highlighted by our recent appointment of Jillian Slyfield as our chief innovation officer.
Jillian's digital experience and deep connections with Aon and across the industry position her exceptionally well to ensure that we're rapidly distributing new solutions to clients.
To summarize, 2021 was a year of incredible performance and a year that positions us for growth, innovation and momentum for 2022.
As we look forward, this momentum is further reinforced by global economic and societal trends and the resulting challenges and opportunities for our clients, which means that our Aon United strategy becomes even more relevant as we help clients make better decisions to protect and grow their businesses.
The capability and track record that we've built gives us confidence in our ability to drive further value for our clients, colleagues, society and shareholders.
As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year.
In the quarter, we delivered 10% organic revenue growth, the third consecutive quarter of double-digit organic growth, which translated into double-digit adjusted operating income and adjusted earnings-per-share growth, continuing our momentum as we head into 2022.
As I reflect on full year results, first, organic revenue growth was 9%, including double-digit growth in commercial risk solutions and health solutions.
I would note that total revenue growth of 10% includes a modest favorable impact from change in FX, partially offset by the impact of certain divestitures completed within the year.
Most notably, the retiree healthcare exchange business, as we continue to shift our portfolio toward our highest growth and return opportunities.
As we look to 2022, we're continuing to monitor various macroeconomic factors, including the underlying drivers of GDP, asset values, corporate revenues and employment, inflation, government stimulus and the impacts of COVID variants, all of which impact our clients and our business.
We continue to expect mid-single-digit or greater organic revenue growth for 2022 and over the long term.
Moving to operating performance.
We delivered substantial operational improvement, with adjusted operating income growth of 17% and adjusted operating margin expansion of 160 basis points to a record 30.1% margin.
The investments we have made in Aon Business Services give us further confidence in our ability to expand margins, building on our track record of approximately 100 basis points average annual margin expansion over the last decade.
We previously described the repatterning expenses that incurred within 2021, which have no impact on year-over-year margins.
While certain expenses may move from quarter to quarter, we do not expect further repatterning.
We expect the 2021 expense patterning to be the right quarterly patterning going forward before an expense growth.
During the year, as we previously communicated, we saw revenue growth outpace expense growth and investments.
While we do expect expenses to increase in 2022 due to certain factors such as increased investments in colleagues and a modest reduction of T&E, we think about growing margins over the course of the full year.
We expect to deliver margin expansion in 2022 as we continue our track record of cost discipline and managing investments and long-term growth on an ROIC basis.
We translated strong adjusted operating income growth into double-digit adjusted earnings per share growth of 22% for the full year, building on our track record of double-digit adjusted earnings per share growth over the last decade.
As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.03 in the fourth quarter and was a favorable impact of roughly $0.23 per share for the full year.
If currency will remain stable at today's rates, we would expect an unfavorable impact of approximately $0.16 per share or approximately $48 million decrease in operating income in the first quarter of 2022.
In addition, we expect noncash pension expense of approximately $11 million for full year 2022 based on current assumptions.
This compares to the $21 million of noncash pension income recognized in 2021.
Turning to free cash flow and capital allocation.
We continue to expect to drive free cash flow growth over the long term based on operating income growth, working capital improvements and structural uses of cash enabled by Aon Business Services.
In 2021, free cash flow decreased 23% to $2 billion reflecting strong revenue growth, margin expansion and improvements in working capital, which were offset by $1 billion termination fee payment and other related costs.
I'd observe that excluding the $1 billion termination fee payment, free cash flow grew $400 million or approximately 15% from $2.6 billion in 2020.
Our outlook for free cash flow growth in 2022 and beyond remains strong.
Given this outlook, we expect share repurchase to continue to remain our highest return on capital opportunity for capital allocation as we believe we are significantly undervalued in the market today, highlighted by the approximately $2 billion of share repurchase in the quarter and $3.5 billion of share repurchase in 2021.
Over the last decade, we've repurchased over a third of our total shares outstanding on a net basis.
In 2022, we expect to return to more normalized levels of capex as we invest in technology and smart working.
We expect an investment of $180 million to $200 million.
As we've said before, we manage capex like all of our investments on a disciplined return on capital basis.
We also expect to invest organically and inorganically in content and capabilities to address unmet client needs.
Our M&A pipeline is focused on our highest priority areas that will bring scalable solutions to our clients' growing and evolving challenges.
We continue to assess all capital allocation decisions and manage our portfolio on a return on capital basis.
We ended 2021 with a return on capital of 27.4%, an increase of more than 1,500 basis points over the last decade.
Turning now to our balance sheet and debt capacity.
We remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile.
In addition, we issued $500 million of senior notes in Q4.
As we said before, growth in EBITDA, combined with improvements in our year-end pension and lease liability balances, increases the capacity we have to issue incremental debt while maintaining our current investment-grade credit ratings.
Our net unfunded -- funded pension balance improved by nearly $500 million in 2021, reflecting continued progress and a result of the steps we've taken over the last decade to derisk this liability and reduce volatility.
This reduction in volatility is significant for many of our clients, who still have pension obligations on their balance sheets.
Current market conditions and funding status are giving many clients a chance to reduce the risk of future volatility related to funding status or regulatory changes.
Our retirement team's insight and analytics in this space can help our clients access new capital to efficiently reduce their risk, often with a partial pension risk transfer, creating a long-term opportunity for us to help our clients manage their balance sheet risk effectively.
In summary, 2021 was another year of strong top and bottom-line performance, driven by the strength of our Aon United Strategy and Aon Business Services.
We returned nearly $4 billion to shareholders through share repurchase and dividends in 2021.
The success we achieved this year provides continued momentum as we head into 2022.
We believe our disciplined approach to return on invested capital, combined with expected long-term free cash flow growth, will unlock substantial shareholder value creation over the long term.
| q4 revenue rose 4 percent to $3.1 billion.
|
Joining us on the call today are members of the media.
During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that FedEx Corporation desires to take advantage of our safe harbor provisions of the Private Securities Litigation Reform Act.
Joining us on the call today are Raj Subramaniam, president and COO; Mike Lenz, executive vice president and CFO; and Brie Carere, executive VP, chief marketing and communications officer.
And now, Raj will share his views on the quarter.
First and foremost, our thoughts are with those affected by the ongoing violence in Ukraine.
The safety of our team members in Ukraine is our utmost priority, and we are providing them with financial assistance and various resources for support.
We have suspended all services in Ukraine, Russia, and Belarus.
Additionally, we are helping to move relief to Ukraine, and we have provided more than $1.5 million in humanitarian aid.
Execution of our strategies resulted in substantially higher operating income for the quarter as Team FedEx delivered yet another outstanding peak season.
December 2021 was our most profitable December in FedEx history.
Our ability to handle the influx of packages was years in the making as we've taken deliberate steps to enhance our unparalleled network and support of customers large and small.
We have fundamentally changed our performance as we handled increased e-commerce volume during peak and set a new precedent for peak seasons moving forward.
Having said that, we are laser focused on improving our margins.
You'll hear us talk more about this today and then more specifically at our upcoming Investor Day.
Even with the successful execution of peak, the new year brought new challenges, mostly driven by omicron.
This affected our business in two ways: first, we experienced staffing shortages, particularly in our air operations.
In January alone, the absentee rate of our crew due to omicron was over 15%, which caused significant flight disruptions.
domestic and European markets.
Both of those factors resulted in softer-than-expected volume levels, especially in January.
We estimate the effect of omicron-driven volume softness in our Q3 results was approximately $350 million.
While it was significant, it was also temporary, and we have seen volume rebound from January levels.
Even with these challenges, FedEx Express delivered strong adjusted operating income growth of 27% year over year.
Speaking of the Express team, we announced that after nearly 40 years of distinguished service, Don Colleran, president and CEO of FedEx Express, will retire later this year and named Richard Smith, current executive vice president of global support and regional president of Americas at FedEx Express, as a successor.
We'll have much more to say about Don and his countless contributions to the business during our call in June.
FedEx Freight once again delivered strong results with third quarter operating income nearly tripling year over year, driven by a continued focus on revenue quality.
Turning to FedEx Ground.
Operating costs continue to be challenged by the competitive labor environment now primarily manifesting in increased labor rates.
We estimate the total impact of approximately $210 million at ground in the third quarter, which is significantly lower than what we saw in Q1 and Q2 as we have seen substantial improvement in labor availability post peak.
With the stabilization in the labor environment, I'm pleased to share that we have successfully unwound network adjustments that were necessary to provide service but cost inefficiencies.
Staffing levels and the rapid acceleration in labor costs have stabilized and our network is operating at normal levels.
Despite improvement in the labor headwind, volume levels in Q3 were softer than we had previously forecasted, in part due to omicron surge slowing customer demand.
As such, we expect our second half Ground margins will be lower than our previous expectations and not reach double digits.
Over the years, FedEx Ground has built a strong foundation to serve B2B and small and medium customers with an unmatched value proposition.
As a result, we have grown market share in these segments and they remain strong priorities for the future.
And then more than three years ago, we built upon this foundation and embarked on a strategy that positioned FedEx squarely in the center of the fast-growing e-commerce market with a differentiated portfolio and a diversified customer base.
This included a period of strategically investing in our network to meet growing market demand.
Let me note here that this strategy is different than what our primary competitor has pursued.
By building on our current base of business and making those prior investments in our network to facilitate growth, we are in a position to generate improved operating profit and margins.
We saw this potential in our financial results for December prior to the surge of omicron.
And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization, and leveraging technologies that facilitate optimization of our existing physical capacity and staffing.
As we prepare to close fiscal year '22, permit me a moment to share what's on the horizon for FedEx as we continue to focus on margin expansion and shareholder return.
In addition to the opportunity to enhance performance at Ground that I just discussed, we have other levers for profitable growth, which include: number one, driving improved results in Europe; number two, increasing collaboration and efficiency to optimize our networks, lower our cost to serve and enhance return on capital; and number three, unlocking new value through digital innovation.
Of course, we'll do this in an environment of strong revenue quality management.
Our international business, particularly Europe, remains a big profit opportunity.
Air network integration remains on track for the end of the month to complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks, both in the air and on the road.
Paris CDG airport will serve as the main hub for all European and intercontinental flights.
Liege will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth.
Our expanded collaboration across operating companies will utilize our air and ground networks in a smarter and more calculated manner.
For example, FedEx Freight trucks have traveled more than 7 million miles while operating on behalf of FedEx Ground this fiscal year.
FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched more than 36,000 times.
We'll continue to comprehensively look at all our assets in our network to put the right package in the right network and the right cost to serve.
Additionally, we are unlocking value through digital innovation, our accelerated integration of data-driven technologies that will drive increased productivity in our linehaul and dock operations, as well as in the last mile.
Enhanced sortation technology will be operational at FedEx Ground in hundreds of facilities fired as we speak.
It will increase upstream efficiencies, enabling managers to do better balance and planned sortation operations, thereby unlocking key capacity.
For example, during Cyber Week, this technology helped keep 1.9 million ground economy packages out of constrained sorts.
We're also modernizing the planning and staffing of our dock operations, as well as the systems, training, and technology that maximizes productivity on every sort.
One such example is a recently rolled out package handler scheduling technology that will help ensure the right staffing levels for every sort and every facility across the Ground network.
This will improve dock productivity.
And when combined with a focus on employee retention, it will enable us to significantly reduce the cost of turnover and strategically target recruiting spend when and where necessary.
For last mile, we continue to improve upon the route optimization technology already implemented to enable service providers to make real-time decisions that enhance their business' daily efficiency.
These ongoing investments in automation and technology have helped FedEx build the most flexible and responsive network in the industry and will enable us to improve our margins.
In closing, we have the networks, the strategy, and the right team in place as we deliver financial returns and drive shareholder value for years to come.
Several macroeconomic forces, including the tragic conflict in Ukraine, uncertainty around the pandemic, a tight labor market, supply chain disruptions, high energy prices, and inflationary pressure have dampened the current GDP outlook globally and for the United States.
Last week, we lowered our economic outlook.
U.S. GDP is now expected to increase 3.4% in calendar year 2022, revised down from 3.7%, and our outlook is 2.3% in calendar year 2023, with consumer spending tilting toward services and B2B growth supported by inventory rebuilding.
Global GDP growth is expected to be 3.5% in calendar year 2022, previously 4.1% and it will be 3.1% in calendar year 2023.
Growth will be driven by the release of pent-up demand for services while investment demand and inventory restocking support global manufacturing and trade.
Given the tremendous fluidity of the macroeconomic environment, we will continue to update our outlook.
Our teams are ready to adjust plans, as required, to drive margin improvement despite the dynamic environment in which we operate.
With fuel prices increasing around the world, today, we announced a fuel surcharge increase effective April 4 for FedEx Express, Ground, and Freight.
Additional details can be found on fedex.com.
The change in economic outlook does not change our confidence that e-commerce will continue to drive strong parcel market growth.
We believe the e-commerce growth rate in the United States will be in the mid- to high single digits for the next three to four years.
We will continue to build differentiated value propositions to achieve market-leading pricing in all our customer segments, including e-commerce, our small and medium customers and our commercial B2B business.
We are very pleased with the results of our revenue quality strategy and know we have a great opportunity to increase the flow-through to margin expansion.
In the third quarter, revenue growth was 10% year over year, with double-digit yield improvement for FedEx Express and FedEx Freight, close behind with FedEx Ground at 9% year-over-year yield improvement.
In the United States, our package revenue grew 9% in Q3 on strong yield improvement of 10%.
We executed on our peak pricing strategy in the month of December, delivering more than $250 million in peak surcharge revenue.
Softness in parcel volumes came predominantly from constraining FedEx Ground economy and the effects of omicron on both our network and on our customers.
The focus on revenue quality and profitable share growth drove outstanding results for FedEx Freight this quarter.
For the quarter, revenue increased 23% year over year, driven by a 19% increase in revenue per shipment.
Additionally, FedEx Freight Direct continues to gain great momentum as an e-commerce solution for heavy bulky items with phenomenal growth in Q3 year over year.
Our international businesses are navigating a dynamic environment.
Capacity constraints continue to be a reality.
At this point, valet capacity on Trans-Atlantic passenger airlines is expected to recover faster than Trans-Pacific.
Passenger airline capacity is not expected to fully recover to pre-COVID levels until 2024 or even later across our largest global trade lanes.
Scarce capacity on international lanes and strong demand out of Asia is resulting in a continued favorable pricing environment.
With the completion of our integrated air network at the end of this month, we have one European air network and one road network in and out of Europe.
Our international portfolio of services contains the best European road network, the broadest U.S. next-day coverage, and a combined parcel and freight offering that no one else in the market has.
As a result of the integration, we will be able to offer improved transit times, earlier delivery, and later pickup services to more customers and more locations.
Seven new countries will now be connected on a next-day basis within Europe, while 14 countries will be expanding our noon delivery coverage.
In several countries, this will be the first time we have introduced next-day service to the rest of Europe.
We will leverage the expanded European portfolio to improve international profitability, drive revenue growth and gain market share.
In addition to the improvements in our European value proposition, we have made significant strides to enhance our digital solutions as well.
In January, we enhanced our tracking service based on an advanced machine learning and artificial intelligence model developed by FedEx DataWorks.
This new experience delivers greater estimated delivery date accuracy, including updates for early or delayed shipments through all tracking channels.
This improves both the shipper and the recipient experience, and it will reduce calls to customer service.
Additionally, our new modernized FedEx Ship Manager, which is our online shipping application, has now been rolled out in more than 153 countries.
In January, we began introducing customers to it in the United States and Canada.
FedEx Ship Manager is the primary shipping application for our small and medium customer segment.
We believe a market-leading digital portfolio will enable FedEx to continue to take market share in this very profitable segment.
In summary, we remain optimistic about Q4 and beyond, and we'll continue to deliver on our market-leading value proposition.
After a strong start to the third quarter with the most profitable December in company history, January was significantly influenced by the rapid spread of the omicron variant and its negative effect on our operations and the macro environment.
These challenges subsided during February, resulting in third quarter adjusted operating income of $1.5 billion, up 37% year over year on an adjusted basis.
There are a number of factors influencing our third quarter results for both this year and last year that I will cover.
As Raj explained the effects on our operations, I will give further context for the financial implications.
First, labor market conditions, although much improved, once again had a significant effect on our results at an estimated $350 million year over year, which was primarily experienced at Ground.
For the third quarter, that was primarily due to higher rates for both purchase transportation and wages.
Labor availability-driven network inefficiencies were significantly less of a factor in the third quarter compared to earlier in the year.
The implications from the omicron variant surge reduced third quarter operating income by an estimated $350 million, predominantly at Express, as it influenced customer demand and pressured our operations, resulting in constrained capacity, network disruptions and lower volumes and revenue.
The third quarter had favorable year-over-year comparisons for variable compensation of approximately $380 million, including the one-time Express hourly bonus last year and significantly less impactful winter weather that lead it to $310 million.
With that overview of the consolidated results of the third quarter, I'll turn to the highlights for each of our transportation segments.
Ground reported a 10% increase in revenue year over year, with operating income down approximately $60 million and an operating margin at 7.3%.
While pressures from constrained labor markets began subsiding, the effect was still significant at an estimated $210 million year over year, predominantly due to the higher purchase transportation and wage rates.
In addition, our volume was softer than expected due to the omicron variant surge slowing customer demand.
A 9% yield improvement partially offset these headwinds, and our teams remain very focused on improving ground performance, as Raj outlined earlier.
Express adjusted operating income increased by 27% year over year, driven by higher yields and a net fuel benefit, with adjusted operating margin increasing by 100 basis points to 5.8%.
Express results also benefited in the third quarter from $285 million of lower variable compensation, as well as much less severe winter weather.
The strong results were partially offset by the headwinds I mentioned earlier, with the omicron surge having the largest effect, especially during January, of an estimated $240 million.
Team member absences primarily among our pilot severely disrupted operations, requiring many flight cancellations and further constraining capacity.
Additionally, during this time, the omicron surge reduced customer demand in many parts of the world.
Freight had another outstanding quarter, delivering an operating margin of 15%, 850 basis points higher year over year, and revenue for the third quarter increased 23% with operating income up over 180% despite the pressures from higher purchase transportation rates and wages.
And for the first time in Freight's history, they realized sequential operating income and operating margin improvement from the second quarter to the third quarter.
Turning to the balance sheet.
We ended our quarter with $6.1 billion in cash and are targeting over $3 billion in adjusted free cash flow for fiscal 2022.
As I emphasized last quarter, our stronger cash flow provides extensive flexibility as we continue to focus on balanced capital allocation.
As such, I'm pleased to share the accelerated share repurchase program announced last quarter was completed during Q3 with 6.1 million shares delivered under the ASR agreement.
Total repurchases during fiscal '22 are nearly 9 million shares or 3% of the shares outstanding at the beginning of the year.
The decrease in outstanding shares resulting from the ASR benefited third quarter results by $0.06 per diluted share.
Also during the quarter, we made a $250 million, a voluntary contribution to our U.S. pension plan and have funded $500 million year to date.
Now turning to what's ahead.
We are affirming our full year adjusted earnings per share range at $20.50 to $21.50.
The operating and business environment uncertainty I mentioned in December did materialize to a greater degree than anticipated during Q3, but we have navigated those challenges and project a solid finish to our fiscal year.
Labor-related network and efficiency effects have diminished and the wage rate component should become less of a headwind as we lap the onset of labor rate increases in the fourth quarter.
Lastly, variable compensation expense will be a tailwind as it was in Q3.
Turning to capital spending.
We have lowered our FY '22 capital-spending forecast from $7.2 billion to $7 billion.
Much of the change is driven by extended timelines resulting from supply chain considerations.
While we are still developing our FY '23 plans, our focus remains on lowering our capital intensity while investing in strategic initiatives to drive returns.
We are highly focused on ensuring our capital investments generate returns to drive further growth in earnings and cash flows.
Lastly, our projection for the full year effective tax rate is now 22% to 23%, prior to the mark-to-market retirement plan adjustments.
While we are confident in our ability to deliver a strong fourth quarter, uncertainty remains across many fronts, including additional pandemic developments, the labor market, inflation, high energy prices and further geopolitical risk, and the potential effects on the pace and timing of global economic activity.
We continue to monitor these trends and adjust accordingly.
With that, we are all very much looking forward to sharing additional background in our upcoming investor meeting on June 28 and 29 in Memphis.
| q3 operating income improved due to higher revenue per shipment and a net fuel benefit at all transportation segments.
sees fy earnings per share $20.50 to $21.50 before (year-end mtm retirement plans accounting adjustment, and excluding some costs.
sees fy capital spending of $7.0 billion, compared to prior forecast of $7.2 billion.
qtrly results were partially offset by effects of omicron variant, as well as higher purchased transportation costs and wage rates.
strong quarterly operating income increase was dampened by surge of omicron variant.
|
First, I hope you're all safe and healthy in light of the current challenges.
, we continue to control what we can control, and to make the health and well-being of our teams, our customers and the communities we serve, our highest priority.
Fortunately, with good planning and careful execution, we have been able to protect our people effectively.
I'm very pleased to report that our team continues to excel in this environment.
At times like these resilience, the ability to adapt, fast decision making and strong execution are proving critical to win and our team has exhibited every one of these trades at every turn.
This crisis continues to test us all and now with second waves in multiple places, it is clear that we are not running a sprint by the Marathon.
We continue to stay focused on servicing our customers well; managing our cost structure tightly; optimizing margins and controlling our inventories balance sheet and liquidity.
You are doing a great job and you make us very proud.
I will now spend a few minutes on our results for the third quarter and then I will touch on how we are approaching the holiday selling season.
After that I will comment on our strategic business planning process and highlight key accomplishments for the period.
I'm pleased to report that we had a very good third quarter where we exceeded our top line expectations and delivered a very strong bottom line, reporting adjusted earnings per share of $0.58 versus $0.22 last year.
In the quarter, we more than doubled our adjusted operating profit and achieved an adjusted operating margin of 9.7%, which represents a 600 basis points expansion versus last year.
It's worth noting that we delivered strong earnings on an 8% decrease in revenues for the period.
In a very challenging environment, we achieved very solid gross margin performance and deliver healthy operating margin expansion in most of our businesses.
The most significant improvement was driven by our business in Europe, which benefited from increased wholesale revenues.
We enable the increased revenues when we elongated the fall winter season shipping window and canceled the development of the pre-spring-summer line.
This proved to be a great strategy and represented a revenue increase in the period for Europe of about $50 million.
Total Q3 revenues for Europe increased 16% and operating profit exceeded $51 million delivering a margin expansion of 900 basis points for the period.
As we continue to focus on key product categories that represent the foundation of our business for women's and men's.
During the quarter essentials, active wear, denim, accessories and shoes outperform the overall business.
We managed our balance sheet well and ended the period with cash and equivalents of $365 million and inventories 24% below last year's levels.
As we look into the holiday season, we believe that we are well positioned with our product; our marketing plans and our teams preparedness across the globe.
Let me give you some color of what we are experiencing in our business now and then Katie will quantify the financial impact of each factor.
Starting with retail, customer traffic into our stores continues to be challenged by the pandemic, especially during traditionally high traffic periods like Black Friday.
That said those customers coming into the stores have a higher intention to purchase and this has consistently resulted in higher conversion rates.
Temporary government mandated shutdowns are also impacting several markets, especially in Europe and Canada, where we have significant businesses.
We are pleased to see that our e-commerce business is accelerating, partially offsetting the negative store trends.
Regarding our wholesale business in Europe, as I mentioned, we made the decision to cancel the development of the pre-spring-summer line to consolidate the development of spring-summer products into one main collection versus two in the past.
This change will result in a smaller percentage of the shipments of that main collection occurring in the fourth quarter, that compared to last year.
With the majority of the shipments to be completed in Q1 of next year.
In connection with this, we recently closed the spring-summer sales campaign, which delivered orders that were only slightly below the two collections combined in the previous year.
This results exceeded our expectations and demonstrate the great momentum that the brand is enjoying with our wholesale customers across Europe.
I believe that many of our wholesale customers are concentrating their price within fewer, stronger, highly reliable brands and we are clearly one of those preferred brands.
So we are getting a bigger share of their base.
We continue to plan our business based on expected demand and size, our inventories and expenses accordingly.
We are confident in our assortments and our product ownership and have been pleased to see that the level of promotional activity in the marketplace remains moderate.
As we said in our previous call, we are in the process of updating our strategic business plan and we will schedule an event to share our plan at a later date.
Let me just confirm today that we still believe that the opportunities we had identified to expand operating margins by 500 basis points are still intact.
For now, I will update you on the progress that we are making on some of our key initiatives and how we are leveraging the crisis to accelerate change.
I will speak specifically about the elevation of our brand, our customer centricity initiative and our organizational development strategy.
Elevating the customers' perception of our brand starts with our product; product in our business has always been and continues to be king; offering a consistent line of product across all markets is a very ambitious goal when you have a global presence that reaches nearly 100 countries.
I am thrilled to report that for the first time ever, we now have one global line of products across all categories; including women's and men's apparel, at leisure, lingerie, all accessories including handbags, footwear, kids MARCIANO for women's and men's and jewelry.
Having one global line will enable us to represent our Guess?
brand consistently across all markets and significantly reduce product development costs throughout our supply chain.
Hundreds of starts per season, which in the past were developed in each region and now represented by one common line for all markets.
Just as an example, the new line development for the next pre-fall/winter season for Guess?
apparel resulted in a style reduction of 38% and this is after expanding the offering with multiple colors per stall, for e-commerce that represented a 7% increase of product choices online.
I think that Paul and the product teams in all of our regions did an incredible job to make this happen.
It took strong vision, tremendous courage and great teamwork to achieve this, and deliver a line of product that can serve all global markets effectively.
To elevate the brand takes a strong commitment to raise the quality of everything we do.
This commitment starts with the quality of our products.
In order to accomplish this, we reviewed every product, challenge the styling, Guess?
DNA alignment, the quality and sustainability of full [Phonetic] fabrics and materials; make and fit; perceived value and price.
Today, we have a line that speaks to a larger audience with consistent stalling between genders solidly grounded in the Guess?
DNA, offering a strong point of view on differentiation in the marketplace.
We have beautiful products offering our customers tremendous value for the price and quality of each item.
I strongly believe that our product strategy will contribute to profitable market share gains.
We continue to make great progress with our sustainability goals.
In fact PR News recently named Guess?
the winner for best sustainability CSR Report 2020.
We were honored to be recognized alongside iconic global brands like PepsiCo and Johnson & Johnson.
Our commitment to elevate the quality of everything we do is also impacting other areas of the business; including the customer experience in stores, our websites, digital media and marketing campaigns.
The focus assortments and boutique feeling that you experience when you walk into our stores now represent a stark contrast to what we had a year ago.
I just visited stores in Italy a few weeks ago, I was very impressed with the overall experience.
As an example for next summer in Europe, we planned an SKU reduction in stores of about 35% and then SKU expansion online of 9%.
We planned to run the business with an omnichannel customer focus, regardless of where the customer chooses to shop and engage with our brand.
Our goal is to leverage our entire assortment and inventory ownership with omnichannel capabilities; such as buy online, ship from store or buying store from our larger assortment online and ship from the e-commerce warehouse.
These capabilities are available in the Americas today and will be fully implemented in Europe next year.
Next is our initiative about customer centricity, which we introduced last year.
As you know since the pandemic began, we have been working hard to accelerate the implementation of our plan.
We are pleased to report that we have completed the implementation of the salesforce platform in the US and Canada and all over Europe except for Russia, which is scheduled for next February.
We are very pleased with the speed and overall performance of the platform and are confident it enables a significantly faster and improved customer experience, better conversion and engagement and it will contribute to significant growth of our digital business.
We also made significant progress with our Customer 360 project.
This suite has also been developed by salesforce and is an integrated tool to optimize customer data capture, journey engagement, personalized marketing and results analysis.
We have already implemented the customer service and marketing cloud solutions, which are part of the suite and we are currently working on the social studio obligation.
We plan to complete the full implementation of the Customer 360 solution by the end of next year.
The third initiative relates to our global organizational development strategy.
We plan to optimize performance management and accountabilities.
We'll be eliminating redundancies across our global organization, leveraging technology to do a lot more with less in every area of our operation.
Our goal is to complete the implementation of this project by the end of next year as well.
In closing, since Guess?
started 40 years ago, the company has always adapted its business very effectively to the challenges presented by the market, the environment and new customer preferences.
Throughout its entire history, this company has evolved successfully time and time again.
I strongly believe that today presents our company with yet another opportunity to transform our business and increase our earnings power.
I also believe that we have the team to accomplish this and I look forward to the years of growth to come.
With that, let me pass it to Katie.
So today is my one-year anniversary at Guess?
, exactly a year ago we were presenting our strategic business plan to you, little did I know then that we were going to have the year that would follow.
Today, I am very proud to report our results for the third quarter, which I believe demonstrate the power of agile planning and solid execution.
In the midst of a very challenging environment, we delivered substantial sequential improvement in sales, exceeding our expectations, significantly expanded operating margins and tightly managed inventory and working capital.
We are extremely happy with our liquidity position, which is especially strong given the extraordinary circumstances that we have faced so far this year.
This is evidence that we've been able to adjust our cost structure and capital spending to partially offset the deceleration in demand that our industry has experienced throughout the pandemic.
But as importantly as knowing what the cut is knowing when and where to invest to fuel future growth in the company, while maintaining liquidity and profitability.
We continue to support our efforts in digital and omnichannel initiatives, as well as investments to support long-term cost savings.
And we continue to return value to our shareholders.
Our Board has approved the payment of the cash dividend again this quarter.
As I said, last time we spoke, our long-term capital allocation strategy has not changed.
Now, let me take you through some of the details on our performance for the quarter.
Let's start with sales.
Third quarter revenues were $569 million, down 8% in US dollars and 10% in constant currency.
The biggest driver in our improvement versus last quarter was wholesale in Europe, which was up 39% in constant currency versus last year.
As Carlos mentioned, we elongated the fall/winter season shipping window and canceled the development of the pre-spring/summer line, which resulted in higher revenues this quarter versus last year.
In retail store comps in the US and Canada were down 23% in constant currency in line with Q2 as momentum in the US was offset by softening in Canada, due to traffic declines as a result of the pandemic.
Europe and Asia, both showed an improvement in store sales this quarter.
Store comps were down 18% in Europe in constant currency, we have strong momentum was tempered in the last week of the quarter by shutdowns, due to the second wave of the pandemic.
Store comps were down 17% in Asia in constant currency, driven by strengthening in China and Korea.
Across the globe, we continue to see traffic declines, partially offset by significantly higher conversion with our tourist-centric stores experiencing a tougher recovery.
Our e-commerce business in North America and Europe was up 19% for the quarter, an improvement from up 9% in Q2, driven by momentum in Europe.
Our Americas wholesale business was down 34% in constant currency, still under pressure from the deceleration in demand, but improving each quarter.
Licensing revenues also improved versus Q2, down 12% in Q3.
Gross margin for the quarter was 42.1%, 480 basis points higher than prior year.
Our product margin increased by 200 basis points this quarter, primarily as a result of higher IMU, as well as lower promotions.
Occupancy rate decreased 280 basis points as a result of business mix and rent relief.
This quarter we booked roughly $8 million in rent credits for fully negotiated rent relief deals, mostly in Europe.
We continue discussions with our landlords and we'll realize any additional credits as the negotiations are finalized and signed.
Adjusted SG&A for the quarter was $184 million, compared to $206 million in the prior year, a decrease of $22 million.
We continue to benefit from changes to our expense structure particularly more streamline hourly labor-staffing at the store level, corporate headcount and travel reductions and lower professional fees.
In addition, there were some one-time benefits from government subsidies and decreased advertising in the period versus last year, but these were offset by higher variable costs associated with wholesale shipments.
Adjusted operating profit for the third quarter was $55 million, a 140% more than the operating profit in Q3 last year of $23 million.
Our third quarter adjusted tax rate was 16%, down from 24% last year, driven by the mix of statutory earnings.
Inventories were $393 million, down 24% in US dollars and 25% in constant currency versus last year.
We ended the third quarter with $365 million in cash versus $110 million in the prior year, and we had an incremental $260 million in borrowing capacity.
Capital expenditures for the first nine months of the year were $12 million, significantly lower than what we spent in the same period of the prior year.
Free cash flow for the first nine months of the year was an inflow of $83 million, an increase of $162 million versus an outflow of $79 million last year.
This year we benefited from lower capital expenditures, extended payment terms with our vendors and unpaid rent to landlords while we finalize negotiations.
In addition, last year's outflow included the non-recurring payment of the $46 million European Commission fine.
Given the continued level of uncertainty in the current environment, we are not going to provide formal guidance.
However, let me walk you through how we are thinking about the fourth quarter.
We expect fourth quarter revenues to be down in the low to mid-20s to prior year.
As Carlos mentioned, there are three main factors driving this decrease.
As the pandemic persist worldwide, we expect the continued pressure on customer traffic to negatively impact store sales.
At the same time, the momentum in our e-commerce business will partially offset this decline.
We expect the net effect of these two trends to represent approximately half of the revenue decline in the fourth quarter.
Our businesses in Europe and Canada are currently being impacted by government mandated store closures.
Well, at the height of the closures in November, we had over 200 stores closed, more than half of these have reopened and we expect further openings in the coming days.
These temporary closures, as well as some permanent closures are expected to represent a quarter of the decline.
The last quarter of the revenue decrease is a result of the shift of wholesale shipments in Europe for the spring/summer collection into next year.
In terms of profit, gross margin in the fourth quarter is expected to be slightly down to last year, as IMU improvement is expected to be more than offset by deleverage on lower sales.
Given the expected level of revenue, the seasonality of our business, as well as the mix, we expect SG&A as a percent of sales to delever by approximately 400 basis points versus the prior year.
In closing, I am very pleased with how our company continues to navigate this crisis.
We have proven that our brand is relevant and resilient.
We continue to showcase our team's ability to manage the business through a very fluid situation.
And while we realize that our path to growth may not be linear over the next few months given the uncertainty around the global health crisis, we are as confident as ever in our long-term strategic initiatives.
| compname reports q3 adjusted earnings per share $0.58.
q3 adjusted earnings per share $0.58.
not providing detailed guidance for q4 or full fiscal year ending january 30, 2021.
qtrly asia retail comp sales including e-commerce decreased 15% in u.s. dollars and 18% in constant currency.
expect revenues in q4 of fiscal 2021 to be down in low to mid-twenties.
during q3, continued to experience lower net revenue compared to same prior-year period as it remained challenged by lower demand.
|
As we have done on our past calls, we'll be taking questions at the end of Craig's comments.
We will start on page 3 with recent highlights and first I'd just say we had a terrific quarter and we're significantly increasing our full year guidance as you saw.
Our teams have just done an outstanding job of managing through this dynamic market environment, which is reflected in our strong results.
Q1 adjusted earnings per share of $1.44 were solid 15% percent increase year-over-year and 18% above the midpoint of our guidance.
Our Q1 revenues of $4.7 billion were up 0.5% organically, which was well above the high end of our guidance range of down 3%.
This outperformance was driven primarily by the two electrical segments as well as our vehicle business.
We also posted a Q1 record for segment margins of 17.7%.
And looking at our incrementals, we generated $73 million of higher profits despite having $97 million of lower revenues.
This was the result of we'd say strong execution, ongoing improvements in the cost structure from the multi-year restructuring program that we announced in the second quarter of 2020 as well as closely managing price and inflation in the quarter.
Our cash flow was also very strong.
Our adjusted operating cash flow increased by 42% and our adjusted free cash flow increased by 62%.
And we had another successful quarter of M&A, closing three deals.
We're also making good progress toward the closure of the previously announced acquisition of Cobham Mission Systems as well as the divestiture of Hydraulics.
And finally, we recently announced the agreement to acquire 50% of Jiangsu YiNeng meaning electric's busway business in China, an important part of our growth strategy for the Asia Pacific region.
Having been quite busy on the M&A front, we thought it'd be helpful to provide a summary of these three recent deals.
We covered Tripp Lite and Cobham Mission Systems acquisitions in some depth on the investor meetings, but each of these three deals here certainly advanced our strategic growth objectives and our electrical business.
First, Green Motion, based in Switzerland, it expands our capabilities in the electrical charging market where we expect to see significant growth over the next decade linked to energy transition.
Their proven charter designs and advanced power management capabilities, billing software are valuable additions to our existing energy storage and power distribution offerings that support our view of everything as a grid.
We also closed our previously announced investment in HuanYu.
HuanYu is based in China and provides a strong portfolio of products that will open up significant growth opportunities in our business throughout Asia Pacific.
They make cost-effective circuit breakers and contactors and that give us access to Tier 2 and Tier 3 markets in Asia Pacific.
And finally, last week we were pleased to announce the agreement to acquire 50% of Jiangsu YiNeng electric busway business in China.
YiNeng's strong busway capabilities in China combined with YiNeng's broad portfolio of products will really position us well to participate in the high growth data center, industrial and high-end commercial segments and allowing us to pull through related electrical products.
The HuanYu and YiNeng transactions, I'd also add, significantly expand our addressable market in China and in Asia Pacific, certainly allowing us to accelerate our growth rate in the region.
Moving to page 5, we summarize our Q1 financial results and I'll just note a couple of points here.
First, acquisitions increased sales by 1% but this was more than offset by the divestiture of Lighting which reduced sales by 5.5%.
You'll recall that we sold the Lighting business in March of 2020.
Second, segment margins of $831 million were 10% above prior year and this is despite a 2% decline in total revenue.
This is largely the result that I'd say of solid execution, restructuring savings and really our ability to effectively manage price and inflation during the quarter.
We expect the inflation impact to worsen certainly in Q2, but we will more than fully offset this for the full year.
And lastly, our adjusted earnings of 577 million, up 12% and when combined with our lower share count, we delivered a 15% increase in our adjusted EPS.
Turning to page 6, you see the results for our Electrical Americas segment.
Revenues were up 2% organically driven by strength in data centers, residential and utility markets which offset weakness in industrial and commercial markets.
The acquisition of Tripp Lite and PDI added 2% of revenues while the divestiture of Lighting reduced revenues by 14%.
Operating margins, as you can see, increased sharply, up 330 basis points to 20.5%, a quarterly record.
And as you can see, profits were $24 million higher on significantly lower revenues.
These results once again were driven by good execution, cost savings and really favorable mix due to the divestiture of Lighting.
We're also pleased with the 11% orders growth in the quarter.
This was driven by once again strength in data center and residential markets.
Our backlog was actually up 23% versus last year and due to ongoing strength in once again data center and residential markets.
We were also encouraged to see some very large orders in select commercial markets, perhaps a sign here that these markets too are beginning to turn positive.
And while it's difficult to judge, we do think the order strength could have been due to some concern about some of the supply chain shortages that you certainly have been reading about.
Next on page 7, we show the results for our Electrical Global segment.
We posted a 5% organic growth with 5% favorable impact from currency largely due to the weaker dollar.
Organic revenue growth was driven by strength in data centers, residential and utility markets, you can see the pattern here.
We also delivered 250 basis point increase in operating margins and posted a new Q1 record of 17%.
Our incremental margins in the segment were also strong, more than 40% and were also driven by good cost control measures, saving from actions taken from our multi-year restructuring program.
Orders grew 7% in the quarter, and like sales, the primary contributors to the growth came from data centers, residential and utility markets.
And I say dragged down by the earlier COVID-related declines, orders declined 12% -- 5% on a rolling 12 month basis.
And lastly here, our backlog was up 17% versus last year, driven by the same three end markets.
Moving to page 8, we summarize our Hydraulics segment.
Revenues increased 11% with strong 9% organic growth and 2% positive currency impact.
Operating margin stepped up significantly to 15%, a 420 basis point improvement over last year.
And our Q1 orders were also very strong, up 53% driven primarily by strength in mobile equipment markets.
As we anticipated, Danfoss did receive conditional regulatory approval from the EU to acquired the Hydraulics business, which is an important step in the process and this sale is still expected to close in the second quarter here.
Turning to page 9, we have the financial results for our Aerospace segment.
Revenues were down 24%, including 26% organic decline driven by the continued downturn in commercial aviation.
Currency, as you can see, added 2% to revenues.
And as you can also see, operating margins were down 310 basis points to 18.5%, down, but still at very attractive levels overall.
Our team, I give them a lot of credit, they moved quickly to flex the business and we're able to really deliver better than normal decrementals margins of approximately 30%.
Orders were down 36% on a rolling 12-month basis, once again due to the ongoing downturn in commercial aerospace markets.
However, I would add on a sequential basis, we are starting to see some improvement as orders were up 14% from Q4.
And lastly, our previously announced acquisition of Cobham Mission Systems remains on track and we expect the transaction to close at the beginning of Q4 2021, this year.
Next on page 10, we show the results of our Vehicle segment.
As you can see, revenues increased 9% and were much stronger than anticipated.
The strongest growth came from global commercial vehicle markets and from the Chinese light vehicle market.
Just is a point of reference here, NAFTA Class 8 production was up some 12%.
Operating margins also improved significantly here to 17.3%, another quarterly record and a 380 basis point increase with incremental margins of nearly 60%.
