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I'm pleased to report another very strong quarter with record revenues at CooperVision and CooperSurgical, driving record earnings and robust free cash flow.
CooperVision's growth was broad-based and led by our daily silicone hydrogel portfolio of lenses and a solid rebound in EMEA.
While our myopia management products also performed really well, and of course, we received the exciting news about regulatory approvals for MiSight in China.
CooperSurgical continued posting great results led by fertility and a nice bump in PARAGARD, helped by buying activity from a price increase.
Moving forward, we expect core operational strength to continue driving strong performance even with challenges from COVID and currency.
With this expectation and the opportunities we're seeing in myopia management, daily silicones, and fertility, we've increased our constant currency revenue guidance for both CooperVision and CooperSurgical and we'll maintain our investment activity to capitalize on the potential for incremental share gains as we move toward fiscal 2022.
Moving to third-quarter results and reporting all percentages on a constant currency basis, Consolidated revenues were $763 million, with CooperVision at $558 million, up 20%, and CooperSurgical at $206 million, up 58%.
Non-GAAP earnings per share were $3.41.
For CooperVision, our daily silicone hydrogel portfolio led the way with all 3 regions posting strong growth.
Particular strength was noted in our daily toric franchises, but daily spheres and multifocals also performed well.
And in a great sign, we've seen a nice uptick in fit data for MyDay and clariti, which bodes well for share gains and future growth.
Within the regions, the Americas grew 16%, led by MyDay and clariti and continued improvement in patient flow.
EMEA grew a healthy 24% as consumer activity returned in the region, and we took share.
1 in EMEA, and we're seeing the benefits of increasing patient flow, So, we'll continue investing to support the reopening activity happening in many of the European markets.
Asia Pac grew 18%, led by a slow but steady improvement in consumer activity.
For us, a significant portion of Asia Pac is driven by Japan.
And although consumer activity remains somewhat muted, we're performing well and taking share, and we're well-positioned to capitalize on future opportunities given our recent product launches.
Moving to category details.
Silicone hydrogel dailies grew 31% and with MyDay and clariti both performing well.
MyDay, in particular, continues taking share, led by strength in MyDay toric in all regions.
For our FRP portfolio, Biofinity continued its solid performance led by Biofinity Energys and Biofinity toric multifocal.
Regarding product expansions and launches, we remain very active.
We're finishing the launch of clariti, sphere, and the MyDay second base curve sphere in Japan.
We're rolling out Biofinity toric multifocal in additional markets.
We're rolling out an expanded toric range for MyDay, giving it the broadest range of any daily toric in the world.
And we're also completing the rollout of extended toric ranges for clariti and Biofinity.
We've also started prelaunching activity for MyDay multifocal with the launch -- with a full launch on target for the U.S. and other select markets in November.
Feedback on this lens remains extremely positive, including from fitters commenting that our OptiExpert fitting app has the highest fit success rate of any multifocal on the market.
Recent data shows that over 90% of contact lens wearers over the age of 40 expect to continue wearing lenses with the biggest challenge being finding a good multifocal.
Given the feedback we've been receiving, we believe MyDay will be the best multifocal on the market and combined with the fact that it's joining an already highly successful MyDay sphere and toric, we're very optimistic about its success.
Moving to myopia management.
Our portfolio grew a robust 90% this quarter to $18 million, with MiSight up 187% to $5 million and ortho-k products up 68%.
As a global leader in the myopia management space, our portfolio is the broadest in the industry, comprised of MiSight, the only FDA-approved myopia control product, our broad range of market-leading ortho-k lenses, and our innovative SightGlass Vision glasses.
We continue targeting $65 million in myopia management sales this year, including MiSight reaching $20 million.
Regarding MiSight, there was a lot of positive activity this quarter as we continue capitalizing on our first-mover advantage.
We received regulatory approval in China, and we're extremely excited about that opportunity.
The approval requires lenses to be manufactured post-approval.
So, we've quickly initiated production and packaging, and plan to seed the market starting in early fiscal Q1 with a full launch in fiscal Q2 of next year.
As part of this, we're immediately ramping up marketing efforts and working quickly to ensure the product is positioned for success.
Myopia rates are very high in China, So, the market potential is significant.
As an example, it's estimated that over 80% of high school kids are myopic, So, treating children at a younger age is of high importance in the country.
Outside of China, we continue making great progress with our large retailers and buying groups.
Our pilot programs are live and expanding, and we've finally been able to resume in-person training in many markets, including in the U.S.
We now have over 40,000 children wearing MiSight worldwide, and that number is growing quickly.
Additionally, the average age of a new MiSight wearer remains 11, So, this treatment is bringing children into contact lenses at a much younger age.
Lastly, on MiSight, we did see momentum pick up even more in August, including here in the U.S., So, we're bullish for a strong Q4.
Regarding our other myopia management products, we had a solid quarter for ortho-k driven by our broad product portfolio and from the halo effect we're seeing with MiSight.
And we continue making progress with our SightGlass myopia management glasses, preparing for several upcoming launches later this calendar year.
We've also submitted our application to the FDA for approval for MiSight as a myopia management treatment and expect to receive initial feedback within a couple of months.
In the meantime, as the myopia management market continues developing, we're definitely seeing the value of offering multiple options to eye care professionals, So, we look forward to expanding our offerings and availability.
To wrap up on myopia management, our innovation pipeline is very healthy with eight focused pipeline products.
Our sales and marketing efforts are proving successful and our focus on leading with clinical data and providing the best and broadest portfolio in the market, has us in an excellent position for continued success.
To conclude on vision, our business is doing really well.
The back-to-school season is healthy, new fits are doing well, and we're excited about our existing products and upcoming launches.
On a longer-term basis, the macro growth trends remained solid, with roughly 33% of the world being myopic today, and that number is expected to increase to 50% by 2050.
Given our robust product portfolio, new product launches, myopia management momentum, and strong fit data, we're in great shape for long-term sustainable growth.
This was an outstanding quarter with record revenues of $206 million.
Fertility, in particular, continued to perform exceptionally well, growing 72% year over year to $83 million.
Strike was seen around the world and throughout the product portfolio, including from consumables, capital equipment, and genetic testing.
Some areas of strength included growth in media, for pets, needles, incubators, and embryo transfer catheters, along with another very strong quarter from RI Witness, our proprietary automated lab-based management system that clinics implement to maximize safety and security by optimizing their lab practices.
We're also benefiting from increased utilization of our artificial intelligence-based genetic testing platform, which increases the doctor's ability to select the best embryos for transfer.
Similar to last quarter, we're continuing to see COVID impact the market, but share gains and improving patient flow in most countries are driving our results.
Regarding the broader fertility market, the global landscape remains fragmented with significant geographic diversity.
And with an addressable market opportunity of well over $1 billion and mid- to upper-single-digit growth, this is a great market for us.
It's estimated that one in eight couples in the U.S. has trouble getting pregnant due to a variety of factors, including increasing maternal age.
And that more than 100 million individuals worldwide suffer from infertility.
Given the improving access to fertility treatments, increasing patient awareness, greater comfort discussing IVF and increasing global disposable income, this industry should grow nicely for many years to come.
So, overall, in fertility, our portfolio and market positioning are excellent.
We remain in a great spot for future share gains with improving traction in key accounts.
We're seeing continued reopening activity around the world, and the industry has great long-term macro growth drivers.
For all these reasons, we remain very bullish on this part of our business.
Within our office and surgical unit, we grew 50% with PARAGARD up 51% and office and surgical medical devices up 49%.
For PARAGARD, we implemented a roughly 6% price increase toward the end of the quarter, which resulted in a buy-in of roughly $4 million.
This will impact our Q4 performance, but the price increases are long-term positive noting with contracts and reimbursement timing, the price increase rolls in over the next couple of years.
Within medical devices, several products performed well, including EndoSee Advance, our direct visualization system, for evaluation of the endometrium and our portfolio of uterine manipulators.
To wrap up on CooperSurgical, this was another excellent quarter, and it was great to exceed $200 million in sales for the first time ever.
Similar to CooperVision, we have powerful macro trends supporting our underlying growth and remain confident in our ability to continue delivering strong results.
Third-quarter consolidated revenues increased 32% year over year or 28% in constant currency to $763 million.
Consolidated gross margin increased year over year to 68.3%, up from 66.3% with CooperVision posting higher margins driven by product mix and currency, and CooperSurgical posting higher margins from product mix tied to the significant year-over-year growth in fertility and PARAGARD.
Opex grew 28% as sales increased with a rebound in revenues, along with higher sales and marketing expenses associated with investments in areas such as myopia management.
Consolidated operating margins were strong at 26.6%, up from 23.2% last year.
Interest expense was $5.6 million and the effective tax rate was 13.5%.
Non-GAAP earnings per share was $3.41 with roughly 49.8 million average shares outstanding.
Free cash flow was very strong at $180 million, comprised of $224 million of operating cash flow, offset by $44 million of capex.
Net debt decreased to $1.5 billion and our adjusted leverage ratio improved to one and a half times.
Overall, this was a very strong quarter, and we exceeded our financial performance expectations.
We continue monitoring and evaluating the scope, duration, and impact of COVID-19 and its variants.
And while this remains a risk factor, our visibility is sufficient to provide the following update to our guidance.
For the full fiscal year, we're increasing our constant currency guidance for both CooperVision and CooperSurgical and maintaining our non-GAAP earnings per share guidance.
Specific to Q4, consolidated revenues are expected to range from $730 million to $760 million, up 7% to 11% in constant currency, with CooperVision revenues between $540 million and $560 million up 6% to 10% in constant currency, and CooperSurgical revenues between $190 million and $200 million, up 8.5% to 14% in constant currency.
Non-GAAP earnings per share is expected to range from $3.24 to $3.44.
To provide color on this guidance, currency moves since last quarter have reduced the benefit of the full-year FX tailwind from 3% to 2.5% for revenues, and 7% to 5% for EPS.
With respect to Q4, this equates to reducing revenues by $10 million in CooperVision and $2 million at CooperSurgical, and reducing earnings per share by $0.14.
CooperVision is offsetting some of the impact with expected strength in daily silicone and myopia management sales, while CooperSurgical is expecting continued strength, although incorporating the Q3 PARAGARD buy-in of $4 million and hopefully some conservatism regarding COVID's impact on elective procedures.
Consolidated gross margins for the fiscal year are expected to be around 68%, with fiscal Q4 gross margins expected to be around 67.5%, driven primarily by currency.
Operating expenses are expected to be slightly lower sequentially, but similar to fiscal Q3 on a percentage of sales basis, as we continue investing in multiple areas such as myopia management and fertility.
Our Q4 tax rate is expected to be around 11%.
And lastly, our free cash flow continues to improve, and we're now expecting roughly $550 million for the full year.
| q3 non-gaap earnings per share $3.41.
sees q4 2021 non-gaap earnings per share $3.24 to $3.44.
sees fiscal 2021 total revenue $2,893- $2,923 million (16% to 18% constant currency).
sees fiscal q4 2021 total revenue $730 - $760 million (7% to 11% constant currency).
|
It's hosted by Marco Sala, executive chair; Vince Sadusky, chief executive officer; and Max Chiara, our chief financial officer.
We are presenting from multiple locations, so please bear with us if we encounter some technical difficulties.
We met and, in many instances, exceeded the financial targets we set for the year.
We also made important progress on several strategic objectives and reinitiated returning capital to shareholders.
As we enter 2022, the company is in a very strong place, with a solid financial condition and the strong foundation to build on.
We recently made some leadership changes that best position the company to realize its long-term growth initiatives and create significant shareholder value.
I have moved into a new role as executive chair of IGT, and Vince Sadusky was named the company's new CEO.
In June, I will be proposed as the next CEO of De Agostini, IGT's majority shareholder.
As you can imagine, I have been in parallel discussions regarding the leadership evolution at IGT and De Agostini for some time.
This was happening while we were managing through the pandemic and making important progress of sharpening IGT's strategic focus and growth objectives.
We outlined a new long-range plan at our investor day and the time is right for a strong leader to deliver on it.
We are very fortunate to have Vince, a seasoned C-Suite executive and longtime IGT board member, to be IGT's CEO.
I have enjoyed working with him over the last seven years and has every confidence he is the right person at the right time to lead the company in an exciting era of growth.
He has an impressive track record of creating shareholder value.
Obviously, I'm not leaving IGT.
I will remain engaged as executive chair, working with Vince on IGT's strategic direction, serving as a resource on customers and regulatory methods and focusing on corporate governance.
Vince will be responsible for establishing the company's priorities, managing day-to-day operations and delivering on strategic and financial goals.
We also enjoyed -- we always enjoyed a constructive dialogue, and I have valued your support of the company.
And now to Vince.
I am really excited to be here leading IGT in the next chapter of its evolution.
I've been a keen observer and advocate of the company's progress for more than a decade in my role as a board member, including as chair of the audit committee.
I've admired the way Marco and team have led the company, especially over the last few years, navigating a highly disruptive pandemic, while making important strategic decisions to position the company for the future.
There are many parallels between IGT and the media companies I've run in the past.
Both operate in regulated markets with high barriers to entry, expertise in content and technology, a culture of innovation and distribution power are critical to success, and each generate strong cash flows and have faced both disruption and opportunity with the emergence of digital.
Given these similarities, I see opportunity to create great value for all IGT stakeholders.
I'm excited to build on the strong foundation I am inheriting.
The company laid out some long-term financial and strategic goals at the November investor day, and I intend to deliver on them.
I signed off on them as a board member, and I'm doubling down as CEO.
Our mission is to strengthen IGT's global leadership position in the regulated gaming industry by offering innovative content, services and solutions.
That is the foundation of our strategy to grow top line and margins across all segments, while increasing operational efficiency and optimizing capital allocation.
And we're in a great position to do so.
Our core activities are in markets with secular tailwinds and accelerating digital growth.
We have set aggressive, but achievable financial goals that include impressive cash flow generation over the next several years, and we have a disciplined strategy to allocate that cash flow to maximize value for all stakeholders.
We have a powerful, diverse portfolio that not only offers compelling growth prospects, but also provides significant resilience.
This was clearly on display during the pandemic where strong lottery and digital and betting growth helped mitigate the impact of wide-scale casino and gaming hall closures.
The collection of assets also provides unique and sustainable competitive advantages, including a best-in-class management team with extensive global industry experience.
From an industrial perspective, the content, technology and management of our operations are highly complementary and are leverageable across slots, lottery, sports betting, and iGaming.
In the quest to sharpen our focus on core operations, we recently announced the sale of our Italy commercial services and payments business at a very attractive multiple, over 15 times 2021 EBITDA.
Net proceeds will primarily be used to reduce debt and potentially for strategic M&A if we see compelling opportunity.
I'd like to highlight some of the progress we're making in our goals.
Beginning with global lottery segment, where same-store sales were up over 20% compared to both 2020 and 2019 levels.
IGT's unique insights on game innovation, portfolio optimization and sales and distribution strategies are helping to drive record level wagers for our customers.
The broad appeal and high entertainment value of lottery games is clear.
In the last two years, we have established a much higher baseline to grow from, and it is important to highlight the tremendous operating leverage in the business as operating income increased at more than double the top-line growth rate in 2021.
iLottery and instant ticket services are two areas of incremental opportunity for us.
We are making good progress on both evidenced by strong KPIs for the year.
In the markets served by IGT's iLottery platform, our lottery same-store sales increased over 60% in 2021, including nearly doubling in the U.S., where iLottery penetration reached 12% in the fourth quarter.
Our innovative new eInstant games are consistently delivering higher average revenue per user for our iLottery customers.
Instant ticket Services had a record year, fueled by a more than 35% increase in standard units produced.
The multiyear outlook for our lottery business is compelling.
We expect innovation, higher average player consumption, increased iLottery adoption and market share gains in instant ticket services to fuel sales growth.
We have a favorable contract renewal cycle ahead of us, and our investments here have attractive returns.
Focused product strategies and the global market recovery are driving a strong rebound in sales and profits for the global gaming segment, which continues to see sequential improvement in sales and profits.
The expansion of our multilevel progressive game portfolio on the new Peak cabinets is strengthening our leased game portfolio and generating some of the strongest sales funnels ever.
Our award-winning Resort Wallet cashless gaming technology recently received regulatory approval in Nevada.
With this achievement, IGT's entire cashless gaming solution, which includes the option for one-step external funding via IGT pay on personal mobile devices is approved for deployment throughout the state.
It is an important milestone for this emerging technology as Nevada is widely viewed as a future forward gaming jurisdiction.
Continued execution on well-defined product strategies is expected to drive market share gains in key categories for us over the next several years.
The digital and betting segment continues to grow at a fast clip, propelled by our strong leadership positions and new iGaming and sports betting regulations in the U.S.
We are investing in R&D and talent to build a solid foundation to support the high revenue and profit growth trajectory we expect over the next several years.
New leadership for both the iGaming and sports betting verticals are already making an impact.
This year, we expect to significantly increase the number of new iGaming titles, and we will also begin distributing our first third-party games.
Our PlaySports solution powers over 60 venues in more than 20 states and was recently recognized as the Platform Provider of the Year at the SBC Awards North America.
The turnkey sports betting solution is gaining traction, including new partnerships with Meruelo Gaming and Cliff Castle Casino.
We also have a robust pipeline of new turnkey customers teed up for 2022.
We are making progress on creating a strategic optionality for the digital and betting segment.
The separate legal entity and organizational realignment is underway along multiple work streams.
It's an exercise that will likely last until year end.
Like many others, we are facing some incremental near-term challenges in four main areas: the impact of the Omicron variant in certain markets, labor shortages, increased supply chain pressure and cost inflation.
Omicron has impacted Italy lottery sales, especially venue-based draw games, like Lotto, since late December.
It has also led to incremental casino restrictions, mostly outside the U.S.
We have found that negative COVID-related impacts on lottery sales proved to be short-lived.
In addition, casino GGR trends and our sales funnel remains strong in North America, which represents about 70% of our global gaming segment.
Low unemployment and higher attrition are impacting our ability to fill open positions as quickly as we'd like.
We are investing in our people and have made talent acquisition and retention a top priority.
IGT's culture of innovation and commitment to diversity and inclusion have proved to be important advantages in attracting and retaining talent.
We are also experiencing increased pressure on product deliveries due to longer lead times and availability of certain components.
We are mitigating this by prioritizing key product and customer deliveries.
A sustained focus on cost discipline and avoidance is also helping to mitigate inflationary pressure on things like components, freight and wages.
It is hard to know if we will experience any impact from the conflict between Russia and Ukraine.
We have minimal direct exposure to those countries, but the repercussions throughout Europe and the rest of the world are difficult to assess at this time.
Net-net, based on what we know today, we expect to offset the impact of the incremental headwinds and maintain the 2022 outlook provided in November.
Six weeks in, I get more and more excited about what we can achieve in the next few years.
The team is extremely motivated to deliver on the plan to take IGT to the next level, and I have tremendous confidence that we will do just that.
And now over to Max for some insight into our financial results.
The figures we reported today demonstrate the highly resilient nature of our business as we not only deliver meaningful revenue and profit growth year over year but also exceeded pre-pandemic levels on all key financial metrics.
A high-level summary of our fourth quarter financial results with comparisons to both the prior year and 2019 is shown here on Slide 14.
In the quarter, we generated over $1 billion in revenue, up 19% year over year on solid global same-store sales growth in lottery, higher replacement unit shipments and ASP in gaming and 25% growth in digital and betting, propelled by continued market expansion and customer demand for our products and technology.
Strong profit flow-through and operating leverage drove adjusted EBITDA to $387 million and the associated margin to 37%, up 31% and 400 basis points, respectively.
It is important to mention that this substantial increase in profit already incorporates higher cost related to the reestablishment of incentive comp programs and favorable supply chain impact and work associated with establishing digital and betting as a separate legal entity.
The solid financial performance and our rigorous approach to invested capital led to record level cash flow generation with cash from operations of nearly $400 million and free cash flow totaling $326 million, inclusive of favorable working capital performance, part of which is timing with Q1.
I would now like to shift the focus to full year results to provide perspective relative to the multiyear outlook we provided during our investor day in November.
In 2021, we delivered over $4 billion in revenue with significant growth across segments versus the prior year.
Strong operating leverage, bolstered by structural cost savings, drove significant increases in profit with over $900 million in operating income and nearly $1.7 billion in adjusted EBITDA, exceeding both prior year and 2019 results.
As we continue to recover from the extreme measures taken during the pandemic, our cost structure is benefiting from the execution of our OPtiMa program, where we overachieved our $200 million cost savings target.
As a reminder, about 3/4 were achieved in our P&L, while 1/4 of that was achieved with structural efficiency in our capital expenditure.
The overachievement piece to our cost savings target primarily comes from temporary actions that are an important mitigant to the increased supply chain costs, primarily in logistics that have impacted our '21 performance and will continue into 2022.
More on that later when we speak about our outlook for '22.
Cash flow generation exceeded our expectations with cash from ops of over $1 billion and free cash flow more than doubling to over $770 million, both record levels.
Now let's review the results of our three business segments.
Global lottery achieved record financial results during the year.
Revenue increased 30% to $2.8 billion as strong customers' demand drove global same-store sales up over 20% year on year and versus 2019.
As a reminder, extremely high play levels in the first half of '21 were bolstered by certain discrete items, including gaming hall closures in Italy, elevated multi-stage productivity and LMA performance in the U.S. These items contributed about $165 million in revenue and around $140 million of profit.
The high flow-through of same-store sales growth and a positive geographic mix also led to record profit levels with operating income rising nearly 70% to $1.1 billion.
Adjusted EBITDA increasing over 40% to $1.5 billion and operating income and adjusted EBITDA margins of 39% and 55%, respectively.
Global gaming returned to profitability during the year with significant increases in revenue and profit compared to the prior year.
Revenue rose 33% to $1.1 billion, driven by solid increases in active units, yields, number of machine units sold and ASPs.
The installed base in North America reflects changes in the WLA markets of Delaware, New York and Rhode Island.
Unit reductions in this market of about 840 units year over year and 650 units sequentially were partly offset by increases in the balance of the portfolio.
In the rest of the world, the installed base rose over 380 units year on year and 180 units sequentially, primarily driven by increases in Latin America and plus two units in South Africa.
Global unit shipments increased 62% year on year as operators began increasing capital budgets in the midst of the market recovery.
Shipments totaled 57% of pre-pandemic levels during 2021, indicating there is still some runway to a full recovery in this area, which we don't expect to happen completely until 2023, although we expect North America unit shipments will get close to 2019 levels in 2022.
IGT sold over 23,800 units globally during 2021 compared to about 14,700 units in the prior year and at higher average selling prices.
2021 ASP of over $14,000 exceeded both prior year and 2019 levels on an improved mix of products and new cabinets.
Strong operating leverage, which was accentuated by savings realized from the OPtiMa program, drove a substantial recovery in operating income and adjusted EBITDA with contributions of over $40 million and $170 million, respectively.
Operating income margins in the fourth quarter reached 11%, nearly matching the 12% pre-pandemic level achieved in the fourth quarter of 2019 and are expected to continue to improve in 2022.
The digital and betting segment continues to grow at a fast pace, generating revenue of $165 million in 2021 with double-digit growth achieved in both iGaming and sports betting.
This growth is propelled by new market adoption, new customers and organic growth.
We completed the successful launch of iGaming in both Michigan and Connecticut, and so our sports betting footprint expand to over 60 sports books.
Operating income grew to $33 million, and the operating margin reached 20%, a solid profit contribution from an emerging business and a nice profit flow-through even with increased investments in talent and resources to fund future growth.
Adjusted EBITDA increased to $48 million, more than double the prior-year level.
As I mentioned earlier, exceptional operational performance and disciplined capital management led to a record level of cash generation which, in addition to approximately $900 million in net proceeds from the strategic sale of our Italy gaming business, allowed us to reduce net debt by $1.4 billion.
Leverage is down to 3.5 times, the lowest leverage in company history, and reaching the 2022 year-end leverage target 12 months early.
With the improved risk profile, we now have a more balanced capital allocation framework that once again includes shareholder returns.
In Q4, we reinstated a quarterly dividend and implemented a $300 million share repurchase program, the first in company history.
We delivered over $80 million to shareholders during the quarter, including about $40 million in the purchase of 1.5 million shares at an average price of just about $27 per share.
Based on recent SEC filings, you can see we continued repurchasing shares in Q1 with another 570,000 shares repurchased through February 9.
Proactive management of our capital structure continued during the year, as evidenced by the redemption of nearly $1 billion of euro notes.
The refinancing of another $1 billion in U.S. dollar notes at a lower interest rate and the successful amendment and extension of our term loan facility.
The reduced debt, increased liquidity and extended maturities have greatly improved our credit profile and lower interest expense by about $60 million during the year.
We also recently accomplished the goal of raising our credit ratings, restoring our pre-pandemic levels.
Last month, S&P and Moody's upgraded our corporate credit rating to BB+ and BA2, respectively, citing the strong performance, improved leverage, EBITDA margin improvement and the use of asset sale proceeds to reduce debt.
These latest actions position us very well in the fixed income market going forward and strengthen our conviction in pursuing our long-term leverage objective.
Our debt portfolio is favorably structured in the current market environment with a heavily weighted mix of fixed to floating rates and no large near-term maturities.
In conclusion, let me summarize by saying 2021 was a very successful year, with compelling progress made on many growth initiatives and the successful achievement of our financial goals, with all key financial metrics exceeding 2019 levels.
We reduced debt and leverage to record levels and increased capital returns to shareholders.
More broadly, over the past couple of years, we have built a solid foundation for profitable growth in the future as we drove an accelerated recovery from the pandemic, readied our company to capture potential portfolio opportunities and realign our portfolio to high growth opportunities.
Based on the strong performance of 2021 and despite the recent headwinds, we are reaffirming the 2022 full year guidance we provided at the recent investor day.
We currently expect to deliver revenue of approximately $4.1 billion to $4.3 billion, operating income margins of 20% to 22%, cash from operations of between $850 million and $1 billion and capital expenditures ranging from $400 million to $450 million.
Leverage is expected to remain around 3.5 times x in '22 with some variability quarter to quarter.
The leverage outlook excludes any positive impact from the recent -- from the receipt of proceeds from the recently announced sale of our commercial service and payment operations in Italy.
On a pro forma basis, we see a further improvement in our leverage ratio to the tune of 1/4 of a turn.
That transaction is expected to close in the third quarter of 2022.
As Vince mentioned earlier, we are managing through some headwinds caused by near-term market dynamics.
We're confident we can mitigate the impact of these items with incremental product sales, financial rigor on cost and lower depreciation and amortization related to the capex efficiency as well as timings of spending.
It is fair to mention that our outlook does not factor at this point any material consequence from the recent conflict in Ukraine given our limited direct exposure to the affected region, although we continue to monitor events very closely and we'll adjust our posture accordingly as events unfold.
In order to provide some indications with respect to the first quarter of 2022, we expect to achieve revenue of $1 billion to $1.1 billion and operating income margins of 20% to 22% in the quarter.
This outlook implies a sequential improvement in profit from Q4 '21.
| reaffirming full-year 2022 guidance provided at recent investor day.
sees q1 revenue of about $1.0 billion - $1.1 billion.
sees q1 operating income margin of 20% - 22%.
|
What we will say today is based on the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
Due to the commitment and resilience of our people, we were able to overcome unprecedented challenges during 2020 to achieve record earnings and cash flow.
In addition to the ongoing challenges from the pandemic, our people and organizations also experienced and overcame significant adversity in Texas just last week.
In 2020, we earned more than 20% of our revenue in Texas, where we have multiple strong mechanical capabilities in many markets, and Texas is also the home to our largest electrical team.
Virtually, all of our operations were closed for at least three full days with loss of productivity throughout last week.
We are now back to full capacity.
I am deeply grateful for the courage and perseverance that our field employees demonstrated, last week, in Texas and in many other markets that experienced terrible weather.
And I am in awe of our field workforce's grit and perseverance through COVID as every day our essential workers overcame the challenges they faced.
We continue to work hard to keep our workforce and our community safe and healthy every day.
2020 was a record year for Comfort Systems USA.
We finished the year with strong fourth quarter earnings per share of $1.17, and for the full year, we earned $4.09.
This marks the highest annual earnings per share in the history of our company, even without our tax and valuation gain.
Revenue for full year 2020 was also a record at $2.9 billion.
Our backlog is up slightly since September, and we have very good ongoing bidding activity as we start 2021.
Our 2020 free cash flow was an unprecedented $265 million.
And yesterday, we again announced an increase in our dividend.
At the end of 2020, we acquired a Tennessee Electric Company headquartered in Kingsport, Tennessee, and we expect they will contribute $90 million to $100 million of revenues in 2021.
This acquisition was closed on December 31, 2020.
So their balance sheet and backlog are included as of the last day of December.
TEC is a strong electrical and mechanical contractor, but TEC also brings unique industrial construction and plant service expertise and relationships with complex industrial clients.
Their results will be reported in our electrical segment starting in 2021.
In December, we promoted Trent McKenna to Chief Operating Officer.
Trent has been with Comfort Systems USA for 16 years, and I believe he will be a valuable leader, as we continue to grow and improve our operations.
By the way, I am not going anywhere, but this added depth will provide much-needed bandwidth to our senior team.
Before I review our operating results and prospects, I want to ask Bill to review our financial performance.
So as Brian said, our results were again very strong.
I'm going to just briefly point out some things for most of the line items of our P&L.
So fourth quarter revenue was $699 million, a decrease of $21 million compared to the same quarter last year.
Our same-store revenue declined by a larger $68 million.
However, our recent acquisitions of TAS and Starr offset that decline somewhat as they added $48 million in revenue this quarter.
You may recall that last year, at this time, we had large data center work in Texas that created very high revenue in the comparable period.
We will continue to face tough revenue comparisons through the first half of this year, especially in electrical, as a result of last year's big deployments.
Revenue for the full year was $2.9 billion, an increase of $241 million or 9% compared to 2019.
Full year same-store revenue in 2020 was 2% lower than in 2019 due to the factors I just mentioned.
Gross profit was $137 million for the fourth quarter of 2020, an increase of $4 million.
And gross profit as a percentage of revenue rose to 19.6% in the fourth quarter of 2020 compared to 18.4% for the fourth quarter of 2019.
For the full year, gross profit increased $45 million, and our gross profit margin was approximately flat at 19.1%.
SG&A expense was $89 million or 12.7% of revenue for the fourth quarter of 2020 compared to $87 million or 12% of revenue for the fourth quarter of 2019.
The prior year fourth quarter benefited from insurance proceeds associated with the cyber incident of approximately $1.6 million, and that reduced SG&A last year.
For the full year, SG&A as a percentage of revenue was 12.5% for 2020 compared to 13% for 2019.
On a same-store basis, for the full year, SG&A declined $6 million, and that decrease was primarily due to austerity relating to COVID, such as reductions in travel-related expenses.
During the fourth quarter of 2020, we revalued estimates relating to our earn-out liabilities, and as a result, we reported an overall gain of $7 million or $0.18 per share.
For the full year, the gain associated with acquisition earn-out valuation changes was $0.20 per share.
These gains were due to lower-than-forecasted earnings associated with our recent acquisitions, especially at Walker, which was more affected by COVID than our other operations.
Our 2020 tax rate was 21.6% compared to 24.7% in 2019.
During the third quarter of 2020, we finalized advantageous settlements with the IRS from their examination of our amended federal tax returns for 2014 and 2015.
On a go-forward basis, we now expect our normalized effective tax rate will be between 25% and 30%.
Although 2014 and 2015 are now settled, we have open audits relating to refunds we are claiming for the 2016, 2017 and 2018 tax years.
But we believe that any benefits that arise from those years would most likely be recognized in 2022 or beyond.
So after giving effect to all these items, we achieved record net income.
Specifically, net income for the fourth quarter of 2020 was $43 million or $1.17 per share as compared to $34 million or $0.92 per share in 2019.
Earnings per share for the current quarter included that $0.18 gain associated with earn-out revaluations.
Our full year earnings per share was $4.09 per share compared to $3.08 per share in the prior year.
The current year also included a tax benefit of $0.17 that we reported in the third quarter of 2020 from a discrete tax item.
The gains associated with earn-out revaluations, which for the full year was $0.20.
For the fourth quarter, EBITDA was $63 million, which is 6% higher than the fourth quarter of last year.
Our annual 2020 EBITDA was a milestone achievement for us, as our full year EBITDA was $250 million.
Cash flow for 2020 was extraordinary.
Our full year free cash flow was $255 million compared to $112 million in 2019.
Our 2020 cash flow includes roughly $32 million of benefit, that's a direct result of the Federal Stimulus Bill, which allowed us to defer payroll tax payments in the last nine months of 2020.
These tax deferrals will be repaid in two equal installments in the fourth quarters of 2021 and 2022.
Even with our acquisition expenditures, we were able to reduce our debt to less than one turn of trailing 12-month EBITDA.
2020 was our largest year for share repurchases in quite some time, as we reduced our overall shares outstanding by repurchasing 685,000 of our shares at an average price of $43.99.
Since we began our repurchase program in 2007, we have bought back over 9.3 million shares at an average price under $20.
That's all I have, Brian.
I'm going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for 2021.
Our backlog level at the end of the fourth quarter of 2020 was $1.51 billion.
Sequentially, our same-store backlog increased by $10 million, with particular strength in our modular backlog.
Same-store backlog compared to one year ago has decreased by $375 million, of which approximately, 1/3 related to an expected decline in our electrical segment.
We are also experiencing delays in bookings and in project starts at certain of our large private companies.
Overall, we are comfortable -- we are very comfortable with the backlog we have across our operating locations as our booked work at the end of 2019 included some live beta projects and that comparison represented an unusually high level of backlog.
Most of our sectors continued to have strong quotation activity, even the sectors where bookings have been delayed.
That is particularly true on our industrial business, which includes technology, manufacturing, pharmaceuticals and food processing.
Our industrial revenue has grown to 39% of total revenue in 2020 compared to 34% a year ago.
We expect this sector to continue to be strong, and the majority of TAS and TEC revenues are industrial.
Institutional markets, which includes education, healthcare and government, were 36% of our revenue, and that is roughly consistent with what we saw in 2019.
The commercial sector was 25% of our revenue.
For 2020, construction was 79% of our revenue with 47% from construction projects for new buildings and 32% from construction projects in existing buildings.
Both of our construction and service businesses achieved record operating income margin.
Service was 21% of our 2020 revenue with service projects providing 8% of revenue and pure service, including hourly work, providing 13% of revenue.
Beginning in late March, our service business experienced the first and most pronounced negative impacts associated with COVID-19, largely as a result of building closures and decisions by customers to limit facility access.
We are seeing good opportunities in internal air quality, which has helped many of our service departments return to pre-pandemic volumes.
The most important element of IAQ is this -- is not just the immediate revenue, but also the opportunity to use our unmatched expertise to create new relationships.
This really plays to our strength of solving problems for our customers, and it is not just a service story.
As air quality considerations really add to our ability to differentiate and add value in construction and at times will increase the size and complexity of even large projects.
Overall, our service operations ended the year with improved profitability, and thus, today, they are back to prior volumes.
Despite pandemic-related challenges, our mechanical segment performed incredibly well during the quarter.
We are grateful for our performance this year, and our prospects are much better than we would have expected this past spring.
Our electrical segment had a tougher 2020 than we would have liked, but we currently expect good margin improvement in electrical in 2021.
Our backlog strengthened this quarter, but our near-term business continues to reflect some delays in bookings and starts that will result in same-store revenue headwinds in the first half of 2021.
At the same time, we have really strong project development and planning activity with our customers.
We are increasingly optimistic about 2021 and beyond because of that strong pipeline.
We currently expect full year 2021 results that are similar to, but lower than, the record results that we achieved in 2020.
We continue to prepare for a wide range of potential circumstances in nonresidential construction in the coming quarters.
However, we perceived strong trends, especially in industrial, technology and manufacturing.
And we think our geographic markets are favorably positioned with comparatively strong prospects.
We look forward to good profits and cash flow in 2021.
We have an unmatched workforce and a great and essential business, and we will continue to invest our reliable cash flows to make the most of these advantages and opportunities.
| q4 earnings per share $1.17.
q4 revenue $699 million versus refinitiv ibes estimate of $694.7 million.
backlog as of december 31, 2020 was $1.51 billion.
|
Kurt will begin and close the call, and Melinda will speak to the financials midway through.
We'll then open the call to questions.
Although we believe these statements to be reasonable, our actual results could differ materially.
The most significant risk factors that could affect our future results are described in our annual report on Form 10-K.
We encourage you to review those risk factors as well as other key information detailed in our SEC filings.
Following yesterday's close of market, we reported our fiscal 2020 fourth quarter and full year results.
Fiscal '20 was indeed a tale of two cities.
Our performance through the first ten months of the year was one of the best in our Company's history, with strong retail results, great product introductions and supply chain excellence, all translating into solid sales and earnings growth.
However, all of that changed in March when the COVID-19 pandemic and related retail closure forced us to cease production, close our own stores, and wait for the economy to reopen.
Now, given our philosophy of fiscal conservatism, we entered the crisis with a strong balance sheet, which positioned us to successfully move through this uncertain period.
With the health, safety and well-being of our employees, customers and communities our top priority, we responded quickly and rolled out an action plan on March 29th, that included a series of elements essential to ensure La-Z-Boy not only weathers the unprecedented storm, but emerges with strength.
In addition to temporary plant and store closes, our COVID-19 action plan included a temporary furloughing 70% of our workforce, eliminating all non-essential operating expenses, significantly reducing capital expenditures, suspending the June dividend and share repurchase program, and temporarily reducing pay by 50% for senior management and 25% for all other salaried employees, with our Board of Directors foregoing the cash portion of their compensation.
We also proactively drew down $75 million on our credit facility to ensure liquidity through this period.
As we continue to analyze and prepare for success in the new economic landscape earlier this month, we took some additional actions to strengthen and align La-Z-Boy to the new external environment.
While we were pleased to have brought back some 6,000 furloughed workers, we made the decision to permanently close our Newton, Mississippi La-Z-Boy branded manufacturing facility and reduce our global workforce by approximately 10%.
All of these actions impacted our various stakeholders and everyone throughout the La-Z-Boy organization was affected in some way.
To level set where we are today, we started calendar 2020 with 9,800 employees, and during the worst of the pandemic, temporarily furloughed about 6,800.
In the end about 10% became permanent reductions.
We deeply regret the impact to those employees, but our decisions are in the long-term best interest of the Company.
However, as we now move forward, our manufacturing facilities and Company-owned stores are open.
The vast majority of our workforce will be back to work by the beginning of July and our employees are back to full pay without -- with the exception of the executive officers and Board members.
On the manufacturing side, for the La-Z-Boy branded business, we have been ramping up production weekly.
When we restarted our plans from a complete shutdown, we ramped up to about 50% in May versus May of 2019.
And as we head into July, we expect to be operating at 80% of year ago volumes.
I'm so proud of how our team rapidly geared up once we restarted production to meet the demand we are experiencing.
With no notice, we announced difficult furloughs for a broad population.
And when we restarted operations and brought people back, they returned with enthusiasm and hit the ground running, without missing a beat.
We have an amazing workforce that has my admiration.
I'd also like to say how proud I am of the work we did throughout the pandemic to provide support to many organizations including manufacturing and donating hundreds of thousands of masks for health-care workers and tens and thousands for our suppliers.
They certainly are our true heroes.
Balancing the two very different chapters of the year, the Company turned in solid financial performance.
We closed fiscal 2020 with $1.7 billion in sales, generated $164 million in cash from operations and returned $68 million to shareholders through dividends and share repurchases.
Now turning to the results of the fourth quarter.
As noted earlier, the Company performed very well through February.
However, the shutdown of North America [Technical Issues] COVID-19 has a significant impact on our results for the fourth quarter, with many retailers across the country closed for the last four weeks of the period and for even longer during the quarter as well as our manufacturing operations closed for the last four weeks of our year.
To provide some perspective, with respect to one component of our distribution, for the entire La-Z-Boy Furniture Gallery network, written same-store sales increased 10.5% in the third quarter and increased 20% in the month of February, only to drop 44% in March, and 90% in April, in concert with the pandemic.
As a result, for the quarter, we experienced a 19% decline in consolidated Company sales to $367 million and the GAAP operating income for the period was $13 million and non-GAAP operating income was $34 million.
Even with this dramatic impact, for the quarter, we were still able to generate $44 million in cash and returned $14 million to shareholders through dividends paid and share purchases made prior to the shutdown.
Looking at our business by segment, we will start with retail, which has become a core competency for the organization, and is greatly contributing to the value of the La-Z-Boy enterprise.
Throughout the year, prior to COVID, the team executed at a very high level with increased conversion, and design sales with improved engagement with our consumers.
For the quarter, on an 8% sales decline to $140 million, the segment posted a double-digit operating margin driven primarily by prior period written sales delivered during the quarter and lower operating expenses related to the Company's COVID-19 action plan.
Let me give you some more context.
For the first three quarters of fiscal 2020, written sales for our Company-owned stores were up 8.1%.
For that same period, delivered same-store sales were up 3.6% with both metrics, written and delivered, driven by improved traffic trends, conversion and strong execution at the store level.
After an extremely strong February start, which delivered same-store sales for the Company-owned stores with -- delivered same-store sales for the Company-owned stores, increasing 15%, they were only up 2% in March and declined 52% in April, culminating in a fourth quarter delivered same-store sales decrease of 10%.
As the majority of the stores were closed in the last four weeks of the quarter, as state and local restrictions limited our ability to deliver product.
However, many are working on reduced schedule in terms of hours open, and number of employees depending on traffic.
We have implemented a series of health and safety procedures to keep our employees and consumers safe.
It is essential for our customers to feel comfortable in our store environment, and we are also offering private shopping appointments outside of regular store hours if they prefer to shop that way.
As stores reopen, we manage our spend on marketing and overhead in more short-term iterations remaining very nimble as we anticipate what would happen each week.
In the meantime, our teams are rapidly adapting to improve e-commerce sales through the shutdown and executed a virtual design program.
Now for the broader store network, includes both Company-owned and dealer-owned stores, written same-store sales for the 354 La-Z-Boy Furniture Gallery stores in North America decreased 35% in the fourth quarter.
As we noted, even with a 20% increase for the month of February, it was hard to overcome the effect of store closures throughout the period with many stores closed for a part of March and the majority of stores closed in April as per local guidelines, driving written sales, same-store sales down in March and April 44% and 90% respectively.
The challenging fourth quarter impacted the full '20 year with written same-store sales down 3.6% even after a 6.4% increase for the first three quarters of the year.
The La-Z-Boy Furniture Gallery store system is the cornerstone of our distribution, and we along with our dealer base are committed to investing in the stores to keep them updated and appealing to the consumer.
We ended the year with 354 stores including one net new and 166 in the new concept design.
Presuming business trends continue to improve, we anticipate adding four net new stores over the course of fiscal 2021 bringing our total store count to 358.
Now, onto our wholesale business.
In the upholstery segment on sales -- on a sales decline of 22% to $253 million, non-GAAP operating margin increased to 11.8%.
Margins benefited from a one-time $16 million rebate of previously paid tariffs and favorable commodity costs, mostly offset by higher bad debt expense due to the Art Van furniture bankruptcy and the provision for potential credit losses in the COVID-19 environment in SG&A.
Also, our SG&A dollar spent for the period were lower due to COVID-19 action plan, but higher as a percentage of sales due to decline in volume related to the pandemic.
Throughout this period we have right-sized our marketing investment to balance fiscal responsibility with regaining sales volume in what appears to be increased interest in living room furniture as consumers spend more time at home and shift discretionary dollars to furniture.
During uncertain and challenging times, consumers tend to return to brands they know and trust, and we are building on that momentum -- on the momentum of our Live Life Comfortably campaign featuring brand ambassador Kristen Bell who continues to be a highly effective spokesperson for us.
Before turning to Casegoods, I'd like to take a moment and talk about la-z-boy.com.
As discussed in the past, our core consumer has consistently demonstrated a preference to shop-in-store.
Without that ability during the pandemic, we did see an uptick in traffic and an increase in sale on www.
la-z-boy.com and are happy to provide consumers this option as part of our omni channel offering.
During the year, we strengthened our digital presence and consumer experience, introducing a number of innovations that further simplify browsing, researching and purchasing, including various selling tools that allow consumers to view products in their own home virtually.
Such innovations facilitate easier virtual engagement and were particularly helpful while all the stores were closed.
Going to our Casegoods segment, with a 20% decline in sales, our non-GAAP operating margin decreased to 1.9% primarily reflecting the impact of COVID-19, and related temporary manufacturing facility and retail closures and an increase in bad debt expense given the current economic environment.
Although the segment faced a number of headwinds throughout fiscal 2020, we are better positioned now with more occasional tables sourced from countries other than China, freight rates starting to ease, and a series of new product introductions that have been well received.
However, we do expect some disruption to continue in the import, supply chain over the next several months as suppliers come back online following the COVID-19 shutdowns in Asia.
I'll now spend a few moments on Joybird.
For the quarter, Joybird's sales reported in Corporate and Other declined 30% to $15.4 million as the business posted a larger operating loss than the prior year period.
Operating performance impacted in the quarter by the temporary closure of the Joybird manufacturing facility, and our inability to deliver product to consumers due to the state and local restrictions related to the pandemic.
On a more positive note, Joybird's written sales for the quarter were very strong and a higher order rate for the first -- for first time visitors to the site.
With their Mexico-based manufacturing facility reopening in phases throughout May, and working its way up to pre-risk production levels in June, Joybird will have a longer tail for deliveries versus the La-Z-Boy branded business, and expects to deliver these written orders at the end of the first quarter and some into the second quarter.
We are continuing to make improvements across the Joybird business model with the objective to balance investments and growth, with bottom line performance and expect to Joybird to deliver value to the La-Z-Boy enterprise over the long term.
As always, let me remind you that we present our results in both the GAAP and non-GAAP basis.
In addition to these items, also excluded from our non-GAAP reporting for the full year and discussed in previous quarters are, pre-tax charges from purchase accounting adjustments from the first three quarters of the year, a non-cash impairment charge for an investment in a privately held start-up Company, a net benefit related to our supply chain optimization initiative, and the benefit related to the prior year termination of the Company's defined benefit pension plan.
Fiscal 2019 non-GAAP results for the fourth -- full year and fourth quarter, exclude a charge for the termination of the Company's defined benefit pension plan, and purchase accounting charges.
My comments from here will focus on our non-GAAP reporting.
On a consolidated basis, fourth quarter sales declined 19% to $367 million in fiscal '20, Q4 versus the prior-year period, reflecting two months of dramatic, temporary impacts from the COVID pandemic.
Consolidated non-GAAP operating income was $34 million versus $39 million in last year's quarter and consolidated non-GAAP operating margin was 9.3% versus 8.6% reflecting increases in the upholstery and retail segments, offset by a decline in Casegoods margins.
Results for the quarter include a 440 basis point benefit related to a rebate of previously paid Chinese tariffs, almost entirely offset by higher bad debt expense.
Fiscal 2019 fourth quarter results include a 40 basis point charge related to changes in employee benefit policies.
Non-GAAP earnings per share was $0.49 per diluted share in the current quarter versus $0.64 in last year's fourth quarter.
Moving on to full year results for fiscal 2020, sales decreased 2.4% to $1.7 billion, again reflecting strong performance through February and two months of impact from COVID-19.
Consolidated non-GAAP operating income increased to $139 million from $137 million in fiscal 2019, and consolidated non-GAAP operating margin was 8.2% versus 7.8% in the prior year, with results reflecting improvement in our upholstery and retail segments.
Diluted non-GAAP earnings per share for fiscal 2020 were $2.16 versus $2.14 in fiscal 2019.
Consolidated gross margin for the full fiscal year increased 230 basis points.
Improved gross margin was driven by rebates on previously paid duties which provided a 100 basis point increase to gross margin and changes on our consolidated business mix due to growth in our retail segment and the contribution from Joybird, both of which carry a higher gross margin than our wholesale businesses, which accounted for 90 basis point increase.
We also benefited from lower raw material costs in the upholstery segment with most of that offset by the temporary shutdown in our manufacturing facilities in Q4 due to COVID-19, and inflationary pressures in the broader supply chain.
Moving on to SG&A for the full fiscal, on lower sales volume for the year, SG&A as a percent of sales increased 190 basis points.
Changes in our consolidated mix with Retail and Joybird composing a higher percentage of our business increased SG&A as a percent of sales by 130 basis points for the year.
Bad debt expense drove an 80 basis point increase on the year, primarily due to the Art Van bankruptcy as well as a provision for credit losses given the current economic environment.
In fiscal 2019, we recognized a one-time $3.8 million benefit due to changes in employee vacation policies, the absence of which resulted in a comparative 20 basis point increase in SG&A as a percent of sales for fiscal 2020.
Partially offsetting these increases was a 90 basis point decrease in SG&A as a percent of sales related to lower incentive compensation costs as we fell short of our targets due to the impact of COVID-19.
On a GAAP basis, our effective tax rate for fiscal 2020 was 31.4% versus 26.4% last year.
Impacting this year's effective tax rate was a net tax expense of $4 million primarily from the tax effect of the 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 2020 would have been 26.4%.
Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes and for fiscal '21 absent discrete items, we continue to estimate our effective tax rate on a GAAP basis, will be in the range of 25% to 26%.
Turning to cash, we generated $164 million in cash from operating activities in fiscal 2020.
We ended the year with $264 million in cash, cash equivalents and restricted cash, including $75 million proactively drawn on the Company's credit facility to enhance liquidity in response to COVID-19, as well as $29 million in investments to enhance returns on cash.
This compares with the $132 million in cash, cash equivalents and restricted cash and $31 million in investments to enhance returns on cash at the end of fiscal 2019.
During the year, we invested $46 million in capital, primarily related to machinery and equipment upgrades to our Dayton manufacturing facility, and investments in our retail stores.
Over the fiscal year, we also paid $25 million in dividends and spent $43 million purchasing 1.4 million shares of stock in the open market under our existing authorized share repurchase program, which leaves 4.5 million shares in purchase availability under that authorization.
Our longer-term capital allocation priorities remain to invest in the business to drive growth, and then provide returns to shareholders with our dividends and discretionary share buyback.
However, as part of our COVID-19 action plan, in an effort to preserve cash in the near term and provide for a financial flexibility, we eliminated our expected June dividend and temporarily suspended our share buyback program.
As the Company's performance continues to recover, we will look to return value to our shareholders through dividends and share buybacks, once we have evaluated the business recovery for a meaningful period.
We expect capital expenditures for fiscal '21 to be in the range of $25 million to $40 million, largely dependent on economic conditions and business recovery.
Our spending for the year will prioritize essential maintenance, projects already under way including plant upgrades to our upholstery manufacturing and distribution facilities, technology upgrades, improvements to several retail stores, and other projects as business conditions permit.
And we anticipate one time pre-tax charges of $5 million to $7 million or $0.08 per share to $0.11 per share related to our recently announced closure of the Newton assembly plant and the 10% reduction of our global workforce.
The majority of which will be realized in the first quarter.
Moving forward, savings realized from these closures will be reinvested to drive business recovery.
And finally, I'd like to spend a moment to address the ongoing impact of COVID-19 on our business.
Indeed, there was a dramatic hit to our fiscal 2020 fourth quarter due to plant and retail closures, which we have addressed in detail.
But importantly, there is a continued tail to the retail and manufacturing shutdowns, which will impact, at least, our first quarter, which is already our seasonally slowest period for sales and earnings.
As all of the written sales we didn't have in March and April and even early May during the shutdown, resulting no deliveries and no related revenue recognition for May and June.
And then, a dip in cash until those receivables are collected even later in the summer.
Although we incur expenses to reopen and ramp up.
Even with the positive recovery trends, results for at least Q1 will be extremely challenged.
The good news is that stores are open and plants are up and running, while we're cautiously optimistic, we will need to remain as agile as possible to manage through this near-term period.
More broadly speaking, I would note that no trend should be drawn from our fiscal 2020 fourth quarter margin performance, given the many dramatic and unique impacts of COVID-19 shutdown.
While our plants are ramping up production on a weekly basis, we still have not reached prior-year volume levels or even critical sales levels to support our historically strong margins.
Only time will tell if what we are seeing in terms of volume increases is solely pent-up demand, the impact of federal stimulus money or longer term sector rotation with discretionary spending moving from travel and leisure to home and furnishing.
All may be playing a role in the bounce back of the home furnishings industry that we are experiencing.
Whether that demand is sustainable and what the new normal will be are still questions.
Thus, we continue to balance meeting customer demand for our product with financial prudence.
While most retailers now are open, thus far, we are pleased with consumer traction.
However as Melinda alluded [Phonetic] to, there is some uncertainty with respect to future trends and it will be a while before we have a better idea of the continuing, ongoing run rate.
That said, with solid positioning in the marketplace through our well-known and trusted brand, our vast distribution network, including the vibrant La-Z-Boy Furniture Gallery stores system, world class supply chain and a strong balance sheet, I have every confidence we will emerge with strength and have the potential for additional market share gains, as demand environment improves.
In my more than 40 years at La-Z-Boy, I have seen the Company manage its way through many crisis, but never seen an event the magnitude of COVID-19 where we were in a no revenue environment for an extended period of time.
Now that made our path forward complex and even unpredictable.
We are now focused on ramping up the business, and importantly, we will take as much from this experience as possible to further strengthen La-Z-Boy and make it more competitive.
And I am confident we will emerge as a stronger, wiser and more resilient Company and will provide long-term value and returns to our many stakeholders.
Steve led the Casegoods Group through a comprehensive transition from a domestic manufacturer to an import model as the wood industry primarily moved offshore.
He was a gentleman's gentleman, was highly respected within the industry, a man of great integrity and a friend of all.
He truly cared about every single employee at every level at Kincaid, and was a great leader.
He will be sorely missed by many of us.
We will begin the question-and-answer period now.
Kristie, please read the instructions for getting into the queue to ask questions.
| q4 non-gaap earnings per share $0.49.
la-z-boy - have called back some 6,000 furloughed workers, who have returned or will return to work by july 1.
la-z-boy - permanently closed newton, mississippi manufacturing facility, reduced global workforce by about 10%.
la-z-boy - written same-store sales for la-z-boy furniture galleries network decreased 35% in q4.
|
These statements are subject to numerous risks and uncertainties, as described in our Annual Report on Form 10-K, quarterly reports on Form 10-Q and other SEC filings.
These risks could cause our actual results to differ materially from those expressed in or implied by our comments.
During our last call, we shared our optimism about the second quarter.
And while we anticipated to see marked improvement, our adjusted EBITDA for the quarter significantly exceeded our expectations.
The swift pace of our recovery so far demonstrates the operating leverage within our business, as we translate an improving RevPAR environment into revenue growth and margin expansion.
Operating cash flow was positive for the quarter and our owned and leased segment adjusted EBITDA improved over $40 million from the first quarter.
We do find ourselves experiencing very different demand profiles throughout the world.
The overall recovery thus far has been much quicker than we predicted and leisure demand is at a record high in certain markets, yet demand remains at historic lows in many parts of the world.
COVID remains present in both narratives, but it's clear in our second quarter results that when restrictions are eased and people are able to travel safely, the desire to get back to travel and back to hotels is stronger than it's ever been.
The labor environment has been challenging, putting significant pressure on our teams to deliver the high level of service our guests expects from our brands.
We're remaining agile in how we are addressing these labor challenges by examining all aspects at how we retain, attract and train new talent.
We're forming new recruiting relationships and sourcing more candidates from outside of our industry.
We're also increasing pool of nontraditional candidates through initiatives focused on diversity, equity and inclusion, such as our Rise High [Phonetic] program, which focuses on the employment of opportunity use.
As we remain focused on hiring, I'm proud to say that we recently published our EEI commitment as part of the launch of World of Care, our ESG platform.
I look forward to continuing to update you on our progress to drive meaningful change within the hospitality industry and across the communities in which we operate.
So let's start with the latest trends we're seeing.
As I shared at the start, we anticipated the pace of recovery would accelerate in the second quarter in conjunction with wider vaccine availability, but the quarter finished well-ahead of our expectations.
We've seen growing leisure transient demand and I'll take a moment to review just how quickly it has accelerated this year, but I'll also share how the recovery has varied globally compared to our 2019 results.
Starting with sequential growth.
System wide RevPAR grew 58% in the second quarter compared to the first quarter.
Demand has steadily improved since January with double-digit RevPAR growth in each successive month compared to the prior month.
The most pronounced period of RevPAR acceleration commenced with Memorial Day weekend in the United States and continued through July, driven by a wave of leisure transient demand.
Systemwide RevPAR was trending approximately 50% of 2019 levels just prior to Memorial Day and it's grown to nearly 75% of 2019 levels for the month of July with RevPAR ending at approximately $100.
The RevPAR acceleration has come through higher demand but also bolstered by a significant increase in the rates, which are nearing fully recovered levels.
Overall, swiftness of improvement in recovery is impressive considering major travel restrictions remain throughout the world, business chains and group have only partially recovered and international travel remains limited.
RevPAR growth in the United States was the primary driver of the jump in systemwide RevPAR improving 75% in the second quarter over the first quarter and more than double a 30% aggregate growth rate for the remainder of the world.
The United States benefited from widespread vaccine availability and reduced travel restrictions, which unleashed significant pent-up leisure demand.
From a global geographic market perspective, the rate of recovery continues to be highly uneven and heavily dependent on successful vaccination rollouts, leading to lower transmission rates COVID-19 and ultimately the easing of travel restrictions.
To give you a sense of the disparity as of mid-July, geographic areas such as Europe, Southeast Asia and the Middle East are trending at less than 50% of fully recovered RevPAR levels, while the United States, Mainland China and the Caribbean are over 80% recovered.
The surge in our resorts is unlike anything we've previously experienced.
In January, comparable US resort RevPAR was down 75% versus 2019.
In June, just five months later, RevPAR was 11% above 2019 with strong average rate growth in June of over 25% compared to 2019 levels.
The leisure transient surge has extended well-beyond our domestic resorts.
Hotels in Mexico and certain parts of the Caribbean are also at higher RevPAR levels in June relative to the same period in 2019.
Additionally, we've experienced a notable improvement in our urban and suburban markets in the United States.
This trend has only accelerated further in July with leisure transient nearly 20% ahead of 2019 levels in the United States and even stronger in Mainland China.
The outside contribution from these two markets are driving systemwide leisure transient revenue that is now slightly above 2019 levels across all comparable hotels.
Moving on to business transient and group.
These segments are lightly in leisure, but the momentum is growing and we are encouraged by the steady improvement.
Our system line business transient RevPAR in June has nearly doubled from the first quarter driven by strength in the United States and Mainland China.
Notably, we RevPAR performance is now trending at 60% at 2019 levels at the end of June compared to just 40% two months prior.
Business transient remains approximately 40% recovered globally and demand varies significantly by market.
In the United States, dense urban markets such as New York, Washington D.C., Chicago and San Francisco are still only 20% to 30% recovered, while the majority of other urban markets are trending at a 50% recovery level or higher.
Regional businesses and some of our smaller corporate accounts are recovering the quickest, but we're also seeing acceleration in our comp accounts and continue to expect a more robust recovery in the fall.