The strong margin performance was driven certainly by increased volume and also from savings from the multi-year restructuring program that we've undertaken.
And despite volumes that were still below pre-pandemic levels, this business is approaching our target segment margins of 18%.
So making very strong progress in our Vehicle segment.
And one additional noteworthy development in this segment was the introduction of the new automated transmissions for the heavy-duty truck market in China through our Eaton-Cummins JV.
This product, I'd say, is already getting great traction and seeing strong growth in the market.
Turning to page 11, we summarize our eMobility segment.
Here, revenues increased 15%, 13% organic and 2% from currency.
We experienced solid growth in global vehicle markets, which was driven here both by high and low voltage products.
Operating margins were a negative 8.4% as we continued to invest heavily in R&D.
And as I've reported in the past, we continue to manage I'd say a really robust pipeline of opportunities.
Of note, in Q1 we secured a multi-year agreement with a leading global automotive customer to buy our next-generation brake -- circuit protection technology for battery electric vehicles.
This award represents $33 million in material revenue sales and we hope to be awarded additional vehicle platforms using the same technology.
This win, I would say, it really does highlight the strength of our electrical pedigree and now we're able to leverage the strength to grow in the eMobility market.
And on slide 12, we've updated our organic revenue guidance for the year.
As you can see, we're significantly increasing our organic revenue growth for the year with our strong Q1 results.
We're optimistic about the remainder of 2021.
Our strong order book and growing backlog persist that markets and market demand is really increasing and improving across most of our end markets.
We now expect overall Eaton organic growth to be up 7% to 9% and this is up from 4% to 6% previously.
And while we're experiencing some supply chain issues, we have confidence in our team's ability to manage through these temporary challenges.
As you can see, we've kept our forecast for Aerospace unchanged.
Vehicle has increased by 600 basis points.
Electrical Global has increased by 400 basis points and all other segments have increased by 300 basis points.
Encouragingly, I'd say here about our Electrical segment, we're seeing higher than expected demand across all of our markets with the exception of utility and that market remains in line with our original outlook which was for mid single-digit growth.
So really strong performance in the Electrical segment.
Moving to page 13, we show our updated segment margin guidance for the year where we're also significantly increasing our guidance.
For Eaton overall, we're increasing segment margins by 50 basis points at the midpoint with a range of 17.8% to 18.3% and we've raised our margin guidance in each of our segments with the exception of Aerospace and eMobility which are unchanged.
Compared with our original guidance, we expect to deliver better incremental margins for sure on this higher volume.
I'd also note that for the full year, we continue to expect net price versus inflation to be neutral.
And on page 14, we have the balance of our 2021 guidance.
We're raising our full year adjusted earnings per share by $0.50 to $5.90 to $6.30, a midpoint of $6.10 and this is a 9% increase over our prior guidance and a 24% increase over 2020.
With our recent M&A activities, we now expect a net 4% headwind from acquisitions and divestitures, down from our prior outlook of 8%.
I'd say it's also worth noting here that our segment margin guidance of 18.1% to 18.5% is 190 basis point increase at the midpoint over 2020 and will be an all-time record.
It's also, just as a point of reference, above our pre-pandemic margins of 17.6% which we posted in 2019, which was also an all-time record.
So we're off to a strong start and I'd say well on our way to achieve our longer-term target of getting to 21% segment margins.
The remaining components of our full-year 2021 guidance remain unchanged.
And lastly for Q2, our guidance is as follows.
We expect to be between $1.45 and $1.55 on earnings for organic revenue to be up 24% to 28% and for segment margins to come in between 17.5% and 17.9%.
And if I could, just finally, on page 15, I'll wrap up with a kind of high-level summary of why we think Eaton remains an attractive long-term investment and I begin with first, our intelligent power management strategy really does position us to capitalize on these key secular growth trends that we've talked about for the last couple of years, electrification, energy transition and digitalization.
And we're gaining traction here in all of these areas with a number of new wins.
Our technology solutions, including our Brightlayer platform are being well received by customers.
As a result, we continue to expect higher than historical organic growth rate for the company over the next five years.
We're reaffirming our view that 4% to 6% outlook looks very much in hand.
This accelerated growth plus our, what I call, proven ability to deliver margin expansion will allow us to deliver on average 11% to 13% earnings per share growth per year over the next five years.
We will also continue to deliver very strong free cash flow, which provides the optionality to invest in organic growth, to add strategic acquisitions and to return cash to shareholders.
And our commitment to ESG remains strong.
We will continue to develop sustainable solutions for our customers, for our own businesses and then certainly for the environment that we all share.
Given our time constraint at only an hour today, really appreciate if you guys can limit your opportunity to just one question and a follow-up.
| eaton corp q1 operating profit rose 8% to $332 mln.
q1 operating profit rose 8 percent to 332 million usd.
quarterly adjusted earnings per share $1.44.
compname says raising adjusted earnings per share guidance for 2021 to $6.10 at midpoint, up 24 percent over 2020.
|
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.
A reconciliation of these items to U.S. GAAP can be found in the quarterly earnings section of our investor relations website.
Our results once again beat expectations this quarter, with comparable sales up 5% for the total company and 5.1% for the U.S. on top of over 28% growth last year.
on a two-year basis.
These results capped of outstanding financial results for fiscal 2021 with sales of $96.3 billion, up 6.9% on a comparable basis and earnings per share of $12.04, up 36% on an adjusted basis.
With these outstanding results, 100% of our stores earned a quarterly Winning Together profit-sharing bonus.
This $94 million payout is $24 million above the target payment level.
And in recognition for their hard work throughout the pandemic in 2021, we are awarding an incremental discretionary bonus of $265 million to our frontline associates.
Altogether, we rewarded our frontline associates with bonuses of over $350 million in the fourth quarter.
As Joe will discuss later in the call, financial support of our frontline associates is consistent with our commitment to being an employer of choice in the retail industry.
Our Total Home strategy continues to gain momentum, as we grow our share of wallet with both Pro and DIY as they increasingly rely on Lowe's as a one-stop solution for all their project needs.
In looking at our results this quarter, I'm particularly encouraged that our growth was broad based and balanced across product categories, across both DIY and Pro, both online and in-store.
In Pro, we delivered growth of 23% and 54% on a two-year basis.
And we are building on our momentum with the Pro with the launch of our new Pro loyalty program, MVPs Pro Rewards and Partnership Program.
We redesigned our loyalty program based on feedback from our Pro customers who expressed a desire for a business partnership rather than a series of stand-alone transactions.
Our data shows that Pros who leverage our loyalty and credit offering spend 300% more than Pros not engaged in these programs.
Our Pro business is off to a strong start this year, and we're excited about the national launch of our MVPs Pro loyalty program.
I look forward to providing updates on this critical initiative throughout the year.
Now turning to our DIY customer, where we delivered growth on top of exceptionally strong demand last year.
Later in the call, Bill will discuss how we continue to grow our DIY market share by elevating our private brands product assortments in our home decor category.
On Lowes.com, sales grew 11.5% on top of 121% growth in the fourth quarter of 2020, which represents a two-year comp of 147% and nearly 11% sales penetration.
Our intuitive online shopping experience and expanded on-trend assortments are resonating with our customers.
And while we're pleased that our online sales have more than doubled over the past two years, we still have tremendous growth opportunity in front of us.
And as part of our efforts to enhance our omnichannel experience, we are expanding our same-day and next-day fulfillment capabilities.
With that in mind, we're actively piloting several gig network solutions, including partnering with Instacart in several markets with same-day DIY home delivery.
And building on the success we gained in the Florida and Ohio Valley regions with our market delivery strategy, we completed the conversion of our third geographic area, the Carolina region, during the fourth quarter.
By way of reminder, in the market-based delivery model, big and bulky products flow from our supply chain directly to customers' homes.
This replaces the highly inefficient store delivery model where each store acts as its own distribution and transportation center for these products.
As we continue to expand our market-based delivery model, we're freeing up space in our 10,000 square foot store back rooms, which on average are considerably larger than our competition.
And we are testing out different options to drive both greater in-store fulfillment and expanded delivery alternatives for both Pro and DIY customers.
In a few minutes, Bill will discuss our continued investments in online as we create a best-in-class integrated omnichannel shopping experience.
During the quarter, operating margin expanded approximately 115 basis points, leading to diluted earnings per share of $1.78, which is a 34% increase as compared to adjusted diluted earnings per share in the prior year.
These results reflect our disciplined focus on driving operating leverage through our perpetual productivity improvement initiatives or PPI, as well as the ongoing benefits of our new pricing strategies.
Joe and Dave will discuss these initiatives in further detail later in the call.
The Canadian leadership team continues to drive productivity through proven technology and processes that have delivered great results in the U.S. Before I close, I'd like to share my perspective on the home improvement market, as well as our opportunity to continue to win share.
Our outlook for the home improvement industry remains strong, supported by a very healthy consumer balance sheet, especially for homeowners and continuing home price appreciation.
Persistent solid demand for homes despite an uptick in interest rates is also expected to support residential investment.
In fact, we're encouraged by the strengthening millennial household formation trends that will support home buying in the coming years.
Other trends remain favorable, including baby boomers' increasing preference to-age-in-place.
And with the extension of remote work for some employees, we're expecting a permanent step-up in repair and maintenance cycle.
are over 40 years old and will continue to require investments for upkeep and approximately two-thirds of Lowe's annual sales are generated from repair and maintenance activity.
Therefore, we're encouraged that the macro environment for home improvement remains very supportive.
As we close the year, we continue to give back to the communities where we operate, with total donations of $100 million in 2021 well over our pre-pandemic levels.
And we're pleased that our efforts to enhance our brand reputation while supporting our associates and driving long-term value for our shareholders and was recently recognized by Fortune Magazine as they named Lowe's the No.
1 most admired specialty retailer for the second year in a row.
This is the first time in our history that we received this recognition in back-to-back years.
In closing, I'd like to extend my heartfelt appreciation to our frontline associates.
As I travel the country every week visiting stores, I continue to be struck by their commitment to supporting our communities while providing excellent customer service.
In the fourth quarter, U.S. comparable sales increased 5.1% and 35.2% on a two-year basis.
We delivered positive comps in all three merchandising divisions in the quarter with growth across Pro and DIY customers.
Growth was well balanced with 12 of 15 merchandising departments comping positive and was broad-based on a two-year basis with all 15 departments up more than 18% in that time frame.
Beginning with our Home Decor merchandising division, flooring and appliances delivered the strongest comps in the quarter.
In flooring, vinyl flooring once again led the way as we continue to see consumer preference shifting toward this affordable and stylish solution.
Lowe's already offers a wide selection of vinyl flooring products, including several Pergo WetProtect options.
And this year, we look forward to extending our own trusted STAINMASTER brand with its high performance characteristics and lifetime stain-resistant warranty across a full range of flooring products, including laminate, tile and vinyl.
Within appliances, sales of ranges, cooktops, along with dishwashers were the strongest in the quarter.
As we continue to extend our private brand offering, we recently launched Origin 21 across several product categories in home decor.
This is our new modern brand designed for the trend-setting millennial consumer, while our ever popular Allen + Roth brand is tailored to the more traditional style.
Now, turning to our performance in hardlines.
The team delivered an exceptional holiday season.
Customers were active early and shopped often in our trim and tree category, which drove excellent sell-through in this holiday category.
Seasonal, outdoor living and lawn and garden delivered standout performances, as customers continue to enhance their outdoor living spaces with new grills, patio heaters, fire pits, as well as live goods for the yards and garden.
With the home serving as a center for entertainment, our customers are making the most of their homes, inside and out.
We continue to build on our No.
1 position in outdoor power equipment with further share gains in battery outdoor power equipment, as we drove over 37% growth in this area for the quarter and over 118% on a two-year basis.
Both DIY and Pro customers enjoy the convenience, reliability and the power of our innovative battery-powered products available in the EGO, Kobalt, CRAFTSMAN and Skill brands.
In this spring, we are thrilled to expand our exclusive lineup of EGO battery products with their new 52-inch zero-turn riding mower with features that include a fabricated deck and power to mow up to four acres on a single charge.
Also new for EGO is the industry's most powerful handheld battery-powered blower with power that will outperform the leading gas blower with 765 cubic feet per minute of blowing capacity.
These new products will complement our existing lineup and assortments from powerful brands, such as John Deere, Honda, Husqvarna, Aaron's and CRAFTSMAN.
This spring, we will launch our new Origin 21 patio collections, as well as our new style selection replacement cushions.
These cushions are made with 100% recycled plastic bottles and they are fade-resistant, UV-protected as well as easy to clean.
Now turning to the building products division.
Our comps were very strong driven by broad-based balanced growth across lumber, electrical, rough plumbing, millwork and building materials.
We are pleased with the continued momentum we are building with the Pro as we work to expand our brand and product offerings to meet their project needs.
New this year will be a full range of CertainTeed roofing, insulation and gypsum products.
As a leading manufacturer of building products for both residential and commercial construction, CertainTeed is an important strategic partner that we are proud to add to Lowe's as we continue to enhance our Pro offering in the building materials category.
We also continue to build out our Pro power tool program with the introduction of the new DEWALT power stack battery technology, which is the smallest and most energy-densed battery pack on the market.
These new products and new brands are strong additions to our Pro brand arsenal, which already includes other great brands like Bosch, Eaton, Estwing, FastenMaster, FLEX, GRK, ITW, LESCO, Little Giant, Lufkin, Mansfield, Marshalltown, Metabo, SharkBite, Simpson Strong-Tie, SPAX, Spyder and Werner.
As Marvin mentioned, we delivered sales growth of 11.5% in the quarter and 147% on a two-year basis in the fourth quarter.
We are focused on further enhancing our omnichannel capabilities in 2022 across three key areas: expanding our online assortment, enhancing the user experience and improving fulfillment.
First, we are expanding our Lowes.com assortment to meet our customers' design and lifestyle needs.
For example, within Lowe's Livable Home products, we will offer a range of products to help our customers adapt to their changing mobility needs.
At the same time, we will continue to enhance the user experience with continued upgrades to the visualization and configuration tools, like kitchen visualizer and measure your space.
Finally, as we continue to improve our fulfillment capabilities, our customers can now track their appliance delivery in real time, and we will soon be leveraging enhanced technology to further streamline the buy online, pick-up in store experience for our customers through an improved store execution process.
As we look ahead to spring, we are well positioned to capitalize on what we expect to be another strong spring season.
Consistent with our approach over the past year, we have worked hard to land our spring product early.
Through an expansion of our network of coastal holding facilities, we are better able to manage the flow of imported product enabling us to quickly flow product where needed as spring arrives across the country.
As one of the largest importers in the U.S., we continue to leverage our scale and carrier relationships to secure capacity and work to mitigate and manage the impact of cost increases across our supply chain.
Before I close, I'd like to extend my appreciation to our merchants and inventory and supply chain teams, along with our vendors for their hard work and continued support.
In recognition of their outstanding efforts, we awarded the discretionary year-end bonus of $6,000 for assistant store managers, $1,000 for department supervisors, $800 for full-time hourly associates and $400 for part-time hourly associates.
As Marvin mentioned, the combination of Winning Together and this discretionary year-end bonus will result in a payout of over $350 million for our frontline associates this quarter.
As someone who started his career in home improvement as an hourly associate, I understand how meaningful this type of financial recognition is for our hourly associates.
At Lowe's, our people are truly our most valuable asset.
When it comes to recruiting and retaining top talent, we strive to be an employer of choice.
From the moment that a candidate applies for a position at Lowe's, we are committed to creating a positive impression.
We have invested in leading technology that accelerates the hiring process, so that we are processing applications in a matter of minutes rather than the weeks that the manual process required as recently as last year.
We also continue to improve our onboarding process so that our new hires can quickly come up to speed, leveraging the technology and product knowledge that is readily available to them on their handheld mobile devices via the Lowe's University application.
As I mentioned on our last call, we are also leveraging our new Lowe's University in-store training labs to provide the ongoing training that our associates need to build their skills and confidence so they can continue to progress in their career.
Over the last three years, we have created valuable career opportunities for our associates with the incremental 10,000 department supervisor roles and 1,600 ASM positions that we have added.
Since 2018, we have also invested well over $2 billion in incremental wage and equity programs for our frontline associates to ensure that we continue to offer a strong competitive wage and benefit package to our associates.
I'm really pleased to report that our investments to position Lowe's as an employer of choice are paying off.
Heading into spring, we anticipate being even better positioned than last year from a hiring perspective.
And we are also confident that we will continue to drive productivity in our operations through our perpetual productivity improvement or PPI initiatives.
As a reminder, this is not a single win.
It is a series of improvements that are scaling across our stores over time.
In fact, we are working on over 20 different PPI initiatives in our store operations this year.
To highlight just a few key PPI initiatives, we have just launched a new store inventory management system, or SIMs across all of our stores.
This platform gives store associates real-time visibility to inventory in their store.
This includes inventory in the home bay location as well as product in the top stock and cap, off-shelf and back stock room.
This new system will eliminate the countless nonproductive hours associates have been spending looking for product.
I'm also excited about our continuing efforts to eliminate the ancient green screen technology with the launch of our simplified user interface to other selling stations throughout the store.
First introduced at our front-end registers, we are beginning to implement this new technology across the sales floor.
With this new platform, we are accelerating the associate training process and facilitating cross-training in other departments.
This new technology will free up our associates to focus on providing excellent customer service while reducing customer wait time.
While these two initiatives are just a few of the PPI deliverables planned for this year, we expect that these two initiatives alone will drive $100 million in productivity this year.
Looking forward, we will continue to leverage technology to reduce manual tasking for our associates while also enabling them to deliver better service to our Pro and DIY customers.
As Marvin indicated, the consumer backdrop remains favorable, as we are confident that home improvement demand will remain strong despite an uptick in interest rates.
Historically, when interest rates have risen against a strong economic backdrop, the home improvement sector has delivered solid growth.
During these periods, housing affordability was supported by growth in jobs and personal income, which offset the impact of higher borrowing costs.
Today, housing affordability remains above the pre-pandemic average.
The market is expecting moderately higher interest rates in the coming quarters.
But keep in mind, rates are increasing off historic lows.
Home equity has increased due to rising home prices and consumer savings are about $2.5 trillion higher than pre-pandemic levels, positioning consumers for continued residential investments.
Given all these factors, we are expecting another strong year of demand in the home improvement market.
Now, let me turn to capital allocation.
We remain committed to be best-in-class when it comes to our ability to create value for our shareholders through our strong capital allocation program.
In 2021, we generated $8 billion in free cash flow driven by outstanding operating results, and we returned $15.1 billion to our shareholders through both share repurchases and dividends.
During the fourth quarter, we paid $551 million in dividends and repurchased approximately 16 million shares for $4 billion.
This brought the total to $13.1 billion in share repurchases for the year, ahead of our expectations of $12 billion.
This reflected better-than-expected financial performance and our commitment to return excess cash to shareholders.
Capital expenditures were $597 million in the quarter and nearly $1.9 billion for the full year as we continue to invest in strategic initiatives to both drive growth and enhance returns across the business.
Our balance sheet remains very healthy.
Adjusted debt-to-EBITDAR stands at 1.98 times, well below our long-term leverage target of 2.75 times.
As I mentioned at our December 15 investor update, we are planning to return to our leverage target over the next two years, driven by our shareholder-focused capital allocation strategy.
With that, I'd like to turn to the income statement.
In the fourth quarter, we reported diluted earnings per share of $1.78, an increase of 34% compared to adjusted diluted earnings per share last year.
This increase reflected better-than-expected sales growth, improved gross margin rate and favorable SG&A leverage, driven by our productivity initiatives.
In the quarter, sales were $21.3 billion, reflecting a comparable sales increase of 5%.
Comparable average ticket increased 9.4% and with higher ticket sales in appliances, flooring and seasonal and outdoor living and 90 basis points of commodity inflation in both lumber and copper.
In the quarter, comp transaction count decreased 4.4%, but on a two-year basis, comp transactions increased 8.9%.
We continue to gain traction with our Total Home strategy as reflected in Pro growth of 23% and positive DIY comps on top of extremely strong DIY growth last year.
On Lowes.com, sales increased 11.5% in the quarter.
U.S. comp sales increased 5.1% in the fourth quarter and 35.2% on a two-year basis.
We saw acceleration in both our Pro and our DIY comp sales trends from our third quarter performance.
By month, our U.S. comparable sales were up 8.1% in November, up 7.4% in December and down 1.3% in January.
Recall that we cycled over government stimulus in late December and early January of last year.
comp growth on a two-year basis from 2019 to 2021, November sales increased 33.8%, December increased 37.4% and January increased 33.9%.
Gross margin was 32.9% of sales in the fourth quarter, up 115 basis points from last year.
Product margin rate increased 65 basis points, driven by our disciplined pricing and cost management strategies.
Improvements in both shrink and credit revenue benefited gross margin by 50 basis points and 25 basis points, respectively.
These benefits were partially offset by roughly 30 basis points of pressure related to higher transportation and importation costs, as well as the expansion of our supply chain network.
I'd like to spend just a moment addressing the recent increase in lumber prices.
We are confident that we have an effective strategy to carefully manage our inventory and rapidly adjust pricing.
Although we are planning for our lumber margins to be compressed when prices decline, we are confident in our outlook for gross margin rate to be up slightly in 2022.
We levered 15 basis points versus LY, driven by higher sales and our relentless focus on productivity.
This quarter, we incurred $50 million of COVID-related expenses as compared to $165 million of COVID-related expenses last year.
This reduction in these expenses generated 60 basis points of SG&A leverage.
Additionally, we incurred $150 million of expenses related to the U.S. stores reset in the fourth quarter of last year.
As we did not incur any material expenses related to this project in '21, this generated approximately 75 basis points of SG&A leverage versus LY.
These benefits were pressured by 100 basis points related to the discretionary year-end bonus of $215 million for our store-based frontline associates.
Operating profit was over $1.8 billion in the quarter, an increase of 21% versus LY.
Operating margin of 8.7% for the quarter increased 115 basis points over last year, largely driven by higher gross margin rate, as well as favorable SG&A leverage.
The effective tax rate was 25.3% in the quarter, which is in line with prior year.
At year-end, inventory was $17.6 billion, up $920 million from Q3 and in line with seasonal trends and consistent with our effort to land spring products earlier.
Driven by both improved operating performance and a disciplined capital allocation strategy, we delivered return on invested capital of 35% for the year, up 760 basis points from 2020.
Now, turning to our 2022 financial outlook.
We closed out 2021 ahead of the expectations that we presented at our December 15 investor update.
comparable sales trends are in line with our fourth quarter performance on a two-year basis.
And based on the continued momentum that we are seeing in Pro sales, as well as higher expectations for commodity inflation, we are raising our sales outlook for 2022 to a range of between $97 billion to $99 billion for the year, representing comparable sales of down 1% to up 1%.
Now, please keep in mind that our outlook assumes that lumber pricing will return to a more normalized level in the second half of the year.
We continue to expect Pro to outpace DIY in 2022.
Keep in mind that we are cycling over an estimated 300 basis points of stimulus in the first quarter.
Also, as a reminder, our 2022 sales outlook includes a 53rd week, which equates to approximately $1 billion to $1.5 billion in sales.
We now expect gross margin rate in 2022 to be up slightly as compared to the prior year.
With higher projected sales, improving gross margin outlook and continued execution of our PPI initiatives, we are raising our outlook for operating margin to a range of 12.8% to 13% from a prior range of 12.5% to 12.8% for the full year.
We are also raising our outlook for diluted earnings per share to a range of $13.10 to $13.60 from a prior range of $12.25 to $13.
In 2022, we continue to expect capital expenditures of approximately $2 billion and share repurchases of approximately $12 billion.
Finally, we are raising our outlook for return on invested capital to above 36% from our original outlook of approximately 35%.
In closing, we are off to a great start in 2022.
We have significant runway ahead of us to both grow our market share, expand operating margins and deliver meaningful long-term shareholder value.
| q4 sales $21.3 billion versus $20.3 billion.
q4 earnings per share $1.78 excluding items.
q4 earnings per share $1.78.
raises fiscal 2022 outlook.
sees fy total sales of $97 billion to $99 billion, including 53rd week.
sees fy comparable sales expected to range from a decline of 1% to an increase of 1%.
sees fy capital expenditures of approximately $2 billion.
sees fy diluted earnings per share of $13.10 to $13.60.
|
As always, we appreciate your interest in Central Pacific Financial Corp.
I'd like to comment on some exciting news we sent out yesterday regarding some key executive management promotions to be effective January 1, 2022.
They are as follows: Catherine Ngo, currently President of CPF and President and CEO of CPB, will become Executive Vice-Chair of the bank and the holding company.
Arnold Martinez, currently EVP and Chief Banking Officer, will be promoted to President and Chief Operating Officer of the Bank and the holding company.
David Morimoto, currently Executive Vice President and CFO, will be promoted to Senior Executive Vice President and CFO of the Bank and the holding company.
And Kevin Dahlstrom, currently EVP and Chief Marketing Officer, will become EVP and Chief Strategy Officer of the Bank and the holding company.
Catherine will continue to serve on the CPB Executive Committee responsible for the management of the bank.
Working collaboratively with Catherine and myself, all three of the individuals promoted have played a key role in our financial success the past several years, and I am pleased that they will continue to be part of the team.
Our focus on our four key business pillars will continue as before.
These include residential lending, small business, Japan market development and digital expansion.
We will also continue to be active in the commercial real estate, C&I and consumer segments, with a focus on driving digital solutions to provide an exceptional customer experience.
Our transformation to become a digital first bank is underscored with the upcoming launch of Shaka Checking, Hawaii's first and only digital bank account from a local financial institution.
We are proceeding the November 8th launch with the state's largest ever social media influencer marketing campaign.
We have over 2,000 people on the wait list who are looking to be the first to sign up for Shaka.
Product benefits include the opportunity to get your paycheck up to two days early, a reimbursement of ATM fees up to $20 a month and a higher than average return on funds in the account.
We feel this product and other digital products like it will help to galvanize our position as the digital banking leader in Hawaii.
We will, however, continue to leverage our branch network, updating and modernizing our facility and investing in the talent required to deliver these products to market with the strong customer service we are known for.
Like the rest of the country, the state of Hawaii experienced the spike in COVID case counts in August and September related to the Delta variant.
To address this, our state put in place certain measures to curb further spread of the virus and we are pleased the state has been able to get the Delta variant under control, as we have seen a rapid decline in case counts in recent weeks.
Given this positive trend, earlier this month, the Governor implemented the easing of restrictions on gatherings and events on Oahu.
And last week, the Governor announced welcoming back fully vaccinated domestic travelers for business or pleasure, starting November 1st.
Our statewide vaccination rate has risen to over 70%, as many employers in the state have mandated vaccinations to protect their employees, their customers and the community in general.
With these positive developments, local economists are projecting that visitor numbers will once again continue to rise and Hawaii will have a strong holiday travel season.
The state of Hawaii unemployment rate declined to 6.6% in the month of September and is forecasted by the Department of Business Economic Development and Tourism to decline further to 6.4% in 2022.
The housing market in Hawaii remained very hot with our median single-family home price surpassing the $1 million mark this past quarter.
Overall, the Hawaii economy remains on track for recovery.
Our financial results for the third quarter were very strong with quarterly pre-tax income again reaching a new record high.
Our core loan growth picked up as anticipated and we are on track for a strong second half of the year.
Our successful PPP effort continues to deliver strong fee income as forgiveness continues.
Our asset quality continues to be strong with non-performing assets at just 10 basis points of total assets as of September 30th.
Additionally, total classified assets were less than 1% of total loans.
Nearly all of the loans we granted, COVID related payment deferrals have returned to pay status.
As of September 30th, we have just $1.3 million in loans remaining on deferral.
Finally, net charge-offs declined to just $0.2 million in the third quarter.
Shifting to our employees, we are very pleased that 95% of our employees are now fully vaccinated against COVID-19.
To protect our employees and customers, we started weekly COVID testing in September with a small group of un-vaccinated employees.
We also offered a $500 cash incentive for un-vaccinated employees who got vaccinated after September 1st.
In the third quarter, our loan portfolio increased by $184 million or 4% sequential quarter, which was offset by PPP forgiveness paydowns of $216 million.
Year-over-year, our core loan portfolio increased by 7%.
The core loan growth was broad-based across all loan categories except construction.
Approximately $58 million or 32% of the quarter's loan growth came from Mainland consumer loans.
Our residential mortgage production continue to be very strong with total production in the third quarter of nearly $245 million and total net portfolio growth in residential mortgage and home equity of $72 million from the previous quarter.
PPP forgiveness continues to progress well with 93% of the loan balances originated in 2020 and 40% of the balances originated in 2021, already forgiven and paid down through September 30th.
During the third quarter, we purchased an auto loan portfolio for about $20 million from one of our Mainland auto loan origination partners, and we continued consumer unsecured purchases on an ongoing flow basis based on our established credit guidelines.
The purchase during the quarter had a weighted average FICO score of 750.
As of September 30th, total mainland consumer, unsecured and auto purchase loans were approximately 5% of total loans.
Both our Mainland and Hawaii consumer portfolios continue to perform well.
Our target range for total Mainland loans, including commercial and consumer is around 15% of total loans.
With Hawaii's steady economic recovery, we continue to see a healthy loan pipeline in all loan product categories.
As such, we anticipate ending the year with strong loan growth.
On the deposit front, we continue to see strong inflow of deposits with total core deposits increasing by $267 million or 4.6% sequential growth.
On a year-over-year basis, total core deposits increased by $1.1 billion or 21.6%.
Additionally, our average cost of total deposits dropped in the third quarter to just 5 basis points.
Finally, as the Hawaii economy continues to recover and investment activity increases, we are focused and prepared to help our customers meet their financial objectives.
Net income for the third quarter was $20.8 million or $0.74 per diluted share, an increase of $2.1 million or $0.08 per diluted share from the prior quarter.
Return on average assets in the third quarter was 1.15%, and return on average equity was 14.83%.
Net interest income for the third quarter was $56.1 million, which increased by $4 million from the prior quarter due to core loan and investment portfolio growth, loan and investment yield improvements and slightly higher PPP fee recognition.
Net interest income included $8.6 million in PPP net interest income and net loan fees compared to $7.9 million in the prior quarter.
At September 30th, unearned net PPP fees was $7.9 million.
The net interest margin increased to 3.31% in the third quarter compared to 3.16% in the previous quarter.
The NIM normalized for PPP was 2.96% in the third quarter compared to 2.93% in the prior quarter.
The normalized NIM increase was driven by the increase in the investment portfolio yield, partially offset by an increase in excess balance sheet liquidity.
Third quarter other operating income remained relatively flat at $10.3 million.
During the quarter, there was a decrease in bank-owned life insurance income of $0.7 million driven by market fluctuations.
This was offset by higher service charges and fees.
Other operating expense for the third quarter was $41.3 million, which was in line with the prior quarter.
The efficiency ratio decreased to 62.3% in the third quarter due to higher net interest income.
We remain focused on driving positive operating leverage with our strategic investments to continue to improve our efficiency.
As part of our ongoing efficiency initiatives, we recently announced the consolidation of our Kapiolani [Phonetic] branch into a nearby branch in Honolulu at the end of this year.
We expect annual future savings of approximately $800,000 from this consolidation.
With the continued migration of transactions to digital channels, we will continue to evaluate our branch network and consider both consolidation as well as expansion opportunities in 2022.
At September 30th, our allowance for credit losses was $74.6 million or 1.55% of outstanding loans, excluding PPP loans.
In the third quarter, we recorded a $2.6 million credit to the provision for credit losses due to improvements in the economic forecasts and our loan portfolio.
The effective tax rate was 24.7% in the third quarter.
Going forward, we continue to expect the effective tax rate to be in the 24% to 26% range.
Our capital position remains strong and during the third quarter we repurchased 234,700 shares at a total cost of $5.9 million or an average cost per share of $25.12.
Finally, on October 26, our Board of Directors declared a quarterly cash dividend of $0.25 per share, which was an increase of $0.01 or 4.2% from the previous quarter.
In summary, Central Pacific had a solid third quarter and we will continue to leverage our investments and innovate to progress toward our strategic targets, at the same time we maintained our strong credit, liquidity and capital position.
Further, we remain committed to providing support to our employees, customers and the community as we continue to progress through the economic recovery.
Finally and perhaps more importantly, we approach the future with a highly motivated management team with optimism and a sense of purpose.
This team worked together to lead the implementation of RISE2020, a multi-faceted initiative designed to strengthen our position in the market by investing in our branches, ATM and our digital product offerings as well as continued focus on our four primary lines of business.
The results of these efforts are becoming increasingly apparent.
With this team, we are well positioned to build on our past accomplishments and success as we continue to focus on service and value to customers, employees and shareholders.
At this time, we'll be happy to address any questions you may have.
Over to you, Betsy.
| compname reports q3 earnings per share of $0.74.
compname reports $20.8 million third quarter earnings and increases cash dividend.
q3 earnings per share $0.74.
net interest income for q3 of 2021 was $56.1 million versus $49.1 million.
|
As always, we appreciate your interest in Central Pacific Financial Corp.
Let me start first with some positive updates on the Hawaii economic recovery.
Visitor arrivals from the U.S. Mainland to Hawaii have returned much quicker than anticipated, a good sign for economic recovery.
The daily arrival count have averaged about 30,000 per day since June, which is nearly at pre-pandemic level.
In early July, the state of Hawaii began allowing arriving passengers to skip pre-testing and quarantining with proof of full vaccination against COVID in the U.S. Although we are not immune to the spike caused by the Delta variant, Hawaii's COVID infection rates continue to be at very low level, with our infection rates currently at the lowest in the nation.
Nearly 60% of our state population is fully vaccinated as of July 21, 2021.
The state of Hawaii's unemployment rate declined to 7.7% in the month of June and is forecasted by the University of Hawaii Economic Research Organization to decline to 4.8% in 2022.
The housing market in Hawaii remains hot with the median single-family home price at $979,000 in the month of June.
Our financial results for the second quarter were very strong, with quarterly pre-tax income reaching a new record high.
With increased confidence in the Hawaii economic recovery and our continued solid asset quality, liquidity, and capital, we resumed share repurchases during the second quarter and continue to pay our quarterly cash dividend.
Against this backdrop, we are very optimistic about our future business profit.
Digital continues to be a key strategic priority for us.
Enhancements to our online and mobile banking platforms are being made on a continual basis.
Additionally, in the second quarter, we issued new contactless debit cards to all of our customers and increased mobile deposit adoption among our customer base.
Further, online chat is now available and online appointment schedule is coming soon to make banking easier and more convenient for our customers.
We continue to work diligently on our product and service development in the digital area.
First, I'd like to provide an update on the credit area.
We are pleased that our clients have weathered through the challenges of the pandemic.
Nearly all of the loans we granted, COVID-related payment deferrals have returned to pay status.
As of June 30, we have just $3.5 million in loans remaining on deferral, the majority of which are residential mortgages.
Additionally, our classified assets declined during the quarter to $42 million, and our nonperforming assets remain near historic lows at just nine basis points of assets.
I'd also like to share about a recent developments in the environmental, social, and governance or ESG area.
In the second quarter, we were pleased to publish our first annual 2020 ESG report.
We continue to develop our ESG reporting and look forward to providing further updates in the future.
CPB's legacy in helping the small business community is one of the pillars of our ESG program and remains a key priority for us.
Last week, we were pleased to announce the new program run by our CPB foundation call We, that is W-E By Rising Tide.
This program supports women entrepreneurs as we believe they are key to building a strong and resilient economy.
As part of this program, we selected our first cohort of 20 women entrepreneurs from seven different business sectors that will participate in a 10-week series of workshop on financial management, marketing, and leadership and receive free advertising and networking benefits.
Support of our employees is another color of our ESG program.
We believe that investing in our employees is critical to our success.
During the second quarter, we had our annual merit increases and we made a few key strategic new hires.
We also continue to prioritize the health and well-being of our employees and therefore, continue to allow flexible work schedule while developing our hybrid return-to-office plan.
Finally, we are pleased that the second and final phase of our Central Pacific Plaza revitalization was completed last month.
We expect smaller office projects to continue as we create collaborative, refreshed, and sustainable workplaces for our employees.
We also continue to refresh our branches and evaluate our branch network to meet the changing needs of our customers.
In the second quarter, our core loan portfolio decreased by $103 million or 2.3% sequential quarter, which was offset by PPP paydown of $163 million.
Year-over-year, our core loan portfolio increased by 3.7%.
The core loan growth was broad-based across all loan categories, except C&I, which as everyone knows, was because Customer segment most impacted by the pandemic and now in recovery.
Our residential mortgage production continues to be very strong, with total production in the second quarter of nearly $280 million and total net portfolio growth in residential mortgage and home equity of $48 million from the previous quarter.
We ramped up 2021 new PPP originations during the second quarter with over 4,600 loans totaling more than $321 million.
I am proud of our team for maintaining a leadership role in supporting our small business customers and the broader business community.
PPP forgiveness is also progressing well with 70% of the loans originated in 2020 already forgiven and paid down through June 30.
Assisting our customers with the forgiveness process has been a key priority for the bank as the local economy begins to recover and our business customers begin to pivot from surviving to thriving in.
During the second quarter, with confidence that the national economic recovery was gaining strength and the local economy was on its way to recovery, we resumed our consumer lending programs on the Mainland and in Hawaii.
During the quarter, we purchased an auto loan portfolio from one of our established partners and also restarted other consumer programs on an ongoing full basis for consumer direct and indirect loans on the Mainland and in Hawaii.
While it was a prudent process to span our consumer programs last year despite what we experienced in the economic downturn, both our Mainland and Hawaii consumer portfolios performed well, augmented by the support from federal stimulus programs.
With Hawaii's economic recovery expected to take traction, combined with our healthy loan pipeline, we anticipate strong loan growth for the second half of the year.
On the deposit front, we saw a strong inflow of deposits with total core deposits increasing by $279 million or about 5% sequential quarter growth.
On a year-over-year basis, total core deposits increased by $705 million or 13.8%.
Additionally, our average cost of total deposits outweigh the second quarter by just six basis points.
Finally, I want to mention that the Hawaii economy is recovering and consumer confidence is increasing.
We are seeing positive trends in transactional fee income recovery, including investment services fees.
Net income for the second quarter was $18.7 million or $0.66 per diluted share.
Return on average assets was 1.06% and return on average equity was 13.56%.
Net interest income for the second quarter was $52.1 million, which increased from the prior quarter, primarily due to greater recognition of PPP fee income due to higher forgiveness.
Net interest income included $7.9 million in PPP net interest income and net loan fees compared to $5.2 million in the prior quarter.
At June 30, unearned net PPP fees was $15.9 million.
Net interest margin decreased to 3.16% compared to 3.19% in the prior quarter.
The net interest margin normalized for PPP was 2.93% compared to 3.12% in the previous quarter.
The normalized NIM decrease was due to an acceleration of MBS premium amortization, excess balance sheet liquidity, and lower investment and loan yields.
Investment MBS premium amortization increased by $900,000 sequential quarter due to an acceleration of prepayments in the second quarter.
To mitigate the prepayment risk going forward, we executed a sovereign coupon MBS bond swap totaling $175 million.
We continue to deploy excess liquidity to the loan and investment portfolios to further support our net interest margin.
Second quarter other operating income remained relatively flat at $10.5 million.
During the quarter, there was a decrease in mortgage banking income, which was offset by higher service charges and fees and bank-owned life insurance income.
Other operating expense for the second quarter was $41.4 million compared to $37.8 million in the prior quarter, with much of the increase in the salaries and benefits line.
The current quarter increase in salaries and benefits was primarily due to $1.2 million in nonrecurring reductions in the prior quarter and $2.8 million in higher incentive compensation and commission accruals, strategic hires to drive forward performance, and annual merit increase.
The efficiency ratio increased to 66.2% in the second quarter due to higher other operating expenses.
We expect the efficiency ratio to moderate and improve over time as we drive positive operating leverage based on our strategic investments.
Net charge-offs in the second quarter totaled $0.8 million, with the majority of charge-offs coming from the consumer loan portfolio.
At June 30, our allowance for credit losses was $77.8 million or 1.68% of outstanding loans, excluding the PPP loans.
In the second quarter, we recorded a $3.4 million credit to the provision for credit losses due to improvements in the economic forecast and our known portfolio.
The effective tax rate was 23.9% in the second quarter and going forward, we expect the effective tax rate to be in the 24% to 26% range.
Our capital position remains strong and as Paul noted earlier, we resumed share repurchases this quarter with repurchases of 156,600 shares at a total cost of $4.3 million.
We've also repurchased an additional 78,000 shares of common stock month-to-date through July 20 at an average cost of $24.93.
Finally, our Board of Directors declared a quarterly cash dividend of $0.24 per share, which was consistent with the prior quarter.
In summary, Central Pacific has a solid financial credit, liquidity, and capital position, and we continue to make positive forward progress on our core business strategy.
Further, we remain committed to providing support to our employees, customers, and the community as we continue to progress through the economic recovery.
At this time, we'll be happy to address any questions you may have.
Back to you, Andrew.
| compname reports increase in second quarter earnings to $18.7 million.
compname reports increase in second quarter earnings to $18.7 million.
q2 earnings per share $0.66.
net interest income for q2 of 2021 was $52.1 million.
|
Before we get started, I want to let you know that we have slides to accompany our discussion.
Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are posted on our website, as well.
Turning to Slide 3, you'll see the agenda for today's call.
I'll start with some highlights of our 2020 accomplishments and a look into 2021 before handing over to John, who will go into more detail on our outstanding performance and outlook.
Let's start with an overview of the year, turning to Slide 4.
When we started the transformation, we had a specific plan for turning the Company into the highly functioning successful organization we all knew it could be.
The team has embraced the process, driving operational performance, optimizing our portfolio, and strengthening our financial discipline.
And they did it during one of the most challenging environments in recent history.
As we go through the results for the year, you'll see the power of the new Bunge.
One significant change we made was transforming our operating model to improve visibility, and speed to act.
As a result, the commercial and industrial teams are better coordinated, helping us to maximize our assets.
In 2020, outside of Argentina, we processed record volumes in soy and soft seed crush.
Our commercial teams ensured our plants had the supplies they needed, and our industrial teams reduced unplanned downtime at the facilities, by more than 30% year-over-year in soy, and approximately 20% year-over-year in soft seeds.
This improved capacity utilization, brought immediate financial benefits without a significant additional use of capital.
This is just one example of how this more global approach has improved our network efficiency.
We were also better able to capitalize on market and customer opportunities, as they arose throughout the year.
As COVID lockdowns changed consumer eating habits, we quickly adjusted our production to help some of the world's leading brands continued to keep their products on the store shelves.
We also worked closely with our food service customers, as they continued to adapt to the changing demand patterns.
Agility is also critical, as we continue to look at how our vital work can be done more sustainably.
We're proud to be an industry leader in protecting the environment in areas where we operate.
We are a leading supplier of certified deforestation-free soy from Brazil.
And as we work to reduce greenhouse gas emissions in our operations, we're converting more facilities over to wind and solar power.
For instance, our corn and soybean processing plants in Kansas run on wind today, and we recently announced a deal to use renewable energy at our Fort Worth, Texas packaging facility.
As we look at our assets, we've now announced all of the significant portfolio optimization actions we originally identified.
With these major changes behind us, we can now shift our focus to continuous improvement in growth opportunities.
In the immediate future, we know that COVID will still be with us.
We continue to remain focused on our top priority of protecting our team, their families and communities.
Our global and regional COVID crisis teams continue to meet regularly to make sure our operations have the resources and tools needed to keep our employees safe, so we can continue to serve our customers.
Now, let's turn to our results on Slide 5.
With our strong team and unmatched platform, we've created a resilient model for moving forward.
This quarter and the full-year really highlighted the earnings power of that platform, benefited from improving trends throughout the year, and we're able to move quickly to capture the opportunities they've presented themselves in markets around the world.
During the year, we saw demand-led markets with higher volumes, volatility and prices.
And with our platform and operating model, including our industry-leading risk management, we captured upside well above our earnings baseline.
In the fourth quarter, agribusiness benefited from a better-than-expected market environment, with particularly strong results in our North American operations, driven by higher oilseed crush and elevation margins.
In edible oils, we realized exceptional margins in our Brazilian consumer business, and also benefited from increasing demand from biodiesel in South America, and renewable diesel in the US.
We continued to innovate to deliver solutions that benefit our customers on both ends of the supply chain, consumers and farmers.
A great example of this is Karibon, a Shea-based substitute for cocoa butter, we launched in the fourth quarter; a sustainably sourced ingredient that also benefits the communities in Africa, where we sourced Shea.
2020 also demonstrated the power of our approach to risk management.
There will always be volatility in this industry.
But our approach to risk management allows us to capture the upside of that volatility, and protecting its most of the downside.
While we won't always manage it perfectly, this approach is what makes our model unique and powerful.
The strength will be critical, as we look ahead into 2021.
Many of the conditions that helped drive our success in 2020 remain in place today, but we don't have clear visibility into the second half of the year.
And while we don't expect all of the conditions that existed in 2020 to repeat in 2021, we do expect to deliver adjusted earnings per share of at least $6 per share.
Our team will be closely watching the key factors that could impact our forecast, including changes in demand, crop production, and a post-COVID recovery.
And with that, I'll hand the call over to John to walk through the financial results in detail, and we'll then close with some additional thoughts on 2021.
Let's turn to the earning highlights in Slide 6.
Our reported fourth quarter earnings per share were $3.74, compared to a loss of $0.48 in the fourth quarter of 2019.
Adjusted earnings per share was $3.05 in the fourth quarter versus $1.69 in the prior year.
Our reported results included a net gain of $0.59, primarily related to our previously announced sale of our Brazilian margarine and mayonnaise assets, as well as the impact of an indirect tax credit related to the favorable resolution of a tax claim.
For the full-year, 2020 rates per share was $7.71 versus a loss of $9.34 in 2019.
Adjusted full-year earnings per share was $8.30 versus $4.76 in the prior year.
Adjusted core segment earnings before interest and taxes, or EBIT was $637 million in the quarter versus adjusted EBIT of $467 million in the prior year, driven by strong performances in our agribusiness and edible oil segments.
Agribusiness closed out an excellent year with a very strong fourth quarter.
Higher oilseeds results were primarily driven by soft seed processing, where earnings were higher in all regions, driven by robust veg oil demand and record capacity utilization.
Soy processing results were in line with the prior year.
These improvements in our North American and Asian operations were offset by South America and Europe.
In Grains, higher results were primarily driven by our North American operations, which benefited from strong export demand and exceptional execution of logistics.
Results also benefited from favorable risk management and optimization in our global trading and distribution business.
In South America, earnings decreased largely due to lower origination volumes, as farmers have accelerated sales earlier in the year, in response to the spike in local prices.
Edible oils finished up and turned out to be an excellent year, with very strong results of $113 million, up $38 million compared to last year, primarily driven by higher margins in our consumer business in Brazil, as a result of tight supply and strong demand.
Higher results in North America were largely due to increased demand for renewable diesel sector, and higher contributions with our key customers.
Results were also higher in Asia, driven by lower costs.
Earnings declined in Europe due to lower margins.
In Milling, lower results in the quarter were driven by North America, which was impacted by lower volumes and margins, as well as the loss of earnings from our rice milling operation, which was sold during the quarter.
Results in South America were in line with last year, as higher volumes were offset by lower margins.
Fertilizer also had a strong quarter, with results of $32 million, similar to 2019 finishing off a very strong year.
Total adjusted EBIT for corporate and other for the quarter was comprised of a negative $81 million from corporate, and $2 million from other.
This compares to a negative $95 million from corporate and negative $60 million from other for the prior year.
The decrease in corporate expenses during the quarter was primarily related to the timing of performance-based compensation accruals in the prior year.
The increase in other reflects the prior-year impact of our Beyond Meat investment.
Results for our 50/50 joint venture with BP benefited from higher year-over-year average ethanol prices in local currency, as well as improved industrial efficiency.
Earnings in the fourth quarter of last year benefited from lower depreciation due to our Brazilian Sugar and Bioenergy operations being classified as held for sale.
For the quarter and year ended December 31, 2020, income tax expense was $97 million and $248 million respectively, compared to $16 million and $86 million respectively for the prior year.
The increase in income tax expense during 2020 was primarily due to higher pre-tax income.
Adjusting for notable items, the effective tax rate for the year was just under 70%.
The effective tax rate was lower than our prior forecast, primarily due to earnings mix.
Net interest expense of $66 million were slightly higher than our prior forecast, due to increased short-term borrowings to support higher commodity prices and volumes.
Here you can see our positive earnings trend adjusted for notable items and some timing differences over the past four years, reflecting the execution of our strategy to drive operational performance, optimize our portfolio, and strengthen financial discipline.
Slide 8 compares our full-year 2020 adjusted SG&A to the prior year.
We achieved underlying addressable SG&A savings of $50 million toward our savings target of $50 million to $60 million established at our June Business Update.
While we are pleased with our progress, we recognize a portion of the savings was accelerated due to COVID-19 related restrictions, such as reduced travel.
However, we are confident we will return to pre-pandemic levels, as we have all learned to operate differently, and we will continue our focus on further streamlining the business.
The net increase of $90 million in the specified items reflects a significant increase in performance-based compensation accruals due to our improved financial performance this year, slightly offset by other items such as inflation and the impact of foreign currency fluctuations.
Moving to Slide 9, for the full-year 2020, our cash generation, excluding notable items and mark-to-market timing differences, were strong with approximately $1.9 billion of adjusted funds from operations.
The cash flow generation enabled us to comfortably fund our cash obligations over the year, and apply retained cash of $1.1 billion to reduce debt.
Slide 10 summarizes our capital allocation of adjusted funds from operations.
After allocating $254 million to sustaining capex, to include maintenance environmental health and safety, and $34 million to preferred dividends, we had approximately $1.6 billion of discretionary cash flow available.
Of this amount, we paid $282 million in common dividends to shareholders, invested $111 million in growth and productivity capex, and bought back $100 million of our stock.
As shown previously, the remaining cash flow of approximately $1.1 billion was used to strengthen our balance sheet in support of our credit rating objective of BBB/Baa2.
Moving on to Slide 11, a $1.1 billion of retained cash flow offset a portion of our $3.1 billion of cash outflow of this year for working capital.
As a result, net debt rose by $2.2 billion over the course of the year.
The growth in working capital, primarily reflects an increase in readily marketable inventories, resulting from higher commodity prices and our deliberate decision to increase volumes to optimize earnings potential.
As the slide shows, our availability under committed credit lines remained largely unchanged, leaving us with ample liquidity as we enter 2021.
As you can see on Slide 12, at the end of the fourth quarter, only 9% of our net debt was used to fund uses other than readily marketable inventories.
This compares to 17% last year.
For 2020, adjusted ROIC was 15.9% or 9.3 percentage points over our RMI-adjusted weighted average cost of capital of 6.6%, and up from 9.7% in 2019.
ROIC was 12.2% or 6.2 percentage points over our weighted average cost of capital of 6%, and well above our stated target of 9%.
The widening spread between these return metrics reflects how we have been effectively using merchandising RMI, as a tool to generate incremental profit.
As a reminder, we have adjusted these return metrics to exclude the impact of changes in foreign exchange rates on book equity as of year-end 2018.
We believe this provides a clear picture of our economic performance from the management actions we've taken over the past two years.
Moving to Slide 14.
Here you can see our cash flow yield trend, which emphasizes cash generation measured against our cost of equity of 7%.
For the year ending December 31, 2020, we produced a cash flow yield of nearly 26%, up from 13.4% at year-end 2019.
As Greg mentioned in his remarks, taking into account the current margin environment and forward curves, we expect full-year 2021 adjusted earnings per share of at least $6 per share.
In Agribusiness, full-year results are expected to be down from 2020, primarily driven by lower contributions from oilseed processing and origination primarily in Brazil.
While we are not forecasting the same unique environment or magnitude of opportunities that we captured during 2020, we do see some potential upside to our outlook, resulting from strong demand and tight commodity supplies.
In Edible Oils, full-year results are expected to be comparable to last year.
Higher results in the North American business, driven by a recovery in food service and increased renewable diesel demand are expected to be offset by lower results in our consumer business in Brazil.
In Milling, full-year results are expected to be in line with last year.
In Fertilizer, full-year results are expected to be down from a strong prior-year.
In Non-Core, full-year results in our Sugar and Bioenergy Joint Venture are expected to be a positive contributor, driven by improved sugar and Brazilian ethanol prices.
Additionally, the Company expects the following for 2021.
An adjusted annual effective tax rate in the range of 20% to 22%, net interest expense in the range of $230 million to $240 million, capital expenditures in the range of $425 million to $475 million, and depreciation and amortization of approximately $415 million.
With that, I'll turn things back over to Greg for some closing comments.
Before turning to Q&A, I want to offer a few closing thoughts.
We set ambitious goals for Bunge's transformation, and we can see the results from the changes we've made.
Now that we've completed the majority of the actions we originally laid out, we're able to focus on continuous improvement in growing the business across the cycle, as we move forward.
As we did in 2020, we're going to be leveraging our platform and the operating model we've put in place, and look for the opportunities ahead of us, as we work effectively to capture the upside and minimize the downside.
Looking over the longer term, we remain excited about the structural shift we're seeing in the consumer demand for food, feed and fuel.
In particular, we're focusing on four primary areas of growth; oilseed processing and origination, renewable feedstock for biofuels, plant protein ingredients and plant lipid ingredients, which is our specialty fats and oils.
And with our global platform, culture of innovation, and oilseed leadership, we believe we're in a unique position to benefit from those trends.
The leadership team and I are incredibly proud of the entire Bunge team's continued focus on execution.
And while 2021 will surely present different challenges and opportunities, I'm confident we have the right platform, and I look forward to continuing to work together to maximize Bunge's full potential.
| compname posts q4 earnings per share $3.74.
q4 gaap earnings per share $3.74.
favorable market environment continuing into 2021 overview.
to date, the company has not seen a significant disruption in its supply chain.
in agribusiness, full-year results are expected to be down from 2020.
in milling, full-year results are expected to be in line with last year.
in non-core, full-year results in sugar and bioenergy joint venture are expected to be a positive contributor.
in edible oils, full-year results are expected to be comparable to last year.
qtrly earnings per share $3.05 on an adjusted basis excluding certain gains and charges and mark-to-market timing differences.
|
With me on the call is our Chief Executive Officer, Brian Deck; and Chief Financial Officer, Matt Meister.
JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results.
These documents are available in the Investor Relations section of our website.
Also our discussion today includes references to certain non-GAAP measures.
Commercially, we are enjoying a strong recovery in demand at FoodTech, with record orders in the period.
Cash flow was outstanding.
We also saw some encouraging signs at AeroTech.
On the other hand, we are experiencing increasing operational challenges created by supply chain constraints, inflationary pressures and COVID related customer access in select geographies, pressures that will likely persist through the remainder of 2021.
That said, I am extremely proud of how well our people from sales to customer care to manufacturing and procurement have managed this environment.
And we continue to expect a meaningful sequential ramp in our performance through the next three quarters.
Matt will walk you through our updated guidance for the full year as well as provide analysis on our first quarter results.
We are pleased with our first quarter performance.
In the quarter, we saw strong quarter growth in FoodTech at 22% year-over-year.
Revenue met our forecast and both earnings per share and free cash flow exceeded our expectations.
On a year-over-year basis, revenue increased 1% at FoodTech, while declining 28% at AeroTech.
FoodTech margins were in line with guidance, with operating margins of 13.3% and adjusted EBITDA margins of 18.7%.
AeroTech margins were ahead of expectations, with operating margins of 9.3% and adjusted EBITDA margins of 10.7%.
The better than forecasted margins were the result of favorable equipment mix, better than expected aftermarket revenue and good cost control.
Earnings in the quarter also benefited from lower interest expense as continued strong cash flow reduced our debt balance.
Additionally, corporate expense, M&A and restructuring costs were slightly favorable to guidance.
As a result, JBT posted adjusted diluted earnings per share from continuing operations of $0.90 or GAAP earnings per share of $0.84.
Free cash flow for the quarter significantly exceeded our expectations at $78 million, driven by continued strong collection of accounts receivable and customer deposits.
The robust cash flow performance improved our bank leverage ratio to 1.9 times and increased overall liquidity to $496 million.
We expect to expand our balance sheet to support an increase in sales in the back half of the year to achieve full year free cash flow conversion just above 100%.
As we look ahead to full year 2021, while we are benefiting from strong commercial activity, challenges in the operating environment are expected to increase further as we work through extended vendor lead times, worldwide constraints on logistics and inflationary pressure specifically on metals as well as COVID travel and access restrictions in Europe and Asia Pacific that increase the cost of doing business.
With that in mind, we have refined our full-year 2021 guidance.
Given the strength of orders and outlook for FoodTech we have raised, topline growth to 9% to 11%, up from our previous guidance of 5% to 8%.
However, while we expect to be able to mostly offset inflationary input costs with sourcing actions and pricing, the operational challenges I mentioned previously are expected to exert downward pressure on margins.
Therefore, we have lowered full year margin guidance by 25 basis points.
Operating margin of 14.25% to 14.75% and adjusted EBITDA margins of 19.25% to 19.75%.
Our guidance for AeroTech is unchanged with projected revenue growth of 0% to 5%.
Operating margins of 10.75% to 11.25% and adjusted EBITDA margins of 12% to 12.5%.
Due to the existing pricing commitments and current market conditions, in the short-term AeroTech is limited in its ability to adjust prices to offset inflationary conditions.
Therefore, although, AeroTech exceeded margins in Q1, we have held our full year margin guidance.
We are holding our forecast for corporate cost at 2.7% of sales, while lowering interest expense to about $11 million.
Altogether, this increases the full year adjusted earnings per share range to $4.40 to $4.60.
Our GAAP earnings per share guidance is now $4.20 to $4.40, with M&A and restructuring costs of $8 million to $10 million.
Now in terms of Q2.
We expect revenue of $325 million to $340 million at FoodTech and $105 million to $115 million at AeroTech.
Our second quarter guidance for operating margins are 13.75% to 14.25% at FoodTech, with adjusted EBITDA margins of 19% to 19.5%.
For AeroTech, operating margins are forecasted at 8.75% to 9.25%, the adjusted EBITDA margins of 10% to 10.5%.
For the quarter, we expect corporate costs of $12 million to $13 million, M&A and restructuring costs of $4 million, interest expense of about $3 million.
Factoring second quarter's adjusted earnings per share guidance to $0.90 to $1 and $0.80 to $0.90 on a GAAP basis.
I'd like to start by talking about order trends and what we hear about the market from our customers' perspective.
In the first quarter of 2021, FoodTech orders had a record $386 million.
The pandemic driven boost to need at home, retail and quick service restaurant demand continued into the quarter, filling orders from food processors requiring additional capacity [Technical Issues] to serve these markets.
From a geographic perspective, North America and the Asia Pacific region continued to be strong.
South America improved meaningfully while demand in Europe remained volatile as the region was [Technical Issues] the challenges of the pandemic.
Our research and customer engagement confirms our expectations of double-digit expansion in capital expenditures along our FoodTech customers in 2021.
This is consistent with our forecast for FoodTech equipment growth, which is expected to outpace our more stable recurring revenue.
Beyond the current strength on the retail side, we believe progress controlling COVID particularly in the US will spur new projects in the foodservice side.
Inquiries and conversations with customers serving the foodservice market has picked up.
At the same time, the pandemic has accelerated customer investment in permanent [Phonetic] design changes, production flexibility, so producers can respond quickly to shifts in demand is increasingly important.
Moreover, the pandemic serves to make automation, which was always a priority and imperative for food processors.
Automation not only gets labor shortages and enhances productivity, but it is necessary to reduce worker density.
At AeroTech, although orders were down 35% compared to pre-pandemic levels a year ago, we've met our expectations and there are some encouraging signs.
We continue to see stability and infrastructure side with our services and passenger boarding business.
So with some construction related push out of bridge deliveries from Q2 to Q3, this is reflected in our guidance.
And as we've discussed over the past few quarters, we're excited about the outlook for Cargo in 2021 and military demand longer term.
Additionally, our engagement with commercial airlines improved in the quarter, resulting in a few equipment orders, something we have not seen since the collapse in passenger air travel in 2020.
However, we believe prudently [Phonetic] in commercial airline capex spending will be gradual over the next two years.
Let me switch gears and talk about M&A.
As we said last quarter, we're looking to deploy capital in 2021 and beyond as we evaluate strategic acquisitions that advance FoodTech's competitive position as an innovative comprehensive solution provider.
Our M&A pipeline is active and includes opportunities to leverage JBT's capabilities and scale.
We continue to look at equivalent providers to provide -- that enhance our ability to provide [Indecipherable] solutions as well as those that expand our penetration to attract the food categories.
Additionally, with the company's of unique service, digital and process enhancing capabilities that enhance JBT's strategy to be a more meaningful solutions partner to our customers.
Overall we are reassured by the robust commercial activity of FoodTech and indications that AeroTech is on the upswing.
While we have challenges ahead this year, caused by inventory supply chain imbalances, JBT and our people look forward to delivering in 2021.
| compname reports q1 adjusted earnings per share of $0.90.
q1 adjusted earnings per share $0.90.
sees fy adjusted earnings per share $4.40 to $4.60.
sees fy gaap earnings per share $4.20 to $4.40.
q1 earnings per share $0.84 from continuing operations.
q1 revenue fell 9 percent to $417.8 million.
|
I'm joined by Steve Rusckowski, our Chairman, CEO and President; and Mark Guinan, our Chief Financial Officer.
Actual results may differ materially from those projected.
Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent Annual Report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K.
The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows and/or its financial condition will be primarily driven by the pandemic's severity and duration; healthcare insurer, government and client payer reimbursement rates for COVID-19 molecular tests; the pandemic's impact on the US healthcare system and the US economy; and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control.
Any references to base business, testing, revenues or volumes refer to the performance of our business excluding COVID-19 testing.
Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates.
Finally, revenue growth rates from acquisitions will be measured against our base business.
Now, here is Steve Rusckowski.
Well, we had a strong third quarter as COVID-19 molecular volumes increased throughout the summer.
While our base business continued to deliver solid volume growth versus the prior year and 2019.
In late summer, we experienced some softness in the base business across the country, but saw a rebound in September.
Importantly, our base business continued to improve sequentially in the third quarter, which speaks to the ongoing recovery.
We have raised our outlook for the remainder of the year based on higher than anticipated COVID-19 volumes as well as continued progress we expect to see in our base business despite rising labor costs and inflationary pressures.
The momentum of our base business positions us to deliver the 2022 outlook we shared at our March Investor Day.
But before turning to our results into the third quarter, I'd like to update you on our progress we've made in our Quest for Health Equity initiative, a more than $100 million initiative aimed at reducing healthcare disparities in underserved neighborhoods.
Since we've established just over a year ago, we have launched 18 programs across the United States and Puerto Rico ranging from supporting COVID-19 testing of vaccination events, to educating young students on healthy nutritional choices, to providing funding support for a long-haul COVID-19 clinic in Puerto Rico.
Recently, we announced a collaboration with the American Heart Association that will expand research and mentorship opportunities for Black and Hispanic scholars and drive hypertension management and COVID-19 relief.
We're off to a good start and I look forward to updating you on our continued progress as Quest for Health Equity enters its second year.
Now turning to our results for the third quarter.
Total revenue of $2.77 billion, down 40 basis points versus the prior year; earnings per share were $4.02 on a reported basis, down approximately 3% versus the prior year; and $3.96 on an adjusted basis, down 8% versus the prior year.
The revenue and earnings declines in the third quarter reflect lower COVID-19 testing in 2021 versus the prior year, partially offset by continued recovery in our base business.
Cash provided by operations increased by nearly 20% year-to-date through September to approximately $1.75 billion.
Now, starting with COVID-19 testing, our COVID-19 molecular volumes increased in the third quarter versus the second quarter due to the spread of the Delta variant over the course of the summer.
Testing began to increase meaningfully in mid-July and peaked in early mid-September.
Our observed positivity rate peaked in mid-August and has steadily been declining across much of the country in recent weeks.
We performed an average of 83,000 COVID-19 molecular tests today in the third quarter and maintain strong average turnaround times of approximately one day for most specimens throughout the surge.
As clinical COVID-19 volumes declined, we are expanding our non-clinical COVID-19 testing to support the return to school, office, travel and entertainment.
We're making testing easy, fast and affordable for school systems and other group settings across the country.
We are currently performing K through 12 school testing in approximately 20 states with five additional states ready to come online.
We're testing passengers on Carnival Cruise Lines and Quest exclusively provided testing at the Boston Marathon earlier this month.
In the base business, we continue to make progress on our two-point strategy to accelerate growth and drive operational excellence.
Now, here are some highlights from the third quarter.
Our M&A pipeline remained strong.
In the third quarter, we completed a small tuck-in acquisition of an independent lab in Florida.
We continue to build on our exceptional health plan access of approximately 90% of all commercially insured lives in the United States.
At our Investor Day, we discussed how we have fundamentally changed our relationship with health plans and we continue to see the promise of value-based relationships come to life.
So here is a couple of examples.
We are working with National Health Plans to help their self-insured employers, employer customers improve quality outcomes and lower the cost of care for both the employers and their employees.
Also, effective October 1, we gained access to 1 billion Managed Medicaid members in Florida as their coverage transitions to Centene's Sunshine Health Plan.
We're getting good feedback from the provider community in our growing testing volumes through this expanded access opportunity.
Our hospital health system revenue continues to track well above 2019 levels, driven largely by the strength of our professional laboratory services contracts.
As we highlighted previously, 2021 performance is benefiting from two of our largest PLS contracts to-date, Hackensack Meridian Health and Memorial Hermann.
Altogether, our PLS business is expected to exceed $500 million in annual revenue this year.
Trends in our hospital reference business also remained steady with third quarter base testing volumes above 2019 levels.
We also generated record consumer-initiated testing revenue through QuestDirect in the third quarter.
While COVID testing has been the strong contributor to growth, we expect our base direct-to-consumer testing revenue to more than double this year.
Recently, we soft-launched a comprehensive health profile on QuestDirect, similar to our Blueprint for Wellness offering for employers.
This expanded health plan panel offers a deep dive into consumers' health profile with a battery of test and biometric measurements to provide a personalized Health Quotient Score that can be used to track health progress over time.
And then finally, our MyQuest app and patient portal now has almost 20 million users.
In advanced diagnostics, we continue to ramp investments and see strong momentum in key growth drivers.
We're seeing strong growth in non-invasive prenatal testing significantly above 2019 levels and saw solid contribution in our specialty genetics portfolio from Blueprint Genetics.
We continue to work closely with the CDC to sequence positive COVID specimens in an ongoing effort to track emerging variants, expanding the -- of the work that we performed in the quarter.
And then finally, we plan to introduce a test service based on a new FDA-approved companion diagnostic from Agilent for a therapy from Eli Lilly for a certain type of high-risk early breast cancer.
Quest will be the first laboratory to offer it to physicians nationally at the end of the month.
Turning to our second strategy, driving operational excellence, we made progress and remain on track to deliver at our targeted 3% annual efficiencies across the business.
Last week, we announced that we completed the integration and consolidation of our Northeast regional operations into our new 250,000 square foot next-generation lab in Clifton, New Jersey.
This state-of-the art highly automated facility services more than 40 million people across seven states.
In patient services, we are seeing all-time high numbers of patients making appointments to visit our patient service centers.
Now, more than 50% of patient service center visits are now by appointment versus walk-ins and this enables patients to be very satisfied and also improves our ability to drive productivity of our phlebotomists.
Similar to our immunoassay platform consolidation, we recently procured a highly automated urinalysis platform that is expected to generate millions in annual savings once these new systems are standardized across our laboratory network.
As a demonstration of our gratitude, we're assisting our employees with a one-time payment of up to $500 designed to reimburse cost they incurred during the pandemic.
Additionally, another year of pandemic pressures and travel restrictions have made it very difficult for many employees to take their hard-earned time off.
Therefore, we are providing a payout of most unused paid time off for our hourly employees to ensure they don't forfeit their earned unused time at year-end.
For the third quarter, consolidated revenues were $2.77 billion, down 0.4% versus the prior year.
Revenues for Diagnostic Information Services were essentially flat compared to the prior year, which is reflected by lower revenue from COVID-19 testing services versus the third quarter of last year, largely offset by the strong ongoing recovery in our base testing revenues.
Compared to 2019, our base DIS revenue grew approximately 6% in the third quarter and it was up nearly 2% excluding acquisitions.
Volume, measured by the number of requisitions, increased 5.3% versus the prior year with acquisitions contributing approximately 2%.
Compared to our third quarter 2019 baseline, total base testing volumes increased 9%.
Excluding acquisitions, total base testing volumes grew approximately 4% and benefited from new PLS contracts that have ramped over the last year.
We saw a rebound in our base business volumes in September following a modest softening in August that we believe was at least partially caused by the rise of the Delta variant and the timing of summer vacations.
Importantly, our base business revenue and volume grew sequentially in the third quarter.
This helps illustrate the ongoing recovery as historically total revenue and volumes typically step down in Q3 versus Q2 due to summer seasonality.
As most of you know, COVID-19 testing volumes grew in the third quarter versus Q2, which was in line with broader COVID-19 testing trends across the country.
We resulted approximately 7.6 million molecular tests and nearly 700,000 serology tests in the third quarter.
So far in October, average COVID-19 molecular volumes have declined approximately 10% from where we exited Q3 but are still above the levels we expected prior to the surge of the Delta variant, while the base business continues to improve since September.
Revenue per requisition declined 5.4% versus the prior year, driven primarily by lower COVID-19 molecular volume and, to a lesser extent, recent PLS wins.
Unit price headwinds remained modest and in line with our expectations.
Reported operating income in the third quarter was $652 million or 23.5% of revenues compared to $718 million or 25.8% of revenues last year.
On an adjusted basis, operating income in Q3 was $694 million or 25% of revenues compared to $831 million or 29.8% of revenues last year.
The year-over-year decline in operating margin was driven by lower COVID-19 testing revenue, partially offset by the recovery in our base business.
Reported earnings per share was $4.02 in the quarter compared to $4.14 a year ago.
Adjusted earnings per share was $3.96 compared to $4.31 last year.
Cash provided by operations was $1.75 billion through September year-to-date versus $1.46 billion in the same period last year.
Turning to guidance, we have raised our full-year 2021 outlook as follows.
Revenue is expected to be between $10.45 billion and $10.6 billion, an increase of approximately 11% to 12% versus the prior year.
Reported earnings per share is expected to be in the range of $14.69 [Phonetic] and $15.09 and adjusted earnings per share to be in the range of $13.50 and $13.90.
Cash provided by operations is expected to be approximately $2.2 billion and capital expenditures are expected to be approximately $400 million.
Before concluding, I'll touch on some assumptions embedded in our updated outlook.
We expect COVID-19 molecular volumes to continue to decline from Q3 levels throughout the remainder of the year.
At the low end of our outlook, we assume approximately 50,000 molecular tests per day in Q4 and serology volumes to hold relatively steady at approximately 5,000 tests per day.
As you may know, late last week, the public health emergency was again extended another 90 days through late January.
We expect reimbursement for clinical COVID-19 molecular testing to hold relatively steady through the remainder of the year.
However, we continue to assume average reimbursements to trend lower in Q4 as our mix of COVID-19 molecular volumes potentially shift from clinical diagnostic testing to more return-to-life surveillance testing.
Finally, we continue to assume low single-digit revenue growth in our base business in Q4 versus 2019.
Getting to the midpoint or higher end of our outlook ranges assumes stronger COVID-19 molecular testing volumes and/or stronger growth in our base business.
Well, to summarize, we had a strong third quarter.
We have raised our outlook for the remainder of the year based on higher than anticipated COVID-19 volumes as well as our continued progress we expect to see in our base business.
And finally, the momentum of our base business positions us to deliver the 2022 outlook we shared at our March Investor Day.
| compname posts qtrly adjusted diluted earnings per share of $3.96.
quest diagnostics inc - raises full year 2021 outlook to reflect higher than anticipated covid-19 testing volumes.
quest diagnostics inc - q3 reported diluted earnings per share (eps) of $4.02.
quest diagnostics inc - qtrly adjusted diluted earnings per share of $3.96.
quest diagnostics inc - had a strong q3, as covid-19 molecular volumes increased throughout summer.
quest diagnostics inc - in late summer we experienced some softness in base business across country, but saw an overall rebound in september.
quest diagnostics inc - base business continued to improve sequentially in q3 which speaks to ongoing recovery.
quest diagnostics inc - q3 revenues of $2.77 billion, down 0.4% from 2020.
quest diagnostics inc - sees fy net revenues $10.45 billion to $10.60 billion.
quest diagnostics inc - sees fy adjusted diluted earnings per share $13.50 - $13.90.
quest diagnostics inc - sees fy reported diluted earnings per share $14.69 - $15.09.
|
Although we believe these estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
Well, first and foremost, we hope that you and yours, continue to be safe, happy, healthy and engaged; and I think, looking at our business despite reopening delays related to the delta variant, the office market continues to improve, tour activity, lease negotiations and deal executions, remain on a positive trend line.
Our portfolio occupancy has increased to approximately 35%, the predominance of tenants returning has though expanded beyond just small employers, as occupancy for tenants 50,000 square feet and below is now over 50%.
During our prepared comments we'll review our third quarter results, discuss progress in our business plan and update you on our recent capital and development activity.
Tom will then also provide a financial overview and after that Dan, George, Tom and I are available to answer any questions you may have.
From a portfolio management standpoint, we remain focused on reducing forward rollover and providing a solid platform for growth.
These efforts have been successful.
We have reduced our forward rollover exposure through 2024 to an average of 6.8%, a slight improvement over last quarter.
Our forecasted rollover exposure is now below 10% annually, through 2026.
Revenue and earnings growth remain a top priority.
Key near-term earnings drivers for us are, as you all know, we have several key vacancies, that upon lease-up will generate between $0.07 and $0.10 per share of growth and we're delighted to report that we have now leased about 46% of that targeted square footage and achieved about 45% of that forward revenue growth, at an average mark to market of 12% cash and 19% GAAP and that income will be substantially in place by the third quarter of 2022, which can create a good growth opportunity for us.
Some notable components of that during the quarter, the last 38,000 square feet vacated by [Indecipherable] in Austin has been leased and we've also signed a replacement lease for the 42,000 square foot tenant in Radnor, Pennsylvania.
And lastly we did sign three new leases at Commerce Square, totaling just shy of 29,000 square feet.
We do see clear trend lines of tenants requiring higher quality space, which we do think positions our portfolio extremely well.
From a financial standpoint, for the third quarter, we posted FFO of $0.35 per share, which is 1% per share above consensus estimates, which Tom will walk you through.
We've also made excellent progress in all the other components of our 2021 business plan.
We do anticipate about a 100,000 square feet of positive absorption during the fourth quarter, and we will achieve our year-end occupancy and lease percentage guidance ranges.
And to reinforce our leasing progress to date, we are increasing our speculative revenue target by $500,000 from our mid-point range of $25.5 million to $21 million and we are over 99% complete on that revised target.
It's important to note that that $21 million target that we're now circling is about 15% above the bottom end of our original range and it does reflect ever improving office market conditions.
Looking at some other operating statistics.
We've also posted great results there for the quarter as well, tenant retention was above our 2021 business plan range.
Of the 59 new deals that we signed this year, the weighted average lease term is 7.8 years, 68% of those lease terms are longer than four years and our medium lease term has remained fairly consistent with what we are able to achieve in 2018, '19, and in 2020.
Third quarter capital cost came in below 8% of generated revenue, so well within our business plan range.
Cash mark to market was a positive 12% and our GAAP mark to market was a positive 16%.
Our year-to-date mark to market results are above our full year ranges.
However, as we noted on last quarter's call, based on leases already executed and commencing this in the fourth quarter, with lower mark to market results, we will finish the year within our business plan ranges.
We also expect that every region will post positive mark to market results on both a cash and GAAP basis this year.
Our third quarter GAAP same store NOI was 2% and year-to-date results were within our '21 range.
Our third quarter cash same store NOI was 5.5% and above our 2021 range of 3% to 5%.
But again, similar to our mark to market dynamic, tenants scheduled to take occupancy later this year will accelerate same-store growth, will enable us to achieve our 2021 business plan ranges.
We are still forecasting a 21 year end debt to EBITDA in the range of 6.3 times to 6.5 times.
And looking at leasing velocity we know that everyone is keenly focused on recovery data points and we have several encouraging signs to report.
The Philadelphia suburban market produced more than 350,000 square feet of leasing activity in the second quarter, it was at 42.7% increase quarter-over-quarter.
The CBD market also posted 181,000 square feet of leasing activity, and Philadelphia generally is making a strong recovery from the pandemic in comparison to a number of other major American cities.
Our vacancy rate is lower than the national average and based upon a major brokerage report Philadelphia is in the top 10 of all American cities for pandemic recovery, as measured by recovery rates and employment, vaccination and leasing activity.
During the quarter, we had a total of over 1,500 virtual tours and inspected over 758,000 square feet in line with second quarter results.
Physical tours were down slightly over the second -- from the second quarter and we attribute this really more to the summer months as third quarter physical tours outpaced first quarter tours by over 13%.
Our overall pipeline stands at 1.6 million square feet, which increased by about 600,000 square feet during the quarter.
Another good sign of more tenants entering the marketplace.
And while these recovery data points are encouraging.
They also do compare favorably to the pre-pandemic leasing trends.
So our pipeline today is 7% better than our third quarter '19 results.
Deal conversion rate was on par with previous quarter results as well.
Now as you might expect and we've reported last quarter, median deal cycle time continues to trail pre-pandemic levels by approximately 30 days.
But on a very positive note, during the quarter, we executed 464,000 square feet of leases, including 347,000 square feet of new leasing activity.
We also continue to see two favorable trends that we think positively impact our portfolio.
First, quality product does matter, since the beginning of the pandemic approximately 100,000 square feet of deals have moved up in the Brandywine buildings versus lower quality competitors.
Secondly, we have seen approximately 20 tenants expand their premises by approximately 122,000 square feet since the beginning of the pandemic.
In looking at our liquidity and dividend coverages, as Tom will report, we have excellent liquidity and anticipate having approximately $515 million available on our line of credit by the end of the year.
We have no unsecured bond maturities until 2023, have a weighted average effective rate of 3.73% as a fully unencumbered wholly owned asset base.
Our dividend remains extremely well covered with a 54% FFO and 81% CAD payout ratio and as we noted, our five year dividend growth rate has been 5.3% while our five year CAD growth rate has been just shy of 8%, well in excess of our core peer averages.
From a capital allocation standpoint, it was frankly another quiet quarter, but we continue to make progress on many other fronts.
As part of our land recycling program we did sell three non-core land parcels, generating just shy of $11 million of proceeds and at a $900,000 gain.
Also, as we noted in our supplemental package, during the quarter, at $50 million preferred equity investment in two office properties in Austin, Texas were redeemed.
We did record a $2.8 million incremental investment income during the quarter due to that early redemption, that $50 million preferred equity generated just shy of a 21% internal rate of return during the whole period.
Taking a quick look at our development opportunity set.
250 King of Prussia Road, which we note in our supplemental package, is a 169,000 square foot project under renovation in the Radnor Submarket, that was started in the second quarter and will be wrapped up by the second quarter of '22.
The project will accommodate heavy life science as well as office use.
Our cost did increase quarter-over-quarter due to the additional -- some additional MEP [Phonetic] work to facilitate broader life science penetration, as well as this adding an additional generator for our redundant -- for power redundancy.
Those two items did impact our targeted yields by reducing it about 20 basis points.
The project, as we noted before, is really the first delivery in our Radnor Life Science Center, which will consist of more than 300,000 square feet of life science space, and one of the region's best performing submarkets, our current pipeline for 250 King of Prussia Road totals more than 200,000 square feet, including 51,000 square feet in lease negotiations.
Looking at Schuylkill Yards, our Schuylkill Yards west project is on time, on budget for Q3, '23 delivery.
That project will be delivered -- a 7% blended yield, as you may recall, it consists of 326 apartment units, 200,000 square feet of commercial and life science space and 9,000 square feet of street level retail.
We have an active pipeline continuing to build on that project and our $56.8 million equity commitment is fully funded.
Our partners' equity investment is currently being made and the construction loan that we closed recently really will not have its first funding until the first quarter of 2022.
Looking at 405 Colorado and Austin, Texas; this project is now complete.
During the quarter we did increase our lease percentage from 24% to 44%.
We do have a growing an active pipeline now that that building has been fully delivered.
We did slide our stabilization date a couple of quarters to reflect the timing of these new lease signings, as well as the timing of our targeted pipeline.
The 522 space garage did open during the summer and is currently just shy of about 12% occupied and we have signed already 102 monthly contracts since we opened the garage.
3000 Market Street in University City, Philadelphia, is a 91,000 square foot life science renovation as part of our Schuylkill Yards neighborhood, base building construction is complete.
The building is fully leased for 12 years at a development yield of 9.6%.
The redevelopment did include increasing the building size from 64,000 to about 91,000 by converting below grade space into labs.
This property was placed in the service on October 1st.
Cira Labs, which we announced a couple of quarter agos, where we partnered with PA Biotech Center to create a 50,000 square foot, 239 seat life science incubator, within the CIra Center Project, that will be completed later in the fourth quarter and will open January 1, 2022.
Since we announced, we have had great leasing success announced and just shy of 50% -- about 49% leased, with 118 of that 239 seats leased and a pipeline with 17 additional proposals, aggregating more seats than we have available capacity.
So very excited about delivering that project on a substantially pre-leased basis.
And just looking at some future development at Schuylkill Yards and Broadmoor, within Schuylkill Yards the life science push really continues.
We can develop that 3 million square feet of life science space.