As for group the trends are very encouraging.
More groups large and small have been returning to our hotels and ballrooms.
Importantly, we're seeing room blocks actualize above expectations and the general size and mix of groups returning to more normalized levels.
We continue to expect demand to strengthen into the fall as evidenced by recent booking trends.
Group revenue booked in June for events that will occur in 2021 has reached approximately 90% of 2019 levels in our Americas full service managed properties with the rate of cancellation diminishing to only a fraction of the levels we experienced just a couple of months ago.
As we look to 2022, while group is down in the mid-teens compared to 2019, our leads are tracking 30% higher, which suggests that our pace deficit should improve.
Additionally, we're pleased to see group business booked in the second quarter for 2022 at an average rate that is 5% higher than the same period in 2019.
In summary, as we look across the world, growth remains uneven.
The geographic areas that have ease restrictions and are furthest along vaccination rates are seeing a surge of leisure demand.
We've opened 100 hotels over the trailing 12 months, a record level of organic expansion leading to net room growth of 7.1% in the second quarter.
Even with our rapid rate of hotel openings, we've maintained our pipeline of signed deals in a challenging environment, closing the second quarter with a development pipeline of 100,000, 101,000 rooms representing over 40% of our existing lease base.
As we've highlighted in previous quarters conversion definite key ingredient to our growth.
Our independent collection brands including the Unbound Collection by Hyatt, JDB by Hyatt and Destination by Hyatt accounted for all eight conversions in the quarter and in high barrier to entry markets such as Los Angeles, Toronto, Beijing, Sweden and Visa Spain.
Demand for all of our brands remains strong among our development community, but I'm especially pleased with the integration and growth of the brands that we acquired through the acquisition of Two Roads Hospitality Alila, Thompson, JDV by Hyatt and Destination by Hyatt.
By way of reminder, we acquired Two Roads Hospitality in late 2018 and spent much of 2019 integrating the brands and back-end technology into the Hyatt ecosystem.
We clearly define the purpose and profile of each brand alongside our existing portfolio.
We continue to be focused on scaling these brands and our hard work is resonating with developers around the world.
As a result of the successful integration, 2021 is shaping up to be a banner year of openings for all four brands.
Already through the first half of the year, the number of hotels in these four brands have expanded by 20% and we expect to end the year with growth of 30% or more.
It's exciting to see how these brands have been so quickly adopted by our loyal guests with the World of Hyatt program driving over 40% of room nights.
This loyal member base has been a key catalyst of market share gains.
RevPAR index for comparable former Two Roads hotels is up 13% versus 2019 through the first half of this year.
The successful integration of these former Two Roads brands has contributed to the broader evolution of the Hyatt portfolio as an industry leader in the luxury lifestyle space.
In the span of just three years, we tripled the number of lifestyle insofar properties from approximately 50 to 150, accounting for nearly 40% of total hotel openings over that time frame.
Further we significantly expanded our resort presence.
Since 2017 we've grown our resort room count by 45% with well over 80% of that growth in the luxury segment.
Ultimately as we look at the Hyatt portfolio today and our signed pipeline, we're excited with the positioning of our portfolio to take full advantage of the demand coming back to our hotels.
This transition to a heavier leisure-driven portfolio has been very intentional and complemented with a variety of enhancements such as the launch of High Prive which is our luxury travel advisor program, the expansion of Benefits with the within the World of Hyatt programs such as the addition of small luxury hotels properties, the ability to use points for experiences such as Midland exhibitions and our strategic relationship with American Airlines.
Most recently during the quarter we announced the launch of our relationship with Built Rewards a new rewards program with access to millions of urban renters who are now able to earn the global high points just by paying rent.
Our portfolio of brands complemented with a best-in-class loyalty program and digital platform is clearly resonating.
Our base of loyalty members is the largest, it's ever been and has grown 14% since the same point last year.
Our co-brand credit card spend is trending well above 2019 levels and our enhancements to our digital platform are driving hi.com booked revenue more than 20% higher than 2019 levels which is outpacing OTA channels.
Our portfolio and programs have us openly positioned to be the preferred brand for high-end leisure travelers now and well into the future.
Finally, I want to provide a brief update on transactions before turning it over to Joan.
During the quarter we announced the disposition of higher agency loss times for approximately $275 million a price that was above our pre-COVID-19 expectations.
We also acquired Ventana Big Sur, an Alila resort for $148 million securing our brand presence in a highly sought after resort destination.
With the completion of these asset transactions, we've realized net proceeds of approximately $1.1 billion since the time of our announcement in March of 2019.
In addition to these transactions, I'm pleased to note that we are in advanced stages for the disposition of two other assets in the aggregate amount of $500 million.
Should we successfully close these two transactions, we will exceed our $1.5 billion asset sell-down commitment and do so well before our target date and at an aggregate multiple in the high teens.
In total, from the outset of our asset sell-down strategy announcement in November of 2017, and assuming the closing of the sale of the two properties in process, we will have sold over $3 billion of assets at an average EBITDA multiple of just under 17.5 times, demonstrating the valuations realized in our disposition efforts are materially in excess of the implied valuation, the market has placed on our owned and leased business.
We look forward to updating you on the progression of these sales and future plans, relative to our sell-down program during our next earnings call.
Around the world things remain uncertain and we remain vigilant, as we maintain the health and safety of our colleagues and our guests.
It is clear and it's been validated repeatedly across markets and cultures that when people are able to travel and reconnect, the commitment to do so drives customer behavior.
While we expect starts and stops, we remain confident we are on the path to full recovery.
Joan, over to you.
Late yesterday, we reported a second quarter net loss attributable to Hyatt up $9 million and a diluted loss per share of $0.08.
Adjusted EBITDA was $55 million for the quarter, a sharp improvement from the adjusted EBITDA loss of $20 million in the first quarter of this year.
As Mark mentioned, the operating leverage in our business has enabled us to translate improving demand into a strong increase in earnings.
Systemwide RevPAR was $72 in the second quarter, representing a 50% decline compared to the same period in 2019 on a reported basis and a 58% increase compared to the first quarter of 2021.
Both occupancy and rate contributed meaningfully to the sequential RevPAR growth with roughly 60% of the improvement coming through occupancy and 40% strip rate.
Leisure transient was a key driver of our improved results for the quarter, leading to a material increase in our base, incentive and franchise fees, which totaled $77 million in the second quarter, a notable acceleration of $49 million in the first quarter.
In June, systemwide comparable occupancy eclipsed 50% and as of June 30, only 18 hotels or less than 2% of hotel inventory remained closed.
Turning to our segment results.
Our management and franchising business delivered a combined adjusted EBITDA of $63 million, improving over 90% to $33 million in the first quarter.
The Americas segment accounted for the vast majority of the growth led by our resort and select service portfolio but also increasingly for our business and convention hotels as more cities eased restrictions as the quarter progressed.
The Asia Pacific segment experienced improved performance, doubling its adjusted EBITDA in the first quarter, as hotels in Mainland China rebounded strongly after the easing of government restrictions.
It's important to highlight that Mainland China through a combination of RevPAR improvement, strong operating margins and net rooms growth generated more base incentive and franchise fees than any other previous quarter of record.
As for our Europe, Africa, Middle East and Southwest Asia segment, adjusted EBITDA was modestly lower than the first quarter as travel restrictions were prevalent throughout the region.
However, the pace at which demand is currently improving, especially in Europe, as we progress through this summer, serves as another proof point that when restrictions are eased, people are ready and excited to travel.
Our owned and leased hotel segment, which delivered $12 million of adjusted EBITDA for the quarter improved spend more than $40 million from the first quarter of 2021.
The swift path back to profitability highlights the strong operating leverage within our owned and leased portfolio.
Owned and leased RevPAR was $87 for the second quarter, experiencing strong acceleration throughout the quarter with RevPAR improving from $73 in April to $107 in June, nearly doubling the rate of improvement of our systemwide portfolio.
Our owned and leased resorts were a key driver surpassing adjusted EBITDA generated in the same period in 2019.
Further, the acceleration in group business throughout the quarter had a material positive impact.
And this was most pronounced in June, our strongest month in the quarter, as group room nights accounted for 25% of the total room night mix, up from just 18% in May.
As we turn toward July, owned and leased RevPAR continued to strengthen further.
Preliminary RevPAR for the owned and leased portfolio in July is approximately $135, up nearly 30% from June, and nearly 85% recovered versus the same month in 2019.
Importantly, the average rate in July is above the same period in 2019.
Our comparable owned and leased operating margins improved to 13.9% in June -- second quarter of June finishing above 19% a sharp improvement from the negative margins last quarter.
We continue to closely monitor the labor environment, and are working hard to get open positions filled.
To date, we've seen some pressure on wages and our general managers have made specific adjustments based on competitive factors, but it varies by market.
As we assess the potential impact of inflation on our business, we believe the increase in daily room rates will at least offset increases to wages or other costs.
Our revenue management practices and teams reprice inventory on a continuous basis allowing us to quickly respond to changing market conditions.
This is evidenced by our ability to quickly realize stronger rates, which were up 20% at our owned and leased resorts compared to 2019 in the second quarter.
I would also point out that valuations of hotel assets benefit from a inflationary environment, and this is a positive for us as we execute our owned and leased disposition strategy.
I'd also like to provide a brief update on our liquidity and cash.
Operating cash flow, including interest payments was positive for the quarter and exceeded our expectations.
We anticipate our operating cash flow will continue to improve from the second quarter levels as RevPAR strengthened.
We have and will continue to invest in the growth of our brand, including capital expenditures.
Our cash investments in this area have remained in the same approximate range as the prior two quarters about $10 million to $15 million per month.
We expect monthly investment spend to trend higher consistent with our expected strong year of openings and signing activity.
As of June 30, our total liquidity inclusive of cash, cash equivalents and short-term investments and combined with borrowing capacity was approximately $3.2 billion with the only near-term debt maturity being $250 million senior notes maturing this month.
We received a $254 million US tax refund in July related to 2020 net operating losses carried back to prior years under the CARES Act.
We intend to use this tax refund to pay off our senior notes upon maturity later this month.
I'd like to make a few additional comments regarding our 2021 outlook.
Consistent with our communication in the first quarter, we continue to expect adjusted SG&A to be in the approximate range of $240 million excluding any bad debt expense.
Further, we continue to expect capital expenditures to be in the range of $110 million.
Given our confidence in the recovery, we are evaluating pulling forward selected renovation projects to take advantage of seasonality and lower displacement than we expect to have in the future.
To take this action, this may increase our capital expenditure estimate modestly and we'll update you further next quarter.
Turning to net rooms growth, earlier this quarter in connection with the pending our agreement with Service Properties Trust, which extended our management of 17 high-place hotels that we previously forecasted to exit the system, we increased our net rooms growth projection to approximately 6%, up from greater than 5% as previously reported in the first quarter of 2021.
We're updating this expectation of net rooms growth to be greater than 6% for the year.
While there is some degree of uncertainty related to supply chain issues, which could push certain openings into early 2022, we remain very confident in our ability to deliver another exceptionally strong year of net rooms growth.
Finally, I'd like to briefly comment on earnings sensitivity.
Our previously communicated earnings sensitivity levels illustrated that a 1% change in RevPAR level using 2019 RevPAR as a baseline resulted in an impact of approximately $10 million to $15 million in adjusted EBITDA.
We previously communicated that we expected that our earnings sensitivity would be at the high end of this range in the near-term due to the larger decline in owning leased RevPAR relative to our systemwide RevPAR as a result of COVID-19.
As the relationship between owned and leased systemwide RevPAR has formalized, the earnings sensitivity is now expected to improve toward the midpoint of the $10 million to $15 million range of adjusted EBITDA, reflecting our ability to mitigate the adjusted EBITDA downside impact relative to our 2019 results.
Adjusted EBITDA and operating cash flow were positive for the quarter and we anticipate the momentum to continue into future quarters.
Our management and franchise business reflects the quickly strengthening RevPAR environment and coupled with industry-leading net earnings growth is accelerating meaningfully.
Our owned and leased hotels continue to exceed expectations as the segment generated positive adjusted EBITDA for the quarter.
We remain mindful that this recovery will be uneven, but have unwavering confidence we are on a path to full recovery.
| q2 loss per share $0.08.
sees 2021 adjusted selling, general, and administrative expenses to be about $240 million.
sees 2021 capital expenditures to be approximately $110 million.
qtrly total revenue were $663 million versus $250 million.
hyatt - received a u.s. tax refund of $254 million in july of 2021 related to 2020 net operating losses carried back to prior years under cares act.
|
As Joanne mentioned, I'm Christine Cannella, Vice President, Global Corporate Communications and 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 distributions.
With that, I am pleased to turn today's call over to Mohammad.
It has been a very difficult few months for the world.
Our thoughts go out to all the heroes working to keep people safe and healthy during this unprecedented evolving global pandemic.
I want to extend my best wishes to you and your families that you stay safe and healthy.
I also want to extend my gratitude to our frontline team members for their commitment to providing healthy convenient fresh and prepared food products during this crisis.
I will go directly to what is likely top of mind for all of us, the impact of the COVID-19 pandemic and the actions we have taken to support our team members and their families, customers, suppliers and our local communities.
At the outback of the pandemic, we immediately activated our global and regional executive crisis management teams to respond accordingly.
At our production facilities where food safety has always been top of mind, we introduced additional operating procedures and safety protocols to include social distancing, thermal screenings and increase cleaning cycles to protect our production teams.
We activated our supply chain contingency plans to mitigate any disruptions in our ability to service our customers.
Most recently we voluntary closed the distribution and fresh-cut facility in Boston, Massachusetts for 10 days, due to team members being diagnosed with the COVID-19.
We shifted inventory and production from our Boston facilities and continued to meet demand and deliver uninterrupted service to our customers in the Northeastern US.
As of today our Boston facility is back in operation.
Other preventive actions included having as many global employees as possible working remotely.
Our worldwide team members have rallied around maintaining business continuity during this critical time.
And I am pleased with how quickly they adapted to the circumstances, especially our frontline teams that have kept our farms, plants and distribution centers running, allowing us to maintain our commitment to providing healthy convenient and safe Del Monte branded products around the world.
We are also collaborating in a number of ways with our local communities during this time of uncertainty, adding support wherever we can.
Regarding our business, while we saw an increase in demand in our banana business, we did experience reduced demand for fresh-cut, for Fresh and value-added products, as stay at home orders impacted the restaurant and foodservice industry.
We anticipate this trend continuing in the near future as consumer adapt social distancing.
Households manage unprecedented economic hardships and unemployment rates soar.
I would like to add that our Mann Packing subsidiary had shown improved results in January and February as they are recovering from their fourth quarter 2019 voluntary recall.
However the COVID-19 impact to the foodservice channel also reduced demand for Mann's meals and snacks and fresh-cut vegetables product lines.
We expect the trend to continue in the second quarter of 2020 if conditions remain the same.
Over the coming three months we will be moving our operations to our new Gonzales, California facility, which will allow us to streamline and improve our production capabilities, customer service and reduce costs.
In addition, earlier in the quarter we saw a reduction in our business in Asia as a result of supply and demand imbalances brought about by the closures and restrictions put in place in China logistics operations.
This plan turned around in March as the Asia region showed signs of recovery and we began to see demand increase, especially for bananas.
While we did experience a number of challenges in the quarter that softed top line sales, we took several actions to fortify our business and conserve liquidity, including halting our share repurchase program, reducing our dividend by 50%, postponing non-critical capital investments for the second half of 2020 and establishing measures to reduce selling, general and administrative expenses going forward.
All of these measures, give me confidence that we will come out of this crisis stronger than ever.
What will the new normal be?
I believe we will see behavior changes in the market.
One such example is the surge in e-commerce category sales, while online grocery shopping grows at rapid pace during the pandemic, I believe, consumer usage has just begun.
Which is why in April of 2020 we broadened our distribution channels by introducing our online store in the United Emirates with plans, sort of the concept to other countries soon now.
I want to begin with a few words regarding the confidence we have in our cash and our current debt positions as we renewed our credit facility.
As you're aware, we have a considerable variability in our $1.1 billion credit line.
Our leverage ratio for the first quarter of 2020 was below 3.2 times EBITDA.
In addition to our variability on our credit line, the decision to halt our share repurchase program reduced the interim cash dividend and postponed non-critical capital investments, we strengthened our cash flow position for the second quarter.
In terms of liquidity, we were assured from our lenders we have no issues with drawing down if needed.
We generated cash this quarter and kept our level almost flat to the end of fiscal year 2019.
So these speak to the strength of our business.
We continue to focus on reducing our debt while we continue to invest in critical high margin capital projects to drive efficiency in our operations and expand our value-added business.
While we see pressure on revenue and earnings in the short-term, we see much opportunity for us to be ready for future growth when this crisis has passed.
Given all of our capabilities as Mohammad declared, I am confident Fresh Del Monte will weather these difficult times and emerge stronger from this challenge.
With that I will now get into the results for the first quarter of 2020.
Adjusted earnings per diluted share were $0.34 compared with adjusted earnings per diluted share of $0.46 in 2019.
Net sales were $1,118 million compared with $1,154 million in first quarter 2019, with unfavorable exchange rates negatively impacting net sales by $8 million.
We estimate that the COVID-19 pandemic impacted net sales during the first quarter of 2020 by approximately $27 million.
Adjusted gross profit was $77 million compared with $95 million in 2019.
Adjusted operating income for the quarter was $24 million compared with $41 million in the prior year and adjusted net income was $16 million compared with $23 million in the first quarter of 2019.
In regards to the product lines for the first quarter of 2020, in our fresh and value-added business segment, net sales decreased $29 million to $661 million compared with $690 million in the prior year period.
And gross profit decreased $19 million to $43 million compared with $62 million in the first quarter of 2019.
The decrease in net sales was primarily the result of lower net sales of fresh-cut vegetables, pineapples and meals and snacks, partially offset by higher net sales of avocados.
As compared with our original expectations, the COVID-19 pandemic affected our net sales of fresh and value-added products by an estimated $21 million during the quarter.
Also the continuing effect of November's Mann Packing voluntary product recall affected our net sales in the first quarter of 2020.
In our pineapple category, net sales were $102 million compared to $111 million in the prior year period, primarily due to lower sales volume in North America, Asia and Europe as a result of lower production in our Costa Rica and Philippines operations, primarily due to unfavorable growing conditions.
Also contributing to the decrease in net sales was the impact of the COVID-19 pandemic, which resulted in lower demand for pineapples across all of our regions.
Partially offsetting this decrease were higher selling prices in North America and Europe and higher sales volume in the Middle East as a result of expanded sales to existing markets and additional shipments from our Kenya operation.
Overall volume was 16% lower.
Unit pricing was 9% higher and unit cost was 6% higher than the prior year period.
In our fresh-cut fruit category, net sales were $118 million in line with the prior year period.
Net sales were impacted by lower demand in our foodservice distribution channel as a result of social distancing measures imposed by government around the world.
Overall volume and unit pricing were in line with the prior year period and unit cost was 1% higher than the first quarter of 2019.
In our fresh-cut vegetable category, net sales were $103 million compared with $119 million in the first quarter of 2019.
The decrease in net sales was due to the effect of the COVID-19 pandemic, which -- a significant reduction of our foodservice business during the month of March, mainly in our Mann Packing subsidiary.
We also faced the continuing effect of our voluntary product recall announced in November 2019.
Volume was 12% lower.
Unit pricing was 2% lower and unit cost was 5% higher than the prior year period.
In our avocado category, net sales increased to $94 million compared with $89 million in the first quarter of 2019, primarily due to higher selling prices in North America as a result of lower industry supplies from Chile.
Also contributing to the increase in net sales were higher sales volume and selling prices in Asia, due to increased demand.
Partially offsetting this increase were lower sales volume in North America.
Pricing was 33% higher and unit cost was 44% higher than the prior year period, impacted by start-up costs from our new processing facility in Europe and Mexico.
In our vegetables category, net sales decreased to $39 million compared with $42 million in the first quarter of 2019, primarily due to lower sales volume and selling prices as a result of Mann Packing voluntary product recall and lower sales as a result of the COVID-19 pandemic.
Unit price was in line with the prior year period and unit cost was 9% higher.
In our non-tropical category, which includes our grape, berry, apple, citrus pear, peach, plum, nectarine, cherry and kiwi product lines, net sales increased to $62 million compared with $61 million in the first quarter of 2019.
Volume increased to 9%.
Unit pricing decreased to 7% and unit cost was 8% lower.
In our prepared for the product line, which includes the company's prepared traditional products and meals and snacks product lines, net sales decreased primarily due to the impact of the COVID-19 pandemic, product rationalization in our Mann Packing business and the continued impact of the 2019 voluntary product recall.
The decrease in net sales was partially offset by higher net sales in the company's prepared traditional product line.
Gross profit was impacted by lower sales volume in our meals and snacks product line.
In our banana business segment, net sales decreased to $5 million to $427 million compared with the $432 million in the first quarter of 2019, primarily due to lower net sales in Asia, Europe and North America, partially offset by higher net sales in the Middle East.
Asia was impacted by lower sales volume and port closures in China related to the COVID-19.
Europe banana net sales decreased due to lower industry supply in the beginning of 2020 and the impact of COVID 19 selling prices in March.
As compared with our regional expectations the COVID-19 pandemic affected banana net sales by an estimated $6 million during the quarter.
North America was also impacted by lower supplies from our Central America production area.
Overall volume was 1% higher than last year's first quarter.
Worldwide pricing decreased 2% over the prior year period.
Total worldwide banana unit cost was 1% higher and gross profit decreased to $25 million compared to $35 million in the first quarter of 2019.
Now moving to selected financial data.
Selling, general, administrative expenses during the quarter were $53 million compared with $54 million in the first quarter of 2019, mainly due to lower advertising and administrative expenses.
We expect our recent actions to reduce selling, general and administrative expenses to have a positive impact beginning in the second quarter.
The foreign currency impact at the gross profit level for the first quarter was unfavorable by $6 million compared with an unfavorable effect of $3 million in the first quarter of previous year.
In the month of March we entered in several fuel hedges that extend through the end of 2021 to take advantage of lower fuel prices to reduce the exposure of our shipping cost in the Americas and Asia.
Similar to our foreign currency hedges we have in place to reduce our exposure in different countries that we market our products.
These fuel hedges are intended to minimize our financial exposure to volatility in the market.
Interest expense net for the first quarter was $5 million compared with $7 million in the first quarter of 2019 due to lower debt levels and interest rates.
Income tax expense was $300,000 during the quarter compared with income tax expense of $9 million in the prior year.
The decrease in the provision for income taxes was primarily due to lower earnings in certain taxable jurisdictions.
The tax provision for the first quarter of 2020 also includes a $2 million benefit related to net operating losses carry back provision allowed through the recently enacted Coronavirus Aid Relief and Economic Security Act, the CARES Act.
For the first three months of 2020, our net cash provided by operating activities was $2 million compared with a net cash used in operating activities of $7 million in the same period of 2019.
The increase in net cash provided by operating activities was primarily attributed to higher balances of accounts payable and accrued expenses, partially offset by lower net income.
Our total debt increased from $587 million at the end of 2019 to $599 million at the end of the first quarter of 2020.
As it relates to capital spending, we invested $17 million on capital expenditures in the first quarter of 2020 compared with $34 million in the same period of 2019.
This concludes our financial review.
| q1 adjusted earnings per share $0.34.
expects volatility in supply & demand,reduced demand in foodservice distribution will adversely impact q2.
|
I'm Dan Glaser, President and CEO of Marsh McLennan.
Joining me on the call today is Mark McGivney, our CFO, and the CEOs of our businesses; John Doyle of Marsh; Peter Hearn of Guy Carpenter; Martine Ferland of Mercer and Scott McDonald of Oliver Wyman.
Marsh McLennan had an outstanding start to 2021.
Our first quarter results were excellent.
And we are well positioned for a very good year.
Even though the pandemic is ongoing, our underlying revenue growth of 6% is the highest in over 6 years and accelerated sequentially across every business.
We also grew adjusted earnings per share by 21% and generated significant margin expansion.
Our business has proven resilient throughout the pandemic and with the global economy now beginning to turn the corner, we saw an acceleration in our growth.
With 6% underlying growth to begin the year, we now expect full year 2021 underlying revenue growth to be at the high end of our 3% to 5% guidance range and possibly above.
As we look ahead, the outlook for the U.S. and many of the countries we operate in is encouraging.
However, many parts of the world continue to suffer with high levels of infection, and there is still a significant amount of uncertainty.
GDP in the U.S. was close to flat in the first quarter and strong levels of growth are expected starting in the second quarter due to a rebound in demand as the impact of vaccines takes hold along favorable economic comparisons to a year ago.
Meanwhile, in India, Brazil and many other parts of the world, case counts continue to rise and broad levels of vaccination remain a long way off.
Our proprietary Pandemic Navigator now forecast that the U.S. will achieve the herd immunity threshold by early to mid-summer, and we see a fairly similar timeline in the UK.
These milestones bring hope for reopening and economic growth, although it will vary by country.
We are also mindful that the risks exists and that there still are many unknowns such as variants of the virus, the efficacy of vaccines on the variants, the duration of immunity and vaccine hesitancy, but we are resilient and are confident we will be able to adapt to a wide range of scenarios, just as we have since the beginning of this crisis.
Our colleagues are our single largest competitive advantage.
We have world-class talent that has delivered for clients and one another throughout the crisis.
We continue to invest in hiring.
We are an employer of choice for smart, hard-working talented individuals and are adding to what is already the deepest talent pool in the industry.
We are also pressing ahead with acquisitions.
MMA made a significant acquisition on April 1st, PayneWest.
PayneWest was one of the largest independent agencies in the U.S. with more than 700 employees in 26 locations.
The acquisition adds nicely to our geographic footprint in the middle market space and brings the Northwest hub.
Overall, we are on track for a very good year.
Demand for our advice and solutions is strong.
The economy is recovering.
P&C insurance pricing remains firm, and we are benefiting from industry disruption.
Although the outlook remains uncertain, we are more optimistic than we were when we started the year and our efforts are focused on resurgence rather than recovery.
At the end of the first quarter, Marsh McLennan released our inaugural Environmental Social & Governance report.
Truly great companies must deliver both exceptional financial performance and be good employers and global citizens, and we are working on many fronts to advance the interests of all of our stakeholders.
We believe that starts with transparency.
Our report provides enhanced disclosure in a variety of ESG related areas from how we measure our own carbon footprint to how we use data to manage our workforce.
Our report highlights our commitment to a diverse and inclusive workplace.
In 2020, we launched our Leading the Change initiative to underscore the need to continuously nurture our inclusive culture and serve the fundamental principles of human dignity, equality, community and mutual respect.
We also strengthened our commitment to a better sustainable future through our pledge to be carbon-neutral this year along with the commitment to reduce our carbon emissions by 15% by 2025.
ESG issues are among the most critical challenges facing our clients today.
We are creating solutions for our clients related to complex business issues, such as climate change, diversity and inclusion, affordable healthcare, cyber security and responsible investing.
Marsh and Guy Carpenter are helping clients build resilience to flood risk and the documented increase in natural catastrophe perils witnessed in recent years.
Marsh and Guy Carpenter's experience in the alternative energy space has sparked innovation and been a growth driver.
Marsh designed in place the first of its kind policy for a European utility which set lower upfront premium payments based on the client's achievement of sustainability targets.
Oliver Wyman is actively advising its clients across sectors including banking, energy, industrials and transportation and managing the risks and capturing the opportunities associated with climate change and the transition to a low-carbon economy to a new climate and sustainability practice.
Away from climate risk, Mercer is helping address the gender pay gap, diversity and inclusion in the workplace, the workforce of the future and consulting on new normal strategies in the wake of the pandemic.
Overall, we see significant growth potential in the areas of ESG as well as an opportunity to benefit our clients, colleagues and communities.
Let me spend a moment on current P&C insurance market conditions.
The first quarter marks the 14th consecutive quarter of rate increases in the commercial P&C insurance marketplace.
The Marsh Global Insurance Market Index showed price increases of 18% year-over-year versus 22% in the fourth quarter.
The pace of price increases moderated sequentially in the first quarter after accelerating for 11 straight quarters.
However, the 18% increase is still one of the highest since we started publishing the index in 2012.
Global property insurance was up 15% and global financial and professional lines were up 40% while global casualty rates were up 6% on average and U.S. workers compensation rates were modestly negative.
Keep in mind, our index skews to large account business.
However, U.S. small and middle market insurance pricing continues to rise as well, although the magnitude of price increases is less than for large complex accounts.
Turning to reinsurance, the Guy Carpenter's Global Property Catastrophe Rate on Line index increased just under 5% at the January 1st reinsurance renewals.
For the April 1st renewals, Japanese property catastrophe pricing increased for the third year in a row, but at a more moderate pace versus prior years.
Meanwhile, pricing in terms and conditions in the U.S. on April 1st business were largely a continuation of the January 1st pricing environment.
Capacity is more than adequate and demand remains high.
However, reinsurance capacity remains constrained on certain lines of business, most notably for cyber risk.
Overall price increases continue to persist in both the P&C insurance and reinsurance markets.
Low interest rates, elevated loss activity and continued uncertainty related to the pandemic present challenges for underwriters.
Times of uncertainty underscore the need for our advice and solutions, and we are working hard to help our clients navigate these challenges.
Now let me turn to our first quarter financial performance, which represents an excellent start to 2021.
We generated adjusted earnings per share of $1.99, which is up 21% versus a year ago, driven by a combination of strong growth and the continuation of the suppressed environment for travel and entertainment expenses as we continue to operate largely remotely.
Total revenue increased 9% versus a year ago, and rose 6% on an underlying basis.
Underlying revenue grew 7% in IRS, and 3% in consulting.
Marsh grew 8% in the quarter on an underlying basis, the highest quarterly underlying growth since 2003, and benefited from double-digit new business growth.
Guy Carpenter grew 7% on an underlying basis in the quarter.
Mercer underlying revenue was flat in the quarter, which showed sequential improvement from the fourth quarter.
Oliver Wyman underlying revenue grew by 11% as demand accelerated.
Overall, the first quarter saw adjusted operating income growth of 20%, and our adjusted operating margin expanded 250 basis points year-over-year, reflecting positive operating leverage and favorable expense comparisons.
As we look out for the remainder of 2021, we are well positioned, given the strong demand for our advice and solutions, and our expectation for an improving economic backdrop.
As we mentioned, we now expect 2021 underlying revenue growth to be at the high end of our 3% to 5% range, and possibly above.
We also expect to generate margin expansion and strong growth in adjusted EPS.
As we mentioned last quarter, 2021 represents the 150th anniversary of Marsh McLennan.
As we look back on our storied history, once theme runs through it all.
This company steps up in the moments that matter, at times of war and peace, in eras of transcending innovation,in serving the public good.
In March, we changed our name from Marsh & McLennan Companies to Marsh McLennan.
It was a small, but important change that better reflects the way that our company has come together.
One company with 4 global businesses, united by a shared purpose to make a difference in the moments that matter.
The challenges before us all our vast.
It sower the possibilities, climate resilience, systemic risk, digital disruption, the protection gap, affordable healthcare, the future of work.
As we face this new world together, one thing will never change.
Marsh McLennan will be at our clients' side finding opportunity and navigating uncertainty in the areas of risk, strategy and people.
Our first quarter results were outstanding, and we are well-positioned for a very good 2021, despite the continued uncertainty associated with the pandemic.
Underlying growth accelerated across all of our businesses, and our margin expansion in earnings growth were impressive.
Consolidated revenue increased 9% in the first quarter to $5.1 billion, reflecting underlying growth of 6%.
Operating income and adjusted operating income were both approximately $1.4 billion.
Our adjusted operating margin increased 260 basis points to 29.6%.
GAAP earnings per share was $1.91, and adjusted earnings per share was $1.99, up 21% compared with the first quarter a year ago.
Looking at Risk & Insurance Services.
First quarter revenue was $3.2 billion, up 11% compared with a year ago, or 7% on an underlying basis.
It marks the highest level of underlying growth since 2012.
Adjusted operating income increased 17% to $1.1 billion, and our adjusted operating margin expanded 210 basis points to 36.6%.
At Marsh, revenue in the quarter was $2.3 billion, up 13% compared with a year ago, or 8% on an underlying basis.
This was Marsh's highest level of underlying growth in nearly 2 decades.
Growth in the quarter was broad based, and driven by double-digit new business growth, and solid retention, and was impressive considering Marsh's strong growth in the first quarter of last year.
The U.S. and Canada division delivered another exceptional quarter with underlying revenue growth of 9%.
This is the highest quarterly underlying growth U.S. and Canada has achieved since we began reporting their results.
And they have now averaged 6% underlying growth over the last 12 quarters.
In international, underlying growth was strong at 6%, marking the highest underlying growth since 2013.
EMEA was up 6% with strong results in each region, including in the UK.
Asia Pacific was up 8%, a strong rebound from the fourth quarter, and comes on top with 6% growth in the first quarter of 2020.
And Latin America grew 6% on an underlying basis, continuing to show sequential improvement.
Guy Carpenter's revenue was $895 million, up 8% or 7% on an underlying basis, driven by strong growth in North America, EMEA, Global Specialties and Latin America treaty.
Guy Carpenter has now achieved 5% or higher underlying growth in 12 of the last 14 quarters.
In the Consulting segment, revenue in the quarter was $1.9 billion, up 6% from a year ago, or 3% on an underlying basis.
Adjusted operating income was $370 million, and the adjusted operating margin expanded by 330 basis points to 20.5%.
At Mercer, revenue in the quarter was $1.3 billion, which was flat on an underlying basis.
Mercer's top line performance improved each month in the first quarter, and we expect Mercer to return to underlying growth in the second quarter.
Wealth increased 1% on an underlying basis, reflecting strong growth in investment management, offset by a modest decline in defined benefits.
Our assets under delegated management grew to approximately $380 billion at the end of the first quarter, up 42% year-over-year, or 6% sequentially, benefiting from net new inflows and market gains.
Health underlying revenue was flat in the quarter, but faced a tough comparison to 8% growth in the first quarter of last year.
And Career grew 1% on an underlying basis, reflecting strong sequential improvement.
At Oliver Wyman, revenue in the quarter was $585 million, an increase of 11% on an underlying basis.
First quarter results were a continuation of the momentum we started to see materializing in the fourth quarter.
Adjusted corporate expense was $57 million in the quarter.
Foreign exchange added approximately $0.06 to our adjusted EPS.
Assuming exchange rates remain at current levels, we expect FX to be a slight benefit in the second quarter with limited impact thereafter.
Our other net benefit credit was $71 million in the quarter.
For the full year 2021, we continue to expect our other net benefit credit will increase modestly year-over-year.
Investment income was $11 million in the first quarter on a GAAP basis, or $10 million on an adjusted basis, and mainly reflects gains in our private equity portfolio.
Interest expense in the first quarter was $118 million compared to $127 million in the first quarter of 2020, reflecting lower debt levels in the period.
Based on our current forecast, we expect approximately $114 million of interest expense in the second quarter.
Our effective adjusted tax rate in the first quarter was 24.3% compared to 23.2% in the first quarter of last year.
Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation, similar to a year ago.
Excluding discrete items, our effective adjusted tax rate was approximately 25.5%.
When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative.
Based on the current environment.
, it is reasonable to assume a tax rate between 25% and 26% for 2021.
Our current outlook for 2021 assumes the global economy returns to growth in the second quarter, with a strong recovery in the U.S. Based on this outlook and our strong first quarter performance, we now expect underlying revenue growth to be at the high end of our 3% to 5% underlying growth guidance, and possibly above.
We currently expect we will deliver margin expansion for the full year.
But as you think through the quarterly cadence, keep in mind, we have tough expense comparison in the second and third quarters.
This view is based on our outlook today and it goes without saying that conditions could turn out materially different than our assumptions, which would affect our projection.
Turning to capital management and our balance sheet.
So far this year, we have completed our JLT-related deleveraging, enhanced our short-term liquidity flexibility and seen S&P, Moody's and Fitch restore our rating outlook to stable.
We ended the quarter with $11.3 billion of total debt, which was consistent with the level at December 31st.
In April, we repaid $500 million of senior notes scheduled to mature in July, taking advantage of a prepayment option.
This repayment brought our debt down to $10.8 billion and completed our planned deleveraging, marking an important milestone for us.
Our next scheduled debt maturity is in January 2022 when $500 million of senior notes will mature.
Earlier this month, we entered into a new 5-year revolving credit agreement.
Under this new facility, we increased the credit available to $2.8 billion from $1.8 billion.
In addition, we increased the size of our commercial paper program and now have capacity to issue $2 billion, up from $1.5 billion previously.
We view these changes as prudent steps that enhance our liquidity profile and provide additional flexibility.
In the first quarter, we resumed share repurchases, reflecting our strong financial position and outlook for cash generation.
We repurchased 1 million shares of our stock for $112 million.
We continue to expect to deploy approximately $3.5 billion of capital in 2021 across dividends, debt reduction, acquisitions and share repurchases.
The ultimate level of share repurchases will depend on how the M&A pipeline develops.
As we've consistently said, we favor attractive acquisitions over share repurchases as we view high quality acquisitions is the better value creator for shareholders and the company over the long term.
Now that our deleveraging is behind us, we are back to our normal focus for capital management.
Our capital management strategy reflects balance and supports our consistent focus on delivering solid performance in the near term while investing for sustained growth over the long term.
For the capital we generate and target to deploy, we prioritize reinvestment in the business, both through organic investments and acquisitions.
However, we also recognize that returning capital to shareholders generate meaningful returns for investors over time, and each year we target raising our dividend and reducing our share count.
Our cash position at the end of the first quarter was $1.1 billion.
Uses of cash in the quarter totaled $392 million and included $237 million for dividends, $112 million for share repurchases and $43 million for acquisitions.
Overall, we had an outstanding first quarter positioning us well to deliver strong growth in both underlying revenue and adjusted earnings in 2021.
Operator, we are ready to begin Q&A.
| q1 adjusted earnings per share $1.99.
q1 gaap earnings per share $1.91.
q1 revenue rose 9 percent to $5.1 billion.
|
Before we begin, I'd like to direct you to our website, www.
Before we dive into the results of the quarter, I want to make a couple of quick announcements.
If you have not done so already, I would encourage you to read our letter to shareholders that was released a couple of weeks ago.
The letter, which is included in our 2020 annual report can be found on the Investor Relations section of our website.
It provides a good overview of our business and highlights the many accomplishments we've been able to achieve over the past year.
Correne joined us as Chief Financial Officer in April and brings a wealth of knowledge of financial expertise to the company.
She comes to us from Whiting Petroleum, having served as Chief Financial Officer.
There's no doubt Correne will play a vital role in driving the company forward as we look to continue the acceleration of the development across our portfolio.
I'm going to open the call today with remarks on the performance of our various business segments before handing it over to Jay Cross, who will provide updates on the Seaport in our strategic development pipeline.
Correne will then speak to our financial results, before concluding and opening up the call for Q&A.
As we've highlighted over the last several quarters, our MPCs are positioned in low cost, low tax states and offer best-in-class amenities that are attractive to both residents and tenants.
These amenity-rich communities are fully integrated with expansive open spaces and provide exceptional quality of life where individuals can live, work and play, all in one highly desirable setting.
And these characteristics are becoming more and more sought after in today's environment, which has allowed us to produce outsized results despite unforeseen circumstances brought on by COVID-19.
Consider for a moment The Woodlands.
In March, Niche.com ranked The Woodlands as the number one best city to live in America.
And today, all homes that are even close to move and ready are selling in off the market within three to five days.
This incredible achievement is a culmination of all the hard work and dedication that has been put into this community by The Woodlands team over the last few decades.
In Summerlin, Bridgeland and The Woodlands Hills, the pace of new home sales and appreciation of our residential land have been incredible, and have only accelerated further since the start of 2021.
This resiliency is a reflection of the demand that continues to strengthen within our communities and is a testament to the quality of the MPCs we are creating.
Even in Ward Village, where we sell premium condominiums to residents, the pace of sales has remained strong despite selling most of these units site unseen due to the travel restrictions brought on by the pandemic.
These are just some recent examples of the great momentum and the positive growth Howard Hughes is experiencing throughout its communities.
Now on to the results of the quarter.
We kick-started the year with a strong first quarter across all aspects of the business.
The acceleration of new home sales and condo sales displayed in the second half of 2020 carried into the New Year.
We also saw improvements within our operating assets that were impacted by COVID, which is very encouraging as we continue to see signs of recovery across our retail and hospitality portfolio.
During the quarter, we took steps to fortify our balance sheet and proactively issued $1.3 billion of senior notes in an effort to further diversify our funding sources, term out our debt maturities, and lower our overall cost of debt.
The combination of these events has allowed us to accelerate 2 million square feet of development in our core MPCs, and we continue to look for additional opportunities ahead.
Within our MPC segment, new home sales, a leading indicator for future land sales, increased a staggering 35%, selling 929 new homes, 241 homes above the same period last year.
MPC earnings before tax, or EBT, increased 44% to $63 million in Q1 of 2021 compared to Q1 of 2020, largely driven by higher custom lot sales in Summerlin and an increase in the number of units closed at The Summit, our joint venture with Discovery Land Company.
It is also important to highlight these results were achieved without closing a single super-pad sale in Summerlin during the quarter.
These figures showcase the volume of residents flocking to our communities, despite economic headwinds, that have negatively impacted the US economy for over a year.
We believe the robust demand in our MPCs will continue for at least the remainder of the year, which gives us the confidence to raise our full year MPC EBT guidance.
On our fourth quarter earnings call, we provided MPC EBT guidance for 2021 in a range of $180 million to $200 million.
Following the results of the first quarter, we are now targeting a range of $210 million to $230 million.
Correne will provide additional details on our MPC segment a bit later, as the increases in acres sold and price per acre provided the support to adjust our guidance.
Our operating assets performed well during the quarter with a 10% sequential increase in NOI across the portfolio.
One of the leading drivers of this increase was retail, which improved by 20% compared to the fourth quarter of 2020.
The largest factors contributing to this increase were driven by our two largest retail footprints, Ward Village and Downtown Summerlin with NOI rising 55% and 44%, respectively.
We've seen foot traffic steadily return to our retail locations, which has resulted in a corresponding increase in collections.
During the first quarter, collections improved to 78%, the highest retail collection rate since the onset of the pandemic.
These results are encouraging and demonstrate that we are well on our way to recovery as we move closer to pre-COVID levels.
Perhaps the hardest hit area of our operating asset portfolio over the past year was our hospitality assets in The Woodlands.
During the quarter, we nearly broke-even as we recorded a net operating loss of $147,000 compared to a net operating loss of $236,000 last quarter.
While our three hotels continue to make steady improvements, business and leisure travel still remain at significantly lower levels relative to what they were a year ago.
We've seen a slight increase in occupancy in our hotels over the last quarter, and we are hopeful this will continue throughout the year.
Last week, on May 6, our Minor League team, the Las Vegas Aviators, was fortunate enough to host its first game back in the Las Vegas Ballpark stadium.
This is a great step in the right direction.
And while circumstances are always subject to change, we are hopeful we will be able to host the remaining games on our schedule, which would have a meaningful impact on the overall contribution to our NOI.
If you recall in our last earnings call, the NOI guidance we provided for 2021 assumed the Ballpark would break-even, given the uncertainty surrounding COVID-19.
Hosting all of our scheduled games this season would certainly have a positive impact on our NOI, which would be concentrated in the second and third quarter of this year.
In addition to these positive improvements, we received the annual distribution from our 5% ownership stake in the Summerlin Hospital totaling $3.8 million, which further fueled the sequential rise.
These strong results were partially offset by sequential declines largely concentrated in our office and multi-family assets.
Office NOI declined 8% compared to the fourth quarter of 2020 largely attributed to space reductions by select tenants in The Woodlands in Columbia.
In total, our stabilized office occupancy dropped 3% since the fourth quarter.
Our leasing teams are proactively pursuing tenants across the country to fill these spaces with a strong focus on corporate relocations.
The NOI generated by our multi-family assets declined 12% sequentially, largely due to favorable property tax true-ups realized during the fourth quarter of 2020 that were not repeated this quarter.
We view this as a one-off event and do not expect this will be a common occurrence moving forward.
Despite the sequential decline, our latest multi-family developments in The Woodlands, Bridgeland, Summerlin and Downtown Columbia continue to lease-up ahead of projections.
The progression in NOI we are seeing across the portfolio plays a crucial part in our recovery from the pandemic.
As this NOI draws closer to pre-COVID levels, it will drive the net asset value of the company higher, unlocking meaningful value for our shareholders.
Our stabilized operating asset NOI target increased to $379 million in the first quarter, an increase of $17 million compared to the first quarter of 2020.
This increase exhibits the progress we've made over the last year with the construction commencement of several new assets ranging from multi-family to office and retail.
As we develop more projects and bring additional assets online, we look forward to increasing this target year in and year out as we strive to unlock the great value inherent in our commercial land.
Shifting over to Ward Village.
The pace of condo sales continues to show no sign of abating.
We contracted 46 units during the quarter, marking a sequential increase of 64%.
Within our completed towers, we closed on a total of five homes at Waiea and Anaha.
Waiea now has only three remaining units to be sold.
Anaha only had one unit remaining at the end of the quarter, which subsequently closed in April.
Anaha is now completely sold out.
We commenced construction during the quarter on our seventh tower, Victoria Place.
We closed on our $368 million construction loan for the development.
The pace of presales for this project is the fastest Ward Village has ever seen, with 85% of the tower already presold.
Said differently, we have only 15% of the tower left to sell between now and the time of completion, which is expected to be in 2024.
This dramatically decreases the overall risk of the project and gives us the ability to command premium prices for the remaining units that are in high demand.
Turning to the Seaport.
We concluded the winter season of The Greens in March.
This concept, which we only launched during this past summer, demonstrated strong results that have greatly benefited our sponsors.
During the first quarter, we served over 38,000 guests and had an average daily wait list of 3,000 people, while generating over $2 million in revenue.
During the first quarter, we made great progress preparing our latest concepts for the debut at the Seaport.
At Pier 17, we rebranded Bar Wayo, a JV owned restaurant with David Chang, which opened as Ssam Bar last month, and we're close to opening our two new concepts by Andrew Carmellini, Mister Dips and Carne Mare.
At the Fulton Market Building, we're preparing the former 10 Corso Como space for two new concepts announced last quarter, The Lawn Club and a restaurant for acclaimed chefs, Wylie Dufresne and Josh Eden.
All of these efforts will be fully maximized with the launch of the Tin Building, which remains on track to be completed by the end of the year, and we anticipate a grand opening in early 2022.
Finally, last week, we passed a significant hurdle in the land use approval process for 250 Water Street that Jay will describe in more detail, in addition to providing updates on our Strategic Developments segment.
Jay, over to you.
As David mentioned, we are seeing strong signs of demand within our communities, evidenced by the pace of new home sales, condo sales and lease-up of our latest multi-family developments.
From a development perspective, our strategy is only to build to meet underlying demand to never oversaturate our markets.
The quarter's results demonstrate the strong desire to live in our MPCs and the projects we have under way will allow us to capture this inflow of demand.
As of the end of April, we have commenced construction on the 2 million square feet of development that was announced in February, and so far, secured $494 million in construction loans to finance these projects.
In Ward Village, we broke ground at Victoria Place and expect to deliver this tower in 2024.
This premium 349-home development is on Ward Village's front row with unobstructed ocean views.
With 85% of the tower already presold, we could not be more pleased with the results of our local Hawaiian team.
We are now in the predevelopment phase for our next two towers and hope to announce the launch of our next presales campaign shortly.
Construction from Marlow is now under way in Downtown Columbia.
This mixed-use product will comprise 472 apartment units and 32,000 square feet of ground floor retail.
Its location is directly adjacent to our latest multi-family asset in the area of Juniper.
Juniper was delivered back in the first quarter of 2020 and is already 80% leased, which has exceeded our projections.
Howard County has restricted multi-family supply due to school capacity that we are exempt from, which gives us the confidence that the leasing amount in Juniper will yield similar results at Marlow, another example of how our development inventory allows us to respond nimbly to market demand in our regions.
Moving over to Bridgeland.
We began construction last quarter on our 358-unit project Starling and secured financing for the project in April.
This is only our second multi-family project in Bridgeland and like Marlow in Columbia follows on the success of Lakeside Row, which opened during the fourth quarter of 2019, and is already 94% leased only after one year in operations.
Starling is the first project launched in what will be our new town center, Bridgeland Central, where we plan to accelerate development over the next few years.
Finally, in Summerlin, we have already announced two new projects, which commenced construction in April.
Our multi-family product, Tanager Echo and our next office building, 1700 Pavilion.
We look forward to bringing these assets online quickly as their predecessor projects, Tanager and two Summerlin office buildings are both 100% leased.
At the Seaport, as David mentioned, we received approval last week from the New York City Landmarks Preservation Commission on our proposed design for a building on the site of the surface parking lot at 250 Water Street.
This favorable ruling confirms that the proposed architecture is appropriate for the Seaport historic district and allows us to proceed with the formal New York City Uniform Land Use Review Procedure, known as ULURP.
Through this process, approval from the New York City Planning Commission will be required to allow us to complete the necessary transfer of development rights to the parking lot site.
This project presents a unique opportunity at the Seaport to transform this last available development site into a vibrant mixed-use asset.
The plan, as proposed, will provide long-term viability to the South Street Seaport Museum and deliver much needed affordable housing and economic stimulus to the area.
We will continue working with the city to advance this process over the coming calendar year, with the goal of bringing these additional benefits to this one-of-a-kind neighborhood.
During the quarter, the Seaport reported an operating loss of $4.4 million, which was largely unchanged from the same quarter last year.
While NOI was largely the same year-over-year, the revenues and corresponding expenses during the first quarter of 2021 were comparatively lower.
This was due, of course, to the impact of COVID-19 that still exists in New York City.
Capacity restrictions have limited the amount of seating in our restaurants.
Foot traffic has declined within our retail locations and social distancing requirements limited our ability to maximize the entire space of the Pier 17 Rooftop.
Despite these challenges, we still had a good quarter with continued success at The Greens and making further progress in the construction of the Tin Building.
As New York City begins to slowly reopen, we are in a strong position to capitalize on the city's post-COVID return to normalcy.
We have several new concepts gearing up to launch soon at Pier 17 and the Fulton Market Building.
And in 2022, we plan to have a grand opening for the Tin Building, which will bring increased foot traffic to the area.
We believe the combination of project completions and the reopening of the Manhattan economy will make the Seaport, one of the premier entertainment and food and beverage destinations in all of Manhattan.
With 2 million square feet of new development under way, we are actively seeking out future opportunities where we can put our capital to work.
One of the ways to do this is by introducing new product types, which will further diversify our portfolio.
Over the next few quarters, we hope to announce new projects throughout our master-planned communities in categories such as single-family for rent, medical office, new timber office buildings, senior housing, residential condos and cultural amenities.
This type of development will enhance our communities, increase our stream of recurring income and ensure that we're putting forth maximum effort to deliver outsized returns for our shareholders.
I'm happy to be joining all of you today on my first HHC earnings call.
I look forward to meeting most of you over the next several months through upcoming conferences, roadshows and meetings.
I'm going to start with a review of our MPC and Strategic Development performance, then we'll turn to our financial results and balance sheet.
With the start of the year, our MPCs across the country continued to experience tremendous growth.
We achieved year-over-year growth in new home sales, price per acre of residential landfills and MPC EBT compared to the first quarter of 2020.
New home sales accelerated quickly during the first quarter with 929 new homes sold in our community, 35% more compared to the first quarter of 2020 and 34% higher than the fourth quarter of 2020.
This is an incredible pace that persists since the latter half of 2020, and we see this trend continuing.
Land sales, however, were down 5% in the first quarter with 54 acres sold versus 57 acres sold in the first quarter of last year.
This is attributed to fewer lots sold in Bridgeland and no super-pads sold in Summerlin, which, as we've always said, are very lumpy quarter-to-quarter and should be evaluated on an annual basis.
The fact that land sales were only down 5% without closing on a single super-pad highlights the strength of the quarter for our MPC.
MPC EBT, which is a metric of profitability we look at for the segment, increased 44% compared to the same period last year.
This uptick in earnings was mostly the result of higher custom lot sales and increased units closing at The Summit, our 555-acre, members-only community in Summerlin.
During the quarter, The Summit closed on 19 units versus six units closed during first quarter of 2020, a substantial increase that helped drive quarterly MPC EBT to $63 million.
Summerlin had a breakout quarter with new home sales higher by 41% in the first quarter of 2021 versus the same period in 2020.
In addition, price per acre in Summerlin residential land grew 13% or $199,000 to $1.7 million per acre for the first quarter of 2021, as compared to the first quarter of 2020.
This also compares very favorably with the $762,000 per acre achieved last quarter.
This increase was attributed to selling only custom lots as opposed to a typical quarter where the majority of our sales are generated through the sale of super-pads.
Summerlin has been a huge beneficiary of the recent migratory patterns of homebuyers leaving high-cost, high-tech states like California.
We see no indication of this trend slowing anytime soon.
Further, we believe the growth demonstrated within Summerlin is sustainable as the broader Las Vegas economy improves.
Bridgeland continues to demonstrate excellent results in the first quarter.
New home sales grew 33% when compared to the same quarter last year, and price per acreage of residential land increased from $439,000 in the first quarter of 2020 to $459,000, a 5% increase.
The influx of homebuyers to Bridgeland have been impressive, and we have reason to believe this momentum will continue.
Similar to what we have seen in Summerlin, the surrounding Houston economy has improved since the lows of last year in oil prices and the overall energy markets have improved.
We view this as a strong catalyst for continued growth in home sales.
While land sales were below the first quarter of 2020, the momentum in new home sales confirms demand is still robust, and we expect strong results through the balance of the year.
In Woodlands Hills, new home sales more than doubled from 41 homes in the first quarter of 2020 to 84 homes this quarter.
Similarly, The Woodlands Hills sold 16 acres of land during the quarter, representing a 92% increase when compared to the same period last year.
In addition, we continue to see steady increase in the price per acre of our residential land sold to homebuilders.
Price per acre of residential land increased from $303,000 in the first quarter of 2020 to $307,000 this quarter.
Although these numbers are from a lower starting basis, given this is our least mature community, the results are an encouraging sign of future expansion ahead as we have only just scratched the surface in terms of residential land sales.
In our Strategic Developments segment, the demand for our homes in Ward Village remains robust.
We contracted 46 units during the quarter, of which 30 units were from Victoria Place.
The sales pace at this tower has been incredible with 85% of the units presold, and we are only just starting construction.
During the quarter, we closed on a $368 million construction loan for this project at LIBOR plus 500 basis points with an initial maturity date of September 2024, and two one-year extension options.
This 85% presold tower has hard deposits from buyers that can be used to fund construction.
Our other two towers under construction, 'A'ali'i and Ko'ula, are making strong progress and are 86% and 79% presold with estimated completions expected at the end of 2021 and 2022, respectively.
During the quarter, we closed on five units between Waiea and Anaha generating $35 million in sales.
Subsequent to the quarter end, we closed on the last remaining unit at Anaha, which is now completely sold making this Ward Village's third sold-out tower, only three units remain at Waiea.
It is important to note that $20 million was charged during the quarter related to additional anticipated costs to repair construction defects previously identified at Waiea.
This is comparison to the $98 million charge in the first quarter of 2020 for the estimated repair costs related to this matter.
As we previously stated on last year's earnings call, we believe the general contractor is ultimately responsible for the defects, and we expect to recover all the repair costs from the responsible parties.
Taking a look at GAAP earnings.
For the first three months ended March 31, 2021, we reported a net loss of $67 million or $1.20 per diluted share, compared to a net loss of $125 million or $2.88 per diluted share during the first quarter of 2020.
The year-over-year improvement was accredited to a stronger result in our MPC and Strategic Developments segments, in addition to no impairment charges during the quarter compared to a $49 million impairment charge against the outlet collection at Riverwalk during the same period last year.
This was partially offset by a loss on the early extinguishment of debt due to the repurchase of the company's $1 billion senior notes due 2025 and the repayment of the loans for 1201 Lake Robbins and The Woodlands Warehouse in February following our $1.3 billion bond offering.
We also reported lower NOI from our operating assets, largely related to the expiration of a short-term lease at The Woodlands tower that ended in June of 2020, as well as lower operating performance from our COVID-impacted assets within retail and hospitality.
Excluding our loss on the early extinguishment of debt and non-recurring items, HHC would have reported a net loss of $31 million or $0.56 per diluted share during the first quarter of 2021.
The bond offering, I mentioned, is just an example of Howard Hughes's opportunistically approaching the high-yield market at the right time.
This successful issuance allowed the company to reduce its annual interest expense by $11 million with the refinancing of its 2025 notes and extended out its maturities by an additional two years.
Further, the issuance was offered across two separate tranches, which allows us to manage our future refinancing needs.
The offering includes a $650 million eight-year issuance due 2029 at a rate of 4.125% and a $650 million 10-year issuance due 2031 at a rate of 4.375%.
This bond offering increased our unencumbered book value of assets by over $300 million, further reduced our cost of debt and extended our maturity profile.
Our nearest debt maturity is not due until October of 2021, which is our $28 million loan on the outlet collection at Riverwalk.
Following the end of the quarter, we closed on several construction loans in order to ensure that we are well positioned for the strategic development activity Jay discussed earlier.
This included construction loans on our multi-family project in Bridgeland and Downtown Columbia.
In April, we secured a $43 million construction loan for Starling at Bridgeland, which bears an interest at LIBOR plus 275 basis points and matures in May of 2026 with an option of a one-year extension.
We also closed on an $83 million construction loan for Marlow, which bears an interest of LIBOR plus 295 basis points and matures in April of 2025 with an option of a one-year extension.
In Summerlin, we also closed on a $59 million loan, which replaces the existing construction loan for Tanager.
This loan was closed in April and bears interest at 3.13% and matures in May of 2031.
Finally, we closed out the quarter with over $1 billion of liquidity, which includes $976 million of cash on hand and $185 million of availability under our lines of credit.
Our net equity requirement for projects under construction totaled $504 million at the end of the first quarter.
When you account for the construction loans we closed in April, this equity commitment drops further to $379 million.
Given the strength of our liquidity position, we have more than enough capital to meet all of our current funding requirements and are well positioned to capitalize on additional opportunities that lie ahead.
The results delivered during the quarter speak to the demand we are seeing with our communities across the country.
Significant increases in new home sales and condo sales point to the desire residents have to live in our highly amenitized, award-winning master plan communities.
The performance of our retail and hospitality assets in the form of higher collections and increased occupancy proves the road to recovery is rapidly improving.
We have opportunities in place to capture the growing demand we are seeing across the portfolio, and our strong liquidity position will allow us to further accelerate this momentum as we continue to unlock value for our shareholders.
We look forward to updating you on our progress throughout the remainder of the year as we continue to deliver unmatched results and successfully grow our communities.
We will now turn to the Q&A section of the call.
We will answer the first few questions that have been generated by state technology and will be read by Dave Striph.