We've already delivered 3000 Market, the Bulletin Building, 3151 Market, which is our 424,000 net rentable square foot life science building, is fully designed, ready to go and with a strong leasing pipeline, and our goal remains to be able to start that project in early 2022 [Technical Issues] assuming market conditions permit and the pipeline continues to build.
At Broadmoor, Block A, which consists of 363,000 square feet of office and 341 apartments at a total cost of $321 million, will be starting later in the fourth quarter.
We are finalizing documentation including construction financing with our partner.
The first phase of Block F, which is a 272 apartment units will be starting in the same venture format in Q1 of '22.
And on the office leasing component, our leasing pipeline right now is slightly over 500,000 square feet with about an additional 1.5 million square feet of inquiries.
Just one additional note related to our third quarter earnings cycle, as we outlined last quarter, we would normally have provided '22 guidance for earnings in our business plan and FFO during the third quarter cycle.
However, consistent with what we did last year and based on the continued uncertain business climate, we will announce our '22 guidance on our fourth quarter earnings call.
Tom will now provide an overview of our financial results.
Our third quarter net income totaled 900,000 or $0.01 per diluted share and our FFO totaled 61.1 million or $0.35 per diluted share and that was $0.01 above consensus estimates.
Some general observations about the third quarter, while our results were above consensus, there were a number of moving pieces and several variances to our second quarter guidance.
Portfolio operating income at $68.5 million was in line with our guidance for the second quarter.
Interest and investment income totaled $4.5 million and was $2.5 million above our $2 million guidance number.
As Jerry mentioned this variance was due to the early termination of a $50 million preferred equity investment, which resulted in the acceleration of some fees, totaling about $1.5 million, and to make whole interest, on the investment income side of about $1.3 million, that's all was recorded in the third quarter.
We forecasted 2.3 million in land gains and tax provisions, which was $1.4 million below our actual results, two land sales were delayed and we believe they will both close in the fourth quarter.
As a result of those two that nets to a $0.01 increase to the reason we're above consensus.
Interest expense of 15.2 was below our second quarter forecast, by $800,000 and that was primarily due to higher than anticipated capitalized interest on our 405 Colorado.
Termination of other income totaled $1.8 million and was 400,000 above second quarter forecast, primarily due to the timing of some anticipated transactions, G&A was $7.1 million, 400,000 below our $7.5 million second quarter guidance.
And that was primarily due to lower employee costs.
Our third quarter, fixed charge and interest coverage ratios were 4.3 and 4.1 respectively, both metrics improved from the second quarter, primarily due to the higher investment income.
Our third quarter annualized net debt to EBITDA decreased to 6.5 and is currently at the high end of our 6.3 to 6.5 guidance.
This metric also benefits from the increased investment income.
On the additional reporting, as we look at cash collections, they were over 99%, continue to be very strong.
We did have some net operating write-offs of tenants, that totaled about 700,000 and did lower our portfolio operating income for the quarter.
For portfolio changes 3000 Market, based on Brandywine completing our base building obligations 3000 Market will be added to our core portfolio during the fourth quarter as it's 100% life -- 100% leased life science to Spark Therapeutics [Phonetic].
Looking at fourth quarter guidance for 2021, we anticipate the fourth quarter results to improve compared to the second -- to the third quarter and we have some of the following assumptions.
Portfolio operating income will total $70 million and would be sequentially higher in the third quarter, that's due to the approximately 212,000 square feet that's going to be moving in during the quarter at a positive mark to market and will commence, and in addition to 3000 Market.
FFO contribution from unconsolidated joint ventures will total about $6.1 million for the fourth quarter, relatively flat compared to the third quarter.
G&A will total roughly $7.1 million again sequentially flat to the third quarter.
Interest expense will be approximately 15.5 with approximately $2 million of capitalized interest.
Termination fees and other incomes should total about $2.5 million.
Net management fees will be about $3 million and interest in other -- interest and investment income about $400,000.
We do anticipate land sales and tax provision to be about $1.3 million mainly based on the slides from the land sales that didn't occur in the third quarter, and this will generate about $6 million in net cash proceeds.
On other business plan assumptions there will be no property acquisitions, we did note one JV sale in our all state portfolio, which should generate about $12 million of net cash proceeds, no anticipated ATM or share buyback activity, no financing or refinancing activity in the quarter and our share count will be about 73.5 million diluted shares.
On the financing front, as previously mentioned, we did close on our construction loan at Schuylkill Yards, which represents a 65% estimate to -- estimated cost -- loan to cost.
Initial interest rate will be about 3.75% based on our current capital plan we will start drawing on that during the fourth quarter of 2022.
We plan to restructure and extend our current line -- our current loan, encovering our joint venture and 4040 Wilson [Phonetic] and that will lower our borrowing costs by about 100 basis points, generate minimal initial proceeds but allow for increased borrowings to complete the leasing of the vacant office space.
While we have no other financing or refinancing activity in our plan, we continue to monitor the debt markets ahead of our 2023 secured bond maturity.
Looking at our capital plan, our second quarter CAD was 65% of our common dividend and year-to-date coverage is within our range.
Our fourth quarter 2021 capital plan is very straightforward at 140 million, and includes $70 million of development and redevelopment activity, $33 million of common dividends, $15 million of revenue maintained and $15 million of revenue create capital expenditures and contributions to our joint ventures totaling about $5 million.
The primary sources will be cash flow from interest payments of -- after interest payments of $38 million, $42 million used as the line of credit, $42 million cash on hand and cash -- other sales and land totaling about $18 million.
Based on our capital plan, we will have about 558 available in line of credit.
The increase, in our projected line of credit, is partially due to the build-out of our incubator at Cira Center and we also project the net debt to EBITDA to fall within the 6.3 to 6.5 range with a big variable being this timing and scope of capital development payments that could reduce cash.
Our net debt to GAV will be 39% to 40%.
In addition, we anticipate our fixed charge ratios to approximate 3.6 on interest coverage and will approximate 3.9% -- Sorry fixed charge of 3.6 interest coverage at 3.9 which represent sequential decrease, again primarily due to some of the investment income that we received in the thirrd quarter.
So the key takeaways, as we wrap up our prepared comments, the portfolio and operations are in excellent shape.
We've made some really good progress on both building the pipeline as well as beginning the process of significantly filling some of those larger vacancies we have, that will be a great growth throughout to look at over the next couple of years.
And also the leasing pipeline certainly continues to increase as tenants return to the workplace, that pace is not as fast as any of us would like, but we certainly are seeing a lot of green shoots in terms of more tenancies coming into the market.
And along those lines.
We actually do expect, as we're beginning to see now, a compression of decision timelines later in the year and into early '22 and we are certainly anticipating a continuation of positive mark to markets, driven by improving market conditions, as well as the necessity of having a higher rents based on escalating construction prices.
Safety, health and amenity programs both in design and execution are remaining a top priority of all prospects, large and small, and based on that we really do believe that new development and our trophy inventory stock will remain in a very positive position.
We are very much focused on our two forward growth drivers, both delivering additional products within Schuylkill Yards, leasing up what we have under development and are delighted to be moving forward on the first phase of Broadmoor later this year and into the first quarter of '22.
The success we've had added 3000 Market, the Bulletin Building just reported results on Cira Labs, as well as a focus on starting 3151 early next year.
We'll have over a million square feet of life science space operating under construction, which starts to build that base of revenue diversification that we've talked about.
We certainly are very focused on continuing to grow cash flow and our attractive CAD growth over the last five years has really resulted in a well covered and attractive dividend that's poised to grow as we increase earnings.
And then just a final comment on financing and capital availability, private equity remains readily available at very effective pricing as well as we all know with a very competitive and advantageously priced debt market.
Strong operating and development platforms like Brandywine have significant traction for project level investments as certainly as evidenced by -- what we've demonstrated thus far Broadmoor and Schuylkill Yards, so we really do believe there is readily executable attractive financing available for our development at very attractive third party equity cost of capital.
We do ask that in the interest of time you limit yourself to one question and a follow-up.
| compname reports q3 earnings per share of $0.01.
q3 earnings per share $0.01.
q3 ffo per share $0.35.
|
With me in New York today are Tiger Tyagarajan, our president and chief executive officer; and Ed Fitzpatrick, our chief financial officer.
Our agenda for today will be as follows.
Tiger will provide a high-level overview of our results and update you on our strategic initiatives.
Ed will then discuss our financial performance in greater detail and provide our outlook for 2020.
And as Gigi just mentioned, we expect our call to last roughly an hour.
In addition, during our call today, we will refer to certain non-GAAP financial measures.
We believe these non-GAAP measures provide additional information to enhance the understanding of the way management views the operating performance of our business.
Outstanding execution and continued transformation services wins capped off one of our best revenue growth years ever.
This translated into a healthy adjusted earnings per share and operating cash flow growth for 2019.
These metrics were all above the high end of our expectations.
Clients' desire for transformational change is accelerating, expanding our addressable market and providing greater opportunities for us to drive profitable long-term growth.
We continue to improve the rigor and agility of our portfolio evaluation process, allowing us to quickly reallocate investment and talent resources to best penetrate high-growth areas.
Here are our full-year 2019 results on a constant-currency basis.
Total revenue increased 18%, Global client revenue increased 12% and Global client BPO revenue increased 14%.
We also delivered adjusted operating income margin of 15.9%, up 10 basis points; and adjusted earnings per share of $2.05, up 14%.
During 2019, we were increasingly recognized by our clients and industry analysts as a preferred partner to drive transformational change.
By leveraging disruptive digital technologies and real-time predictive insights, we are reimagining the way work gets done to solve critical business problems for our clients.
With the relentless pace of technological innovation, as well as competitive, macroeconomic, and geopolitical pressures, corporate leaders must accelerate their decision-making process and make bold decisions based on insights derived from analytics.
We believe our culture of driving change to meet these heightened expectations from the C suite and boards is a huge differentiator in the market and is one of the reasons we win.
During 2019, we drove Global client growth across our chosen verticals led by growth of more than 30% in transformation services.
Our consulting, digital, and analytics transformation services, rooted in domain and process expertise, acts as a tip of the spear for many large, long-term transformational engagements.
Our consistent growth performance over many years supports my long-held view that digital and analytics comes to life when implemented with a deep understanding of domain and process.
Highlighting the impact of transformation services on our business, our fastest-growing relationships are greater than 20% of revenues coming from transformation services.
These accounts are growing at more than double the company average.
During 2019, for the second consecutive year, we signed total new bookings close to $4 billion, fed by our high-quality pipeline that remains near historic highs with steady win rates.
As a comparison, during 2016 and 2017, new bookings averaged approximately $2.7 billion.
Global client bookings had a solid growth in 2019 with proactive sole sourced deals accounting for roughly half of our new wins.
Large deals continued to be a meaningful contributor to total bookings, and almost three quarters of our bookings had transformation services embedded in them, up from 60% range in 2018.
As expected, the bookings declined in 2019, given the large deal we signed late in 2018.
Let me call out some key highlights for 2019.
We continued to add iconic brands to our client list in our focused industry verticals.
We closed two acquisitions to enhance our capabilities in critical areas: financial crimes and risk management and digital experience.
Supply chain services, a strategic focus area, showed dramatic growth in inflows, pipeline, bookings and revenue during the year.
We successfully launched Genome, a reskilling and training platform for our global workforce that has been a huge hit.
We continued to leverage new commercial models, reflecting the changing nature of work we do for our clients.
And finally, through the last phase of the large GE deal, we significantly enhanced our strategic sourcing capability.
Expanding on some of these, during the year, we elevated our brand recognition and solidified our reputation as a thought leader, providing innovative transformative solutions for a growing roster of iconic clients.
For instance, as discussed last quarter, we entered into a strategic relationship with Cardinal Health, where our deep expertise in finance and accounting and ability to leverage data analytics to provide insights will help transform their FP&A analytics function to drive timely, as well as insightful decision-making.
FP&A represents another ripe area for disruption and provides opportunities for growth.
These relationships are creating a heightened level of new inbound C-suite calls as companies want to explore engaging with us to transform their businesses.
We expect to fully leverage such new skill sets from a number of these relationships that has added significant new capabilities over the last two years.
These include highly leverageable teams in financial planning and analysis; order management and supply chain, particularly in consumer goods retail; commercial and pricing analytics; and sourcing and category management.
A lot of this depth is in market and onshore.
We acquired riskCanvas early in 2019, which bolstered our already strong market offerings in financial crimes and risk management services for banks, a large opportunity for growth.
Our expanded capabilities in this space are already showing results.
We were selected by a global bank to transform their KYC process for their wholesale banking business to better define customer risk profiles and improve regulatory compliance.
Our risk domain team, along with our digital and analytics experts, are deploying a first of its kind-as-a-service solution with a transaction-based commercial model.
This unique offering leverages the riskCanvas proprietary cloud platform to collect and organize customer data, populate customer profile templates and provide risk scores.
Replacing the bank's current manual processes with a streamlined digital as-a-service model, this solution is expected to cut processing time in half and provide an industrialized KYC process with much higher accuracy and timely regulatory reporting.
During the fourth quarter, we closed the acquisition of Rightpoint to deepen our capabilities in experience, which is becoming increasingly important to our clients.
While still early days, we're already seeing the value of bringing together our process innovation and Rightpoint's experience innovation.
Supply chain management, now led by the team that joined us from Barkawi in late 2018, is allowing us to build traction in a vastly underpenetrated market.
Our pipeline has expanded more than three times since the beginning of 2019, and we recently won a new engagement with a large global consumer goods company to help transform and run their end-to-end supply chain operations.
The redesigned operating model is aimed at helping the client drive better customer relationships, improve fulfillment rates, accelerate new product introductions and optimize trade promotions, thereby driving higher revenue and better working capital levels for them.
I am excited to report that we now have three global relationships that crossed $100 million in annual revenue, up from just one at the end of 2018.
We expect many more of our relationships to hit this milestone over time.
As our solutions increasingly leverage AI, machine learning, robotic process automation and cloud-based solutions, our commercial models are becoming more outcome based.
At the end of last year, more than 40% of our total revenue is from newer constructs, not just based on FTE pricing, up from the mid-30% range only a couple of years back.
Our talent has always been the most important pillar of our success.
Like many of our clients, we are going through a transformation in the way we excite our workforce to reskill and help them continuously learn.
The launch of our Genome platform early last year provides the right tools and methods to up-skill our 95,000-plus global team members with relevant digital transformation and other professional skills at scale.
We are well on our way to achieving our first-year goal of reaching 70% penetration with the amount of learning hours continuing to expand.
As we move into 2020, we continue to expect our overall demand to be robust and continue to be led by transformation services.
Coupled with the power of our domain and process expertise, we believe we are uniquely positioned to leverage innovative new digital technologies, as well as data and analytics in a focused way to solve for specific business outcomes.
This allows us to drive end-to-end digital transformation for clients in unprecedented ways, delivering significant outcome improvements and superior experiences.
We have been building these solutions through a combination of internal development, partnerships, acquisitions and large targeted carve-outs from our clients.
We now have an active portfolio of solutions that we manage, allowing us to leverage them for scale.
Over time, we will continue to take decisions to proactively pull the plan on some of these.
Recent examples of this include our mortgage origination platform, the KYC JV and the wealth management platform.
This proactive culling allows us to double down on areas such as dynamic workflows in the cloud, customer experience solutions, supply chain optimization, financial crimes and risk solutions and many others that are demonstrating market traction.
Today, I will review our full-year results in detail then briefly touch upon some highlights of our fourth-quarter performance, as well as provide our financial outlook for 2020.
Let me begin with a review of our full-year 2019 results.
Total revenue was $3.52 billion, up 17% year over year or 18% on a constant-currency basis.
Total growth was greater than expected, with transformation services leading the way.
Total BPO revenue, which represents approximately 84% of total revenue, increased 19% year over year, and total IT services revenue was up 10% year over year.
Global client revenue, which represented approximately 86% of total revenue, increased 11% year over year or 12% on a constant-currency basis, at the high end of our expected range.
Within Global clients, BPO revenue increased 13% year over year or 14% on a constant-currency basis, led by growth in transformation services, up more than 30%, while IT services revenue increased 3%.
During the year, as we become a bigger transformation partner for an increasing number of Global clients, we have meaningfully expanded the size of a number of our client relationships.
During 2019, we increased the number of our Global clients with annual revenues over $15 million to 49 from 45.
This included clients with more than $25 million in annual revenue, growing to 25 from 21.
GE revenue increased 78% year over year, above our expectations largely due to incremental scope added during the year related to the large deal we signed late in 2018.
Adjusted income from operations grew 18% year over year to $559 million.
Recall that we had assumed approximately $22 million at the beginning of the year related to the India export subsidy in our adjusted operating income outlook.
As it became clearer throughout the year that we would only receive approximately $4 million of that expected benefit, we put plans in motion to cover the $18 million shortfall with other items.
During the fourth quarter, we were able to finalize the plans to monetize a property we owned in India which generated a gain of approximately $31 million included in other operating income.
This gain was partially offset during the quarter by certain other costs, including an $11 million nonrecurring impairment charge in cost of revenues related to a European wealth management platform that we no longer plan to leverage beyond the current scope.
Adjusted operating margin of 15.9% was 10 basis points or $4 million, lower than our 16% target primarily due to a $4 million impairment charge recorded in the fourth quarter related to certain retirement plan assets in India.
Gross margin was lower year over year primarily due to higher stock-based compensation of 20 basis points and approximately 50 basis points due to the nonrecurring charges I just mentioned.
Better-than-expected revenue growth with higher onshore scope and the additional GE revenue also impacted margin.
SG&A expenses totaled $795 million, compared to $694 million last year.
As a percentage of revenue, SG&A expenses were down 50 basis points year over year, driven by operating leverage, despite a 50-basis point dilution related to higher year-over-year stock-based compensation, as well as a 10-basis point impact from Rightpoint acquisition-related expenses.
Adjusted earnings per share of $2.05 was up 14% year over year, compared to $1.80 in 2018.
This $0.25 increase was primarily driven by higher operating income of $0.34, partially offset by lower foreign exchange remeasurement gains, higher tax expense, and higher net interest expense of $0.03 each.
2019 represents the fifth consecutive year of double-digit adjusted earnings per share growth that produced a 15% compound annual growth rate over that period.
This growth was driven by solid revenue growth and disciplined cost management that has consistently driven increased operating income and related operating margins in each of those periods, in line with our stated key strategic objectives.
Our effective tax rate was 23.7%, compared to 22.3% last year, driven by the expiration of Special Economic Zones benefits in India, changes to the jurisdictional mix of income and the impact of India tax law changes.
Let me now provide some additional color around our fourth-quarter performance.
Global client revenue increased 7% year over year or 8% on a constant-currency basis, largely driven by continued growth in our consumer goods retail, banking capital markets and high-tech verticals.
Recall that our growth rates during the fourth quarter last year made for a tougher comparison this year.
GE revenues were up 61% year over year, driven by the large deals signed late last year and incremental scope of work added during the quarter.
Adjusted operating margin during the quarter was 16.9%, largely in line with the level reported during the same period last year but slightly lower than we expected primarily due to the nonrecurring impairment of the India retirement plan assets in the quarter that I mentioned earlier.
Gross margin for the quarter was approximately 33%, compared to 35.5% level we generated during the first three quarters of 2019.
The decline was primarily driven by the two nonrecurring charges I referred to earlier that total approximately $14 million.
In addition, lower margin on the incremental GE scope and lower margin on the ramp-up of a new account in our banking vertical negatively impacted gross margin levels during the quarter.
The new banking account margins are expected to return to more normalized levels in the first quarter of 2020.
We also expect overall GE full-year 2020 gross margins to be largely aligned with GE's 2019 levels.
Since 2019 was impacted by nonrecurring charges of approximately 50 basis points, we are expecting full-year gross margins to be up by 50 basis points in 2020.
Total SG&A expenses were $213 million, compared to $179 million in the same quarter of last year and included approximately $7.4 million of nonrecurring Rightpoint-related acquisition expenses and approximately $16 million related to stock-based compensation.
Adjusted earnings per share for the fourth quarter was $0.57 compared to $0.52 last year.
The $0.05 increase was driven by higher operating income of $0.07, as well as $0.01 related to the impact of higher foreign exchange balance sheet remeasurement gains, partially offset by higher effective tax rate of $0.02 and increased share count of $0.01.
Our effective tax rate was 28.1% compared to 25.8% last year due to the expiration of Special Economic Zones benefits, changes in the jurisdictional mix of our income and the impact of India tax law changes.
Turning to our balance sheet and cash flows.
During the year, we returned $95 million of capital to shareholders.
This included approximately $65 million in the form of our regular quarterly dividend of $0.085 per share which increased by 13% in comparison to the prior year.
We also repurchased approximately 766,000 shares totaling $30 million at a weighted average price of $39.16 per share during the year.
Since we initiated our share buyback program in 2015, we've reduced our net outstanding shares by 17%.
Over this period, we repurchased 37.4 million shares at an average price of approximately $26 per share for a total of $976 million.
The weighted average annual return on these share repurchases has been approximately 18% from 2015 through the end of January this year.
We currently have approximately $274 million of authorized capacity under our share repurchase program.
Cash and cash equivalents totaled $467 million, compared to $368 million at the end of the fourth quarter of 2018.
Our net debt-to-EBITDA ratio for the last four rolling quarters was 1.7.
With undrawn debt capacity of $428 million and existing cash balances, we continue to have sufficient liquidity to pursue growth opportunities and execute on our capital allocation strategy.
Days sales outstanding were 86 days, which were down from 87 days sequentially and increased three days from the last year, driven by delayed collections on certain accounts where cash was received in early January.
Despite the higher DSOs, we were able to generate $428 million of cash from operations in 2019, up 26% year over year, exceeding the high end of the range we expected for the year.
The majority of this outperformance was driven by higher adjusted operating income.
Capital expenditures as a percentage of revenue was 3.3% in 2019, in line with our expectations.
Finally, let me update you on our outlook for 2020.
We expect total revenues to be between $3.89 billion and $3.95 billion, representing year-over-year growth of 10.5% to 12.5% on a constant-currency basis.
We expect the Rightpoint acquisition to contribute approximately 250 basis points to total company growth in 2020.
This impact is approximately 100 points higher than the contribution from acquisitions to our top line in 2019.
For Global clients, we expect revenue growth to be in the range of 12% to 14% on a constant-currency basis.
We expect GE revenues to normalize and be approximately flat year over year.
We will continue our strategic objectives to expand our adjusted operating margin and expect to drive 10 basis points of improvement to 16%.
As I mentioned earlier, we are expecting our full-year gross margins to improve by approximately 50 basis points in 2020 due to the impact of nonrecurring charges incurred in 2019.
We believe our gross margins have stabilized.
The impact of large deals has driven even higher revenue growth than we expected and thus has had a greater impact on gross margins than we initially expected.
Given the tremendous amount of capabilities we have been adding to our team from these iconic companies, we made the strategic decision to accept initially lower gross margins on these deals.
We plan to fully leverage these skill sets well into the future.
Due to the historic seasonality we see in our business, we currently expect our adjusted operating margin for the first quarter of 2020 to be in the 14% to 15% range we have seen in the last two years.
We also expect the ramp of operating margins to be more in line with the trajectory we have seen over the past two years.
Our 2020 effective tax rate is expected to be approximately 23.5% to 24.5%, up from 23.7% in 2019, driven primarily by the expiration of Special Economic Zones in India.
We continue to expect our effective tax rate to stabilize in a mid-20% range as the Special Economic Zone expirations reduce over time.
Given the outlook I just provided, we are estimating adjusted earnings per share for the full-year 2020 to be between $2.24 and $2.28.
This increase in earnings per share of 9% to 11% includes the negative impact of higher tax rate of approximately $0.01 per share in 2020 and includes no FX remeasurement-related impact.
Recall that we recorded a gain of $0.03 for FX remeasurement gains in 2019.
We have assumed our ending share count as of December 31, 2019, in this estimate.
We are forecasting cash flow from operations to grow by approximately 10%, largely in line with total company revenue growth.
Capital expenditures as a percentage of revenues are expected to remain at approximately 3% to 3.5%.
We continue to expect the free cash flow to net income ratio to be approximately one to one, on average, over time.
And finally, we just announced an increase to our quarterly dividend from $0.085 to $0.0975 per share, which equates to annualized dividend of $0.39 per share, up 15% year over year.
We saw terrific momentum in our business in 2019, driven by disciplined strategic choices and strong execution.
Our investments in our service lines, along with the successful integration of our acquisitions, particularly in digital and analytics, has positioned us well for a multiyear growth trajectory.
Our large deals with iconic brands have solidified our reputation as a transformation partner of choice, leading to higher levels of inbound activity beyond our traditional buying centers.
As we enter 2020, we are seeing the experience economy rewrite the rules of digital transformation.
We are extremely excited about how we have bolstered our capabilities in this area through the acquisition of Rightpoint on the heels of the addition of the TandemSeven a few years back.
We have also been able to leverage our automation to AI platform Genpact Cora in many of our engagements and solutions, and we see it being a huge differentiator.
Cora allows us to bring more standardized, repeatable offerings to the market.
Clients increasingly need predictive insights to make more informed decisions.
With the acceleration of the digitization of data and the maturation of data management, our opportunity in analytics has expanded dramatically.
We saw terrific growth in analytics in 2019, and we expect this trajectory to continue to be a key driver of transformation services growth going forward.
As noted earlier, we will continue to be maniacally focused on reallocating investment and talent resources to high-growth areas, and we'll continue to be thoughtful in our choices.
In summary, we have a growing top line primarily made up of sticky long-term global relationships with inherent operating leverage driving long-term margin expansion and the ability to tap our cash flows and balance sheet to take advantage of opportunities in our underpenetrated market.
We have the right leadership team and talent base to go after this.
I'm pleased with our 2020 outlook, which is very much aligned with our long-term growth and profitability goals.
Gigi, can you please provide the instructions?
| compname reports q4 adjusted earnings per share $0.57.
q4 adjusted earnings per share $0.57.
sees fy revenue $3.89 billion to $3.95 billion.
qtrly total revenue was $941 million, up 13%.
sees 2020 adjusted diluted earnings per share of $2.24 to $2.28.
sees 2020 global client revenue growth in range of 12% to 14% on as reported and constant currency basis.
|
Joining the call today are Gary Coleman and Larry Hutchison, our co-chief executive officers; Frank Svoboda, our chief financial officer; and Brian Mitchell, our general counsel.
Some of our comments may also contain non-GAAP measures.
In the fourth quarter, net income was $187 million or $1.69 per share, compared to $165 million or $1.45 per share a year ago.
Net operating income for the quarter was $188 million or $1.70 per share, a per share increase of 9% from a year ago.
On a GAAP reported basis, return on equity for the year was 11.6%, and book value per share was $66.02.
Excluding unrealized gains and losses on fixed maturities, return on equity was 14.5%, and book value per share grew 9% to $48.26.
In our life insurance operations, premium revenue increased 5% to $631 million, and life underwriting margin was $177 million, up 6% from a year ago.
In 2020, we expect life underwriting income to grow around 4% to 5%.
On the health side, premium revenue grew 7% to $275 million, and health underwriting margin was up 5% to $61 million.
Growth in premium exceeded underwriting margin growth, primarily due to lower margins at Liberty National.
In 2020, we expect health underwriting income to grow around 4% to 6%.
Administrative expenses were $61 million for the quarter, up 7% from a year ago.
As a percentage of premium, administrative expenses were 6.7%, the same as a year ago.
For the full year, administrative expenses were $240 million or 6.7% of premium, compared to 6.5% in 2018.
In 2020, we expect administrative expenses to grow approximately 6%, and to be around 6.7% of premium.
I want to go through the fourth-quarter results at each of our distribution channels.
I'll start out by saying I'm pleased with the sales growth in our agencies in 2019.
I'm particularly pleased with the agent count growth and middle management increase we have seen across all of our exclusive agencies in 2019.
At American income, life premiums were up 8% to $297 million.
And life underwriting margin was up 9% to $98 million.
Net life sales were $59 million, up 9%.
The average producing count for the fourth quarter was 7,631, up 10% from the year-ago quarter and up 1% from the third quarter.
The producing agent count at the end of the fourth quarter was 7,551.
Net life sales for the full-year 2019 grew 6%.
The sales increase was driven by increases in agent count.
At Liberty National, life premiums were up 3% to $72 million, and underwriting margin was up 4% to $18 million.
Net life sales increased 13% to $15 million, and net health sales were $7 million, up 12% from the year-ago quarter.
The average producing agent count for the fourth quarter was 2,534, up 17% from the year-ago quarter and up 6% from the third quarter.
The producing agent count at Liberty National ended the quarter at 2,660.
Net life sales for the full-year 2019 grew 9%.
Net health sales for the full-year 2019 grew 11%.
The sales increase was driven by increases in agent count.
To better describe our nonagency business at Globe Life management insurance company, we have begun replacing the term direct response to direct-to-consumer.
And our direct-to-consumer division at Globe Life, life premiums are up 4% to $209 million, and life underwriting margin was flat at $39 million.
Net life sales were $30 million, up 2% from the year-ago quarter.
For the full-year 2019, net life sales were flat, due primarily to a decrease in juvenile mailing volume resulting from a decline in the response rates from our juvenile mailing offers.
At Family Heritage, health premiums increased 8% to $76 million, and health underwriting margin increased 7% to $19 million.
Net health sales were up 19% to $18 million due to an increase in both agent productivity and agent count.
The average producing agent count for the fourth quarter was 1,228 up 9% from the year-ago quarter and up 8% from the third quarter.
The producing agent count at the end of the quarter was 1,286.
Net health sales for the full-year 2019 grew 9%.
The sales increase was primarily driven by an increase in agent count.
At United American General Agency, health premiums increased 11% to $108 million, while margins increased 12% to $15 million.
Net health sales were $32 million, up 7% compared to the year-ago quarter.
To complete my discussion of margin operations, I will now provide some projections.
We expect the producing agent count for each agency at the end of 2020 to be in the following ranges: American Income, 5% to 7% growth; Liberty National, 5% to 13% growth; Family Heritage, 2% to 7% growth.
Net life sales for the full-year 2020 are expected to be as follows: American Income, 5% to 9% growth; Liberty National, 8% to 12% growth; direct-to-consumer, down 2% to up 2%.
Net health sales for the full-year 2020 are expected to be as follows: Liberty National, 9% to 13%; Family Heritage, 8% to 12%; United American individual Medicare Supplement, relatively flat.
I want to spend a few minutes discussing our investment operations.
First, excess investment income.
Excess investment income, which we define as net investment income less required interest on net policy obligations and debt was $63 million, a 1% increase over the year-ago quarter.
On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 6%.
For the year, excess investment income grew 5%, while on a per share basis, it grew 8%.
In 2020, due to the impact of lower interest rates, we expect excess investment income to decline by 2% to 3%, but on a per share basis, be flat to up 1%.
Now regarding the investment portfolio, invested assets are $17.3 billion, including $16.4 billion of fixed maturities and amortized cost.
Now the fixed maturities $15.7 billion are investment-grade with an average rating of A-, and below investment-grade bonds were $674 million, compared to $666 million a year ago.
The percentage of below investment-grade bonds to fixed maturities is 4.1%, compared to 4.2% a year ago.
Overall, the total portfolio is rated A- compared to BBB+ a year ago.
Bonds rated BBB are 55% of the fixed maturity portfolio, down from 58% at the end of 2018.
While this ratio is in line with the overall bond market, it is high relative to our peers.
However, we have less exposure than our peers to higher risk assets such as derivatives, equities, commercial mortgages and asset-backed securities.
We believe that the BBB securities that we acquire, provide the best risk-adjusted, capital adjusted returns due in large part to our unique ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets.
Finally, we had net unrealized gains in the fixed maturity portfolio of $2.5 billion, $97 million lower than the previous quarter.
Now as to investment yield.
In the fourth quarter, we invested $449 million in investment-grade fixed maturities, primarily in the municipal, industrial and financial sectors.
We invested at an average yield of 4.11%, an average rating of A+ and an average life of 31 years.
For the entire portfolio, the fourth-quarter yield was 5.41%, down 15 basis points from the yield of fourth-quarter 2018.
As of December 31, the portfolio yield was approximately 5.41%.
For 2020, at the midpoint of our guidance, we assumed an average new money yield of 4.10% for the full year.
While we would like to see higher interest rates going forward.
Global Life can thrive in a lower for longer interest rate environment.
The extended low interest rates will not impact the GAAP or statutory balance sheets under the current accounting rules, since we sell noninterest-sensitive protection products.
While our net investment income, and to a lesser extent, our pension expense will be impacted in the continuing low interest rate environment, our excess investment income will still grow, it just won't grow at the same rate as the investors' assets.
Fortunately, the impact of lower new money rates on our investment income is somewhat limited as we expect to have an average turnover of less than 2% per year in our investment portfolio over the next five years.
First, I want to spend a few minutes discussing our share repurchases and capital position.
The parent began the year with liquid assets of $41 million.
In addition to these liquid assets, the parent generated excess cash flow in 2019 of $374 million, as compared to $349 million in 2018.
The parent company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt and the dividends paid to Globe Life shareholders.
Thus, including the assets on hand at the beginning of the year, we had $415 million available to the parent during the year.
As discussed on our prior calls, we accelerated the repurchase of $25 million of Globe Life shares into December of 2018, with commercial paper and parent cash.
We utilized $20 million of the 2019 excess cash flow to reduce the commercial paper for those repurchases, that left $395 million available for other uses, including the $50 million of liquid assets we normally retain as a parent.
In the fourth quarter, we spent $93 million to buy 930,000 Globe Life shares at an average price of $99.82.
For the full-year 2019, we spent $350 million of parent company cash to acquire 3.9 million shares at an average price of $89.04.
So far in 2020, we have spent $33.5 million to buy 322,000 shares at an average price of $104.20.
The parent ended the year with liquid assets of approximately $45 million.
In addition to these liquid assets, the parent will generate excess cash flow in 2020.
While our 2019 statutory earnings have not yet been finalized, we expect excess cash flow in 2020 to be in the range of $375 million to $395 million.
Thus, including the assets on hand at January 1, we currently expect to have around $420 million to $440 million of cash and liquid assets available to the parent in 2020.
As noted on previous calls, we will use our cash as efficiently as possible.
It should be noted that the cash received by the parent company from our insurance operations is after they have made substantial investments during the year to issue new insurance policies, expand our information technology and other operational capabilities and acquire new long-duration assets to fund future cash needs.
With the parent company excess cash flows, if market conditions are favorable and absent alternatives with higher value to our shareholders, we expect that share repurchases will continue to be a primary use of those funds.
We believe a yield to return that is better than other available alternatives and provides a return that exceeds our cost of equity.
Now regarding capital levels at our insurance subsidiaries.
Our goal is to maintain capital at levels necessary to support our current rating.
As noted on previous calls, Globe Life has targeted a consolidated company-action-level RBC ratio in the range of 300% to 320% for 2019.
Although we have not finalized our 2019 statutory financial statements, we anticipate that our consolidated RBC ratio for 2019 will be toward the higher end of this range.
For 2020, we will continue to target a consolidated company-action-level RBC ratio in the range of 300% to 320%.
Finally, with respect to our earnings guidance.
As Gary previously noted, net operating income per share for the fourth quarter of 2019 was $1.70.
In addition, net operating income per share for the full-year 2019 was $6.75.
This was $0.01 above the midpoint of our previous guidance.
Primarily due to greater-than-anticipated life underwriting income at Liberty National and higher excess investment income.
For 2020, we are projecting that net operating income per share will be in the range of $7.03 to $7.23.
The $7.13 midpoint of this guidance is slightly lower than previous guidance due to higher-than-expected employee pension and healthcare costs in 2020.
Those are my comments.
Those are our comments.
| compname reports q4 earnings per share $1.69.
q4 operating earnings per share $1.70.
sees fy 2020 operating earnings per share $7.03 to $7.23.
q4 earnings per share $1.69.
sees net operating income per share will be in range of $7.03 to $7.23 for year ending dec 31, 2020.
|
Our strong momentum from earlier in the year has continued despite the resurgence of COVID-19 due to the delta variant.
This has not had an impact on our operations as we have learned to manage through these disruptions.
Our outlook for the longer-term remains unchanged.
The backdrop for the life science industry continues to be very strong.
Biotech funding continues to run at record levels.
According to the National Venture Capital Association, funding totaled $35.8 billion through September 2021, already exceeding the full year of 2020.
The pipeline of late-stage molecules continues to expand and is at an all time high with almost 3,000 molecules in active Phase II or Phase III development.
Clinical trial starts are trending well ahead of recent years with year-to-date starts up 23% over 2020 and 13% over 2019.
And finally, new drug approvals by the FDA are keeping pace with the historically high levels of 2020 with 40 new drugs approved year-to-date, which sets the stage for a strong volume of upcoming commercial launches.
The bottom line is the dynamics in the industry are strong and we remain bullish on our outlook for our end markets and for IQVIA in particular.
As we think about our longer term plans, I want to remind you of our upcoming Analyst and Investor Conference on November 16th in New York City.
At that meeting, we will provide financial guidance for 2022 ahead of our usual timeline, which is normally coinciding with the end of year results in early February and we will share as well, our mid-term outlook and plans for the next phase of IQVIA's growth.
We look forward to seeing everyone and hope you can join us then.
With that let's review the third quarter.
Revenue for the third quarter grew 21.7% on a reported basis and 21.1% at constant currency and was $64 million above the midpoint of our guidance range.
The beat was driven primarily by higher pass-throughs, which as you know dilutes our margin somewhat, as well as by a stronger organic revenue growth.
Third quarter adjusted EBITDA grew 20.5% reflecting our revenue growth, as well as productivity measures.
The $8 million [Phonetic] beat above the mid-point of our guidance range was entirely due to the stronger operational performance.
Third quarter adjusted diluted earnings per share of $2.17 grew 33.1% that was $0.07 above the midpoint of our guidance with the beat coming from the adjusted EBITDA drop through, as well as favorability in below the line items.
Let me now provide an update on the business.
Our real-world evidence business continues to take a leading role in informing healthcare.
In late September, the FDA released their drug guidance on how electronic health records and medical claims data can support regulatory decision making and it cited several IQVIA publications.
With the growth of rare disease therapies and personalized medicine driven trials, the number of single-arm clinical trials increases every year and external comparators provide important context for these studies for both regulators and payers.
Our clients recognized our leading expertise in this area.
For example, we had a recent major win to deliver an external comparator in a cardiovascular study for top 20 pharma clients.
In another example, we were awarded a 15-year follow up study to demonstrate the long-term effectiveness and safety of a newly launched gene therapy.
Regulatory guidance requires extended follow-up for patients exposed to cell and gene therapy and IQVIA's innovative real-world capabilities combining direct to patient solutions, as well as IQVIA's technology platforms to capture secondary data was pivotal in this award.
On the technology front, our suite of offerings continue to be adopted in the marketplace.
You're familiar with our OCE platform and other commercial technology applications and we have, of course, continued to expand our footprint here.
We had 10 new client wins in the quarter, bringing the total number of OCE wins to-date to 169 customers.
But we are also very excited to see increased adoption of our orchestrated clinical trial suite OCT.
This quarter, for example, a leading biotechnology company in Asia selected our site portal module within OCT to power site engagement across all of their trials.
We now have 165 customers that have bought the site portal module, representing 155,000 sites and 1,716 active studies that are using our site portal module.
Similarly, our award winning eCOA platform continues to experience strong demand.
We have successfully deployed over 150 projects across 35 different therapeutic areas.
To date, we have over 70 customers using this platform, including eight of the top 10 pharma clients.
The platform has processed over 10 million unique patient responses in 65 countries and across 28 languages.
Now I want to say a few words about a fast growing part of our industry.
You are familiar with decentralized trials or DCT.
The IQVIA's decentralized trial offering combined several tech modules within our OCT suite including e-COA, eConsent, telemedicine and connected devices, as well as other service capabilities, including home nurses and phlebotomy, along with our decentralized trial patient counselors and study coordinators, all organized around our decentralized trial platform.
Importantly, we've developed innovative clinical patient engagement offerings including direct-to-patient services to accelerate recruitment and improve patient diversity and inclusion in clinical trials.
When we step back and look at the growing importance of DCT in our own portfolio, we find that up to 30% of our active full service trials utilize one or more components of our DCT Offering.
Incidentally, when our competitors speak about their own DCT offering.
This is often what they report as their DCT business.
When we look at trials that actually fully utilize our DCT capabilities, meaning they are fully run on our decentralized trial platform.
We've been awarded 89 trials to-date, totaling over $1 billion.
These awards are with 34 unique sponsors of which 10 have multiple decentralized trials ongoing with us.
These trials spent 12 different therapeutic areas, 32 unique indications and have recruited over 200,000 patients in 40 countries, our ability to combine advanced clinical technology with an extensive network of investigators and care professionals differentiates us in this space and makes us the partner of choice for decentralized trials that utilize the full capabilities.
Our overall R&DS business continues to build on its strong momentum.
We had approximately $2.6 billion of net new bookings in the quarter, bringing our LTM net new bookings for the first time to over $10 billion including pass-throughs.