Dave can you read the first question?
| howard hughes q1 loss per share $1.20.
q1 loss per share $1.20.
|
Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
The resiliency of Barnes Group was apparent once again this quarter as we grew sequential revenues for the second consecutive quarter and delivered adjusted earnings per share above the high end of our October outlook.
Given the historic challenges resulting from the global pandemic for most of 2020, I'm very proud of the many contributions of our 5,000 employees across the globe who stepped up to the challenge by going above and beyond to meet the needs of our customers and support our communities.
And while I am happy with our performance, given the significance of the disruption, we at Barnes Group, remain mindful and respectful of the personal and social hardships caused by the pandemic across the world.
From the onset, our response to the pandemic was structured around four phases.
First and foremost, the health and safety of our employees.
Second, adjusting the business for the stark realities of lower demand.
Third, anticipating and adapting to structural shifts in some of our end markets.
And fourth, making key strategic investments to position Barnes Group for an economic recovery.
While we moved our current -- while we have moved our current focus to Phase 4, we have not lost sight of the first three phases as they continue to be important.
Through 2020, one thing that has remained unchanged is our vision to be a leading global provider of highly engineered products, differentiated industrial technologies and innovative solutions serving our diversified end markets.
For the fourth quarter, organic sales were down 21%, primarily as a result of lower volumes given the pandemics' continuing impact on our end markets, especially at Aerospace.
The fourth quarter saw a 7% increase over the third quarter with both segments generating sequential sales improvement.
Adjusted earnings per share were $0.36, down 58% from last year.
Though, as mentioned, just above the high end of our October outlook.
Looking at the full-year, organic sales were down 22%, while adjusted earnings per share were $1.64, down nearly 50% from a year ago.
As difficult as those numbers are, early cost actions and a focus on cash generation, allowed us to maintain double-digit margins, positive earnings and strong cash flow throughout the year.
As we turn the page on 2020, our mindset is shifting and our focus has returned to driving growth, both organically and through acquisitions.
With a keen focus on our strategic filters, we continue to explore enabling technologies and market-leading businesses that would complement our current portfolio with several potential targets in the pipeline being analyzed.
We remain enthusiastic in our pursuit of value adding transactions, that strategically advance our transformation.
More immediately, an emphasis on organic investments will target growth-orientated capital expenditures, research and development efforts and further build out of our newly established innovation hub capabilities.
While these investments will influence margins in the short-term, they are instrumental to position the Company more favorably for the long run.
It's my expectation that we'll be talking frequently about our innovation and digital initiatives as we progress through 2021.
Moving now to a discussion of end market dynamics, beginning with Industrial.
At Industrial, we see the continuation of favorable trends discussed on our last call.
Manufacturing PMIs in our major geographic markets remain strong and correspondingly, we've seen fourth quarter organic orders at Industrial grow 10% over a year ago.
Sequential Industrial orders were up 9% over the third quarter and segment book-to-bill was slightly better than 1 times.
So, as we think about our Industrial expectations for the upcoming year, we feel bullish about the prospects for this part of our business.
Molding Solutions generated very strong orders in medical end markets, both year-over-year and sequentially, each with well over 50% growth.
Medical sales lagged a bit in the quarter given a very challenging comparable and the timing of deliveries.
We see that is normal given the nature of this business and expect sales to bounce back by the second quarter.
Packaging orders were very strong on both a year-over-year and sequential basis.
Sales were up over 20% from a year ago.
Meanwhile, personal care orders took a dip in the quarter and sales were slightly down versus a year ago.
However, sequential sales were strong increasing over 20%.
Our Synventive business, which is predominantly automotive hot runners, saw a modest increase in orders, both year-over-year and sequentially.
Although sales were relatively flat to a year ago, they were up 20% sequentially.
All-in, our expectations for 2021 is organic sales growth to be up in the low-double digits for Molding Solutions.
Sheet metal forming markets also continue to see a rebound, as Force & Motion Control orders were up high-single digits over last year and up high-teens over the third quarter.
While sales were down modestly from a year ago, sequential sales were up in the high-single digits.
We forecast Force & Motion Control to generate organic sales growth in the low-double digits for 2021.
At Engineered Components, organic orders were up nearly 20% on a year-over-year basis, with organic sales up mid-single digits versus a year ago.
Total sales were up high-single digits sequentially, continuing a rebound that we've seen over the last couple of quarters.
With General Industrial Markets on the upswing and global automotive production forecasted to be up meaningfully in 2021, we anticipate Engineered Components to grow high-single digits organically.
That said, we are very mindful about the current impact semiconductor shortages are having on automotive production and we will monitor that situation carefully as it unfolds.
Looking next at our Automation business.
It continues to demonstrate signs of a positive rebound as mid-single-digit orders growth over a year ago and third quarter were achieved.
Total sales growth was strong with both year-over-year and sequential growth of 20%.
Like last quarter, demand for our end-of-arm tooling solutions in automotive, and medical and pharma applications remain solid.
We expect 2021 to deliver low-double-digit organic growth as these markets remain healthy and as we launch new innovative products.
Speaking of new products, as I mentioned earlier, our investments in innovation and R&D are aimed at providing a solid foundation for organic growth.
As an example, we recently launched our comprehensive vacuum solutions product line with complete gripping solutions, advanced control systems and high-quality components.
The vacuum product range consists of about 1,100 items, including high-performance suction cups, vacuum pumps, sensors and related accessories that allow our customers to handle different objects in various industrial sectors with low energy consumption and reduce downtime.
Overall, for the Industrial segment, we see 2021 organic growth in the low-double-digit range with adjusted operating margins of 12% to 14%.
Moving now to our Aerospace business.
For the fourth quarter, Barnes Aerospace sales were down nearly 40% at OEM and nearly 50% in the aftermarket from the prior year.
Not surprising as commercial aviation remains significantly disrupted by the global pandemic, our outlook for Aerospace is certainly not as bullish as for our Industrial businesses.
That being said, we continue to believe the trough quarter of sales is behind us.
With OEM, production levels of narrow-body aircraft are expected to improve from here modestly, although wide-bodies will remain pressured.
The journey back to pre-COVID levels will most likely take a few years.
The OEM silver lining for the fourth quarter was book-to-bill of 1.6 times relative -- reflective of the strongest orders quarter since the third quarter of 2019.
One last point on our Aerospace business, OEM business, in particular, our estimates of OEM sales per aircraft for our major programs are unchanged from our prior view except for the 737 MAX.
With the award of the long-term agreement with GE Aviation on the LEAP program, mentioned on last quarter's call, we now forecast approximately $100,000 of sales per aircraft, up from our previous estimate of $50,000.
For the aftermarket, many of the factors discussed last quarter, lower aircraft utilization, weakened airline profitability and government imposed travel restrictions are still affecting the industry.
Recovery will require more widespread vaccine distribution, allowing people to feel more comfortable about flying, combined with the lifting of the various travel restrictions that currently exist.
Only then will we see commercial flights return in earnest, likely led by domestic travel, while international flights are expected to take a little longer to resume.
Until then, we anticipate aftermarket volume to remain pressured.
However, we do expect aftermarket activity to gradually improve beginning in the second half of 2021.
With that as the backdrop, for 2021, we see OEM sales up mid-single digits over 2020, with MRO down mid-single digits and spare parts down in the mid-teens.
We anticipate 2021 segment operating margin to be in the range of 13% to 14%, surely compressed by the lower aftermarket expectation.
In line with our continued focus on addressing the various topics of interest to our stakeholders, you may recall that last quarter on the topic of ESG, I took a few moments to address our commitment to make Barnes Group a more sustainable, socially responsible and diverse and inclusive Company.
While we've made great progress, there's definitely more work to be done.
Related to our ESG efforts, I'm proud to highlight that Barnes Group was recently named as one of America's Most Responsible Companies by Newsweek.
This acknowledgment is a testament to our employees across the globe who embrace our Barnes Group values each and every day.
So, to conclude, the extraordinary disruption in 2020 required many businesses to play defense, including Barnes Group, securing employee safety, keeping our essential operations running, adjusting to the lower demand -- levels of demand, focusing on costs and preserving liquidity were of paramount importance.
Given the circumstances, the financial results achieved are indicative of the quick and decisive actions taken by the strong leadership team and talented workforce at Burns.
With the arrival of 2021, we now turn to a more offense minded view, increasing our investments in innovation, research and development and growth programs across the enterprise.
While the high level of economic uncertainty still exists, we are squarely focused on controlling our own destiny, seeking out new opportunities and setting the Company up for long-term profitable growth.
Let me begin with highlights of our fourth quarter results on Slide 4 of our supplement.
Fourth quarter sales were $289 million, down 22% from the prior year period, with organic sales declining 21% as continuing impacts from the pandemic affect our end markets.
The diversified Seeger business had a negative impact of 3% on our net sales for the fourth quarter, while FX positively impacted sales by 3%.
Operating income was $32.7 million versus $61.3 million a year ago.
Adjusted operating income was $32.9 million this year, down 48% from $63.5 million last year.
Adjusted operating margin of 11.4% decreased 580 bps.
Net income was $17.7 million, or $0.35 per diluted share, compared to $41 million, or $0.80 per diluted share a year ago.
On an adjusted basis, net income per share of $0.36 was down 58% from an $0.86 a year ago.
Adjusted net income per share in the fourth quarter of 2020 excludes $0.01 of residual restructuring charges from previously announced actions with most of the impact reflected in other expense not operating profit.
For the fourth quarter of 2019, adjusted net income excludes a favorable $0.05 adjustment related to the finalization of Gimatic short-term purchase accounting and an $0.11 non-cash impairment charge related to the divestiture of Seeger, both in our Industrial segment.
Moving to 2020 full-year highlights on Slide 5 of our supplement.
Sales were $1.1 billion, down 25% from the prior year.
Organic sales were down 22% for the year.
The Seeger divestiture negatively impacted sales by 3%, while FX had a minimal positive impact.
Operating income was $123.4 million versus $236.4 million a year ago.
On an adjusted basis, operating income was $144 million this year versus $244.1 million last year, a decrease of 41%.
Adjusted operating margin decreased 360 bps to 12.8%.
For the year 2020, interest expense was approximately $15.9 million, a decrease of $4.7 million as a result of lower average borrowings and lower average interest rates.
Other expense was $5.9 million, a decrease of $3 million, primarily as a result of lower FX losses this year as compared to last year, partially offset by higher pension expense.
The Company's effective tax rate in 2020 was 37.6% compared with 23.4% last year, with the increase largely due to a decline in earnings in jurisdictions with lower rates, the recognition of tax expense related to the completed sale of the Seeger business during the first quarter of 2020, the impact of the global intangible low-taxed income or guilty tax on foreign earnings in the US and tax charges related to prior year's stock awards.
For 2020, net income was $63.4 million, or $1.24 per diluted share, compared to $158.4 million, or $3.07 per diluted share a year ago.
On an adjusted basis, 2020 net income per share was $1.64, down 49% from $3.21 in 2019.
Adjusted earnings per share for 2020 excludes $0.27 of restructuring costs and $0.13 of Seeger divestiture adjustments.
While 2019 adjusted earnings per share excludes $0.03 of Gimatic short-term purchase accounting adjustments and an $0.11 non-cash impairment charge related to the disposition of the Seeger business.
Turning to our segment performance, beginning with Industrial.
Fourth quarter sales were $209 million, down 9% from a year ago.
Organic sales decreased 8%.
Seeger divested revenues had a negative impact of 5%, while favorable FX increased sales by 4%.
Sequential sales were up 6% from the third quarter.
Industrial's operating profit for the fourth quarter was $24.5 million versus $30.2 million last year.
As has been the consistent theme since the second quarter, the primary driver is lower sales volume, offset in part by our cost mitigation efforts.
On an adjusted basis, which excludes a small amount of restructuring charges and Seeger divestiture adjustments, fourth quarter operating income was down 24% to $24.7 million and adjusted operating margin was down 230 bps to 11.8%.
For the year, Industrial sales were $770 million, down 18% from $939 million a year ago, with organic sales down 14%.
The Seeger divestiture had an unfavorable sales impact of 5%, while favorable foreign exchange had a positive impact of 1%.
Operating profit of $66.6 million was down 42% from the prior year.
On an adjusted basis, operating profit was $85 million, a decrease of 30% from last year.
Adjusted operating margin was 11%, down 200 bps.
Sales were $80 million for the quarter, down 43% from last year and operating profit was $8.2 million, down 74%, primarily driven by the lower sales volume.
Operating margin was 10.2% as compared to 22.3% a year ago.
All-in, especially considering the meaningful decline in the high-margin aftermarket, the Aerospace team continues to respond well in a challenged environment.
For the full-year, Aerospace sales were $354 million, down 36% from a record $553 million a year ago.
Operating profit was $56.8 million, down 54% from last year's record $122.5 million.
On an adjusted basis, which excludes $2.3 million in 2020 restructure charges, operating profit was $59 million and adjusted operating margin was 16.7%.
Aerospace OEM backlog ended the quarter at $572 million, up 7% from the third quarter and we expect to ship approximately 45% of this backlog in 2021.
2020 cash provided by operating activities was $215 million, a decrease of approximately $33 million versus last year.
Nonetheless, solid performance in the current environment, given our focus on driving working capital improvement.
Free cash flow was $175 million versus $195 million last year and capital expenditures of $41 million were down approximately $13 million from a year ago.
Regarding the balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was approximately 3 times at quarter end.
The Company is in full compliance with all covenants of our credit agreements and maintained adequate liquidity to fund operations.
As a reminder, the Company amended on a temporary basis, the debt limits allowed under our credit agreement.
Through the third quarter of 2021, our senior debt covenant maximum, our most restrictive covenant, has increased from 3.25 times EBITDA, as defined, to 3.75 times.
We anticipate leverage to peak with our first quarter 2021 results, though, well below the amended covenant level.
Our fourth quarter average diluted shares outstanding was 51 million shares and our share repurchase activity remains suspended.
Turning to Slide 6 of our supplement, let's now discuss our initial outlook for 2021.
We expect organic sales to be up 6% to 8% for the year.
FX is not expected to have a meaningful impact.
Adjusted operating margin is forecasted to be between 12% and 14%.
We expect a couple of pennies worth of residual restructuring charges to come through, likely split evenly in the first and second quarters.
Adjusted earnings per share is expected to be in the range of $1.65 to $1.90, approximately flat to up 16% from 2020's adjusted earnings of $1.64 per share.
We do see a higher weighting of adjusted earnings per share in the second half with a 40% first half, 60% second half split.
In particular, we see the first quarter of 2021 being the low quarterly point, given delivery schedules in our longer cycle business in the range of $0.27 to $0.32, significantly lower than last year's strong first quarter.
A few other outlook items.
Interest expense is anticipated to be between $16.5 million and $17 million.
Other expense approximately $8.5 million driven by pension, and effective tax rate of approximately 30%.
Capex of $55 million.
Average diluted shares of approximately 51 million shares and cash conversion of over 100%.
To close, 2020 certainly was historic in terms of business disruption.
The Barnes Group team rose to the occasion to rapidly adapt to the realities of the economic environment with a focus on cost management and cash generation.
As Patrick mentioned, it's now time to shift our mindset to growth with necessary investments in key initiatives like innovation and digital that are targeted to help us accelerate through the anticipated recovery.
Our balance sheet is supportive of such investments and our sales volume and, as our sales volume returns, we expect further margin expansion as well.
| barnes group q4 gaap earnings per share $0.35.
q4 adjusted earnings per share $0.36.
q4 gaap earnings per share $0.35.
q4 sales $289 million versus refinitiv ibes estimate of $282.8 million.
sees 2021 organic sales growth of +6% to +8%.
sees 2021 adjusted earnings per share of $1.65 to $1.90; approximately flat to up 16% from 2020 adjusted eps.
barnes group - as 2021 unfolds, anticipate organic revenue growth to return for industrial business, while aerospace is expected to remain pressured.
|
Such statements are based upon current information and management's expectations as of this date and they are not guarantees of future performance.
As such, our actual outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
Relieved that one of the most difficult years in the company's 100-year history is behind us and optimistic considering market share gains accomplished during the first fiscal quarter of 2021 and strengthening oil prices, which enhanced financial health of our customers.
We entered the new year, with 94 rigs running in U.S. land that's double the number we had in August, and the upward trend continues.
Around this time last year VTI prices were trading in the low-50s there were approximately 800 rigs operating in the U.S. land market and H&P was operating in a 194 of those rigs.
Contrast that with today, where oil prices are up over 10%, up into the upper 50s and the industry rig count is approximately 415 rigs and H&P is running 103 FlexRigs.
Obviously, a lot of happened between these two data points, and it shouldn't surprise anyone that the short and medium term activity outlook from E&P companies is taking a while to take shape.
However, if market expectations for U.S. production levels continue to drop that should have a positive impact on oil prices, which further supports consensus of expectations for approximately 500 active rigs in the U.S. at year-end.
Taking this a step further, by our count, there are approximately 630 super-spec rigs available in the U.S. market.
Looking forward, we believe the vast majority of all working rigs drilling horizontal wells will continue to trend toward the super-spec classification and if activity does reach 500 rigs, the industry rig count would begin to approach utilization levels that have historically provided pricing power.
Today, we are hopeful and encouraged by the recent worldwide deployment of COVID-19 vaccines.
We are encouraged with an improving crude oil price picture and we're encouraged by the progress we continue to make on strategic efforts to deploy additional digital technology solutions and to advance new commercial models.
Even with the early success of vaccines for COVID-19, there remains a significant level of uncertainty regarding the global economic recovery as well as the changing political environment, and that certainly tempers our short-term optimism.
While it's encouraging to see oil prices higher than expectations, we are cognizant that even in a stable or improving environment, there remain several challenges ahead for the industry.
We are encouraged seeing the industry rig count begin to recover, the customers are still in the budgeting process to determine their capital allocation and those levels will set the tone for activity during the remainder of 2021.
We do expect public E&Ps to maintain financial discipline, related to their announced budgets.
We also expect private E&Ps to add rigs, however, we don't expect an outsized increase in fiscal '21 rig count, even if oil prices reach $60 per barrel.
A return-driven capital allocation strategy is in the best long-term interest of our industry, and that's what we're aiming to support with our solutions based offering.
H&P has a differentiated customer-centric approach of combining our people, rigs and leading-edge automation technology, which enables us to deliver the highest value wells for our customers.
And underlying principle of our performance contracts is the creation of a sustainable win-win scenario based not only on efficiency, but also by employing the advantages of automation related to wellbore quality and placement.
Our patented drilling automation software is a key driver in improving well economics for the customer by enabling the drilling of consistently higher quality and better placed wellbores throughout the drilling program.
To-date our autonomous AutoSlide technology is deployed on 25% to 30% of our FlexRig fleet and we currently have similar percentages for performance-based contracts.
Automation solutions improve the drilling efficiency of the well, but it also has a significant influence on the lifetime value of the asset by delivering a better wellbore to the completion phase, which will ultimately enhance production economics.
When successful, the combination of the FlexRig and digital technology solutions leads to superior well economics by lowering risk and increasing returns, for our customers, as well as for H&P.
We can't control the macro challenges, but we can remain laser focused on our technology solution deployment, our performance-based contracts and our value accretion for customers.
We're encouraged that several customers have adopted these new solutions, but we recognize that more work is ahead, an additional efforts aimed at change management must occur within the industry.
Accordingly, improvements in technology solutions and performance-based contract adoptions are not likely to be linear and may not always correlate with our rig count.
That said, we're seeing remarkable progress as being made today and we're steadfast and confident in our ability to lead and effect change in our industry.
I'm very pleased with our people's service attitude and the ability to quickly respond to customer demand and improve activity by roughly 35% during the first fiscal quarter.
Our market share today is back to pre-pandemic levels.
We are adding back more rigs in the competition due to our proven ability to reactivate rig safely, efficiently and cost effectively.
We believe there is an opportunity to grow our market share above 25%.
If you look at previous downturns we have faced since the 2008 Financial Crisis, we have emerged stronger with greater capability as we differentiated our offerings and grew market share in the premium part of the market.
Going forward, in a structurally smaller U.S. market, we believe super-spec rigs combined with digital technology solutions that provide improved value through wellbore quality will prevail.
Relative to the 800 rig drilling a year ago, many idle SCR and less-capable AC rigs may be permanently sidelined.
Further, not all of our competitors with super-spec rigs have the ability to enable firm coordination[Phonetic] features that many customers are beginning to require.
In the super-spec classification segment, we have approximately 37% of the U.S. capacity with 234 super-spec FlexRigs that are unique with their digital technology capability across our uniform fleet.
Another aspect of our asset deployment strategy, we plan to execute, will occur over the medium to long-term in international markets.
That strategy is to opportunistically reduce our U.S. super-spec concentration over time by deploying rigs internationally for appropriately scaled contracts.
Our international business development team is seeing some bidding activity in Argentina, Colombia, the Middle East as well as other markets.
At this time, these prospects are in early stages, but we are encouraged by the customer interest in H&P FlexRigs due to a combination of our expertise and unconventional drilling.
Our strong historical performance in these areas and the need for, what we would consider an imminent legacy rig replacement, driven by an evolution toward digital technology for wellbore quality and placement.
These are great opportunities for H&P in addition to our initiatives to improve our cost structure, where Mark will provide more details in his remarks.
On the last call, we discussed having made investments in geothermal projects and you may have seen some recent announcements by our strategic partners.
Along with looking at admissions reducing opportunities like geothermal, H&P will continue to explore and invest in new and diversified technologies as well as expand our digital technology capabilities for the long-term sustainability of the company.
Before turning the call over to Mark, I want to underscore once more the focus and success our company has made on its strategic objectives, particularly given the economic and industry headwinds we are navigating.
As we've indicated previously, introducing disruptive technologies and new business models, is a long, arduous and sometimes, unpredictable process.
I believe our dedicated teams are well equipped and our conservative financial stewardship will enable us to capitalize on the challenges and opportunities ahead.
Today, I will review our fiscal first quarter 2021 operating results, provide guidance for the second quarter, update full fiscal year 2021 guidance as appropriate and comment on our financial position.
Let me start with highlights for the recently completed first quarter ended December 31, 2020.
The company generated quarterly revenues of $246 million versus $208 million in the previous quarter.
The quarterly increase in revenue was due to higher rig count activity in North America Solutions as operators resumed some drilling activity.
Total direct operating costs incurred were $200 million for the first quarter versus $164 million for the previous quarter.
The sequential increase is attributable to the aforementioned additional rig count in the North America Solutions segment and the related rig recommissioning expenses.
General and administrative expenses totaled $39 million for the first quarter, higher than our previous quarter due to the resumption of short-term incentive accruals for fiscal 2021, but within our guidance for full fiscal year '21.
During the first quarter, we closed on the sale of an offshore platform rig to its long-standing customer as per a provision in the original long-term contract.
The sale closed for consideration of $12 million paid out over two years.
The rig had an aggregate net book value of $2.8 million and the resulting gain of $9.2 million as reported as a part of the sale of assets on our consolidated statement of operations.
In connection with the sale, we entered into a long-term management contract for this rig in our Gulf of Mexico segment.
Our Q1 effective tax rate was approximately 19%, which is on the lower end of our guided range due to a discrete tax expense.
To summarize this quarter's results, H&P incurred a loss of $0.66 per diluted share versus a loss of $0.55 in the previous quarter.
Absent these select items, adjusted diluted loss per share was $0.82 in the first fiscal quarter versus an adjusted $0.74 loss during the fourth fiscal quarter.
Capital expenditures for the first quarter of fiscal '21 were $14 million below our previous implied guidance.
This is primarily due to the timing of spending, which has shifted to the remaining three quarters of the fiscal year.
Turning to our three segments, beginning with the North America Solutions segment.
We averaged 81 contracted rigs during the first quarter, up from an average of 65 rigs in fiscal Q4.
I will note here that at the end of fiscal Q1, all idle but contracted rigs, which I will refer to as IBC rigs thereafter have returned to work compared to an average of approximately 15 IBC rigs in the previous quarter.
During the first quarter, we doubled our rig activity from the prior quarter low of 47 active rigs.
We exited the first fiscal quarter with 94 contracted rigs, which was slightly above our guidance expectations as demand for rigs continue to expand from the low, reached midway through the end of the previous quarter.
Revenues were sequentially higher by $53 million due to the previously mentioned activity increase included in this quarter's revenues were roughly $4 million of unexpected early termination revenue from the cancellation of one rig contract.
North America Solutions operating expenses increased $47 million sequentially in the first quarter, primarily due to adding 25 rigs, a 35% increase in North America activity as well as reactivating 10 idle but contracted rigs, both of which resulting in one-time reactivation expenses of approximately $10.6 million.
Looking ahead to the second quarter of fiscal 2021 for North America Solutions.
As I mentioned earlier, we exited Q1 with slightly more rigs contracted and running than expected.
The activity level has continued to grow, albeit at a more moderate pace than the prior quarter as operators add rigs to maintain production levels with oil above $50 per barrel.
As of today's call, we have 103 rigs contracted with no IBC rigs remaining.
We expect to end the second fiscal quarter of '21 with between 105 and 110 contracted rigs.
As John discussed, our performance contracts are gaining customer acceptance and of the approximately 34 rigs that we have added to the active H&P rig count after September 30th through today, more than a quarter, are working under such performance contracts.
In the North America Solutions segment, we expect gross margins to range between $60 million to $70 million with new early termination revenue expected.
As we continue to add rigs, we will also incur related one-time reactivation expenses, such expenses are expected to be approximately $6 million in the second quarter.
As we have seen in previous cycles, there is a correlation between the reactivation cost per rig and the length of time a rig has been idle.
As a reminder, most of our rigs were stacked back in April of 2020, nine months ago.
Historical experience indicates that rig stacked for nine months or longer will incur cost of $400,000 to $500,000 to reactivate.
Reactivation costs are incurred in the quarter of start-up, so the absence of such costs in future quarters is margin accretive.
Our current revenue backlog from our North America Solutions fleet is roughly $448 million for rigs under term contract, but importantly this figure does not include additional margin that H&P can earn is performance contract criteria are met.
Regarding our International Solutions segment.
International Solutions business activity declined from five active rigs at the end of the fourth fiscal quarter to four active rigs at December 31.
This decrease is the result of an expected rig release in Abu Dhabi, due in large part to the disruption created by the ongoing COVID-19 pandemic.
As we look toward the second quarter of fiscal '21 for International, our activity in Bahrain is holding steady with three rigs working.
We also have one rig under contract in Argentina.
In the second quarter, we expect to have a loss of between $1 million to $3 million, apart from any foreign exchange impacts, as the legacy structural cost in Argentina continue to hamper International margins.
Also we still have a pending rig deployment in Colombia that continues to be delayed, as our customer awaits on required regulatory approvals to begin work.
Turning to our Offshore Gulf of Mexico segment.
We currently have four of our seven offshore platform rigs contracted and we have active management contracts on three customer owned rigs, one of which is on full active rig.
Offshore generated a gross margin of $6 million during the quarter, which was at the lower end of our estimates.
As we look toward the second quarter of fiscal '21 for the Offshore segment.
We expect that Offshore will generate between $6 million to $9 million of operating gross margin.
Now let me look forward to the second fiscal quarter and update full fiscal year 2021 guidance as appropriate.
Capital expenditures for the full fiscal of '21 year are still expected to range between $85 million to 180 -- a 105 -- $85 million to $105 million, with remaining's been distributed over the last three fiscal quarters.
Our expectations for general and administrative expenses for the full fiscal 2021 year, have not changed and remain at approximately $160 million.
We also remain comfortable with the 19% to 24% range for estimated annual effective tax rate and do not anticipate incurring any significant cash tax in fiscal 2021.
The difference in effective tax versus statutory rate, is related to permanent book-to-tax differences as well as state and foreign income taxes.
Now looking at our financial position.
Helmerich & Payne had cash and short-term investments of approximately $524 million at December 31, 2020 versus $577 million at September 30.
Including our revolving credit facility availability, our liquidity was approximately $1.3 billion, not included in the previously mentioned the cash balance is approximately $35 million of income taxes receivable and related interest that we collected after the end of the first fiscal quarter.
Our debt-to-capital at quarter end was about 13% and our net cash position exceeds our outstanding bond.
H&P's debt metrics continue to be in best-in-class measurement among our peer group, but allows us to keep our focus on maximizing our long-term position.
As a reminder, we have no debt maturing until 2025 and our credit rating remains investment grade.
Now a couple of notes on working capital.
Our trade accounts receivable at fiscal year-end of $150 million grew by $38 million to approximately $188 million, due to the added rig activity, as previously mentioned.
The preponderance of our AR continues to be less than 60 days outstanding from billing day.
Also included in AR, there is another approximately $10 million of tax refund receivables.
Our inventory balances have declined approximately $5 million sequentially from June -- from September 30th to $99 million and we continue to leverage consumables across the entirety of U.S. basins to use and reduce inventory on hand.
These efforts are resulting in better spending rationalizations, that are reducing our out-of-pocket expenditures.
Our accounts payable terms optimization project, mentioned on the last earnings call will extend our payable terms with certain key vendors.
And finally of note, our one, the majority of our annual ad valorem taxes accrued through the year are paid annually in the fourth calendar quarter.
And two, the short-term incentive compensation accruing for fiscal year '21 will not be paid until the first quarter of fiscal year '22.
As I mentioned on the November call, we expected to use a modest amount of cash on hand, as we work toward a 100-plus rig count activity level.
As mentioned earlier in my comments we arrived at a 100 rig count level, during this second quarter.
We believe that this activity level, our point forward quarterly operating earnings, will fund our maintenance capital expenditures that service cost and dividends.
Based on our updated forecast, we expect to end fiscal 2021 with cash and short-term investments at or above the $500 million.
In closing, we are continuously working to manage our costs, both operating and SG&A expenses, as well as capital expenditures.
We believe active cost management is crucial in the now structurally smaller United States upstream market.
Various initiatives are under way to identify and drive our costs where possible to enhance margins going forward.
That concludes our prepared comments for the first fiscal quarter.
| q1 loss per share $0.66.
qtrly adjusted loss per share $0.82.
helmerich and payne - expect north america solutions operating gross margins to be between $60-$70 million for q2.
helmerich and payne - sees fy 2021 gross capital expenditures are still expected to be approximately $85 to $105 million.
fiscal year 2021 gross capital expenditures are still expected to be about $85 to $105 million.
helmerich and payne - ended quarter with $524 million in cash and short-term investments and no amounts drawn on its $750 million revolving credit facility.
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We will start today's call with remarks from Bill Berry, Continental's Chief Executive Officer and Jack Stark, President and Chief Operating Officer.
Bill and Jack will be joined by additional members of our team, including Mr. Harold Hamm, Chairman of the Board; John Hart, Chief Financial Officer and Chief Strategy Officer; and other members of our team.
Finally, on the call, we will refer to certain non-GAAP financial measures.
I hope everyone is well.
This significant free cash flow is being dedicated to shareholder capital returns in the form of an increased quarterly dividend to $0.15 per share, continued focus on debt reduction and resumption of our $1 billion share repurchase program.
We appreciate our investors support and hope this continues to provide confidence in Continental being the best investment opportunity in the industry and the most shareholder return-focused company in any industry.
During the second quarter, we generated a company record-breaking $634 million of free cash flow, reducing net debt by $284 million ending the quarter with $4.59 billion.
Year-to-date, we've generated $1.34 billion in free cash flow, while reducing our net debt by $892 million.
We distributed $40 million to shareholders with our previous $0.11 quarterly dividend.
We exceeded our production guidance for the quarter, delivering 167,000 BOE a day and just over -- barrels of oil a day and just over 1 billion cubic feet of gas per day.
We delivered exceptional performance and efficiencies from our assets in the Bakken and Oklahoma, which Jack will provide more details.
With respect to hedging, we remain unhedged on crude oil.
On gas, we have about approximately 50% of our volume hedged through year-end with a combination of swaps and collars that provide a flow around three powertrain retaining price upsize of over $5.
For 2022, we have no gas hedges beyond the first quarter and no hedges at all in 2022.
While we remain bullish on commodity prices given the volatility of price cycles and potential impact of government reaction to COVID variants, we continue to believe it is inappropriate for the industry to overproduce into a potentially oversupplied market, particularly with respect to crude oil.
As I highlighted last quarter, we remain focused on our strategic vision with four key elements I'd like to briefly discuss today.
Free cash flow commitment and capital discipline, strengthening the balance sheet, and corporate and cash returns to shareholders.
Let me start with our commitment to free cash flow and capital discipline.
Our cash flow generation is robust and competitively advantaged versus our peers given our unhedged crude oil profile as shown in Slide 4.
In the first half of the year, we have year-to-date already generated the free cash flow we were projecting for the entirety of 2021.
We're announcing the potential to generate approximately $2.4 billion of free cash flow at current strip prices this year, which equates to an approximately 19% free cash flow yield.
Given our discipline response to rising commodity prices, our capex budget for 2021 has not changed and our reinvestment rate is trending toward 35%.
With regard to strengthening the balance sheet, our net debt reduction is tracking toward $1.8 billion in 2021, which will bring our year-end net debt close to $3.7 billion.
We expect to meet or exceed our leverage target of one-time net debt to EBITDA this year, but are not finished there.
Our intention is to reduce absolute debt to one-time at $50 to $55 WTI, which equates to approximately $3 billion in debt.
Alongside our strong inventory and commodity optionality, we are confident our net debt outlook is one of the many powerful attributes for both the company and our shareholders.
And we believe our current credit metrics are reflective of investment grade.
So let me now discuss corporate returns and cash returns to investors.
We're generating strong corporate returns and projecting to deliver 18% return on capital employed in 2021.
Additionally, we're committed to disciplined and significant shareholder returns through net debt reduction and prioritizing cash returns using the multiple vehicles we have to return cash to investors, including our dividends and share repurchases.
We're committed to growing our dividend in a competitive and sustainable manner.
That is why we increased our quarterly fixed dividend by 36% versus last quarter to $0.15 a share.
This has tripled our original dividend rate and equals to an approximately 1.7% annualized dividend yield, which we believe is competitive with industry peers and shows ongoing growth in cash returns.
We are resuming our share repurchase program of $1 billion, which began in 2019 with $317 million of purchases previously executed $683 million of capacity remains.
Given our significant shareholder alignment you can be confident that shareholder capital returns will remain a significant priority for our company.
The combined shareholder capital returns in the form of the annualized dividend and projected net debt reduction by year-end 2021 alone would equate to 53% of the company's projected full year 2021 cash flow from operations, and 16% of the current -- company's current capital market.
Share repurchases would be additive to these figures depending on the timing of additional share repurchases, which we expect to be in the near future.
2021 guidance updates, let me share with you a little bit on where we are on that.
As we look ahead to the remainder of 2021, several of our key metrics are materially outperforming our original guidance such that we have updated for the following.
Natural gas production in 2021 is now expected to range between 900,000,001 BCF a day.
Production expense is projected to be $3 to $3.50 per BOE better than the original guidance of $3.25 to $3.75.
Additionally, as reflected on Slide 16, we have improved our guidance on DD&A and crude and gas differentials.
I also want to highlight our continued focus on ESG.
We recently released our 2020 ESG updates, which can be found on our website, www.
ESG has always been a key part of our DNA and something we have highlighted as a means to steward our company.
Our ESG efforts remain focused on continuously improving and our approach is to look at all operational impacts, including land, water, and air.
We believe it is essential all countries and all economic participants do their part to improve the ESG in the same way, in order to better our world.
In closing, I did want to provide an update on the launch of the new futures contract Midland WTI American Gulf Coast, which will start trading on the Intercontinental Exchange by year end.
This is a combination of recommendations by the AGS Best Practices Task Force led by Harold Hamm, along with efforts by Magellan and Enterprise Products, and will be an exciting opportunity for U.S. producers seeking greater transparency, more liquidity, and access to global markets.
Appreciate you joining our call.
Today, I'm going to share some highlights from the outstanding results our teams delivered this quarter, and there are three key takeaways I want to leave you with.
First, our assets are performing with remarkable consistency and predictability, delivering their terms in excess of 100% from our Bakken and 60% to 80% from our Oklahoma drilling programs, assuming $60 WTI and $3 NYMEX gas.
Second, we are on track to reduce our weighted average cost per well year-over-year by approximately 10%, and 70% to 80% of these savings are structural.
Third, our capital efficiencies are reaching record levels and we expect to deliver a projected return on capital employed of approximately 18% for 2021.
Our assets also provide optionality to respond to changing market conditions.
For example, the decision to focus up to 70% of our rigs on our Oklahoma natural gas assets in the second quarter of last year has proven to be very strategic.
Our second quarter 2021 natural gas production in Oklahoma was up approximately 10% over the first quarter of 2020, while NYMEX natural gas prices, more than doubled over this same period of time.
With today's improved crude prices, we are exercising this optionality once again in migrating up to 75% of our rigs to a more oil weighted portfolio in the back half of this year.
As Bill highlighted, our well production remains unhedged and our shareholders are receiving the full benefit of the improved crude oil price.
So let's get into the quarterly highlights.
During the quarter, we brought on 108 gross operated wells with 70 in the Bakken and 38 in Oklahoma.
Early performance from our 2021 Bakken wells is right on track as shown on Slide 8.
This chart compares the average performance of our 2021 wells with average performance of 488 Continental operated wells completed over the prior four years, grouped by program year.
Over the last four years, we have also reduced our cycle time for putting Bakken wells online by 50% and dropped our completed well costs by approximately 30% driving our capital efficiencies in the Bakken to record levels.
Today, we are producing approximately 45% more BOE per $1,000 spent in the first 12 months than we did in 2018.
Our Bakken differentials are also improving, driven by demand for Bakken crude and the expansion of DAPL, which was put into operation on August 1.
With this expansion, there is approximately 1.6 million barrels of pipeline and local refining takeaway capacity from the Bakken excluding rail.
Bottom line, considering all of these improvements and the bullish market fundamentals, we are potentially entering one of the most profitable chapters in the history of the Bakken for Continental and its shareholders.
Before leaving the Bakken, I should point out that 11 of our second quarter Bakken completions were located in our Long Creek unit.
These 11 wells are excellent producers as shown on Slide 9, equally impressive by the well costs that are coming in below original estimates at approximately 6.1 million per well.
Recent results are bellwether for things to come, as we continue developing a total of 56 wells in this unit, and we expect to complete about 30% of these wells by year-end 2021, 50% in 2020 and the remaining 20% in early 2023.
In Oklahoma, we continue to see excellent results from our really both our oil and gas condensate wells as illustrated on Slide 10.
These charts show the average well performance by year in all four of our SpringBoard project areas over the last 2.5 years.
The SpringBoard I -- in SpringBoard I and II, you can see that the average well performance has improved over time with great repeatability in both the condensate and oil windows.
This includes 155 operating wells of which 70% were oil well and 30% were condensate wells.
Now the chart on the lower left of Slide 10 shows impressive performance from our operated oil wells in SpringBoard III and IV.
This is a small dataset, so we chose to break the average annual performance by producing formation to provide more color on the results we have seen to-date.
The chart includes seven Woodford and four Sycamore wells that we completed over the last 2.5 years.
The key observations from this chart is that the seven Woodford wells are performing in line with SpringBoard I and II oil wells, while there is four Sycamore wells that were completed in 2019 are significantly outperforming.
Even more impressive is that we're on track to reduce our completed well cost by approximately 17% year-over-year.
Since 2018, our teams have reduced completed well costs in Oklahoma by a total of 40%, which as in the Bakken has driven our capital efficiencies to record levels in Oklahoma.
As shown on Slide 11, we are producing approximately 80% more BOE per $1,000 spent in the first 12 months than we did in 2018.
In the Powder River Basin, our drilling is proceeding right on schedule.
Our drilling teams are doing a great job and have met and exceeded our early expectation for drilling days and costs.
We have six wells waiting on completion and expect to have some results to share later this year.
We currently have two rigs drilling through year end.
Looking ahead, we are maintaining our oil production guidance for the year, and I should point out that our second quarter production was boosted by accelerating the completion of select third quarter wells and putting them online in the second quarter.
In the fourth quarter, we are projecting a December exit rate of approximately 165,000 barrels of oil per day.
We currently have eight rigs drilling in the Bakken, two in the Powder and five in Oklahoma, and are considering adding up to one rig in the Bakken and two in Oklahoma by year end.
In closing, I'll mention that our exploration teams at Continental continue to generate new opportunities within and outside of our core operating areas.
Later this year, we plan to do some exploratory drilling to test a couple of these new opportunities.
Details must remain confidential, but I can tell you that with success, each of these opportunities could add significantly to our deep inventory.
So with that, we are now ready to begin the Q&A session -- section of our call.
| increased its 2021 annual natural gas production guidance to 900 to 1,000 mmcfpd.
continental resources - now projects generating $3.8 billion of cash flow from operations, $2.4 billion of free cash flow for 2021 at current strip prices.
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We will start today's call with remarks from Bill Berry, Continental's Chief Executive Officer; John Hart, Chief Financial Officer and Chief Strategy Officer; And Jack Stark, President and Chief Operating Officer.
Additional members of our senior executive team, including Mr. Harold Hamm, Chairman of the Board, will be available for Question and Answer.
Finally, on the call, we will refer to certain non-GAAP financial measures.
I hope moving the earnings date was not an inconvenience for any of you.
We did this to be able to share several exciting things with you today.
First, is our record free cash flow for the quarter of $669 million.
Clearly, 2021 is going to be a record year for us in terms of free cash flow generation.
Second, we have expanded both our shareholder capital and corporate returns.
This includes increasing our dividend by 33% from $0.15 to $0.20 per share with our return on capital employed and increasing to approximately 21%.
Third, is the exciting news that we now have strategic positions in four leading basins across the Lower 48 with a $3.25 billion acquisition of Delaware assets from Pioneer, providing our company and shareholders with material, geologic and geographic diversity.
Like our first quarter Powder River Basin acquisition, this transaction is accretive on key financial metrics, and the acquired assets will complement our existing deep portfolio in the Bakken, Oklahoma and Powder River.
And fourth, we are now post this transaction, we have been fully returned to fully investment grade.
And as we've indicated on previous calls, we believe Continental has more alignment with shareholders than any other public E and P company.
We focus every day on maximizing both shareholder and corporate returns.
The Permian Basin acquisition will be an integral contributor to these shareholder return plans.
This is an outstanding asset with 92,000 acres, over 1,000 locations, 50,000 net royalty acres.
The acquisition also comes with about 55,000 BOE per day from PDP and anticipated volumes from wells in progress.
And finally, and possibly most importantly, this Permian transaction is projected to add up to 2% to our return on capital employed annually over the next five years.
The acquisition of these assets strongly supports the tenants of Continental's shareholder return on investment and return of investment, dividends and share repurchases.
These are all driven by a continued commitment to strong free cash flow.
Our plans for low single-digit production growth are the foundation for being able to deliver strong free cash flow.
During the third quarter, we took additional steps to increase returns to shareholders with our third dividend increase in as many quarters and executing on $65 million in share repurchases.
While we will be taking on some additional debt to pay for the transaction, our net debt-to-EBITDAX target remains the same, less than one.
We expect to exit this year at a quarter annualized net debt-to-EBITDA of about 1.3 and expect to be below 1-0 1.0 by year-end 2022, assuming $60 and strip gas pricing.
We are unwavering in our commitment to reduce debt.
Our 2021 cash flow generation remains very competitive versus our peers in the broader market, as shown on Slide seven.
This is even after our stock has nearly tripled year-to-date.
We see the potential to generate $2.6 billion of free cash flow this year, which equates to about 14% free cash flow yield at current prices.
This is significantly above the majority of our industry peers and the broader market, indicating further upside in the value of our stock.
As we look to 2022, we expect to provide updates on capital budget and operations, including the pending integration of our newly acquired Permian assets early next year.
We are confident this acquisition will further enhance our free cash flow generation.
Our ESG performance is top of mind for me, and I want to update you with regards to our ESG performance year-to-date.
In the third quarter, we achieved a 98.9% gas capture rate, up from 98.3% in 2020.
In support of our industry-leading ESG gas capture stewardship, we have deferred approximately $45 million in revenue in 2021.
Additionally, we have achieved zero recordable injuries among our employees, through the third quarter 2021.
Congratulations to the team on an outstanding performance.
We're proud of our teams and their exceptional commitment to continuously operate with integrity in a safe and environmentally responsible manner.
We'll spend the remainder of the call discussing some of the specifics on our recently announced and highly accretive expansion into the Permian Basin.
John will highlight the compelling financial aspects of our expansion, and Jack will provide details regarding the outstanding geologic attributes and fully integrated nature of the deal.
Our new position in the Permian as shown on Slide four, was driven by our geology-led corporate strategy and is built on a strong foundation of geoscience and technical operation skills, coupled with the management team fully aligned with shareholders.
This transaction increases Continental's operational footprint in the area with our current acreage position across the Permian now approximately 140,000 net acres.
Later on the call, Jack will provide details regarding this expanded Permian footprint, along with the tremendous success our teams have had growing our top-tier corporate portfolio of Lower 48 assets.
Approximately, 75% of the price of this asset is covered by PDP value and wells in progress at current strip prices, leaving significant upside value and undeveloped acreage.
On a pro forma basis and at current strip prices, we expect to generate at least $3 billion of cash flow in 2022.
Our pro forma free cash flow in '22 is projected to be about 17%.
This compares very favorably to our 2021 projected free cash flow yield of about 14%.
Like our other assets, the fully integrated nature of this asset offers a multifaceted value proposition including minerals and water infrastructure that we control and provides tremendous optionality and upside in the future, as shown on Slide four.
The transaction has been unanimously approved by the company's Board of Directors and is effective as of October 1, with an expected closing date in the fourth quarter.
As Bill mentioned, today's acquisition is immediately financially accretive on cash flow and free cash flow per share, earnings per share, return on capital employed and cash margin.
This transaction has a number of benefits to Continental shareholders.
Let's discuss a few of those items.
This transaction is credit-enhancing due to projected cash flow and rapid debt paydown benefiting our credit metrics while enhancing our commodity optionality and geographic diversity.
It is beneficial to the ongoing trajectory of our credit rating.
I will discuss agency views momentarily.
This transaction includes a healthy amount of PDP, benefiting our EBITDAX by approximately $900 million per year at current strip prices, enhancing our credit metrics.
Additionally, we are projecting an incremental $500 million of free cash flow from the acquired asset in 2022 at current strip prices based on estimated '22 production and capital spending.
Combined with our legacy assets, we expect 2022 free cash flow of at least $3 billion at strip prices for Continental.
We have significant flexibility in how we plan to finance the transaction.
As of September 30, we had approximately $700 million of cash on hand with expectations for strong free cash flow moving forward.
Our revolver remains fully undrawn.
On October 29, we extended our revolver maturity to October 2026.
And increased available commitments to $1.7 billion.
We intend to utilize available cash and our revolver to fund a significant amount of this transaction.
Remaining acquisition financing will be derived from debt capital markets and/or bank term facilities.
We will not issue additional equity as a means to fund this deal.
This financing approach amplifies the accretive nature of this transaction on a per share basis.
Our credit metrics also remained strong with net debt to EBITDAX projected to increase only slightly from 0.9 times in the third quarter to 1.3 times initially with the transaction but is expected to drop below 1 times during 2022 at current strip prices.
Our target is to reduce net debt back to current levels or approximately $4 billion by year-end '22.
We plan to utilize 2022 cash flow to pay off the revolver funding, rebuild our cash position and pay off our '23 and '24 bond maturities at the earliest possible opportunity.
As you may have noted, the rating agencies have been supportive of this transaction and our plans.
Fitch has upgraded us to BBB.
Moody's has upgraded us to Baa3 and S and P has maintained a positive outlook to upgrade to IG.
This positions us with two agencies at investment grade, making us fully investment-grade eligible, and one agency with a positive outlook to investment grade.
We are pleased with this progress as our objective is three investment-grade ratings.
As we have discussed in previous quarters, and as you will note in the Form 10-Q with the rise in natural gas prices, the company has elected to lock in a portion of associated cash flows through natural gas hedges at attractive prices.
Subsequent to September 30, we have continued to layer in natural gas hedges for the second quarter of 2022 through year-end 2023.
We've utilized a combination of swaps and collars with an average swap of $371 and an average foot of $325 at an average collar of $496.
These positions are summarized in our 10-Q along with our prior positions.
We are largely in hedged for oil, as we believe market fundamentals are supportive of price participation due to supply and demand rebalancing.
We have remained capital disciplined with a projected reinvestment ratio of approximately 40%.
Reflecting back on our original guidance in February, we were projecting at that time, $1 billion of free cash flow with a reinvestment rate of 58%.
With our free cash flow now up approximately 160% from our original guidance, we have decided to reinvest a modest amount of additional capital this year or just under 10% of that incremental cash flow figure.
This is due to the associated capex from the pending Permian acquisition, additional leasehold acquisitions and incremental gas-focused activity in order to meet domestic and global natural gas consumer demand, given an undersupplied market outlook this winter.
I'll start out by saying that the Permian assets we acquired are excellent addition to our existing portfolio.
They contain the key strategic components common to all of Continental's assets, including the right rocks, excellent economics, a significant contiguous acreage position with high working interest and net revenue interest, mineral ownership, surface ownership, operated water infrastructure and significant upside potential through continued operating efficiencies, technology and exploration.
I'll touch on each of these briefly here.
First and foremost, it's all about the rocks.
Referring to Slide four, these assets contain proven, stacked oil-rich reservoirs as well as other high potential reservoirs we intend to explore and develop in the future.
We estimate that these assets contain an inventory of over 650 gross wells targeting three primary reservoirs, including the third Bone Spring, the Wolfcamp A, Wolfcamp B, and we think there are over 1,000 locations when you consider other known producing reservoirs that underlie this acreage.
On an economic basis, these assets complement our existing inventory very well delivering rates of return from 50% to well over 100% at $60 WTI and $3 NYMEX.
The 92,000 net leasehold acres being acquired are largely contiguous, as you can see on Slide four and highly concentrated.
Continental will operate 98% of this acreage with an average working interest of approximately 93% per well, and over 90% of this acreage is held by production.
The acquisition also includes 50,000 net royalty acres.
Approximately 70% of these royalty acres directly underlie our leasehold, which raises the average net revenue interest for wells drilled on this acreage to around 80%.
The acquisition also includes significant water infrastructure and surface ownership, including 31,000 surface acres, approximately 180 miles of pipeline, water facilities and disposal wells that can be expanded to accommodate growth.
This will provide immediate operating efficiencies and cost benefits to our operations.
The acquisition also includes approximately 55,000 BOE per day of production, which is inclusive of 10 wells in progress on a pro forma basis, and approximately 70% of this production is oil.
The last point I'll make on these assets is that they are in the early stage of development, which is exactly what we like.
The initial phase of testing and reservoir delineation is complete and the properties are teed-up for full field development.
And as in all of our plays, we see significant opportunity to improve well performance and financial returns through optimized density and wellbore placement, operational efficiency gains and asset growth through exploration.
Most importantly, we've expanded our operations into two additional world-class oil-weighted basins, the Powder River Basin and Permian Basin.
Through Grassroots leasing, trades and strategic acquisitions, we now own or have under contract approximately 140,000 net acres in the Texas portion of the Permian Basin and approximately 215,000 acres -- net acres in the Powder River Basin.
During this time, we also expanded -- or we also added approximately 47,000 net acres in the heart of our springboard assets in Oklahoma.
Combined, these assets have tremendous resource potential, adding well over one billion barrels of net resource potential to our industry-leading assets in the Bakken and Oklahoma, providing Continental shareholders a deep and geologically diverse oil-weighted inventory that will drive strong returns and profitability for decades to come.
This company has a long well-established track record of having an exceptional capability of transferring our unique geologic and operational expertise to new and existing basins.
We have created significant inflection points for the company in the past with our entry into the Bakken and Oklahoma positions.
We now see our position in the Permian and Powder River as an additional inflection point, representing significant complementary step changes to the company's portfolio.
With that, we're ready to begin the Questions and Answers section of the call.
| delivering record free cash flow & strategic expansion into permian basin.
$1.20 per adjusted share (non-gaap)) in 3q21.
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During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin, and free cash flow.
To ensure disclosures are consistent, these slides provide the same details as they have historically, and as I have said, are available on the investor relations section of our website.
With these formalities out of the way, I'm joined today by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
And Mollie, for once I've got the mute off before you turned it over to me.
I obviously hope all continues to be well with each of you and all of your loved ones in these complicated times.
Ajay, in a moment, will take you through the details of the quarter.
Extraordinary efforts over the past few months to support our clients and each other from home and the major efforts over the last few years that have put us in a position such that even in these difficult times, we are seen as highly relevant resources for our clients.
So I'd like to start with that, and then with your permission, also share a couple of perspectives on the future, both the inherent near-term uncertainty these days for a number of our businesses, but also the enormous confidence that we have in the medium- and long-term prospects for all of our businesses.
So let me start with the results.
One way to look at them, a pessimistic way to look at them, is to note that our adjusted earnings per share of $1.32 is down significantly from a year ago.
Another way to look at it, however, is to note first that we happen to be cycling an all-time record quarter for adjusted EPS, so the comparison is a difficult one.
But second and more important, if you step back and think about it, in the face of COVID, in the face of some parts of our businesses being at record low levels of utilization due to travel restrictions, court closures, and other challenges arising from COVID, and in the face of a substantial amount of extra capacity that was added pre-COVID, we still managed to deliver the fifth best adjusted earnings per share ever in the history of this company and the highest revenue quarter ever.
So I am extraordinarily positive about the results and I hope you are too.
As we discussed during the last quarter's earnings calls, we expected this to be a slow quarter.
And parts of our business were, in fact, extraordinarily slow.
Obviously, a number of parts of FLC, but in truth, parts of every segment.
And yet overall, we have been able to deliver incredibly solid results.
So let me just try to describe a little bit of how that happens.
In part, it happens because the markets not only take away, they give.
Though discretionary spend on consulting services is, of course, down considerably, and as I think you know, deal flow is reduced and courts' closures meant litigation was postponed, the COVID crisis, and resulting economic turmoil created need as well.
Need for restructuring, for crisis communication, for crisis litigation support.
So some of what we are seeing is simply a major shift in client needs and spend versus simply a reduction.
So some of these results are market-driven.
To me, what is much more powerful and much more relevant to our long-term efforts to build this enterprise for our people and for you, our shareholders, is to talk about the part of the results that are not due to market forces, but rather due, in recent times to the incredible efforts by our teams to work effectively from home, together with, over the last several years, the efforts of our people to strengthen our position, to extend into new adjacencies and geographies, and to anticipate and deliver on our clients' needs.
So I'd like to try to illustrate that duality.
First fin corp, and where you obviously, see incredible second-quarter results, but also into our other businesses in econ and FLC and strat comms and tech as well.
Let me start with corp fin.
I think -- I suspect that anyone in restructuring today is busy.
And of course, most of you remember that corp fin 10 years ago in the midst of a market boom had record results.
So it's obviously easy to simply say, wow, the markets are up and so is FTI's corp fin business as well.
For me, framing this point that way misses critical, powerful points.
Points that suggest, though, obviously, we are affected by markets, we are not forks on a wave.
Over time, we determine our destiny and part of what we are seeing is the markets, but part of what we are seeing is the result of actions that our teams have taken over time, not simply the markets.
A couple of ways to see that, one way is to recall that corp fin -- our corp fin business was growing and thriving even before this market boom.
In fact, during 2018 and 2019, when the restructuring market was hovering around all-time lows, we delivered record revenues, up 17% and 28%, respectively.
That was no way we were riding, that was us lifting us.
It was the result of our teams' investments and incredible efforts that drove those results.
Equally as powerful is to not just look at how similar we are in corp fin to where we were 10 years ago, but to look at how we've changed since then, how we've enhanced our positions.
Ten years ago, during the last recession, we already had a powerful, strong corp fin business.
But we were primarily a U.S. business at that point in time.
We were in London, but we were probably No.
We didn't have a German business.
We didn't have an Asian or Australian business.
We had a smaller business in Latin America, and even in the U.S., we were primarily known as the best creditor rights business.
We did, in fact, do company side work, but we were known primarily for our middle-market company side capabilities and tended not to win the big company side cases there.
Fast-forward today, in North America, we are still the No.
1 creditor rights business.
But this year, we've already won three of the biggest company side jobs in North and South America.
If you look outside of North America, we are no longer No.
4 in London, we're now No.
We have power on the continent we didn't have 10 years ago with the addition of Andersch in Germany and the addition of other terrific professionals elsewhere in Europe.
We have the leading position in Hong Kong, a strengthened practice in Australia.
And now, a leading practice in Latin America with people on the ground in places like Mexico and Brazil.
And that's all before we talk about what we've built in corp fin that goes well beyond restructuring, our practices in OCFO, in transactions, in carve-outs, in performance improvement, in merger integration, etc.
There are waves in our business.
But what our teams have done is to take a fundamentally strong U.S. business, and rather than sit on it, they've made it fundamentally stronger, turning us into a powerful, global, multidimensional player.
Our success today reflects not just the markets, but the changes that our teams have driven and that is true for corp fin, but it's also true for our other segments as well.
I won't be as long-winded on the other segments, but let me touch on them.
In strat comms, for those of you who have been long-term shareholders, you may remember that 10 years ago when the recession hit, that business, in large part, melted down.
Not because we weren't good, but because we -- we were focused on one part, an important part, but a small part of our clients' core needs.
Today, some parts of this business are also extraordinarily slow, but critically, other parts are soaring.
With the result that if you exclude the negative impact from FX and have through revenues and look at strat comm normalized for those, our strat comm revenues are actually up for the first half of 2020.
And I don't know of any other competitor in that industry who can say that.
Similarly, if you look at econ, 10 years ago, we already had a fabulous econ business, but it was primarily a fabulous -- fabulous North American business.
Today, we still have a fabulous business in the U.S., but now, we have a fabulous business in multiple locations around the world.
And as a result, the time when litigation, investigations, and M&A transactions are down, and some have been delayed and travel is restricted, and you can't get to your clients, we have a business that even with some slow parts is overall even more in demand.
And even in FLC, where, as you can see from our results, we have had a drastic decline in revenues in a number of places due to some large jobs rolling off and the effect of the travel restrictions and the delays in litigation and investigations.
Even there, the breadth of the conversations we are having across multiple dimensions with clients remains robust, reflecting the investments our teams have made to increase the depth and the reach of our offerings, from construction to cyber to investigations to data and analytics in multiple places around the world.
So, yes, what you are seeing on the negative and the positive side is somewhat a function of markets.
Markets fluctuate up and down and those affect us.
To me, what is much more powerful and more durable is the nonmarket-driven pieces, the way our teams have invested to control our destiny, by growing core capabilities that allow us to serve the most important client needs in a wide range of circumstances.
And that to me is a more powerful and the more exciting part of the results you're seeing from this company.
Let me see if I can tie those observations about the quarter in our history to what we see going forward.
First of all, the most obvious point, but one I have to underscore is something I'm sure you all believe as well is that there is tremendous uncertainty in the world.
I don't think anyone can definitively say what the impact of COVID will be over the longer term or even in the medium term on things like bankruptcy, M&A, litigation trends, or the economy more generally, or what the specific impact looks in different paces, in Latin America, the U.S., in India, in Asia, the U.K. So I believe we have to recognize there's clearly just a lot of uncertainty in the world, particularly, in the short term.