This resulted in a contracted net book-to-bill ratio of 1.39 including pass-throughs and 1.28 excluding pass-throughs.
At September 30, our LTM contracted book-to-bill ratio was 1.38 including pass-throughs and 1.37 excluding pass-throughs.
Our contracted backlog in R&DS including pass-throughs grew 12.7% year-over-year to $24.4 billion at September 30, 2021.
As a result, our next 12 months revenue from backlog increased to $6.9 billion, up $300 million sequentially versus the second quarter.
As we have signaled several times in the past, we've ramped up investments in our lab capabilities.
We recently announced the opening of our new 160,000 square foot Innovation laboratories in North Carolina.
This facility provides customers with access to cutting edge bioanalytical, vaccine and genomics capabilities, along with an expansion into exploratory human biomarker discovery services.
These new services will enable us to partner closely with sponsors in the development of essential biomarkers to support new molecules moving into clinical development and throughout their life cycle.
And this expansion of course comes on top of the investment we announced last quarter in our 130,000 square foot facility in Scotland.
Let's start by reviewing revenue.
Third quarter revenue of $3,391 million grew 21.7% on a reported basis and 21.1% at constant currency.
Year-to-date revenue was $10,238 million, growing at 27% reported and 25% at constant currency.
Technology & Analytics Solutions revenue for the third quarter was $1,337 million, which was up 10.8% reported and 9.9% at constant currency.
Year-to-date, Technology & Analytics Solutions revenue was $4,038 million, which was up 17.6% reported and 14.9% at constant currency.
In the third quarter, R&D Solutions had revenue of $1,853 million, up 32.4% at actual FX rates and 31.9% at constant currency.
Excluding the impact of pass-throughs, third quarter R&DS revenue grew 24.7% year-over-year.
Year-to-date revenue in R&D Solutions was $5,612 million, up 37.7% reported and 36.2% at constant currency.
Finally Contract Sales & Medical Solutions or CSMS revenue of $201 million was up 12.3% reported and 12.8% at constant currency.
Year-to-date CSMS revenue was $588 million, growing 6.5% reported and 5.1% at constant currency.
And let's move down the P&L to adjusted EBITDA, which was $728 million in the third quarter, up 20.5%, year-to-date adjusted EBITDA was $2,194 million, growing 33.1% year-over-year.
Third quarter GAAP net income was $261 million and GAAP diluted earnings per share with $1.34.
Year-to-date, we had GAAP net income of $648 million or $3.32 of earnings per diluted share.
Adjusted net income was $423 million for the third quarter and adjusted diluted earnings per share grew 33.1% to $2.17.
Year-to-date adjusted net income was $1,264 million or $6.48 per share.
Turning now to the R&D Solutions backlog.
As already reviewed R&D Solutions delivered another outstanding quarter of net new business.
Backlog now stands at $24.4 billion.
In last 12 months, net new bookings including pass-throughs rose to over $10 billion.
Turning to balance sheet.
At September 30th, cash and cash equivalents totaled $1.5 billion and debt was $12.2 billion.
This resulted in net debt of $10.7 billion.
Our net leverage ratio at September 30th came in at 3.65 times trailing 12 month adjusted EBITDA.
Cash flow was again quite strong in the third quarter.
Cash flow from operations was $844 million and with capex of $162 million, this resulted in free cash flow of $682 million.
This third quarter performance brought our free cash flow year-to-date, that is through the first three quarters to almost $128 billion, which continues the strong improvement trend we've had over the past three years.
In the quarter, we repurchased $125 million of our shares, which leaves us with $697 million of share repurchase authorization remaining under our latest program.
Lets turn to guidance.
As you saw, we're raising our full-year 2021 revenue guidance by $188 million at the midpoint, this reflecting the third quarter strength and the continued operational momentum in our business.
Our new revenue guidance is $13,775 million to $13,850 million, representing year-over-year growth of 21.3% to 21.9%.
Of note that included in this guidance is a $30 million headwind from FX versus our previous guidance.
Now looking at the comparison to the prior year, FX is a tailwind of about 120 basis points to full-year revenue growth.
We're also raising our profit guidance as a result of a stronger revenue outlook.
We've increased our full-year adjusted EBITDA guidance by $20 million at the midpoint.
Our new full-year guidance is $2,980 million to $3,010 million, which represents year-over-year growth of 25% to 26%.
Moving down to EPS, we're increasing our adjusted earnings per share guidance by $0.10 at the midpoint.
The new guidance range is now $8.85 to $8.95, which represents year-over-year growth of 37.9% to 39.4%.
Now, our full-year 2021 guidance assumes that September 30th foreign currency rates remain in effect for the balance of the year.
The full year guidance implies our fourth quarter guidance, which we show here and before getting into the numbers, I'll say for context, you'll probably recall that last year's fourth quarter was unusual due to a snap back in the general business as we rebounded from the effects of COVID-19, picked up incremental demand from mega vaccine studies in R&DS and government-related COVID work within TAS.
Fourth quarter revenue is expected to be between $3,537 million and $3,612 million, representing growth of 7.2% to 9.5%.
FX in the quarter is a headwind to growth of about 100 basis points.
We expect fourth quarter TAS revenue growth to be mid single digits, reflecting the expected year-over-year decline in government COVID related work and the FX drag.
I'll note though that underlying constant currency organic growth for TAS will be in the high single digits, which is a level that TAS has recently accelerated.
R&DS revenue growth would be in the low teens with services growth in the mid teens despite last year's difficult comparison due to the COVID vaccine work.
CSMS will be slightly down.
Adjusted EBITDA in the fourth quarter is expected to be between $786 million and $816 million, up 6.9% to 11% and adjusted diluted earnings per share is expected to be between $2.37 and $247, growing 12.3% to 17.1%.
So, in summary, we delivered a very strong third quarter with strong results results on both the top and bottom line.
R&DS backlog improved to $24.4 billion, that's up 12.7% year-over-year, next 12 months revenue from backlog increased to $6.9 billion, up $300 million sequentially versus the second quarter.
We reported another strong quarter of free cash flow, which at $1.8 million through the first three quarters of the year is a market improvement over prior year.
And finally, we are once again raising our full year guidance for revenue, adjusted EBITDA and adjusted diluted EPS.
| compname posts q3 adjusted earnings per share $2.17.
q3 adjusted earnings per share $2.17.
q3 gaap earnings per share $1.34.
q3 revenue rose 21.7 percent to $3.391 billion.
sees q4 revenue $3,537 million - $3,612 million.
sees q4 adjusted earnings per share $2.37 - $2.47.
|
So, first and foremost we hope that you and yours continue to be safe, healthy and engages as we return the economy to normal, and well certainly the COVID-19 situation remains volatile with the daily news breaking.
There is much more optimism among our tenants as the economy trends toward a full reopening.
We're hearing that directly from both large and small tenants.
Our portfolio occupancy as of late June increased to approximately 33%, which represents a significant increase from where we were in April where it reported between 15% and 20% occupancy levels.
The predominance of tenants returning to expanded beyond just small employers as occupancy for tenants 50,000 square feet and below is over 45%.
During our comments today we will review our second quarter results, discuss progress on our 2021 business plan and update all of you on our recent capital activity.
Tom will then provide a financial overview, After that, Dan, Tom, George and I are available for any questions.
First is the general update on the COVID-19 impact on our business.
Based on an updated tenant survey that was completed in late June, we found a couple of interesting things.
First is a growing need for space planning services, which as we expected, is I think a good sign, 48 tenants representing about 1.2 million square feet have requested assistance for more internal space planning team and we have engaged with them.
We also got a lot of feedback on an increased need for parking due to near-term public transportation concerns, which we certainly believe are short-term in duration, but about 103 of our tenants representing almost 3 million square feet expressed an interest in parking, and actually during the quarter we entered into 167 new monthly contracts and saw a 30% increase in our parking lot occupancies.
From a portfolio management standpoint, we've been very much focused on tenants whose space expire in the next two years.
Those efforts have been successful.
We have reduced our forward rollover exposure to an average of 6% over the next three years, and as noted on page 2 of our SEC to 7.1% from 2022 to 2024.
So, our forecast of rollover exposure is below 10% annually in each year through 2026.
So, over the last several quarters, we have significantly improved our intermediate term portfolio stability.
Revenue and earnings growth remain a top priority.
We do believe we have some key near-term earnings drivers of first, we have, as you all know some several key vacancies that upon lease-up over the next 8 quarters will generate between $0.07 and $0.10 of additional revenue per share, that is in both our wholly owned and joint venture inventory.
We are also projecting that 405 Colorado and 3000 Market stabilize in 2022 as we bring those development projects online, and we're clear we're seeing trend lines of tenants requirements higher quality space, which we believe positions our portfolio extremely well, and that's really evidenced by what we're hearing, but also by a 23% increase in our development pipeline of Q2 over Q1.
In looking at the numbers for the second quarter, we posted FFO of $0.32 per share, which was in line with consensus estimates.
We made excellent progress on all of our 2021 business plan metrics, and during the quarter we had 20,000 square feet of positive absorption.
Given the increase in leasing visibility through the balance of the year, we did increase our speculative revenue target mid point by $500,000 and reduce the range --narrow the range rather from $18 to $22 million to $22 to $21 million, and as reported we are now 98% complete at that revised range.
Rent collections continued to be very strong, one of the best in the sector as we've collected over 99% of our second quarter rents.
Our July receipts continue to track toward that same level.
Tenant retention was 58%.
Our lease percentage remains within our business plan range.
Second quarter capital costs were 12.8% of generated revenues, slightly above our 10% to 12% business plan range, but average lease term was 8.5 years, which exceeded our 7-year business plan target.
Cash mark-to-market was a positive 14%, and our GAAP mark-to-market was also positive 22%.
All of those results are above our full year published ranges, however, as we mentioned last quarter, based on leases already executed commencing later this year with lower mark-to-market results, we will be within our business plan ranges.
We also expect that every region will post positive mark-to-market results on both a cash and GAAP basis for 2021.
Our second quarter GAAP same-store NOI was up 0.5% and year-to-date is below our 2021 range of 0% to 2%.
Second quarter cash same-store NOI was 1.8%, again below our 2021 range of 3% to 5%.
Again, very similar to the mark-to-market dynamics tenant schedule take occupancy later this year will accelerate same-store growth and enable us to achieve our 2021 business plan range.
With the exception of our Met DC operation, all of our regions are expected to post positive same-store results, and our Met DC region will remain negative while 1676 International continues toward its lease up phase.
We are still forecasting 21 year and debt-to-EBITDA in the range of 6.3 to 6.5 as we've always cautioned that it does depend on the timing of future development starts for the balance of the year.
Just a couple of comments on leasing velocity, because I know everyone is looking for recovery data points, just like we are, and we think there are some encouraging signs, at least what we've seen in the last quarter.
Yeah, a lot of tenant prospects with the pandemic one to virtually tour spaces before committing to an in-person tour.
We continue to see this trend evolve during the quarter.
We added total of over 1500 virtual tours with almost 800,000 square feet being targeted.
That lead to a 46% increase in physical tours over Q1.
Our overall pipeline stands at a 1.4 million square feet with approximately 200,000 square feet in advanced stages of lease negotiations.
Our overall pipeline increased by just short of 600,000 square feet during the quarter.
And while these recovering points are encouraging we do believe it will take several quarters to assess the full impact on the office business from the pandemic.
So, to gain some insight we looked at our leasing metrics from the second quarter of 2019, so, pre-pandemic same quarters where we are now.
Those data points we thought were also encouraging.
On a comparable set of properties, the pipeline today is up 7% compared to the second quarter of 2019.
Leases that we executed this quarter are also up 13% from the second quarter of 2019.
Deals at the proposal stage are up 20% including new and expansion proposals being up 13% over that comparative period.
There are two additional benchmarks we looked at that demonstrate that we're clearly still in the recovery phase, but overall we're surprisingly good compared to the second quarter of 2019.
Our deal conversion rates, it was down 6% to 28% in second quarter of 2021 versus 34% in the second quarter of 2019.
As you might expect, given where we are in this recovery phase, the median deal cycle time is up 27 days to 104 days this past quarter versus 77 days in the second quarter of 2019.
So, we're hoping that as the economy continue to revere mostly convincing of that deal cycle time, and that's really is where the rubber meets the road in terms of revenue generation.
In looking at liquidity, we have maximized the liquidity and tends to having $460 million of line of credit availability by the end of the year.
As Tom will touch on we have no unsecured bond maturities until 2023 and have a fully unencumbered wholly owned asset base.
Our dividend is extremely well covered at 57% of FFO and 81% of CAD at the midpoint of our guidance.
Our 5-year dividend growth rate has been 5.3% versus the peer average below 4% and we have grown our CAD during that same 5-year period close to an 8% annual rate versus the peer average again below 4%.
From a capital allocation standpoint, it was a fairly quiet quarter.
We continue to make progress on many fronts, and subsequent to quarter end as part of our land recycling program we did sell two small non-core land parcels and posted a small gain on that.
Looking at development, as we always note, we have a number of production development projects that can be completed in 4 to 6 quarters that cost between $40 and $70 million.
The pipeline on those four production assets grew 40% since the first quarter, which is a good sign, again I think of tenants entering the market, but also looking for high quality space.
And along those lines we did, so as the renovation program for 250 King of Prussia Road that is 169,000 square foot project located in the Radnor Submarket that we acquired for approximately $120 dollars per square foot as part of an overall transaction with Penn Medicine.
We designed that project to accommodate a significant life science component.
The renovation started in the second quarter and will be wrapped up within the next four quarters.
This project will be the first component of our Radnor Life Science Center, which will initially consist of this project, and our planned 155 Radnor ground up 150,000 square foot development, and these two projects will deliver more than 300,000 square feet of life science and office space to one of the region's best performing long term submarkets.
In looking at the existing development projects, Schuylkill Yard West is very much on pace and on schedule.
That's the life science residential and office project we commenced on March 1st.
The project will be built to a 7% blended yield and consists of 326 apartment units, a 100,000 square feet of life science space, 100,000 square feet of innovative office space and street level retail.
It still have an active pipeline comparable to last quarter.
We did close our 65% loan to cost construction loan at a floating rate equal to three quarters per cent.
However, given the front loaded the equity commitment for both us and our partner, even with Brandywine $55 million equity commitment, of which 46.5 has already invested, the first funding of that construction loan won't occur until first quarter of 2022, but it does complete the capital stack for that project.
Looking at our 405 Colorado project in Austin.
That project is now complete.
We're scheduling a grand opening in the fall.
During the quarter, our lease percentage did increase to 24% and we currently have a pipeline of 527,000 square feet including about 40,000 square feet in final lease negotiations.
3000 Market, is there a life science renovation within Schuylkill Yards.
That project is fully leased.
The construction will finish later this year and we're projecting the lease commencing in four quarter 2021 at a development yield of 9.6%.
Cira Labs, which we announced last quarter is a 50,000 square foot incubator that we are partnering with Pennsylvania Biotechnology Center.
B Labs will open in the fourth quarter of 2021.
Since the announcement we have entered the marketing pipeline and build a significant amount of interest with proposals outstanding for roughly 78% of that space.
Just got a couple more updates on Schuylkill Yards and Broadmoor.
Within Schuylkill Yards the life science push continues as we've cited previously we can deliver about 3 million square feet of life science space, which we believe creates an excellent opportunity to establish an corollary research community to all the other great activity over here in University City.
3151 Market Street, our dedicated life science building is fully designed and ready to go.
We have a leasing pipeline on that still in the 400,000 square foot range.
It is advancing, advancing slowly, but I think with a high degree of confidence, and our goal remains being able to start that later this year assuming market conditions permit.
At Broadmoor we are progressing with blockade in the first phase of Block F to recap, the scope of that 250,000 square feet of office and 613 apartment projects at a total cost of about $367 million.
We are a go-mode on all of those components.
We are moving forward through final documentation with our selected equity partner on Block A and Block F residential and is soliciting bids now on construction financing alternatives.
We anticipate third quarter closing date on both blocks A and F. Our plan remains to start the residential component of Block A, which is 341 units at $119 million cost in the fourth quarter of 2021, and on Block A office we are actively in the pre-leasing market and would plan to start that as market conditions permit.
As you may recall, we would normally provide 2022 earnings and business plan and FFO guidance during our third quarter 2021 earnings cycle.
However, consistent with what we said we did in 2021 and based on the continued uncertain business climate, we will announce our 2022 guidance on our fourth quarter earnings call.
So, Tom will now provide a review of our financial results.
The first quarter net loss totaled $300,000 or less than one penny per diluted share and FFO totaled $55.9 million or $0.32 per diluted share and in line with consensus estimates.
Some general observations regarding our second quarter results, while our second quarter results were in line, we had a number of moving pieces and several variances to the first quarter guidance.
Portfolio operating income totaled $67 million, which was below our estimate by $1 million.
Residential and parking revenue were below budget as a result of restrictions that were in place for most of the quarter in Philadelphia negatively impacting those results.
Interest expense totaled 55.5 million and was below our first quarter forecast due to higher interest capitalization on our 405 Colorado project.
Termination and other income totaled $2.7 million and was $1.7 million above our first quarter forecast, primarily due to two insurance claims generating approximately $1.1 million of other income.
We recorded no land gains and minimal tax provision compared to a $1.1 million dollar income guidance for the first quarter.
Two land sales were delayed from this quarter into the next quarter.
One transaction, as Jerry mentioned, is already closed subsequent to quarter end and we anticipate the second transaction closing later this quarter.
G&A totaled $8.4 million or $200,000 above our $8.2 million first quarter guidance.
The increase was primarily due to employee and medical benefit cost.
FFO contribution from unconsolidated joint ventures totaled $6.8 million or $1.3 million above our first quarter estimate.
The higher FFO contribution was primarily due to lower net operating cost from expense savings, and a $600,000 termination fee Commerce Square.
Our second quarter fixed charge and interest coverage ratios were 4.0 and 3.8 respectively, both metrics decreased slightly from the first quarter.
Our second quarter annualized net debt to EBITDA increased to 6.9 and is currently above our guidance range, an increased primarily due to the forecasted lower NOI.
The increase was forecasted and we expect this metric to improve during the second half of the year from higher forecasted NOI.
Additional reporting item on cash collections as Jerry mentioned, we had a very strong quarter of 99% and tenant write offs totaled less than $100,000 for the quarter.
Portfolio changes, as we noted 905 is now completely out of all of our metrics as that building has been taken out of service related to our Broadmoor Master Plan.
Looking at third quarter guidance, we anticipate the third quarter results to improve compared to the second quarter based on executing leasing activity and have some other assumptions, our portfolio operating income, we expect that to total $6.85 million and be sequentially higher during the second quarter.
Part of that it will be due to the 107,000 square feet of forward leasing activity anticipated to commence during the third quarter and should generate a second consecutive quarter of positive absorption.
FFO contribution from our unconsolidated joint ventures were totaled $5.8 million for the third quarter, a $1 million sequential decrease from the second quarter, primarily due to a non-recurring termination fee and incrementally higher net operating expenses, G&A for the third quarter will decrease from 8.4 to 7.5, the sequential decrease is primarily due to the annual equity compensation vesting during the second quarter that will not occur in the third quarter, we expect interest expense to approximate $16 million with capitalized interest of $1.5 million.
Termination and other income, we expect to total $2.1 million for the third quarter.
Net management and leasing will total $3.2 million and interest in investment income of $2 million.
For land gains, we expect about $2.3 million for the quarter based on the two previously mentioned closings and one additional non-core land sale generating total proceeds of $16.7 million.
Our 2021 business plan also assumes no new property acquisitions or sales activity, no anticipated ATM or share buyback activity and no financing or refinancing activity.
We did close on the $186.7 million construction loan at Schuylkill Yards at the initial rate of 3.7%.
While we have no other financing or refinancing activity in our 2021 plan we continue to monitor the debt markets ahead of our 2023 unsecured bond maturity.
Looking at our capital plan, our second quarter CAD was 90% of our common dividend, which is above our stated range.
The increase was due to several large tenant allowance payments, which we anticipated occurring during 2021.
So, the timing of those payments were significant to the quarter, but anticipated for our full-year range, and our CAD range remains unchanged.
Our second half 2021 capital plan is very straightforward and totals about $245 million with a $120 million of development, $65 million of dividends, $20 million of revenue maintain capital, $30 million of revenue create capital and $9 million of equity contributions to our joint ventures, primarily Schuylkill Yards.
The primary sources are cash flow after interest payments of $95 million, $82 million used of our line of credit, using the cash on hand, totaling $48 million, and again, $20 million roughly in land and other sales.
Based on that capital plan outlined, our line of credit balance will be approximately $140 million, leaving $460 million of line availability.
The increase in the projected line of credit balance was partially due to the build-out of our incubator space as well as our development.
We still project our range to be 6.3 to 6.5, but as Jerry mentioned that will be predicated on how our development starts occur, and we still see that debt to GAV between 42% and 43%.
In addition, we anticipate our fixed charge coverage ratio to be approximately 3.7 and our interest coverage ratio to be about 4.0.
So, just in wrapping up, I think the key takeaways are our portfolio and operations are really in solid shape.
We have great team of people on both the operating, the leasing and the marketing front, and we really get excellent visibility into our tenant base.
Information has been key, so, the level of conversation with all of our customers has been significantly enhanced during this cycle.
And I think we're very pleased that our annual rollover through 2024 is only 7% a year.
I think that's a low watermark for the company in terms of portfolio role.
Leasing pipeline continues to increase, certainly not as fast as we would like, and certainly, I know a lot of folks on the call are looking for more visibility as well, but tenants are returning to the workplace.
We think the green shoots we're seeing in terms of their space requirements are good signs, and we do expect a compression of decision timelines later this year and a continuation of positive mark-to-markets driven by improving market velocity, stable overall market conditions and escalating construction prices.
Safety and health both in design and execution are really our tenants top priorities.
We are well positioned to meet their concerns, and we believe that new development in our trophy stock will benefit from this trend.
As I mentioned earlier, our development project pipeline increased by about 23% during the quarter.
We still are very excited about our forward growth drivers.
We have two fully approved mixed use master plan sites that can double our existing portfolio, diversify our revenue stream and drive significant earnings growth, and when you take a look at even it's Schuylkill Yards assuming a start of 3051 markets through with the other projects we have in operation or under construction, that will represent about 5% of our portfolio square feet.
So, a measurable contribution building from a diversification of our revenue stream.
And, in addition to life science, our Schuylkill Yards and Broadmoor developments with existing approvals in place can accommodate about 5,000 multifamily units.
As Tom touched, we've had a very attractive CAD growth rate over the last 5 years.
We think we've created and established stability to a well covered and attractive dividend that we believe is poised to increase as we grow earnings.
And from a financing standpoint, certainly given the continued dislocation the public marketplace, there's always a concern about the best way to finance these properties.
What I can tell you is private equity is more than abundant, the debt markets as we've seen with the Schuylkill Yards West construction loan are extremely competitive.
Strong operating platforms and well conceived projects like Brandywine continue to gain significant traction for project level investments, and we're confident that there is executable financing available for our entire development pipeline in today's marketplace.
So, as usual we'll end where we start in that we really do wish you are all doing well, enjoying the summer, and that you and your families are safe and engaged.
We add for the interest of time, you limit yourself to one question and a follow-up.
| compname reports q2 ffo per share of $0.32.
q2 ffo per share $0.32.2021 speculative revenue range narrowed to $20.0-$21.0 million.
|
In particular, we expect that the continued impact of COVID-19 on our business remains uncertain at this time.
During today's call, we will discuss GAAP and non-GAAP financial measures.
As for the content of today's call, Lewis will begin with a recap of Dolby's financial results and provide our first and second quarter 2021 outlook, and Kevin will finish with a discussion of the business.
I hope everyone is doing well.
Our Q4 revenue was above our guidance, but we are still down on a year-over-year basis and that reflects the ongoing impact of the pandemic.
So let's go through the numbers.
Fourth quarter revenue was $271 million, compared to $247 million in Q3 and $299 million in Q4 of last year.
Our revenue guidance coming into the fourth quarter was a range of $225 million to $255 million.
So compared to guidance, revenues were better than what we projected as we had a true-up of about $25 million in the quarter related to Q3 shipments, which was about $15 million higher than the true-up that we had last quarter, and with most of that improvement coming from TVs and set-top boxes, and PCs.
Total company revenue in Q4 increased sequentially by $24 million compared to Q3, as we benefited from higher unit volumes in TVs, set-top boxes, DMAs and PCs, along with the higher true-up that I just discussed.
And all of this was partially offset by lower revenue from mobile due to timing under contracts, and I will discuss that in a second.
Now looking at Q4 on a year-over-year basis, total company revenue is down by $28 million from last year's Q4 and we can attribute that mainly to COVID-19, especially in products and services, which were down by about $20 million or nearly 60% below last year.
The composition of Q4 revenue was $257 million in licensing and $14 million in products and services.
So let's break down licensing revenue by end market, starting with broadcast.
Broadcast represented about 47% of total licensing in the fourth quarter.
Broadcast revenues increased by about 2% year-over-year, helped by the higher true-up related to the Q3 shipments and also driven by higher adoption in TVs and set-top boxes.
And then this was then offset partially by lower recoveries in the quarter.
On a sequential basis, broadcast was up by about 35% due to higher volume in TVs and set-top boxes along with higher recoveries and the higher true-up.
Mobile represented approximately 15% of total licensing in Q4.
Mobile was down by about 13% over last year due to lower recoveries, but partially offset by higher adoption of Dolby Technologies.
For the sequential comparison, I should point out that last quarter Q3, Mobile was about 33% licensing, which was higher than normal, and that was due to timing of revenue under customer contracts, so we came into Q4 expecting Mobile revenue to decline this quarter and return to a more normalized percentage of revenue, which is what it did.
So accordingly Mobile revenue was down sequentially by about 50%, and that was primarily due to timing of revenue under customer contracts.
Consumer electronics represented about 13% of total licensing in the fourth quarter.
On a year-over-year basis, CE licensing was down by about 8%, mainly due to lower recoveries.
On a sequential basis, CE was about 68% higher than Q3.
And as a reminder, Q3 was lower than usual and only 9% of licensing because of timing under contract.
And so, the sequential increase from Q3 to Q4 was mostly a return to a more normal level.
PC represented about 12% of total licensing in Q4.
PC was higher than last year by about 26%, helped by the higher true-up and also because of the increased adoption of Dolby Technologies.
And sequentially, PC was up by about 32% that's for similar reasons.
Other markets represented about 13% of total licensing in the fourth quarter and they were down by about 19% year-over-year due to significantly lower Dolby Cinema box office share and that's because of the COVID restrictions and lack of big titles, and also because of lower revenues from gaming due to console life cycles and/or recoveries in automotive.
On a sequential basis, other markets was up by about 32%, driven by higher revenue from gaming and from via admin fees and that's the patent pool that we administered.
Beyond licensing, our products and services revenue was $14.3 million in Q4, compared to $11.8 million in Q3 and $34 million in last year's Q4.
Our guidance had anticipated the large year-over-year decrease because most of this revenue comes from equipment that we sell to cinema exhibitors and these customers continue to be negatively affected by the pandemic.
And speaking of products and services revenue, going forward into Q1, we're winding down and exiting conferencing hardware sales, as we will now be fully focused on expanding the availability of the Dolby Voice experience through software solutions, such as interactivity APIs on our developer platform.
So later on, when I cover the outlook for FY '21, my comments on products and services revenue and gross margin will reflect the fact that we are exiting the conferencing hardware arena.
Now I'd like to discuss Q4 margins and operating expenses.
Total gross margin in the fourth quarter was 84.3% on a GAAP basis and 85.1% on a non-GAAP basis.
Products and services gross margin on a GAAP basis was minus $15.5 million in the fourth quarter and a large portion of that consisted of charges for excess and obsolete inventory associated with conferencing hardware and that relates back to what I just said a minute ago, about our plans in that space.
Going forward into Q1, we anticipate that products and services margin will still be negative, but more along the lines of around minus $3 million or minus $4 million.
I'll cover this again in the outlook section in a few minutes.
Products and services gross margin on a non-GAAP basis was minus $14.1 million in the fourth quarter, and my comments here are similar to what I just said for GAAP gross margins.
Operating expenses in the fourth quarter on a GAAP basis were slightly above the high-end of the range that we had guided, coming in at a $198.7 million, compared to $182.9 million in Q3.
And remember that Q3 was particularly low for us, because that was the first full quarter of reacting to COVID-19 and lots of our activities have been temporarily halted or pushed out.
Operating expenses in the fourth quarter on a non-GAAP basis were $176.5 million, which is within our range and that was compared to $159.2 million in the third quarter, and basically the same comments that I made in GAAP apply here as well.
Operating income in the fourth quarter was $30.1 million on a GAAP basis or 11.1% of revenue, compared to $51.2 million or 17.1% of revenue in Q4 of last year.
Operating income in the fourth quarter on a non-GAAP basis was $54.3 million or 20% of revenue, compared to $77.6 million or 26% of revenue in Q4 of last year.
Income tax in Q4 was 21.8% on both the GAAP and non-GAAP basis.
The effective tax rate was slightly higher than guidance, and that was due mainly to the mix of our income between different tax jurisdictions.
Net income on a GAAP basis in the fourth quarter was $26.8 million or $0.26 per diluted share, compared to $43.9 million or $0.43 per diluted share in last year's Q4.
Net income on a non-GAAP basis in the fourth quarter was $45.8 million or $0.45 per diluted share, compared to $67.6 million or $0.66 per diluted share in Q4 of last year.
For both GAAP and non-GAAP, net income in Q4 was above the guidance that we gave at the beginning of the quarter, and that was primarily due to revenue being above the high-end of our range, offset partially by the lower product and services gross margin that I mentioned a minute ago.
During the fourth quarter, we generated about $113 million in cash from operations, which compares to about $130 million generated in last year's fourth quarter.
We ended the fourth quarter with nearly $1.2 billion in cash and investments.
During Q4, we bought back about 640,000 shares of our common stock and ended the quarter with about $187 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 December 4, 2020 to shareholders of record on November 24, 2020.
Before I go into the outlook for FY '21, let's summarize the results for the full-year FY '20.
Total revenue in FY '20 was $1,162 million that compares to $1,241 million in the prior year with a year-over-year decline due to the impact from COVID-19.
Within total revenue, licensing was $1,079 million, which was down about $28 million from last year due to lower consumer activity because of the pandemic, while products and services revenue was $83 million for the year, down about $51 million from last year due mainly to lower demand from the cinema industry because of restrictions brought on also by the pandemic.
Operating income for the full-year FY '20 was $219 million on a GAAP basis or about 19% of revenue and operating income on a non-GAAP basis was $318 million or about 27% of revenue.
Net income on a GAAP basis was $231 million or $2.25 per diluted share and net income on a non-GAAP basis was $305 million or $2.97 per diluted share.
And cash flow from operations for the full-year was $344 million and that's slightly up from the previous year, where cash flow from operations was $328 million.
So now let's discuss the full-year outlook.
First, let me say that we'll be facing some interesting dynamics in FY '21 with our year-over-year comparisons.
Because we have a September year-end, the first two quarters of FY '20 were mostly unaffected by COVID-19, while the last two quarters of FY '20 were fully affected by COVID.
And as we head into FY '21, COVID continues to persist and visibility is very limited, even more so the further out you tried to look.
So today, I'm going to provide an outlook scenario for the first half of the year, including our perspective on what Q1 and Q2 revenue could be and for the second half of the year because visibility is limited, we are not providing guidance at this time, but I will provide some color on some of the factors that could affect the second half.
So let's discuss the first half.
In the first half of FY '21, we currently anticipate year-over-year growth in licensing revenue, and that could be offset by year-over-year decline in products and services revenue.
The anticipated growth that we could get in licensing would come mainly from higher adoption of our technologies as industry analysts currently are projecting market TAM to be flat to slightly down in the first half.
And also, we anticipate Dolby Cinema licensing revenue to be significantly down year-over-year in our first half because of that COVID versus pre-COVID factor of comparison in the cinema industry.
And then for that same reason, we are anticipating cinema product sales to be down year-over-year.
Now within the first half of the year, based on what we currently see, here is the scenario we are assuming for Q1 and then Q2.
In the first quarter of FY '21, we anticipate that total revenue could range from $330 million to $360 million.
Within that, we estimate that licensing could range from $320 million to $345 million, while products and services is projected to range from $10 million to $15 million.
At the midpoint of the range, we anticipate growth in lights seem to be driven by a higher adoption of our technologies across a range of devices.
In addition, the Q1 licensing outlook is benefiting from timing of revenue under customer contracts, as well as potentially higher recoveries.
Now we are not anticipating as much revenue from these items, namely the timing of the recoveries in our second quarter.
And by the way, last year, it was Q2 not Q1 that benefited more from timing of recoveries.
So with that in mind, and based on what we currently see and having just gone over the Q1 revenue outlook, we currently see our Q2 revenue scenario looking like a range of about $270 million to $300 million.
And doing the math for you on the first half of FY '21 by combining the Q1 and Q2 figures that I just went over, our current outlook scenario assumes a first half FY '21 revenue range of $600 million to $660 million.
We will plan to update you on how this picture has evolved after Q1 is completed.
As for the second half, like I said, we are not giving guidance for the second half, but here are some points to consider.
On a sequential basis in our licensing revenue, we typically see second half revenue is lower than the first half because of lower seasonality in consumer device shipments and also because of the timing of revenue on the customer contract.
On a year-over-year basis, while we do expect to see continuing benefit from increased adoption of Dolby Technologies, it's worth noting that with respect to market TAM, current industry analysts reports are projecting markets like PC and TV TAM to be down on a year-over-year basis in the second half.
And that's because of an uptick in unit shipments that happened in the latter part of FY '20 that might not repeat in that same timeframe next year.
So, of course, it's much too early to know if that will be true, but that's what the current reports currently suggest.
And as for Dolby Cinema and cinema products, the year-over-year comparison should be favorable in the second half, but we don't know to what extent or at what pace.
So those are a few things to think about for the second half and we thought it was worth providing you that color.
So let me now finish up by providing the outlook on the rest of the P&L for Q1, already highlighted the revenue range scenario of $330 million to $360 million.
So Q1 gross margin on a GAAP basis is estimated to range from 90% to 91%, and the non-GAAP gross margin is estimated to range from 91% to 92%.
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 billion to minus $3 million on a non-GAAP basis.
As I mentioned earlier, we are winding down and exiting the conferencing hardware space, and the demand for cinema products continues to be weak because of the industry conditions.
And as a result, we are reducing certain resources in manufacturing, as well as other areas that were connected with conferencing hardware and cinema products.
We anticipate that it will take several months to complete, various activities to smoothly transition our conferencing hardware partners and then customers.
With respect to the impact on our products and services gross margin, we estimate that we could start to see savings in our cost of goods sold by around the end of fiscal Q2, and that's because of these transitioning activities that we have to undertake.
Operating expenses in Q1 on a GAAP basis are estimated to range from $207 million to $219 million.
Included in this range is approximately $7 million to $9 million of restructuring charges for severances and related benefits that are being provided to employees that are impacted by the actions that I just mentioned a minute ago.
Operating expenses in Q1 on a non-GAAP basis are estimated to range from $175 million to $185 million, and this range excludes the estimated restructuring charge.
Other income is projected to range from $1 million to $2 million for the quarter, and our effective tax rate for Q1 is projected to range from 20% to 21% on both the GAAP and non-GAAP basis.
So based on a combination of the factors I just covered, we estimate that Q1 diluted earnings per share could range from $0.70 to $0.85 on a GAAP basis and from $0.97 to $1.12 on a non-GAAP basis.
So that's it for me.
Over to you, Kevin.
I want to focus my comments on three main areas today.
I will start by highlighting our continued progress, increasing the number of Dolby Vision and Dolby Atmos experiences around the world.
I'll then spend a few minutes on the changes we have made in our cinema and conferencing hardware business to adjust to the evolving conditions in certain markets.
And then I will share some thoughts on the exciting opportunity for Dolby to address a new world of content through our developer platform and related initiatives.
In a year where we all face challenges and disruptions, we have continued to bring more Dolby experiences to more people around the world, and they are the driving force behind the Dolby magic.
So let me start with the Dolby Vision and Dolby Atmos ecosystem that continues to grow.
With the launch of the iPhone 12, consumers are now able to see the benefits of Dolby Vision when they record video and share it.
We are excited about the opportunity to support this ecosystem so the Dolby Vision content can be enjoyed on social media, video sharing sites and more.
This will vastly expand the content that can be enjoyed in Dolby Vision, adding more reasons for devices and services to adopt our technology and creating new opportunities for Dolby.
During 2020, we continued to grow the presence of Dolby Vision and Dolby Atmos across the many ways that people enjoy movie and TV content.
At the beginning of the year we saw the launches of Disney+ and Apple TV+ with the combined Dolby experience.
Google Play, Showtime and PBS all began streaming in Dolby Vision this year.
In this quarter, Watcher a streaming service in Korea began supporting content in Dolby Vision and Dolby Atmos.
The momentum of Dolby Vision and Dolby Atmos within movie and TV content continues to drive an expanding lineup of devices within the home.
The adoption of Dolby Vision and Dolby Atmos within 4K TV shipments grew significantly year-over-year.
Our partners like TCL, Sony, Panasonic and Skyworth added support for the Dolby Vision and Dolby Atmos experience deeper within their TV lineups and have also broadened the global reach of their offerings, including this year into India.
Xiaomi launched their first TV that supports Dolby Vision and Dolby Atmos just this year.
And we continue to bring new innovations to market, like Dolby Vision IQ, which optimizes the picture on your TV by adjusting to the surrounding line and to the type of content being viewed.
Our continued innovation brings new value to our partners and consumers and adds to the reasons for deeper adoption.
Dolby Vision and Dolby Atmos continue to grow across a broader range of devices.
Apple recently began enabling support for Dolby Atmos to the HomePod.
Earlier this year, Sonos launched its first Dolby Atmos product with the Sonos Arc and Roku began supporting Dolby Vision and Dolby Atmos with the Roku Ultra.
We are also beginning to see increasing adoption of the combined experience within set-top boxes, including the latest offerings from Free in France and Deutsche Telekom in Germany.
Within Mobile and PC, Apple highlights the adoption of the Dolby Vision and Dolby Atmos playback with support throughout their iPad, MacBook and iPhone lineups.
We also have strong initial adoption of Dolby Atmos within the latest flagship mobile phones from Samsung, OPPO and Sony.
Lenovo launched several new PCs that support the combined experience and Dell began shipping Dolby Vision enabled PCs earlier this year.
We see significant growth opportunities within both Mobile and PC as we gain new wins, drive deeper adoption within our partners' device lineups and expand the types of content that can be enjoyed with Dolby Vision and Dolby Atmos.
In the same way, the Dolby Vision and Dolby Atmos enabled great movie and TV content, we see a significant opportunity to create immersive experiences within music and gaming.
These are important forms of entertainment that expand our current value proposition and grow the number of devices that can benefit from the Dolby experience.
Let me start with music.
A year ago, we launched Dolby Atmos for music with Amazon Music HD and the Amazon Echo Studio.
The music in Dolby experience has been met with deep and passionate engagement from artists.
For example, those that we highlighted in the stories from Lizzo, Post Malone, Coldplay and J Balvin.
Tidal became the second streaming service to support Dolby Atmos Music, enabling millions of Dolby Atmos devices within mobile and in the home.
Our increasing presence in music will create opportunities to grow adoption in mobile, automotive, smart speakers and headphones.
In gaming, Microsoft announced their new Xbox to be the first gaming console to support the combined Dolby Vision and Dolby Atmos experience for gaming.
We are also seeing a growing number of gaming PCs adopt the Dolby experience, including new products from Lenovo and ASUS this year.
As we grow the presence of Dolby Vision and Dolby Atmos within gaming content, we add to the value proposition for broader adoption within PCs, gaming consoles and mobile phones.
Our momentum for Dolby Vision and Dolby Atmos across content, services and devices is strong and at the same time, we still see much of the opportunity ahead of us.
We continue to grow our presence throughout devices within the home, and we made it even earlier stages of adoption within mobile and PC.
We are focused on accelerating that adoption by increasing the amount of content and by broadening our presence in categories like music and gaming.
Let me shift now to talk about the areas where we have made some changes to adjust to the evolving conditions in certain markets.
The cinema environment remains challenging as the time of recovery is uncertain and the landscape is evolving.
As Lewis discussed, we have made some adjustments to operations and manufacturing here to reflect a lower outlook for demand.
At the same time, we remain confident that studios will continue to create great content that audiences will continue to want to experience these movies in the cinema and that they will take out the best experiences.
Let me spend a few -- just a few moments on Dolby Voice.
We entered the communication space with the goal of enabling higher quality and more natural meeting experiences.
Our value proposition of enabling higher quality interactions remains as strong and relevant as ever and we see significant opportunities to broaden the reach of our technologies.
As we move forward, we are winding down the sales of our conferencing hardware to focus all of our efforts on the larger opportunity to enable the Dolby Voice experience through our enterprise partners and our developer platform.
And that brings me to the opportunity to bring the Dolby experience to the vast and growing amount of content that are a part of our everyday lives, from user-generated content to social media and casual entertainment to everyday virtual interactions.