And so therefore, you can run a lot of scenarios in terms of how our business is going to perform.
For us, you could run an incredibly negative scenario.
You could say, wow, what would happen if bankruptcies slowed down dramatically in the businesses that are slow, stays slow?
That would be a pretty negative scenario.
We don't believe that's the most likely scenario.
As Ajay will talk about, our current belief is the strong businesses are likely to stay strong.
And our businesses that have been weak so far this year are likely to see a recovery -- a gradual recovery, but a recovery.
And that's how we came to the judgment for the rest of the year that reaffirms our guidance.
But we have to underscore the concept of uncertainty here.
In these COVID days, in truth, nobody knows the depth and duration of the impact we may see.
And although we have enormous confidence in all of our businesses over any medium term, you could have a scenario where government actions cause a temporary pause on bankruptcies in some places around the world.
And of course, you can always have the random idiosyncratic factors, like, you lose some big jobs instead of winning them.
So please recognize, although we are reaffirming guidance, we also are and need to underscore just how uncertain the world is now.
Let me, therefore, instead talk to what I believe is more important, which is where based on the efforts our team have made and are making, we can drive this business in the medium and longer term.
Because over the medium and longer term, I believe markets matter but more at the core.
We control our destiny.
As we just talked about my experience and I believe our results have shown that if you do the right things over a medium-term period, even though quarters can fluctuate and market conditions fluctuate, through the fluctuations, you build the business.
So we focus a lot on making sure we're thinking hard about what the right things are.
So let me describe a few of them we talk about.
First of all, not most critically, but importantly, focusing on knowing the difference between a bad business and a good business that happens to be hurt by some temporary factors, exogenous factors.
We can't mix that up.
We can't take a good business like our FLC business or our EFC business and overreact to temporary exogenous factors.
Second, it's about being willing to support those good businesses during slow times, and indeed, invest in them even in slow quarters.
In fact, in general, in some slow quarters, it's especially important to be willing to invest in talent because it's oftentimes the case that precisely in slow quarters, the most great talent is available.
And to think about our history here, as we've talked about a few times, some of the most important outside hires we've done have been during slow times in our business.
We got terrific cyber capabilities during a period where FLC was slow.
We acquired CDG, which augmented our company side capabilities in the U.S. at a time when corp fin was slow.
And as you may have noticed, we just closed the deal with Delta Partners, which is in the non-restructuring part of CF at a period when the non-restructuring part of CF is not booming.
We made each of those investments because we could find great talent.
Talent that we thought would collaborate terrifically with the rest of our firm at those point in time.
Talent we had confidence in, and it has proven, at least so far in the first two cases, that if you get great talent whenever it is available, over any medium term, it pays for itself, even if at that point in time that business is slow.
Our core belief, therefore, is, notwithstanding fluctuations in earnings.
We always need to be focused on attracting, developing, and betting behind terrific talent, whether it is recruited or it's homegrown.
My experience is that if one does that, if we continue to do that, we will continue to do the essence of building a professional services firm.
Build great businesses, extend those businesses into new adjacencies, extend our core positions to new places, grow our brand, attract, grow, and retain, and develop great people.
And as a result, be more relevant for your clients and take market share.
And thereby, you build a firm and make sure people proud to be there and attracts other great people.
And through that, ultimately, but also powerfully, delivers for you, our shareholders.
That is the path we have been on these past few years, and I believe in the face of COVID, it is even more important path to commit to stay on going forward.
So with that, let me turn this over to Ajay to take you through the quarter in more detail.
Beginning with the second-quarter results.
As Steve said, we reported record quarterly revenues and our results were better than we anticipated at the time of our last earnings call.
Considering the impact of the COVID-19 pandemic on us, our clients, and our employees, we are very grateful for these results.
Revenues of $607.9 million were up $1.7 million or 0.3%, compared to revenues of $606.1 million in the prior-year quarter.
As expected, our revenue growth year over year was driven by record quarterly performance in our corporate finance & restructuring segment because of the surge in demand for our restructuring services.
GAAP earnings per share of $1.27 in 2Q '20, compared to earnings per share of $1.69 in 2Q '19.
Adjusted earnings per share for the quarter were $1.32, which compared to $1.73 in the prior-year quarter.
The difference between our GAAP and adjusted earnings per share in 2Q '20 reflects $2.3 million of non-cash interest expense related to our convertible notes, which decreased GAAP earnings per share by $0.05.
Our convertible notes had a potential dilutive impact on earnings per share of approximately 507,000 shares and weighted average shares outstanding for the quarter as our average share price of $121.03 this past quarter was above the $101.38 conversion threshold price at maturity.
Worth noting, the trigger for conversion of our convertible notes prior to maturity was not met during the quarter.
Second-quarter 2020 net income of $48.2 million, compared to net income of $64.6 million in the prior-year quarter.
The year-over-year decrease was largely due to higher compensation, which was primarily related to an 18.2% increase in billable headcount and higher variable compensation, which was partially offset by a decline in SG&A expenses and a lower tax rate.
SG&A expenses for 2Q '20 of $126.9 million were 20.9% of revenues.
This compares to SG&A of $129.9 million or 21.4% of revenues in the second quarter of 2019.
The decrease was primarily due to lower travel and entertainment expenses resulting from COVID-19-related travel restrictions, which was partially offset by an increase in bad debt.
Second-quarter 2020 adjusted EBITDA of $75.8 million or 12.5% of revenues, compared to $97.2 million or 16% of revenues in the prior-year quarter.
Our effective tax rate for the second quarter of 23.1%, compared to 24.8% in the prior-year quarter.
The 1.7% decline was primarily due to a favorable discrete tax adjustment related to share-based compensation.
For the balance of 2020, we expect our effective tax rate to range between 25% and 27%.
Billable headcount increased by 715 professionals or 18.2%, compared to the prior-year quarter.
Sequentially, billable headcount was up by 65 professionals or 1.4%.
Worth noting, during the quarter, 66 professionals focused on performance analytics, permanently transferred from our forensic and litigation consulting segment to our business transformation and transactions practice within our corporate finance & restructuring segment.
Now, I will share some insights at the segment level.
In corporate finance & restructuring, record revenues of $246 million increased 29.5%, compared to the prior-year quarter.
This terrific growth occurred despite a decline in success fees relative to the extraordinary success fees in the prior-year quarter and lower business transformation and transaction services revenues.
Higher demand and realization for our restructuring services, which includes revenues related to our acquisition of Andersch AG in August of 2019, resulted in the significant increase in segment revenues.
Worth noting, during the quarter, we were engaged in some of the largest company and creditor-side restructuring mandates, particularly, in the retail and consumer, energy, automotive, airline, telecom, and financial services sectors.
Adjusted segment EBITDA of $76.3 million or 31% of segment revenues, compared to $50.5 million or 26.6% of segment revenues in the prior-year quarter as increased revenues more than offset higher compensation related to the 34.7% increase in billable headcount and higher variable compensation.
On a sequential basis, corporate finance & restructuring revenues increased $38.3 million or 18.4% as growth in our restructuring practice was partially offset by a decline in demand for our business transformation and transaction services.
Revenues of $106.4 million decreased 27.1%, compared to the prior-year quarter.
The decrease in revenues was primarily driven by lower demand for investigations and dispute services, in part because certain matters were at least deferred due to travel restrictions to client locations, court closures and delays.
Adjusted segment EBITDA was a loss of $9 million, which compared to adjusted segment EBITDA of $28.2 million or 19.4% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to lower revenues with lower staff utilization and higher compensation related -- primarily related to a 9.4% increase in billable headcount, which was only partially offset by a decline in SG&A expenses.
Sequentially, FLC revenues decreased $41.2 million or 27.9% as we experienced lower demand for our investigations, disputes, and data and analytics services.
In addition to the COVID-19-related impacts that I previously mentioned as negatively impacting revenues, a few large investigations ended during the second quarter.
Our economic consulting segment's revenues of $151.5 million decreased 2.6%, compared to the prior-year quarter.
Despite the impacts of COVID-19, we were able to continue work on large M&A-related antitrust engagements and achieved higher realization.
This increased demand for M&A-related antitrust services was more than offset by lower demand for financial economics and non-M&A-related antitrust services, as well as, lower realization for non-M&A-related antitrust and international arbitration services, compared to the prior-year quarter.
Adjusted segment EBITDA of $21.7 million or 14.3% of segment revenues, compared to $23.3 million or 15% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to lower revenues, as well as, higher SG&A expenses, primarily related to an increase in bad debt, which was partially offset by lower variable compensation.
Sequentially, economic consulting's revenues increased $19.4 million or 14.6% due to increased realization and demand for our M&A-related antitrust services.
In technology, revenues of $47.1 million decreased 15.4%, compared to the prior-year quarter.
The decrease in revenues was primarily due to lower demand for litigation and global cross-border investigation services, in part arising from COVID-19-related delays of investigations and travel restrictions, as well as, lower revenues related to the completion of our transition services associated with the September 2018 Ringtail divestiture.
Adjusted segment EBITDA of $6.4 million or 13.7% of segment revenues, compared to $12.9 million or 23.1% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was due to lower revenues and higher compensation, primarily related to a 19.5% increase in billable headcount.
On a sequential basis, technology revenues decreased $11.6 million or 19.8% because of decreased demand for global cross-border investigations and M&A-related services.
Revenues in the strategic communications segment of $56.9 million decreased 3.8%, compared to the prior-year quarter.
Excluding the impact of FX, the decrease in revenues was primarily due to a $1.9 million decline in pass-through revenues, which include billable travel and entertainment expenses, client event costs, and media buys.
The decrease in revenues was partially offset by higher demand for public affairs and financial communications services.
Adjusted segment EBITDA of $10 million or 17.6% of segment revenues, compared to $10.5 million or 17.7% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was due to higher compensation, primarily related to a 13.2% increase in billable headcount, which was partially offset by a decline in SG&A expenses.
Sequentially, strategic communications revenues decreased $1.5 million or 2.6%, primarily due to a decline in pass-through revenues, which was largely offset by higher demand for services provided to clients managing through urgent communication projects related to restructuring and financial issues.
Let me now discuss key cash flow and balance sheet items.
We generated net cash from operating activities of $153 million and free cash flow of $147.3 million in the quarter.
Total debt, net of cash, decreased $100.1 million year over year from $147.1 million at June 30, 2019, to $47 million at June 30, 2020.
During the quarter, we repurchased 470,853 shares at an average price per share of $108.41 for a total cost of $51 million.
In the last 12 months, ended June 30, 2020, we have repurchased 1.27 million shares at an average price per share of $107.78 for a total cost of $137.1 million.
On July 28, 2020, our board of directors authorized an additional $200 million for share repurchases.
As of July 28, 2020, we have re -- we have purchased 8.2 million shares pursuant to the repurchase program at an average price per share of $54.90 for an aggregate cost of approximately $450.4 million.
We have approximately $249.5 million remaining available for share repurchases under the program.
Turning to our guidance.
In several prior quarterly calls, we have shared with you that a small change in revenue for us can have an outsized impact on earnings per share because of the relatively fixed cost nature of our business and associated margins.
This cuts both ways as was abundantly evident this quarter in a positive way for our corporate finance segment and a negative way for our FLC segment.
Our decision to reaffirm guidance for the year, even in this very uncertain time, is based not only on our results to date, but also on several assumptions about the balance of the year.
First, we expect elevated demand for our restructuring services at least for the balance of this year, driven by strong demand in several verticals, including oil and gas exploration, production and drilling, automotive, department stores, financials, telecommunication services, healthcare, airlines, restaurants, and entertainment, and entertainment venues.
Second, our guidance assumes an improvement, though very gradual, in utilization for many of our practices across several segments, but in particular, for our FLC segment.
We are starting to see virtual depositions and arbitrations being rescheduled and some paused on-site client work starting to resume.
I caution, though, that this situation is fluid as the majority of our client premises are still not open.
We are restricting travel for our employees even where airlines are operating or where cross-border travel is allowed.
Business development is hampered by not being in-person and backups in court proceedings may push certain work into next year.
Third, we believe this pandemic will continue to result in a new genre of disputes, investigations, and conflicts that our experts are well-positioned to assist with and support.
Our expertise is needed as distressed transactions, crisis communications, litigations related to material adverse effect clauses, disputes related to business interruption, and investigations arising from improprieties grow.
Fourth, with business travel all but stopped, there is an associated drop in billable and non-billable travel and entertainment expenditures.
Fifth, our guidance is for a finite period, the next two quarters.
And we typically have lower utilization in the fourth quarter as many of our professionals may take time off for the holidays in the fourth quarter.
This year, in particular, this impact maybe even more pronounced than usual.
Before I close, I want to reiterate a few key themes that underscore the strength and potential of our business.
The relative strength and stability of our collective grouping of businesses shined through this quarter.
Despite a global pandemic, we reported record revenues and reaffirmed guidance.
We continue to attract talent because our colleagues are working on the highest profile engagements in their fields across the globe and we believe our investments in talent with higher utilization will drive profitability.
As Steve mentioned, over the years, we have both deepened our core capabilities, for example, in EMEA, Asia, and Australia in corporate finance and expanded into adjacencies, such as non-M&A-related antitrust, business transformation, cybersecurity, and public affairs.
We continue to believe that these areas will come out strong as we emerge on the other side of this pandemic.
Our business generates tremendous free cash flow as evidenced by the $100.1 million reduction in net debt over the last 12 months despite us repurchasing $137.1 million worth of our shares over the same time frame and making a well-timed acquisition of a leading restructuring business in Germany.
On top of this, our balance sheet strength gives us the flexibility to continue to create shareholder value in numerous ways.
Worth noting, following the close of the second quarter, on July 1st, 2020, we closed the acquisition of Delta Partners.
We believe this acquisition, along with our already very strong position in the technology, media, and telecom vertical, makes us one of the preeminent TMT-focused consulting practices in the world.
And today, we announced a $200 million increase to our share repurchase authorization.
| compname reports q2 earnings per share $1.27.
q2 earnings per share $1.27.
q2 revenue $607.9 million versus refinitiv ibes estimate of $563.9 million.
q2 adjusted earnings per share $1.32 excluding items.
|
I am pleased to report the final results for 2020.
Our performance shows the resiliency of our business.
In 2020, our team has met each challenge with confidence and conviction.
Our team is focused on providing a safe experience for residents, customers and employees.
We were able to serve our residents and customers in a challenging operating environment while maintaining our impressive customer feedback scores.
We continued our record of strong core operations and FFO growth with a 10% growth in normalized FFO per share in the quarter.
The fundamentals of our business remain strong with demographic and economic trends creating tailwinds for future growth.
In 2020, our MH portfolio increased occupancy by 293 sites.
We experienced continued strength at our MH properties with full-year rent revenue growth of 4.6%.
We saw fewer move-outs this year, primarily due to shelter-in-place orders.
We adjusted our sales and marketing efforts and were able to access new customers and efficiently showcase our homes in a virtual environment.
Throughout the fourth quarter, there were over 100 virtual home tours on our website.
Website visitors looking at our listings were three times more likely to express interest in the community and share their contact information for a follow-up from our team after reviewing a virtual tour on our website.
We see this as an opportunity to further grow RV base.
In 2020, the demand was strong for RV sites across the country.
In the quarter, we saw an increase in core transient revenue of 15%.
This growth was fueled by marketing campaigns for fall and winter campaign opportunities.
Our customers are interested in experiencing vacations in a safe environment.
We also see an increased flexibility in customer schedules that will continue to benefit us.
In 2020, our Thousand Trails membership portfolio performed in line with pre-pandemic expectations.
Our dues revenue increased over 4% to $53 million.
We sold over 20,000 camping passes, an increase of over 6% from 2019.
Our upgrade sales increased 15% over 2019 as we saw more customers interested in increasing their commitment to the Thousand Trails system.
In 2020, to help support the safety of our guests and team members, we launched a new online check-in option for our RV guests.
About one-third of guests completed the online check-in process, allowing them to get to their site more quickly and with less direct interaction.
In addition, in 2020, we provided our guests an added way to communicate with our on-site teams during their visit by launching a text message program to reduce the number of in-person interactions.
Our guests reported high satisfaction levels, based on the experience provided by our teams at our properties.
We send online service to our guests after they stay at our RV resorts and campgrounds.
Based on the fourth quarter survey results, guests responding to customer experiences questions with the rating of over 4.5 out of 5.
We have issued guidance of $2.31 at the midpoint, which is a 6.4% growth in normalized FFO per share.
The demand for our MH communities continues to increase.
Over the last five years, we have sold more than 2,200 new homes in our communities.
We finished the year strong with a 30% increase in new home sales year-over-year.
We see heightened demand for our locations and believe our home sales volume will reflect that demand.
We have noticed rent increases for approximately 60% of our residents and anticipate a 4.2% rate growth in MH revenue.
Our RV business in 2020 showed resiliency as it rebounded from pandemic-related closures.
As we head into 2021, we continue to have the backdrop of COVID-related travel issues in Canada and the U.S. hampering our results for the first quarter.
As we have discussed, our Canadian traffic has been significantly impacted by the border closures.
Our guidance for 2021 reflects the strength in our business.
Our guidance is built based on the operating climate of each property, including a robust market survey process and continuous communication with our residents.
Since our last call, we have closed on over $200 million of transactions.
We added approximately 2,100 RV sites to the portfolio and approximately 500 MH sites, with over 700 sites of adjacent expansion and 500 marina slips.
The acquisitions were geographically diverse and complementary to our existing footprint.
Additionally, we closed on four parcels of entitled land with 300 acres.
We anticipate being able to build 1,000 sites in these acquired acres.
In total, in 2020, we purchased eight parcels of land adjacent to our existing properties.
We will continue to pursue and execute on these value add transactions.
Next, I would like to update you on our 2021 dividend policy.
The Board has approved setting the annual dividend rate at a $1.45 per share, a 6% increase.
The Board will determine the amount of each quarterly dividend in advance of payment.
The stability in growth of our cash flow, our solid balance sheet and the strong underlying trends in our business are the primary drivers of the decision to increase the dividend.
Historically, we have been able to take advantage of opportunities due to the free cash flow generated by our operations.
Consistent with the past, in 2021, we expect to have an excess of $90 million of discretionary capital after meeting our obligations for dividend payments, recurring capital expenditures and principal payments.
We have increased our dividend significantly over the last few years.
Over the past five years, we have increased our dividend 71%.
2020 was a difficult year.
We have over 4,000 team members dedicated to ensuring success in our organization, and for that I am grateful.
We asked a lot of our team members this year, with each new regulation or change in operating climate, we saw increased dedication to our continued success.
Our team members strive to perform their best each day and the results of their efforts have been impressive.
I will review our fourth quarter and full-year 2020 results, and provide an overview of our full-year 2021 guidance.
Fourth quarter normalized FFO was $0.57 per share.
Strong performance in our Core Portfolio generated 3.6% NOI growth for the fourth quarter.
Core NOI growth of 2.9% for the full year contributed to our normalized FFO per share growth of 3.9%.
As Marguerite mentioned, full-year core community base rental income growth was 4.6%.
Rate increases contributed 4.1% growth while occupancy generated the additional 50 basis points.
Our 2020 core occupancy increase included a gain of 345 homeowners.
Our rental homes continue to represent less than 6% of our MH occupancy.
Full-year core resort base rental income growth from annuals was 5.6% with 4.9% from rate increases and 70 basis points from occupancy gains.
Core RV seasonal and transient revenues declined 3.7% and 8%, respectively for the year.
Fourth quarter seasonal RV revenues were approximately $2 million less than last year, mainly due to the travel-related restrictions impacting Canadian and U.S. domestic customers' decisions to spend the winter season in our Southern resorts.
For the full year, net contribution from our membership business was $2.9 million higher than 2019, an increase of 5.3%.
Dues revenues increased 4%, mainly as a result of increased rate.
Strong demand for our upgrade products is evidenced by the full-year increase in sales volume of 16%.
Full-year growth in utility and other income is mainly the result of increases in real estate tax pass-throughs and utility income.
The pass-through income represents recovery of 2019 tax increases, mainly in Florida, and the utility income increase reflects recovery of increased expense resulting from higher usage in our properties.
Full-year core property operating, maintenance and real estate taxes increased 5% compared to 2019.
This increase includes approximately $5.1 million in unplanned expenses associated with cleanup following hurricanes Hanna and Isaias, as well as expenses incurred as a result of cleaning and safety protocols and frontline employee compensation following the onset of COVID-19.
Our non-core properties, including those acquired during the fourth quarter, contributed $4.4 million in the quarter and $14.4 million for the full year.
Property management and corporate G&A were $97.2 million for the full year.
Other income and expenses, net, which includes our sales operations, joint venture income as well as interest and other corporate income, was $10.5 million for the year.
Interest and amortization expenses were $102.8 million for the full year.
This includes the partial year impact of our refinancing activity in the first and third quarters, as well as the line of credit borrowings used to fund our recent acquisitions.
As I provide some context for the information we provided, keep in mind, my remarks are intended to provide our current estimate of future results.
Our guidance for 2021 normalized FFO is $445 million or $2.31 per share at the midpoint of our guidance range of $2.26 to $2.36 per share.
We projected core NOI growth rate between 3.3% and 4.3% with 3.8% at the midpoint.
Full-year guidance includes 4.2% rate growth for MH and 4.5% for annual RV rents.
We assume flat occupancy in our MH properties for 2021.
Our guidance assumes first quarter seasonal and transient RV revenues perform in line with our current reservation pacing.
We estimate the first quarter decline in revenue from these line items compared to same period last year to be almost $10 million.
Almost 50% of that shortfall is caused by our Canadian customers deciding not to visit for the season.
Our customer reservation trends indicate a strong interest in returning to our properties for the 2021-'22 winter season.
Current reservations for seasonal stays in the first quarter of 2022 are four times higher than last time at this year.
As a reminder, in years prior to 2020, the first quarter represented approximately 50% of our seasonal RV revenues for the year.
Within our transient RV business, we have two lines of revenue, one services the customers who drive their RV to our property and the other services the cottage rental customers.
For the first quarter, we have seen an increase of 10% in the reservations from customers driving their RV to our resorts and a decline in our cottage rental business of almost 40%.
This represents approximately $1 million less cottage rental income in 2020.
While we have less visibility into the transient business for the remainder of the year, we have seen an increased reservation pace for the spring and summer season.
We expect first quarter normalized FFO per share to represent approximately 24% to 25% of full-year normalized FFO per share.
Our guidance model includes the impact of our recent acquisitions, including the RV property we acquired last week.
The model also includes the financing activity I'll discuss shortly.
The full-year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2021.
I'll now provide some comments on the financing market and our balance sheet.
The lender currently holds the mortgage on two of the properties to be financed.
Those existing mortgages mature in 2022 and carry a weighted average rate of 5.1%.
We intend to use the loan proceeds to repay a portion of our 2022 maturities and amounts outstanding on our line of credit.
Please note, as this loan is not yet closed, we can make no assurance that it will close pursuant to these terms or at all.
Current secured debt terms are 10 years at coupons between 2.5% and 3.5%, 60% to 75% loan-to-value and 1.4 times to 1.6 times debt service coverage.
We continue to see strong interest from life companies, GSEs and CMBS lenders to lend at historically low rates for terms 10 years and longer.
High-quality age-qualified MH assets continue to command best financing terms.
We have no secured debt maturing in 2021.
Our $400 million line of credit currently has approximately $297 million outstanding.
Our ATM program has $200 million of available liquidity.
Our weighted average secured debt maturity is approximately 13 years.
Our debt-to-adjusted EBITDA is around 5.2 times and our interest coverage is 5.1 times.
We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us.
| q4 revenue rose 5.1 percent to $271.9 million.
sees 2021 normalized ffo/share $2.26 to $2.36.
qtrly ffo available for common stock and op unit holders were $0.57 per common share.
sees 2021 fy normalized ffo/share to be $2.26 to $2.36.
q1 2021 normalized ffo per share is anticipated to represent 24-25% of full year normalized ffo per shar.
board has approved setting annual dividend rate for 2021 at $1.45 per share of common stock, an increase of 5.8%.
|
During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin and free cash flow.
To ensure our disclosures are consistent, these slides provide the same details as they have historically, and as I've said, are available on the Investor Relations section of our website.
With these formalities out of the way, I'm joined today by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
Well, I'm sure you've all noticed that it's the end of October and COVID is still with us.
And I'm guessing that's just as troubling for you and as it is for me.
I think most of us knew during the summer that the evidence suggested there would be a good chance that COVID would still be with us at this point.
I don't think any of us really expected that it would be completely gone, but I guess it's -- that most of us secretly hoped it would, and at least had some expectations it would be better than it is today.
Our company, as I'll talk about in a moment, we're in terrific shape.
We're not in perfect shape.
There's no company during COVID that's in perfect shape, but we are in terrific shape.
And that has only been possible because of the extraordinary efforts by our people, efforts to support clients, to support each other from home, efforts that collectively have put us in a strong position not only to weather COVID, but in my view, to soar coming out of this.
And today, as usual, I will let Ajay take you through the details of the quarter, but let me upfront share a couple of comments: one on the revision to guidance; and secondly, and at least as important, why I continue, notwithstanding that revision, to be so positive about this company's future.
Let me start with the adjustment to guidance.
It is really essentially an adjustment to our expectations about the fourth quarter.
The third quarter, though different from expectations and some specifics, did not come out too different from what we expected in aggregate.
But at the end of the last quarter, we had hopes that the evolution of COVID will allow for a stronger fourth quarter than we do today.
So, let me go into that in a little more detail.
As you know, I think, our fourth quarter results are typically our weakest, considerably less strong than the prior three quarters.
For example, if you look at the last five years, our fourth quarter earnings per share is roughly two-thirds of our prior three quarters because of holidays and some end-of-year factors.
This year, we thought the evolution of COVID might allow for better.
Back in July, we suspected that COVID would still be here in the fourth quarter.
But we, and I'm guessing most of you, did not believe it was going to be as present as it is today.
And therefore, we hoped for a somewhat more rapid unfolding of the opening of courts, more rapid derejudification of the legal system, more of an opening of cross-border travel, all of which, of course, would allow a faster return to normal for some of the businesses that were hurt by COVID.
We also thought that if that didn't happen at the speed we hoped for, onto the other side, we would see a continuation of the extraordinary strength we had in our restructuring business in the second quarter.
What has happened in reality is both of these, but unfortunately to a somewhat lesser extent than we had expected.
First, in terms of just the businesses that were negatively affected by COVID, they are in large part starting to come back.
We have started to see some signs of improvement in FLC and in other parts of our business that have been affected by travel restrictions and court closures.
But that recovery is at a considerably slower pace than we had hoped.
It's just not the hockey stick we expected to see begin in the third quarter and continue into the fourth quarter.
Second, in terms of the restructurings and bankruptcies, last quarter, if you recall, we talked about the fact that there is uncertainty -- there was uncertainty around that.
We talked about how we could, at a scenario where the government actions caused a temporary pause on bankruptcies and restructurings, at least in some parts of our world.
We believe then and continue to believe now that the restructuring market is going to be here for a considerable amount of time.
But we also understood that there could be waves because of government policies.
For example, the aggressive monetary stimulus that we have seen can affect or at least seriously delay bankruptcies and restructuring activity.
What has happened here recently is that market forces began to play out to be more in favor of loose money and against restructuring activity than we had expected, not extraordinarily worse, but around-the-edges worse.
You can see that in our third-quarter results, but you can also see it very vividly in external data.
Notably, if you look at, for example, August and September Chapter 11 filings and defaults, they fell to just over half the level that they were between May and July.
And I think the reason for that is essentially the loose money.
The loose money has allowed for an unprecedented issuance of speculative-grade bonds this year and at remarkably reasonable rates.
If you look at the rates right now, they are also not too different from where they were pre-COVID, and the spreads compared to March have halved.
And that has made a difference in the third quarter, and it's obviously making a difference at this point in time.
The consequence of that is not that our restructuring business is doing poorly.
To the contrary, it is still experiencing considerably higher demand than it did pre-COVID, but it is just not as strong as we had hoped and expected back in July.
And it is not as strong enough to offset the slower pace of recovery we are seeing in the other parts of our business.
So the combination of COVID being more significant and longer impact on parts of our business and the loose money have a slowing effect on the pace of bankruptcy filings and other restructuring activities, together, means that we just no longer feel confident in an anomalous fourth quarter, a fourth quarter that's higher or as high as the first three quarters of the year.
And if you build in a more typical ratio of fourth quarters compared to prior quarters, you get to the $5.25 to $5.75 range for adjusted EPS, that Ajay will now talk about, as opposed to the $5.50 to $6 that we had before.
So we've moved our guidance there.
That's all I was going to say on guidance.
Let me move on to what, I guess, is the next set of questions on many people's minds, which is, so what does that mean going forward?
How does that play out?
And I'm guessing there are two versions of that question.
One is, how does that play out near term?
And two, does that change the fundamental trajectory of the company longer term?
Let me talk to both of those with a caveat that perhaps counter-intuitively, it is easier to predict the medium and long term than it is the short term.
I'm sure that's also pretty counterintuitive, but that's my experience in this business.
And the reason for that is, in the short term, we can be and are buffeted by factors such as those I just described, factors that are external to us, loose money, M&A trends, regulatory activity, etc.
Whereas my view of our history is that over the long term in this business, over the long term whether we perform or not, is much more of a function to us, of what we do, which is ultimately in our control.
If we are well positioned around the core issues our clients are facing, if we have great people with great brands and if we are in the market in an effective way, my experience is, and I think the data show, we grow over any medium term.
The factors we can control over the medium term outweigh the short term factors.
As a result, in my mind, though, there is uncertainty in the short term.
I am at least as confident about the long term as when we went into COVID.
In the short term, of course, the trends we are seeing this could continue.
We are seeing a gradual strengthening of the businesses that are slow now, but it's gradual.
We don't see anything that suggests we're going to have -- go backwards, but we also don't see a current acceleration of those trends.
So we could be below our long-term expectations for some subsets of our business for a while.
And so of course, the loose money and the government stimulus could continue to erode the strong performance of Corp Fin for a while.
I should note, however, that, that can reverse itself incredibly fast, for example, with around couple of large bankruptcies or restructurings happening, we win then.
But for sure, it is possible that loose money could affect us for a while, notwithstanding our belief that loose money cannot ultimately offset forever the underlying economics of businesses.
So absolutely, there are things that are out of our control, and those things could mean there are slowness that continues into the first half of the year.
But over any medium or long-term period, one has to believe there's going to be litigation in the world, there's going to be investigations in the world, there are going to be tribunals to try cases.
Juries will eventually allow -- be allowed once again to sit in the same room at the same point in time.
There will be disputes.
We will have an M&A activity.
And the underlying economic realities will dictate there are bankruptcies and restructurings.
So over any medium term, our results, in my view, will be much less affected by forces outside our control and more dictated by questions like, are we well positioned, are we strengthening our businesses, are we going after the right adjacencies.
On the people side, are we retaining the best people, are we developing great people, are we an attractive place for people to join.
And as you know, we felt pretty good about the answers to those questions going into COVID.
In terms of the jobs and awards we had won around the world, the list had never been longer or more impressive.
We had extended into key new adjacencies that were supporting our business, cybersecurity, business transformation, public affairs and others.
We had expanded and enhanced our geographical footprint.
We had record numbers of new promotions and our ability to attract senior talent from the outside, as shown by the powerful number of senior hires that we have achieved, had never been as strong.
And a consequence of that, I'm sure you all remember, was unprecedented organic growth for this company in 2018 and '19.
Double-digit top line growth that drove record earnings.
And even if one discounts some of that growth as anomalous or a catch-up from prior years or you're having slower growth this year, our multiyear trajectory now for an extended period of time, still calculates it to be an impressive set of numbers.
Important this year, notwithstanding COVID and notwithstanding all of its challenges, we have continued to invest between each of those critical levers.
We have continued to also support our clients and what are turning out to be high-profile, brand-building assignments.
The largest bankruptcies globally, mega deals with antitrust implications, largest investigations happening in different parts around the world, Asia, Germany, the U.S. Companies facing an antitrust cases related to data privacy, and companies at the center of the COVID pandemic working toward a vaccine, among many other high-profile engagements.
As a result, we have deepened the most key client relationships in our firm and continue to win industry accolades, from leading The Deal bankruptcy tables for this 12th consecutive year, to having more employees named to who's who on Consulting Experts guide than any other firm globally for the fifth consecutive year, to ALM recently naming us a pacesetter for the financial crisis management, among many others.
Importantly, in the face of COVID, we have promoted more people this year than ever before.
Our employee engagement scores are the highest we have ever had.
Our retention rate is the highest we have ever had.
And our attractiveness to leading experts at other firms that now see FTI as a fabulous platform for advancing their careers, as measured either by the number of hires we've done or probably more currently than not -- our phone is ringing -- has never been higher.
As I'm sure you know, not all firms have gotten through COVID as well as we have thus far, and some of our competitors are experiencing other stresses.
And as a consequence, the number of conversations we're having with terrific people whose culture fits with us, who want to join us, is powerful indeed.
As a consequence, in the face of this COVID, and we have committed to and achieved record headcount growth, leaving us with a strength of team around the world that I believe is unprecedented in this company's history.
As a result, notwithstanding the incredible growth we were experiencing coming into the COVID, today, I feel at least as bullish, if not more, about our prospects coming out of it.
I'm pleased to report strong third-quarter results.
Most notably, our Forensic and Litigation Consulting, or FLC segment, delivered strong sequential improvement even with significant opportunity remaining for increased utilization.
Conversely, in the corporate finance and the restructuring segment, bankruptcies ebbed, perhaps in part due to government stimulus benefiting certain industries, which in turn had us reporting revenue in that segment at less than the level reached in the second quarter of 2020.
Underscoring our market-leading positions and resiliency, even in the face of a global pandemic, this quarter's revenue of $622.2 million was a record high.
Both billable headcount of 5,019 and year-over-year billable headcount growth of 15.8% were records that are giving us ample capacity for future growth and profits.
Let me take you through the details.
For the quarter, revenues of $622.2 million were up $29.1 million or 4.9%,, compared to revenues of $593.1 million in the prior-year quarter.
Our revenue growth year over year was driven by higher demand in our corporate finance and restructuring and economic consulting segments, which was partly offset by lower demand in our FLC and strategic communications segments and a decline in pass-through revenue as compared to the prior-year quarter.
GAAP earnings per share of $1.35 in 3Q '20, compared to $1.59 in the prior-year quarter.
Adjusted earnings per share of $1.54, compared to $1.63 in the prior-year quarter.
The difference between our GAAP and adjusted earnings per share in the quarter reflects a $7.1 million special charge, which reduced GAAP earnings per share by $0.14 and $2.3 million of some noncash interest expense related to our convertible notes, which decreased GAAP earnings per share by $0.05.
The special charge is comprised of two items.
First, we announced in August that we have leased approximately 120,000 square feet of new space at 1166 Avenue of the Americas, consolidating from approximately 160,000 square feet of space in two offices in New York.
We expect to take possession of the space in April of 2021.
In advance of this, and given most employees are currently working from home, we have already abandoned 67,000 square feet of space resulting in around $4.7 million in lease abandonment and relocation costs.
Second, in the quarter, we took performance-related actions in our FLC segment that resulted in severance and other employee-related costs of $2.4 million.
As of September 30, 2020, our weighted average shares outstanding, or WASO, of 37.1 million shares, compared to 37.9 million shares of September 30, 2019.
WASO includes the potential dilutive impact of our convertible notes, which at the end of this quarter was approximately 337,000 shares.
We have more than offset both dilution from our convertible notes and from normal course equity compensation by repurchasing 1.9 million shares over the last 12 months.
Third quarter 2020 net income of $50.2 million, compared to net income of $60.4 million in the prior-year quarter.
The year-over-year decrease was largely because direct costs increased $36.3 million, which was primarily related to 15.8% increase in billable headcount.
We also have the $7.1 million special charge and FX remeasurement losses of $3.5 million due to weakening of the U.S. dollar against other major currencies, which, compared to a $2 million gain in the prior-year quarter.
These cost increases were only partially offset by higher revenues and a decline in SG&A expenses as well as a lower effective tax rate.
SG&A expenses in the third quarter of $122.1 million were the 19.6% of revenues.
This compares to SG&A of $128 million or 21.6% of revenues in the third quarter of 2019.
The decrease was primarily due to lower travel and entertainment expenses, resulting from COVID-19-related travel restrictions and lower bad debt, which was partially offset by an increase in salaries and employee-related expenses driven by the 11% year-over-year increase in nonbillable headcount.
Third quarter 2020 adjusted EBITDA of $90.9 million or 14.6% of revenues, compared to $92.3 million or 15.6% of revenues in the prior-year quarter.
Our effective tax rate for the third quarter of 22.3%, compared to 24.7% in the prior-year quarter.
The 2.4% decline was primarily due to a favorable discrete tax adjustment related to some share-based compensation.
Billable headcount increased by 685 professionals or 15.8%, compared to the prior-year quarter.
Sequentially, billable headcount was up by 374 professionals or 8.1%.
Now I'll share some insights at the segment level.
In Corporate Finance & Restructuring, revenues of $236.6 million increased 23.4%, compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand and higher realized bill rates for our restructuring services and a full quarter of revenues from our Delta Partners.
On July 1 this year, we acquired Delta Partners.
And last year, in August, we acquired Andersch AG.
Acquisition-related revenues in the quarter were $15.4 million.
As a reminder, we consider revenues as acquisition-related for the first 12 months post acquisition.
As such, this quarter, one month of Andersch revenues and three months of Delta Partner revenues were considered acquisition-related.
Worth noting though, from an industry perspective, we experienced the strongest demand in restructuring in airlines, telecom, restaurants, energy, transportation, retail, healthcare, real estate, and media and entertainment.
Adjusted segment EBITDA of $56.2 million or 23.8% of segment revenues, compared to $48.1 million or 25.1% of segment revenues in the prior-year quarter as higher revenues more than offset an increase in compensation, primarily related to a 36.6% increase in billable headcount and higher variable compensation.
On a sequential basis, Corporate Finance & Restructuring revenues decreased $9.4 million or 3.8%.
As Steve mentioned, the volume of bankruptcies in the U.S. slowed in July and August, and we experienced a sequential decline in demand for our restructuring services.
This decline in restructuring revenues was only partially offset by an increase in revenues in business transformation and transactions, which includes the Delta Partners acquisition.
In transactions, we are seeing a good pickup in the activity in healthcare, telecom, media and technology, retail, chemicals and industrials, in particular with our private equity clients.
Sequentially, adjusted segment EBITDA declined more than revenue because of sharply higher headcount-related costs driven by the 18.1% increase in billable headcount.
SG&A expense also rose because of a onetime adjustment to earn-out accretion expenses related to our Andersch acquisition, and additional employee and infrastructure costs added as part of the Delta Partners acquisition.
Turning to FLC, our revenues of $119.1 million decreased 16.5%, compared to the prior-year quarter.
The decrease in revenues was primarily driven by lower demand for disputes and investigation services, in part because certain matters were at least deferred due to travel restrictions to client locations as well as foreclosures and delays.
Adjusted segment EBITDA of $13.6 million or 11.4% of segment revenues, compared to adjusted EBITDA of $27 million or 18.9% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was also primarily due to lower revenues with lower staff utilization, which was only partially offset by a decline in SG&A expenses.
Sequentially, FLC revenues increased $12.7 million or 12% as demand rose for our investigations, data and analytics and dispute services.
Notably, we saw a gradual opening of courts over the course of the quarter, and trial dates are getting scheduled.
Our adjusted EBITDA increased $22.6 million compared to the second quarter of 2020.
This impressive rebound is primarily due to the increase in revenues as well as lower compensation, which included variable compensation accruals and lower bad debt.
As I mentioned earlier, during the quarter, we took a special charge within our FLC segment, resulting from severance payments to 16 employees.
Our economic consulting segment's revenues of $155 million increased 9.4% compared to the prior-year quarter.
Like last quarter, revenue growth was driven by higher demand and realized bill rates for large M&A-related antitrust engagements.
Our adjusted segment EBITDA of $25.7 million or 16.6% of segment revenues, compared to $19.4 million or 13.7% of segment revenues in the prior-year quarter.
The year-over-year increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by an increase in compensation primarily due to a 15.2% increase in billable headcount and higher variable compensation.
Sequentially, Economic Consulting's revenues increased $3.5 million or 2.3%.
We delivered higher revenues in our International Arbitration business as the virtual testimony was introduced more broadly during the quarter.
Also noteworthy, we are seeing higher demand for our non-M&A-related antitrust services and higher demand for our financial economics and breach of contract services, driven by an uptick in demand arising from COVID-19-related disputes.
This was partially offset by a decline in revenues for our M&A-related antitrust services compared to the second quarter of 2020.
In Technology, revenues of $58.6 million increased 2.6% compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand for global cross-border investigation and litigation services, which was partially offset by a decline in demand for M&A-related services.
Adjusted segment EBITDA of $11.9 million or 20.4% of segment revenues, compared to $12.3 million or 21.5% of segment revenues in this prior-year quarter.
The decrease in adjusted segment EBITDA was due to higher compensation primarily related to a 13.2% increase in billable headcount.
On a sequential basis, Technology revenues increased $11.5 million or 24.4% primarily due to higher demand for our investigation services and a surge in demand for M&A-related second request services.
Revenues in the strategic communications segment of $53 million decreased $7 million or 11.7% compared to the prior-year quarter.
The decrease in revenues was primarily due to lower demand for corporate reputation and financial communications services and a $2.3 million decline in pass-through revenues.
Adjusted segment EBITDA of $8.4 million or 15.9% of net segment revenues, compared to $12.6 million or 21.1% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was primarily due to lower revenues.
Sequentially, strategic communications revenues decreased $3.9 million or 6.9%, primarily due to a decline for our restructuring and financial communications services, which had surged during the second quarter with a rush of bankruptcy filings.
Let me now discuss free cash flow and balance sheet items.
We generated net cash from operating activities of $111.6 million and free cash flow of $99.8 million in the quarter.
Total debt net of cash of $36.6 million decreased $21.2 million, compared to $57.8 million at September 30, 2019.
During the quarter, we have repurchased 749,315 shares at an average price per share of $110.57 for a total cost of $82.9 million.
At the end of the quarter, we had approximately $182.4 million remaining available for share repurchases under our current authorization.
Turning now to our guidance.
At the outset of the pandemic, parts of our business experienced a strong tailwind, particularly our restructuring business, while other parts of our business experienced a strong downdraft from deferral -- from a deferral of work, if not a reduction in demand.
The exact trade-offs between these opposing forces was and is uncertain.
Regardless, we maintained our guidance all through this year.
Now with three quarters under our belt, we are adjusting our guidance ranges for this 2020 only slightly downwards, with the higher end of our revised ranges still within our original range.
We now expect 2020 revenues will range between $2.42 billion and $2.47 billion.
This compares to the previous revenue range of $2.45 billion to $2.55 billion.
We now expect 2020 GAAP earnings per share will range between $4.93 and $5.43.
This compares to the previous GAAP earnings per share range of between $5.32 and $5.82, and includes our third-quarter special charge of $0.14 per share and an estimated noncash interest expense of $0.18 per share related to 2023 convertible notes.
And we now expect 2020 adjusted earnings per share will range between $5.25 and $5.75.
This compares to the previous adjusted earnings per share range of $5.50 to $6.
First, we experienced a reduction in the volume of bankruptcies over the last few months compared to the second quarter of 2020.
And our revised guidance assumes a similar level of bankruptcies in the fourth quarter as we had this quarter.
As Steve mentioned, in terms of restructuring globally, the pandemic has had an uneven impact on many industries and government subsidies and policies have altered the natural course.
In aggregate, in the fourth quarter, we now expect continued distressed situations in oil and gas exploration, production and drilling; healthcare; automotive; department stores; airlines; restaurants; and entertainment and entertainment venues.
So the level of such demand is not expected to be as strong as earlier in the year.
Second, we delivered strong sequential improvement in our FLC segment.
While there remains significant room for further improvement from higher utilization, we expect such improvement to be gradual.
Other segments, despite the pandemic, are doing well.
However, we are also approaching year-end and are expecting our employees to take well-deserved vacations with ensuing typical seasonal impact to billings across all segments.
Before I close, I want to reiterate a few key themes that underscore the long-term strength and potential of our business.
First, we believe we are the leading in -- the world leader, in restructuring.
And we expect waves of defaults in the coming 12 to 24 months, so timing is uncertain.
With our record staff additions in this segment, and as we continue to invest for growth, we are better positioned now to help our clients globally than ever before.
Second, we have significantly diversified our offerings over the last several years with investments in areas such as non-M&A antitrust, international arbitration, business transformation, cybersecurity and public affairs.
Not only are we producing better results in FLC, but also, we are seeing these practices strengthening as we slowly emerge on the other side of this pandemic.
Third, we believe we are the choice employer in our practice areas and continue to attract talent because our colleagues are working on our highest profile engagements in their fields across the globe.
Fourth, at our core, we help our clients, especially in times of dislocation, as they navigate through their most complex business challenges.
This pandemic will undoubtedly result in a new genre of disputes, investigations and conflicts that our experts are already assisting with and supporting.
And fifth, in the last 12 months, we have reduced net debt by $21.2 million while repurchasing $212.2 million worth of our shares, and acquiring Delta Partners, the preeminent technology, media and telecom focused consulting practice.
Our good business generates tremendous free cash flow and our balance sheet is enviable, giving us the ability to continue to invest for growth and return capital to shareholders.
| compname reports q3 earnings per share $1.35.
sees fy 2020 adjusted earnings per share $5.25 to $5.75.
sees fy 2020 earnings per share $4.93 to $5.43.
q3 earnings per share $1.35.
sees fy 2020 revenue $2.42 billion to $2.47 billion.
q3 revenue $622.2 million versus refinitiv ibes estimate of $623 million.
q3 adjusted earnings per share $1.54 excluding items.
|
Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
On behalf of our entire team at Applied, we hope you and your families are healthy, safe and managing well.
I'll start today with a brief operational update, including our ongoing actions in response to the COVDI-19 pandemic, as well as what we're seeing across our business in this fluid environment.
Dave will follow with a summary of our financials and some specifics on our fourth quarter and outlook, and then I'll close with some final thoughts.
I'm proud of what we've accomplished and how we've responded.
Particularly over the past several months as we face an unprecedented environment from the pandemic and manage to slower demand, within our core end markets.
It's inspiring to see how we've stepped up to the challenge collectively, and remain focused on driving value across our customer and supplier base.
Our top priority remains the well-being of our associates, customers, suppliers and business partners, as the COVID-19 pandemic continues to evolve.
We have quickly adapted our operations, and embedded various safety measures, allowing us to swiftly adjust to our customers' requirements and solidify our supply chain.
All our operations and facilities have remained open, and fulfillment at our distribution centers and local service centers remains efficient.
Our operating model and sales team has shown tremendous flexibility.
Effectively leveraging virtual communication platforms, system investments made in recent years, and our multi-channel capabilities.
The resilient nature of our value proposition is apparent across many facets of our company.
From the motion control products we provide for critical break-fix MRO applications throughout essential industries, such as food and beverage, agriculture, and pulp and paper, to leading fluid power solutions, including electronic control integration, driving greater safety and precision, as well as pneumatic solutions supporting various areas of technology, life sciences and sustainability.
Our position is further strengthened by our team at Olympus Controls, who are addressing greater safety and productivity requirements in the COVID-19 environment, through leading next generation automation solutions.
We are also gaining traction with our cross-selling opportunity, focused on further penetrating our fluid power, flow control, automation and consumable solutions across our legacy service and our customer base.
Of note, we are experiencing greater quoting activity, and sales of flow control products and solutions across our service center network over the past several quarters.
We're also encouraged by initial progress in identifying and developing opportunities aimed at connecting Olympus Controls' automation capabilities across traditional industries.
Our cross-functional teams are laying a foundation that is driving greater customer awareness at various strategic accounts, particularly as the environment cycles and customers look to consolidate spend with fewer more capable providers, that are already critical to their direct production infrastructure.
We're still in the early innings of this cross-selling opportunity, which we believe is meaningful and should drive the incremental growth into fiscal 2021 and beyond.
Importantly, through the evolving backdrop over the past several months, our business and entire Applied team has shown powerful durability.
Our operating discipline and prompt cost actions have allowed us to quickly align expenses and manage working capital within the slower environment, driving mid teen decremental margins, record cash generation and improved liquidity during our fiscal fourth quarter.
We are encouraged by the execution across our team in recent months, which provides solid footing entering fiscal 2021.
As expected, the broader demand environment remain challenging throughout our fourth quarter, as customers implemented shelter in-place orders, reduced production, closed facilities, and deferred project activity.
By month, organic daily sales declined by a high-teens percentage rate year-over-year during April and May, followed by a low 20% decline during June, despite a slight sequential improvement in daily sales rates.
Organic sales to-date in our fiscal first quarter of 2021 or down by mid-teens percentage year-over-year.
When considering prior-year comparisons by month and typical seasonal progression, we would characterize underlying sales as generally stable to slightly stronger, since [Technical Issues].
Weakness remains pronounced across many of our core manufacturing end markets.
This includes heavy industries, such as machinery metals, oil and gas and transportation.
While more customers are bringing facilities back online following shutdowns in recent months, the pace remains gradual and balanced by adjustments to production schedules and working capital discipline.
In addition, while we are selling greater amounts of safety and janitorial supplies to customers, given COVID-19, this product category represents a small portion of our business and was less than 5% of our overall sales during fiscal 2020.
There are however some positive signs in recent weeks, worth noting.
In particular, order rates have gradually improved across our service centers since early July.
We are starting to see greater maintenance activity and break-fix demand from heavy industry customers, as production gradually ramps and safety buffer stock is depleted, following what we believe was some unusual pandemic driven pre-buying during April.
Combined with our increased orders across our consumables business and improving industrial sentiment, such as indicators like PMI, which typically lead our core business.
We believe industrial activity is firming, is behind us.
Ultimately, as industrial production regains momentum, we believe our customer requirements will be meaningful, following a prolonged period of idle production and maintenance deferrals on critical equipment and infrastructure.
That said, visibility remains limited and uncertainty still exists around the speed of recovery, as customers continue to manage operations around a still evolving pandemic and macro outlook.
As such, we remain focused on managing expenses, and are extending various cost actions we outlined last quarter into early fiscal 2021.
These actions include temporary pay reductions and furloughs, as we align to current business conditions, while preserving jobs.
We understand our requirements and will remain disciplined, as the cycle continues to evolve.
That said, these actions are not easy, and we intend to proactively reverse them where appropriate, as soon as possible, given the inherent value our associates bring to this organization and to our growth opportunity going forward.
With our business model showing durability in our fourth quarter, our balance sheet in a strong position, and initial signs of a recovery ahead, we will take an offensive approach into fiscal 2021.
Before I begin, I will remind everyone that a supplemental investor deck, which recaps key financial performance and discussion points, is available on our investors site for your additional reference.
To provide more detail on our fourth quarter results, consolidated sales decreased 17.9% over the prior year quarter.
Acquisitions contributed 1.5% growth, partially offset by an unfavorable foreign currency impact of approximately 1%.
Netting these factors, sales decreased 18.4% on an organic basis, with a like number of selling days year-over-year.
Turning to sales performance by segment, as highlighted on slide 7 and 8 in the deck, sales in our service center segment declined 22.3% year-over-year or 21.1% on an organic basis.
Lower industrial production activity and customer facility closures from COVID-19 precautions drove reduced MRO needs across the majority of our service center customer base during the quarter.
Weakness was particularly acute within metals, mining, oil and gas, machinery and transportation end markets, partially offset by more resilient demand within food and beverage, pulp and paper, forestry, electronics and chemical industries, as well as growth in our Australian operations.
Within our fluid power and flow control segment, sales decreased 6.8% over the prior year quarter, with our August 2019 acquisition of Olympus Controls contributing 5 points of growth.
On an organic basis, segment sales declined 11.8%, reflecting lower fluid power sales within industrial OEM, and mobile off-highway applications, as well as weaker flow control sales from slower project activity.
This was partially offset by fluid power sales growth within the technology end-market during the quarter.
Moving now to margin performance, as highlighted on page 9 of the deck, gross margin of 28.7% declined approximately 40 basis points year-over-year or roughly 70 basis points, when excluding non-cash LIFO expense of $0.8 million in the quarter.
This compared favorably to prior year LIFO expense of $3.4 million.
Gross margin performance was largely in line with our expectations, with year-over-year declines, primarily reflecting unfavorable mix, tied to softer sales across our local service center accounts, coupled with a greater mix of lower margin project business in our Canadian operations, as well as lower levels of vendor support, attributed to softer volumes.
These headwinds were partially balanced by our margin expansion initiatives, stable price cost dynamics, and positive fluid power and flow control segment performance.
While we expect some of these headwinds to persist near term, we remain focused on driving annual gross margin expansion, as demand levels normalize, reflecting benefits from our systems investments, the positive contribution of expansionary products, strategic growth from our technical service oriented solutions, and initiatives to expand business across our local customer base.
Turning to our operating costs; on an adjusted basis, selling, distribution and administrative expenses declined 13.8% year-over-year, excluding $1.5 million of non-routine costs in the quarter, $1 million of which was recorded in our service center segment and $0.5 million in our fluid power and flow control segment.
These costs include severance and facility exit cost related to actions implemented in response to the weaker demand environment.
Adjusted SG&A expense declined nearly 16% over the prior year on an organic basis, when excluding operating costs associated with our Olympus Controls acquisition.
As highlighted last quarter, we implemented various actions to align expenses with slower demand.
These include restricting T&E, over time, temporary labor and consulting spend.
as well as staffing alignments, implementation of furloughs and pay reductions and the temporary suspension of the company's 401(k) match.
While materially difficult, our team displayed great discipline and swiftly executed these requirements across the organization.
As a reminder, this includes a mix of both structural and temporary cost actions, as we continue to assess the environment.
With the demand outlook still soft and uncertain, we remain focused on managing costs near term and have extended the temporary cost actions into our current fiscal first quarter of 2021.
That said, we will be balancing these cost alignments into our fiscal first half, as we look to execute our strategic growth initiatives and requirements to ramp and effectively respond as recovery continues to unfold.
Adjusted EBITDA in the quarter was $64.8 million, down roughly 26% compared to $87.6 million in the prior year quarter, while adjusted EBITDA margin was 8.9% or 9%, excluding non-cash LIFO expense in the quarter.
On a GAAP basis, we reported net income of $30 million or $0.77 per share, which includes the $1.5 million of previously referenced non-routine costs on a pre-tax basis.
On a non-GAAP adjusted basis, excluding these costs, we reported net income of $31.1 million or $0.80 per share, down $39.8 million or $1.02 per share respectively in the prior year quarter.
Moving to our cash flow performance and liquidity; during the fourth quarter, cash generated from operating activities was $127.1 million, while free cash flow was $123.2 million, or nearly four times adjusted net income.
For full year fiscal 2020, we generated record free cash flow of $277 million, representing 186% of adjusted net income and up over 70% from $162 million in the prior year.
The strong cash performance during the quarter and the full year reflects ongoing contribution of our working capital initiatives, as well as the countercyclical cash flow profile of our business model.
Given the strong cash flow performance in the quarter, we ended June with nearly $269 million of cash on hand, with over 80% of that unrestricted U.S. held cash.
Our net debt is down 22% over the prior year, and net leverage stood at 2.3 times adjusted EBITDA at quarter end, below the prior quarter level of 2.5 times and the prior year level of 2.6 times.
We are in compliance across our financial covenants, with cushion at the end of June, following the solid quarter of cash flow performance.
During July, we utilized excess cash to pay off a $40 million private placement note that came due.
The paydown of the note, which had a 3.2% fixed rate, will drive additional cash interest savings into fiscal 2021.
We have now paid down roughly $170 million of debt since early 2018, including $55 million within the past seven months.
In addition, our revolver remains undrawn, with approximately $250 million of capacity, and additional $250 million accordion option, combined with incremental capacity on our uncommitted private shelf facility, we remain in a positive liquidity position.
Capital deployment near term will continue to focus on preserving liquidity and opportunistically paying down debt, though our M&A initiatives and related pipeline remain active.
Our focus remains on smaller bolt-on targets, that align with our growth priorities including fluid power, flow control and automation opportunities.
Visibility remains limited on how customers will proceed with operations, particularly if an additional wave of infections materializes into the fall and winter months.
As such, we believe it more productive to be transparent on how our operations are trendy to date, and provide near term directional guidance as appropriate, pending greater clarity on a macro trajectory, particularly when considering the unique nature of this downturn.
With that as a backdrop, assuming underlying demand remains consistent with July and early August trends for the remainder of the quarter, we expect fiscal first quarter 2021 sales to decline 17% to 18% organically year-over-year.
This includes an assumption of high teens organic declines in our service center segment and mid-teen declines in our fluid power and flow control segment.
As a reminder, we will have roughly a half a quarter of inorganic contribution from Olympus Controls, which was acquired in mid-August of 2019.
At this sales level, we believe high teen decremental margins is still an appropriate benchmark to use near term.
This takes into consideration, cost actions and emerging growth and operational requirements, as we position around the recovery.
In addition, to provide a frame of reference and some direction for your full year modeling, assuming sequential daily sales patterns are consistent with average historical trends, this would imply year-over-year sales declines do not materially improve, until the second half of our fiscal year, with a return to year-over-year organic growth in our fiscal fourth quarter.
Again, this assumes sequential trends in the daily sales rates that are similar to historical seasonal patterns, and can certainly vary, depending on the direction of the industrial cycle, the broader economy, and execution of our growth initiatives going forward.
Lastly, we believe an effective tax rate of 23% to 25% remains an appropriate assumption near term.
From a cash flow perspective, keep in mind our free cash generation is typically softer in the first half of our fiscal year, reflecting modest seasonality.
As such we expect, moderation from record fourth quarter level sequentially near term.
We also expect potentially greater working capital requirements in the fiscal 2021, as we look to support growth and the recovery, as the recovery of the year plays out.
Our capital and capex requirements remain limited, with fiscal 2021 targeted at $15 million to $20 million of capital spend.
Overall, we are encouraged by our fiscal 2020 cash performance, which provides further evidence of our strong cash flow profile, including benefits from working capital initiatives, and improving margin profile in recent years.
We remain confident in our cash generation potential going forward, and reiterate our normalized annual free cash target of at least 100% of net income.
As we enter fiscal 2021, we see a significant opportunity ahead, as we leverage our industry position, as a leading technical distributor around new and emerging growth opportunities.
While we are facing a challenge as the industrial economy transitions from a generational pandemic, we have a remarkably strong business model, that generates cash and adapts well throughout the cycle, as we demonstrated in our fourth quarter.
This foundation will provide significant support to navigate through the near term headwinds, while staying focused on our strategic initiatives, aimed at positioning and adapting the company for stronger organic growth, relative to our legacy trends, greater free cash generation, and improved returns on capital in the coming years.
I strongly believe our greatest opportunity is now in front of us, considering our cross-selling potential, customers' increasing technical needs, potential greater U.S. industrial production requirements, and likely ongoing, if not accelerated industry consolidation in coming years.