Today, developers can access our technology through Dolby.io to improve media and interactivity within their applications.
We have seen growing engagement from developers across a variety of industries and use cases from improving audio quality in podcast, media production and online marketplace videos to enabling interactivity in online education, social media, and live streaming applications.
This quarter, we began partnering with SoundCloud to enable artists to improve the quality of their tracks using our mastering APIs and have seen nearly 200,000 tracks mastered through our APIs in the few months since launch.
We are also working to integrate our media APIs onto the box platform this quarter to enable their customers to enhance content with our media APIs right within the box experience.
Additionally, we recently enabled our interactivity APIs to include the benefits of Dolby Voice and we have drawn strong engagement from developers since its release.
As we look ahead, we will continue to expand our offerings to address more audio and video features.
For example, now that consumers can create Dolby Vision with the iPhone 12.
We see opportunities to support content platforms seeking to make the most of this expanding world of Dolby Vision content.
While we are just at the beginning of these new opportunities, we are learning quickly from our early engagement with developers and evolving our offering to bring the Dolby experience to everyday applications and services.
So to wrap up, the momentum of Dolby Vision and Dolby Atmos with movies and TV content is strong as our partners continue to bring new devices and services to market.
Our opportunity remains ahead of us and we are enabling more content experiences in music and gaming that can accelerate the adoption across device categories.
Consumers can now capture and edit in Dolby Vision for the first time, expanding the Dolby experiences into the growing world of user-generated content.
And we are excited by the opportunity to bring the Dolby experience to new use cases and industries through our developer platform.
All of this gives us confidence in our ability to drive revenue and earnings growth into the future.
I look forward to updating you next quarter.
| q4 non-gaap earnings per share $0.45.
q4 gaap earnings per share $0.26.
sees q2 revenue $270 million to $300 million.
sees q1 2021 total revenue to range from $330 million to $360 million.
sees q1 2021 diluted earnings per share to range from $0.70 to $0.85 on a gaap basis.
diluted earnings per share on a non-gaap basis is anticipated to range from $0.97 to $1.12 for q1 2021.
anticipate that cinema sites could continue to be negatively affected through first half of fiscal 2021 or longer.
|
I am joined with our Chairman and CEO, Scott Santi and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss fourth quarter and full year 2019 financial results and provide guidance for full year 2020.
Finally, I'd like to remind folks, we have our Investor Day coming up six weeks from today on March 13 in Fort Worth, Texas.
The ITW team delivered another quarter of solid operational execution and strong financial performance in Q4.
Despite some broad-based macro challenges, we delivered GAAP earnings per share growth of 9%, operating margin of 23.7% and after-tax return on invested capital of 28.9% in the quarter.
For the full year, against the backdrop of an industrial demand environment that went from decelerating in the first half of the year to contracting in the second half of the year, we're continuing to execute well on the things within our control.
As a result, despite revenues that were down $700 million or 4.5% year-on-year, we delivered record GAAP earnings per share of $7.74, expanded operating margin to 24.4% excluding higher restructuring expenses and group free cash flow by 9%.
In addition, we were able to raise our dividend by 7% and returned $2.8 billion to shareholders in the form of dividends and share repurchases.
Equally important, in 2019, we continued to make solid progress on our path to ITW's full potential performance through the execution of our enterprise strategy.
Last year, we invested more than $600 million to support the execution of our strategy and further enhanced the growth and profitability performance of our core businesses.
In addition, each of our divisions continued to make progress in executing well-defined and focused plans to achieve full potential performance in their respective businesses.
We look forward to providing a full progress update on our enterprise strategy and our progress toward ITW's full potential performance at our Investor Day in March.
Looking ahead, ITW's powerful and proprietary business model, diversified high quality business portfolio and dedicated team of highly skilled ITW colleagues around the world position us well to continue to deliver differentiated performance across a range of economic scenarios in 2020 and beyond.
In the fourth quarter, organic revenue declined 1.6% year-over-year in what remains a pretty challenging demand environment.
The strike at GM reduced our enterprise organic growth rate by approximately 50 basis points and Product Line Simplification was 60 basis points in the quarter.
By geography, North America was down 2% and international was down 1%.
Europe declined 1%, while Asia Pacific was flat.
Organic growth in China was broad-based across our portfolio and up 7% year-over-year.
As expected, our execution on the elements within our control remained strong in the fourth quarter.
Operating margin was 23.7%, including 40 basis points of unfavorable margin impact from higher restructuring expenses year-over-year.
Excluding those higher expenses, operating margin was up 10 basis points to 24.1%.
Enterprise initiatives contributed 130 basis points and price/cost was positive 30 basis points.
GAAP earnings per share was up 9% to $1.99 and included an $0.11 gain from three divestitures and $0.06 headwind from higher restructuring expenses year-over-year and foreign currency translation impact.
The effective tax rate in the quarter was 22.8%.
Free cash flow was 114% of net income.
And as planned, we repurchased $375 million of our own shares during the quarter.
Overall, Q4 was another quarter characterized by strong operational execution and resilient financial performance in a pretty challenging demand environment.
Let's move to Slide 4 and operating margin.
Overall, operating margin of 23.7% was down 30 basis points year-over-year, primarily due to higher restructuring expense.
Excluding those higher restructuring expenses, margin improved 10 basis points despite a 3% decline in revenues.
Enterprise initiatives were once again the highlight and key driver of our margin performance, contributing 130 basis points, the highest levels since the fourth quarter of 2017.
The enterprise initiative impact continues to be broad-based across all seven segments, ranging from 80 basis points to 200 basis points.
And the benefits of the restructuring activities that we initiated earlier in the year are being realized.
The majority of these restructuring projects are supporting enterprise initiative implementation, specifically our 80-20 front-to-back execution.
Price remained solid with price well ahead of raw material costs and price/cost contributed 30 basis points in the quarter.
Volume leverage was negative 30 basis points.
In Q4, as we always do, we updated our inventory standards to reflect current raw material costs.
As raw material cost in the aggregate have declined over the course of the year, the annual mark-to-market adjustments to the value of our inventory that we do every fourth quarter, this year had an unfavorable impact of 30 basis points versus last year.
We also had a favorable item last year that didn't repeat this year for 40 basis points.
And finally, the other category, which includes typical wage and salary inflation was 50 basis points.
So overall, solid margin performance again for the quarter and the year.
Turning to Slide 5 for details on segment performance.
As you know, 2019 was challenging from an industrial demand standpoint.
And you can see that the organic growth rate in every one of our segments -- seven segments was lower in 2019 than in 2018.
At the enterprise level, the organic growth rate swung from positive 2% in 2018 to down 2% in 2019 with the biggest year-on-year swings in our capex-related equipment offerings and automotive.
Speaking of automotive, let's move to the individual segment results starting with Automotive OEM.
Organic revenue was down 5% as the GM strike reduced revenues by approximately two percentage points.
Taking a closer look at regional performance, North America was in line with D3 builds, down 13%, Europe was essentially flat versus builds that were down 6% and China organic growth was 11% compared to builds, up one.
Moving on to Slide 6, Food Equipment had a good quarter with organic growth up 2% year-over-year despite a tough comp of 5% organic growth last year.
The service business was solid, up 4% in the quarter.
Equipment growth of 1% reflects double-digit growth in retail and modest decline in institutional and restaurants, against tough year-over-year comps for both of those.
Operating margin expanded 90 basis points to 27.5% with enterprise initiatives the main contributor.
Test & Measurement and Electronics had a very strong quarter with Test & Measurement up 6% with 13% growth in our Instron business.
This segment also experienced a meaningful pickup in demand from semiconductor customers.
Electronics was up 2%.
Margin was the highlight as the team expanded operating margin 330 basis points to a record 28.1%, the highest in the company this quarter with strong contributions from enterprise initiatives and volume leverage.
Also in the quarter, we divested Electronics business with 2019 revenues of approximately $60 million.
Turning to Slide 7.
Welding organic revenue declined 4% against a tough comparison of 8% growth last year.
North America equipment was down 3% against a tough comparison of up 7% last year.
The lower demand is primarily in the industrial business, while commercial, which includes smaller business and personal users was pretty stable.
Oil and gas was down 2%.
Operating margin was 25.4%, down 150 basis points, primarily due to higher restructuring expenses.
In the quarter, we divested an installation business with 2019 revenues of approximately $60 million, which reduced Welding's organic -- which overall growth rate by 150 basis points in the quarter.
Polymers & Fluids' organic growth was down 2% versus a tough comp of plus 4% last year.
Polymers was flat, Automotive aftermarket was down 1%, Fluids was down 6%.
Operating margin was strong, up 150 basis points, driven primarily by enterprise initiatives.
Moving to Slide 8.
Construction organic revenue was down 1% with continued softness in Australia/New Zealand, which was down 4%.
Europe was down 3% with the U.K. down 14%.
North America was up 2% with residential remodel up 2% and commercial up 5%.
Operating margin was 22.2% down due to the inventory mark-to-market adjustments and higher restructuring expenses.
In Specialty, organic revenue was down 3%, which on a positive note, is an improvement from the past couple of quarters.
As in prior quarters, the main drivers are significant PLS and the relative performance of the businesses we have identified as potential divestitures.
Excluding these potential divestitures, core organic growth was down 1.7%.
By geography, North America was down 4% and international 3%.
We also divested a business in this segment with 2019 revenues of approximately $15 million.
And these divestitures reduced Specialty's growth rate by almost eight percentage points.
Now let's quickly review full year 2019 on Slide 9.
In a challenging industrial demand environment, organic revenue was down 1.9% with total revenues down 4.5% as foreign currency translation impact reduced revenues by 2.3% and divestitures by 30 basis points.
GAAP earnings per share was $7.74 and included $0.09 of divestiture gains, as well as $0.32 of headwinds from foreign currency and higher restructuring expenses year-over-year.
Operating margin was 24.1% -- 24.4% excluding higher year-on-year restructuring expense as enterprise initiatives contributed 120 basis points.
After-tax return on invested capital improved 50 basis points to 28.7%.
Our cash performance was very strong with free cash flow up 9% and a conversion rate of 106% of net income.
We made significant internal investments to grow and support our highly profitable businesses, increased our annual dividend by 7% and utilized our share repurchase program to return surplus capital to our shareholders.
A quick update on our various divestiture processes that overall remained on track.
As a reminder, we're looking to potentially divest certain businesses with revenues totaling up to $1 billion and are targeted to complete the effort by year-end 2020.
The strategic objective with this phase of our portfolio management effort is to improve our overall organic growth rate by 50 basis points and improve margins by approximately 100 basis points.
Not counting potential gains on sales, the plan is to offset any earnings per share dilution with incremental share repurchases.
In the fourth quarter, we completed the sale of three businesses with combined 2019 revenues of approximately $135 million, generating a pre-tax gain on sale of $50 million or $0.11 a share.
In 2019, these businesses were a 20 basis points drag to our organic growth rate and 10 basis points to our margin rate.
On Slide 10, we wanted to give you a quick update on the progress that we're making on our organic growth initiatives.
We estimated the aggregate market growth rate or decline for each one of our segments and compared it to the segments actual organic growth rate in 2019.
We also included Product Line Simplification by segment.
As you know, full potential steady state PLS is expected to be about 30 basis points.
As you can see overall, we've made some good progress, as our segments are all outgrowing their underlying markets, except for Specialty Products.
At the enterprise level, we estimate that we outpaced our aggregate blended market growth rates by approximately one percentage point.
So overall good progress on our organic growth initiatives.
And by completing our Finish the Job agenda over the next several years, we expect to generate one to two percentage points of additional improvement in ITW's organic growth rate.
As Scott mentioned, we look forward to providing a full progress update at our Investor Day in March.
Now let's talk -- let's turn the page and talk about 2020, starting with Slide 11.
First, we expect GAAP earnings per share in the range of $7.65 to $8.05 for 2020.
Using current levels of demand adjusted for seasonality, organic growth at the enterprise level is forecast to be in the range of 0% to 2% for the year.
At current exchange rates, foreign currency translation impact and the revenue associated with our 2019 divestitures are each of -- one percentage point headwind to revenue.
PLS impact is expected to be approximately 50 basis points.
We expect to expand operating margin from 24.1% in 2019 to a range of 24.5% to 25% in 2020 with enterprise initiatives contributing approximately 100 basis points.
After-tax ROIC should improve to a range of 29% to 30%.
And as usual, we expect strong free cash flow with conversion greater than net income.
We have allocated $2 billion to share repurchases with core share repurchases of $1.5 billion, an additional $500 million to offset the earnings per share dilution from the three completed divestitures.
Additional items include an expected tax rate in the range of 23.5% to 24.5%, which represents a 10% -- $0.10 earnings per share headwind and foreign currency at today's rates is also unfavorable $0.10 of EPS.
Just a quick word as it relates to the Coronavirus situation in China and we're obviously in the same position as everyone else.
At this point, we've baked into our guidance a last week of production, assuming that we all return to work in China on February 10.
But obviously it's too early to tell and we'll continue to monitor the situation closely.
Overall, ITW is well positioned for differentiated financial performance across a wide range of scenarios as we continue to execute on the things within our control and make meaningful progress on our path to full potential performance through the implementation of our Finish the Job enterprise strategy agenda.
Finally, we're providing an organic growth outlook by segment for full year 2020 on Slide 12.
And as always, these are based on current run rates adjusted for seasonality and are obviously influenced by year-over-year comparisons as we go through the year.
It's important to note that there is no expectation of demand acceleration embedded in our guidance.
You can see that every segment is forecast to improve the organic growth rate in 2020 relative to 2019.
The same is true for margins, as every segment expects to improve the margin performance in 2020.
Julianne, we're ready to open up the lines for Q&A.
| q4 gaap earnings per share $1.99.
sees fy earnings per share $7.65 to $8.05.
illinois tool works inc - plans to repurchase approximately $2 billion of its shares in 2020.
illinois tool works inc qtrly organic revenue down 1.6%.
illinois tool works inc - at current levels of demand, sees 2020 organic growth to be in range of 0% to 2%.
|
Our fourth quarter results reflected the continued positive trends in our largest businesses.
Harsco Environmental and the hazardous waste portion of our Clean Earth segment.
Overall, Harsco delivered both sequential and year-over-year growth in Q4, and EBITDA was consistent with our expectations.
With that said, we are very happy to have 2020 in our wake.
Harsco, like many other companies, faced challenges in 2020 that required us to shift our focus, essentially overnight to keeping our employees safe, our businesses resilient and our liquidity position strong.
At the same time, we closed the largest acquisition in Harsco's history in terms of revenue, ESOL.
Beyond its scale, ESOL required a complicated carve-out from its parent company, was in need of basic process discipline and was underperforming its market.
Additionally, in 2020, we made a step change in our ESG journey as evidenced by significant ratings upgrades, external recognition and improved metrics in nearly all areas.
It is clear that ESG is closely aligned with our strategy and central to the shifting identity of Harsco.
Looking back on what the Harsco team accomplished, I could not be more proud about the effort and the results.
There are many reasons to be optimistic about the direction of our company.
Most notably, the continued improvement in our end markets and the value creation potential of our environmental services businesses that represent about 80% of our revenue.
Our strategic focus is clear, and we look forward to executing the next major steps of our portfolio transformation as conditions warrant.
We have four principal objectives this year.
Apart from our primary objective of continuing to manage the impact of the pandemic on our people and on our businesses.
The first objective is to realize the targeted benefits of the Clean Earth and ESOL integration and prepare for accelerated growth in this new platform.
Second, enhancing the value proposition and the cash flow profile of Harsco Environmental by shifting the revenue mix further toward environmental solutions.
Third, increasing the enterprise value of our rail business through further operational improvements and backlog growth; and fourth, reducing our financial leverage to a level much closer to our target of about 2.5 times.
Regarding the Clean Earth platform, the benefits realized from the integration of ESOL were about twice what we expected in 2020.
We anticipate incremental benefits of about $20 million this year, also or about double those realized in 2020.
We still expect total benefits of $40 million to $50 million by the end of 2022 on a run rate basis.
Although external integration costs are behind us, we will incur about $10 million of cost this year for branding and IT initiatives that will not repeat in 2022.
Overall, while the negative impact of the pandemic on the business could not have been predicted, I'm pleased with our execution and the foundation we are building in this new platform.
In Harsco Environmental, it's terrific to have following seas after 18 months of medicine head seas.
I'm excited to see the development of the business this year, particularly in the areas of Altek, applied product sales and innovation.
As previously discussed, a significant amount of maintenance capital was deferred from 2020 to this year, and capital spending on new contracts will also be higher than in future years.
Nonetheless, the growth and cash flow trends in the business are favorable, and we are targeting free cash flow generation of 8% to 9% of revenue in 2022 on a path to 10-plus percent in future years.
Our Rail business was set up to have a very strong year in 2020, based on operational improvements and a record backlog.
The impact of COVID on capital spending in both the freight and transit sectors has been dramatic.
Although the freight sector is recovering, spending on maintenance of way equipment will lag by a few quarters.
And the transit sector remains particularly weak.
Another challenge for our business is overcoming the margin loss associated with a large Chinese aftermarket program that is winding down.
Fortunately, our backlog and the launch of new products and our global reach should enable us to outperform the market this year.
While our project SCOR met its objectives in terms of capacity and data analytics, it uncovered more opportunity to improve manufacturing costs than we had realized.
Just a few comments on our portfolio.
As noted previously, an aggressive slate of internal initiatives and our financial leverage will likely push the next major step in our portfolio transformation into next year.
We also continue to focus on the best avenue to create shareholder value with our Rail business.
But our strategic ambition remains clear, continuing our transformation to a pure-play environmental solutions company.
Now over to Pete.
Harsco's revenues totaled $508 million and adjusted EBITDA totaled $62 million in the fourth quarter.
Our revenues increased 27% over the prior year quarter, with ESOL contributing most of the growth followed by revenue increases within both our Environmental and Rail segments.
The revenue increase for Harsco Environmental is noteworthy as Q4 was the first year-on-year increase in revenues for the business in a number of quarters.
This reflects both successful execution of our strategy and the positive trends in the underlying markets.
Relative to the third quarter, revenues were a little changed as continued growth from the Q2 lows for environmental and hazardous waste processing were offset by increasing market pressures related to COVID within our Contaminated Materials and Rail businesses.
Our fourth quarter adjusted EBITDA of $62 million was near the high end of our previously disclosed guidance range.
EBITDA for Q4 improved both sequentially and year-over-year, reflecting the business reasons I mentioned earlier and the actions we undertook in response to the pandemic in 2020.
Harsco's adjusted earnings per share from continuing operations for the fourth quarter was $0.12, this adjusted figure excluded costs for the ESOL integration and the severance costs related to additional restructuring actions in environmental.
The actions in HE supplement those taken in the first quarter of 2020 and illustrate our focus on continuous improvement and further strengthening the business results.
The ESOL integration process remains ongoing, but our related external costs are now essentially complete.
For 2021, we don't expect to incur any significant external integration costs.
However, there will be other internal integration costs, which I'll outline later in my remarks.
Lastly, our free cash outflow was $8 million in the fourth quarter.
This outcome, while below our expectations, was largely the result of higher-than-anticipated capital spending and the timing of receivables collections.
With respect to receivables, some customers chose to manage payments at year-end, with this cash subsequently received by us in the first and second week of 2021.
And these factors are considered in our cash flow guidance for the current year, which I'll discuss later.
Revenues totaled $246 million and adjusted EBITDA was $52 million, representing a margin of 21%.
This EBITDA figure of $52 million compared to $51 million in the prior year quarter and $40 million in the third quarter of 2020.
Overall, these were very strong results for HE with attractive incremental margins against comparable periods.
We're very pleased with these results as they demonstrate the increasing resilience of the segment despite the persistent impacts of the pandemic.
Compared with the fourth quarter of 2019, the EBITDA change can be attributed to higher demand for Applied Products in North America and lower SG&A spending.
And this lower administrative spending is the result of our actions linked to the pandemic deflects our costs as well as permanent reductions, some of which were taken in the fourth quarter, as I mentioned earlier.
Steel consumption and production at our customer sites continues to improve.
The LST or steel production volume increase from the third quarter was strong, more than 10% sequentially.
Relative to the prior year quarter, customer LST also improved incrementally.
This marked our first positive year-on-year comp for LST since early 2019.
The increase was, however, modest, and the benefit was largely offset by a less favorable mix of services, as shown in our bridge.
It is encouraging nonetheless to see the market recovery accelerate and financial performance strengthen within the steel industry in recent months.
I would also emphasize that the industry continues to operate well below its normal utilization rates, which for our customers, averaged just over 75% in Q4.
So we look forward to further capitalizing on additional growth as the industry continues to recover.
Lastly, Harsco Environmental's free cash flow totaled $5 million in the quarter and totaled $69 million for the year.
This full year figure compares with free cash flow of $13 million in the prior year, with the improvement during 2020 driven by lower capex and cash generated from working capital.
For the quarter, revenues were $185 million, and adjusted EBITDA totaled $16 million.
Growth compared to the fourth quarter of 2019 reflects the inclusion of ESOL in our hazardous waste line of business.
This impact was offset by lower contributions from our contaminated materials business line, which continues to face pandemic-related impacts.
The change in our contaminated materials performance also reflects a challenging comp to the fourth quarter of 2019, which was a very strong period for the business from a mix point of view, both for soil and dredged material processing.
Also, as we've discussed before, our corporate cost allocation to Clean Earth also impacted the year-on-year EBITDA comparison.
Relative to the third quarter of 2020, revenues were approximately 5% lower, and adjusted EBITDA declined to $16 million.
These changes reflect lower soil and dredge revenues in Q4 and again, a less favorable mix across all way streams relative to the sequential quarter.
Hazardous waste volumes were modestly higher quarter-on-quarter.
Next, Clean Earth's free cash flow was again very strong for the quarter.
The segment's free cash flow totaled $17 million in the quarter and for the year, it totaled $55 million versus adjusted EBITDA of $58 million.
We are pleased with its results in the second half, and we remain ahead of our plan on integration.
ESOL contributed approximately $20 million of EBITDA in the second half of the year, which represents a meaningful improvement year-on-year.
The benefits realized from synergy or improvement initiatives now total approximately $10 million, with the largest improvements coming from disposal optimization and commercial levers.
This total was higher than our original goal for 2020.
Looking forward, we still have more work ahead of us to complete the ESOL integration this year.
Areas of focus and investment in the coming quarter will be IT integration, logistics, procurement, site productivity and additional commercial opportunities to name a few.
We remain confident that we will reach our improvement targets by year-end, and I'll discuss the anticipated 2021 benefits within our outlook in just a bit.
Rail revenues reached $77 million while the segment's adjusted EBITDA totaled approximately $2.5 million in the fourth quarter.
This EBITDA figure compares with a loss of $2 million in the prior year quarter.
The improvement relative to the prior year can be principally attributed to lower manufacturing costs and higher contracting contributions from new contracts in North America and Europe.
These positive factors were partially offset by lower short-cycle equipment and aftermarket results.
Relative to the third quarter of 2020, the changes in our aftermarket business also led to the slight decrease in EBITDA sequentially.
Lastly, let me highlight that our rail backlog remains healthy at just over $440 million, representing a slight decrease from the prior quarter as we continued production under our long-term contracts.
As we mentioned with our third quarter results, economic or business conditions within the rail maintenance-of-way market remained challenging.
Many customers continue to defer required maintenance spending and equipment replacement or upgrade expenditures.
This pandemic related trend continued throughout the entire fourth quarter.
With that said, rail industry metrics are improving, and we expect that Harsco Rail will begin to see the benefits from this positive trend in mid-2021.
For this reason, we are optimistic that business conditions will see improvement in 2020 as it progresses, putting our business in the right direction to achieve some of the financial goals we've discussed in the past.
Turning to slide nine, which is a high-level summary of our full year 2020 results.
For the full year, revenues increased to $1.9 billion, and adjusted EBITDA totaled $238 million.
Also, our free cash flow was $2 million.
Let me start by saying that given the extremely difficult environment we all saw in 2020, I am very proud of the extent and depth of the actions and processes we put in place as a result of the pandemic to protect our people, continue serving our customers and support our financial health.
From a financial point of view, we trimmed the capital spending by roughly $65 million and pushed out project spending.
We took advantage of the CARES Act legislation and deferred other payments.
We also took actions to reduce our cost structure by more than $20 million with some of these being permanent savings, as I mentioned earlier.
And secondly, the acquisition of ESOL accelerated our strategic transformation, and as I mentioned earlier, our integration work to date has exceeded our expectations.
Also related to ESOL, you will recall that we successfully raised capital to fund this acquisition during a period of extreme market volatility.
We ended the year with net debt of $1.2 billion, a leverage ratio of 4.6 times and liquidity of more than $300 million.
We are also now evaluating opportunities to take advantage of attractive credit markets to extend our debt maturities by another three years and provide even more financial flexibility.
Regarding our segment outlook on slide 10.
There is no need to remind everyone of the continuing volatility in the end markets caused by the pandemic.
However, we believe we have enough visibility in our businesses to provide outlook commentary for 2021.
Of course, this assumes there are no significant negative pandemic-related market developments from what we see presently.
With that in mind, in summary, each business is expected to show improvement compared with 2020.
Starting with Harsco Environmental, revenue is projected to increase 10% to 15%.
Adjusted EBITDA is projected to increase approximately 20% at the guidance's midpoint.
The business drivers for HE in the year will be higher customer output and related services demand, increased Applied Products volumes, growth initiatives and new contracts.
Next, for Clean Earth, we are guiding to adjusted EBITDA of $72 million to $78 million for the year on revenues of approximately $790 million.
We anticipate that CE's pro forma revenue growth will be within a range of 3% to 5%, while we expect double-digit pro forma EBITDA growth for the business.
Higher revenues will support the EBITDA growth, but the primary earnings driver for CE in 2021 will be integration or operational improvement benefits.
We expect to realize an uplift of roughly $20 million from our actions taken to date and those contemplated in 2021.
Most of these efficiencies will be operationally driven, including lower disposal and transportation costs.
We also anticipate some commercial benefits as well.
And as I alluded to earlier, these benefits will be partially offset by additional support costs and investments.
And it's important to note, a portion of these expenses, approximately $6 million to $8 million, comprising largely duplicative costs for IT integration and branding will not recur in 2022.
We've also allocated an additional $3 million of corporate costs to Clean Earth.
This allocation and the nonrecurring expenditures will total approximately $10 million for the year.
Lastly, for Rail, we project top line growth of 15% to 20% and adjusted EBITDA growth of 25% at the guidance's midpoint.
For the year, higher equipment, technology and contracting sales will offset the impact of a weaker parts mix, reduced Asian aftermarket demand and investments, including R&D.
And lastly, corporate costs are anticipated to be within a range of $33 million to $34 million.
Turning to our consolidated 2021 outlook on slide 11.
Our adjusted EBITDA is expected to increase to within a range of $275 million to $295 million.
This guidance translates to adjusted earnings per share of $0.59 to $0.76.
The earnings per share range contemplates interest expense of $63 million to $66 million and an assumed effective tax rate of 36% to 38%.
Lastly, we are targeting free cash flow before growth capital spending of $100 million.
And after considering all capex, our full year free cash flow should range from $30 million to $50 million.
This forecast anticipates net capital spending will be within a range of $155 million to $175 million.
And this amount compares with net capex of $114 million in 2020, with most of the increase attributable to growth and renewal expenditures in environmental that were deferred in 2020.
While capital spending will increase year-on-year, we will continue to employ strict spending discipline.
As in 2020, capex remains an important lever to support free cash flow.
Also at this point, I expect that our capital spending beyond 2020 will normalize to levels below our current year forecast.
Also note that our projected free cash flow ranges include cash payment deferrals from 2020, including those related to the CARES act of roughly $12 million to $15 million.
But looking past 2021, our cash flow generation will increase as capex normalizes and the cash payment deferrals from 2020 are behind us.
We expect to see consolidated run rate free cash flow generation in excess of 6% to 8% of revenue by the end of 2022.
So let me move to slide 12 with our first quarter guidance.
Q1 adjusted EBITDA is expected to range from $52 million to $58 million.
Compared with the first quarter of 2020, we expect HE results to improve due to lower administrative spending and a more favorable service mix.
Clean Earth results are projected to be modestly higher as ESOL contributions will offset the impact of lower contaminated soil and dredge volumes and the nonrecurring expenses I mentioned earlier.
We also assume that we'll be able to make up in March, some volume that was lost in January and February, due to weather conditions in the Northeast and in Texas.
Rail results are anticipated to be lower year-on-year as a result of lower aftermarket volumes and mix.
Also, corporate costs are expected to be modestly higher due to timing of expenditures and some normalization of costs.
Lastly, let me comment on this year's phasing.
As you'll likely conclude, we expect our results to strengthen as the year progresses.
And the factors to consider regarding this phasing include the seasonality of HE and Clean Earth, the impact of growth investments in the maturing of new sites in environmental, the timing of synergies at Clean Earth and the conversion of our rail backlog and anticipated improvements in the rail maintenance-of-way market.
While my wife and I are extremely excited about it and very much looking forward to my retirement and entering the next stage of our lives, it is hard not to have mixed emotions.
I look back fondly and proudly at my time here at Harsco, and there is so much I will miss.
Above all, Nick's excellent leadership, counsel and friendship these past six years, which I value immensely, for which I'm extremely grateful.
I will also greatly miss my colleagues on the executive leadership team who are far more than just colleagues.
And finally, I will miss the world-class global finance and IT organizations I've had the privilege to lead and the countless members of the Harsco team I've met and worked with, each of whom clearly reflects the values and culture of this exceptional organization.
Yes, I will certainly miss much, but rest assured I'll be watching eagerly and optimistically as a shareholder as Harsco continues to achieve success.
| q4 adjusted earnings per share $0.12 from continuing operations.
q4 revenue $508 million versus refinitiv ibes estimate of $513.6 million.
2021 adjusted ebitda expected to increase to between $275 million and $295 million.
2021 free cash flow projected to increase to $30 million-$50 million.
sees 2021 adjusted earnings per share $0.59 - $0.76.
|
I'll begin with some brief comments on the quarter.
For the second quarter, we achieved consolidated earnings of $0.72 per share versus $0.69 last year.
After excluding from both periods, gains on investments held to fund one of the company's retirement plans, earnings per share increased by 7.8% on an adjusted basis.
The second quarter contributed to a strong 2021 year-to-date, where we've achieved 12.1% earnings growth over last year on an adjusted earnings per share basis.
In addition, we announced a 9% increase in the quarterly dividend last week, marking our 67th consecutive calendar year of dividend increases.
While we await some key decisions from the California Public Utilities Commission, or CPUC, we continue to execute on our business strategies, provide high-quality water, wastewater and electric services to over one million people and make timely investment in our systems, all while keeping our unwavering commitment to reliability and safety.
Our capital investments allow us to replace and upgrade critical infrastructure, so that we can meet our customers' needs for generations to come.
While our focus remains on strong financial results, excellent customer service and maintaining a strong infrastructure, we remain committed to ESG initiatives, including conservation, environmental stewardship, employee safety and well-being, diversity and inclusion and sound governance practices.
We will continue to focus on our ESG commitments, which benefit our customers, the communities we serve, our employees, our suppliers and ultimately, our shareholders.
Let me start with our second quarter financial results on slide eight.
Excluding gains earned on investments of $0.03 per share and $0.05 per share from the second quarter of 2021 and 2020, respectively, adjusted earnings for the second quarter increased by $0.05 per share, or 7.8%, as compared to adjusted earnings last year.
This slide presents our reported results before adjustments.
Our water segment's earnings were $0.57 per share as compared to $0.54 per share.
Adjusting for the gains on investments incurred in both quarters, earnings at water segment increased by $0.05 per share due to a higher water gross margin generated from new rates authorized by the California Public Utilities Commission and a lower effective income tax rate due to certain flow-through and permanent tax items.
These increases in earnings were partially offset by increase in water treatment costs, depreciation expense and interest expense.
Our electric segment's earnings for the quarter were $0.04 per share as compared to $0.03 per share for the same period in 2020 due to an increase in electric gross margins resulting from higher rates as approved by the CPUC.
Earnings from our contracted services segment decreased $0.01 per share for the quarter due to higher construction costs incurred on certain projects.
Our consolidated revenue for the quarter increased by $7.1 million as compared to the same period in 2020.
Water revenues increased $4.5 million due to full third year step increases for 2021 as a result of passing earnings tax.
The increase in electric revenues was largely due to CPUC-approved rate increases for 2021 and an increase in usage as compared to the second quarter of 2020.
Contracted services revenue increased $2.2 million, largely due to increases in construction activities and increases in management fees due to the successful resolution of various economic price tests.
Turning to slide 10.
Our water and electric supply costs were $28 million for the quarter, an increase of $1.7 million from the same period last year.
Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracking balance income.
Looking at total operating expenses other than supply costs, consolidated expenses increased to $3.5 million as compared to the second quarter of 2020.
This was primarily due to an increase in construction costs at our contracted services segment resulting from increased construction activity.
Interest expense, net of interest income and other increased by $2 million due in part to higher interest expense resulting from overall increase in borrowings and lower gains generated on investments held for retirement plans during the second quarter as compared to last year, as previously discussed.
Slide 11 shows the earnings per share bridge comparing the second quarter of this year with last year's second quarter.
This slide reflects our year-to-date earnings per share by segment as reported fully diluted earnings for the six months ended June 30, 2021, were $1.24 as compared to $1.07 for the same period in 2020.
When the $0.04 per share gain on investments held to fund a retirement plan is removed from 2021 year-to-date earnings, this resulted in a 12.1% increase in the adjusted EPS.
Net cash provided by operating activities was $41.1 million for the first six months of 2021 as compared to $46.3 million in 2020.
This decrease was largely due to timing differences of income and payroll tax payments, which were deferred during the second quarter of 2020 as a result of COVID-19 relief legislation effect in 2020, but not for this year.
This was partially offset by an improvement in cash from accounts receivable related to nonresidential customers due in part to improved economic conditions as compared to the first six months of 2020 because of the pandemic.
Our regulated utility invested $75 million in the company-funded capital projects during the first six months.
We estimated our full year 2020 company-funded capital expenditures to be $125 million to $135 million.
At this time, we do not expect American States Water to issue additional equity for at least the next three years to fund its current businesses.
I'll now provide updates on the drought in California and on our recent regulatory activity.
Currently, the majority of California is considered to be in extreme drought.
The Governor of California has proclaimed the state of emergency for 50 of the 58 counties within the state and signed an executive order asking all Californians to voluntarily reduce water usage by 15% as compared to 2020.
The CPUC has called on all of California investor-owned water utilities to implement voluntary conservation measures to meet this goal.
In response, Golden State Water has increased its communication with customers regarding the need for conservation and intends to implement voluntary conservation efforts in all of its ratemaking areas and has filed with the CPUC to request authority to establish a water conservation memorandum account to track incremental drought-related costs for future recovery.
Regarding our current rate cycle, the water segment has an earnings test it must meet before implementing the second and third year step increases in the 3-year rate cycle.
As we have previously reported, we have tightly invested in our capital projects and achieved capital spending consistent with the amount authorized by the CPUC.
As a result, rate increases are expected to generate an additional $11.1 million in the adopted water gross margin for 2021 as compared to the adopted water gross margin in 2020.
Regarding our cost of capital proceeding, which was filed in May of this year, we requested a capital structure of 57% equity and 43% debt, which is our currently adopted capital structure, a return on equity of 10.5% and a return on rate base of 8.18%.
A final decision is originally scheduled for the fourth quarter of this year with an effective date of January 1, 2022.
As we discussed in our prior calls, Golden State Water filed a general rate case application for all its water regions and the general office during July 2020.
This general rate case will determine new water rates for the years 2022 through 2024.
Among other things, Golden State Water requested capital budgets of approximately $450.6 million for the 3-year rate cycle and another $11.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
Water Revenue Adjustment Mechanism, or WRAM, and the Modified Cost Balancing Account, also known as the MCBA until our next general rate case application covering the years 2025 through 2027.
As part of the response to the COVID-19 pandemic, Golden State Water and Bear Valley Electric Service have suspended service disconnections for nonpayment pursuant to CPUC orders.
On July 15 of this year, the CPUC issued a final decision on the second phase of the water utility low income affordability rulemaking, which, among other things, extended the existing moratorium on water service disconnections due to nonpayment until further CPUC guidance is issued or February 1, 2022, whichever occurs first.
On June 24 of this year, the CPUC issued a final decision to extend the moratorium on electric disconnections until September 30 of this year.
Under the terms of the CPUC-adopted payment plans, actual electric service disconnections for nonpayment will not incur until approximately December 1.
Turning our attention to slide 18.
This slide presents the growth in Golden State Water's rate base as authorized by the CPUC for 2018 through 2021.
The weighted average water rate base has grown from 752.2 million in 2018 to $980.4 million in 2021, a compound annual growth rate of 9.2%.
The rate base amounts for 2021 do not include any rate recovery for advice letter projects.
Let's move on to ASUS on slide 19.
ASUS' earnings contribution decreased by $0.01 per share to $0.11 during the second quarter of 2021 as compared to the same quarter last year, largely due to higher construction costs incurred on certain projects.
For the year-to-date June 30, 2021, and ASUS' earnings contribution is $0.04 per share higher than last year due to an overall increase in construction activity and management fee revenue as well as a decrease in overall operating expenses.
The increase in construction activity for the year-to-date was largely due to timing differences of when work was performed as compared to the first six months of 2020.
We reaffirm our projection that ASUS will contribute $0.45 to $0.49 per share for 2021.
Thus far, the COVID-19 pandemic has not had a material impact on ASUS' operations.
We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve.
In addition, completion of filings for economic price adjustments, requests for equitable adjustment, asset transfers and contract modifications awarded for new projects, provide ASUS with additional revenues and dollar margin.
The U.S. government is expected to release additional bases for bidding over the next several years.
We are actively involved in various stages of the proposal process at a number of bases currently considering privatization.
We continue to have a good relationship with the U.S. government as well as a strong history and expertise in managing water and wastewater systems on military bases, and we believe we are well positioned to compete for these new contracts.
I would like to turn our attention to dividends.
Board of Directors, last week, approved a 9% increase in the dividend increasing the annual dividend from $1.34 per share to $1.46 per share.
This increase is comparable to the compound annual growth rate of 9% achieved by the company in its quarterly dividend over the last five years.
Our long and consistent history of dividend payments date back to 1931 in addition to an unbroken 67-year history of annual calendar year dividend increases.
Currently, our dividend policy is to provide a compound annual growth rate of more than 7% over the long term.
| compname posts q2 earnings per share of $0.72.
q2 earnings per share $0.72.
american states water - on july 27, board approved 9% increase in q3 dividend, from $0.335 per share to $0.365 per share on common shares.
|
I'm Jeff Kotkin, Eversource Energy's Vice President, Investor Relations.
Speaking today will be Joe Nolan, our new President and Chief Executive Officer; and Phil Lembo, our Executive Vice President and CFO.
Also joining us today are John Moreira, our Treasurer and Senior VP for Finance and Regulatory; and Jay Buth, our VP and Controller.
We hope that all on the phone remain healthy and that your families are safe and well.
I'm looking forward to meeting many more of you over the coming years and sharing my optimism and enthusiasm for Eversource's future and excellent investment thesis.
I'm grateful to the Eversource Board of Trustees and to Jim for allowing me to lead an incredibly dedicated and high-performing organization.
In approving these Executive level changes, the Eversource Board is signaling its confidence in our long-term strategy that focuses on our core regulated business with an exciting investment in offshore wind.
We are in a world where customer service, safety, and reliability have never been more important.
We will never forget that we would not be in the business without our 4.3 million customers; they are our top priority.
Customers pay the bills and they deserve the reliable and safe utility service that we must provide.
Over the coming decades the tens of billions of dollars we will invest in our energy and water delivery systems will be critical in helping New England prepare for a clean energy future, and we expect to be a central catalyst to that clean energy transition.
But first, I need to address our Company's relationship with Connecticut.
We have thousands of employees in Connecticut, who work hard each day to provide our 1.7 million natural gas, water, and electric customers with the most reliable and responsive service possible.
During emergency situations, which we have had far too often over the past year, due to the historic storm levels, they are working up to 16 hours a day for as many days as it takes to ensure that our customers have their service restored promptly and safely, even in a pandemic.
So I cannot tell you how painful it was for me to read certain elements of the Tropical Storm Isaias decision that was released on April 28th.
It did not reflect the hard work of our dedicated employees in a company I've been chosen to lead.
Our customers, PURA, and our company all want the same thing, great service each and every day of the year.
And, when there is a strong event power restoration as safely and quickly as possible.
The women and men of Eversource work hard each and every day to meet these expectations.
The PURA auto [Phonetic] on storm response clearly identify the areas for improvement.
We know we have to work to not only our response plan but also on our relationship with PURA.
This was apparent from the April 28 decision in a subsequent notice of violation.
I can assure you that we hear this loud and clear and already doing all we can to improve on both accounts.
Turning to our clean energy initiatives.