Our value proposition puts us in a unique position to emerge, as a leading growth beneficiary from these tailwinds.
We plan to leverage our comprehensive suite of technical products and solutions, as we expand into emerging areas of growth from an ever more sophisticated, automated, and connected industrial supply chain.
These growth opportunities, combined with our operational excellence initiatives, expansion of our shared services model and leveraging our systems investments, will further solidify our ability to expand margins in coming years.
Long term, we remain committed to our financial targets of $4.5 billion in sales and 11% EBITDA margins.
While the timing of these goals is dependent on the industrial cycle trajectory, I believe they are within Applied's reach and provide the framework for significant value creation, as we execute our strategy going forward.
To our customers and suppliers, our message is clear, we are the leading stand-alone distributor of industrial motion power and technologies, with growing capabilities across next generation automation and industry 4.0 solutions.
We have the most comprehensive portfolio and technical service capabilities, premier engineered solution expertise, and greatest track record of consistency and commitment to this vital space.
We are investing for the future, developing best-in-class talent and focused on solidifying Applied, as the eminent return enhancing channel for your critical industrial supply chain products and solutions.
We are here to serve and partner with you during these unique times, and what will be fast-moving and dynamic environment going forward.
| q4 adjusted non-gaap earnings per share $0.80.
q4 earnings per share $0.77.
applied industrial technologies - due to ongoing uncertainty from covid-19 pandemic, co refraining from providing formal financial guidance for fy 2021.
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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 referred to measures that exclude items management believes impact the comparability for the period referenced.
Today, Dave and I will discuss our strong second-quarter results as well as our perspective on how Conagra is positioned to continue to succeed in both the current environment and beyond.
So, let's get started.
I'm very pleased with our strong results for the second quarter.
Our business continue to perform well both in the absolute and relative to peers.
Our success to date in fiscal 2021 is not only a testament to our team's ability to adapt to the current environment but a reflection of the work we've done to transform our business over the past five-plus years.
Our ongoing execution of the Conagra Way playbook perpetually reshaping our portfolio and capabilities for better growth and better margins has enabled us to rise to the occasion during the COVID-19 pandemic.
And that has positioned the business to excel in the future.
During the second quarter, we continue to build on our momentum and our Q2 results exceeded our expectations across the board.
We had strong, broad-based sales growth, our margin expansion is ahead of schedule, and I'm proud to announce that we've reached our deleveraging targets earlier than originally planned.
In keeping with our Conagra Way playbook, we continue to optimize the business for long-term value creation during the quarter.
We made targeted investments in both production capacity and marketing support to drive the physical and mental availability of our products.
We also remained committed to sculpting our portfolio through smart divestments with the agreement shortly after the second quarter closed to sell Peter Pan Peanut Butter.
Peter Pan is a very good business, but it's not an investment priority for Conagra given our other portfolio priorities.
Finally, we are reaffirming our fiscal 2022 guidance for all metrics.
And none of this would be possible without our exceptional team, particularly our frontline workers.
So, before we dive into the details of the quarter, I want to recognize everyone responsible for the continued extraordinary work of our supply chain.
I'm extremely proud of the thousands of hardworking Conagra team members whose dedication has enabled our industry-leading performance.
We remain focused on keeping employees safe while meeting the needs of our communities, customers, and consumers.
With that, let's get into the business update.
As the table on Slide 7 shows, our second-quarter results exceeded our expectations across the board.
We delivered organic net sales growth of 8.1%, adjusted operating margin of 19.6%, and adjusted earnings per share of $0.81.
These results enabled us to reach our fiscal '21 net leverage ratio target of 3.6 times ahead of schedule.
During the second quarter, we continued to drive significant growth across our retail business.
Total Conagra retail sales grew 10.4% year over year with strong growth across each of our snacks, frozen, and staples portfolios.
Our results were driven by continued success in expanding our presence with consumers and gaining share.
Total Conagra household penetration grew 14 basis points versus a year, ago and our category share increased 26 basis points.
Critical to our ability to sustain our growing relevancy with consumers is the physical availability of our products, whether through brick and mortar or online.
And Slide 9 demonstrates how our ongoing investments in e-commerce have continued to yield results.
In the chart on the left, you can see the step-change in e-commerce growth for total edibles that has occurred since the onset of the pandemic.
But what's really impressive about this chart is the sustainability of our e-commerce performance.
We've retained a massive portion of the e-commerce sales we gained at the onset of the pandemic, and our results have outpaced total edible e-commerce growth each quarter.
As a result of our sustained success, e-commerce continued its recent trend of steadily increasing as a percentage of our total retail sales as you can see on the right.
While e-commerce growth both on an absolute basis and as a percent of overall sales is not a new dynamic for Conagra, this growth has accelerated during COVID-19.
In addition to our continued progress in e-commerce, our new innovation generated strong performance during the second quarter.
When we began this journey over five years ago, we've recognized that we had a lot of latent potential in the portfolio, it just had to be modernized.
So, we set out to aggressively do just that.
And you'll recall that we established a goal of having 15% of our annual retail sales come from products launched within the preceding three years.
As you can see on Slide 10, our innovation performance has continued to exceed our 15% goal.
What's equally important is the consistency of our innovation performance.
Investments we've made over the last five years in our innovation capabilities enabled us to continue launching new products since the pandemic began.
Customers trust our innovation track record and rely on our new products to drive consumer trial and overall category growth.
Slide 11 drills down on the strength of our recent innovation performance compared to last year's first half launches.
The products we introduced in the first half of this year have achieved 37% more sales per UPC, and 28% more distribution points per UPC during the comparable time period.
Product performance highlights include Marie Calendars boast the No.
1 branded new item in frozen indulgent single-serve meals.
Duncan Hines has delivered the top 3 highest velocity new items in the single-serve baking, and our modernized Hungry Man brand is outpacing category growth by more than two times.
After a strong first half of fiscal '21, we will introduce even more new products that will build distribution in the second half.
Expect to hear more about our upcoming product launches at CAGNY next month.
Importantly, our terrific frozen vegetables business returned to strong growth in the quarter as we brought on our additional capacity investments online.
Slide 13 digs a bit deeper into our largest frozen brand, Birdseye.
Birdseye is a cornerstone of the important frozen vegetable segment with a No.
1 position in the category, more than twice the category share of the closest branded competitor.
Recall that Birdseye previously faced some supply constraints as we worked to bring new capacity online.
And last quarter, I noted that shipments for the brand were a bit ahead of consumption as retailers started rebuilding their inventories.
As you can see in the charts on Slide 13, Birdseye returned to form in Q2 as expected.
In addition to strong retail sales growth of 7.2% in quarter, Birdseye gained an impressive 261 basis points of share from Q1 to Q2.
Continuing to Slide 14, you can see how Birdseye has attracted and retained more new buyers than our competition since the pandemic began.
Frozen vegetables category remains highly relevant to consumers and we believe the steps we've taken over the past several quarters to modernize the Birdseye brand and expand capacity have positioned us well to build on our category leadership.
Turning now to another area of strength, our leading portfolio of frozen single-serve meals had another terrific quarter.
As you can see on Slide 15, Conagra has outperformed peers, driven category growth, and attracted new buyers since the start of the pandemic.
As the chart on this slide shows, we have three of the top brands in this category from both the trial and repeat perspective.
Our snacks business also continued to see strong growth in the quarter.
As you can see on Slide 16, we delivered double-digit retail sales growth on a year-over-year and two-year basis in snacking led by impressive results across the popcorn, sweet treats, and meat snacks.
We're not just growing, we're winning versus the competition.
Slide 17 shows how we grew share year over year in popcorn, meat snacks, hot cocoa, and ready-to-eat pudding and gelatin in the quarter.
Our staples portfolio also delivered solid results in Q2.
Historically, this portfolio has served as a -- primarily as a source of cash for us but it hasn't been looked at as a growth engine.
But Slide 18 shows how staples remained highly relevant to consumers in the quarter as people continue to rediscover cooking and the utility, relevance, and value of products in our portfolio.
Our basket of the total staples category grew retail sales by 12.7% in the second quarter.
People are returning to their kitchens during the pandemic and new, younger consumers are discovering the joy of cooking.
Many of the brands on this slide including PAM, RoTel, and Hunt's are cooking utilities and ingredients.
As we've discussed before, the current environment has resulted in consumers trying or reengaging with our products and coming back again and again.
And that takes us to what we see going forward and how our business is uniquely set up to win.
Our execution of the Conagra Way playbook over the last five-plus years enabled us to deliver strong performance prior to the onset of COVID.
And we firmly believe that our reshaped portfolio, modernized products, and enhanced capabilities have been foundational to our ability to excel during these highly dynamic times.
We all know that the COVID pandemic has driven an increase in at-home eating overall.
But for Conagra, it has also meant an acceleration of the consumer trial, adoption, and repeat purchase rates of our products.
Our results have been strong on both in absolute and relative basis.
These dynamics have driven meaningful levels of incremental cash flow for our business.
They've also enhance the ROI of our previous disciplined investments in portfolio, capabilities, and the physical and mental availability of our products.
Importantly, the Conagra Way is perpetual.
While we've adapted to the current environment and deliver superior results, we also continue to look to the future and make smart investments to further strengthen our business.
Our investments include continuing to modernize our products and packaging, increasing production capacity when category dynamics warrant, supporting on-shelf availability, and increased e-commerce share, and raising consumer awareness.
To be clear, these investments are not a reaction to the near-term environment but to see as rooted in our longer-term outlook for the business and our disciplined execution of the Conagra way.
We believe that Conagra is in a strong position to continue to win now and for years to come.
We expect that our investments, coupled with consumer adoption and the proven stickiness of our products will result in Conagra continuing to deliver long-term profitable growth.
In summary, we continue to see solid execution across our portfolio aligned with the Conagra way playbook in Q2 which enabled us to deliver results that exceeded our expectations.
Our business remains strong in the absolute and relative to competition.
And we expect Conagra to be in an even better position post-COVID as a result of our ongoing disciplined approach to investment and innovation.
Today, I'll walk through the details of our second-quarter fiscal '21 performance and our Q3 outlook before we move to the Q&A portion of the call.
I'll start by calling out a few performance highlights from the quarter which were captured on Slide 22.
As Sean mentioned, outstanding execution by our teams across the company enabled us to exceed expectations for net sales, margin, profitability, and deleveraging during the second quarter while we continued to invest in the business.
Reported and organic net sales for the quarter were up 6.2% and 8.1%, respectively, versus the same period a year ago.
We continued our strong margin performance from Q1 as Q2 adjusted gross margin increased 139 basis points to 29.9%.
Adjusted operating margins increased 250 basis points to 19.6%.
Adjusted EBITDA increased 16.7% to $712 million in the quarter.
And our adjusted diluted earnings per share grew 28.6% to $0.81 for the second quarter.
Slide 23 breaks out the drivers of our 6.2% second-quarter net sales growth.
As you can see, the 8.1% increase in organic net sales was primarily driven by a 6.6% increase in volume related to the growth of at-home food consumption.
The favorable impact of price mix which was evenly driven by favorable sales mix and less trade merchandising also contributed to our growth.
The strong organic net sales growth was partially offset by the impacts of foreign exchange and a 1.7% net decrease associated with divestitures.
The Peter Pan peanut butter business is still part of Conagra Brands and thus included in our organic results.
We expect the sale of Peter Pan to be completed in Q3 at which point it will be removed from organic net sales growth.
I will discuss the estimated impact of this divestiture shortly.
Slide 24 summarizes our net sales by segment for the second quarter.
On both the reported and organic basis, we saw continued significant growth in each of our three retail segments: grocery and snacks, refrigerated and frozen, and international.
The net sales increase was primarily driven by the increase of at-home food consumption as a result of COVID-19, which benefited our retail segments but negatively impacted our food service segment.
The grocery and snack segment experienced strong organic net sales growth of 15.3% in the quarter.
The segments we're getting net sales growth outpaced its growth in consumption as retailers continued to rebuild inventories.
Our refrigerated and frozen segment delivered organic net sales growth of 7.8%.
This growth is a testament to our continued modernization and innovation efforts and illustrates the increasingly important role refrigerated and frozen products play in meeting the evolving needs of today's consumers.
Turning to the international segment.
Quarterly organic net sales increased 9.1%.
This segment experienced particularly strong growth in both Canada and Mexico.
This quarter, our food service segment reported a 21.4% organic net sales decline, primarily driven by a volume decrease of 25.3% due to less restaurant traffic as a result of COVID-19.
Slide 25 outlines the adjusted operating margin bridge for the quarter versus the prior-year period.
As you can see, in the second quarter, our adjusted operating margin increased 250 basis points to 19.6%.
Strong supply chain realized productivity, favorable price mix, cost synergies associated with Pinnacle Foods acquisition, and fixed cost leverage combined to drive 440 basis points in adjusted operating margin improvement more than offsetting the impact of cost of goods sold inflation and COVID-related costs in the quarter.
Collectively, these drivers resulted in a 139 basis point increase in our adjusted gross margin versus the same period a year ago.
A&P increased 4.7% on a dollar basis primarily due to increases in e-commerce marketing A&P was flat on a percentage-of-sales basis this quarter versus Q2 a year ago.
Finally, our adjusted SG&A rate was favorable by 110 basis points primarily as a result of fixed cost leverage on higher net sales, the Pinnacle cost synergies, and temporarily reduced spending as employees work from home and significantly reduce their travel.
I want to give you some additional perspective on our margin expansion.
As I just mentioned, operating margin expanded 250 basis points for the quarter well ahead of our expectations.
Of this 250 basis point expansion in operating margin this quarter, approximately 60 basis points reflects our ongoing progress toward achieving our fiscal '22 margin target of 18% to 19%.
We also saw an approximate 180 basis point margin benefit from price mix in the quarter primarily driven by mix, and to a lesser extent, favorable pricing in lower-trade merchandising.
We expect to retain some of this benefit going forward, but exactly how much remains uncertain at this point.
Additional 10 basis points of net margin expansion came from favorable fixed cost leverage across the entire P&L and COVID-related SG&A benefits, mostly offset by COVID-related cost of goods sold.
We do not expect this net benefit to repeat next year.
Slide 26 summarizes our adjusted operating profit and margin by segment for the second quarter.
Our three retail segments, all operating profits increased by double-digit percentages versus the same period a year ago.
Each retail segment benefited from higher organic net sales and strong supply chain-realized productivity.
In the foodservice segment, however, operating profit decreased due to the COVID-related impacts of lower organic net sales and higher input costs that more than offset the impacts of favorable supply chain-realized productivity and cost synergies.
Overall, we're pleased with the continuation of the strong Q1 margin results into the second quarter which are anchored by core productivity and benefits from the Pinnacle acquisition we expected to see.
Turning to Slide 27.
We've outlined the drivers of our second-quarter adjusted diluted earnings per share growth versus the same period a year ago.
EPS increased 28.6% to $0.81.
The growth in the quarter was primarily driven by the increase in adjusted operating profit associated with the net sales increase and margin expansion, and also benefited from a decrease in net interest expense as we've continued to reduce debt as prioritized.
Slide 28 highlights our significant progress on the overall synergy capture since the close of the Pinnacle Foods acquisition during the second quarter of fiscal '19.
We captured an incremental $27 million in savings during the most recent quarter bringing total cumulative synergies to $246 million.
As a reminder, the majority of total synergy to date have been in SG&A.
Cost-of-goods-sold synergies have started to be a bigger portion of our synergy cash for the last two quarters and we expect them to make up a majority of our synergies going forward.
We remain pleased with the team's progress in capturing synergies and remain on track to achieve our fiscal '22 synergy targets.
Slide 29 shows the strong progress we've made to date to achieve our deleveraging targets.
Since the close of the Pinnacle acquisition in the second quarter of fiscal '19 through the end of the second quarter fiscal '21, we have reduced total gross debt by $2.3 billion resulting in net debt of $9.2 billion.
We are pleased to report that at the end of the second quarter, we achieved our net leverage ratio target of 3.6 times, down from five times at the closing of the Pinnacle acquisition and 3.7 times at the end of the first quarter of fiscal '21.
Strong, consistent improvements in debt reduction, coupled with robust earnings enabled us to achieve this net leverage ratio target ahead of schedule.
Looking ahead, we will continue to be focused on executing a balanced capital allocation policy.
We remain committed to solid investment-grade credit ratings as we continue to be opportunistic using our balance sheet to drive shareholder value such as our increased investment in capex and the recent 29% dividend increase.
Slide 30 summarizes our outlook.
While we're confident in the quarters ahead and that Conagra will continue to excel beyond the COVID-19 environment, the sustained impact of COVID-19 remains dynamic and continues to make near-term forecasting with specificity a challenge.
We expect a continuation of elevated retail demand and reduced foodservice demand compared to historic pre-COVID-19 demand levels.
We are currently seeing both of these trends continue in the third quarter to date.
For the third quarter, we expect organic net sales growth to be in the range of plus 6% to 8%.
We expect Q3 operating margin to be in the range of 16% to 16.5%, implying a year-over-year increase of 30 to 80 basis points.
This estimate includes an expected acceleration of our AMC investment in e-commerce marketing that we started in Q2, reducing the estimated year-over-year Q3 operating margin expansion.
As a reminder, Q3 operating margins are historically lower than Q2 operating margins given the leverage impact on the seasonality of sales.
Given these sales and margin factors along with expected improvement in below-the-line items, we expect to deliver third-quarter adjusted earnings per share in the range of $0.56 to $0.60.
Our third-quarter guidance also continues to assume that the end-to-end supply chain operates effectively during this period of heightened demand.
We are selling the business for approximately $102 million and the expected annualized impact of the divestiture is a reduction of approximately $110 million of net sales and $0.03 of adjusted EPS.
Lastly, we are reaffirming all metrics of our fiscal '22 guidance which also excludes the impact of the pending sale of Peter Pan.
We look forward to presenting again next month at CAGNY where we will provide another update on our progress in executing the Conagra Way.
We hope you'll join us.
| q2 adjusted earnings per share $0.81.
sees q3 adjusted earnings per share $0.56 to $0.60.
reaffirming its fiscal 2022 guidance, which does not yet include impact of pending sale of peter pan peanut butter business.
sees q3 adjusted earnings per share is expected in range of $0.56 to $0.60.
organic net sales growth is expected in range of +6% to +8% in q3.
ultimate impact of covid-19 pandemic on company's full year fiscal 2021 consolidated results remains uncertain.
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Following their prepared comments, the operator will announce that the queue will open for the Q&A session.
This information is not calculated in accordance with GAAP and may be calculated differently than non-GAAP information at other companies.
These statements reflect the best information we have as of today.
All statements about our recovery, outlook, new products and acquisitions and expectations regarding business development and future acquisitions are based on that information.
They are not guarantees of future performance and you should not put undue reliance upon them.
These documents are available on our website and at sec.gov.
Before we begin, I would like to make you aware that over the last few weeks, we posted two short videos to the Investor Relations website.
The first is around our approach and strategy for electric vehicles as discussed by Alan King, who is the head of the U.K., Europe and ANZ for fuel and heading up that effort for us.
The second is a video providing some insight into our downmarket full AP product so you can get a feel for what it is and how it works.
We had mentioned that we would likely spend some more time on these topics in the future, and this is an interim step while we continue to work on those efforts.
So upfront here, three subjects: first, my view of Q1 results; second, I'll share our rest of year outlook; and then third, talk a bit about how we're positioned for growth over the midterm.
Okay, let me turn to Q1 results.
So we reported Q1 revenue of $609 million, really kind of spot on our expectations.
Reported cash earnings per share of $2.82.
That's a bit better than our guide, mostly helped by lower credit losses and fewer outstanding shares.
The macro, not much of a factor.
We really call the macro pretty well versus our guidance.
We did have higher fuel prices but a bit lower spreads and so really no impact there.
Against the prior year, we reported a revenue decline of 8% and organic revenue decline of 6%.
Unfavorable Brazil FX hurting our prints and continued weak same-store client volume softness impacting our organic growth.
All right, let me make a turn to the trends in the quarter and share with you what we're seeing.
So volume, sequential volume in Q1 versus Q4, pretty stable, as we expected, but we are now beginning to see a bit of an uptick here in April, so early signs of volume recovery.
Same-store sales or what we call client softness really stuck at approximately minus 6%.
This continues to reflect a small segment of our client base that is struggling to recover but fortunately still trying.
Retention, really terrific in Q1.
We reported 93% overall retention.
That's our best result in years.
Credit losses, very low for the quarter, $2 million.
That was helped by a $6 million recovery and again, lower sales rolling into this year.
But the real story of Q1 is sales, so Q1 sales results, nothing -- really nothing short of fantastic.
Consolidated sales finished 7% ahead of last year.
Yes, 7% ahead of last year, so finally growing again.
If you rewind sales over the last four quarters, so sales versus prior year, 55%, 81%, 92% and now 107%.
Inside of that, our fuel card businesses, both here and international, coming in ahead of the prior year, driven mostly by record digital sales.
So for Q1, we signed 35,000 new business clients worldwide, 35,000.
So again, a terrific result.
So the summary for Q1, I'd call it an in-line result for volume, revenue and cash EPS, and I call it an outstanding result for credit performance, retention performance and most importantly, sales performance.
Let me transition to our rest of year 2021 outlook, along with the assumptions behind that.
Included in our Q1 earnings supplement on page 12, you'll see our updated guidance for the year.
So full year '21 revenue expectations at the midpoint, $2,650,000,000.
That's unchanged from last time.
Reasons that we're staying put are: one, Q1 revenue, again, coming in kind of on plan; two, we've built in significant sequential revenue step-up in the forward quarters, probably in the range of $100 million up from Q1 to Q4.
So our Q2, Q3, Q4 revenue guidance now assumes revenue growth in the high teens.
In terms of the COVID recovery in our outlook, I'd say it's a bit mixed.
U.S. and U.K. look maybe better than our planned outline.
But in our case, the Brazil COVID situation, worse, and so a pushback there in terms of recovery.
On the cash earnings per share front, we will flow through our $0.12 Q1 beat.
We'll raise full year '21 cash earnings per share guidance at the midpoint to $12.42, so $12.42 for the base business.
In terms of the AFEX acquisition, hopeful now to close that deal on June 1.
Initially, we thought May 1.
So as a result of the one month delay, we're going to take the expected in-year AFEX accretion at the midpoint to $0.18 versus $0.20 previously.
If you combine the base business and AFEX, our consolidated earnings per share outlook at the midpoint would be $12.60, $12.60 for the full year.
I do want to add, we feel very good about the AFEX cross-border deal.
They had a great Q1 performance and their management is really holding steady their rest of year forecast.
Let me make a turn over to our last subject today, which is how is FLEETCOR positioned for growth in '22 and beyond.
So I do want to highlight just a few factors that give us confidence in sustainable growth.
So one is the exit rate.
So if we hit this rest of year guidance, our Q4 step-off will be quite strong heading into '22.
And if we hit our rest of year sales plan, again, that will pour in-year revenues into 2022.
Digital, I can't say enough about digital and the investments we're making in digital selling, digital UIs and customer experience, new ways of underwriting credit, and so the digital transformation making a big impact on the company.
We're actually embracing EV, particularly in Europe.
Early feedback really, really positive there that we may actually be advantaged in selling because of our integrated mix lead experience as well as this at-home recharging opportunity.
It looks like clients will pay subscriptions to basically measure and reimburse employee recharging at home.
So potentially a new meaningful revenue opportunity that is nonexistent today.
Fourth factor, our Beyond strategy or our entry into new segments.
So as we've discussed before, we're extending into new customer segments really in each of our major lines of business.
So in corporate pay, the Roger deal helped us enter the SMB space.
In lodging, a couple of deals last year helped us enter the airline accommodation space.
And in Brazil, we've entered what we call the urban driver space.
So in each of these cases, basically, we're extending our businesses, extending our TAM and obviously extending our longer-term sales opportunity.
Fifth factor is brand.
We've just introduced our new Corpay brand aimed at unifying all of our various corporate payment assets.
So this single brand will help our corporate payment business go to market with a single identity and hopefully give us an advantage with this broader bundle that we've got.
And then last factor is capital.
Our balance sheet's in terrific shape.
Leverage ratio 2.5 times, liquidity approaching $2 billion.
Again, our plan is to generate $1 billion-plus of annual free cash flow.
We had the ability to lever up to three times target, which would produce circa $8 billion in capital to invest in either M&A or buybacks over the forecast period.
So obviously, upside for us via capital allocation.
So look, the takeaways from today: so one, Q1, I'd say again, an in-line Q1 financial performance but an outstanding Q1 sales performance.
Rest of year, again, we're raising rest of year cash earnings per share at the midpoint to $12.42.
That's excluding acquisitions, and the $12.60 at the midpoint, that's including AFEX, so tracking to deliver that, although again, fully aware of the uncertainties.
And then lastly, in terms of positioning, we really do feel well positioned to grow the company next year and beyond.
Again, we expect a strong exit, which will pour into '22.
We're extending each of our businesses into bigger TAMs, and we've got the available capital to drive incremental returns if we manage it well.
For Q1 of 2021, we reported revenue of $609 million, down 8%; GAAP net income up 25% to $184 million, and GAAP net income per diluted share up 29% to $2.15.
Included in our Q1 2020 results was the impact of the $90 million onetime loss related to a customer receivable in our cross-border payments business, which equated to $0.74 per diluted share, as reported last year.
Adjusted net income for the quarter decreased 8% to $242 million, and adjusted net income per diluted share decreased 6% to $2.82 as we continue to feel the effects of COVID on our businesses.
Organic revenue growth improved two points sequentially to down 6% on a year-over-year basis.
We saw improvement in every category except tolls as Brazil continues to grapple with incremental COVID-related shutdowns.
As a reminder, organic revenue neutralizes the impact of year-over-year changes in foreign exchange rates, fuel prices and fuel spreads and includes pro forma results for acquisitions closed during the two years being compared.
Our fuel category was down organically about 6% year-over-year, which was a 4-point improvement from Q4.
The international fuel business growth was a bit better than North American growth as those international markets shut down earlier in the quarter last year, so had easier comps.
The corporate payments category was down 5% in the first quarter, one point better than Q4, as improvements in virtual card and full AP were offset by FX, which was lapping a very strong Q1 last year.
Full AP growth accelerated 14 points sequentially to 21% growth year-over-year, powered by continued strong new sales.
Tolls was up 3% compared with last year but down four points from Q4 of 2020 due to the aforementioned shutdowns in Brazil.
Looking longer term, compared with Q1 of 2019, revenue was up 13% organically.
The lodging category was down 14%, which was an improvement from down 25% last quarter, with domestic airline activity recovering faster than we expected.
Gift showed organic growth of 2% year-over-year as that business felt the effects of COVID earlier in Q1 of 2020 than most of our other businesses.
That said, we've seen real traction in digital card sales and in our B2B sales efforts where we are selling gift cards to businesses for use as incentives.
Recognizing that the comps to 2020 may not be very helpful, we did add some comparisons to 2019 for organic revenue growth and sales, so you can see how we are trending compared with the most recent pre-COVID or "normal year".
That's available in the supplement we provided today.
looking further down the income statement.
Total operating expenses were down 7% to $343 million, excluding the impact of the onetime loss in our cross-border payments business last year.
The decrease was primarily due to better bad debt expense, lower expenses in Brazil due to the currency translation impact and lower T&E costs as travel and the associated expenses are much lower than last year.
As a percentage of total revenues, operating expenses excluding the onetime loss were stable compared with Q1 of 2020 at approximately 56%.
In the quarter, bad debt was only $2.5 million or one basis point, as it included the benefit of a $6 million recovery for credit loss recorded in the first quarter of last year.
Credit continues to be a bright spot, but we expect our bad debt to normalize as our new sales levels recover and grow.
Interest expense decreased 20% to $29 million due to lower borrowings on our revolver and decreases in LIBOR related to the unhedged portion of our debt.
Our effective tax rate for the first quarter was 21.8%.
Excluding the impact of the onetime loss in our cross-border payments business last year, our effective tax rate in Q1 of 2020 was 18.9%.
The increase over last year's adjusted tax rate was due primarily to the level of excess tax benefit on employee stock option exercises relative to pre-tax income.
Now turning to the balance sheet.
We ended the quarter with $958 million of unrestricted cash, and we also had approximately $1 billion of undrawn availability on our revolver.
In total, we had $3.5 billion outstanding on our credit facilities and $915 million borrowed on our securitization facility.
As of March 31, our leverage ratio was 2.48 times trailing 12-month adjusted EBITDA, as calculated in accordance with our credit agreement.
We refinanced our securitization facility at the end of the first quarter, less than six months after our last refi.
Recall that our normal three year term expired last fall when credit markets were unfavorable, so we entered into a one year note at LIBOR plus 125 basis points with a 37.5 basis point floor, expecting to refinance again when conditions improve.
Our new securitization has a duration of three years at LIBOR plus 100 basis points with a floor of 0, so our effective all-in rate is approximately 50 basis points better, given the current level of LIBOR.
We've also just completed a refinance of our Term B credit facility, upsizing it to $1.15 billion for a new term of seven years and maintaining the rate of LIBOR plus 175 basis points.
We used the proceeds to pay off our existing Term B note, pay down the revolver, funded the AFEX acquisition and improve our liquidity position for future capital actions.
We repurchased approximately 640,000 shares during the quarter for $170 million at an average price of $266 per share, and we have approximately $836 million in repurchase capacity remaining under our current authorization.
Now let me share some thoughts on our outlook.
We are maintaining our full year revenue guidance of between $2.6 billion and $2.7 billion as improvements in some businesses such as domestic airline lodging are being offset by other places like Brazil and Europe.
They're experiencing incremental virus flare-ups and associated lockdowns.
As we explained last quarter, our full year guidance assumes we recover about 1/3 of our Q4 exit revenue softness during calendar 2021.
And that this recovery would account for about four to five percentage points of revenue growth in the second half.
Within that expectation, there is very little recovery impact assumed for Q1, a modest amount for Q2 and then an acceleration into the back half of the year.
While we are seeing some puts and takes between businesses, our overall outlook remains intact.
We are raising the midpoint of our adjusted net income per diluted share guidance $0.12 to $12.42 to reflect our first quarter results compared to our expectations.
Looking ahead, we are expecting Q2 2021 adjusted net income per diluted share to be in the range of $2.80 to $3 per share.
Volumes should build throughout the year with the COVID recovery and our new growth initiatives gaining momentum.
As for AFEX, the closing is taking longer than we had hoped, but we still believe the deal will close by the end of the second quarter as we're nearing the finish line with all of the approvals we need from the various regulators globally.
Because of the delay, the in-year benefit will be slightly less than what we expected in February.
But the upside is that we've had more time to refine our integration plans, so we'll hit the ground running at full speed once we do close.
| sees q2 adjusted earnings per share $2.80 to $3.00.
q1 adjusted earnings per share $2.82.
q1 earnings per share $2.15.
sees fy revenue $2.6 billion to $2.7 billion.
q1 revenue fell 8 percent to $608.6 million.
|
Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials and the SEC filings that are available on the website.
Information about the non-GAAP financial measures, including reconciliations to those, can also be found in our earnings materials that are available on the website.
I hope all of you continue to manage safely through the new variant.
Our new CFO has been in that role since November 1, and he's off to a great start, and you're going to hear from him in a minute.
So just stepping back on the cover slide.
Today, we reported $7 billion in after-tax net income or $0.82 per diluted share.
That's up significantly from the year-ago period.
This quarter was a repeat of the themes we discussed with you in the last few quarters.
The pre-pandemic organic growth engine that is Bank of America is fully back in place and producing success.
We had strong organic and responsible growth across all our businesses.
We grew revenue and produced positive operating leverage.
We continue to see very strong asset quality metrics.
We support our clients and our need for capital, and we made further progress in support of local community efforts across all our markets.
Let's go to start on Slide 2 and a few comments about our full-year results.
This quarter capped a record year of $32 billion in earnings for 2021 and represented significant growth in net income over 2020.
We even saw a more significant growth in earnings per share as share count dropped.
We generated more than $7 billion of earnings in every quarter in 2021.
Revenue grew 4% year over year and activity gained momentum throughout the year.
NII grew well in the second half of the year, which complemented fee growth, especially in our markets-related businesses.
Wealth management, investment banking and sales and trading revenues were all strong in '21.
Recall that in the first quarter 2021, we noted at the time that our expectation is that quarterly NII could progress up by $1 billion per quarter as we entered the fourth quarter.
And in fact, we have recorded fourth quarter NII that is $1.2 billion or 12% better than first quarter '21.
Our teams managed well through the rate volatility, and we grew loans and deposits with our customers as the year progressed.
That sets us up nicely for 2022, and Alastair is going to talk about that in a minute.
Expense was well-managed, but expense did go up as we continue to invest for growth.
Our COVID-related costs remained elevated and revenue-related costs grew.
So while we do not see full-year operating leverage, we did, however, return to strong operating leverage in each of the last two quarters of the year, restarting our streak that we had before the pandemic.
Credit remains stellar through 2021.
Charge-offs consistently improved each quarter.
Our commitment to responsible growth remains well-placed.
We are growing faster than the market and keeping credit costs in check.
The economic improvement and our strong credit allowed us to release much of the reserves we built in 2020.
When you look at the balance sheet, we grew deposits $270 billion in 2021.
That was on top of the $360 billion of growth we had in 2020.
Our loan growth accelerated throughout the year.
Fourth quarter represented the strongest quarter of organic loan growth we have experienced at Bank of America.
Now, of course, that's absent the first quarter of 2020 at the start of COVID, which had $70 billion of panic drawdowns in a few weeks.
At the end of the day, we produced strong ROA and a 17% ROTCE for you, our shareholders, and we returned $32 billion in capital during the year.
Let's go to Slide 3.
The best way to highlight the drivers behind the earnings success is to look at the momentum in client activity across the businesses.
This shows organic growth engine is running hard.
More and more of this client activity is powered by our digital transformation, which is foundational to everything we do.
We are proud of our digital stats and continue to spotlight our results later in the materials, as usual, see Pages 24 to 28.
But some key stats on this page: Consumers logged into our digital channels more than 2.7 billion times in the fourth quarter alone.
Erica, our digital financial assistant, completed more than 400 million requests from our clients in year 2021.
Half our consumer sales were digital in the fourth quarter.
86% of all the check deposit transactions are now digital.
Customers use Zelle to transfer $65 billion in the most recent quarter.
The number of Zelle transactions now surpasses the checks written by our consumers.
Cash flow approvals by our commercial and corporate clients to move money grew 240% since the pandemic.
So the digital journey continues, and that supercharged our relationship manager-driven model.
And together, that has driven the growth in loans and deposits, and fees.
Net new checking accounts have grown in each of the past 12 quarters.
This contributes to the continued growth in our core deposits.
This also demonstrates the extent of our leadership position with U.S. consumers and deposits.
We have $1.4 trillion in deposits from all American consumers.
On credit cards, at roughly 1 million new accounts in the fourth quarter alone, that's now operating at the same level of new card production as it was pre-pandemic.
We're going to continue to drive that opportunity.
When you think about consumer investments, Merrill Edge, as we call it, we opened 525,000 new accounts in the year 2021.
Those accounts carried when they renew at opening, $70,000 in balances for each of those accounts.
This demonstrates the deep penetration of the mass affluent customer base of America.
Sales of bank products in both Merrill and our private bank teams have remained strong.
Now when you combine Merrill, the private bank, and consumer investments, they produced more than $170 billion in net client flows in 2021.
In global banking, we had record years of investment banking fees combined with strong GTS results.
In global markets, we saw record equity sales and trading revenue.
These are just a few examples of the types of client activity that are driving market share gains for our company.
As I've done in the past, I want to spend a few minutes on the broader economy, and I'll use our own customer data to make a few points.
Let's go to Slide 4.
First, on consumer spending, I'd offer a few thoughts.
We are a provider of choice for individuals and businesses when paying for goods and services.
Our award-winning and easy-to-use capabilities across all forms help clients budget, save, spend and borrow carefully and confidently.
We look at all forms of consumer spending, including ACH wires bill pay, P2P cash, and checks.
Many firms focus -- many firms and many people discuss credit and debit spending, but as you look at the chart on the lower left-hand side of Page 4, you can see that 80% of the money moves in other form.
So what happened in 2021?
Well, consumers spent record amounts in context in comparing '21 against the pre-pandemic period of '19, and you can see that in the upper chart on both sides of the page.
Bank of America's 67 million clients made $3.8 trillion in total payments during 2021.
That was an increase of 24% over pre-pandemic levels, an all-time high.
Fourth quarter in December payments also reached record highs.
Fourth quarter payments were up 28% over 2019.
The December payments were up 30% over 2019.
These are the dollar volume payments, but likewise, the numbers of payments were up double digits also and showing more and more activity.
Just focus on debit and credit spending, for the holiday period of November and December, spending was up 26% over 2019.
This data confirms that consumers continue to spend into the holiday season.
And so far this year, that strength continues.
For all the spending of all types through January 17, 2022, we have seen it up over 11% versus the start of '21, which is well up over '20 and '19.
That bodes well for the rest of the year and quarter.
Focusing on the channels of payment in the lower right-hand chart that you'd expect cash and check volumes are down 24% for 2021 compared to '19.
This simply means more and more customers are using our digital capabilities to achieve their goals each year.
Now importantly, though, this allows us to grow our consumer business with lower cost.
We believe there's lots of potential spending capacity left as average deposit balances continue to move up to the end of the year despite the heavy spending you see.
We had one segment, one cohort of deposits that dipped for one month out of the last part of the year.
In November, we had a small dip in customers who had $2,000 or less in their balances pre-pandemic.
They dipped by 1%.
Other than that, every cohort from June, July, August, September, October, November, and December all grew every month.
And what's striking is that the balances for people who had less than $2,000 average balances before the pandemic, they're now sitting with five times the balances they had pre-pandemic.
For those customers at $10,000 in accounts before the pandemic, they're now sitting with two times in their accounts .
The teams track this data carefully and it shows the spending power left in the American consumer.
Another economic signpost worth noting with our customer activity was acceleration of loan growth in the fourth quarter.
Earlier this year, we -- earlier last year, we talked about the green shoots of loan growth we saw in the first quarter, and we saw that turn into growth as we move through the quarters, culminating with $50 billion in record loan growth this quarter.
We note these borrowers, both consumer and commercial, have strong capacity to continue to borrow if they so desire as lines across the border in low-usage status.
We provide Slide 5 to show you the daily outstanding loans again this quarter, which gives you a sense of progression across time.
Every loan category saw improvement this quarter except for home equity.
What I would draw your attention, too, on Slide 5 is the addition of the pre-pandemic starting point to give you some reference.
Some of the growth this quarter was in global markets, and that business ebbs and flows with the market activity.
$35 billion of that $50 billion was in the core consumer and commercial books.
So far in January, the businesses other than global markets continue to show growth over the end of the year.
So let's start and talk about the commercial portfolio where we have moved above the pre-pandemic level for the most recent growth.
Commercial loans; excluding PPP, grew $43 billion or 9% linked quarter.
Compared to quarter 3, growth this quarter was broad-based across all segments of commercial lending.
We saw improvement in both new loans, as well as improving utilization from existing clients.
This reflects the intense relationship manager effort our teams have done and -- across the last couple of years and adding more and more relationship managers.
Commercial loans of wealth management clients extended their growth trend this quarter as these customers barred for various liquidity needs for asset purchases.
In small business lending, the all-important small business segment, lending activity is running consistently above pre-pandemic levels.
And especially in our Practice Solutions Group that supports medical, dental, and veterinary practices, we continue to see continued momentum and finished one of the best years across all small business with our Business Advantage rewards cards.
Turning to consumer loans.
Card loans grew $4.6 billion or 6% from quarter 3 levels.
This occurred as spending increased and even occurred as payment rates -- paying off the card completely trended higher for the quarter.
Card balances still remain well below the pre-pandemic levels of $95 billion, and we continue to push that opportunity.
Mortgage loan levels grew 2% linked quarter as origination remained at high levels and paydown slowed down.
On the next, Slide 6, I would like -- I would say that while we deliver capital back to our shareholders, $32 billion, and we invested in our teammates, we also continue to invest in our communities through our local teams across the country focused on our markets.
I call out the reference in the bottom of the slide, middle -- bottom-middle of Slide 6 to the sweeping changes we announced last week in our NSF policies.
These updates continue the work we began over a decade ago to simplify our product set and allow a great experience for our clients and an efficient capability for our operations.
Eliminating NSF fees and reducing the overdraft charge per occurrence from $35 to $10 and the other changes we're making is a big win for our clients.
It's going to have an obvious impact on those fees, which have fallen dramatically since 2009 and 2010, but currently run about $1 billion in '21, and we'd expect them to drop by 75% over the next year or so.
I'm going to take us to our fourth quarter results on Slide 7, focusing on comparisons against the prior-year quarter.
And I'll also talk through the high-level commentary on Slide 8.
As Brian noted, we produced $7 billion in net income, which grew 28% from fourth quarter '20, while earnings per share of $0.82 improved at a faster 39% pace due to our share repurchases.
Looking at our top-line improvement on a year-over-year basis, revenue rose 10%.
The improvement was driven by a $1.2 billion increase in NII and a little more than $800 million increase in noninterest income.
Each business segment produced strong noninterest income results.
And as you look at significant components of revenue, it was pretty consistent through the quarters in 2021.
One important aspect of responsible growth has been to grow consistently and sustainably.
And I think we executed on that in 2021 with investment banking over $2 billion each quarter; sales and training -- trading near or above $3 billion each quarter; investment and brokerage services revenue over $4 billion each quarter.
With regard to expenses, our revenue-related costs increased and we continue to make investments in our people and our capabilities to grow the franchise.
At the same time, lower COVID costs and further digital engagement have helped to offset some of those increases.
In the fourth quarter, revenue growth outpaced expense growth on a year-over-year basis, which produced operating leverage of 400 basis points and a 19% year-over-year improvement in pre-tax pre-provision income to $7.3 billion.
With regard to returns, our ROTCE was 15%, ROA was 88 basis points, both of which improved nicely over the year.
Moving to Slide 9.
During the quarter, the balance sheet grew $85 billion to a little less than $3.2 trillion, and this reflected the $100 billion of growth in deposits.
These deposits funded $51 billion of loans growth.
And we also added $14 billion in securities, and so our cash increased by $68 billion.
Partially offsetting these increases were typical year-end moves in our global markets balance sheet.
Our liquidity portfolio grew to $1.2 trillion or a little more than a third of our balance sheet, and shareholders' equity declined $2.4 billion from Q3, driven by the $8.9 billion of capital distributions, which once again outpaced earnings in the fourth quarter as it did in Q3.
With regard to our regulatory ratios, CET1 under the standardized approach was 10.6% and remains well above our 9.5% minimum requirement.
The CET1 ratio declined 50 basis points from Q3, driven by excess capital reduction, as well as an increase in our RWA, due to the strong loans growth.
And we're happy to see that capital usage increasingly needed to support customers and to fuel their growth, while still producing plenty of capital to return to our shareholders.
Earnings alone in the most recent quarter contributed 45 basis points to our CET1 ratio before the other capital impacts of share repurchase.
Given our deposit growth, our supplemental leverage ratio declined to 5.5% versus a minimum requirement of 5%, which still leaves plenty of capacity for balance sheet growth.
And our TLAC ratio remained comfortably above our requirements.
Turning to Slide 10.
We included the schedule on average loan balances, but in the interest of time, I don't have anything to add beyond what Brian noted earlier.
Moving to deposits on Slide 11.
We continue to see significant growth across the client base as we deepened relationships and added net new accounts across our deposit-taking businesses.
Combining both consumer and wealth management customer balances, I would highlight that retail deposits grew $48 billion from Q3.
Our retail deposits have now grown to nearly $1.4 trillion, and we lead our competitors.
We also saw continued strong growth with our commercial clients.
And remember, the deposits we're focused on and are gathering are the operational deposits of our customers in both consumer and wholesale.
Turning to Slide 12 and net interest income.
On a GAAP non-FTE basis, NII in Q3 was $11.4 billion.
But I know, as investors, you tend to focus on the FTE NII number, which was $11.5 billion.
So focusing on the change on an FTE basis, net interest income increased $1.2 billion from Q4 '20 or 11%, driven by deposit growth and related investing of liquidity.
NII versus Q3 of '21 was up $319 million, driven by deposit growth and then higher securities levels, as well as loans growth.
Premium amortization declined roughly $100 million to $1.3 billion in Q4, and the positive NII impact of lower premium amortization offset lower PPP fees.
Given continued deposit growth and low rates, our asset sensitivity to rising rates remains significant.
It's modestly lower quarter over quarter as long-end rates moved higher, and we recognized some of that sensitivity in our now higher reported level of NII.
So I'd like to give you a couple of thoughts on NII expectations for 2022.
First, I want to start by reiterating Paul's comment last quarter that we expect to see robust NII growth in 2022 compared to 2021.
That assumes we see continued loans growth and the rising rate expectations embedded in the forward curve.
And in the first quarter specifically, we expect two headwinds.
First, there are two less interest accrual days in the quarter.
And as a reminder, we picked those back up in the subsequent two quarters.
Second, we expect less PPP fee benefits.
Combined, those two headwinds add to about $250 million.
Despite those headwinds, we would still expect Q1 to be up about a couple of hundred million from Q4 and should grow nicely each subsequent quarter in 2022.
Again, that's, of course, dependent upon the realization of the forward curve and some loans growth.
Lastly, as we see the forward curve now expecting a new rate hiking cycle to begin, we added Slide 13, as we thought it might be helpful from a historical context to see the trend of NII across the years since the last rate hike cycle.
And what I'll draw your attention to is the stark difference in the size of our balance sheet today.
And because of that balance sheet differential, today's NII is already at the NII level we saw when we were well into the middle of the last rate cycle.
And importantly, our short-end asset sensitivity today is twice what it was in the third quarter of 2015 as that cycle began.
Let's turn to costs, and we'll use Slide 14 for that discussion.
Our Q4 expenses were $14.7 billion, an increase of $291 million from Q3.
Higher revenue-related costs, and to a lesser degree, seasonally higher marketing costs, drove the increase.
As Brian noted at the mid-quarter conference, our Q4 expenses were a bit higher than we anticipated when we ended the last quarter.
Revenue continued to hold up well, and the company had a good year, both resulting then in higher incentive costs.
Compared to the year-ago period, expense growth was driven by incentive costs associated with all of our markets-related improvements.
As we look forward, we continue to invest in technology and people at a high rate across our businesses, and we continue to add new financial centers in expansion and growth markets.
So let me say two things about 2022 expenses.
First, relative to Q4 expense, we expect Q1 to include two elements of seasonality.
We typically experience seasonally higher payroll tax expense, and that was about $400 million in 2021.
Also, Q1 is typically our best period of sales and trading revenue which results in modestly higher associated costs.
Second, with regard to full-year 2022, our best expectation currently is we can hold expenses flat compared to 2021, which finished just below $60 billion.
This guidance incorporates our expected continuing investments, strong revenue performance, and the inflationary costs we experienced in the second half of 2021.
It also relies upon our continued expense discipline, operational excellence improvements, and the benefits of digital transformation to deliver the operating leverage we seek.
Turning to asset quality on Slide 15.
The asset quality of our customers remains very healthy and net charge-offs this quarter fell to a historical low of $362 million or 15 basis points of average loans.
They continued a steady decline through the quarters of 2021, with Q4 down $100 million from Q3 and down more than $500 million from Q4 last year.
Our credit card loss rate was 1.42%, and that's less than half of the pre-pandemic rate.
It improved each quarter during the year.
Several other loan product categories have been in recovery positions throughout the year.
Provision was a $489 million net benefit in Q4, driven primarily by asset quality, and macroeconomic improvement, and was partially offset by loans growth.
This included a reserve release of $850 million, primarily in our commercial portfolio.
And on Slide 16, we highlight the credit quality metrics for both our consumer and commercial portfolios.
Turning to the business segments, let's start with consumer banking on Slide 17.
I'll start by acknowledging what a strong year the consumer bank has had as they generated nearly $12 billion of earnings, which is 37% of record year results for the company.
Consumer opened over 900,000 net new checking accounts.
And in fact, this quarter represents their 12th consecutive quarter of net new consumer checking account growth.
And in turn, consumer grew deposits by more than $140 billion.
They opened 3.6 million credit cards and grew card accounts in 2021 by more than any of the past four years.
This helped card balances grow in Q4 despite payments remaining high.
They also opened 525,000 new consumer investment accounts.
And that helped us to reach a new record for investment balances of $369 billion, growing 20% year over year as customers continue to recognize the value of our online offering.
Yes, market valuations grew balances, and we also saw $23 billion of client flows since Q4 '20.
So Q4 was a strong finish to these results.
And in the quarter, the business produced $3.1 billion of earnings off $8.9 billion of revenue and managed costs well.
Our 8% revenue growth was led by NII improvement as we continue to recognize more of the value of our deposit book.
And while revenue grew, expense declined by 1% year over year, generating over 900 basis points of operating leverage.
Lower COVID costs and increased digital adoption by clients more than offset our continued investments in people and our franchise.
This expense discipline has now driven our cost of deposits to an industry-leading 111 basis points.
Net charge-offs declined and we had $380 million of reserve release in the quarter.
And as you can see, and as I already noted, deposits continued to grow strongly both year over year, as well as linked quarter.
Importantly, our rate paid remained low and stable.
Turning to the wealth management business.
Bank of America continued to deliver wealth management at scale across a full range of client segments.
The continued economic progress, strong market conditions, and the efforts of our advisors contributed to strong client flows and net new household growth.
This allowed Wealth Management to generate more than $4 billion in earnings in 2021, up more than 40% from 2020.
In Q4, this powerful combination of Merrill Lynch and our private bank produced records for revenue, earnings, investment balances, and asset management fees, as well as record levels of loans and deposits.
In fact, with regard to loans, this is the 47th consecutive quarter of average loans growth in the business.
It's consistent and it's sustained.
Q4 net income was $1.2 billion, improving 47% year over year and driven by strong revenue growth, good expense controls, and lower credit costs.
Revenue growth of 16% was led by strong improvements in both AUM and brokerage fees, as well as higher NII on the back of solid loan and deposit increases.
Expenses increased 8% in alignment with the higher revenue and resulted in 800 basis points of operating leverage.
Client balances of $3.8 trillion rose $491 billion, up 15% year over year, driven by higher market levels, as well as very strong net client flows of $149 billion.
Within these flows, deposits grew $68 billion year over year to $390 billion, and loans grew $21 billion year over year to $212 billion.
And that loan and deposit growth is further evidence that more and more Merrill and private bank clients are using the bank's products broadly.
Net new household generation is getting closer to pre-pandemic levels as advisors are meeting in person more with clients and are building their pipelines back following the shutdown during the pandemic.
This quarter, Merrill Lynch's net new households of 6,700 and private banking relationships net new of 500 were both up more than 30% from the year-ago period.
The clients of this business continue to lead our franchise in digital adoption, utilizing digital tools to access their investments and also for other banking needs like mobile check deposits and lending.
The evolution is forming a modern Merrill, which is advisor-led and powered by digital.
Moving to global banking on Slide 19.
The business momentum through the back half of the year was strong.
Net interest income grew on the back of accelerating loans growth.
Investment banking fees reached record levels and deposits continued to grow as clients navigated the pandemic.
We also saw strong demand from our clients around ESG investments driving improvements in bottom-line results.
Net income for the full year was a record $9.8 billion or 31% of the company's overall net income.
The business earned $2.7 billion in Q4, improving nearly $1 billion year over year, driven by higher revenue and lower provision costs, partially offset by higher expenses.
Revenue improvement of 24% year over year reflected more than 30% growth in investment banking fees in this segment, and net interest income increased 18%.
This investment banking performance allowed us to gain market share and record No.
3 ranking in overall fees in what was a very strong Q4 market.
1 in investment grade and No.
2 in leverage finance with market share improvement compared to the year-ago period.
And we also saw another record M&A period.
And most importantly, our investment banking pipeline remains quite healthy.
Provision expense reflected a reserve release of $435 million, compared to a $266 million release in the year-ago period.
And what I'd draw your attention to here is the reduction in net charge-offs year over year from $314 million in Q4 of '20 to small recoveries in Q4 '21.
That year-ago period included some losses from clients in those industries that were heavily impacted by COVID.
Finally, given the strength of revenue we saw expenses increase by 12%, which is still only half of our increase in revenue.
Switching to global markets on Slide 20.
Full-year net income of $4.6 billion reflects another solid year of sales and trading revenue.
This included a record year for equities, up 19% versus 2020.
Investments made in this part of the business are seeing good results as our financing clients are doing more business with our company.
As we usually do, I'll talk about the segment results, excluding DVA, even though net DVA was negligible in both Q4 '21 and Q4 '20.
In Q4, global markets produced $667 million in earnings, $167 million lower than the year-ago quarter.
Focusing on year over year, revenue was modestly down, driven by sales and trading.
Sales and trading contributed $2.9 billion to revenue, a decline of 4% year over year.
FICC, down 10%, while equities improved 3%.
FICC results reflect a weaker credit trading environment in Q4 '20, and the strength in equities was driven by growth in client financing activities and the multiplier effect.
The year-over-year expense move was driven by investments in revenue-related sales and trading costs, partially offset by the absence of costs associated with the realignment of liquidating business activity to the all other units in Q4.
Finally, on Slide 21, we show all other, which reported a loss of $673 million, which declined a little more than $250 million from the year-ago period.
Revenue declined as a result of higher volume of deals, particularly solar, and partnership losses on ESG investments.
That's offset by the tax impact in this reporting unit.
Expense increased as a result of costs now recorded here after the fourth quarter realignment out of global markets, which was partially offset by a decrease in various other expenses in the segment.
That realignment obviously had no bottom-line impact on our company overall.
And in all other, we incorporate the impact of our ESG tax credits and any other unusual items.
For the full year, the effective tax rate was 6%.
And excluding the second quarter '21 positive tax adjustment triggered by the U.K. tax law change, and other discrete items, the tax rate would have been 14%.
Further adjusting for ESG tax credits, our tax rate would have been 25%.
And looking forward, we would expect our effective tax rate in 2022 to be between 10% and 12%, absent any tax law changes or unusual items.
And with that, I think I'll stop and we'll open it up for Q&A.
| compname reports q4 net income of $0.82 per share.
compname reports q4-21 net income of $7.0 billion; earnings per share of $0.82.
qtrly fixed income currencies and commodities (ficc) revenue of $1.6 billion and equities revenue of $1.4 billion.
qtrly provision for credit losses improved by $542 million to a benefit of $489 million.
qtrly net interest income up $1.2 billion, or 11%, to $11.4 billion.
qtrly revenue, net of interest expense, increased 10% to $22.1 billion.
bank of america - qtrly noninterest income up 8% to $10.7 billion, driven by record asset management fees and record investment banking revenue.
fourth-quarter results were driven by strong organic growth, record levels of digital engagement, and an improving economy.
qtrly noninterest expense rose 6% to $14.7 billion.
in quarter, historically low net charge-off ratio of 0.15%, down 5 basis points from the prior quarter.
in quarter, wealth management had record client flows & strongest client acquisition numbers since before pandemic.
added $100 billion of deposits during the quarter.
bank of america - in quarter, global markets had highest sales & trading revenue in a decade, led by record equities performance as we invested in business.
bank of america - asset quality remained strong with loss rates at historically low levels as global economy continued to improve.
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Lexington believes that these statements are based on reasonable assumptions.
Any references in these documents to adjusted company FFO refers to adjusted company funds from operations available to all equity holders and unitholders on a fully diluted basis.
Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington's historical or future financial performance, financial position or cash flows.
Executive Vice Presidents Lara Johnson & James Dudley will be available during the question-and-answer portion of our call.
Our third quarter results were strong in all areas of our business.
We have transformed the company's portfolio, delivered revenue and adjusted company FFO above consensus, produced strong underlying portfolio performance and increased the dividend by 11.6%.
With 95% of our gross assets now industrial, we have substantially completed our portfolio transformation to a predominantly single-tenant industrial REIT.
In addition, we are executing on a number of value-enhancing initiatives, including pursuing prudent external growth, active asset management, and continuing our disciplined capital allocation.
Our portfolio continues to benefit from healthy fundamentals in the industrial sector, including strong leasing demand and rental growth.
Tenant leasing velocity is being driven by the need to improve supply chain efficiency as transportation costs rise, resulting in a greater desire for additional space to house inventory.
Demand is still outpacing supply, with vacancy at an all-time low, leading to rental rates continuing to rise across the country.
Class A warehouse distribution space in our target markets is benefiting from all of these trends.
In short, it is a great time to be an industrial real estate company with top-quality assets.
Our robust third quarter leasing activity is certainly reflective of the strength of our target markets.
With 2.6 million square feet of space leased in the quarter, we raised our stabilized lease portfolio 110 basis points to 98.9% and increased base and cash base industrial rents on extensions and new leases 6.5% and 4.7%, respectively.
Further, for the nine months ended September 30, we raised base and cash-based industrial rents on extensions and new leases 10.3% and 7%, respectively.
Average rent per square foot in our warehouse distribution portfolio is $3.97, which we view as 6% to 8% below market, as market rents continue to grow considerably faster than the escalations built into our leases.
And we note that rents in our target markets have grown on average approximately 8% over the last year.
Our strategy to purchase vacancy to produce higher stabilized yields is proving successful as evidenced by some notable third quarter leasing activity.
We secured a 5.5-year lease with a new tenant who will occupy the 195,000 square foot vacant property that we recently purchased in the Greenville-Spartanburg market as part of a four-property industrial portfolio acquisition.
The lease term includes 2.75% annual rental escalations, and the lease produces an initial stabilized yield of 5.3% for the property.
Additionally, we leased 68,000 square feet of available space to a new tenant at our Lakeland, Florida warehouse distribution facility for five years, increasing the building's occupancy from 53% to 84%.
The starting rent is $5.70 per square foot with 3% annual escalations.
Other significant leasing outcomes during the quarter that resulted in an increase to cash base rent over the prior lease term included a five-year lease with 3% annual escalations at our 640,000 square foot Statesville, North Carolina warehouse distribution facility and a three-year lease with 2.25% annual escalations at our 1.2 million square foot Olive Branch, Mississippi warehouse distribution facility.
Subsequent to quarter end, we had a huge success at our 908,000 square foot spec development facility in Fairburn, Georgia, executing a seven-year lease with 3% annual escalations and bringing the stabilized yield to 7.2%, excluding our partner promote, which was well above our underwriting assumptions.
This lease illustrates the value creation that our development pipeline is now delivering.
We currently have four spec development projects in process, two of which we added during the third quarter, with an estimated total project cost of $358 million and $270 million left to fund.
Speculative development and the purchase of non-stabilized properties continued to be a principal focus of our investment strategy and highlight how our platform, market presence and warehouse distribution focus are creating shareholder value.
On the purchase front, we acquired $135 million of Class A warehouse distribution product during the quarter, with an additional $76 million purchased subsequently, and we currently have a sizable pipeline under review.
Brendan will discuss investment activity and the development pipeline in greater detail shortly.
Our sales volume as of September 30 totaled $219 million at average GAAP and cash cap rates of 7.6% and 7.9%, respectively.