You are probably aware of the climate legislation that Massachusetts Governor Baker signed into law earlier this spring.
Among many elements, the law will allow each of the state's utilities to build up to 200 -- 280 megawatts of solar generation, NSTAR Electric will be able to increase its level of solar generation in rate base from 70 megawatts to 350 megawatts.
As Phil mentioned during our year-end earnings call, we have budgeted approximately $500 million for this initiative from 2022 to 2025.
The other item with a direct impact on us is a 2,400 megawatts expansion of Massachusetts offshore wind authorization from 3,200 megawatts to 5,600 megawatts.
This expansion will help me [Phonetic] to stay at the forefront of offshore wind development in the United States.
As you can see on Slide 2, there are now more than 10,000 megawatts of unawarded offshore wind authorizations in Southern New England and New York, with Massachusetts set to award up to 1,600 megawatts later this year.
In fact, Massachusetts RFP was just issued on Friday of last week.
Our offshore wind partnership with Orsted is very near and dear to my heart.
Since I'm always seeing that relationship and worked closely with our partner in recent years, it is an important element of our clean energy growth strategy.
And we have had a number of positive offshore wind developments already this year.
Starting with Slide 3 in early January, the Bureau of Ocean Management or BOEM released its draft environmental impact statement on South Fork project.
Comments received by late February, and we expect to see a final EIS way this summer.
BOEM is scheduled to rule on our final federal permits for that project in January of 2022.
Assuming that the January data is met, we expect to begin construction early next year and complete the project in late 2023.
Additionally, in late March, The New York Public Service Commission approved the necessary New York state sighting permit for the project, while the local town and trustees of East Hampton approved the local real estate rights required for the project.
Turning to Revolution Wind.
Late last month BOEM released a schedule for reviewing the 704 megawatt project.
The schedule calls for a final environmental impact statement to be issued in March of 2023 and for a final decision on construction and operating plan by the end of July 2023.
The release of that schedule represents a significant step forward with this project.
Revolution Wind and South Fork are two of only three projects in the Northeast, that have achieved that milestone.
Over the coming months, we and Orsted will be reviewing the BOEM and the state of Rhode Island permitting process to develop a projection for the Revolution Wind construction schedule.
Finally, we expect to receive BOEM review schedule for our 924 megawatt Sunrise Wind project later this year.
We continue to make significant progress in preparing for the commencement of construction.
Over the past couple of months, we have announced agreements with two critical ports that will serve as staging grounds for construction.
New London, Connecticut will serve as a hub for turbine construction and Providence, Rhode Island will be the center for foundation construction.
Enormous economic benefits will accrue to these communities, as a result of their role in our construction activities, including hundreds of direct jobs.
We are also very encouraged by the extremely positive signs we see from Washington.
President Biden has underscored his support for offshore wind construction along the Atlantic seaboard and has marshaled multiple members of his cabinet to support it.
The goal was to have about 30,000 megawatts of offshore wind turbines operating in the U.S. by 2030.
We expect to be a significant contributor to that output through our partnership with Orsted.
Already more than 1,750 megawatts are under contract to serve load in Connecticut, New York, and Rhode Islands.
Again, I look forward to speaking with many of you at the AGA Virtual Conference later this month.
Now, I will turn over the call to Phil.
So I'll start with Slide number 4 and noting that earnings were $1.06 per share in the first quarter, compared with earnings of $1.01 per share in the first quarter of 2020.
Results for both years included after-tax costs associated with our recent acquisition of the assets of Columbia Gas, Columbia Gas of Massachusetts and that's $0.02 per share this year and $0.01 per share in 2020.
Results for our Electric Distribution and Natural Gas Distribution segment showed the most significant changes year-to-year.
Electric Distribution earned $0.27 per share in the first quarter of this year, compared with earnings of $0.39 per share in the first quarter of 2020.
Lower results were driven by a couple of principal factors.
The first is that we recorded a charge of $30 million or $0.07 per share, primarily to reflect customer credits of $28.4 million and an additional penalty of $1.6 million to be paid to the state of Connecticut.
These credits relate to a Notice of Violation that Connecticut regulators announced last week, as a result of our performance in restoring power following the catastrophic impact of Tropical Storm Isaias last August.
The docket established by PURA to review the penalty is scheduled to run through mid-July of this year.
Additionally, Electric Distribution results were negatively affected by approximately $20 million of higher storm-related expenses in the first quarter of 2021 and that's compared to a pretty quiet and warm first quarter in 2020.
And in fact, in this quarter, we experienced 31 separate storm events across our three states versus fairly limited activity in Q1 of 2020.
So, by contrast, our Natural Gas Distribution segment showed a sharp increase in earnings because it's now about 50% larger than it was a year ago.
It earned $0.43 per share in the first quarter of 2021 compared with earnings of $0.26 per share in the first quarter of 2020.
Improved results were due primarily to the addition of Eversource Gas of Massachusetts, which earned $0.14 per share in the quarter.
In addition, we had higher revenues at NSTAR Gas and Yankee Gas and these were partially offset by higher O&M and depreciation expense.
I should note that the transition process for Eversource Gas of Massachusetts continues to progress extremely well.
As we continue to migrate off of NiSource business systems and onto Eversource platforms, reducing costs and improving service.
To date, more than 80% of the business processes have been transferred to Eversource from NiSource's, great progress has been made.
Eversource ownership of the distribution system is being well received by customers, communities, and employees, and we continue to meet or exceed the financial and operational targets we'd set for ourselves.
On the Electric Transmission segment, we earned $0.39 per share in the first quarter of 2021, compared with $0.38 per share in the first quarter of 2020.
Improved results were driven by a higher level of investment in transmission facilities and this was partially offset by dilution of additional shares issued.
Our Water Distribution segment earned $3.6 million in the first quarter of 2021, compared with earnings of $2.1 million in the first quarter of last year.
Improved results were due largely to lower interest expense and lower effective tax rate.
As you may have noticed, last month Aquarion announced an agreement to purchase a small investor-owned water system that is based in Connecticut, but also serves portions of Massachusetts and New Hampshire.
New England service company, as it's called, serves about 10,000 customers in the three states and has rate base of about $25 million.
This acquisition is consistent with the growth strategy we've discussed for our water delivery business.
And assuming timely regulatory approvals, we expect to close the transaction by the end of this year and for it to be accretive right away in 2022.
As you probably noted in our news release and you can see on Slide 5, we are reaffirming our long-term earnings-per-share growth rate in the upper half of the 5% to 7% range.
However, we modified our current year 2021 earnings guidance to reflect the customer credits I mentioned earlier.
We now project earnings per share toward the lower end of the $3.81 to $3.93 range and this includes the $0.07 per share impact of the credits.
On the regulatory side.
While our primary operating companies don't have any base rate reviews pending, we have several regulatory dockets open in Connecticut and I'll summarize the status of a few of them.
In addition to the penalty I described previously, PURA also identified a 90 basis point reduction in our authorized distribution ROE.
This is likely to be addressed in the current CL&P interim rate decreased proceeding.
Given the revised schedule the PURA released last week, we believe any ROE reduction would take -- would not take place or take effect until October 1st of this year.
To help you size that impact currently, CL&P's authorized ROE is 9.25% and we have approximately $5 billion of rate base at CL&P.
Also, on April 28th, PURA finalized an interim decision on the recovery of certain tracked cost by CL&P.
This decision would result in a number of changes to those track cost that would be implemented on June 1st, with other modifications deferred until October 1st.
The interim decision implemented a number of positive modifications to an early draft and we appreciate PURA making those decisions -- making those changes in its decision.
PURA also continues to review several other dockets, including potential for grid modernization initiatives, including AMI electric vehicle programs and storage.
And the status of the major open PURA docket is listed in an appendix to our slides.
Turning from Connecticut to Washington.
We were disappointed last month in the developments around the ongoing notice of proposed rate making concerning incentives that FERC is granted for many years to utilities that participate in regional transmission organizations or RTOs.
FERC will be taking comments and replies on the proposed changes over the next several weeks before deciding on a final order.
I would expect that the New England transmission owners and others will file comments opposing the change, which some see as being inconsistent with the Energy Policy Act of 2005 and with President Biden's focus on building out the nation's electrical infrastructure to bring more clean-energy resources to market.
As a helpful rule from a 10 basis point reduction in our transmission ROE effects consolidated earnings by about $0.01 per share.
In terms of financings, we completed $450 million of debt issuances so far this year, primarily to pay off maturities at Eversource parent and at the Aquarion in Connecticut -- Aquarion company in Connecticut.
We've not issued any additional equity this year other than through our ongoing dividend reinvestment and employee incentive programs.
However, as you know and we've stated in the past, we continue to expect to issue approximately $700 million of new equity through some sort of after market program and that would occur at various points in time over our forecast period.
In terms of our operations, we've gotten off to a very strong start this year.
Electric reliability continues to be in the top quartile of the industry versus our peers.
Through March, our above-average safety record improved even further with fewer employee injuries than we experienced in the first quarter of 2020.
All three of our natural gas utilities are outperforming on their emergency response requirements and Aquarion's water quality is solidly exceeding its target.
| compname reports q1 earnings per share of $1.06.
q1 earnings per share $1.06.
reaffirmed projected long-term earnings per share growth rate in upper half of range of 5 to 7%.
estimates it will earn toward lower end of 2021 recurring earnings per share guidance of $3.81 to $3.93 per share.
|
I'm Gabe Tirador, President and CEO.
In the room with me is Mr. George Joseph, Chairman; Ted Stalick, Senior Vice President and CFO; Jeff Schroeder, Vice President and Chief Product Officer; and Chris Graves, Vice President and Chief Investment Officer.
Before we take questions, we will make a few comments regarding the quarter.
Our third quarter operating earnings were $0.78 per share compared to $1.11 per share in the third quarter of 2018.
The deterioration in operating earnings was primarily due to an increase in the combined ratio.
The combined ratio was 98.6% in the third quarter of 2019 compared to 95.6% in the third quarter of 2018.
The deterioration in the combined ratio in the quarter was primarily from worst results in our private passenger auto business outside of California and our California commercial auto business which together added 2.8 points to the companywide combined ratio in the third quarter of 2019 compared to the third quarter of 2018.
For states outside of California, we posted a private passenger auto combined ratio of 101% in the third quarter of 2019 compared to 82% in the third quarter of 2018.
Those results include approximately $2 million of favorable prior-year reserve development on $86 million of earned premium compared to $12 million of favorable prior-year reserve development on $88 million of earned premium in the third quarter of 2018.
Our California commercial auto business posted a combined ratio of approximately 120% in the third quarter of 2019 compared to 90% in the third quarter of 2018.
Those results include approximately $6 million of unfavorable prior-year reserve development on $34 million of earned premium compared to $1 million of unfavorable prior-year reserve development on $29 million of earned premium in the third quarter of 2018.
Our California private passenger auto combined ratio deteriorated slightly to approximately 97.6% in the third quarter of 2019 from 97.4% in the third quarter of 2018.
Overall, frequency was relatively flat and severity was up approximately 7% compared to the third quarter of 2018.
Partially offsetting the year-over-year increase in loss severity in the quarter were recent rate increases.
In California, a 6.9% personal auto rate increase for California Automobile Insurance Company was implemented in March 2019 and a 6.9% personal auto rate increase for Mercury Insurance Company was implemented in May of 2019.
Collectively, these represent two-thirds of companywide direct premiums earned.
Approximately 81% of the California Automobile Insurance Company rate increase was earned during the quarter and about 53% of the Mercury Insurance Company rate increase was earned during the quarter.
Our third quarter 2019 California private passenger auto frequency and severity, each increased by about 4% compared to the second quarter of 2019.
The sequential increase in frequency and severity was the primary reason our California private passenger auto combined ratio deteriorated from approximately 96.7% in the second quarter of 2019 to 97.6% in the third quarter of 2019.
The sequential increase in frequency and severity in the quarter was partially offset by our recent rate increases.
Our year-to-date accident year combined ratio for California personal auto is approximately 96.1%.
Our California homeowners combined ratio was 97.5% in the third quarter of 2019 compared to 101.2% in the third quarter of 2018.
A 6.99% rate increase in our California homeowners line was approved by the California Department of Insurance and was implemented in August 2019.
We also recently filed for another 6.9% rate increase in our California homeowners line of business.
California homeowners premiums represent about 13% of direct companywide premiums earned.
Companywide, we recorded $1 million of favorable prior-year reserve development in the quarter compared to $6 million of unfavorable reserve development in the third quarter of 2018.
Catastrophe losses, primarily from Hurricane Imelda in Texas, were $3 million in the quarter compared to $13 million in the third quarter of 2018, primarily from the Carr Wildfire in Redding, California.
The expense ratio was 24.2% in the third quarter compared to 24% in the third quarter of 2018.
The slightly higher expense ratio was primarily due to a $6 million increase in accrued expense related to our previously announced settlement with the California Department of Insurance, partially offset by a decrease in profitability-related accruals, slightly lower acquisition costs and cost efficiency savings.
Premiums written grew 8.6% in the quarter, primarily due to higher average premiums per policy and an increase in homeowners policies written.
Several wildfires earlier in October and wildfires currently burning have caused damage in California.
At this time, it's too early to estimate our losses from these wildfires.
Our catastrophe reinsurance treaty provides coverage for wildfire catastrophe losses in excess of Mercury's $40 million retention has a total wildfire limit of $508 million and allows for one full reinstatement.
Loss occurs for a wildfire event includes all losses within 150-mile radius and within a 10-day period.
Both the radius point and the 10-day window are at the choice of Mercury.
Lastly, we generally expect the combined ratio for the fourth quarter, excluding catastrophes, to be higher than the rest of the year, due to increased loss frequency and higher severity caused by seasonal driving weather.
That said, it is hard to predict with certainty, whether the underlying combined ratio will be higher as there are many factors currently unknown or beyond our control.
With that brief background, we will now take questions.
| compname reports qtrly operating earnings per share $0.78.
quarterly operating earnings per share $0.78.
|
By way of introduction, I have been with Avista since 2009, working in our accounting group.
I'm very excited to be taking over from John for my first earnings call, and I look forward to working with all of you in the coming year.
, President and CEO, Dennis Vermillion; Executive Vice President, Treasurer, and CFO, Mark Thies; Senior Vice President, External Affairs and Chief Customer Officer, Kevin Christie; and Vice President, Controller and Principal Accounting Officer, Ryan Krasselt.
Our consolidated earnings for the third quarter of 2021 were $0.20 per diluted share compared to $0.07 for the third quarter of 2020.
For the year-to-date, consolidated earnings were $1.38 per diluted share for 2021 compared to $1.04 last year.
Now I'll turn the discussion over to Dennis.
As you heard, this is Stacey's first call today, and we're just so happy to have her in this role, and she's going to be with us at EEI too.
So you'll -- everybody will have a chance to meet Stacey and get to know Stacey a little bit.
And unfortunately, looks like we still have a ways to go.
We will, no doubt, face more challenges as we move forward.
Our region and our nation, we're recovering and rebuilding from this, and we're ready for the challenge.
I continue to be extremely proud of our employees, and I'm just so grateful for the resolve and resiliency that they've all demonstrated and the flexibility they've displayed.
And then the commitment and concern they have for our customers and communities just really fantastic.
And just so proud of our team.
I'm confident that no matter what the future brings, that we have the team and we have what it takes to manage through whatever the future may bring.
Now, let me turn to our earnings results at Avista Utilities.
Our earnings were above expectations primarily due to the timing of the recognition of income taxes.
And over at AEL&P, their earnings remain on track to meet the full year guidance.
And in our other business, we've had a great year so far, and we are pleased with our investments.
They produced significant gains in 2021, exceeding expectations.
We continue to expect these investments to contribute $0.05 to $0.10 per diluted share going forward.
In regards to regulatory matters during the third quarter, we concluded our Idaho and Washington general rate cases with rates effective September one and October 1, respectively.
We are pleased with both Commissions' support of our ongoing investments in the infrastructure that serves our customers and offers us the opportunity to continue to provide our customers with safe and reliable and affordable energy without immediately impacting customer bills.
However, we did get -- we did not get recovery of certain operating expenses through the Washington general rate cases.
In October, we filed our general rate case in Oregon.
We have proposed that the increase in base revenues included in the rate case be fully offset for a 2-year period with tax customer credits of the same amount, resulting in no impact to customer bills.
Early in the first quarter of 2022, we expect to file general rate cases in Washington, both electric and gas.
They will be multi-year rate plans as required under the new law, and we will seek to include in rates all capital investments and expected operating expenses through the end of the rate plan period in an effort to earn our allowed return by 2023.
In other regulatory filings, we were the first utility to file its Clean Energy Implementation Plan with the Washington Commission in October.
Our plan sets the course for an equitable transition to clean energy and provides a road map for specific actions to be taken over the next four years to show the progress we're making toward achieving clean energy goals established by the Clean Energy Transformation Act or CETA.
And that plan is available on our website under the Clean Energy Future tab, and there's a good executive summary there if you have interest in checking that out.
Focusing back on earnings, we are confirming our consolidated earnings guidance for 2021 and 2023 of $1.96 to $2.16 per diluted share for 2021, and $2.42 to $2.62 per diluted share for 2023.
We are lowering our consolidated guidance by $0.10 per diluted share in 2022 to a range of $1.93 to $2.13 per diluted share.
We look forward to seeing everybody down at EEI as well and talking about our company, which we're excited about.
For everybody's reference, the Blackhawks are on a one game winning streak.
I can only say that because it's the only game they won this year.
We've had a tough start.
But for us, at Avista, the third quarter has been a good quarter for us.
As we mentioned, Avista Utilities is up, we have $0.13 a share compared to $0.08 in the prior years.
But this is really primarily due to income taxes and how we record the timing of such income taxes, and we expect that outperformance to offset in the fourth quarter to back to normal performance for Avista Utilities.
The ERM, the energy recovery mechanism in Washington had a pre-tax expense of $3.8 million in the third quarter compared to a benefit in the prior year.
And for the year-to-date, we've recognized an expense of $7.1 million compared to a benefit of $5.9 million.
But when we look at it for the year compared quarter-over-quarter, last quarter, we expected for the full year to be a negative $0.08, and we currently expect it to be a negative $0.09.
So it's really just a slight move in our expectations over the year, within the year, and we had a big recognition in the quarter though.
For capital expenditures, we continue to be committed to investing the necessary capital, as Dennis mentioned, in our utility infrastructure.
We currently expect Avista Utilities to spend about $450 million in 2021 and $445 million in '22 and '23 to continue to support customer growth, and maintain our system to provide safe, reliable energy to our customers.
To fund that capital, we expect to issue approximately $140 million of long-term debt and $90 million in equity in 2021.
$70 million of the debt has already been issued.
We issued that and also $61 million of the common stock has been issued through September.
During 2022, we expect to issue $370 million of long-term debt, which is really covering a $250 million maturity and then also $90 million of common stock, which will help us fund our capital expenditures and maintain a prudent capital structure.
As Dennis mentioned, we are confirming our '21 and '23 guidance, but we're lowering '22.
And as we look at it, for lowering '22, there are a few factors.
As he mentioned earlier, we didn't get all the recovery.
We believe we had a fair order in our Washington rate case and our Idaho rate case, and we had many big projects that Kevin will be able to answer questions on in the order in Washington, but we didn't -- so we got our capital, we believe in a fair way, but we had some operating expenses that we were not allowed to recover.
We believe that we'll be able in our next case.
We expect to file our next case in -- early in the first quarter of '22, and we expect that case to be completed by the end of '22 if the normal timing works.
And we believe we'll be able, as Dennis mentioned, to get our capital and our operating expenses for the rate period in that rate case.
With respect to our guidance range at Avista -- we expect Avista for '21, we expect Avista Utilities to contribute in the range of $1.83 to $1.97 per diluted share.
And primarily due to the impact of the ERM, as I mentioned earlier in my comments, we expect to be down about $0.09.
We expect to be near the bottom of the range at Avista Utilities.
Our current expectation is to be in a surcharge position in the 90% customer/10% company band, which is expected to decrease earnings by $0.09.
In addition, based on our year-to-date results, we expect to be above the top end of our range with respect to our other investments.
We had, as Dennis mentioned, significant gains.
We've had strong performance in our investments that we've been investing for the last several years.
A number of different investments, not just one, a number of different investments had positives, and we expect to be above the top end of the range.
So when you add that together with AEL&P matching their expectations, we expect to be near the middle of our range for 2021, including the negative impact of the ERM.
For 2022, we are lowering our guidance due to the lower recovery of certain costs.
And those costs really included insurance costs, increases in labor as we've seen inflationary pressures impacting labor and other costs, IT costs and certain Colstrip-related costs.
Early in -- in the first quarter of '22, we do expect to file our general rate case, and it will, as Dennis mentioned, be a multi-year plan as required by our new law, and we will seek to include all of our capital and projected operating expenses for the planned period to allow us to have the opportunity to earn our allowed return by 2023.
As always, our guidance assumes, among other things, timely and appropriate rate relief in all of our jurisdictions as well as normal operating conditions and does not include any unusual or non-recurring items until they're known and certain.
| compname reports q3 earnings per share of $0.20.
q3 earnings per share $0.20.
lowering consolidated guidance by $0.10 per diluted share in 2022 to $1.93 to $2.13 per diluted share.
lowering 2022 guidance due to lower recovery of certain operating costs in washington general rate cases, and higher operating costs.
|
Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow-up.
We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
I hope everyone is staying safe and healthy.
While we are well over a year into this pandemic, the effects are still being felt.
We are encouraged by the rollout of vaccines, but many areas around the globe, continue to experience a surge in cases.
Through the efforts of our employees and the robust demand we continue to experience for our products, we delivered another outstanding quarter.
We had a strong start to 2021 and our ability to effectively navigate this highly dynamic environment resulted in exceptional top and bottom line growth.
For the quarter, sales increased 25%.
Excluding acquisitions and currency, sales increased 19%.
Operating profit increased 61% to $366 million, principally due to strong volume leverage and reduced spending in the form of lower travel, entertainment, and marketing expenses across our segments.
Earnings per share increased an outstanding 89%.
Turning to our plumbing segment, sales grew 27% excluding currency, driven by strong volume growth at Hansgrohe, Delta, and Watkins.
Our two recent plumbing acquisitions performed well in the quarter and contributed 5% to Plumbing's growth.
North American Plumbing grew 28% led by our wellness business which continue to experience strong demand and begin to comp their March shutdown of 2020.
Delta faucet delivered another quarter of double-digit growth with strength across all channels, particularly e-commerce which showed exceptional strength as consumers continue to shift their buying patterns to online.
International Plumbing grew 37% in the quarter as many of our markets returned to strong growth with particular strength in Central Europe and China.
And our Decorative Architectural segment sales grew 15% against a healthy 9% comp from Q1 of 2020.
Acquisitions contributed 2% to our Decorative growth.
Our Lighting, Bath and Cabinet Hardware and Paint businesses, each posted double-digit growth during the quarter.
DIY Paint grew high teens in the quarter, which is impressive considering it was facing a strong double-digit comp in Q1 of 2020.
While PRO paint was down low-single digits for the quarter as it faced a tough comp in Q1 of 2020, we did see a return to positive growth in the back half of the quarter and we're encouraged by the momentum we are now seeing in this business as we move into Q2.
Lastly, we actively continued our share repurchases during the quarter by repurchasing 5.5 million shares for $303 million.
We anticipate deploying approximately $800 million toward share repurchases or acquisitions for the full year as we guided on our 4th quarter call.
In addition, we anticipate receiving approximately $160 million for our preferred stock in Cabinetworks, resulting from their recently announced transaction, assuming it closes as expected.
We intend to deploy these funds toward share repurchases or acquisitions, which would be in addition to the $800 million that I just mentioned.
Now let me discuss two issues that are top of mind right now, inflation and supply chain tightness.
We have seen significant inflation of raw materials, namely copper, zinc, and resin used in both our paint and plumbing businesses as well as increases in freight costs.
All in, we expect our raw material and freight costs to be up in the mid single-digit range for the full year for both our Plumbing and Decorative segments with inflation likely reaching high single-digit levels in both segments in the 3rd and 4th quarters.
To mitigate these impacts, we have secured price increases across both segments to begin offsetting these costs.
We have further actions planned including additional price increases and productivity improvements while continuing to work with our customers and suppliers to offset [Technical Issues] full year margin expectations in both segments that we provided on our 4th quarter call.
With respect to supply chain tightness in addition to the strain caused by robust demand, we have been impacted by significant disruption in the supply of resins and [Technical Issues] products in both our plumbing and paint businesses due to the severe weather that Texas experienced in February.
Additionally, ocean container availability and timeliness continues to be a constraint.
This has temporarily reduced output of certain spot products during the month of April and limited our ability to build certain -- to build inventory of certain architectural coatings and other products.
However, the availability of resins is improving and our teams have done an outstanding job utilizing Masco's size, scale, and agility to countermeasure these issues by working with our key suppliers to increase availability of certain materials by leveraging our purchasing power to increase container availability for our products and by working around-the-clock to adjust production to meet the needs of our customers.
This once again shows the competitive advantage that comes from being part of Masco's portfolio.
With our strong [Technical Issues] performance, the actions we have taken and will take to offset persistent inflation, the interest savings from our recent bond transaction and the continued strong demand for our products and innovative -- and products brands, products and brands, excuse me, we are increasing our full year expectations of earnings per share to be in the range of $3.50 to $3.70 per share.
This is up from our previous expectations of $3.25 to $3.45.
As Dave mentioned, most of my comments will focus on adjusted performance excluding the impact of rationalization and other one-time items.
Turning to slide 7, we delivered a very strong start to the year as first quarter sales increased 25%, currency increased sales by 2% in the quarter and the 3 recently completed acquisitions contributed an additional 4% to growth.
In local currency, North American sales increased 21% or 17% excluding acquisitions.
This outstanding performance was driven by strong volume growth in North American faucets, showers and spas as well as DIY paint.
In local currency, international sales increased 27% or 23% excluding acquisitions.
Gross margin was 35.6% in the quarter, up 80 basis points as we leveraged the increased volume.
Our SG&A as a percentage of sales improved 340 basis points to 17% in the quarter.
This was primarily due to operating leverage, decreases in certain costs such as travel and entertainment and trade shows and the deferral of certain marketing and other spend.
We expect SG&A as a percent of sales to increase throughout the year to a more normalized 18%, a certain cost come back along with additional investments in our brands, service, and innovation to fuel future growth.
We delivered outstanding first quarter operating profit of $366 million, up $138 million or 61% from last year with operating margins expanding 420 basis points to 18.6%.
Our earnings per share was $0.89 in the quarter, an increase of 89% compared to the first quarter of 2020.
Turning to slide 8, Plumbing grew 31% in the quarter.
Currency contributed 4% to this growth and acquisitions contributed another 5%.
North American sales increased 27% in local currency or 22% excluding acquisitions.
This was led by Delta's double-digit growth in the quarter as they continue to drive strong consumer demand across all their product categories and channels.
Watkins, our wellness business, was also a significant contributor to growth in the quarter, and both demand and our backlog remains strong.
Watkins' performance also benefited from a softer comp in the first quarter of last year as government mandated COVID lockdowns resulted in two of their manufacturing plants being temporarily shut in 2020.
International Plumbing sales increased 27% in local currency or 23% excluding acquisitions.
Hansgrohe delivered year-over-year increases across most of their markets with continued double-digit growth in both Germany and China.
Demand remain strong in Central Europe despite continued COVID restrictions and we are starting to see improvement in the UK.
Operating profit was $253 million in the quarter, up $94 million or 59% with operating margins expanding 370 basis points to 28.3%.
This performance was driven by incremental volume, cost productivity initiatives and lower spend on items such as travel and entertainment, trade shows, and marketing.
This favorability was partially offset by an unfavorable price cost relationship.
We expect raw material inflation in this segment to peak in the 3rd quarter.
During the quarter, we entered into an agreement to divest our Huppe business, a small shower enclosure business based in Germany as we determined it did not align to our strategic direction.
Huppe sales were approximately EUR70 million in 2020, net proceeds will not be material.
Given our first quarter results and the current demand trends, we now expect plumbing segment sales growth for 2021 to be in the 15% to 18% range with 10% to 13% organic growth, another 3% net growth from the recent acquisitions and then divestiture of Huppe.
And given current exchange rates, we anticipate foreign currency to favorably benefit plumbing revenue by approximately 2% or $70 million.
We continue to anticipate full year margins will be approximately 18%.
Turning to slide 9, Decorative Architectural grew 15% for the first quarter or 13% excluding acquisitions.
This exceptional performance was driven by low-teens growth in our paint business.
Our DIY paint business grew high teens against a strong double-digit comp in the first quarter of 2020.
Our PRO business also faced strong comp decline to low single digits in the quarter.
Despite this decline in our PRO paint business, delivered positive year-over-year PRO growth in the back half of the first quarter and anticipate high single-digit growth for the PRO paint business for the full year as consumers continue to become more comfortable with paint contractors in their homes.
Our builders' hardware and lighting businesses each delivered double-digit growth as their new products and programs capitalized on increased consumer demand.
Operating profit in the quarter was $142 million, up $46 million or 48%.
This outstanding performance was driven by incremental volume, cost productivity initiatives, and lower spend partially offset by an unfavorable price cost relationship.
For 2021, we are raising our outlook and now expect architectural segment sales growth will be in the range of 4% to 9% with 3% to 7% organic growth and another 1.5% from acquisitions.
We continue to expect segment operating margins of approximately 19%.
Turning to slide 10, our balance sheet remains strong with net debt to EBITDA at 1.3 times and we ended the quarter with approximately $1.8 billion of balance sheet liquidity which includes full availability of our $1 billion revolver.
Working capital as a percent of sales including our recent acquisitions is 17.5%.
During the first quarter, we continued our focus on shareholder value creation by deploying approximately $303 million to repurchase 5.5 million shares.
In mid-February, we completed a significant bond refinancing.
In this transaction, we called our 2022, our 2025 and our 2026 debt maturities which aggregated $1.3 billion and refinanced these with a combination of new 7 year, 10 year, and 30 year notes totaling $1.5 billion [Technical Issues].
From an interest perspective, the net effect is a $35 million annualized interest savings.
Due to the timing of this transaction, interest expense will be approximately $110 million compared to our previous guidance of $135 million for 2021 and will be approximately $100 million in 2022.
From a maturity perspective.
This transaction also means we have taken out all our near-term maturities and our next debt maturity is not until 2027.
And two reminders for everyone; first, we will be terminating and annuitizing our US defined benefit plans in the second quarter and we will have an approximate $140 million final cash contribution to these plans to complete this activity.
And second, our Board previously announced its intention to increase our annual dividend by 68% to $0.94 per share starting in the second quarter of 2021.
This will increase our targeted dividend payout ratio from 20% to 30%.
We have summarized our updated expectations for 2021 on slide 13 in our earnings deck.
Based on Q1 performance and current robust demand for our products, now anticipate overall sales growth of 10% to 14% up from 7% to 11% with operating margins of approximately 17%.
Lastly, as Keith mentioned earlier, our updated 2021 earnings per share estimate of $3.50 to $3.70 represents 15% earnings per share growth at the midpoint of the range.
This assumes a 254 million average diluted share count for the year.
Additional modeling assumptions for 2021 can be found on slide 14 of our earnings deck.
Our markets remain strong and housing fundamentals are supportive of continued long-term growth.
Year-over-year home price appreciation increased over 17% in March and existing home sales were up over 12%.
Both of these metrics have a strong correlation with our sales on a lag basis.
Furthermore, the US consumer is healthy with estimated built up savings of nearly $2 trillion even before the new stimulus money and consumers continue to invest in their homes.
We believe these factors along with the increased demand from the large millennial demographic will lead to continued growth in the repair and remodel markets.
With our market leading brands, history of innovation, and strong management teams, we are well positioned to capitalize on these growth drivers, serve our customers and deliver value to the shareholders.
| q1 adjusted earnings per share $0.89 from continuing operations.
anticipate 2021 earnings per share in range of $1.52 - $1.72, and on an adjusted basis, in range of $3.50 - $3.70.
|
I'm Lauren Scott, the company's director of investor relations.
Patrick Burke, Callaway's senior vice president of global finance; and Jennifer Thomas, our chief accounting officer, are also in the room today for Q&A.
I'm pleased to report strong third quarter results that exceeded our expectations as Callaway continued to benefit from broad-based momentum across all segments.
The operational headwinds we and nearly all consumer brands faced during the quarter were no match for our world-class team of professionals and the strong demand we are experiencing in golf equipment and apparel.
In addition, Topgolf delivered exceptional results as increased walk-in traffic and social event bookings led to further gains in sales and productivity.
Our company is on a role, and I'm very optimistic about the road ahead.
I hope the No.
1 takeaway from today's call is the upside we are seeing on the long-run earnings potential of this business.
At a high level, total net revenue for the third quarter increased 80% year over year to 856 million, with 39% coming from the Topgolf segment, 34% from golf equipment, and 27% from apparel, gear, and other.
Profitability also increased with adjusted EBITDA up 57% to 139 million.
Before providing commentary on each segment's progress during the quarter, I want to remind everyone of the transformation that has taken place here at Callaway over the past several years.
Less than five years ago, we were almost exclusively a golf equipment company, but that has changed significantly with the addition of OGIO, TravisMathew, Jack Wolfskin, and now even more so with the addition of Topgolf.
When you invest in Callaway, you are now investing in, what I like to call, modern golf, a combination of traditional golf with lifestyle apparel and the world's leading tech-enabled golf entertainment company.
We are engaging with a wide range of consumers and meeting them where they play, whether that's on the golf course, off course that are top golf venues in Toptracer bays, out hiking a mountain, or out socializing with friends.
Golf equipment is a great business with wind at its back.
but is now just a portion of our business, just under 40% of this year's estimated full year revenues.
Looking ahead, we expect all of our segments and business units to deliver growth and to support each other's continued success.
Topgolf, in particular, has exceptional growth embedded within its portfolio, and our apparel assets have strong brand momentum that will continue to drive strong results.
The combined entity has a competitive advantage in scale in the golf sector and an unmatched reach to a wide range of consumers.
With that said, I'll move now to segment highlights, starting with an update on our Topgolf business.
I'm pleased to report that our owned venues continued their positive trends with Q3 same venue sales at approximately 100% of 2019 levels.
The overperformance in Q3 was driven by continued strong walk-in traffic and improved event sales, especially in the social event bookings.
Our performance was particularly impressive considering the headwinds we faced from the increase in Delta COVID cases early in the quarter.
Getting back to 2019 levels of same venue sales is a significant milestone for the Topgolf team and a strong indicator of more growth to come as the business fully recovers from COVID impacts.
In addition, we're seeing very strong flow-through to the bottom line with adjusted EBITDA of 59 million for the quarter, which significantly outpaced our forecast.
To put this in perspective, Topgolf earned as much in Q3 as it did for the entire year in 2019.
As we look out over the remainder of the year, we continue to believe the corporate events business will be lighter than it was in 2019.
However, now that we are one week into November, we are pleased to report that the number of leads for corporate events in Q4 is improving, as is the conversion rate from those leads.
Overall, relative to Q3, we see total systems same venue sales stepping down in Q4, but only because corporate events are historically a larger portion of the Q4 sales mix.
And we now anticipate low to mid-90 same venue sales rates for both Q4 and the full year, up nicely from our prior forecast.
Like many companies, for the remainder of this year and into 2022, we anticipate above-average inflationary pressures on food, beverage, and wages, but we believe we will be able to continue to effectively mitigate the impacts of these by sustaining strong top line revenues, continued labor efficiency and selectively taking price.
Venue expansion continued as planned during the quarter with the opening of Colorado Springs, a 74-bay medium-sized venue and Holtsville, Long Island, a large 102-bay venue.
Year to date, we've opened a total of eight new venues, and we have our final venue for the year slated to open later this month in Fort Myers, Florida.
We now also have a strong visibility into the 2022 development pipeline and are confident that we can hit our target of 10 new venues next year.
Toptracer expansion continued during the quarter with year-to-date installation surpassing a full year of installs in 2020 and nearly double the full year of installs in 2019.
However, COVID restriction supply chain issues led to fewer installs during the quarter than we anticipated.
Now for the full year, we anticipate that our total new bay installs will be approximately 10% below our 8,000 bay target.
Most importantly, though, demand for Toptracer remains very strong as is customer feedback with driver ranges reporting 25 to 60% revenue increases post installation.
We are confident that in a normal operating environment, we will be able to get back to our goal of 8,000-plus installations per year.
Before I continue on to our other segments, I want to take a moment to highlight the Five Iron Golf minority investment we announced last week as it aligns nicely with both our golf entertainment and our golf equipment segments.
Five Iron is a privately owned indoor golf and entertainment concept predominantly located in major metropolitan cities.
They offer simulated rentals, golf lessons and custom club fittings, while also providing a fun space for social events.
We are excited about the Five Iron investment and partnership as it increases our exposure to the off-course golf and entertainment space, which we believe will be a key driver of the long-term growth of the industry as it introduces more new entrants to the sport.
In addition, through the partnership, we have a nonexclusive marketing agreement where Five Iron members and guests will have the opportunity to demo Callaway clubs and balls increasing our reach to golfers at all levels.
If you're in New York, Baltimore, Chicago, or several other major cities, we encourage you to check out one of their facilities.
Moving to the golf equipment segment.
Demand and interest in golf remains at all-time highs, and our supply chain team successfully navigated the Q3 supply chain challenges to capture more demand than we thought was possible when we last spoke.
Digging deeper into the operational side, we're pleased with the trends we are now seeing in the supply chain.
And although we expect both us and the industry at large to be supply constrained for the foreseeable future, we are also confident we'll be able to manage through in a manner that supports our growth and profitability initiatives.
We are also cautiously optimistic that our efforts and scale are creating a competitive advantage for us here.
Specific to the most recent Vietnam shutdowns, I'm pleased to report that our suppliers' factories in Vietnam are back open and ramping to support our 2022 product launch plans.
Barring any foreseen new macro issues, we anticipate no meaningful disruption to our 2022 product launches.
We've also been fielding questions as of late on the sustainability of the heightened interest in golf.
And I want to go on the record saying that all signs show that the high level of interest is continuing and will do so through the foreseeable future.
Hardgoods retail sell-through has continued to trend higher according to Golf Datatech, with Q3 up 1.3% year over year, and up 46.5% compared to 2019.
We are not seeing demand decline, and our customers are telling us that they expect a strong year for golf in 2022.
Shifting to the apparel and gear segment.
Results for the quarter highlighted the strong momentum within the TravisMathew and Jack Wolfskin brands, as well as the success of our Callaway branded product in Asian markets.
The TravisMathew brand continues to be on fire, gaining strong traction in newer East Coast markets while maintaining a strong following here on the West Coast.
The brand is performing extremely well in all channels.
Looking specifically at our own stores.
comp store sales for the quarter were very strong, up 84% versus 2020, and 50% versus 2019.
During the quarter, we opened two new Travis stores in Florida, one in Boca and the other in Palm Gardens, ending the quarter with a total of 26 retail locations.
We expect to open another three doors in Q4 for a total of 29 doors by year-end.
Needless to say, the performance of our retail doors have been outstanding on a stand-alone basis.
But what makes them even more attractive as they tend to drive increased brand strength in wholesale demand in the regions and communities where they are located.
E-commerce was also a strong driver of growth with normalized sales up 50% year over year.
That is excluding a onetime sale we did last year.
In line with the company's sustainability initiatives, we were excited to launch the TravisMathew Eco Collection in September in partnership with the Surfrider Foundation.
The fabric blends in this collection use at least 98% organic cotton and at least 62% recycled polyester created from plastic bottles, with 100% of the profits going to the Surfrider Foundation, an organization dedicated to protecting the world's oceans and beaches.
Jack Wolfskin experienced a strong Q3 as well, with 2022 spring/summer pre-books up significantly over 2020 and comp store sales increasing almost 10% over both 2019 and 2020.
were also an issue in Hamburg, Germany, but the team did a wonderful job navigating the challenges, and we were able to successfully fulfill all orders in the quarter without cancellations.
Lastly, Callaway apparel in Japan continued to be a top-performing brand in the wholesale channel, holding the No.
1 position year to date.
And in Korea, the brand was off to a solid start as well with positive reception from the major department stores in the region.
In conclusion, as I said at the top of the call, our business is on a roll.
While we are not providing 2022 guidance at this time, based on the strong trends we're seeing across all segments, we believe that all business lines, all regions are poised for growth next year.
I want to start by echoing Chip's enthusiasm about our third quarter results and positive outlook for the remainder of the year and into 2022.
The record results highlight the significant growth potential embedded in our business which we are realizing more quickly than we initially anticipated.
The demand for our golf equipment and apparel products, coupled with our operation team's ability to navigate successfully the COVID supply chain challenges, have resulted in stronger-than-anticipated financial results in those businesses.
We also benefited from very strong Topgolf revenue, driven by increased walk-in traffic and more social events business as COVID concerns ease during the past few months.
Profitability at Topgolf also exceeded our expectations due to the strong sales combined with increased operating margins.