We sold an additional $25 million after quarter-end and have two other properties under contract to sell for $29 million.
As we focus our strategy on acquiring and developing modern Class A warehouse distribution facilities, we continue to view our manufacturing and cold storage portfolio as a potential source of capital for redeployment.
With the sale of our nonindustrial properties substantially complete, our board announced a dividend increase that brings our payout ratio more in line with our peers after several years of focusing more on retaining cash flow and maintaining a low payout ratio during this period of intensive capital recycling.
The new declared quarterly common share dividend, which will be paid in the first quarter of 2022, will be $0.12 per share, representing an 11.6% increase over the prior quarterly dividend.
Our intent to grow the dividend annually, moving forward, reflects our confidence in the direction of market rent growth and our opportunity to raise future rents.
On the ESG front, I'd like to highlight how pleased we are to have earned the first place ranking for U.S. industrial listed companies in our first 2021 G-res assessment.
ESG is an ongoing priority for us, and we continue to enhance and strengthen our program.
We encourage you to review our most recent ESG disclosures, which highlights many of our 2021 ESG achievements and initiatives.
In closing, by transforming LXP into a predominantly single-tenant industrial REIT, we have created a much stronger, more valuable portfolio.
The compelling growth opportunities we see ahead of us position us well to continue to drive meaningful long-term financial performance and enhanced shareholder returns.
During the third quarter, we purchased five warehouse distribution assets spanning 1.3 million square feet for $135 million at average GAAP and cash stabilized cap rate of 4.9% and 4.6%, respectively.
We briefly discussed the four-property portfolio located in Greenville-Spartanburg on last quarter's call.
We purchased that portfolio with the vacant property, which we leased up shortly after our second quarter call.
Echoing Will, this success demonstrates the value of our strategy of acquiring vacancy in strong markets where we can utilize our market knowledge and expertise to enhance yield.
We also acquired a 293,000 square foot stabilized warehouse distribution facility in Columbus, Ohio, a primary distribution market in the central U.S.
This facility is a recent build occupied by two tenants with a weighted average lease term of seven years and average annual rental escalations of 2.5%.
Subsequent to quarter-close, we purchased a three-property, 878,000 square foot portfolio in the Whiteland submarket of Indianapolis.
Indianapolis is a market we've made a commitment to for several reasons, including its central location and population reach, extensive highway air and rail systems, deep labor pool, business-friendly government and its access to the second largest FedEx hub in the world.
The three properties, all recently constructed, sit along I-65 in the Whiteland Exchange Business Park.
On the development front, we acquired two land sites during the quarter that, when completed, will comprise five buildings, three in the Greenville-Spartanburg market and two in Phoenix.
The 234-acre site in Greenville-Spartanburg is in the Smith Farms Industrial Park, where we own two other warehouse distribution facilities.
Upon completion, which will be staggered in the first half of 2022, the three buildings will total roughly 1.9 million square feet.
The estimated development cost of this project is approximately $133 million, with estimated stabilized cash yields projected to be in the low to mid-5% range.
The Phoenix project is a 57-acre site in the Goodyear submarket along the Southwest Valley Loop 303 industrial hub.
Upon completion, the project will consist of two Class A warehouse distribution facilities totaling 880,000 square feet.
The site is in PV 303, the sub-market's premier master-planned business park that is highly desirable for corporate users.
Like the Greenville-Spartanburg project, the facilities will have varying deliveries in the first half of 2022.
The estimated development cost is approximately $84 million, with estimated stabilized cash yield forecasted to be in the high 4% range.
Phoenix is an area where we've been growing significantly in recent years.
And as a result, we've built a deep knowledge and expertise in this very strong market.
Currently, we have 2.4 million square feet of modern Class A industrial space in Phoenix; and, more specifically, two million square feet in Goodyear, and we'll further increase our footprint there with the completion of this development project.
This square footage also includes our build-to-suit that is largely complete, with the tenant already occupying and operating in most of the space.
We have observed record-breaking activity and continue to like the market's strong fundamentals, driven by Phoenix's fast-growing population, its moderate operating costs, low taxes, affordable labor and proximity to major markets such as Los Angeles, San Diego and Las Vegas.
We'll continue to provide regular updates on the progress of these projects, which we believe provide a very attractive risk return profile.
During the third quarter, we produced adjusted company FFO of roughly $54 million, or $0.19 per diluted common share.
Today, we announced an increase to both the low and top end of our adjusted company FFO guidance range to a new range of $0.75 to $0.78 per diluted common share.
The revised range considers the timing of acquisitions and dispositions and positive leasing outcomes.
Revenues for the quarter were approximately $83 million, with property operating expenses of just over $11 million, of which 84% was attributable to tenant reimbursement.
G&A for the quarter was $8.4 million, and we expect 2021 G&A to be within a range of $33 million to $36 million.
Our same-store portfolio was 98.7% leased at quarter end, with overall same-store NOI increasing 0.7%, which would have been approximately 1.9%, excluding single-tenant vacancy.
Industrial same-store NOI increased 1.2% and would have been 2.5%, excluding single-tenant vacancy.
At quarter-end, approximately 90% of our industrial portfolio leases had escalation, with an average rate of 2.6%.
Our company's balance sheet remains solid, with net debt to adjusted EBITDA of 5.4 times at quarter-end and unencumbered NOI at 91.5%.
During the quarter, we issued $400 million of senior notes due in 2031 with an attractive rate of 2.375%.
The net proceeds and cash on hand were used to fully redeem our 4.25 senior notes due in 2023 and repay the outstanding balance under our revolving credit facility.
Consolidated debt outstanding as of September 30 was approximately $1.5 billion with a weighted average interest rate of approximately 2.9% and a weighted average term of about eight years.
Finally, during the quarter, we settled 3.9 million common shares previously sold on a forward basis, leaving $240 million, or 20.8 million common shares, of unsettled common share contracts available at quarter-end.
The contracts mature at various states, with the majority of these contracts maturing in May 2022.
| lexington realty trust increased q4 of 2021 common share dividend by 11.6%.
lexington realty trust - increasing adjusted ffo per share guidance range for fy21 to $0.75 to $0.78.
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Unless otherwise stated, all net sales growth numbers are in constant currency and all organic results exclude the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of currency translation.
As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms.
It also includes estimated sales of our products through our retailers' websites.
We are grateful you have joined us today.
We delivered excellent performance to begin fiscal year 2022, reinforcing our optimism in the opportunities of tomorrow as we discussed with you in August.
Our multiple engines of growth strategy enabled us to excel amid continued volatility and variability from the pandemic.
Organic sales rose 18%, and adjusted diluted earnings per share grew an even stronger 31%.
Encouragingly, relative to the pre-pandemic first quarter of fiscal year 2020, our business is 13% larger on a reported basis and more profitable.
We achieved these outstanding results with increasingly diverse growth engines as we expected.
By virtue of our dynamic strategy, we could act locally amid the complexity of the pandemic to both create and capture demand.
The growth engines of makeup, developed markets in the West, and brick-and-mortar reignited and complemented momentum in skincare, fragrance, Mainland China, Travel Retail in Asia Pacific, and global online.
13 brands contributed double-digit organic sales growth, demonstrating the breadth of strength across our portfolio.
Estée Lauder and MAC drove makeup emerging renaissance, while La Mer and Clinique delivered standout results in skincare.
Impressively, skincare solidly outpaced its prior-year organic sales growth performance despite having the far toughest comparison among the categories.
Fragrance showed double digits, driven by Tom Ford Beauty and Jo Malone London.
Let me share a few highlights by brand.
Estée Lauder advanced planning for the makeup renaissance delivered significant sales growth.
As social and professional usage occasions resumed in certain markets, the brand was well-positioned with compelling innovation, superb merchandising, and on-point communication.
Its double wear and futurist foundation franchises rose strong double digits, while its new pure color whipped matte lipstick was a hit.
MAC strategically engaged consumers to drive performance in makeup.
In the Americas and EMEA, excellent results from in-store activations and regional MAC the Moment campaigns combined with desirable innovation like luster glass sheer shine lipstick and magic extension mascara.
The brand's new omnichannel capabilities, which leverage its freestanding stores, also contributed to the strength and demonstrate a new capability for MAC to benefit from going forward.
La Mer performed magnificent and led the company with sales rising strong double digits.
Its new hydrating infused emulsion expanded our portfolio of east to west innovation captivating consumers in every region.
It is a striking example of the innovation gains we can achieve when the power of our data analytics combined with our creative talent and R&D.
La Mer's iconic creme de la Mer prospered as a new global campaign focused on its moisturizing benefit realized terrific initial results.
Clinique strived in skincare from the strength of its heroes.
Moreover, its new smart clinical repair wrinkle correcting serum with powerful clinically led claims and compelling before-and-after visualizations extended Clinique win streak with innovation and further demonstrated the brand's ability to be highly relevant for consumers of all ages.
DECIEM complemented our organic sales growth in skincare with its coveted vegan brand, The Ordinary.
DECIEM is known for its transparency, which has enamored it with consumers.
And in the first quarter, we launched the insightful Everything is Chemicals campaign.
And the new Regimen Builder by The Ordinary on brand.com realized spectacular adoption, further enhancing the brand's powerful online ecosystem.
Fragrance momentum continued with stellar double-digit performance in every region, powered by hero products and innovation from Tom Ford Beauty, Jo Malone London in our artisanal offerings.
We are excited for the Estée Lauder brand launch of its luxury collection in the second quarter as it expands our portfolio in the high-growth segment of fragrances.
Our fragrance category benefits from diversification among our categories as well as regions with outstanding performance from both historically strong markets for fragrance and emerging fragrance opportunities.
The self-care rituals related to scent, which were embraced during the pandemic, continued even as social and professional usage occasions resumed.
Of note, Tom Ford Beauty performed strongly in both fragrance and makeup such that the brand was among our top performers in the quarter.
Its new Ombre Leather perfume and hero's Oud Wood and Lost Cherry fueled the brand's success.
Our growth engines also diversified geographically, led by developed markets in the West.
Our business in North America executed with excellence to deliver strong double-digit organic sales growth, powered by readiness for makeup's emerging renaissance, ongoing strength in skincare and fragrance, and recovery in hair care.
Strategic go-to-market initiatives supported by on-trend innovation increased advertising spending, and expert in-store virtual services delighted consumers.
Our expanded consumer reach enhanced these initiatives as Bobbi Brown launched in Ulta Beauty exceeded expectations, and we are encouraged by the early results of the new Ulta Beauty at Target and Sephora at Kohl's relationships.
In Asia Pacific, many markets faced COVID-induced lockdowns and temporary store closures, which pressured performance.
Despite this, the region still grew 10% organically driven by strength in Greater China and Korea.
Mainland China achieved double-digit organic sales growth owing to skin care and fragrance, with online and brick-and-mortar both higher.
We launched locally relevant innovation which proved highly desirable, while we also increased advertising spending, strategically expanded our consumer reach to match success on JD, and designed successful activation for Chinese Valentine's Day.
We continue to invest in the vibrant and compelling long-term growth opportunity in Mainland China, led by our talented local team.
We are enthusiastic for our new innovation center in Shanghai to open in the second half of this fiscal year.
This new world-class innovation center will be the first of its kind for our company.
With it, we will have a unique ability to grow and build on our market and consumer insights to develop exceptional products to meet and surpass the needs and desires of Chinese consumers.
What is more, we are seeing the benefits of recent investment in online fulfillment, which have led to higher service levels and better inventory manager while setting the stage for expanded omnichannel capabilities in the market.
From a channel perspective globally, brick-and-mortar grew strongly in markets which are gradually emerging from the latest wave of COVID-19.
We realized excellent results across the board in brick-and-mortar, most especially in the Americas and EMEA.
Our brands created excitement in store with enticing high-touch services and unique activations.
We are encouraged by improving trends in the productivity of brick-and-mortar, owing to both increased traffic and our strategic actions, including those under the post-COVID business acceleration program.
As brick-and-mortar reignites, our global online business continued to showcase its tremendous promise, with impressive organic results despite significant organic sales growth in the year-ago period.
Online grew to be nearly double the size, on a reported basis, of the pre-pandemic first quarter of fiscal year 2020.
Many markets capitalized on the remarkable new consumer acquisition trend of the pandemic to deliver sustained gain in repeat purchases.
As we seek to engage with consumers in innovative ways, we advanced our work with Instagram, Snapchat, TikTok, WeChat, and others to capitalize on exciting trends in social commerce.
We also deployed a technology solution, which enables brands to better customize consumer outreach by leveraging data to merchandise and personalized communication.
This is leading to higher conversion rates for new consumers and a deeper level of relationship building after the initial purchase to foster retention.
Initiatives such as this position us well to realize even greater success with trial and repeat.
We continued to invest in online to strategically expand our consumer reach and realize promising results.
For example, in the first quarter, La Mer launched on Lazada in Southeast Asia to tremendous success with differentiated merchandising, unique services, and prestige packaging, making it one of the platform's biggest brand launches ever.
Our relationship with Lazada expanded in the current quarter with Jo Malone London's debut.
Before I close, I wanted to share that today we will release our fiscal year 2021 social impact and sustainability report.
We are incredibly inspired by the achievements of our employees globally.
The report highlights initiatives across key areas, including inclusion, diversity, and equity.
Climate, packaging, social investment, responsible sources, and green chemistry.
I'm particularly proud of our support to employees globally who faced financial hardships due to COVID-19.
The ELC Cares Employee Relief Fund awarded nearly 14,000 grants and distributed nearly $8 million through June 30, 2021.
Here, a few among the many other highlights of the report: We are continuing to contribute to a low-carbon future.
For the second year in a row, we sourced 100% renewable electricity globally for our direct operations and achieved net-zero scope one and scope two emissions.
The company also made strong progress in its Science-based Targets for scope one and two and made efforts toward meeting its scope three science-based targets.
We achieved our existing post-consumer recycled content goal ahead of schedule and announced a more ambitious goal to increase the amount of such material in our packaging to 25% or more by the end of calendar year 2025.
We also committed to reduce the amount of virgin petroleum plastic in our packaging to 50% or less by the end of calendar year 2030.
On the last few earnings calls, I discussed actions we are taking to make more progress on our commitments for racial equity as well as women's advancement and gender equality, which are reflected in the report.
We also deepened our work by further aligning the strategy of The Estee Lauder Companies' charitable foundation to identify and support programs at the intersection of climate, justice, human rights, and well-being with a focus on equity, building upon our legacy of founding girls' education and leadership programs.
In the beginning of fiscal year 2022 and aligned with our social impact commitments, we were pleased to announce a three-year partnership with Amanda Gorman, activist, award-winning writer, and the youngest inaugural poet in U.S. history.
The Estée Lauder Companies will contribute $3 million over three years to support Writing Change, a special initiative to advance literacy as a pathway to equality, access, and social change.
In addition, Mrs. Gorman will bring her voice of change to the Estée Lauder brand, debuting her first campaign in the second half of this fiscal year.
In closing, we delivered outstanding performance to begin the new fiscal year amid the volatility and variability of the pandemic, while continuing to invest in sustainable long-term growth drivers.
We are focusing on fundamental capabilities for product quality and the consumer-centric elements of acquisition, engagement, and high-touch experiences and services.
We are doing this while improving our cost structure, diversifying our portfolio and its distribution, investing behind the best growth opportunities, and leading our values.
Our confidence in the long-term growth opportunities for global prestige beauty and our company is reflected in the announcement today to raise the quarterly dividend.
I'm forever grateful to the grace, wisdom, and ingenuity of our employees globally, who are making us a stronger company each and every day.
We are off to an outstanding start with first-quarter net sales growing 18% organically, driven by the nascent recovery in the Americas and EMEA during the quarter compared to a more difficult environment in the prior year.
Global logistics constraints caused some retailers, primarily in North America, to order earlier to ensure popular sets and products would be on counter for holiday.
We estimate that this contributed approximately 1.5 points to our first-quarter sales growth that otherwise would have occurred in the second quarter.
The inclusion of sales from the May 2021 DECIEM investment added approximately three points to reported net sales growth, and currency added just over two points.
From a geographic standpoint, organic net sales in the Americas climbed 27% as COVID restrictions eased throughout the region.
Brick-and-mortar retail grew sharply across all formats compared to the prior-year period when many stores were temporarily shut down.
Distribution in Kohl's with Sephora and in Target with Ulta Beauty began its phased rollout to initial stores and online in mid-August, with minimal impact on net sales growth for the quarter.
With the strong resurgence of brick-and-mortar traffic, online organic sales growth in the Americas declined single digits against a sharp increase last year, while organic online penetration remained solid at 31% of sales.
The inclusion of sales from DECIEM added about nine points to the overall reported growth in the region.
In our Europe, the Middle East, and Africa region, organic net sales rose 19% with virtually every market contributing to growth, led by the emerging markets in the Middle East, Turkey, and Russia as well as the U.K. Most markets throughout the region saw COVID restrictions lifted, and some tourism resumed during the peak summer months.
By channel, the region saw more balance between brick-and-mortar and online growth.
All major categories grew this quarter, and the region saw the strongest growth in fragrance and makeup as social occasions increased.
Our global Travel Retail business grew double-digit as China and Korea continued to be strong.
Internal travel restrictions during the quarter in China slowed Hainan sales temporarily, but restrictions lifted in early September, and traffic rebounded.
Retailers also responded to the August dip by driving post-travel consumption online.
Summer holiday travel in Europe and the Americas picked up, but international travel still reached only 40% of pre-COVID levels.
In our Asia Pacific region, organic net sales rose 10%, driven by Greater China and Korea.
The region overall experienced higher levels of COVID lockdowns this quarter compared to last year's quarter due to the rise of the delta variant, although online remains strong.
Sales growth in Mainland China was somewhat slower due to COVID restrictions during July and August.
And the pace of online sales growth slowed following the successful 6.18 programs last quarter and in anticipation of the 11.11 shopping festival.
As we've mentioned before, these key shopping moments have created some additional seasonality in our business in this region.
More than half of our brands in virtually all channels rose double-digit in Mainland China.
Hong Kong and Macau were bright spots this quarter.
They benefited from strong new product launches from La Mer and Jo Malone and successful marketing campaigns from several other brands.
From a category perspective, net sales growth in fragrance jumped nearly 50%.
Virtually every brand that participates in the category contributed to growth, with exceptional double-digit increases from Tom Ford Beauty, Jo Malone London, and Le Labo.
Perfumes and colognes led the category growth; and bath, body, and home fragrances continue to perform well.
Net sales in makeup rose 18% as markets in the Americas and Europe began to recover from COVID shutdowns.
We are encouraged by the sequential improvement in makeup versus pre-COVID levels.
However, makeup sales in the quarter were still 19% below two years ago.
Nonetheless, Estée Lauder foundations continue to resonate strongly with consumers, and MAC leaned into the makeup recovery with a number of fun and compelling campaigns.
Skincare sales remained strong during the quarter.
Organic net sales grew 12%, and the inclusion of sales from DECIEM added six percentage points to reported growth.
Nearly all of our skincare brands contributed to growth, although Estée Lauder had a tough comparison with the prior-year launch of its improved Advanced Night Repair Serum.
Our haircare net sales rose 8% as traffic in salons and stores in the U.S. and Europe began to return.
Both Aveda and Bumble and bumble saw growth in-hero products as well as continued strength from innovation.
Our gross margin declined 100 basis points compared to the first quarter last year.
The positive impacts from strategic pricing and currency were more than offset by higher obsolescence costs for both basic and holiday product sets and the inclusion of DECIEM.
Operating expenses decreased 240 basis points as a percent of sales.
Our strong sales growth was partly due to earlier orders from some North America retailers concerned about logistics constraints, and costs related to these sales are expected to be incurred in our second quarter.
We do continue to manage costs with agility, realizing savings from our cost initiatives, while also investing to support a continued brick-and-mortar recovery as well as our strategic initiatives.
Our operating income rose 32% to 941 million, and our operating margin rose 140 basis points to 21.4% in the quarter.
Diluted earnings per share of $1.89 increased 31% compared to the prior year.
During the quarter, we used 81 million in net cash flows from operating activities, which was below the prior year.
This reflects a more normalized first quarter where we typically have seasonally higher working capital needs.
We invested 205 million in capital expenditures as we ramped up our investment to build a new manufacturing facility in Japan.
And we returned 749 million in cash to stockholders through both share repurchases and dividends.
So now let's turn to our outlook.
We are encouraged by the green shoots we are seeing around the world, even in the context of an environment of increased volatility.
Our strong performance reflects our ability to navigate through the volatility while leveraging our multiple engines of growth.
At the same time, we are mindful that recovery is tenuous and likely to be uneven.
Nevertheless, we are cautiously optimistic, and our assumptions for fiscal 2022 remain consistent.
We continue to expect an emerging renaissance in the makeup category as restrictions are safely lifted and social occasions increase.
And as intercontinental restrictions are lifted, we expect international passenger traffic to build toward the end of the fiscal year.
We began taking strategic pricing actions in July.
And overall, pricing is expected to add at least three points of growth, helping to offset inflationary pressures.
On the costs side, we plan to continue to increase advertising to support our brands and drive traffic in all channels.
Selling costs are expected to rise to support the reopening of brick-and-mortar retail.
We also continue to invest behind key strategic capabilities like data analytics, innovation, technology, and sustainability initiatives.
As you are all aware, global supply chains are being strained by COVID and its related effects in some markets, resulting in port congestion, higher fuel costs, and labor shortages at a time when demand for goods is rising.
This is causing us to experience inflation in freight and procurement, which we expect to impact our cost of goods and operating expenses beginning next quarter.
Based on what we see through October, the expected benefit of pricing, combined with good cost discipline elsewhere, are enabling us to maintain our expectations for the year.
For the full fiscal year, organic net sales are forecasted to grow 9 to 12%.
Based on rates of 1.163 for the euro, 1.351 for the pound, and 6.471 for the Chinese yuan, we expect currency translation to be negligible for the full fiscal year.
This range excludes approximately three points from acquisitions, divestitures, and brand closures, primarily the inclusion of DECIEM.
Diluted earnings per share is expected to range between 7.23 and 7.38 before restructuring and other charges.
This includes approximately $0.04 of accretion from currency translation and $0.03 accretion from DECIEM.
In constant currency, we expect earnings per share to rise 11 to 14%.
At this time, we expect organic sales for our second quarter to rise eight to 10%.
The net incremental sales from acquisitions, divestitures, and brand closures are expected to add about three points to reported growth, and currency is forecasted to be neutral.
Operating expenses are expected to rise in the second quarter as we support holiday activations and the continued recovery of brick-and-mortar retail around the world.
Additionally, the prior-year quarter included some benefits of government subsidies, which are not anticipated in the current year quarter.
We expect second quarter earnings per share of $2.51 to $2.61.
Both currency and the inclusion of DECIEM are expected to be immaterial to EPS.
Notably, our earnings per share forecast also reflects a 23% tax rate, compared to 15.9% in the prior year when we benefited from certain one-time items.
In closing, we are pleased with the terrific start to the year and are proud of the continued efforts of our global team.
We remain confident in our corporate strategy with its multiple growth engines to drive sustainable, profitable growth.
| sees q2 earnings per share $2.51 to $2.61 excluding items.
confirming full year outlook.
qtrly adjusted diluted earnings per common share to $1.89.
qtrly net sales increased 23% to $4.39 billion.
for fiscal 2022, we continue to expect strong net sales and adjusted earnings per share growth with margin expansion.
higher transportation and logistics costs to negatively impact cost of sales and operating expenses in fiscal 2022.
|
mdu.com under the Investors tab.
President and CEO, Dave Goodin and I will be leading today's discussion.
Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results could differ materially.
Yesterday, we announced third quarter earnings of $139.3 million or $0.68 per share compared to third quarter 2020 earnings of $153.1 million or $0.76 per share.
On a year-to-date basis, we have earned $291.6 million or $1.44 per share compared to the prior year's $277.9 million or $1.39 per share.
Let's look at some of the details by segment starting with the quarterly comparison of our construction operations.
Construction Services reported third quarter earnings of $23.1 million compared to the prior year's record third quarter earnings of $29.8 million.
EBITDA at this business decreased $10.9 million from the same period in 2020 to $35.9 million.
Results were negatively impacted by $5.5 million after-tax for changes in estimates on a construction contract during the quarter.
This business also had decreased margins from higher employee cost attributed to a shortage of available skilled labor.
While we saw less storm recovery work this quarter in the prior year the demand for our general utility work has remained very strong.
Our Construction Materials business reported earnings of $96.3 million for the third quarter, down from the prior year's $107.3 million.
EBITDA decreased $13.4 million from the same period last year to $158.9 million.
The primary drivers behind the decreased earnings were lower asphalt and related product sales and margins, as well as lower contracting revenues.
Asphalt products and contracting margins were impacted by an increase in asphalt oil and diesel fuel costs as well as less available highway paving work in certain regions when you compare that to the strong third quarter we experienced in 2020.
Partially offsetting these impacts were lower selling, general administrative expense primarily from lower incentive accruals and lower benefit-related costs.
Turning to our Regulated Energy Delivery business, our Combined Utility business reported net income of $5.2 million for the quarter compared to a net loss of $800,000 in the third quarter of 2020.
The Electric Utility segment reported strong third quarter earnings of $20.6 million compared to $16.8 million for the same period in 2020.
Warmer weather helped drive an 11.1% increase in electric retail sales volumes, along with more businesses being open when compared to last year due to pandemic-related impacts.
Increased MISO revenues and transmission interconnect upgrades also had a positive impact on earnings of this business.
Our natural gas segment reported an expected seasonal loss of $15.4 million for the quarter, which was a $2.2 million improvement from the previous year.
Higher adjusted gross margin from rate relief and a 2% increase in retail and natural gas sales volumes drove the decreased loss, partially offset by higher O&M expense.
The pipeline business had earnings of $10.6 million in the third quarter compared to $8 million in the third quarter of 2020 primarily from higher AFUDC on the company's North Bakken Expansion project.
Also during the quarter MDU Resources experienced lower income tax benefits of approximately $4.6 million when compared to the third quarter of 2020 related to the timing of recognition of our consolidated annualized estimated tax rate.
That summarizes the key financial highlights from the quarter.
The strength of our two platform business model was evident during the third quarter as the strong results from our regulated energy delivery business helped offset some of the headwinds our construction businesses faced.
MDU Resources remains well positioned for a strong end to 2021 and beyond.
To summarize activity by business unit, I'll start off with the regulated energy delivery businesses.
Third quarter highlights for our utility operations include significantly high earnings on a year-over-year basis.
The utility continues to seek regulatory recovery for the costs associated with providing safe and reliable electric and natural gas service to our growing customer base.
On a combined basis, we saw 1.7% customer growth since the same period in 2020 and in the third quarter our natural gas utility refiled in the State of Washington for a $13.7 million annual rate increase that is currently pending.
We continue preparing to kick off construction in early 2020 on our Hesket Station Unit IV, which is expected to be in service in early 2023.
As a reminder, Hesket IV is a natural gas peaking unit that will aid in partially replacing the generation loss with the pending retirements of our coal-fired Hesket Station Units I and Unit II and the coal-fired Lewis & Clark Unit I that was retired in the first quarter of this year.
At our pipeline business also performed very well throughout the third quarter and reported earnings just shy of its third quarter 2018 record.
Construction is well underway on the North Bakken Expansion project.
We expect this fully subscribed project will be in service in early 2022 with capacity to transport 250 million cubic feet of natural gas per day for our customers.
While a portion of the first year customer committed volumes are delayed one year as we discussed last time at this -- last year at this time, the project is well-positioned in the Bakken and can be readily expanded in the future for forecasted natural gas production growth.
I recently had the opportunity to visit the construction site in North Western North Dakota with other members of our management team and I can tell you first hand, it was an impressive to see over 700 employees and contractors are safely and efficiently working together to complete this $260 million project.
Our pipeline business also received FERC approval during the third quarter to use the pre-filing review process for its Wahpeton Expansion Project.
This project involves constructing approximately 60 miles of 12-inch pipeline from our existing facilities at Mapleton, North Dakota, extending to Wahpeton, North Dakota.
It will add 20 million cubic feet per day of natural gas capacity and is expected to cost approximately $75 million.
Depending on regulatory approvals, construction is expected to begin in early 2024 with the completion date later that same year.
When the North Bakken and Wahpeton expansion projects are complete, WBI's total system capacity will be more than 2.4 billion cubic feet of natural gas per day, which will help to reduce natural gas flaring in the region and allow producers to move more natural gas to markets.
Now I'd like to move on to our construction platform.
Our Construction Services Group results were impacted by changes in estimates on a construction project contract as well as higher labor costs for the quarter.
In 2021, the markets where Construction Services operates have experienced labor shortages that have in turn caused the increased employee-related costs as we continue to focus on the attraction and the retention of skilled specialized labor.
Storm-related utility repair work was down compared to last year, but we continue to see strong demand overall for utility-related work.
Demand for sales and leasing of the transmission line equipment that this business manufactures remains very high.
Coupled with the strong capex budgets that we see across utility industry, our outlook for the outside specialty contracting remains positive.
Opportunities for inside specialty contracting also remain high, especially in the commercial sector.
Construction Services ended the quarter with a backlog of $1.27 billion, down just slightly from the prior year's third year record of $1.28 billion.
Bidding remains competitive across the company's footprint and we do expect that our relationships with existing customers combined with our high quality of service and effective cost management will continue to aid us in securing profitable projects.
While Construction Services had a very strong first half of the year, we have adjusted our revenue and margin guidance for this segment to reflect the impacts of here in the third quarter.
We now expect revenues to be in the range of $2.0 billion to $2.2 billion with margins comparable to 2020 levels.
And finally our Construction Materials business; Knife River had a solid third quarter although down from last year's record third quarter earnings.
The primary impacts to earnings at this business were higher costs for asphalt oil and diesel fuel as commodity costs return to levels closer to what we saw in 2019.
As you may remember, decreased energy related cost pushed our asphalt and asphalt related product line margins to a near all-time high last year.
Knife River has also been impacted by labor constraints largely for truck drivers as the COVID-19 pandemic amplified a prior and existing labor shortage.
While labor challenges continue to impact many construction companies, Knife River is actively engaged in attracting the next generation to the construction industry.
The company is nearly finishing building a training center on a 270-acre track of property in the Pacific Northwest.
That is designed to enhance the skills of its current employees and those of partner organizations, as well as provide training to new comers to the industry.
The Knife River training center features and 80,000 square foot heated indoor arena for training on trucks and heavy equipment and an attach 16,000 square foot office with classroom and lab facility.
The center already is holding classes helping students build marketable skills through both classroom education and hands on experience.
In addition to developing individual talents, the goal of the center is to showcase construction as a true career of choice.
The facilities and classes are open to all construction companies beyond even Knife River.
Given the third quarter results we have adjusted our margin guidance for this business.
Revenues are still expected to be in the range of $2.1 billion to $2.3 billion.
However, margins are now projected to be slightly lower than those seen in 2020.
Knife River backlog as of September 30 was $651.7 million, a 14% increase from the prior year's $571.3 million.
We are seeing more bidding opportunities in certain regions from strong economic conditions.
We have exceptional employees from entry-level to management level with a number of our employees spending their entire careers in the industry.
I am confident that our management teams will continue to navigate through the labor challenges we are seeing.
Over the last year and a half our teams have managed through numerous challenges presented by the COVID-19 pandemic and we continue to produce solid results.
Overall MDU Resources and our companies had solid performance through the third quarter and while results did not reach the level we anticipated our operations continue to operate safely and effectively.
Based on our results through the third quarter, we have adjusted our earnings per share guidance to now a range of $1.90 to $2.05 per share.
Looking forward, both our Construction Materials and Construction Services businesses are well positioned to benefit from the allocation of the American Rescue Plan Act Funds along with a federal infrastructure plan.
As the bipartisan bill progresses, the focus on traditional infrastructure projects including the construction of roads and bridges, electric vehicle and broadband build out an upgraded power infrastructure will provide significant upside for our construction companies.
And we'll also provide funding certainty for our customers and the coming years.
We also continue to seek acquisition opportunities that will enhance market share for our construction operations.
As always MDU Resources is committed to operating with integrity and with a focus on safety, while creating superior shareholder value as we continue providing essential services to our customers and delivering on our tag line of Building a Strong America.
I appreciate your interest in and commitment to MDU Resources and ask now that we open the line to questions.
| mdu resources adjusts guidance.
sees fy earnings per share $1.90 to $2.05.
q3 earnings per share $0.68.
|
A more detailed description of such factors can be found in the filings with the Securities and Exchange Commission.
Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; and Ware Grove, Chief Financial Officer.
With the release of our third quarter results, I am extremely proud of our performance to date.
Our results in the third quarter and throughout this year continue to demonstrate the strength and resilience of our business.
We started this year with a good deal of optimism, especially given the performance of the business since the onset of the pandemic, the steadily increase in demand for our services that were experienced through the second half of last year and the level of confidence about the business climate that we're hearing from many of our clients.
Even with our optimistic outlook, our performance to date has exceeded our expectations.
While we oftentimes experienced some seasonal slowness in the third quarter, that has not been the case this year.
The strong demand for our core essential services that we experienced through the first half of this year has continued through the third quarter, and our results have been bolstered by very strong performance from many of our more project-oriented advisory services that are often viewed by our clients as being more discretionary.
And perhaps most encouraging, the strong performance reflected in our year-to-date results is coming from both of our major practice groups and across nearly all major service lines of our business.
Within our Financial Services group, we continue to experience strong performance from our core accounting, tax and advisory businesses.
And in addition, during the third quarter, we saw steady demand for our tax consulting services and robust demand across the board for our advisory services.
These results reflect the strength of our current business climate and the overall confidence and optimism of our clients.
As our clients take steps to capitalize on opportunities to accelerate growth in the future, these actions should translate into additional project-based advisory work for us.
Within our government healthcare consulting business, we are experiencing a rate of growth in the mid-single digits.
While this growth is consistent with our experience since the onset of the pandemic, we would expect to see accelerated growth in the months ahead as more states fully reopen and some delayed work resumes.
A complementary acquisition that provides actuarial services that we made this past summer, is creating additional opportunities for us to bring even greater value to our government clients in the administration of complex healthcare programs.
Now turning to our benefits and insurance group.
We are also experiencing the continuation of the strong performance that we saw for the first half of the year.
We continue to see steady demand for our core employee Benefits, Property & Casualty and Retirement Plan Advisory businesses.
As we've discussed on prior calls, we've made substantial investments over the past several years to accelerate organic growth within our employee benefits business by adding to the number of producers.
We are very pleased with the results that we are seeing in this area and the impact of our efforts are evidenced in our results today.
Within these results, I also want to emphasize the importance of client retention.
We continue to see retention rates of over 90% without our employee benefits business and for many of our other businesses within our benefits and insurance group.
These levels of client retention speak to the value that our clients receive from our team and our commitment to bring them solutions that are unmatched in our industries.
Within our property and casualty business, we continue to see steady demand and production for both the commercial and program components of the business.
We've described in the past earnings call how some industries like hospitality, lodging and adventure sports, were disproportionately impacted during the pandemic.
We are seeing the return of these businesses.
And while some are not yet back to pre pandemic levels, the trend is positive.
The strength of the market is also providing additional lift to our retirement investment services business and an increase in demand for more project-based work, such as our executive recruitment and our compensation consulting services.
Our payroll business is the one area where we continue to experience some softness.
As we've mentioned on previous calls, this business serves a larger number of smaller employers that continue to be disproportionately impacted by current business conditions, including labor shortages.
Overall, we couldn't be more pleased with our year-to-date results and the performance of our business.
I will remind you that during our last earnings call, we raised our full year revenue guidance.
Today, we are pleased to be in a position to raise our revenue guidance and our adjusted earnings per share guidance for the remainder of 2021 and where we'll walk through what we expect in his comments.
Our results for the third quarter and for the nine months ended September 30 continued to be very strong.
I want to take a few minutes to talk about the highlights.
With revenue up by 18.6% in the third quarter, and up by 14.5% for the nine months, demand for our core services continues to be stable and strong.
Same unit revenue for the third quarter grew by 8.3% compared with last year.
And for the nine months, same unit revenue grew by 7.3% compared with last year.
We are seeing growth in both our Financial Services group as well as the benefits and insurance group.
In the third quarter, total revenue in the Financial Services group grew by 20.4%.
And for the nine months, revenue grew by 16%.
Same unit revenue in the Financial Services group was up by 9.2% in the third quarter.
And for the nine months, same unit revenue was up by 8.7%.
We are seeing growth across all major service lines, with particularly strong growth within our advisory business services.
Within our benefits and insurance group, total revenue grew by 16.1% in the third quarter.
And for the nine months, total revenue grew by 12.4%.
Same unit revenue within benefits and insurance grew by 6.6% in the third quarter.
And for the nine months, same unit revenue grew by 4.4%.
With the exception of our payroll services, where we are experiencing some slight softness, we are seeing growth in all service lines.
The investment in producers that has been underway for some time now is continuing to show positive results.
The acquisitions we made last year and through the first nine months this year are performing well.
These newly acquired operations contributed 10.3% to total revenue growth in the third quarter and contributed 7.3% to total revenue growth for the nine months.
As we presented second quarter earnings earlier this year, we made an adjustment to eliminate the impact of the $30.5 million nonrecurring UPMC settlement that was announced on June 30, plus an adjustment to eliminate the impact of the $6.4 million nonrecurring gain on sale from a divestiture that occurred in the second quarter.
On an adjusted basis, for the nine months, adjusted earnings per share was $1.84 compared with $1.41 a year earlier.
This is up 30.5%.
In the third quarter, earnings per share was $0.41 compared with $0.36 a year ago.
In line with our comments during the second quarter call earlier this year, as we began to restore discretionary expenses, such as marketing, travel or as other healthcare benefit costs began to normalize from abnormally low COVID influence levels from a year ago.
We cautioned that expense headwinds would impact margin in the second half this year.
As a result, margin on income before tax declined in the third quarter from 11.4% a year ago to 10.3% this year.
This is not a reflection on the health of the business.
This is simply a reflection of the year-over-year pandemic influence impact on these costs, which reflect abnormally low levels a year ago.
On an adjusted basis, eliminating the nonrecurring items I mentioned, we are very pleased that margin on income before tax for the nine months has improved by 120 basis points, up to 15.2% versus 14% a year ago.
To date this year, we have closed five acquisition transactions that will contribute approximately $72 million of annualized revenue.
Through September 30, we have used $74.8 million for acquisition purposes, including earn-out payments on acquisitions closed in prior years.
Future earn-out payments are estimated at approximately $6.6 million for the balance of this year, $26.7 million in 2022, $19.3 million in 2023, $22.9 million in 2024 and approximately $6 million in 2025.
Our continuing priority is to utilize capital to enhance growth through strategic acquisitions, and we continue to have a very active pipeline of potential acquisitions.
With our strong cash flow, we also have the flexibility to repurchase shares.
Through September 30, we utilized approximately $85 million to repurchase 2.7 million shares.
And since that time, through October 26, we have repurchased an additional 258,000 shares.
As a result of these share repurchases, we expect full year share count within a range of 53.5 million to 54 million shares.
With strong revenue growth and expansion of margin, cash flow has continued to be strong.
At September 30, debt outstanding on our unsecured $400 million credit line was $190.2 million with $201.6 million of unused capacity.
Leverage under the credit facility was 1.2 times adjusted EBITDA at September 30.
As a reflection of cash flow, adjusted EBITDA for the nine months this year was $153.5 million, up 21% from $126.9 million a year ago.
Focused primarily on facility and office improvements, capital spending through September 30 was $6.5 million, with $3.2 million spent in the third quarter.
Full year spending may come in between $8 million to $10 million.
Day sales outstanding on receivables was 88 days at September 30, and this continues to reflect improvements that were gained over the past 12 to 18 months.
Bad debt expense through September 30 this year was approximately 10 basis points of revenue compared with 41 basis points a year ago.
Our effective tax rate for nine months was approximately 24.5%.
There are a number of unpredictable factors that can impact the tax rate either up or down, but we expect the effective rate for the full year within a range of 24% to 24.5%.
As we look at the remainder of the year and update guidance on our full year outlook and as you begin to compare expectations to last year, be aware of the year-over-year anomalies to the items that I mentioned earlier.
Headwinds with higher expense levels compared to last year on the same items we experienced in the third quarter, such as healthcare and benefits, travel and marketing are expected to persist for the remainder of the year.
In addition, consider that we closed several significant business acquisitions in the financial services space in midyear this year.
These operations will have a very positive full year impact on both revenue growth and contribution to earnings, and this will provide a significant tailwind for us in 2022.
However, recognizing the typical seasonality of these businesses with higher first half revenue and profitability, we are projecting a slight operating loss in these newly acquired operations in the fourth quarter this year.
One other nonoperating item to point out is the impact of the timing of vacation expense accruals.
In a normal year, vacation expense accruals are relieved throughout the year.
Last year, as we work with clients to maintain high levels of service throughout the pandemic conditions, a higher portion of vacation time was delayed into the fourth quarter.
As a result, there was a larger-than-normal fourth quarter favorable adjustment last year as vacation expense accrual was relieved.
This year, vacation accruals have followed a more normal pattern, so there is no significant favorable adjustment projected in the fourth quarter.
Of course, there is no full year impact, and this is purely a COVID influenced accounting anomaly that will be unique to the comparison of fourth quarter this year compared to fourth quarter a year ago.
With revenue up 14.5% and adjusted earnings per share up 30.5%, the health of our business is very strong.
As we consider the unique items described above that are projected to impact the balance of the year-over-year comparisons, our expectations for the full year are as follows: Total revenue growth in 2021 is expected within a range of 12% to 15% over 2020.
Adjusted earnings-per-share growth is expected within a range of 20% to 24% over the $1.42 earnings per share recorded in 2020.
We expect a full year weighted average share count within a range of 53.5 million to 54 million shares.
And unpredictable factors can impact the tax rate either up or down, but we expect a full year effective tax rate within a range of 24% to 24.5%.
Again, we are extremely pleased with the performance of the business this year.
Despite the several headwinds I described that impact the second half comparisons this year, the business is very healthy, and there are considerable growth opportunities as we look ahead.
As I discussed last quarter, we started this year with the strongest M&A pipeline that we've seen in our recent history.
The annualized revenue contribution from the five transactions that we've already closed this year will provide nice momentum going into 2022.
In addition, we continue to have a very strong pipeline, including some larger deals, and there's still opportunity for us to close one or more of these transactions before year-end.
While we are always looking ahead, I'd like to take a moment to talk about the most recent group to join our team.
F In early September, we completed the acquisition of Shea Labagh Dobberstein, and accounting, tax and advisory services firm based in San Francisco, Bay Area.
SLD serves privately held businesses, individuals and nonprofit organizations across the West Coast and has offices in San Francisco, San Mateo and Walnut Creek, California.
This acquisition is part of our long-term growth strategy on the West Coast.
SLD complements our existing geographic footprint and increases the visibility of our brand while adding valuable capacity and scale in this growing market.
Moreover, we always seek to find partners that share our commitment to client service and demonstrate a strong cultural fit and alignment on core values.
SLD checked all of these boxes and more, and we look forward to working together to bring even greater value to our teams, our clients and to accelerate growth.
| compname reports q3 earnings per share of $0.41 from continuing operations.
sees aggregate annual revenue from acquisitions of about $72 million on full year basis (not sees fy revenue about $72 million).
sees fy gaap earnings per share $1.36 to $1.42.
q3 same store sales rose 8.3 percent.
q3 earnings per share $0.41 from continuing operations.
sees fy revenue up 12 to 15 percent.
q3 revenue rose 18.6 percent to $282.7 million.
cbiz sees fy gaap earnings per share of $1.36 to $1.42.
sees fy revenue about $72 million.
|
I'm Quynh McGuire, Vice President of Investor Relations.
You may access this announcement via our website at www.
As indicated in our announcement, we've also posted materials to the Investor Relations page of our website.
That will be referenced in today's call.
References may also be made today to certain non-GAAP financial measures.
Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer.
I'll now turn this discussion over to Leroy.
As you may have seen as shown on Slide 3, we announced today that Koppers will be hosting an Investor Day scheduled for Monday, September 13, 2021 beginning at 9:00 A.M. Eastern Time.
I sincerely hope that you'll be able to join me and our senior management team for this event and it will take place in Pittsburgh, Pennsylvania.
The venue location is still to be determined.
We will, of course, closely monitor health and safety guidelines regarding the COVID-19 pandemic, but are looking forward to bringing back in person to tell our story.
Moving on to Slide 5.
I'm proud to report that Koppers continues to fulfill its purpose of protecting what matters and preserving the future by transporting critical goods, providing power and connectivity to homes and businesses, and keeping our infrastructure strong and reliable.
At Koppers, we take our responsibility seriously, knowing that the things we all take for granted, every day, do not occur without our products and services, and we're incredibly proud to do our part.
Now, I'd like to start with the Zero Harm update, as always, after many delays due to the pandemic, our team is happy to get back to deploying our ongoing Zero Harm training sessions, in person and in a safe manner.
And it couldn't happen at a more important time as our safety performance during the first quarter lagged our expectations.
We need to get our safety professionals back in front of our people, in operations, to train and reinforce positive behaviors since that is now happening as COVID restrictions begin to get relaxed.
Throughout the year, we will be working to roll out our Foundations training which emphasizes the importance of empathy for fellow colleagues and the criticality of communications as it relates to the presence of hazards or hazardous behavior.
Additionally, we recently presented our company's annual Zero Harm President's award, which I'll describe in detail in a few moments.
Moving to Slide 7.
And it offers an update of the key aspects of our employee health and well-being efforts.
And regarding COVID-19, we currently have about 13% or 265 employees testing positive with rates dropping significantly over the past six weeks.
Sadly, we did have one employee recently pass away, having contracted the virus outside of the workplace.
It's a terrible reminder that as close as we feel to being out of the woods, the virus is still out there, wreaking havoc and the best way to protect yourself is to get vaccinated.
I say that not as a political statement, not to trying to force my beliefs on others, but as someone who doesn't want to see any more people that are under my care, unnecessarily die of a virus that is extremely unpredictable.
We implemented a Life-Saving rule related to COVID, some months ago, and it remains in effect, demonstrating the importance of this issue and the fact that it remains our single biggest fatality risk.
As CDC guidelines are updated, we'll adjust accordingly at our facilities in the US as appropriate.
In addition, we maintain COVID pool testing at four key locations in North America.
We're scheduling vaccine clinics at our facilities when possible and offering a $250 incentive to those who are fully vaccinated.
In addition, we're using point of dispensary occupational medical clinics and other commercial outlets to make vaccination as easy and convenient for employees as possible.
Now, despite my pleased employees, at this point, I only have about 40% of our US employee base as been vaccinated.
And I don't really expect that rate to change all that much given that most everyone has been eligible for a while now.
Internationally, the rate is much lower at this point, but that has more to do with vaccine availability than indifference.
On Slide 8, we see an overview of our operations and planning efforts at our facility in Stickney, Illinois, the tar plant experienced approximately one month of unplanned downtime, beginning March 20.
And has been back up and running for a few weeks now, and while it was a major inconvenience operationally and commercially, The impact on our consolidated results for the first and second quarter is expected at less than 5% and already baked into our full-year guidance.
Employee travel, we continue to limit those to essential-only trips.
An example of that would be the recent deployment of our Zero Harm training modules for front-line employees as well as peer-to-peer workshops.
Now, with COVID vaccination rates increase, we're resuming this training at selective locations.
As always we closely follow social distancing measures and masking protocols, and also we're conducting hazard assessments for certain tasks in order to protect our employees from the highest job site risks.
Regarding off reentry, we're still urging employees who are able to work from home to continue doing that.
And those who need to come into the office must use facial masks and observe all social distancing protocols when not located inside an enclosed Workspace.
We're postponing an official return to the office until September 7, just after the US Labor Day holiday, with limited office return, starting July 1, for those who would like to choose that option.
The pandemic has brought the work-life balance issue to the forefront, so we have asked our employees for suggestions on how to improve that aspect of their lives.
Now, there were many interesting ideas to consider, and ultimately, we plan to implement certain measures over time.
And while we haven't ironed out all of the final details as of yet, it's fair to say that we realize that a one-size-all -- fits-all approach is not fitting for an organization that's spread out as we are in many smaller employee pockets.
What's fit for Pittsburgh is not necessarily what fits for Nyborg, Denmark or Sydney, Australia.
One thing that's for certain though and that is our approach to flexibility in the workplace will reach heights we wouldn't have ever imagined prior to the pandemic.
Now to [Phonetic] notable accomplishments during the quarter.
In April, we presented -- Koppers Zero Harm President's award to our crosstie recovery facility in L'Anse, Michigan, as shown on slide 10.
The L'Anse group led all Koppers' teams worldwide in practicing proactive leading activities related to safety and zero lagging indicators.
I want to congratulate the team at L'Anse for earning the President's Award and to the 10 other impressive teams in locations listed in the finalists' category.
Moving to Slide 11 that recognizes our L'Anse's facility going for three years without any serious injuries and our plant in Nyborg, Denmark, recently completing 365 days, an entire year, without any serious injuries which includes keeping their employees and contractors safe, while managing a number of major projects.
Slide 12 illustrates the new mobile app introduced by our UIP business to better connect directly with customers on products, technical reports, and pole shipments.
It's a great reflection of the different ways we're looking to serve our customers and bring them more value by making our people and the critical information that they need more accessible.
Chief Sustainability Officer, Leslie Hyde offered an overview in a local publication, Pittsburgh Magazine, of our sustainability strategy, while Tom Horvat, Performance Chemicals, Director of Global Marketing, spoke on the consumer appeal of treated wood products to building products digest.
Linkwomen observed Women's History Month by launching a college scholarship in the name of our late Treasurer, Louann Tronsberg Deihle.
Eligible participants are female family members of Koppers' employees.
And Linkwomen encourages professional development for all Koppers employees and has been recently working on a project to look at ways to increase female interest and involvement in the stem fields.
Also, in February, we honored Black History Month by highlighting Tracie McCormick, our Assistant Treasurer and Mario Franks, a 23-year Koppers lift truck operator veteran in our Florence, South Carolina facility.
And also, we challenged employees to recommend ideas to further improve our work-life balance.
As a result we launched LINKparents, a new employee resource group that gives parents and caregivers an outlet to share advice and appreciate diverse perspectives.
On Slide 15, you'll see highlighted one of the most interesting interactions we had in the community this past quarter, which was the Police Chief Town Hall that was organized and moderated by our own Global Director of inclusion and diversity, Lance Hyde.
Lance was able to gather six leaders in law enforcement from around the country to engage in a discussion on ways that we can all work better together to help bridge the racial divide.
We opened up participation in the event to customers, suppliers, and the community, and had approximately 1,200 people join this virtual event to encourage positive change.
And finally, during the past quarter, on Slide 16, our Ashcroft British Columbia team donated funds to a long-term care facility, while employees from our Galesburg, Illinois plant assembled food boxes during the pandemic.
On a bigger picture scale, Koppers celebrated Earth Day on April 22 by promoting tips on how to conserve energy and water and on how to reduce, reuse, and recycle materials in everyday life.
So one [Phonetic] more way we demonstrate that we're living on our sustainability principles and practical actionable ways.
As shown on Slide 18, consolidated sales were $408 million, which was a first-quarter record for Koppers and also an increase from sales of $402 million in the prior year.
Sales for RUPS were $192 million, up slightly from $190 million.
PC sales rose to $124 million, up from $111 million, and CM&C sales came in at $92 million, down from $101 million.
On Slide 19, adjusted EBITDA for the quarter was $55 million or 13.5% and this is a first-quarter record and also up from $38 million or 9.4% in the prior year.
Adjusted EBITDA for RUPS increased to $16 million, up from $13 million.
PC EBITDA rose to $28 million, up from $17 million and CM&C EBITDA was $10 million compared with $7 million.
On Slide 20, sales for RUPS were $192 million, slightly higher than the $190 million in the prior year.
This was primarily due to Class I volume increases, higher demand in the railroad bridge services, and crosstie disposal businesses, and partially offset by year-over-year declines in commercial crossties.
In Q1 crosstie procurement decreased 27% from the prior year due to a continuing tight supply for untreated ties as well as unfavorable weather.
Crosstie treatment in the first quarter was higher than prior year by 6%, driven by increased volumes from Class I railroad customers.
Moving on to Slide 21.
Adjusted EBITDA for RUPS was $16 million in the quarter compared with $13 million in the prior year, and this was driven by a favorable product mix and stabilization in our maintenance of way businesses, offset in part by lower commercial crosstie volumes.
For 2021, we anticipate a favorable outlook for our maintenance of way businesses, which were severely impacted in the prior year due to the pandemic.
On Slide 22, sales for PC were $124 million compared to sales of $111 million in the prior year.
We experienced continued strong sales growth due to ongoing high demand for copper-based preservatives, higher sales in the US from continued home repair and remodeling projects, and higher volumes internationally from improved industrial and agricultural demand.
Adjusted EBITDA for PC was $28 million compared with $17 million in the prior year.
The higher profitability can [Phonetic] be attributed to higher sales volumes, a favorable product mix, and better absorption on increased production.
Profitability also benefited from the demand generated by the strong home repair and remodeling trend.
Moving on to Slide 24.
This shows CM&C sales at $92 million compared to sales of $101 million in the prior year.
The year-over-year decrease was primarily due to lower volumes of phthalic anhydride in the US, lower carbon pitch pricing and volumes globally, and lower volumes for carbon black feedstock in Australia.
Also, the prior year benefited from increased phthalic anhydride sales volumes due to one of our competitors experiencing supply disruption issues during that time period.
On Slide 25, adjusted EBITDA for CM&C was $10 million in the quarter compared to $7 million in the prior year.
Despite the market challenges, CM&C generated higher profitability and a double-digit margin.
This was primarily driven by a lower cost structure and production efficiencies.
In terms of carbon pricing and cost trends compared with the fourth quarter, the average pricing of major products were higher by 15%, while average coal tar costs went up by 11%.
Compared with the prior-year quarter, the average pricing of major products was lower by 2%, while average coal tar cost decreased by 7%.
Now, let's review our debt and liquidity.
As seen on Slide 27, at the end of March, we had $766 million of net debt, with $326 million in available liquidity.
We continue to project $30 million of debt reduction for 2021 and we expect to be at 3.1 times to 3.2 times with our net leverage ratio at year-end.
We remain in compliance with all debt covenants and we do not have any significant debt maturities until 2024.
The recent history of our net debt leverage ratio was also shown on this Slide, as well.
As March 31 -- at March 31, our net leverage ratio was 3.4 times, which was a significant decline from 4.5 times just a year ago.
Longer-term, our goal continues to be between 2 times and 3 times.
So, let's review our business segments and how 2021 looks to be taking shape, starting with our Performance Chemicals group.
On Slide 29, the overall outlook for Performance Chemicals has improved from the more cautious approach we were taking as we entered the year.
We've seen strong year-over-year demand in North America through April, which is not a surprise as prior year comps did not reflect the stay-at-home pandemic effect of home improvement projects.
We did see a mid-quarter minor low [Phonetic] in volumes relative to what we had seen in previous eight months, which we attributed to record lumber prices that we believe were holding traders back to a certain degree as they were looking to avoid getting caught possibly with high-priced inventory if the market took a sudden sharp downturn.
Consumer demand for the product to satisfy the backlog of projects has the industry pushing through the inventory hesitancy and volumes have reverted back to what we had been seeing.
Overseas, the international picture looks to exceed 2020 results due to prior year being severely impacted by the pandemic, as such we're cautiously optimistic about PC's ability to generate EBITDA in 2021 that will actually meet or potentially even surpass the prior year, after initially thinking that we could see some drop off from prior year demand as the year went on.
I'm still a little concerned about where things go in the back-third of the year from a demand standpoint but feel comfortable enough raising our guidance in this business due to the lead we have built in Q1, a better comfort level on Q2, and the rebound in our international segments.
Koppers has continued its rise to record highs and as a result, the industry will need to build that cost increase into materials if this trend continues into 2022.
Across the North American market, residential and commercial treating outlook remained strong, with ongoing pent-up home improvement demand driving lumber prices to record levels.
Big Box retailers have mostly built up their inventory during the first quarter and independent dealers have now decided to jump into the market, despite the higher lumber prices to get ready for the anticipated spring rush.
And our projections of 2021 being a big year for preservative conversions also remain in place as our CCA/DuraClimb utility poles are expected to increase market share over the next year or so as a result of the phase-out of Penta.
Both the US EPA and Health Canada are proposing canceling Penta registrations in the respective countries which would be the final nail in the coffin for the product whose only manufacturer previously announced that they were discontinuing production of the product as at the end of this year.
We continue to consider the proper entry point into copper naphthenate, where other oil borne systems for wood species that cannot take [Phonetic] to our client, but overall we feel satisfied in the interest of our waterborne product as a great substitute for the Southern yellow pine wood species region.
And we're pleased to note that plans for the capacity expansion at our facility located in Hubbell, Michigan, remain on target for the third quarter, which should provide some cost relief in the back half of the year should volumes drop below prior-year levels.
Also, we've de-risked our supply chain by locking in long-term domestic supplies for intermediates over the second half of the year, which will also cut down on lead times.
Continuing on regarding North America, on Slide 30, we show that friendly customer consolidations that are happening currently could mean new volume growth by the fourth quarter and into 2022 as our capacity is expanded.
Now the data that we track to determine the health of our PC business seems to be pointing in a good direction.
According to the National Association of Realtors, existing-home sales rose 12.3%, year-over-year, in March 2021, but fell 3.7% from prior month because of nearly historic lows in housing inventory.
The sales prices of median existing homes soared to record levels and would have been higher had more inventory been available.
The NAR forecasted buyer confidence is on the rise.
The Leading Indicator of Remodeling Activity says home repair and improvement expenditures are expected to increase 4.8% and reach $370 billion by the first quarter of next year as homeowners take on larger discretionary renovations deferred during the pandemic.
These indicators strongly suggest that people are feeling more positive about the economy as validated by the Consumer Confidence Index, which saw another strong increase for the second straight month.
The Index in April came in at 121.7, up from 109 in March, which marked a significant rise from the 90.4 index in February.
Internationally, our PC activity in South America remains on a positive path and looks to be a growing market.
After several failed attempts to acquire manufacturing capacity in Brazil, we're now looking hard at greenfielding a site, which would put us in a much stronger market position in a growing region where we already hold significant market share through an important tolling model.
Australasian business had a strong first quarter and looks to reap the benefits of an anticipated post-pandemic housing boom.
In Europe, as certain of our product registrations are set to expire, we pulled demand forward to satisfy longer-term customer needs, and therefore, we will be challenged in this region as the year progresses.
Now, given that this is a small piece of our global PC portfolio, we don't anticipate any issue in offsetting the expected weakness in the remainder of 2021.
We have been sorting through the long-term alternatives for this business for a while now, and we'll be moving forward soon with the plan to bolster our aging product portfolio through the introduction of new products with the acquisition of existing technology that has a longer regulatory timeline.
Slide 31 brings us to an overview of our Utility and Industrial Products business.
Demand in the US and Australia appears to remain strong in 2021.