Fortunately, we have overperformed, but we would also have liked to have been more accurate.
The reality is forecasting our business in this environment has been very challenging for a variety of reasons.
These include the ebbs and flows of COVID cases globally, a steady diet of new and exciting supply chain challenges that we have never had to work through before, unique operating conditions that cause profitability to flow a lot differently than in the past, and the increased overall scale of our business, which is new to us.
We appreciate your patience and understanding as we work through these issues.
We are learning accordingly, and we will be adjusting to return to more accurate forecasts.
In the guidance we are providing you today we are reflecting the more normalized spending levels, as well as sustainable operating leverage.
In the meantime, we hope the forecasting challenges do not overshadow what is clearly an outstanding year, as well as higher long-term expectations.
As we turn to discuss our financial results, I want to remind you that we use certain non-GAAP measures to evaluate our business performance.
Moving to Slides 12 and 13.
Consolidated net revenue for the quarter was $856 million, an increase of 80% or $381 million compared to Q3 2020.
The increase was led by the addition of Topgolf revenue of $334 million, along with an 8.4% increase in golf equipment revenue and an 11.9% increase in apparel, gear, and other.
Changes in foreign currency rates had a $4 million favorable impact on third quarter 2021 revenues.
Total cost and expenses were $772 million on a non-GAAP basis in the third quarter of 2021, compared to $406 million in the third quarter of 2020.
Of the 366 million increase, Topgolf added $310 million of total costs and expenses.
The remaining $56 million increase includes moving spending levels back to normal levels, the start-up of the new Korean Callaway apparel business and expansion of the TravisMathew business, increase corporate structure -- increase corporate costs to support a larger organization, and increase freight costs and inflationary pressures.
To date, increased sales volumes and selective price increases have balanced out the cost increases, and we believe this will continue to be the case in Q4 and into early 2022.
We are also reporting for the third quarter of 2021, non-GAAP operating income of $85 million, a $15 million increase over the same period in 2020.
The increase was led by a $24 million increase in segment profit due to the addition of the Topgolf business, and a $9 million increase in apparel, gear, and other operating income, partially offset by $11 million decrease in golf equipment operating income due to increased freight costs and return to more normalized spend.
Non-GAAP other expense was $22 million in the third quarter compared to other expense of 3 million in Q3 2020.
The $19 million increase was primarily related to a $16 million increase in interest expense related to the addition of Topgolf, as well as lower hedge gains, compared to the prior period.
On a GAAP basis, the effective tax rate for the third quarter was an unusual 132%.
You may recall that in the second quarter, we were required to use the discrete method for calculating our tax rate, and therefore, reversed a significant portion of the valuation allowance we had recorded during the first quarter as a result of the Topgolf merger.
In the third quarter, we were required to move back to using the annual rate method and once again record the valuation allowance that was reversed in the second quarter.
I have my own opinion, but we'll leave it to you to assess whether there was any value added by this round trip of the valuation allowance.
On a nine-month GAAP basis, the effective tax rate was 22%.
Excluding the valuation allowance we recorded again and the impact of the other nonrecurring items, our non-GAAP effective tax rate for the third quarter was 58% and for the nine months was 29%.
The third quarter rate was impacted by the transition from the discrete method to the annual rate method, and both periods were impacted by the deferred benefits of certain tax items.
There are a lot of moving parts with our tax rates, and the interim period rates are not always an accurate guide.
For internal purposes, we are using low 20s for our planning purposes for the non-GAAP full year rate.
Non-GAAP earnings per share was $0.14 or an approximately 194 million shares in the third quarter of 2021, compared to $0.61 per share on approximately 97 million shares in the third quarter of 2020.
The share increase is primarily related to the issuance of additional shares in connection with the Topgolf merger.
Full year estimated diluted shares is approximately 177 million shares, which includes the weighted average shares issued in connection with the merger over approximately a 10-month period.
Lastly, adjusted EBITDA was $139 million in the third quarter of 2021, compared to $88 million in the third quarter of 2020.
The $51 million increase was driven by a $59 million contribution for the Topgolf business, which performed exceptionally well this quarter and was partially offset by a return toward more normal spend levels in the golf equipment and soft goods businesses.
Turning now to Slide 15.
I will now cover certain key balance sheet and other items.
As of September 30, 2021, available liquidity, which is comprised of cash on hand and availability under our credit facilities was $918 million, compared to $630 million at September 30, 2020.
This additional liquidity reflects overperformance in all of our business segments.
At quarter end, we had a total net debt of $1 billion, including deemed landlord financing of $311 million related to the financing of Topgolf venues.
Our leverage ratios have improved significantly period over period and on a net debt basis is now 2.5 times, compared to 3.5 times at September 30, 2020.
As we look forward over the next few years, we expect the leverage ratio to trend a little higher, depending on the level of top of development and deemed landlord financing.
Consolidated net accounts receivable was $255 million, an increase of 6%, compared to $240 million at the end of the third quarter of 2020.
This increase is primarily attributable to the increase in third quarter revenue, as well as an incremental $10 million of Topgolf accounts receivable.
We continue to remain very comfortable with the overall quality of our accounts receivable at this time.
Legacy days sales outstanding decreased to 53 days as of September 30, 2021, compared to 55 days as of September 30, 2020.
Our inventory balance increased to $385 million at the end of the third quarter of 2021, compared to $325 million at the end of the third quarter of the prior year.
This $60 million increase was due to higher golf equipment inventory, especially toward the end of the quarter, reflecting an increase in in-transit inventory and a shift to making '22 launch product.
The Topgolf business also added $18 million to total inventory this quarter.
Capital expenditures for the first nine months of 2021 were $149 million, net of expected REIT reimbursements.
This includes $109 million related to Topgolf.
From a full year 2021 forecast perspective, the golf equipment and soft goods business forecast is $60 million.
The 2021 full year forecast for Callaway and Topgolf is approximately $225 million, net of REIT reimbursements, primarily related to the new venue openings.
The foregoing amounts do not include approximately 33 million in capital expenditures for Topgolf in January and February, which was premerger.
Non-GAAP depreciation and amortization expense was $37 million in the third quarter of 2021, compared to $8 million in 2020.
This includes $28 million of non-GAAP depreciation and amortization related to Topgolf.
For the full year 2021, we expect non-GAAP depreciation and amortization expense to be approximately $130 million, which includes $93 million for the Topgolf business.
The foregoing does not include approximately 18 million of Topgolf non-GAAP depreciation and amortization from January and February in the aggregate.
Now turning to our outlook on Slide 16.
For the full year, we expect revenue to range between 3.11 and $3.12 billion.
That compares to 1.59 billion in 2020 and 1.70 billion in 2019.
The company's full year 2021 net sales estimate assumes continued positive demand fundamentals for our golf equipment and soft goods segments and no further business, supply chain or retail shutdowns due to COVID.
It also assumes continued strong momentum in the Topgolf business, which is expected to generate 10-month segment revenue that will come in slightly above its 2019 full 12-month revenue of $1.06 billion.
Full year adjusted EBITDA is projected to be between 424 and $430 million, which assumes approximately 158 million from Topgolf.
For the fourth quarter, our implied revenue guidance is increasing by approximately 30 million, with about 50% of that flowing through to adjusted EBITDA.
The revenue increase is driven by continued over performance in the venues, increased supply and golf equipment and spend levels continue to ramp up to normalized levels.
On the operational side, as I mentioned earlier in my remarks, we are expecting continued cost pressure from increased freight costs and inflationary pressures, including labor and commodity prices, as well as negative foreign currency impacts due to a strengthening U.S. dollar for the balance of 2021 and into 2022.
However, despite these headwinds, we believe strong demand sales volumes and select price increases across our business segments will balance out these pressures, and we expect all businesses to grow next year.
Operator, over to you.
| q3 non-gaap earnings per share $0.14.
q3 2021 consolidated net revenue increased $381 million to $856 million.
|
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 our call, Ray Ritchey, Senior Executive Vice President and our regional management teams will be available to address any questions.
Today, I'm going to depart from my typical organizational remarks and instead summarize all the reasons why we are confident in Boston Properties' future prospects and enthusiastic about the company's growth potential at this unique point in time.
As part of my comments, I will address accomplishments and challenges of the past year, current capital and property market's conditions as well as Boston Properties' capital allocation decisions and strategy.
I will begin with three points on Boston Properties' potential for income growth, both in the short and long term from where we closed out 2020.
First, our variable income streams will recover.
Over the next 24 months, Boston Properties will likely enjoy one of its most significant and predictable improvements in economic conditions and leasing activity as we witness the end of the COVID-19 pandemic.
Two vaccines with high efficacy rates have been FDA approved, 5.8% of Americans have already received at least one dose of the vaccine.
The more easily refrigerated Johnson & Johnson vaccine is near approval and health authorities are advising that anyone who wants to be vaccinated will be accommodated by this summer.
The Biden administration is aggressively pursuing a more rapid vaccine rollout as well as economic stimulus to help bridge the economic damage caused by the pandemic.
Given the herd immunity created by a high percentage of the population either recovered from infection and/or vaccinated, infections will likely drop precipitously in the middle of the year.
We are all anxious to come out of isolation and return to our normal lives.
So as the infection rate drops, the economy will reopen and individuals will return to offices, restaurants, shops, theaters and travel.
Approximately $97 million of Boston Properties' FFO decrease in 2020 came from the variable income streams of parking, our single hotel and retail customers, all of which were devastated by the lockdowns.
And we will likely see a strong recovery in these variable income streams in the near term as the economy reopens.
Second, Boston Properties' office portfolio is stable.
We have been collecting through the pandemic over 99% of our office rents owed demonstrating the quality of our buildings and office tenants.
Only 7.1% of our leases roll over this year, and we experienced 20% roll-ups on average the last three years, providing a cushion for decreases in market rent caused by the pandemic.
We have signed over 600,000 square feet of leases on currently vacant space that will experience rent commencement in 2021.
We expect the noncash charges experienced in 2020 for accrued rent balances to diminish, if not cease in 2021.
We are now recognizing rent on a cash basis for all theater and co-working tenants as well as the vast majority of retail credits we consider at risk.
We will also be delivering in whole or part three assets into service this year, 100 Causeway, 159 East 53rd Street and 200 West Street, just under one million square feet in the aggregate and 95% leased.
Third, Boston Properties has significant external growth drivers, which are readily quantifiable over the next four years.
We currently have under development and redevelopment seven projects comprising 3.7 million square feet and $2.2 billion in total investment.
These projects are 88% pre-leased, fully funded with cash on our balance sheet and projected to generate cash yields on cost at stabilization of approximately 7%.
In addition, we recently delivered three Class A urban apartment complexes in Boston, Reston and Oakland, with an aggregate of 1,350 units that are only 56% leased and have substantial income upside as the economy reopens.
We expect the income from delivering this development pipeline to add 3.4% annually to our FFO growth over the next four years.
We also anticipate starts this year of over $800 million, the majority of which are new life science developments and conversions.
And lastly, we own or control land aggregating over 16 million square feet of potential office, lab and residential development, which we will commence as dictated by market conditions.
Now my next points relate to our business model and strategy.
A core strategic principle for Boston Properties is to build, acquire and own high-quality buildings.
Our portfolio is dominated by Class A urban assets many among the leading buildings in their respective markets, such as Salesforce Tower, the General Motors Building, 200 Clarendon Street and Kendall Center.
Higher quality buildings stay more occupied and perform better in times of recession, as certain customers take advantage of lower rents to upgrade their space.
For example, VTS reported from their database that tours for Class A buildings in New York City went from 38% of total before the pandemic to 54% during the pandemic.
Another hallmark of our quality strategy is market selection as we believe in the long-term health and attractiveness of our coastal gateway markets.
But we remain confident in the attractiveness of our target markets for two basic reasons: the clustering of knowledge workers and increased barriers to new supply.
The cities where we currently and aspire to operate, New York, San Francisco, Boston, Washington, D.C., Los Angeles and Seattle, have unmatched educational, cultural and civic resources which attract the leading clusters of knowledge workers in the U.S., particularly in computer science and life sciences.
Knowledge workers have more job opportunities and are more productive when working with others in clustered environments.
Future job growth and office demand is going to be driven in the technology and life science fields where our target markets have a distinct clustering advantage.
To create value in office real estate as an owner, you need rental growth, which is driven by both job growth and barriers to supply.
Our markets have built in obstacles to new development, including a dearth of available sites difficulty in permitting, antidevelopment local ordinances and cost and complexity in construction.
My last point on business model is Boston Properties' fully integrated operating capability and quality of execution.
In 2020, we were able to lease 3.7 million square feet with a weighted average lease term of 8.6 years, which is around 60% of our recent annual leasing averages, while the leasing activity in our markets was approximately 40% of recent annual averages.
In all our core cities, we are a market-leading participant providing advantages in assessing new investment opportunities, procurement and attracting and retaining talent.
We are an industry leader in ESG performance as measured by GRESB, the EPA, USGBC, Energy Star, Fitwel and others and were recently recognized as the leading office company and second best property company in Newsweek's 2021 Most Responsible Companies ranking.
My next points relate to valuation.
Because of the pandemic and the variability in our parking, retail and hotel income streams, Boston Properties' FFO dropped approximately 15% the last three quarters of 2020 versus prepandemic levels, which is clearly disconnected from our stock price, which has dropped 37% over the same period.
The gap is caused by expectations, specifically concerned about Gateway markets addressed earlier and the impact of work-from-home on office demand.
I will reiterate that we think more remote work is here to stay after the pandemic, but concerns over the impact to office space demand are overblown.
Business leaders want their employees back in the office to foster culture, collaboration, teamwork and mentoring and to provide more supervision.
In a recent employee survey completed by Gensler, workers want to return to the office as well, where they believe they are most productive and collaborative.
But 52% want a hybrid model with more time to work-from-home for convenience and safety from COVID-19, fears of which should dissipate over time.
However, 90% of those employees surveyed won an assigned workstation when in the office.
And while only 21% of those surveyed had a private office layout, 47% wanted it.
Though employees may be working remotely more in the future, it will be difficult for employers to translate lower census into space savings due to employees' desire for more privacy and a fixed workstation.
There is also a disconnect between where the private real estate market is valuing Class A office assets in Gateway markets and where the public market is valuing Boston Properties.
At our current share price, the look-through cap rate on our portfolio is 5.9%.
High-quality office assets comparable to much of Boston Properties' portfolio are trading at sub-5% cap rates.
Though office transaction volumes were down materially in the last three quarters of 2020 from the prior year, activity improved each quarter as investors return to the market.
Volumes were down 45% in the fourth quarter versus the fourth quarter in 2019, but were up 59% sequentially from the third quarter.
Office was no more out of favor than other asset classes after the pandemic as office transaction volume was 29% of total commercial real estate volume, both in 2019 and the last three quarters of 2020.
There continues to be a robust market for life science real estate as well as quality office buildings and technology-driven markets with more limited leasing exposures.
Just in life science, life science is a portfolio dominated by a leasehold interest in University Park in Cambridge sold for $3.4 billion, around $1,500 a square foot and a mid-4% cap rate with roll-up potential.
And a partial interest in Discovery Park in Cambridge was sold for $720 million, representing $1,190 a square foot and a 4.7% cap rate.
And in office, 410 10th Avenue in New York City sold for $950 million, which equated to $1,490 a square foot and a 4.5% cap rate.
And 510 Townsend and 505 Brannan streets in San Francisco sold for a combined $570 million, $1,280 a square foot and a 5% cap rate.
Though both buildings are leased long term, one is being sublet in full by its user.
And in the Seattle CBD, a leasehold interest in 2NU sold for $700 million, $1,020 a square foot and a 4.7% cap rate and 1918 8th Avenue sold for $625 million, $940 a square foot and also a 4.7% cap rate.
There is material investment activity in like assets to Boston Properties.
And with interest rates forecast to remain low and the economic recovery described earlier, we expect transaction activity to increase and cap rates potentially to tighten for well-leased assets.
And lastly, Boston Properties has the balance sheet and access to capital to take advantage of opportunities that will present themselves as a result of the pandemic.
We currently have $3.2 billion in liquidity.
And after the redemption of our unsecured bonds and fully funding our current development pipeline, we'll have $1.5 billion of liquidity remaining.
We have been more actively monetizing in-service assets, having completed $570 million in gross sales in 2020, and we expect a similarly elevated level of activity this year.
We have access in size at attractive terms to the unsecured debt market, if needed, and have been developing increasingly formalized relationships with large-scale private equity partners to help us fund acquisitions.
We have a reasonable pipeline of potential new opportunities in our core markets in Seattle and continue to look for investments that require leasing and/or redevelopment to take advantage of our operating skills and to create higher returns.
As mentioned, we also intend to invest more aggressively into life science real estate and have 5.8 million square feet of new development and redevelopment projects under our control located primarily in the life science hubs of Cambridge, Waltham and South San Francisco.
So in conclusion, the COVID-19 pandemic continues to create a very challenging environment for many sectors of the U.S. economy and commercial real estate, including office assets.
However, the end of the pandemic is approaching and we are confident Boston Properties will emerge with strength and momentum given our portfolio quality, income stability, growth potential, access to capital and highly engaged management team.
Doug, over to you.
I thought about just sort of stopping right there and starting with questions, but I guess I'll make some remarks and give some time for Mike as well.
As we sit here in January of '21, we are shifting from COVID, COVID, COVID as the obstacle to a pickup in activity to vaccine, vaccine, vaccine as the signal to rejuvenate tenant conversations about bringing staff back to the office and starting the leasing transaction processes.
There is no question that the rapid increase in COVID cases over the last six weeks of 2020 and the beginning of 2021 suppressed leasing tours in discussions during that period of time.
But in the last two weeks, two large Boston companies have announced their expected return-to-work dates.
We signed an LOI for a 70,000 square foot tenant that's going to need space in December of 2021.
And just yesterday, Amazon announced in Boston that they are committing to another 630,000 square feet to be built office building and bringing 3,000 additional jobs to the Boston CBD.
So while the first half of '21 is expected to be quiet, we are cautiously optimistic that we've been through the worst of the pandemic and that the latter part of '21 will have a discernible pickup in leasing transaction volume, parking revenue and retail sales.
The year-end market leasing reports that are published by the commercial brokerage organizations held a few surprises, as you probably heard through many of the analyst calls.
Leasing volumes were way off their historical pace and with the significant sublet space added to the market, we saw negative absorption and increased availability everywhere.
It's important to remember that there are two types of sublet space.
First, space that comes from users that have had changes in their employee headcount and are clearly no longer going to need all that space.
And then there's a second group.
Tenants that are being opportunistic, listing their entire premises, by the way, at no cost to them, with an expectation that they'll decide what to do if they get an acceptable actionable offer down the road.
They may reoccupy, they may relocate and transact or they may find a way to sublet a portion of their space, we just don't know.
But based on all the conversations we have had with our technology, our life science, our professional service, our legal, our financial firms as well as the leasing brokers that are responsible for these listings, a change in workplace strategy, aka, we're going to work from home, where we're going to go to a disaggregated workforce, that's not what's driving the bulk of the sublet activity.
One thing is sure, not all the sublet space is actually available.
You might find the following illustrative at.
In Midtown Manhattan, after the Great recession, according to CBRE, from 2008 to 2009, about 24 million square feet of space was put on the sublet market.
Between 2009 and 2010, 13.6 million or 57% of that was withdrawn from the market.
Not all space is available.
The Boston Properties' office portfolio ended the year at 90.1% occupied.
The quarterly sequential drop is entirely due to the addition of Dock 72 at 33% leased into the in-service portfolio.
As Owen said, we have 600,000-plus square feet of signed leases, 134 basis points in our in-service portfolio that has not yet commenced revenue and hence is still defined as vacant, but it has been leased.
We completed another 1.2 million square feet of leasing during the quarter.
On a relative basis, my view of the ranking activity on our portfolio, active lease negotiations, tours, RFPs in our markets is as follows, starting with the best and moving to the least.
Boston Waltham, by the way, we don't have any available space in Cambridge.
Northern Virginia, Midtown Manhattan, Princeton, Los Angeles, the Peninsula Silicon Valley, DC and, finally, the CBD of San Francisco.
During the fourth quarter, in the Boston CBD, we did five leases, including another full floor new tenant at Atlantic Wharf.
The cash starting rent on this full floor lease will be 34% higher than the expiring rent, and there are future rent increases.
The cash rents on the other four leases had a weighted average increase of about 30%.
We continue to have additional activity in our CBD Boston portfolio, albeit with a number of smaller tenants under 10,000 square feet.
A few are looking for incremental growth, and a few were considering letting their 2021 leases expire and are now actively engaged in short-term renewal conversations.
I also want to note that we finally obtained possession of the 120,000 square foot 2-story former Lord & Taylor Building on Boylston Street during the early part of this month.
This was a big win as we believe we can find a far more productive use for this box that has been under leased since the mid-1960s to Lord & Taylor.
In our suburban Boston portfolio, we completed 226,000 square feet of new leasing, including all of the remaining space at 20 CityPoint, first generation.
This is in addition to the life science lease we did at 200 West Street.
The cash rent on the second-generation leases, about 150,000 square feet was up an average of 23% on a cash basis.
We continue to have additional activity in suburban Boston.
In Waltham, we're negotiating a 60,000 square foot lease extension, a lease with a new tenant for a 63,000 square foot block of space and we're responding to a number of large life science lab requirements.
At the moment, we don't have any ready-to-go vacant lab space, but we hope to begin our conversion of 880 Winter Street 220,000 square feet during the second quarter.
And our 300,000 square foot 180 CityPoint lab building has been fully designed, fully permitted, and we are simply waiting final construction bids over the next few months.
Turning to Northern Virginia.
This quarter, we completed six renewals at our VA 95 single-story park, totaling about 218,000 square feet.
In addition to the VW commitment in Reston Next, we completed another 82,000 square feet in the town center in Reston.
In total, in 2020, we completed 1.15 million square feet of leasing in Reston Town Center.
We still have more work to do.
But we have a good start to 2021 with lease negotiations ongoing for an additional 60,000 square foot block of space.
In Reston Town Center, rents are basically flat to slightly down 1% to 2% on the relet, since the expiring cash rents have been increasing contractually by 2.5% to 3% for the last 10 years, and they will continue to do so on a going-forward basis.
Our D.C. CBD exposure rests in our JV assets.
But here too, activity in our portfolio has picked up.
We completed 24,000 square feet of leasing during the quarter, and we're negotiating over 120,000 square feet of leases as we speak.
In New York City, we executed our lease with Ascena at Times Square Tower for about 132,000 square feet of office space.
We completed two floor deals in the New York City market, each 31,000 square feet at 601 Lex, one was a one-year extension, and the second was a 10-year renewal and the cash rent decreased about 8% on that renewal.
We also did four small transactions at 250 West 55th Street in Time Square Tower totaling 26,000 square feet, three were short term and one was a 10-year deal.
We're negotiating a full floor of transaction at 399 Park on a space that's not expiring until the end of 2021.
While we didn't do much leasing in Princeton during the quarter, we have a number of active discussions ongoing that we believe tenants will be making decisions to expand or relocate in late '21 and are strongly considering Carnegie Center.
When we talk about California, you need to appreciate the fact that the state has been strongly discouraging tenants from asking their employees to go to their offices for the last 11 months.
The uncertainty 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.
And this has affected tenant's appetite for making any decisions.
Just to put this year in perspective, from 2017 to 2019, there were, on average, 10 -- excuse me, 14 tech company leases per year in excess of 100,000 square feet.
In 2020, there were none.
Our San Francisco assets are 95% leased, and we have 280,000 square feet expiring in '21.
The third quarter produced just three transactions totaling about 23,000 square feet at EC.
And during the fourth quarter, we did another four leases, all renewals, up about 18% on a cash basis totaling 20,000 square feet, it's pretty slow there.
In South San Francisco, our Gateway JV is planning the construction commencement of 751 Gateway, a 230,000 square feet ground up lab development to begin over the next few months, followed by the conversion of 651 Gateway, which will be a renovated building, if we're able to relocate the existing tenant there.
There's more activity in the Silicon Valley Mountain View area than the rest of the Bay Area.
two technology companies did 100,000 square foot plus expansions during the quarter, and there are three active requirements right now in the market in excess of 200,000 square feet.
There continues to be a slow resurgence of medical device, alternative energy, automotive, the hardware side of technology that are all out looking for space.
We are seeing a few of these organizations looking at our Mountain view single-story product, which is plug-and-play ready.
In Santa Clara, we're going to be taking our 218,000 square foot Peterson Way building out of service when the lease expires in the second quarter of '21.
This was a covered land play and contributed about $4.8 million of revenue in 2020.
We have entitlements for a 630,000 square foot campus, permitted and improved, ready to go.
In spite of the challenging COVID-related conditions in California, in Santa Monica, we continue our renewal negotiations with our 2021 expirations.
And as I said at the outset, we signed a 70,000 square foot LOI at Colorado Center from a new tenant.
You may recall earlier this year, we actually did an expansion with another technology company at the Santa Monica Business Park.
I purposely didn't make any comments about market rents during my remarks.
With very limited activity, any conjecture about where rents will settle out is pure opinion.
What I can tell you is that there will be large differences between deals cut on sublet space and direct space.
Sublet landlords will have less appetite for capital and more leeway with lowering face rents or giving free rent.
There will be tenants, however, that simply don't want the risk of sublet space.
Will that prime tenant actually pay their rent for the full term?
Is that a risk worth taking?
Or the as is conditions and other issues associated with that may make them very uncomfortable with those risks?
There will be a very wide gap between the bid and the ask on direct space at the outset until we have a meaningful amount of direct deal comparable transactions for the market to understand.
Landlords with vacant space that are according tenants that want a new installation will use capital to entice users to this space, not necessarily space rent.
And landlords working on renewals will be more aggressive with swing space where it can be made available or lower contractual rates if the installation that's there currently works for the user.
However, there will be a flight to quality and the better buildings as tenants see value in paying less of a premium to be in the best assets in these markets.
Conditions are going to value -- are going to vary submarket by submarket.
I'm going to stop there and yield the rest of our time to Mike.
So I'm going to cover the details of our earnings for the fourth quarter.
I'll also explain our guidance for the first quarter that we provided and some insight into our expectations for the full year 2021.
We've reinstated quarterly FFO guidance, which we hope will be helpful and serve as an indicator of our increased confidence in the operating environment.
Our office tenant collections remain strong, and we believe the write-offs are largely behind us.
We also continue to execute on new and renewal office lease requirements as evidenced by the 1.2 million square feet of leasing in the fourth quarter and the 3.7 million square feet of leasing in 2020 overall, despite the pandemic-related shutdowns.
We're encouraged by the rollout of the vaccine and are confident we will see a return of workers to the office in mass, but there remains uncertainty with respect to timing.
We anticipate our ancillary revenues, such as parking and retail will continue to be weak until the population increases.
Once we have better visibility into the timing, we expect to restore full year guidance as well.
Our fourth quarter results contained two charges that I would like to explain.
The first is a $60 million noncash impairment of our equity investment in Dock 72.
Our 670,000 square foot development we put into service in the Brooklyn Navy Yard.
This investment is held in an unconsolidated joint venture, where we own 50%.
Because the investment is unconsolidated, GAAP requires a mark-to-current fair value.
Also, while the $0.35 per share charge is a deduction from net income, it is added back to arrive at FFO.
So it has no impact on our reported FFO pursuant to NAREIT's definition.
Dock 72 is only 33% leased, as Doug said.
And while we had some promising leasing activity pre-COVID, there's little activity today and the market conditions in Brooklyn have weakened.
We have increased our projected costs to stabilize as well as modified and extended our anticipated lease-up.
And the combination of this has resulted in a lower current fair value for the property.
The extension of timing to achieve stabilization has a meaningful impact on fair value.
We see Dock 72 as a unique situation, and we do not anticipate any additional impairments in the portfolio.
The rest of our development pipeline is very well leased at 88%, our in-service portfolio is over 90% leased and, honestly, most of the assets have significant embedded gains.
The second charge is a $38 million or $0.22 per share noncash charge to net income and FFO for the write-off of all accrued rental income for tenants in the co-working industry.
While these tenants are paying rent today, we believe the ongoing length of the pandemic is stressing the sector's revenue and liquidity.
As such, we do not believe they meet the standard to maintain an accrued rent asset on our balance sheet.
As we discussed in both our second and third quarter earnings calls, co-working is the remaining tenant sector that we've been monitoring closely.
It is possible we could face a few individual credit situations this year due to the impact of the pandemic across the portfolio, but we don't anticipate additional significant accrued rent write-offs to other sectors of tenants like we've experienced with retail and with co-working in 2020.
For the fourth quarter, our reported FFO was $1.37 per share.
If you exclude the accrued rent charge, our fourth quarter FFO would have been $1.59 per share and in line with consensus and the expectations that we shared with you last quarter.
Now I'd like to look forward to 2021.
We have provided first quarter 2021 guidance for FFO of $1.53 to $1.57 per share.
At the midpoint, this is $0.04 per share lower than our fourth quarter 2020 FFO before charges.
The decline is entirely due to approximately $0.10 per share of seasonally higher anticipated G&A.
The first quarter is always our highest quarter for G&A due to accounting for compensation.
If you look back historically, we typically recorded 30% of our annual G&A expense in the first quarter.
The increase in G&A expense is anticipated to be partially offset by higher revenue contribution from our portfolio, including the commencement of revenue for a portion of the signed leases that Doug described.
We also expect lower interest expenses.
We are redeeming our $850 million bond issuance in mid-February with cash on hand.
These bonds have a yield of 4.3%, and there will be no prepayment charge.
We're currently earning close to 0 on our cash.
So we will see the full benefit of lower interest expense for the second half of this quarter and for the rest of 2021.
So as we think about the full year 2021, there's a few things to consider.
If you simply annualize the midpoint of our first quarter guidance, you get to about $6.20 per share.
But that does not account for the seasonality of our G&A, the reduction of interest expense from our bond redemption or the incremental impact of leased developments coming online during the year.
For modeling purposes, we suggest you consider adding the following to the Q1 annualized FFO of $6.20 per share: $0.19 per share for the impact of lower G&A for the rest of the year; $0.08 per share from lower interest expense due to the bond redemption; and $0.05 per share of incremental FFO from new developments coming online, including 159 East 53rd Street, which is 96% leased to NYU and where we expect to commence revenue in the second quarter; 100 Causeway Street in Boston, which is 94% leased with projected revenue phasing in starting in the third quarter; and 200 West Street, our life science development in Waltham, which is 100% leased and is projected to deliver in December.
So adjusting our first quarter annualized run rate for these known items gets to approximately $6.52 per share for 2021.
That said, we are not providing full year guidance for FFO because there remains uncertainty than our variable income streams, including our ancillary income and our same-property leasing, both of which impact revenues and occupancy.
The timing of recovery from the pandemic is still unknown.
It could have a material impact on the recovery of revenues from our parking, retail and hotel.
Currently, these income streams are depressed.
Their contribution is nearly $30 million lower on a quarterly basis than what we saw prepandemic.
We are hopeful that a portion of this revenue will start to return in the back half of 2021, but the timing is really reliant on the success of the COVID vaccines and return to a safe and healthy environment in our cities.
We also have lease expirations in 2021 that will impact our occupancy and same-property NOI.
Our rollover for 2021 is 3.2 million square feet.
As Doug described, we already have 610,000 square feet of leases signed that will take occupancy of currently vacant space this year.
We're also actively working on over one million square feet of new leases and renewals across the portfolio.
Overall, we expect our year-end 2021 occupancy to be flat to down 100 basis points compared to current occupancy.
It's also worth noting that we have a meaningful amount of free rent that burned off in 2020 that will boost our cash same-property performance and AFFO in 2021, specifically at 399 Park Avenue, we had 450,000 square feet of space in build out and under free rent for nine months in 2020 that is now in cash rent.
And at the General Motors Building, 160,000 square feet of office space and a portion of our retail was under free rent for most of 2020 and are now paying cash rent.
This showed up in our results in the fourth quarter with a $10 million increase in same-property cash NOI sequentially from Q3 to Q4.
In summary, we're excited about the prospects for revenue and FFO growth.
Our portfolio cash flow is expected to grow in 2021.
The success of the vaccine program should give rise to the recovery of our ancillary revenue streams.
And we have $2.2 billion of leased developments coming online over the next couple of years, all of which should drive future earnings growth and value.
That completes our formal remarks.
| compname reports earnings per share of $0.05 and ffo per share of $1.37.
q4 ffo per share $1.37.
sees q1 ffo per share $1.53 to $1.57.
signs 1.2 million square feet of leases in q4.
|
Our consolidated earnings for the second quarter of 2021 were $0.20 per diluted share compared to $0.26 for the second quarter of 2020.
For the year-to-date, consolidated earnings were $1.18 per diluted share for 2021 compared to $0.98 last year.
Now I'll turn the discussion over to Dennis.
I hope your summer is going well and that you're staying safe.
On June 30, Washington State officially lifted most of the remaining restrictions that have been in place during the pandemic.
We're excited to see our local economies continue to recover.
We're experiencing increased loads, and customer growth is steady.
Like many other businesses, we continue to monitor the pandemic very closely and watch what's happening with variants and case count in our communities.
We're ready and able to successfully adjust our business as needed and also continue to provide care and compassion for those who are struggling.
Now let's look at some highlights from our second quarter.
We had a challenging second quarter, which included an unprecedented heat wave that brought with it several consecutive days of triple-digit record-breaking temperatures across the region.
On June 29, Spokane temperature soared to 109 degrees, setting new record -- a new record high temperature and was even higher in many of our neighborhoods.
That same day, Avista experienced a major increase in customer usage, which resulted in the highest energy usage in our company's 132-year history.
The intense temperatures, combined with record high usage, strained parts of our electrical system and caused some of the equipment that runs our electric grid to overheat.
Six of our 140 distribution substations were impacted.
To prevent the equipment from overloading and to avoid extensive and costly damage to our electric system, we implemented protective outages for customers served by the equipment that was most impacted by the heat.
Over the course of the event, we were able to reduce the impact to customers through system modifications.
We appreciate our customers' patience for those who experienced outages.
Higher customer loads, related to the extended heat wave, were the primary driver for an increase in net power supply cost to serve our customers, which negatively affected the Energy Recovery Mechanism, or ERM.
Overall, we've experienced hotter and drier-than-normal weather across the Pacific Northwest, which contributed to lower-than-normal hydroelectric generation and increased power prices.
For these reasons, we had to rely on thermal generation and purchased power at higher prices to serve those additional loads.
As a result, Avis Utilities' earnings were below expectations for the second quarter.
AEL&P's earnings met expectations in the second quarter, and they are on track to meet the full year guidance.
It was a strong quarter for our other businesses, which exceeded expectations due to gains on our investments and the sale of certain subsidiary assets associated with Spokane steam plant.
Wildfire resiliency continues to be a focus for Avista.
Our region has experienced extremely dry conditions all spring and summer.
And combined with high temperatures, wildfire risk is high.
In response to these conditions, Avista has been operating in, what we call, dry land mode since late June, and dry land mode decreases the potential for wildfires that could occur when reenergizing a power line.
Normally, under normal conditions, these lines, located in rural and/or forested areas, are generally reenergized automatically.
However, during the current dry weather conditions, Avista's line personnel physically patrol in outage area before a line is placed back into service.
This can require more time to restore service, but it decreases a potential fire danger.
This practice is in line with Avista's wildfire resiliency plan, which was released last year, building on prevention and response strategies that have been in place for many years.
Avista has committed to a comprehensive 10-year wildfire resiliency plan that includes improved defense strategies and operating practices for a more resilient system.
In regards to regulatory matters, we are pleased to have reached an all-party settlement in our Idaho general rate case.
The new rates are fair and reasonable for our customers, the company and our shareholders and will allow Avista to continue receiving a fair return in Idaho.
Our Washington general rate cases continue to work their way through the regulatory process.
Our hearings have been held, and we expect a decision by the end of September.
In Oregon, we expect to file a rate case in the fourth quarter of 2021.
We are confirming our 2021 earnings guidance with a consolidated range of $1.96 to $2.16 per diluted share.
While we are confirming our consolidated range, we are adjusting our 2021 segment ranges to lower Avista Utilities by $0.10 per diluted share and raise other by $0.10 per diluted share.
For 2022, we are lowering consolidated earnings guidance by $0.15 per diluted share to a range of $2.03 to $2.23 per diluted share.
For 2023, we are confirming our earnings guidance with a consolidated range of $2.42 and to $2.62 per diluted share.
Although we expect to experience headwinds in 2022 from regulatory lag, we are confident that we can meet our earnings guidance for 2023 and earn our allowed return.
Looking ahead, we'll continue focusing on our utility operations, while prudently investing in the necessary capital to maintain and update our infrastructure to provide safe, reliable and affordable energy to our customers and our communities.
I know everybody is sitting on the edges or seat waiting for the Blackhawk's next acquisition, which is a Spokane native.
We got Tyler Johnson, a 2-time Stanley Cup Champion, who is a Spokane native.
So we're pretty excited about that.
There's your Hawks update.
As Dennis mentioned, we're confirming our 2021 earnings guidance, lowering our utility guidance for '21 and also '22 and confirming '23 consolidated guidance.
Our guidance -- I'll spend a little time on that.
Our guidance assume, among other things, a timely and appropriate rate relief in our jurisdictions.
That's very important as we need -- Dennis mentioned, we settled our Idaho case.
We're still awaiting approval from the commissions, which we expect before those rates go into effect September 1.
For 2021, we expect Avista Utilities to contribute in the range of $1.83 to $1.97 per diluted share, and the lower end of our guidance in '21 and '22 for the Avista Utilities is primarily due to increased regulatory lag.
That's due to increase capital expenditures primarily due to growth and higher-than-expected depreciation expense.
But that is, we believe, all timing, and we begin -- as we begin to plan for our next Washington general rate case to be filed early in the first quarter of '22, we expect that to be a multiyear rate plan as required under the new law.
We will seek to include all capital investment through the end of the rate plan period in rates in an effort to earn our allowed return by 2023.
In addition, we have experienced an increase, as Dennis mentioned, in actual and forecasted net power supply cost.
Although the midpoint of our guidance range does not include any benefit or expense under the ERM in Washington, the increase in power supply cost has reduced the opportunity for us to be in the upper half of the guidance range.
And our current expectation for the ERM is a surcharge position within the 90-10 sharing -- company sharing band, which is expected to decrease earnings by $0.08 per diluted share.
And recall, last quarter, our estimate for the ERM for the year was in a benefit position, which was expected to add $0.06 per diluted share.
In addition, we are also absorbing more net power supply cost under the PCA in Idaho.
For 2021, as Dennis mentioned, we expect AEL&P to contribute $0.08 to $0.11.
And we increased the range in our other businesses by $0.10, which really offsets the utility reduction, and that's largely due to a range of $0.05 to $0.08 of diluted share because of investment gains and the gain we experienced from the sale of Spokane Steam Plant.
Our guidance generally includes only normal operating conditions and does not include unusual or nonrecurring items until the effects are known and certain.
Moving on to earnings for the second quarter.
Avista Utilities contributed $0.11 per diluted share compared to $0.26 in 2020.
Compared to the prior year, our earnings decreased due to an increase in net power supply costs, as Dennis mentioned, mainly due to higher customer loads from the heat wave, and we had lower-than-normal hydroelectric generation because of the hot and dry conditions.
Our hydroelectric generation is about 91% of -- our expectations are normal for this year.
The ERM in Washington also moved significantly.
Had a pre-tax expense of $7.6 million in the second quarter of '21 compared to a pre-tax benefit of $0.4 million in 2020.
Year-to-date, we've recognized $3.3 million of expense in '21 compared to $5.6 million in benefit in 2020.
In addition to the higher power supply cost, we also had higher operating expenses in the quarter, mainly due to the timing of maintenance projects, as many of those maintenance projects were delayed in 2020 because of COVID-19, whereas in 2021, we returned to our original schedules and performed that maintenance in the second quarter.
The higher maintenance costs were partially offset by lower bad debt expense as we are continuing to defer bad debt through our COVID-19 regulatory deferrals.
Moving on to capital.
As Dennis mentioned, we're committed to be continuing to invest the necessary capital in our utility infrastructure.
We currently expect Avista Utilities to have increased capital expenditures up to $450 million in 2021 and $415 million in 2022 -- or $445 million in '22 and '23.
That's a $35 million and $40 million increase in '21, '22 and '23, $40 million in '23 as well.
And this is really to support continued customer growth.
Our customer growth's about 1.5%, which is up from 0.5% to 1% in prior expectations.
We expect to issue approximately $140 million of long-term debt and $90 million of common stock, including $16 million that we've already issued through June on the common stock side in 2021.
The increase in long-term debt and common stock is to fund the increased capital expenditures.
| compname posts q2 earnings per share $0.20.
q2 earnings per share $0.20.
confirming 2021 consolidated earnings per share guidance with a range of $1.96 to $2.16.
lowering our 2022 consolidated earnings guidance to a range of $2.03 to $2.23 per diluted share.
for 2023, confirming earnings per share guidance with a consolidated range of $2.42 to $2.62.
|
Subsets and Splits