Though we may see a bit of sales decline as a result of our recent exit from our operating agreement with TEC in Texas, but we expect that that will translate into improvement in EBITDA as production moves from TEC's Jasper, Texas location to our Somerville, Texas, treating facility.
The TEC arrangement that we inherited with the acquisition of the UIP business was unprofitable and deemed unflexible without some meaningful contractual changes, which we just could not seem to reach agreement on with TEC.
As a result, we'll now be going in alone in Texas, which is probably best in the long run, anyway.
Texas is a creosote pole market and as a burgeoning market for pole disposal, all elements that speak to the strength of our integrated business model.
Now, even if we put the pandemic behind us, it will remain an imperative for utilities to limit or avoid service interruptions.
It's likely that some portion of the workforce will continue to work remotely and as a result the workforce is expected to be more dispersed geographically, compared with a pre-pandemic environment.
An emerging trend shows that more Americans are moving south and west and to the extent that migration and home construction trends are occurring in the Southern US, our business could benefit due to having strong market share in the region.
[Technical Issues] same time energy and telecommunications needs are expected to continue to increase, which should result in a need for upgrades and expansions of the transmission network.
Mentioned earlier, the production of Penta preservative will cease at the end of 2021 and the registration for user Penta is on the road to being canceled in the US and Canada.
And we're converting our first plant from Penta to CCA, a Koppers produced preservative, while evaluating copper naphthenate, DCOI as additional oil borne alternative.
We expect our CCA/DuraClimb product to lead the way in the Eastern US market for a combination of cost and performance reasons.
Our capital program this year is also allocated to adding drying capacity to treating sites, further reducing cost and supply risk.
First kiln is expected to come online in Q2, with the second in Q3.
In Australia, an aging network and a need to rebuild infrastructure following last year's wildfires appear to create a solid demand base for 2021.
Pine poles have gained greater acceptance due to the lack of hardwood, so we're also adding drying capacity in Australia to facilitate increased pine pole production.
Moving on to the RUPS business on Slide 32.
Demand for all product lines looks to be strong for this year and next, as margins are expected to improve with continued cost control.
Integrating tie and pole treatment in Somerville along with processing of end of life ties, illustrates the Super Plant model, referenced in the past, is a key goal for Koppers in the coming years and a core tenant of our network optimization strategy.
The biggest risk we face currently to 2021, results for -- the biggest risk we face currently to 2021 results for our crosstie business is the tightened hardwood supply.
Now, this has been an every couple-of-year issue within the industry, where the supply of hardwoods for untreated crossties tightens either due to weather issues, competing demands for hardwood, or both, and we'll work through it as we have in the past, but if our untreated numbers don't start increasing soon, we could see an impact on treating and shipments by the end of the year.
Now, despite the challenges, the industry is currently dealing with on the supply side, we do remain focused in the crosstie market on increasing our market share and we continue to drive efforts to renew key Class I contracts by the end of 2021.
The expansion of our North Little Rock facility to be completed by the end of this year, further puts us in position for EBITDA improvement in 2022 as it will lower our cost footprint, enable and enable us to compete for a greater share of the market.
Larger market indicators paint an overall encouraging picture for the RUPS business.
The Railway Tie Association forecast 2.7% growth in 2021% and 3.6% in 2022 for crossties, primarily driven by the commercial market while Class I volumes are seeing holding at similar year-over-year levels.
[Technical Issues] raw material availability is slightly constricted according to the RTA, but their view for the next six months to 12 months is ideal, which is probably a little more optimistic than our view at this moment.
And as mentioned earlier, remains our biggest near-term risk.
Rebounding national economy and government stimulus payments are expected to spur increased consumer spending.
RTA reports that retailers' inventory to sales ratios are at their lowest levels in a decade, meaning freight activity should benefit from suppliers' needs to replenish inventory.
Rail traffic continues to recover from 2020 levels as of March 31, year-to-date, according to the American Association of Railroads.
Total US carload traffic decreased 2.6% year-over-year, while intermodal units increased 3.2%.
Combined, year-over-year, the US traffic was up by 5.6%.
The AAR adds that railroad volumes correlate strongly with manufacturing output, so recent signs of strength point to positive indicators for the railroad industry.
Slide 33 shows the impact of Maintenance of Way projects on the RUPS segment, and even though, COVID-19 negatively affected this business tremendously, Maintenance of Way still generated EBITDA and margin improvement in 2020.
In the backlog, the railroad structures project this year is 50% higher than a year ago, pointing to increases in profitability from a full pipeline of incoming work.
In 2021, we don't anticipate as much disruption from COVID-19 as compared with the prior year, which should improve project efficiency.
We're actively working to expand the crosstie recovery business, including the addition of Class I accounts.
We also see more growth potential by leveraging the synergy between landscape crossties and the needs of our PC customers.
Combination of new value-added services, lowering cost, and increasing efficiency for rail customers point to a growing revenue model.
And the Mains-of-Way [Phonetic] business is emerging as a bigger proportion of our RUPS business, having transformed from one of our most negatively impacted businesses during the pandemic and to now representing roughly half of all the EBITDA increase for RUPS in 2021.
According to IHS Markit automotive group, light vehicle production is projected to grow about 14% in 2021, globally, with US production expected to increase 24%.
As such, we expect growth in overall EBITDA margins as demand improves and cost management continues.
Progress of CMC through the pandemic has proven that the model we have built can consistently deliver EBITDA in the low to mid-teens, regardless of the economic cycles.
In North America, we see more tar production in 2021, regaining normal levels in the second half of the year and we expect transportation cost savings as imports from Europe are reduced or eliminated.
Carbon pitch and creosote demand look to be solid, while higher average oil prices should maintain higher profitability in our phthalic anhydride business.
Our CMC footprint worldwide has been streamlined to the degree that we can now support reinvestment in our Stickney, Illinois facility.
And these improvements are under way since last year, designed to provide long-term reliability by minimizing the risk of operational disruptions like what recently occurred.
Higher profitability is anticipated through increased efficiency, upgraded technology, lower costs, improved environmental performance, and most importantly, an enhanced safety record.
Slide 35 details CMC operations in Europe and Australia.
Europe remains the region with the most commercial challenges as the slowdown in aluminum capacity has affected our competitors customer base disproportionately and increased pricing pressure for the remaining base of business.
And while higher oil prices represent a net positive for our overall CM&C business, the one area where it presented challenges in Europe where it makes coal tar more competitive raw material for the carbon black feedstock market, thereby pushing down supply and putting pressure on pricing.
This is where our commercial supply chain chain group has proven to excel over the years in managing these ever-changing dynamics, and I'm confident they'll be successful managing at this time as well.
In the Australian market, we see that higher China benchmark pricing will support a healthier carbon pitch pricing environment.
And should this pricing remain in place, we anticipate that Australia will generate the largest year-over-year improvement of the CMC regions.
Pulling everything together, on Slide 37, our sales forecast for 2021 remains in the range of $1.7 billion to $1.8 billion, compared with $1.637 billion in the prior year.
Our RUPS and CMC businesses are expected to generate a similar range of increase with PC estimated to be somewhere close to prior-year sales numbers.
On Slide 38, we're increasing our EBITDA projections for 2021 to a range of $220 million to $230 million compared with $211 million in the prior year.
The biggest driver in our increased guidance is our increased confidence that PC will see elevated levels of demand, at least through the third quarter.
The EBITDA estimate translates to an increase in our adjusted earnings per share guidance, which is seen on Slide 39, and is now $4.35 to $4.60 per share, compared to the prior guidance of $4 to $4.25 per share, and prior-year adjusted earnings per share of $4.12.
Finally, on Slide 40, our capital expenditures were $24.2 million in the first quarter or $19.5 million net of $4.7 million in cash proceeds from asset sales.
The cash proceeds came from the February sale of the Follansbee facility and the final release from escrow of dollars held from our 2018 sale declared [Phonetic].
The Follansbee sale is an important milestone for Koppers as it will save us considerable ongoing costs and cash flow, and allow us to refocus efforts in cash toward the growth and improvement opportunities in our other -- in our other businesses.
We remain on track to spend a net amount of $80 million to $90 million on capital expenditures this year with half of that dedicated to growth and productivity projects that are expected to generate $8 million to $12 million of annualized benefits.
In summary, I have greater confidence in our ability to deliver a significantly better financial performance this year, now that we're through the first four months of 2021 and have better visibility on the second and third quarters.
Beyond 2021, I remain excited about the many opportunities that we have to further build upon our integrated business model, focused on wood and infrastructure, and look forward to sharing the details of how we believe we can take Koppers to over $300 million of EBITDA generation by the end of 2025 at our upcoming September 13 Investor Day.
With that, I would like to open it up to any questions.
| expects ebitda, on an adjusted basis, will be approximately $220 million to $230 million for 2021.2021 adjusted earnings per share is forecasted to be in range of $4.35 to $4.60.
expects that 2021 sales will be approximately $1.7 billion to $1.8 billion.
|
So for the quarter, earnings -- net income came in at $104 million, $1.11 per share compared to $98.8 million or $1.06 per share last quarter.
The -- for the full -- for the first six months of the year, this translates to an ROE of 13.2%, ROA of 115 basis points.
I'm very happy with where things came out on the earnings front.
NII, net interest income continued to grow despite tons and tons of liquidity on the balance sheet, which I think is a problem with every bank these days.
Our NII came in at $198 million.
Last quarter, it was $196 million.
This quarter last year, it was $190 million.
NIM contracted a tiny bit from 2.39%, down at 2.37% mostly because of that elevated level of liquidity that I just mentioned.
On the deposit front, again, a very strong quarter.
Deposit costs came down, the mix improved, the volumes grew.
So across the board, no matter how you measure it, the story of the deposit side was again very, very strong.
So just quickly getting into the numbers.
Our cost of deposits dropped from 33 basis points to 25 basis points in the last quarter.
That's an eight basis point reduction.
DDA grew by $869 million.
And most of our growth was DDA again.
And by the way, DDA now stands at 31% of deposits for -- it was 25% just at the end of last year.
So for those of you who have followed our story for some time, even as recently as a year or 1.5 years ago, we think of 30% as the profitability scale.
I'm happy to report we're at 31%.
But that doesn't mean that we're not shooting for a higher number.
And I think the bar just has been reset, and we think we can actually get -- improve the funding mix even beyond this 31% that we're at today.
Provision for credit losses came in at a negative $27.5 million, and Leslie will get into the specifics of how that all evolved.
On the credit front, we again got some progress.
Credit -- criticized classified assets dropped by $541 million.
That's a 21% drop.
Loans that are either temporarily, deferred or modified under the CARES Act also declined.
They were $762 million last quarter, now they're down to $497 million.
Our NPL ratio, however, went up a little bit from 1% of loans last quarter to 1.28%.
If you exclude the guaranteed portion of SBA loans, that number is 1.07%.
This increase is attributable to -- largely attributable to basically one credit.
It's a large credit, $69 million.
It's a relationship in the C&I business here in Florida.
It's a relationship that we had for almost a decade.
And for the large part of that decade, the first seven years or so, it was -- we were the primary bank all in the last two or three years that we become a participant in a shared national credit because the company got so large that we couldn't really support them from their credit needs.
So one of the large banks in the country took over the primary, and we've been a participant, but it's a company that we've known for a decade.
Some accounting irregularities came up over the last few weeks in the books of this business, which is why we took the stand of moving this to a nonperforming loan and taking a large reserve against it.
A $30 million reserve against this loan.
Capital -- by the way, net charge -- let's just move to financial then on the credit side.
Net charge-off ratio was 24 basis points compared to 26 basis points for the full year of 2020.
Capital, as you know, we have tons of capital.
We've announced a share buyback back in February, which is still outstanding by $37.7 million, still outstanding at that.
We are adding to that.
And yesterday, the Board met and approved another $150 million on top of what was already left in the last authorization.
So I think over the last couple of earnings calls, I've mentioned that the stand we've taken with buybacks is that we will be more opportunistic rather than just steady buy a little bit every day.
And the reason for that is we expect this to be a very volatile market.
Even a little bit of bad news or good news can really move stock prices a lot, which is what we're seeing right now.
So we're going to use that to our advantage and be opportunistic.
It's -- with the stock trading, I guess it's a fairly easy decision for us to do.
CET1, one capital, is 13.5% holdco; 15.1% for the bank.
Our book value, again, continues to grow.
Book value was $33.91 now.
So very happy about that continued progress upwards.
This quarter, after I think the longest hiatus we've ever had, this quarter, we are back in the hiring business and brought in producers both on the left and right side of the balance sheet across business -- the various business lines.
We have not done that for a full year, which, like I said, it was the longest we've ever gone without bringing in new producers.
We even launched a new business line.
We were always in this business, the HOA deposit business.
We've always been in this business but not organized as a separate business line, but we did that.
We see a big opportunity.
We've made a couple of hires again on the production side.
And those hires will be starting soon.
So very excited about what that business will do for us over the course of the next three or four years.
The other thing is this quarter -- last quarter, excluding PPP loans, our loan growth was negative $500 million, round number.
This quarter, we still have a negative number, but it's small compared to how much decline we had in loans last quarter.
And as I look forward to where the pipeline is, I'm actually very optimistic about what third quarter and fourth quarter would bring to us, especially in the commercial side, especially in the C&I business.
Less on the CRE front where the pipelines are also getting better, but C&I pipelines are much better, and Tom will get into a little bit details of this a little more.
But as we see into the second half of the year, the best we can tell is we will most likely make up the reduction that we've had in loans, again, excluding PPP loans because that's just a different animal.
So the economy is healing both in New York and Florida.
Florida is further ahead than New York, like I've said in the past, but even New York is showing very good signs.
We are obviously watching how the healthcare numbers evolve.
That can change at any time, so we do keep an eye on that very closely.
But overall, it's been a very positive picture.
We have opened up and brought our employees back in a capsulated way.
We're not completely back into the office.
But by Labor Day, goal is to get to the new normal where a number of people will work in a hybrid fashion, others will work remote and some -- a few will work permanently five days a week at the office.
So all of those what we call RTO, or return to office, is being played out as we speak.
And we expect that by Labor Day, we will be in the new normal.
Again, the caveat, obviously, is the healthcare crisis that we're watching.
One more thing, which Leslie just pointed out to me.
The other change on strategy that is very recent over the last three months or so is for the first time in the history of the company, we are beginning to think about geographies outside of just New York and Florida.
In the past, we've said New York and Florida is about as much of the market as we want because it's just hard just flying back and forth between these two markets.
But if the pandemic has taught us anything is that you don't have to fly back and forth all the time to cover two markets.
If that's the case, then there are other markets that will work well with our business model.
Generally, business dense urban markets where we are beginning to look and have discussions with to see if we want to expand into these markets.
There's nothing to announce.
These are in very early phases, but I wanted to share at least our thinking about geographic expansion much before it actually happens.
So when there is something more comprehensive, we'll come talk to you about it, but we are beginning to at least think in those terms that it's not just Miami and Manhattan, but other markets might also get added to this franchise over time.
So let's talk a little bit about the deposit side.
First, overall average noninterest-bearing deposits grew by $673 million for the quarter or by $2.9 billion compared to the second quarter of 2020.
On a period-end basis, noninterest-bearing DDA, as Raj said, grew by $869 million for the quarter while total deposits grew by $877 million.
NIDDA has now increased 26% on a year-to-date basis.
So what's really good about that is it's another quarter where we've seen really strong growth, really, in all of our business lines.
It's a broad-based support of the continuance of NIDDA new relationships.
Most of the growth was driven by new logos coming into the organization, new treasury management relationships, which is showing up strongly in our fee income lines, which were up 31% in terms of service charges.
So we're seeing good support in all of these areas.
Time deposits declined by $806 million.
Money market and interest-bearing checking grew by a total of $815 million.
So we're seeing some movement from time deposits to our money market product.
As we've lowered rates on the CD side, retention has been good.
And actually, as I said, a lot of this money has been moving to the money market accounts.
On the loan side, I'll spend a little bit of time on this and follow up on some of Raj's comments.
While we did have a decline, excluding the PPP loan forgiveness by $56 million, in the quarter, it began to feel like a more normalized quarter.
Residential growth was $494 million for the quarter, including both the residential and the EBO side.
And I think most importantly for us, as an indicator, C&I loans were up by $186 million for the quarter, which is really, really a good sign for us.
It's one of our major business lines.
It's the first time that this line has grown in the -- since the onset of the pandemic.
So that was really good to see.
Also even better or just as good as the $186 million, what was nice is there was a good blend of new relationships into the bank as well as existing clients increasing credit facilities during the quarter.
So utilization -- line utilization has been a challenge for the industry.
It's been a challenge for us.
We're at relatively low historic rates from a utilization perspective.
So it was nice to see clients start to move back to a more normalized basis, see transactions being done in the quarter, see M&A activity being done in the quarter.
So the blend was good, and we also -- within the C&I business, if we looked at the business, it was a strong back end of the quarter.
June was particularly strong and we saw transactions in a number of different industries.
At one point, I looked at the pipeline for closing in June, and we had something like 18 deals and all 18 were in different industries.
So that was nice to see from a diversity perspective.
So given the pipeline activity that we're seeing now, we expect to see growth in the second half of the year.
We will see a better commercial real estate environment.
We had $225 million of CRE runoff in the multifamily business.
That will pretty much taper off at this point.
As you can see from some of the supplemental information, our multifamily New York portfolio has now been kind of reduced to what I would call a pretty stabilized level.
This has been kind of a 5-year process of this reduction.
And I think now we're kind of at a stabilized level.
The other thing that was good, as Raj mentioned, we've made a number of key hires.
The HOA segment on the deposit side, we brought in producers on both sides of the balance sheet.
We've been a strong player in this market, and I think this is an opportunity for us to really significantly grow this business over the next few years.
We also added capability to our healthcare practice team, which is important to us, and we hired several commercial producers in kind of our -- one of our core Florida C&I-type team.
So the cadence in the field, it feels like it's starting to return to kind of a normalized basis for us from a business, business production, calling perspective and whatnot.
So a little update on the PPP.
$438 million of First Draw PPP loans were forgiven in Q2.
At June 30, there was a total of $209 million of PPP loans outstanding under the First Draw program and $283 million outstanding.
Under the Second Draw program, forgiveness applications are in process for the majority of the First Draw loan programs, and slide eight in the deck provides more detail on this.
A quick update on deferrals and CARE modifications.
slide 17 in the supplemental deck also provide some data on this.
On the commercial side, only $3 million of commercial loans are now in short-term deferral.
As of June 30, $436 million of commercial loans remained on modified terms under the CARES Act.
The largest group of loans still under the CARES Act is in the hotel portfolio.
Although the total CARES Act modified loans in that portfolio declined from $343 million at March 31 to $225 million at June 30.
We've seen -- particularly in Florida where about 76% of our hotel portfolio is, we've seen a pretty strong rebound in tourism in Florida.
Any of us who've been trying to book hotel rooms in Florida recently have found it pretty difficult to do at high rates.
And we're seeing a strong rebound in occupancy, particularly travel-related beachfront property occupancy, within the overall Florida book.
So that led to the significant decline that we had there, and we expect to continue to see improvement in that.
$218 million in commercial loans rolled off of deferral or modification this quarter.
100% of these loans are either paid off or resumed regular payments.
On the residential side, excluding the Ginnie Mae early buyout portfolio, $59 million of the loans were on short-term deferral or had been modified under a longer-term CARES Act repayment plan at June 30.
Of $532 million in residential loans that were granted an initial payment deferral, $493 million or 93% have rolled off.
Of those that have rolled off, 93% have either paid off or making regular payments.
Just some selected data on our CRE portfolio.
Rent collections on commercial properties remained very strong.
When we looked at larger clients in selected data that we see in the office portfolio, it's -- rent collections have run 98%, actually.
Both in Florida and New York, it did do strong performance in multifamily, 96% in Florida, 91% in New York.
Retail collections were 95% in Florida, 85% in New York, and we continue to see some improvement in the New York retail market.
As I mentioned a little bit earlier, the Florida hotel market is particularly back stronger.
All Florida and all New York properties are now open.
Occupancy averaging 75% for the second quarter of 2021, excluding one New York hotel that did not open until the end of the second quarter.
So we're seeing a good overall rebound in that market.
So as Raj mentioned, NIM was down slightly this quarter to 2.37% from 2.39% in large part due to even stronger-than-anticipated headwinds from high levels of liquidity.
Cash was elevated and liquidity was deployed into the bond portfolio, which, while accretive to net interest income is not accretive to the margin.
The yield on loans this quarter increased to 3.59% from 3.58% last quarter.
Recognition of fees on PPP loans that were forgiven added 11 basis points to that loan yield this quarter compared to six basis points last quarter.
So without the impact of PPP origination fees, the yield on loans would have declined by four basis points for the quarter just due to the turnover of the portfolio into lower-yielding assets in this environment.
We have $9.8 million of deferred fees on PPP loans that remain to be recognized.
$1.1 million of this relates to the First Draw program, and I would expect most of that to come into income in the third quarter.
And $8.7 million relates to the Second Draw program, and I really wouldn't expect to see much of any of that in the third quarter.
The yield on securities declined from 1.73% to 1.56%.
That was somewhat more than we had anticipated.
Retrospective method accounting adjustments related to faster prepayments on mortgage-backed securities actually accounted for 10 basis points of that quarterly decline and the rest of the decline, obviously, just attributable to turnover of the portfolio in a lower rate environment.
As Raj said, the cost of -- total cost of deposits declined by eight basis points quarter-over-quarter with the cost of interest-bearing deposits declining by 10 basis points.
With respect to the FHLB advances, there's still $1.1 billion of cash flow hedges against FHLB advances that are scheduled to mature over the remainder of 2021 with a weighted average rate of 2.4%.
We estimate that -- we talked about the impact on the NIM with higher levels of liquidity.
We estimate that if we simply -- if we normalize elevated cash balances, that accounts for about eight basis points.
So even if cash balances have been normalized, the NIM would have been eight basis points higher.
And we estimate that if we also normalize the level of securities, we would have seen 14 basis points.
So that impact on NIM of high levels of liquidity is somewhere between eight and 14 basis points depending on how you think about it.
As Raj said, we currently expect the cost of deposits to continue to decline next quarter, and we currently expect the NIM to be stable to slightly higher.
However, liquidity may continue to be a headwind there.
Moving on to the provision in the allowance.
Overall, the provision for credit losses this quarter was a recovery of $27.5 million.
slide s 10 through 12 of our deck provides some further details on the allowance for credit losses.
The reserve declined from 95 basis points at March 31 to 77 basis points at June 30.
Biggest drivers of that change, $19.4 million of the decrease related to the economic forecast.
The largest impacts were improvement in the unemployment outlook and improving HPI in commercial property forecast.
The reserve decreased by $17.6 million due to net charge-offs and to $16.2 million due to portfolio changes, that bucket includes things like the net decrease in loans; shift into portfolio segments with lower expected loss rates, such as residential; as well as the impact of just loans moving in and out of the portfolio; and improving borrower financial statement spreads.
$12.8 million decrease in the amount of qualitative overlays that had related to some uncertainties around the COVID pandemic that we -- that seem to be resolving themselves and an increase of $20.7 million related to risk rating migration, most of that was the $27.2 million increase in the reserve related to the $169 million commercial relationship that Raj spoke about bringing that reserve up to $30 million.
The largest component of the reduction in the reserve was the CRE portfolio because that model is particularly sensitive to unemployment and property forecast.
Similarly, we saw a reduction in the residential allowance, again, related to improving unemployment and HPI.
The C&I reserve actually increased this quarter on a loss rate basis, and that was again due to the large reserve on the one loan.
Total criticized and classified loans declined by $541 million; special mention, down by $282 million; and substandard accruing, down by $299 million; substandard non-accruing loans increased by $40 million, again, back to that one commercial loan that we've been talking about.
A couple of notes on other income and expense.
With respect to operating expenses, we saw a decline in comp this quarter.
As expected, Q1 is always somewhat elevated.
Deposit insurance expense came down correlating to a reduction in criticized and classified assets.
We continue to see increases in deposit service charges and fees stemming from our treasury management solutions initiatives that we initiated in conjunction with BankUnited 2.0.
One more thing I just want to mention real quick.
With respect to the tax rate, I would expect it to remain around 26%.
Consistent with the uncertain tax positions disclosure we made in our last 10-K, we have very recently entered into discussions with the state of Florida regarding several outstanding tax matters.
There's a possibility that these discussions could result in recognition of a benefit somewhere in the next few quarters.
These discussions have just recently gotten underway.
So it's too soon for me to be much more specific than that.
While Leslie was talking, I just looked up on my deposit report, which I get every day.
And so as of last night, our deposit cost was at 20 basis points.
So I feel pretty comfortable in saying that we will be in the teens this quarter, might be in the teens as early as next week.
So I know in the past, I've said that we think we will end the year on a spot basis in the teens.
I'm happy to say that we're about five months ahead of schedule.
And by the way, deposits continue to grow.
Truth be told, while I'm very excited about deposit growth that has come in, liquidity is a problem.
So it's -- this would have been an even better report if we had said to you that we actually kept the model as flat.
So we're trying to -- and we are succeeding in pushing out anything that we think is quite sensitive and will hurt us in the future when rates rise.
So we continue to increase the quality of the book because some day rates will rise.
So it is -- if I look back six months ago when we thought the year would play itself out, overall, on the deposit side, we're much further ahead of what we thought we could do this year.
On the loan front, we're further behind than what we thought we would do.
But I think about standing here over the next six months, I still see a lot of good news on the deposit front because the pipeline has still good money still coming in and cost of funds are still declining further than we ever thought it would.
And on the loan side, pipelines are now beginning to look normal.
So also, a point that Tom made that I just want to repeat, it may have gotten lost.
Multifamily in New York has been the big headwind for us.
The runoff from that portfolio has been a big headwind for us because exactly five years ago is when we changed strategy and deemphasized multifamily.
That 5-year anniversary is literally around maybe I think this month.
So as that portfolio matures and those payoffs and sort of natural runoff gets behind us, as I look forward, we don't see the same velocity of payoffs happening because that portfolio is kind of getting to a normalized place.
So that was also, from a payoff perspective, a good story.
And I look forward over the next couple of quarters compared to the last couple over the last -- last couple of quarters over the last five years.
So I just wanted to make that point.
| bankunited q2 earnings per share $1.11.
q2 earnings per share $1.11.
|
mdu.com, under the Investors tab.
Leading our quarterly earnings discussion today are Dave Goodin, President and CEO of MDU Resources and myself.
Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially.
For second quarter of 2021, we delivered earnings of $100.2 million or $0.50 per share compared to second quarter 2020 earnings of $99.7 million or also $0.50 per share.
During the quarter, our results were impacted by higher stock-based compensation and healthcare costs of approximately $4.2 million after tax.
Further impacting our second quarter consolidated results was a $5.4 million lower investment returns on certain benefit plans compared to the same quarter in 2020.
While these items had an impact on the quarter's results, all of our operations performed very well throughout the first six months of the year, growing consolidated revenues by 3.5% and increasing earnings $27.5 million year-to-date.
Our utility business are $9.6 million for the second quarter compared to earnings of $11.2 million in the second quarter of 2020.
For the Electric Utilities segment, reported earnings of $10.3 million for the quarter compared to $12.2 million for the same period in 2020.
Higher operation and maintenance expense, largely the result of higher labor-related costs, including the increased stock-based compensation expense and healthcare costs, as we previously discussed, as well as increased generating station expenses drove the decrease in earnings.
Lower benefit plan investment returns also negatively impacted the results.
Partially offsetting the decrease was higher adjusted gross margin driven by a 6.9% increase in retail sales volumes.
Sales volumes increased for industrial and commercial customers during the quarter and were offset in part by lower residential volumes as the impacts of the COVID-19 pandemic start to reverse and individuals are returning to work as businesses reopen.
Higher demand revenues and higher revenues associated with transmission interconnect projects also had a positive impact on the adjusted gross margin.
Our natural gas utility segment reported a seasonal loss of $700,000, improved from a seasonal loss of $1 million for the same period in 2020.
Adjusted gross margin increased during the quarter from approved rate recovery and 2% customer growth.
Transportation revenues also increased from higher volumes transported to the company's electric generation customers.
Partially offsetting the decreased loss was higher operation and maintenance expense, primarily labor-related costs, as previously discussed, as well as lower returns on certain benefit plan investments.
The pipeline business had earnings of $9.2 million in the second quarter compared to $9 million in the second quarter of 2020.
Higher nonregulated project revenues and increased allowance for funds used during construction were the primary drivers of the increase in earnings.
Partially offsetting this was higher operation and maintenance expense relating to the previously measured increase in nonregulated projects as well as higher payroll.
Now turning to the construction businesses.
Construction services reported record second quarter earnings of $28.9 million compared to the prior year's record of $27.9 million.
Revenues increased 6% on a year-over-year basis to second quarter -- to a second quarter record of $525.6 million.
Demand for construction services remains high for both the inside and outside specialty contracting.
Inside specialty contracting saw strong demand for commercial and industrial work, specifically in the manufacturing industry and outside contracting workloads increased with high demand from the utility industry.
Lower depreciation, depletion and amortization expense resulting from decreased intangible amortization related to prior acquisitions also contributed to the increase in earnings.
Our construction materials business reported second quarter earnings of $51.4 million compared to the prior year's $53 million in the second quarter.
Revenues increased 2% to $633.8 million.
The decrease in earnings was primarily the result of higher selling, general and administrative expenses from increased labor-related costs as we had previously discussed.
Lower returns on certain benefit plans also impacted the quarter.
Partially offsetting these items was lower interest expense due to lower average interest rates.
That summarizes the financial highlights for the quarter.
Today, I'll walk through each of our business lines to highlight some notable drivers in the quarter and go into greater detail about some of the organic growth items covered in yesterday's news release.
Starting with our regulated energy delivery platform.
We now have approximately 1.15 million customers across our electric and natural gas utility businesses.
And our utility employees remain focused on organic growth and infrastructure improvements that help to safely and efficiently serve our customers.
We continue to expect strong customer growth across our service territory, outpacing the national average and in the range between 1% and 2% compounded annually.
The electric utility finished the precommissioning -- decommissioning activities on the coal-fired Unit I at the Lewis & Clark generating station here in the second quarter and commenced decommissioning here in July.
We expect to retire Units I and II at Heskett Station near Mandan, North Dakota early next year, which are the last of the company's wholly owned coal-fired facilities.
Our generation portfolio in regards to nameplate capacity prior to the commencement of the retirements -- these retirements was 48% coal and will decrease to 31% in 2023 upon completion of the proposed Heskett IV natural gas-fired peaking unit.
Our natural gas utility, along with our pipeline business, WBI Energy, recently announced a project that will increase natural gas service to Wahpeton, North Dakota, while also being able to offer natural gas service for the first time to Kindred, North Dakota.
This project is driven by customer contracts requiring more firm natural gas supply that our current infrastructure can provide to Eastern North Dakota.
The project involves constructing approximately 60 miles of 12-inch pipeline from our existing facilities at Mapleton, North Dakota to Wahpeton.
It will add 20 million cubic feet per day of natural gas capacity and is expected to cost approximately $75 million.
Depending on regulatory approvals, construction is expected to begin in early 2024 with the completion date later that year.
Speaking of our pipeline business, we're excited that in early July, WBI Energy received final FERC approval, allowing construction to begin on the North Bakken expansion project in Western North Dakota.
This $260 million project will add 250 million cubic feet of daily natural gas transportation capacity to our system, bringing WBI's total pipeline capacity to more than 2.4 Bcf per day, while helping to reduce natural gas flaring in the region and allowing Bakken producers to move natural gas to market.
Construction began here in mid-July.
And with favorable weather during the construction season, we expect the project to be in service by end of this year.
Now moving on to Construction.
Our Construction Services Group had an outstanding second quarter as demand for both inside and outside specialty contracting remains very strong.
CSG reported record second quarter revenues and earnings and an all-time record backlog now standing at $1.32 billion as of the end of June.
Bidding remains highly competitive in all areas, but we are confident that our relationships with existing customers, our skilled workforce and our high quality of service will aid in securing and executing on profitable projects.
As a reminder, revenue guidance at this business for 2021 continues to be in the range of $2.1 billion to $2.3 billion, with margins comparable to or slightly higher than 2020 levels.
And finally, at our construction materials business, while earnings were down slightly year-over-year, Knife River is operating at near-record levels, falling just short of the prior year's record second quarter earnings while continuing to produce record revenues.
Demand and pricing for aggregates and ready-mix concrete is strong across a number of markets.
Construction materials reported backlog at the end of the quarter at $912 million, an increase of over 4% from the prior year.
Revenue guidance for this business is also in the range of $2.1 billion to $2.3 billion, with margins comparable to our 2020 levels.
We remain optimistic about our construction businesses and continue to evaluate strategic acquisition opportunities that will enhance our existing footprint and appropriately expand our business, all while earning attractive returns on invested capital.
As mentioned in our news release yesterday, we feel very positive about the conversation surrounding infrastructure funding packages at the federal level as well as at various state levels across our footprint.
With combined construction backlog at an all-time record at $2.23 billion as of June 30, we believe we are well positioned to take advantage of these multiyear growth opportunities.
While we believe these infrastructure proposals will provide additional opportunities to some of our core areas of business, such as surface transportation improvements, renewable energy, power grid modernization, broadband and much more, these infrastructure proposals are not included in our earnings per share guidance of $2 to $2.15 for this year of 2021 or in our 5-year capital investment plan for that matter as well.
Overall, we are very pleased with our performance throughout the first half of the year.
Our focus at MDU Resources has been and continues to be to produce significant long-term value as we execute on our business plans, our organic growth projects and our targeted acquisitions.
We continue to maintain a strong balance sheet, solid credit ratings and a good liquidity position.
For the last 83 consecutive years, we provided a competitive dividend for our shareholders and have been increasing it for the last 30 years.
As always, MDU Resources is committed to operating with integrity and a focus on safety while creating superior shareholder value, and we continue to act along our tag line of Building a Strong America.
| mdu resources affirms earnings guidance.
q2 earnings per share $0.50.
sees fy 2021 earnings per share $2.00 to $2.15.
sees fy construction materials revenues in range of $2.1 billion to $2.3 billion.
sees fy construction services revenues in range of $2.1 billion to $2.3 billion.
qtrly total operating revenues $1,423.7 million versus $1,362.9 million.
|
Q2 was a very strong quarter, and it's the best in the history of Brown & Brown.
Our performance for the first six months of 2021 is due to the tremendous effort of our talented 11,000-plus teammates that deliver creative risk management solutions for our customers.
Each of our segments delivered impressive results with strong top and bottom line growth due to more new business, good customer retention, increased premium rates across most lines of coverage, and higher exposure units driven by continued economic expansion.
These results reflect the strength and diversity of our operating model as well as the power of a performance-based culture.
Now let's transition to the results for the quarter.
I'm on slide number three.
We delivered $727 million of revenue, growing 21.5% in total and 14.7% organically.
This is the strongest organic growth that we've ever delivered.
I'll get into more details in a few minutes about the performance of our segments.
Our EBITDAC margin was 32.9%, which is up 340 basis points from the second quarter of 2020.
Our net income per share for the second quarter was $0.49, increasing 44% on an as-reported and adjusted basis, with the latter excluding the change in estimated acquisition earn-out payables.
In summary, we're very pleased with our strong performance and believe we're well-positioned to continue delivering best-in-class solutions for our customers.
I'm on slide four.
Let's start with the economy and what we saw during the quarter.
As companies continue to reopen and strengthen, business confidence is improving.
However, not all companies are back at 100%, and we continue to hear about struggles with certain customer segments in hiring workers.
We think this will work itself out over the coming months and quarters, but these open roles are serving as a bit of a governor on the speed of recovery.
Due to this uncertainty, customers remain very focused on their insurance spend and therefore managing their deductibles and aggregate limits.
Rates were generally in line with what we experienced in the first quarter.
However, we started to see some moderation to the level of increases in certain admitted and non-admitted lines.
Certain customers and industries with high losses remain a placement challenge.
However, we continue to see carriers seeking higher rate increases on renewal business while quoting at or below expiring rates for new business of a similar risk profile.
Admitted rates continue to be up 3% to 7% across most lines.
the outliers are workers' compensation rates which remain down 1% to 3% and commercial auto rates which were up 5% to 10%.
From an E&S perspective, most rates are up 10% to 20%.
Coastal property, both wind and quake, are up 15% to 25%.
However, near the end of the quarter, we started to see less upward rate pressure on renewals.
Professional liability for most accounts remains challenging, the SPAC market in particular.
Professional liability rates are generally up 10% to 25%-plus, cyber rates are generally up 10% to 20%-plus, with increased underwriting questions and some reduction in coverage availability.
Also, excess umbrella coverage remains very difficult to place.
For both of these lines, we're seeing carriers reduce overall limits while seeking significant rate increases.
In the E&S space, California and Florida personal lines continues to be the most challenging.
The appetite for personal lines in CAT areas will continue to be constrained through at least the end of '21.
From an M&A perspective, we closed two transactions during the quarter with the annual revenues of, approximately, $11 million.
Our pipeline remains full, and we feel good about the level of activity engagement with prospective sellers.
Slide five, let's discuss the performance of our four segments.
Retail delivered an outstanding organic growth of 17.6% for the second quarter.
The performance was driven by growth across all lines of business and most customer segment through a combination of strong new business, good retention, rate increases, and higher exposure units as a result of the economic recovery.
National Programs grew 13.3% organically, delivering another great quarter.
Our growth was driven by strong performance from most programs due to robust new business, good retention, and rate increases.
The Wholesale Brokerage segment delivered a solid quarter with 12.3% organic growth.
Brokerage continues to perform very well, delivering strong growth in new business and realizing continued rate increases for most lines of coverage.
Binding Authority had a good quarter, driven by new business and continued economic recovery and personal lines in California and Florida remain very difficult to place, and we don't expect carrier appetite to change in the second half of the year.
The Services segment had a good quarter and delivered organic revenue growth of 4.6%, primarily driven by claims processing revenue.
The growth for the quarter was partially offset by continued headwinds within the Advocacy businesses, primarily the Social Security space.
Overall, it was a very strong quarter across the board.
Like previous quarters, we'll discuss our GAAP results and certain non-GAAP financial highlights.
We're on slide number six.
For the second quarter, we delivered total revenue growth of $128.5 million or 21.5% and organic revenue growth of 14.7%.
EBITDAC increased by 35.4%, which expanded EBITDAC margin by 340 basis points, despite lower margin associated with certain acquisitions completed in the past few quarters and slightly higher travel costs.
The EBITDAC growth was driven by the continued leveraging of our expense base and lower non-cash stock-based compensation.
Income before income taxes increased by 44%, growing faster than EBITDAC due to a lower growth rate in amortization and interest expense, as well as a decrease in acquisition earn-out payables.
Net income increased by $42.5 million or 43.9% and our diluted net income per share increased by 44.1% to $0.49.
The effective tax rate for the second quarter of this year and last year was 25.2%.
We continue to anticipate our full-year effective tax rate for 2021 will be in the 23% to 24% range.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $0.093 or 9.4% compared to the second quarter of 2020.
Moving over on slide number seven.
This slide presents our results after the adjustment to remove the change in estimated acquisition earn-out payables for both years.
For the second quarter of this year and last year, the impact was minimal with the adjusted and as-reported diluted net income per share of $0.49 growing 44.1% over the prior year.
Moving over to slide number eight.
This slide presents the key components of our revenue performance.
For the quarter, our total commissions and fees increased by 21.3% and our contingent commissions and GSCs increased by 2.2%.
Organic revenue, which excludes the net impact of M&A activity and changes in foreign exchange rates, increased by 14.7%.
Over to slide number nine.
The Retail segment delivered total revenue growth of 28.3%, driven by acquisition activity over the past 12 months and organic revenue growth of 17.6%, which was driven by growth across all lines of business.
Organic growth for the quarter was positively impacted by, approximately, 300 basis points due to the $8 million adjustment recorded in the second quarter of last year for the economic disruption associated with the pandemic.
EBITDAC margin for the quarter increased by 510 basis points and EBITDAC grew 55.1% due to the leveraging of higher organic revenue along with a gain on disposal associated with the sale of certain books of business.
The growth was partially offset by recent acquisitions that have margins lower than the average, higher non-cash stock-based compensation, and slightly higher travel cost.
Income before income tax margin increased 580 basis points, growing faster than EBITDAC, driven primarily by amortization and intercompany interest expense growing at a slower rate than EBITDAC.
Moving over to slide number 10.
Our National Programs segment increased total revenue by 14% and organic revenue by 13.3%.
Regarding outlook for the last two quarters of 2021, we wanted to highlight that we anticipate approximately $4 million to $6 million of revenue shifting from the third quarter to the fourth quarter due to renewal timing for certain accounts.
EBITDAC increased by $7.9 million or 12.6%, growing slightly slower than total revenues due to incremental costs associated with onboarding new customers, increased non-cash stock-based compensation, and slightly higher variable cost.
Income before income taxes increased by $18.4 million or 38%, growing faster than EBITDAC, primarily due to lower estimated acquisition earn-outs payable and lower intercompany interest expense.
Over to slide number 11.
The Wholesale Brokerage segment delivered total revenue growth of 17.7% driven by acquisitions in the past 12 months and organic revenue growth of 12.3%.
EBITDAC grew by 19.1% with a margin increase of 40 basis points, even with lower guaranteed supplemental commissions, slightly higher variable operating expenses, and incremental non-cash stock-based compensation.
Income before income taxes grew by 6.9%, which was slower than total revenue growth primarily due to higher intercompany interest expense and a change in estimated acquisition earn-out payables.
Over on Slide 12.
Our Services segment increased total revenue and organic revenue by 4.6%.
Regarding outlook, we anticipate organic revenue growth to be flat or down slightly for the second half of the year due to continued headwinds in processing claims by the Social Security Administration.
For the quarter, EBITDAC grew by 9.8% driven primarily by leveraging organic revenue growth.
Income before income taxes increased by 19.8%, growing faster than EBITDAC due to lower intercompany interest expense and amortization.
A few comments regarding liquidity and cash conversion for the quarter.
We experienced another strong quarter of cash flow generation and have delivered $466 million of cash flow from operations through the first six months of 2021, growing $50 million or 12% as compared to the first six months of 2020.
Our ratio of cash flow from operations as a percentage of total revenue remained strong at 30.2% for the first six months of 2021.
With the combination of our cash generation and capital availability, we are well positioned to fund continued growth.
From an economic standpoint, we continue to believe the economy will improve over the coming quarters.
This should drive increased confidence among business owners and how they invest in their companies.
A few items we believe will impact the speed and trajectory of the economy are, in no particular order: one, the ability to hire workers in certain industries; two, supply chain issues that continue to constrain production and sales; three, the spread of and response to the delta variant; and four, the impact of inflation.
How these play out will influence the bumps in the road to recovery.
At this stage, we believe there should be further economic improvement throughout the remainder of '21 and into 2022 but not at the same pace experienced in the second quarter.
As a result, we anticipate some moderation of our organic revenue growth during the back half of the year compared to what we delivered in the first half.
As it relates to the underwriting process, we continue to anticipate our carrier partners to be competitive for new business and accounts with low losses.
We also expect rate increases will be fairly similar to the first half of the year with maybe some moderation.
From an M&A perspective, we believe the market will remain very active.
There are a lot of companies looking to do transactions, and we feel that we are well positioned with a good pipeline to attract great companies to join the Brown & Brown team.
We will continue to follow our disciplined approach of focusing on culture and financial alignment as these have been the key to our long-term success in delivering shareholder value.
We've been talking over the last few earnings calls about our technology initiatives and how these are advancing.
We're very pleased with our progress and the teams are doing a great job.
Our holistic focus is to improve the experience for our customers, carrier partners, and teammates.
To achieve this goal, we have prioritized the following areas: optimize and enhance our utilization of data and analytics; expand our digital delivery capabilities around products and services; and engage in initiatives designed to drive greater efficiency and velocity through our underwriting processes.
In summary, we couldn't be happier with the financial performance of the second quarter and the first half of the year.
The results are just outstanding.
Our team is doing an incredible job of leveraging our wide-ranging capabilities to win new customers and retain our existing customers.
We're well positioned to continue delivering good profitable growth.
| compname announces quarterly revenues of $727.3 million, an increase of 21.5%, and diluted net income per share of $0.49.
q2 earnings per share $0.49.
|
On behalf of the, say, 204 or 205 Comstock employees and the board of directors, I'll make a few opening comments, and then we'll go to the results.
First, Comstock's shift, I think as Ron Mills has talked about to the analysts, I think Comstock's shift to longer laterals, the 10,500-foot laterals in 2022 versus the 8,800-foot laterals in 2021, you should all know that it's expected to create a great value on a per well basis going forward.
We have better cost efficiencies.
We should have a lower decline curve, thus an increase in well performance.
The higher capital efficiencies associated with the longer laterals did allow us to more than offset the impact of higher service costs in the fourth quarter of 2021.
You can see that in the numbers.
And we have seen higher service costs.
We will use commitment from the board and from management.
We'll use the free cash flow to pay off the revolver and redeem the remaining $244 million of the 2025 bonds.
We do have a target, continue to have this leverage ratio at 1.5 or less.
We think we can get there in the second half of 2022.
And that does open discussions up on returning capital to shareholders.
I know we may have that question.
Our drilling inventory, which is the holy grail of E&P companies, I think that's why you have a lot of M&As in the last year or two years.
But our drilling inventory has never been more valuable or stronger.
Because in 2021, we made great strides in extending our lateral length per location by 25% from our average lateral length at the end of 2020 it was 6,840 feet, and today, it's about 8,520 feet.
If you look at that, 25 years' worth of drilling inventory based upon our 2022 activity, we've got 1,633 net locations.
53% of those were Haynesville, 47% were Bossier.
And just think, I mean 902 net locations with lateral lengths 8,000 feet or longer.
On the operational front, which is I think that's the nucleus of this company, on that front we increased our drilling footage per day by 25%.
We went from 800 feet to 1,001 feet per day, and that's how you make money.
Our average lateral length at the wells in the fourth quarter, 11,443 feet.
And the reason is we drilled four 15,000-foot lateral wells, two Haynesville, two Bossier.
Again, in spite of higher service costs, we're able to lower our drilling and completion costs due to improved operational performance and improved capital efficiencies associated with the longer laterals drilled in the fourth quarter of 2021, which that will be carried over into 2022.
We have a few slides to take you back to 2018 and be accountable for our performance.
That was kind of a turnaround year.
That's the year that Jerry Jones and his family invested in Comstock.
And since that time, Comstock has surfaced as the only pure-play Haynesville producer.
I'm Jay Allison, chief executive officer of Comstock.
With me is Roland Burns, our president and chief financial officer; Dan Harrison, our chief operating officer; and Ron Mills, our VP of finance and investor relations.
While we believe the expectations and such statements will be reasonable, there could be no assurance that such expectations will prove to be correct.
Our fourth quarter 2021 highlights, Slide 3.
We cover the highlights on the fourth quarter on Slide 3.
In the fourth quarter, we generated $105 million of free cash flow from operating activities, increasing our total free cash flow generation for 2021 to $262 million.
Including the impact of our acquisition and divestiture activity, our total free cash flow for the year was $343 million.
For the quarter, we reported adjusted net income of $99 million or $0.37 per diluted share.
Our operating cash flow for the quarter was $250 million or $0.90 per diluted share.
Our revenues, including our realized hedging losses, increased 37% to $380 million.
Our adjusted EBITDAX in the fourth quarter was $297 million, 41% higher than the fourth quarter of last year.
Our production increased 12% in the quarter to 1.348 Bcf a day.
In the fourth quarter, we completed two 15,000-foot Haynesville wells, which had IP rates of 48 million and 41 million cubic feet equivalent per day, both of which are new corporate records that Dan Harrison will review in a moment.
During the quarter, we also closed on the sale of our Bakken properties and closed a bolt-on acquisition for $35 million.
If you'll flip over to Slide 4, we'll go over some of the major accomplishments in 2021.
We significantly reduced our cost of capital by refinancing $2 billion of our senior notes in March and June, which saved us $48 million in cash interest expense and extended our average maturity from 4.7 years to 7.1 years.
We also reduced the amount outstanding under our bank credit facility by $265 million with our free cash flow and asset sale proceeds and improved our leverage ratio to 2.2 times as compared to 3.8 times in 2020.
With another successful year in our Haynesville Shale drilling program, we drilled 64 gross or 51.9 net wells, including four 15,000-foot laterals.
On the wells we put to sales at an average IP rate of 23 million cubic feet equivalent per day, we grew our SEC proved reserves by 9% to 6.1 Tcfe with a PV-10 value of $6.8 billion.
We replaced 199% of our production at a low all-in finding cost of $0.60 per Mcfe.
Highlighting our attractive cost structure, we achieved a 78% EBITDAX margin, one of the highest in the industry.
In addition, we achieved a 12% return on average capital employed and a 27% return on average equity.
In 2021, we added 49,000 net acres to our acreage position prospective for the Haynesville and Bossier through a leasing program and acquisitions totaling $57.7 million or $1,178 per acre.
We took several big steps in 2021 on the environmental front.
Early in 2021, we partnered with BJ Energy Solutions to deploy its next-generation natural gas-powered Titan Frac Fleet, which is expected to be put in service in April.
The most significant step we took was to partner with MiQ to certify our natural gas production under the MiQ methane standard.
Flip over to Slide 5 and we recap the bolt-on acquisition in East Texas that we did close late December for a purchase price of $35 million.
The acquisition included 18.1 net producing wells and 17,331 net acres in Harrison Leon, Panola, Robertson and Rust counties.
With the acquisition, we added 57.9 net drilling locations which represents approximately one year's worth of our drilling inventory.
The acreage is 94% held by production, but the acquisition also added the lateral lengths on 44 of our existing drilling locations to be increased.
Our production increased 12% to 1.35 Bcfe a day.
Adjusted EBITDAX grew 41% to $297 million.
We generated $250 million of discretionary cash flow during the quarter, 62% higher than 2020's fourth quarter.
And our adjusted net income totaled $99 million during the quarter, a 186% increase from the fourth quarter of 2020.
We generated $105 million of free cash flow from operations in the quarter or $204 million if you include the impact of the acquisition and divestiture activity, which most of that occurred in the fourth quarter.
This free cash flow contributed to an improvement in our leverage ratio, which improved to 2.2 times, down from 3.2 times at the end of 2020.
Our cash flow per share during the quarter was $0.90 per share, up from $0.56 in the fourth quarter of 2020, and adjusted earnings per share was $0.37 per share as compared to $0.14 in the fourth quarter of 2020.
On Slide 7, we show how much Comstock has changed since 2018 when Jerry Jones and his family invested in the company.
Production growth has averaged 117% over the last three years.
EBITDAX has gone from $287 million to $1.1 billion at a compounded annual growth rate of 97%.
Cash flow has grown from $206 million back in 2018 to $908 million this year in 2021, averaging 114% over the last three years.
Adjusted net income has grown from $29 million to $303 million at a compounded annual growth rate of 319% and free cash flow from operations has grown to $262 million, and our leverage ratio has improved from four and a half times to 2.4 times.
On a per share basis, cash flow has gone from $1.96 to $3.29 and earnings has gone from $0.27 to $1.16.
On Slide 8, we provide a breakdown of our natural gas price realizations.
And this is an important slide to understand the quarterly results as we've had a very volatile NYMEX contract during the fourth quarter which has continued into the first quarter of this year.
On this slide, we show how the NYMEX contract settlement price, and we show the average NYMEX spot price for each quarter.
During the fourth quarter, there was a very significant difference between the quarter's NYMEX settlement price of $5.83 and the average Henry Hub spot price of $4.74.
During the quarter, we nominated 67% of our gas to be sold at index prices, which are more tied to the contract settlement price or the final price that the contract comes off the market at.
And then we also sold 33% of our gas in the daily spot market.
If you use those percentages, the approximate NYMEX reference price for looking at our activity in the fourth quarter would have been $5.47, not $5.83.
Our realized pricing from the fourth quarter averaged $5.22, which reflects a $0.25 differential from that reference price, which is fairly in line with our historical results.
In the fourth quarter we were also 72% hedged, so that reduced our final realized gas price to $3 per Mcf.
On Slide 9, we detailed our operating cost per Mcfe and the EBITDAX margin.
Operating costs per Mcfe averaged $0.67 in the fourth quarter.
That was $0.02 higher than the third quarter rate.
Our lifting cost and gathering costs were both up by $0.01, but production taxes were down by $0.03.
Higher G&A costs of $0.08 was also higher in the quarter, and that's primarily related to year-end adjustments for bonuses.
We do expect our G&A to go back to average somewhere between $0.06 to $0.07 per Mcfe in 2022.
Our EBITDAX margin including hedging came in at 78% in the fourth quarter, unchanged from our third quarter margin.
On Slide 10, we recap our fourth quarter and full year 2021 drilling and completion costs.
In the fourth quarter, we spent $140 million on development activities, $114 million of that related to our operated Haynesville and Bossier Shale properties.
We also spent $8 million on non-operated wells, and we had $15 million that we spent on other development activity in the Haynesville, in our Haynesville operations.
We spent an additional $3 million for our properties outside of the Haynesville.
For the full year, we spent $628 million on development activities.
$554 million was related to our operated Haynesville and Bossier Shale properties.
We also spent $74 million on non-operated activity and for other development activity outside of just drilling and completion.
We drilled 51.9 net operated Haynesville horizontal wells, and we turned 54.2 net wells to sales in 2021.
We also had an additional 2.2 net wells from our non-operated activity.
In addition to funding our development program, we also spent $58 million on acquisitions.
Most of those acquisitions related by an undrilled Haynesville shale acreage.
Slide 11 covers our proved reserves at the end of 2021.
We grew our SEC proved reserves from 5.6 Tcfe to 6.1 Tcfe in 2021, and we replaced 199% of our production.
Our 2021 drilling activity added 797 Bcfe to proved reserves, and we had about 89 Bcfe of positive price-related revisions.
We also added 203 Bcfe of proved reserves through our acquisition activity.
The reserve additions were offset by a divestiture of 100 Bcfe, which is primarily our Bakken shale properties.
Our all-in finding costs for 2021 came in at a very attractive $0.60 per Mcfe.
Our drill pit finding costs for '21 came in at $0.71 per Mcfe.
Our reserves are almost 100% natural gas following the sale of our Bakken properties.
The PV 10 value of our proved reserves at SEC pricing was $6.8 billion at the end of last year.
In addition to the 6.1 Tcfe of SEC proved reserves, we have an additional 2.4 Tcfe of proved undeveloped reserves which are not included in that number as they are not expected to be drilled within the five-year window required by the SEC rules.
We also have another 4.4 Tcfe of 2P or probable reserves, and we have 7.2 Tcfe of 3P or possible reserves for a total overall reserve base of 20.1 Tcfe on a P3 basis.
Slide 12 shows our balance sheet at the end of 2021.
We had $235 million drawn on our revolving credit facility at the end of the year after repaying $265 million during 2021.
The reduction in our debt and the growth of our EBITDAX drove a substantial improvement to our leverage ratio, which was down to 2.2 times in the fourth quarter on a stand-alone basis as compared to 3.8 times in 2020.
We plan on retiring $479 million of debt in 2022.
That would include redeeming our 2025 senior notes.
We are targeting to be below 1.5 times levered in 2022, and we ended 2021 with financial liquidity of almost $1.2 billion.
Flip over on Slide 13.
This is where we show our average lateral length we drilled by year going back to 2017 along with our estimated average lateral length for this year and also our record longest lateral that we've completed to date.
In 2017, our average lateral length was 6,233 feet as we were drilling primarily a mix of 4,500-foot and 7,500-foot laterals, and we had just started drilling our first 10,000-foot laterals.
In subsequent years through 2020, we slowly increased the number of 10,000-foot laterals that we were drilling, which allowed us to gradually increase the average lateral length.
In late 2020, we successfully drilled and completed our first lateral exceeding 12,500 feet, and our average lateral length in 2020 had increased to 8,751 feet.
Now, through the end of 2021, we have successfully drilled and completed four 15,000-foot laterals with two drilled to the Haynesville and two drilled into the Bossier.
In 2021, our average lateral length increased to 8,800 feet.
Our record longest lateral to date is 15,155 feet and was drilled and completed in the Haynesville in late 2021.
Building on the success of our 15,000-foot laterals, we now anticipate our average lateral length to increase by 19% in 2022 up to 10,484 feet.
In 2022, we anticipate drilling approximately 21 wells with laterals longer than 11,000 feet and nine of these being 15,000-foot laterals.
By continuing to execute our long lateral strategy, we'll be better able to maintain our low-cost structure into the higher price environment.
On Slide 14, we highlight the improvement in our drilling performance, which is based on the total footage drilled divided by the number of days from spud to TD.
Our drilling performance was relatively stable from 2017 through 2019 in the 700-foot per day range.
In 2020, our drilling performance improved 15% to 800 feet a day.
And in 2021, our drilling performance improved an additional 25% to just over 1,000 feet per day, while our record fastest well to date was drilled last year at an average rate of 1,461 feet a day.
The performance improvements have been achieved via drilling the longer laterals combined with sound drilling practices, improved tool reliability and execution at the field level.
With our goal of drilling longer laterals in future years, we expect to maintain our drilling performance at a very high level.
On Slide 15 is our updated D&C cost trend for our Bismarck long lateral wells.
These are wells with an average lateral length greater than -- with a lateral greater than 8,000 feet.
Our D&C cost averaged $1,027 a foot in the fourth quarter, which is a 2% decrease compared to the third quarter and flat compared to our full year 2020 D&C costs.
Breaking this down, our drilling costs remained essentially unchanged for the quarter at $413 a foot, while our completion costs were down 4% quarter over quarter to $615 a foot.
In spite of the higher service costs we began to experience during the last quarter, we were still able to achieve the slightly lower D&C cost due to improved operational performance and improved capital efficiency associated with the longer average lateral length that we drilled during the quarter.
Our average lateral length for the quarter was 11,443 feet.
This is the longest quarterly average lateral length we've achieved to date and was accomplished primarily due to the completion of our first two 15,000-foot laterals that were turned to sales during the fourth quarter.
The higher capital efficiencies associated with the longer laterals allowed us to offset the impact of the higher service costs during the quarter.
While we do continue to see service costs further increase into this year, our ability to execute on the longer laterals with the more robust economics will help cushion and partially offset the negative effects of the higher service costs.
On Slide 16 is a map outlining our fourth quarter well activity.
Since the last call, we have completed and turned 16 new wells to sales.
The wells were drilled with lateral lengths ranging from 8,504 feet to 15,155 feet with an average lateral of 10,508 feet.
The wells were tested at IP rates that range from 12 million up to 48 million a day with a 23 million cubic feet per day average IP.
The results this quarter include our first two planned 15,000-foot Haynesville laterals, the Talley 32-29-20 HC number one and number two wells.
These wells were completed with laterals of 14,685 feet and 15,155 feet and tested at rates of 41 million and 48 million cubic feet a day.
The seven wells with the lower IP rates are in Panola County in the liquids rich area of the Haynesville.
The high BTU gas in this area will generate a yield of 25 to 40 barrels of plant products, which will enhance the economics from a dry gas well with similar production by 20% to 30%.
Also during the quarter, we successfully drilled two additional 15,000-foot laterals into the Bossier as mentioned earlier.
These two wells were turned to sales late last night, and we'll be reporting on those on the next call.
Regarding activity levels, we did finish out 2021 running five rigs and three frac crews.
We're in the process now of adding two rigs, increasing our rig count to seven and will remain at the seven-rig count throughout the remainder of this year.
We plan to continue running three full-time frac crews throughout the rest of the year.
On Slide 17, this is the detail of the 2021 drilling inventory.
The drilling inventory is split between the Haynesville and Bossier locations.
It is divided into four categories.
We've got our short laterals up to 5,000 feet, median laterals at 5,000 to 8,000 feet, our long laterals at 8,000 to 11,000 feet, and we've got a new extra-long category now for the wells beyond 11,000 feet.
Our total operated inventory currently stands at 1,984 gross locations, 1,420 net locations, which represents a 72% average working interest across the operated inventory.
Based on -- our non-operated inventory currently stands at 1,425 gross locations and 213 net locations and this represents a 15% average working interest across the non-operated inventory.
Based on the recent success of our new extra-long lateral wells, we've modified the drilling inventory to take advantage of our acreage position, and where possible, we have extended our future laterals out further to the 10,000 to 15,000-foot range.
In our new extra-long lateral bucket, we capture all our wells that now extend beyond 11,000 feet long, and in this bucket, we currently have 397 gross operated locations and 287 net operated locations.
These are split 50-50 between the Haynesville and the Bossier.
To recap our total gross inventory, we have 436 short laterals, 392 medium laterals, 759 long laterals, and now 397 extra-long laterals.
The total gross operated inventory is split 53% in the Haynesville and 47% in the Bossier.
Also, by extending our laterals, we have increased the average lateral length in the inventory from 6,840 feet now up to 8,520 feet, which is a 25% increase.
And in addition to the uplift in our economics, the longer laterals will help to reduce our surface footprint on future activity and also further reduce our greenhouse gas and methane intensity levels.
In summary, our current inventory provides us with over 25 years of future drilling locations based on our planned 2022 activity levels.
With our ability to execute on the new ultra-long laterals, our drilling economics are more robust and it enhances the value of our acreage position.
I'm going to turn it now back over to Jay to summarize the outlook for 2022.
Well, like we said earlier, our drilling inventory, which Dan just said, it is the holy grail of E&P companies.
It's never been more valuable or stronger than it is today.
If you go to Slide 18, I'd direct you to kind of the summary of our outlook for 2022.
We expect our 2022 drilling program to generate 4% to 5% production growth year over year, and we would expect to generate in excess of $500 million of free cash flow at current commodity prices.
In 2022, the lateral length of the wells in this year's program is expected to be 19% longer than the 2021 wells.
The additional investment we are making this year in our drilling program will pay off in the future years as our lateral length per well will have a lower decline rate than the shorter laterals.
In 2022, our operating plan is focused on repaying $479 million of debt, including redeeming our 2025 senior notes.
We continue to have an industry-leading low-cost structure, which gives us best-in-class drilling returns.
We are working on the certification of our natural gas production as responsibly sourced gas under the MiQ standard.
At the end of 2021, we had financial liquidity of almost $1.2 billion, which is expected to increase further in 2022 as we repay the remaining borrowings outstanding on our bank facility.
On Slide 19, we provide the financial guidance.
As shown on the slide, first quarter production guidance of 1.24 to 1.29 Bcf a day, and the full year guidance is 1.39 to 1.45 Bcf a day.
During the first quarter, we only plan to turn to sales about 15% of the planned wells to be turned to sales for the year.
And those wells have a little bit lower working interest than the wells later in the year.
As a result, the majority of our wells turned to sales and production growth are expected to occur during the second and third quarters of this year.
Development capex guidance is $750 million to $800 million, which is based on a similar number of turned to sales wells as last year, and incorporates an expected 10% increase in service costs and the impact of our average lateral lengths being 19% longer this year.
As a result, if you factor in the 10% inflation and the 19% longer laterals, the midpoint of our guidance would actually represent about 3% to 5% of an improvement in efficiencies, mostly related to the longer laterals.
We've also budgeted for $8 million to $12 million of additional leasing costs.
Our LOE expected to average $0.20 to $0.25 in the first quarter and $0.18 to $0.22 for the full year, while our gathering and transportation costs are expected to average $0.23 to $0.27 in the first quarter and $0.24 to $0.28 for the year.
Production and ad valorem taxes expected to average $0.10 to $0.14 a year based on current price outlook.
Our DD&A rate is expected to average $0.90 to $0.96 per Mcfe.
Cash G&A is expected to total $7 million to $8 million in the first quarter and $29 million to $32 million in 2022, with noncash G&A expected to average almost $2 million a quarter.
Cash interest is expected to come in around $38 million to $45 million in the first quarter and $152 million to $162 million -- $160 million in 2022, and that incorporates the planned redemption of our 2025 notes later this year.
From a tax standpoint, the effective tax rate of guidance of 22% to 27% is in line with what we've been reporting.
And going forward, we expect to defer 90% to 95% of the taxes with the cash taxes being related to state taxes.
| compname reports q4 adjusted earnings per share of $0.37.
q4 adjusted earnings per share $0.37.
qtrly revenues, after realized hedging losses, were $380 million, 37% higher than 2020's q4.
|
Q3 was another very good quarter for Brown & Brown.
This was a result of our nearly 12,000 teammates delivering creative risk management solutions for our customers.
We delivered strong top line growth driven by a combination -- by the combination of robust new business, good retention, rate increases and some expansion of exposure units.
At the same time, our team continue to drive profitable growth, resulting an impressive margin improvement and adjusted earnings per share expansion.
We're also very proud that last week our Board of Directors authorized an increase of 10.8% in our quarterly dividend.
Note, we've now increased our dividend for the 28th year in a row.
Now, let's transition to the results for the quarter, I'm on Slide 3.
We delivered $770 million of revenue, growing 14.3% in total, and 8.5% organically.
I'll get into more detail in a few minutes about the performance of our segments.
Our EBITDAC margin grew by 280 basis points to 35.6% versus the third quarter of 2020.
Our net income per share for the third quarter was $0.52 on an as reported basis and $0.58, excluding the change in estimated acquisition earn-out payables.
In summary, we're really pleased with our strong performance for the third quarter and the first nine months.
As the year-to-date results are the best in our history, 10.8% internal growth year-to-date.
I'm now on Slide 4.
We have customers that have done well throughout the pandemic and others that are struggling to fully reopen, mainly due to the inability to hire employees.
We're seeing this challenge in a number of industries and geographies, and as a consequence restricting how fast companies can become fully operational.
In addition to shortages of workers, supply chain issues and inflation are putting pressure on costs.
From a placement standpoint, the themes are pretty consistent.
Customers with good loss experience are getting the best rates in coverage, while those with tough loss experience are seeing material rate increases or reductions in available limits or both.
As a result, customers continue to consider program modifications to manage their premium increases.
Rate increases remain relatively consistent with prior quarters, admitted market rates continue to be up 3% to 8% across most lines, the outliers or workers' compensation rates, which are down 1% to 3%, and commercial auto rates which were up 5% to 10%.
From an E&S perspective, most rates were up 10% to 20% with some outliers.
Coastal property both wind and quake, are up 10% to 30%, with this being a slightly broader range than we saw in the previous quarter.
Professional liability for most accounts remained very challenging with rates up 10% to 15%-plus, cyber-rates in some instances could increase dramatically depending on the security in place with the customer.
Security protocols that were viewed as nice to have in the past are now viewed as a minimum expectations to obtain coverage.
Also, excess umbrella coverage remains very difficult to place.
For professional liability, cyber and umbrella, we're seeing carriers reduce limits while seeking significant rate increases.
Florida and California placements in E&S for personal lines remain the most challenging, due to losses or aggregate concentrations.
We expect the appetite for personal lines in CAT areas to continue to be constrained in 2022, which will likely put pressure on state sponsored programs and the cost of insurance for the consumer.
From an M&A perspective, we were successful in closing seven transactions during the quarter, with annual revenues of approximately $21 million.
We've closed a total of 11 deals year-to-date with annual revenues of $65 million have already announced a couple of additional acquisitions in October.
Our pipeline remains full and we feel good about our level of activity and engagement with prospective sellers on Slide 5.
Let's discuss the performance of our four segments.
Retail delivered great results with organic revenue growth of 8.3% for the third quarter.
The performance was driven by growth from all lines of business through a combination of strong new business, good retention, rate increases and exposure unit expansion.
We're leveraging our broad capabilities to benefit our customers and prospects.
National Programs delivered another outstanding quarter, growing 13.2% organically.
Our growth was driven by the strong performance from most programs due to new business, good retention and rate increases.
The Wholesale Brokerage segment delivered 5.1% organic growth with commercial brokerage and binding performing well, driven by new business and continued rate increases for most lines of coverage.
Personal lines in coastal states continues to be a headwind as I mentioned earlier.
The Services segment delivered organic revenue growth of 0.5%.
The performance for the quarter was driven by claims processing revenue associated with recent weather events, which was substantially offset by external factors continuing to impact our advocacy business.
Overall, it was a great quarter across the Board.
We're over on Slide 6.
Like previous quarters, we'll discuss our GAAP results and certain non-GAAP financial highlights.
For the third quarter, we delivered total revenue growth of $96.3 million or 14.3% and organic revenue growth of 8.5%.
Income before income taxes and EBITDAC both increased by approximately 24%.
EBITDAC margins expanded 280 basis points, driven by strong organic revenue growth and managing our expenses.
Net income increased by $12.4 million or 9.3% and our diluted net income per share increased by 10.6% to $0.52.
The effective tax rate increased to 25.5% for the third quarter of this year as compared to 15.5% in the third quarter of last year.
The tax rate for the current quarter is in line with previous guidance, while the prior year was driven by the tax benefit associated with the vesting of restricted stock awards.
We continue to anticipate our full year effective tax rate for 2021 will be in the 23% to 24% range.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $0.093 or 9.4% compared to the third quarter 2020.
We're over on Slide 7.
This slide presents our results after removing the change in estimated acquisition earn-out payables for both years, which we believe presents a more meaningful year-over-year comparison.
The change in estimated acquisition earn-out payables was a charge of $23.1 million in the third quarter of this year compared to $15.3 million for the same period last year.
Excluding these non-cash items, income before income taxes on an adjusted basis, increased by 26.4%.
Our net income on an adjusted basis increased by $16.7 million or 11.4%.
And our adjusted diluted net income per share was $0.58, increasing 11.5%.
The lower growth of earnings per share and net income for the quarter as compared to the growth of income before income taxes was driven by the change in the effective tax rate.
Overall, it was a very strong quarter on the top and bottom line.
I'm going to move over to Slide 8.
This slide presents the key components of our revenue performance.
For the quarter, our total commissions and fees increased by 14.6% and our contingent commissions and GSCs increased by 27.1% as we qualify for certain additional contingents and GSCs this year.
Organic revenue, which excludes the net impact of M&A activity and changes in foreign exchange rates increased by 8.5%.
Over to Slide 9.
The Retail segment delivered total revenue growth of 17.8%, driven by acquisition activity over the past 12 months and organic revenue growth of 8.3% with solid growth across all lines of business.
EBITDAC margin for the quarter increased by 180 basis points and EBITDAC grew 24.6%, due to higher organic revenue growth, increased contingent commissions and GSCs, and managing our expenses even with slightly higher variable cost.
The growth in income before income tax, as compared to EBITDAC for all segments is impacted by changes in intercompany interest, amortization, depreciation, and estimated acquisition earn-out payables.
Over to Slide 10.
Our National Programs segment increased total revenue by 13.7% and organic revenue by 13.2%.
In conjunction with the onboarding of a new customer, we recognized approximately $5 million of incremental revenue this quarter that represents timing.
We expect the incremental revenue from this customer to more than likely be recognized within the first half of 2022.
EBITDAC increased by $18.7 million or 28.5% with the margin improving 510 basis points, as a result of strong organic revenue growth, managing our expenses and the positive impact of the non-recurring write-off of certain receivables that occurred in the third quarter of last year.
Over to Slide 11.
The Wholesale Brokerage segment delivered total revenue growth of 11.2% driven by acquisitions in the past 12 months and organic revenue growth of 5.1%.
EBITDAC grew 4.7%, but the growth was impacted by incremental broker compensation driven by higher levels of performance, slightly higher variable cost and certain non-recurring intercompany IT charges.
Our Services segment increased total revenue and organic revenue by 0.5% with EBITDAC growing 6.8%, driven by continued management of our expenses.
Few comments regarding cash conversion and liquidity.
We experienced another strong quarter of cash flow generation and have delivered $628 million of cash flow from operations through the first nine months of this year, growing $88 million or 16% as compared to the first nine months of last year.
Our ratio of cash flow from operations as a percentage of total revenue remained strong at 27% for the first nine months of this year.
With the combination of our cash generation and capital availability, we are well positioned to fund continued investments in our business.
We've had an outstanding first nine months of the year and believe we are well positioned to continue profitable growth.
As we look toward the remainder of the year and into 2022, we expect business confidence to improve and exposure units to expand.
The main influencers of increased confidence and business expansion will be one, the availability of employees across all industries.
Two, the resolution of supply chain constraints.
Is it transitory or is it sustained?
And four, the continued management of COVID.
How and when these play out over the coming quarters will influence the trajectory of the economy.
From an underwriting perspective, we anticipate premium increases will continue to moderate for many lines with the exception of cyber, professional, access and automobile.
The M&A market will continue to be very active and valuations will remain at a heightened levels as a result of many buyers with a lot of available capital.
We feel that we're well positioned with a good pipeline to attract great companies to join the Brown & Brown team.
We will continue with our disciplined approach of focusing on culture and financial alignment as these have been key to our long-term success of delivering shareholder value.
From an innovation standpoint, our focus is to constantly and consistently deliver creative solutions for the benefit of our customers, prospects and teammates.
We're making good progress and are continuing to align on common operating platforms for each division, enhancing our customer facing applications to make it easier to do business for Brown & Brown and leveraging our data to the benefit of our customers.
In summary, the results were outstanding for the third quarter and the first nine months of the year, and we are uniquely positioned to succeed in this ever changing marketplace.
| compname announces q3 earnings per share of $0.52.
compname announces quarterly revenues of $770.3 million, an increase of 14.3%, and diluted net income per share of $0.52.
q3 earnings per share $0.52.
qtrly adjusted earnings per share $0.58.
|
We will also discuss non-GAAP financial measures regarding our performance.
Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period.
When we refer to the base revenues, were referring to our total revenues less our COVID diagnostic testing revenues, which include COVID-related revenues from Veritor, BD MAX and swabs.
When we refer to base margins, we are adjusting for estimated COVID diagnostic testing profitability and the related profit we have reinvested back into our business.
When we refer to any given period referring to fiscal period, it must be noted as a calendar period.
Finally, when we refer to NewCo during todays call, were referring to the planned spinout of our Diabetes Care business into an independently public traded company following the effective trade date of the spin, which was announced on the second quarter earnings call.
RemainCo refers to BD post separation.
As a reminder, this transaction is subject to market, regulatory and other conditions, including final approval by BDs Board of Directors and the effectiveness of a Form 10 registration statement that will be filed with the SEC.
On todays call, I will provide highlights of the quarter and discuss the continued strong progress we have made on our BD 2025 strategy.
On behalf of the Board of Directors, the leadership team and the company, I want to express my gratitude to Chris for his leadership and service to BD.
Im confident the CFO transition ahead will be seamless, and his leadership and experience will make him an excellent director for NewCos Board.
Now lets jump into our results.
We were very pleased with our third quarter performance, powered by strong growth and momentum in our base business across all three segments.
Revenues totaled $4.9 billion, and our adjusted earnings per share was $2.74, both ahead of our expectations.
Total revenues were up 26.9% on a reported basis and up 22% on a currency-neutral basis.
Results included COVID diagnostic testing revenues of $300 million, which contributed 4.8% to growth.
Excluding COVID testing revenues, our base business revenues were up 17.6%, better than we expected across most business units.
The strong growth reflected the anniversary of the initial COVID wave and the temporary halting of elective procedures and its impact on medical device utilization in the year ago quarter.
But Q3s result also reflects the continued momentum driven by the successful execution of our BD 2025 strategy.
Excluding COVID diagnostic revenues, base business revenues in Q3 fiscal 21 increased 3.9% relative to our pre-pandemic third quarter fiscal 2019 on a currency-neutral basis, which includes the impact of the Alaris ship hold.
If you exclude the U.S. infusion systems business, our total revenues would have increased 6.6% relative to our prepandemic third quarter fiscal 2019.
Our Pharmaceutical Systems and Urology and Critical Care franchises continue to be standout performers, where revenues are up 17% and 11%, respectively, over 2019 levels.
Bioscience revenues were up 9%.
Surgery and Peripheral Intervention revenues are both up 8%.
Elsewhere, we see opportunities for improvement ahead in fiscal 22 and beyond.
For example, our MDS revenues are up about 2% versus 2019 levels, reflecting the continued impact of COVID as well as the impact of China volume-based purchasing.
As hospital utilization improves, we should see further improvements here.
Also, as I mentioned, Medication Management Solutions revenues are impacted by the Alaris ship hold, and we expect our revenues to improve once we receive our 510(k) clearance for our BD Alaris system.
While Im pleased with how we are accelerating our revenue performance and profile, Im equally pleased with the process were making in improving our working capital and cash flows.
Cash flow performance has been a key focus for us since I became CEO, and that is evident in our working capital metrics.
Year-to-date, cash flows from operations totaled $3.7 billion, an increase of 80% from the prior year period.
This improvement in our cash flows allowed us to advance our more balanced capital allocation strategy this quarter, which included the repurchase of $1 billion in BD stock at an average price of approximately $242.
This marks the first time we have repurchased shares since 2017 and the largest amount we have repurchased since 2012.
Even with this repurchase activity, we ended the third quarter with nearly $3.2 billion in cash and an adjusted net leverage ratio of 2.4 times.
Overall, Im really pleased with our performance in the quarter, particularly with the continued positive momentum in our base business.
This gives us the confidence to raise our base revenue assumption.
We now expect our base business to grow approximately 7.5% to 8% on an FX-neutral basis.
This is higher than our previous expectation of mid-single-digit growth.
We continue to expect COVID diagnostic testing revenues of $1.8 billion to $1.9 billion, with more revenues coming from international markets than we previously anticipated.
We now expect currency-neutral revenue growth overall of approximately 14%.
Our positive base business momentum and a lower tax rate allows us to raise our adjusted earnings per share guidance by $0.10 while continuing to reinvest in our business and overcome lower COVID testing profits, including a provision for excess and obsolete COVID testing inventory.
We now expect our full year adjusted earnings per share range to be $12.85 to $12.95.
Chris will provide you further details on our financial outlook later in the call.
Next, I want to provide an update on our BD Alaris pump remediation, which remains my number one priority.
Last week, we announced to our customers a positive step in our remediation efforts.
Working with the FDA, we are now initiating remediation of existing Alaris system devices in the field by updating the software to version 12.1.
2 following submission of the 510(k), which includes this software version.
This new software version is intended to remediate the issues identified in the February 4, 2020, recall notice and provide programming, operational and cybersecurity updates to affected devices.
However, the software update has not been reviewed or cleared by the FDA.
To address the question on Alaris clearance timing, we remain confident in our submission and the process we are undertaking, including working closely with the FDA.
As Chris will later discuss, we believe it is responsible to not definitively predict the FDA clearance in our FY 22 outlook.
We believe this is a prudent approach given the inherent difficulty in predicting FDA clearance time lines.
Next, I want to update you on our BD 2025 strategy of grow, simplify and empower.
First, Id like to focus on our growth pillar.
We continue to strengthen our market leadership positions in our durable core business while purposely investing in new innovations that help accelerate and shape irreversible trends that we see transforming global health now and in the decade ahead.
Ive spoken about these three innovation and growth focuses before.
And weve been purposely shifting more of our R&D and tuck-in M&A investments into these spaces, which are growing over 6%.
Through this, we aim to lift our weighted average market growth rate and performance over time.
And this year, weve launched several innovative products and solutions across the continuum of care, across our business units and across the globe.
And after completing our strategic portfolio review last month, I can share with you that our pipeline is very deep and wide across our businesses.
Its been further enhanced by our acquisitions over the past 18 months.
And youll hear much more about our innovation pipeline at our Investor Day on November 12.
But let me highlight a few of our organic innovations that were advancing in the near term.
In our Life Sciences business, Im pleased that we will start shipping our BD MAX and BD Veritor combination flu COVID assays this month, in time for the upcoming respiratory season.
Our BD Veritor combination test can detect and distinguish between COVID, flu A and flu B in a single rapid test with a digital readout.
We see the combination test becoming the standard of care moving forward, advancing our strategy to enable better outcomes in nonacute settings.
Another innovation area Id like to highlight is our Biosciences business.
Biosciences has been a strong performer this year, and we expect the unit to deliver high single-digit growth for the full year.
In June, we launched our new e-commerce site, bdbiosciences.com, which is an entirely new and innovative digital marketplace designed to provide a best-in-class online purchasing experience for our flow cytometry customers.
Early feedback has been outstanding, and were already seeing excellent traction and early adoption.
We also have an exciting wave of new product introductions this summer, with the launch of our FACSymphony A5 SE, which is our first BD spectral analyzer, and provides an even higher cellular parameter analysis.
Weve launched our FACSymphony A1 as well, which offers high-end technology and a cost-effective bench top design.
In addition to these launches, we have a healthy innovation pipeline of modular, scalable new instruments and next-generation dyes that will allow our customers to fully leverage our complete and integrated solution suite of instruments, reagents, informatics, single-cell multiomics and scientific support services.
Our products and solutions are being used to uncover new insights on the immune system and develop treatments for many related chronic diseases.
You can hear more about our Life Sciences strategy from Dave Hickey, our Executive Vice President of BD Life Sciences; and Puneet Sarin, our Worldwide President of BD Biosciences, at the upcoming UBS Genomics 2.0 and MedTech Innovation Summit on Wednesday, August 11.
Next, lets turn to our inorganic innovations that weve added to our portfolio.
As you know, we continue to be focused on tuck-in M&A as a means of adding innovative products and solutions that leverage our core market leadership positions and advance us into higher-growth adjacencies.
Year-to-date, weve completed seven tuck-in acquisitions.
While at the same -- at the time of the acquisitions, these individual deals were not meaningful from a revenue perspective.
As we integrate these transactions into our portfolio, we expect them to strengthen our growth profile.
Our three most recent transactions, Velano Vascular, Tepha, Inc. and ZebraSci are good examples of our M&A strategy.
Let me begin with Velano Vascular, which is being added to our MDS business.
Velano has an innovative needle-free technology that enables high-quality blood draws from existing peripheral IV catheter lines, eliminating the need for multiple needle sticks.
This technology will help customers transform the patient experience through the vision of a 1-stick hospital stay.
Velanos PIVO device will be integrated into our sales teams bag of broader catheter solutions initially in the U.S.
This is a great example of how were expanding and strengthening our base business.
The second transaction is Tepha, Inc., a leading manufacturer of a proprietary resorbable biopolymer technology.
Over the past several years, through our long-standing relationship, weve been commercializing this platform via our Phasix resorbable hernia mesh platform.
The acquisition benefits are twofold.
First, it provides us with a vertical integration strategy for our current Phasix platform.
But more importantly, it provides us with exciting new opportunities to expand our horizon into new high-growth areas of tissue repair, reconstruction and regeneration.
Lastly, we acquired ZebraSci, a pharmaceutical services company.
This acquisition provides the opportunity to expand our Pharmaceutical Systems business beyond injectable device design and manufacturing to include best-in-class testing for drug device combination products.
ZebraSci allows us to further engage and collaborate with biopharmaceutical companies and particularly smaller companies, where a large amount of the pipeline is, to support the transition of their molecules into prefilled combination devices.
Next, I want to update you on our Simplify initiatives, which are advancing well.
Through Project Recode, we are optimizing our portfolio, optimizing our plant network and simplifying our business processes.
Project Recode remains on track to achieve $300 million of cumulative savings by the end of FY 24.
We are also continuing the rollout of our BD production system, which is a standardized BD approach to driving the next level of lean processes and continuous improvements across our plants.
The BD production system is already helping to drive improvements in quality and reductions in our inventory days.
We also continue to advance Inspire Quality, our quality, regulatory and risk mitigation program.
The last pillar of our BD 2025 strategy is empower, which represents the changes in our culture and capabilities that were driving to empower our strategy.
In Q3, we completed our Voice of Associates survey with over 86% participation.
And what stood out was that our associates said were making strong progress with improvements in 95% of the metrics since our last survey in 2018.
And most notable were improvements in our focus areas of growth mindset, strong teams, quality and excitement about the future of BD.
Were also advancing our 2030 sustainability strategy, which addresses a range of challenges in our industry while helping to make a difference on relevant issues that affect society and the planet.
Our strategy will ensure we remain focused on shared value creation, meaning how we address unmet societal needs through business models and initiatives that also contribute to the commercial success of BD.
Next, I want to provide a brief update on the progress of our proposed diabetes spin-off, which remains on track for the first half of calendar 2022.
We are making steady progress with our separation activities.
We recently announced that two directors from BDs Board will be appointed as future directors of the Diabetes NewCo.
Retired Lieutenant General David Melcher will serve as the Non-Executive Chairman of the Board.
And Dr. Claire Pomeroy will serve as a director.
Their appointments will be effective upon the completion of the spin, at which point they will transition from the BD Board to the Board of NewCo.
Lieutenant General Melcher brings extensive experience in spin-offs, having served as the CEO of Exelis following its spin-off from ITT.
And under his leadership, Exelis spun off its mission systems business as a separate public company.
Dr. Pomeroy brings broad experience in healthcare delivery, administration, medical research and public health.
Im confident their combined experience, along with future planned board members, will help to set NewCo well on its path to becoming a successful independent publicly traded company focused on growth.
While continuing to evaluate additional Board members, we are also continuing to build a new Diabetes Care leadership team through a combination of current BD leaders and new hires, including Dev Kurdikar, who will be NewCos CEO; Jake Elguicze, who will be CFO, and most recently, Jeff Mann.
Jeff Mann joined our Diabetes Care organization and will be General Counsel and Head of Corporate Development for NewCo.
Jeff brings more than two decades of experience in M&A and transactions, securities law and corporate governance.
Most recently, he served as General Counsel and Secretary of Cantel Medical group.
We are also progressing with the Form 10, which will have the carve-out financials, and we expect it to be publicly available around the end of the calendar year.
Before turning it over to Chris, I will leave you with some key thoughts.
First, our base business momentum and our recovery from COVID continues, and it is broad-based.
We expect that momentum to carry into fiscal 22 and beyond.
As Chris will share with you, todays results underscore our confidence in strong mid-single-digit top line growth for our base business next year.
Second, we are executing well against our innovation-driven growth strategy, which includes our internal R&D as well as advancing our tuck-in M&A strategy.
And third, Im proud of the substantial progress in advancing our BD 2025 strategy and how that will unleash our growth potential in the years to come.
Well deliver innovations for our customers, empower our associates and create value for you, our shareholders.
Ive been with BD for 20 years, and Ive never been more excited.
We just completed our annual strategic review process, as I said, and the road ahead is looking more exciting than it did a year ago.
We look forward to sharing our BD 2025 strategy in greater detail at our November 12 Investor Day.
We hope you can join us.
Im also very pleased with our overall performance in the quarter, particularly with the base business, which showed continued strong momentum.
Third quarter revenues of $4.9 billion increased 26.9% on a reported basis and 22% on a currency-neutral basis and were ahead of our expectations.
Our current quarter results also include $300 million in COVID diagnostic testing revenues, compared to $98 million in the prior year period.
Excluding COVID diagnostic revenues in both periods, our base business revenues increased 17.6%.
Our base business reflects continued strong performance as the market continues to recover from the COVID pandemic, the impact from which was most acute in Q3 of last year.
The BD Medical segment revenues totaled $2.4 billion and were up 7.7% versus the prior year.
MDS revenues increased 24%, reflecting a strong recovery in the U.S., led by strong growth in catheters and vascular care devices.
Additionally, worldwide revenues included $18 million from COVID vaccination devices.
In MMS, the double-digit increase in our dispensing revenues was more than offset by the expected declines in our infusion solutions.
As you may recall, when the pandemic started, we saw a higher level of demand for infusion pumps and sets globally.
Diabetes Care benefited from an easy comparison to the prior year, the timing of sales and slightly better-than-expected market demand.
Pharm Systems continued to deliver strong growth with revenues up 12%, driven by demand for our prefilled devices.
BD Life Sciences revenues totaled $1.4 billion and were up 43%.
This included the $300 million in COVID diagnostic testing revenues, $212 million related to our BD Veritor system, with the remaining $88 million from BD MAX collection, transport and swabs.
Year-to-date, COVID diagnostic testing revenues were over $1.6 billion.
Despite lower average selling prices, driven in part by geographic mix, we are still on track to deliver on our target of total worldwide revenues of $1.8 billion to $1.9 billion for the fiscal year.
Excluding COVID diagnostic testing revenues, our Life Sciences segment grew revenues 27%, driven by strong performances in both Integrated Diagnostic Solutions and Biosciences.
IDS revenues increased 49%.
Excluding COVID diagnostic testing, IDS revenues increased 27%, driven by strong double-digit performance across specimen management and microbiology.
Biosciences increased 27%, driven by both research and clinical solutions.
We continue to see strong demand for research reagents and instruments as lab activity is returning to normal levels.
We also continue to see steady demand for research reagents globally, fueled by COVID research activities related to vaccines and variants, especially from academic research and biopharma companies.
BD Interventional sales totaled nearly $1.1 billion and were up nearly 35%, reflecting the COVID anniversary impact on elective procedures.
Surgery revenues increased 68%, and Peripheral Intervention increased 32%.
Both businesses saw the greatest recovery in the U.S. and Western Europe, which experienced the greatest impact on elective procedure volumes in the prior year quarter.
We saw sequential improvement in both surgery and peripheral intervention.
However, in the last several weeks, we are seeing some impact from the COVID delta variant on elective surgeries in certain U.S. states.
Urology and Critical Care revenues were up approximately 14%, driven by continued growth in our PureWick and Targeted Temperature Management franchises.
Now turning to our P&L.
As we expected and have communicated, our gross margins this year are being negatively impacted by COVID-related expenses, manufacturing variances and FX headwinds, which are more acute in the second half of the year.
Also, as expected, our gross margin declined sequentially.
Our gross margin was 51.5%.
However, this included a net negative 90 basis point impact from COVID testing and reinvestments.
The 90 basis point impact includes a negative 140 basis point impact from an inventory provision related to COVID testing.
Adjusting for the net impact of COVID testing and reinvestments, our underlying base business gross margin was 52.4%.
On a sequential basis, our base business gross margin declined from our second quarter rate of 53.7% due to three factors: 70 basis points of incremental FX headwinds; 40 basis points from inflationary pressures, including higher raw material costs and inbound freight as these costs roll through our inventory; and 20 basis points of other expenses, including Alaris quality remediation.
Now turning to SSG&A.
Our total SSG&A spending increased 21% on a currency-neutral basis to $1.2 billion or 25.2% of revenues.
As a reminder, in the third quarter of fiscal 2020, we implemented several cost-containment measures in response to the COVID pandemic.
In addition, we are continuing to see higher shipping costs.
This quarter also included higher expenses related to our COVID profit reinvestment initiatives.
As a reminder, the COVID testing reinvestments we made in FY 21 will not reoccur.
Our R&D spending totaled $321 million, an increase of 31.1% on a currency-neutral basis.
The higher R&D reflects the timing of project spending, including a higher spending related to the BD Innovation and Growth Fund.
Our R&D spending was 6.6% of revenues, which is higher than our long-term target of 6%.
On a currency-neutral basis, our operating income increased 26.5% as compared to our revenue growth of 22%.
Our operating margin of 19.8% was slightly below our guidance of below 20%.
The inventory provision related to COVID testing I referenced earlier negatively impacted operating margins by approximately 150 basis points.
Interest and other expenses were essentially flat year-over-year at $98 million.
The adjusted tax rate was 5.8%, lower than we previously expected due to discrete tax items that occurred this quarter.
The lower tax rate essentially offsets the impact from the COVID diagnostic inventory provision in the quarter.
The average diluted share count used to calculate our earnings per share in the quarter was 291.9 million.
We repurchased a total of 4.1 million shares for a total of $1 billion at an average price of approximately $242.
Our adjusted earnings per share increased 24.5% over the prior year to $2.74 on a reported basis and were up 25.9% on a currency-neutral basis.
Now Id like to turn to guidance for the balance of the fiscal year.
Our guidance continues to assume no major widespread hospital restrictions on elective procedures related to the COVID pandemic.
However, we did start to see some impact on elective procedures from the COVID delta variant in the last one to two weeks in certain U.S. states and have assumed some continuation of this in our guidance.
That said, given the continued positive momentum of the base business, we are pleased to be able to cover this and still raise our currency-neutral revenue growth to about 14%, up from our previous range of 10% to 12%.
Our revised revenue range would incorporate a base business currency-neutral growth assumption of 7.5% to 8%.
Further, we reaffirm our previously communicated COVID diagnostic test revenue range of $1.8 billion to $1.9 billion.
We now expect a favorable 250 to 300 basis point impact from currency.
This brings our total reported revenue growth to approximately 16.5% to 17.5%.
For the full year, we now expect our fiscal 2021 adjusted earnings per share to be in the range of $12.85 to $12.95.
This higher guidance reflects the positive base business momentum and a lower tax rate.
These benefits allow us to continue to invest while offsetting the COVID testing inventory provision and lower COVID selling prices.
Next, I want to share with you our expectations for gross operating margins for full year fiscal 21 and provide you with an estimate of the net impact of COVID testing and the related reinvestments of profits on our margins.
We expect our full year adjusted gross margins to be in the range of 53.5% to 54%, and this range includes a net neutral to slight positive impact from COVID testing reinvestments.
We expect our full year adjusted operating margin to be in the range of 23.5% to 24%.
This range includes a 200 basis point contribution from the net impact of COVID testing and reinvestments.
Finally, Id like to address FY 22.
We plan to provide our specific fiscal 2022 guidance on our November earnings call, but we wanted to provide some directional color today.
To give you a sense as to what a floor could look like in fiscal 22, we have taken the following approach: As you know, there is a great deal of uncertainty around the level of COVID testing.
Therefore, we have not modeled any testing revenue beyond the typical flu season.
With the continued momentum we are seeing, we have increased confidence in our ability to deliver strong mid-single-digit revenue growth in fiscal 22 over our fiscal 21 base revenues, which, as a reminder, adjusts for COVID diagnostic testing revenues.
With respect to Alaris, our filing is comprehensive and more complex than most submissions.
As we have previously stated, it is possible that the review could be in line with past pump time lines.
However, as we have also mentioned, it was more likely to take longer for the FDA to review and ultimately grant clearance.
It is inherently difficult to predict clearance timing.
We are not assuming Alaris 510(k) clearance.
It is difficult to predict how things will play out as shipments are only being made under the medical necessity process.
At this time, we have incorporated the assumption that revenues associated with Alaris will be approximately similar to FY 21.
We believe it is prudent and responsible not to definitively predict FDA clearance time lines.
That said, we remain confident in our submission and the process we are undertaking, including working closely with the FDA to obtain comprehensive 510(k) clearance.
We expect to drive base business gross and operating margin expansion.
We expect the operating margins for our base business to expand more than our traditional annual target of at least 50 basis points and translate into double-digit operating income growth.
For reference, we expect our base business operating margins to be between 21.5% to 22% in fiscal 2021.
With these assumptions, we expect an adjusted earnings per share floor of at least $12.
This represents approximately low teens growth over our expected base business earnings in fiscal 2021.
Now before opening it up for Q&A, I want to take a moment to comment on todays announcement of my upcoming retirement.
With our strong base business momentum, our strengthened balance sheet and improved cash flows, which is evident by the increased number of tuck-in acquisitions that weve been doing and the restart of our share buyback program for the first time since 2017, I feel that now is the right time for the transition as the company is well positioned to continue to drive shareholder value and impact the lives of patients around the world.
I look forward to helping to ensure a seamless transition to the new CFO.
And Im very excited about the value-creating opportunities ahead for NewCo and helping to ensure this success as a member of their Board.
And Kristen, I think its -- we should open up the -- operator, open up the line to Q&A.
| q3 adjusted earnings per share $2.74.
q3 revenue $4.9 billion versus refinitiv ibes estimate of $4.51 billion.
expects fy 2021 revenues to grow about 16.5% to 17.0% on a reported basis, an increase from the prior guidance of 12% to 14%.
expects fiscal year 2021 currency-neutral revenue growth of about 14.0% versus its prior guidance of 10% to 12%.
expects fy 2021 adjusted diluted earnings per share to be between $12.85 and $12.95, an increase from the prior guidance of between $12.75 and $12.85.
bd- in recent weeks co saw impact on elective procedures from covid delta variant in some u.s. states & assumes some continuation of this in outlook.
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On the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, Senior VP.
We are extremely pleased with our fourth quarter and full year results, highlighted by significant growth and record-setting financial achievements across the board.
By every measure, 2020 was an outstanding year for M/I Homes.
We nearly doubled our net income, increasing our bottom line by 88% over 2019, resulting in a very strong return on equity of 22%.
A number of factors contributed to our strong returns.
We achieved record revenue of $3 billion, an increase of 22% over 2019.
Record closings of 7,709 homes, 22% better than a year ago.
Very strong gross margins that reached 23% in the fourth quarter and 22.2% for the full year, a 260 basis point improvement over 2019.
And our full year pre-tax income percentage improved 360 basis points to 10.2%.
These results continue the trend of strong growth in revenues and earnings that we've achieved, frankly, since coming out of the recession.
Specifically, since 2012, our revenues have grown at a compounded annual rate of 19%, and our pre-tax income has grown at an even more impressive compound annual rate of 49%.
In addition, the strong performance of our mortgage and title operations as well as improved SG&A operating leverage also contributed to our record earnings.
We also had an outstanding sales year.
New contracts for the year improved by 39% to a record 9,427 homes sold.
Fourth quarter sales continued the strong pace of sales that began in late April.
During the quarter, we sold 2,128 homes, a fourth quarter record and 27% better than a year ago.
Overall, housing demand remains very strong, driven by a number of factors, including historically low mortgage rates, low inventory levels, and increasing number of millennials joining the ranks of homeownership and a shift in buyer preference away from renting in more densely populated areas, in favor of single-family homes.
In addition, a number of other factors also helped drive our strong sales performance.
Among them are the quality of our locations, our ability to execute on many fronts, including successfully managing a rapidly increasing number of online leads and the continued success and growth of our Smart Series line of homes.
With respect to our Smart Series, let me remind you that this is our most affordably priced product offering.
At the end of 2020, our Smart Series was being offered in all 15 of our housing markets, comprised 62 of our total communities or 31% of total and accounted for more than 35% of total company sales.
Our Smart Series communities continue to provide a better monthly sales pace, better margins, faster cycle time and, as a result, better overall returns.
We fully expect the sale of our Smart Series homes to grow further within our markets and likely approach 40%-plus of total M/I sales in the coming year.
And in terms of demand and traffic as we begin 2021, housing conditions continue to be very robust throughout all 15 of our markets.
Our year-end backlog increased 64% in units to 4,389 homes, and the dollar value increased by 74% to an all-time company record of $1.8 billion.
Now I will provide some additional comments on our markets, which we divide into two regions.
The Northern region, which consists of Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit.
And the Southern region, which consists of the balance of our markets: Charlotte, Raleigh, Orlando, Tampa, Sarasota, Houston, Dallas, Austin and San Antonio.
We experienced strong performance in the fourth quarter across both the Northern and Southern regions, with new contracts in the Southern region increasing by 31% for the quarter and 21% in the Northern region.
Our closings or deliveries increased 16% over last year's fourth quarter in the Southern region and increased 19% over last year's fourth quarter in the Northern region.
Our owned and controlled lot position in the Southern region increased by 23% compared to a year ago and increased by 12% in the Northern region compared to last year.
While we are selling through communities somewhat faster than expected, it's important to underscore that we are very well positioned to open new communities in 2021 and well into 2022.
37% of our owned and controlled lots are in the Northern region with the balance, 63%, in the Southern region.
We have a very strong land position.
Companywide, we own and control approximately 40,000 lots, up 19% from last year, which equates to about a four to five year supply.
Perhaps more important, over half of the lots that we own and control or about 57% are controlled under option contracts and not yet on our books.
This gives us significant competitive flexibility to react to changes in demand or individual market conditions.
We had 112 communities in the Southern region at the end of the quarter, down from 129 a year ago.
And we had 90 communities in the Northern region at the end of the quarter, down from 96 a year ago.
As I mentioned, the decline in community count is partially a result of our accelerated sale pace.
But it's also important to recognize that nearly 1/3 of our communities are now offering our Smart Series homes.
And that these communities not only often have more lots in total, but as noted earlier, generally produce a greater sales pace.
Before turning the call over to Phil, let me just make a few concluding comments.
First, our financial condition is very strong with $1.3 billion of equity at December 31 and a book value of $44 per share.
We ended 2020 with a cash balance of $261 million and 0 borrowings under our $500 million unsecured revolving credit facility.
This resulted in a 34% debt-to-cap ratio, down from 38% a year ago and a net debt-to-cap ratio of 23%.
Second, 2020 was a year of unprecedented challenge and severe hardship caused by the global pandemic.
As an industry, we have been very fortunate that our business and the business of our competitors has held up exceptionally well.
As it relates to M/I Homes, I could not be more proud of our company as we came together to safely and carefully provide quality homes to so many.
Finally, as we move forward into 2021, we are very optimistic about our business.
Our backlog is strong.
Our sales pace has been terrific.
We have an excellent land position, and housing conditions, including both demand and traffic continue to be very good.
We have a lot of operating momentum and are positioned for another strong year in 2021.
As far as financial results, new contracts for 2020 increased 39% to 9,427, an all-time record compared to 6,773 for last year.
Our new contracts were up 14% in October, up 36% in November and up 35% in December for a 27% improvement in the quarter compared to last year's fourth quarter.
Our sales pace was 3.5 in the fourth quarter compared to 2.5 in last year's fourth quarter.
And our cancellation rate for this year's fourth quarter was 10%.
We are also pleased to say that our buyer demand continued to be very strong in January.
As to our buyer profile, about 53% of our fourth quarter sales were to first-time buyers compared to 49% a year ago.
In addition, 43% of our fourth quarter sales were inventory homes compared to 44% in last year's fourth quarter.
Our community count was 202 at the end of the year compared to 225 at the end of 2019, and the breakdown by region is 90 in the Northern region and 112 in the Southern region.
During the quarter, we opened 18 new communities while closing 23.
And for the year, we opened 69 new communities and closed 92.
We delivered a record 2,242 homes in the fourth quarter, delivering 50% of our backlog compared to 66% a year ago.
There are a couple of factors that led to this decline in backlog conversion rates when compared to last year.
First, our extremely strong sales and significantly higher backlog levels in the back half of 2020 led to longer times for getting homes started.
Secondly, we have been selling spec homes nearly as fast as we can get them started, which leads to lower spec home inventories, especially those which are closer to completion and could contribute to closings within 90 days.
Revenue increased 22% in the fourth quarter of this year, reaching a fourth quarter record $906 million.
And our average closing price for the fourth quarter was $389,000, a 3% increase when compared to last year's fourth quarter average closing price of $377,000.
Our backlog average sale price is $419,000, up 6% from a year ago, and our backlog average sale price of our Smart Series is $322,000.
We recorded $8.4 million of impairment charges in the fourth quarter compared to $5 million in last year's fourth quarter.
And our operating gross margins, excluding impairments for the fourth quarter, was $24.1 million, up 420 basis points year-over-year and up 120 basis points from 2020's third quarter.
Our higher margins in our Texas operations were a big driver of our margin improvement.
And for the full year of 2020, our operating gross margin was 22.5% versus last year's 19.8%.
Our construction costs increased by about 3% in the fourth quarter, with the biggest impact from lumber.
And our fourth quarter and full year SG&A expenses were 11.7% of revenue, a 40 basis points improvement compared to 2019.
And 2020 is our third consecutive year of improved SG&A efficiency.
Interest expense decreased $3.5 million for the quarter compared to the same period last year and decreased $11.7 million for the 12 months of this year.
The decrease for the year is due to lower outstanding borrowings as well as a lower weighted average borrowing rate.
And interest incurred for the quarter was $10 million compared to $12.5 million a year ago.
And for the year, interest incurred was $40 million versus $49 million a year ago.
We are pleased with our improved returns for the year.
Our pre-tax income was 10.2% versus 6.6% last year, and our return on equity was 22% versus 14% a year ago.
During the fourth quarter, we generated $127 million of EBITDA compared to $75 million in last year's fourth quarter.
And for the full year 2020, we generated $383 million of EBITDA, up 60% over last year.
Despite a significant amount of reinvestment into our business, we generated $168 million of positive cash flow from operations in 2020 compared to $66 million last year.
We have $21 million in capitalized interest on our balance sheet.
This is about 1% of our total assets.
And our effective tax rate was 21% in this year's fourth quarter compared to 19% in last year's fourth quarter.
Our annual effective rate this year was 22.6% compared to 23.2% for 2019.
Our fourth quarter and annual tax rate benefited from energy tax credits from prior years.
And we expect 2021's effective tax rate to be around 24%.
Our earnings per diluted share for the quarter increased 88% to $2.71 per share from $1.44 per share in last year's fourth quarter and increased 83% for the year to $8.23 from $4.48 per share last year.
Now Derek Klutch will address our mortgage company results.
Our mortgage and title operations achieved record fourth quarter results in 2020, including record pre-tax income of $14.8 million, up $8.4 million or 131% over 2019.
And record revenue of $25.6 million, which was up 62% over last year due to a higher volume of loans closed and sold along with significantly higher pricing margins.
We also set a record for the number of loans originated.
For the year, pre-tax income was $50.5 million and revenue was $87 million, both all-time records.
The loan-to-value on our first mortgages for the fourth quarter was 83% in 2020, up from 2019's fourth quarter of 82%.
74% of the loans closed in the fourth quarter were conventional and 26% were FHA/VA compared to 76% and 24%, respectively, for 2019's same period.
Our average mortgage amount increased to $319,000 in 2020's fourth quarter compared to $303,000 in 2019.
The number of loans originated increased 25% from 1,398 to an all-time quarterly record of 1,746, and the volume of loans sold increased by 15%.
Our borrower profile remains solid with an average down payment of over 15%.
For the quarter, the average borrower credit score on mortgages originated was 745, a slight decline from 747 last quarter.
Our mortgage operation captured over 85% of our business in the fourth quarter, an increase from 84% one year ago.
We maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to sale to investors.
At December 31, we had a total of $226 million outstanding under these facilities, which expire in May and October this year.
Due to our typical high-volume of fourth quarter closings, we include a seasonal increase in our warehouse facilities, which provides temporary availability of $275 million through February 4, 2021.
After which time, total availability returns to $215 million.
Both facilities are typical 364-day mortgage warehouse lines that we extend annually.
As far as the balance sheet, total homebuilding inventory at 12/31/20 was $1.9 billion, an increase of $147 million over December '19 levels.
During 2020, we spent $415 million on land purchases and $318 million on land development for total land spending of $733 million, which was up from $600 million in 2019.
In 2020, we purchased about 11,500 lots, of which 77% were raw with about 150 average lots per community.
In 2019, we purchased about 7,500 lots, of which 63% were raw with about 100 average lots per community.
In general, most of our Smart Series communities are raw land deals and have above-average company pace and margin.
We have a strong land position at 12/31/20, controlling almost 40,000 lots, up 19% from a year ago.
And of the lots controlled, 43% are owned.
Based on 2020's record closings, this is about a five year supply of inventory with just over two years owned.
And at the end of the year, we had 225 completed inventory homes, about one per community and 1,131 total inventory homes.
At 12/31/19, we had 668 completed inventory homes and 1,459 total inventory homes.
We'll now open the call for any questions or comments.
| q4 earnings per share $2.71.
homes delivered increased 17% to 2,242 in quarter.
backlog units increased 64% to 4,389 in quarter.
|
Certain risk factors inherent in our business are set forth in filings with the SEC, including our most recent 10-K and subsequent filings.
We caution you not to place undue reliance on these statements.
Some of the comments may refer to non-GAAP financial measures, such as adjusted net revenue, adjusted operating margin and adjusted earnings per share, which we believe are more reflective of our ongoing performance.
Joining me on the call are Jeff Sloan, CEO; Cameron Bready, president and COO; and Paul Todd, senior executive vice president and CFO.
We entered 2020 with our business as healthy as it has ever been during my tenure at Global Payments.
And our performance in the first quarter prior to the impact of COVID-19 reflected that strength, the soundness of our strategy and the consistency of our execution.
We believe that these underlying trends will position Global Payments to resume its track record of market-leading growth when the worldwide economy inevitably returns.
The company's results in January, February and through the first two weeks of March exceeded our internal expectations, excluding the impact from COVID-19 in our Asia Pacific region.
However, starting in mid-March, the virus began to impact the company's results significantly in North America and Europe as governments took actions to encourage social distancing and implement shelter-in-place directives.
The deterioration accelerated toward the end of March as the number of countries and localities adopting restrictive measures meaningfully increased.
Notwithstanding the impact of the virus, we were successful in winning meaningful new business in the first quarter.
These competitive takeaways highlight that the underlying strength of our pure-play payments model is being recognized by some of the most complex and sophisticated customers.
They also provide us with continued confidence in further sustained share gains as the partner of choice at scale for cutting-edge companies.
First, we are delighted to announce that Truist Financial Corporation has selected Global Payments to be its provider of issuer processing services for its combined businesses.
Truist is the sixth largest commercial bank in the United States serving approximately 12 million consumer households and a full range of business clients with leading market share in many of the most attractive high-growth markets in the country.
Importantly, Truist has a bold vision to meaningfully increase investment in innovative technology and to create distinctive client experiences.
Truist's strategy to transform its payments businesses via technology aligns perfectly with our TSYS issuer business and provides further validation of our market-leading technologies, product services and the quality and competitiveness of our team members.
Our issuer business has a strong track record of innovation to the benefit of our customers.
Contactless is a great example, and we have seen near 30% year-on-year growth in recent periods.
We also are partnering with the card brands and digital wallet providers to further accelerate contactless growth in light of the virus.
In addition, TSYS will be the first issuer technology partner to offer Visa's new installment solution at the point of sale as an enhancement to our existing capabilities.
Second, we are very pleased to announce that Synovus Financial Corp.
has selected Global Payments to be its new exclusive merchant acquiring partner.
Synovus is a leading regional commercial bank with 299 branches in the southeast region of the United States.
Our new partnership with Synovus confirms the wisdom of the Global Payments and TSYS merger.
We do not believe that either company individually would have been positioned to win this business.
We already launched our partnership with Synovus on April 1.
Third, we continue to notch significant sales wins in our technology-enabled businesses during the quarter.
Our partner software business, which we recently rebranded as Global Payments Integrated, launched 30 new partners in the first few months of 2020.
We are tracking well ahead of where we were at this time in 2019, which was a year that marked a record for new partner production.
Cameron will provide more detail shortly.
We also saw significant new business successes across our own software portfolio.
For example, we are delighted to announce new wins with Inspire Brands and Focus Brands, including Auntie Anne's, CKE Restaurants and Arby's.
In addition, we continue to make meaningful progress with the rollout of our Xenial QSR cloud-based SaaS point-of-sale solution to new and existing customers, such as Long John Silver's and Dutch Bros.
We have also begun testing this solution for a potential placement throughout the restaurant brands international family of more than 26,000 global restaurants.
These wins contribute to Xenial achieving record new bookings for its QSR business this quarter.
It is worth highlighting that Xenial provides enterprise QSR customers with cutting-edge software, digital wallets, drive-through technologies, mobile-ordering capabilities and integrations with leading delivery partners through our omni product.
In fact, for the first quarter, the number of omni mobile and online orders processed for Xenial customers increased over 50% sequentially as QSRs shifted toward online fulfillment.
Fourth and finally, we continue to make progress with our e-commerce and omnichannel businesses, which generated impressive new sales wins, including a large multinational telecommunications carrier for markets outside the United States, one of the largest multinational package delivery companies in Asia and a leading worldwide food services delivery business.
These businesses produced the best financial result for us in the quarter, highlighting our leading position in worldwide e-commerce and omnichannel acceptance.
And that trend has continued into April with absolute growth year over year in a number of virtual markets.
During this challenging time, our top priority remains the health and safety of our team members, customers, partners and the communities in which we live and work.
It has allowed our business and operations to continue to perform normally.
While these are difficult times, we are well-positioned given the strength of our business model and the dedication and focus of our employees.
I am especially proud of our Netspend business, which is facilitating the rapid distribution of much needed funds under the CARES Act.
We believe that Netspend was one of the first companies to provide stimulus funds to customers ahead of both financial technology peers and financial institutions.
Those critical funds were made available on average four days before most of the other providers in the market and ahead of its normal two days faster operating model for typical paychecks because Netspend has the end-to-end infrastructure already in place to process government ACH files upon receipt.
During April, we processed over 0.5 million deposits accounting for over $1.2 billion in stimulus payments to American consumers dispersed by the IRS.
In the coming weeks, we expect additional governmental programs to fund, and a number of our partners will assist consumers who receive paper checks by enabling deposits into existing or new Netspend accounts to our mobile app or directly onto their phones virtually via our Samsung partnership.
As just one example, together with Mastercard, we have helped facilitate 7-Eleven's new Transact prepaid product to enable under and unbanked individuals and families to receive much needed funds faster than a paper check through 7-Eleven stores.
Our powerful combination with TSYS provides us with multiple levers to mitigate headwinds that we may face from the pandemic.
We made significant strides on our integration this quarter, and we continue to anticipate delivering at least $125 million in annual run rate revenue synergies and at least $350 million in annual run rate expense synergies within three years of the merger close.
In addition to the merger synergies, we have now implemented additional cost initiatives to help address the anticipated impact of COVID-19 on our business.
We expect these actions to deliver at least an incremental $400 million in annualized savings over the next 12 months.
These amounts represent a more than doubling of the three-year annualized merger expense synergy benefit in just one year.
We have already initiated these expense actions in a series of ways beginning early in the second quarter.
As you will hear from Paul, our liquidity, free cash flow and balance sheet are healthy.
These efforts are intended to best position Global Payments to weather near-term disruptions and emerge from the crisis in the same strong position with which we entered it.
And we continue to invest in our businesses despite the impact of the virus on the worldwide economy.
Our long-term plans to grow our technology-enabled businesses, expand our omnichannel efforts and target the most attractive markets have not changed.
The uniqueness of our business mix, which is dramatically different today than it was during the last recession, has been a source of strength during the current crisis.
I would also like to express my sincere appreciation to all of our team members who have provided exemplary support to our customers during this challenging time.
As Jeff mentioned, even with the vast majority of our nearly 24,000 team members worldwide working from home since mid-March, our business has continued to operate seamlessly.
For the relatively few team members whose job function requires them to be in one of our offices, we have implemented appropriate social distancing practices, made antibacterial hand sanitizers, masks widely available and increased the frequency of cleaning of key areas.
Throughout this crisis, we have continued to put the health and well-being of our team members first while also supporting our customers and safeguarding our business.
Over the past several years, we have made significant investments in modernizing the operating environments and technology that support day-to-day execution in our business.
The largely cloud-based systems and collaboration tools we use globally facilitated a smooth transition of our operations to business continuity mode with significant utilization of work-from-home arrangements.
This has allowed us to sustain outstanding service to our customers while also enabling continued strong execution of our pure-play payment strategy as evidenced by the significant new wins in the quarter.
In our merchant solutions business, Global Payments Integrated is off to a record start to the year in terms of new partner wins and is already seeing benefits of our merger with TSYS.
We recently signed a new partnership agreement with a large multinational software provider based on our ability to deliver the Genius POS solution together with our best-in-class ecosystem while also enabling its customers to support electronic tips by the Netspend card -- PayCard product.
Global Payments was uniquely positioned to provide this comprehensive solution, which reflects the powerful combination of highly complementary capabilities brought together by our merger with TSYS.
Our strategy of delivering the full value stack in key vertical markets continues to produce deeper, richer and more value-added relationships with our customers.
In addition to the Xenial highlights that Jeff already provided, our higher education business had its strongest ever bookings performance in March, and AdvancedMD saw bookings increased 35% year on year for the first quarter largely due to our ability to deliver cloud-based technology solutions, including telemedicine capabilities to physician practices throughout the U.S. In our Heartland business, we delivered outstanding growth of over 30% in online payments during the first quarter as we continued to see strong customer demand for our omnichannel solutions.
Notably, this growth accelerated in March as we installed three times as many new e-commerce merchants as anticipated largely due to significant demand for online ordering capabilities.
We also began deploying vital POS through our Heartland distribution channel in early March, exactly as we said we would, and we remain confident in our ability to execute on our sales plan for this distinctive solution.
Further, we now plan to deliver vital POS to Canada later this quarter, an acceleration from our original target of a third-quarter launch.
In Canada, our new partnership with Desjardins is off to a terrific start.
Merchant migration and lead referrals from all branches commenced at the beginning of March, and we received nearly 1,500 referrals before the current disruption.
Our early successes reinforce our confidence in this new partnership that combines Global Payments' differentiated technologies and payments capabilities with Desjardins' market-leading position in Québec.
In Europe, we successfully launched our social commerce solution in key markets, enabling our customers to accept payments through social networks.
In the last few weeks, we launched this product with a new leading national veterinary chain and a high-end restaurant group in the U.K. and also signed Hyundai, which is currently deploying the solution to all of its dealerships in the region.
by enabling a leading building society with call center payment solutions for work-from-home environments.
We successfully executed a new acquiring contract with this customer and distributed software to its call center staff and mortgage brokers from start to finish in less than three days.
And in Asia, we saw strong new sales performance, particularly in our e-commerce business despite COVID-19 gripping that region for the majority of the quarter.
We have enabled several of our large retail customers to accelerate their shift to e-commerce and signed new e-commerce partnerships with two large multinational health and wellness companies.
Turning to our issuer business, in addition to the Truist win, we finalized an agreement with Scotiabank to convert its Canadian consumer credit card and loan accounts.
And we have executed a multiyear renewal agreement for its North American consumer and commercial credit card business.
Additionally, we successfully signed a new multiyear processing and managed services agreement with U.K.-based Yaya, encompassing their recently acquired credit card portfolios and extended several other existing client agreements, including with Barclaycard and Bank of Montreal.
We also converted over 300,000 accounts during the period and have a robust pipeline with implementation stage throughout the year and into 2021.
Delivering superior support to our customers is a key pillar of our business model, and we have continued to do so in this unprecedented environment without exception.
Throughout this pandemic, we remain focused on supporting customers across all of our businesses, including our small to medium-sized merchant customers in the markets most impacted by the virus.
We have worked tirelessly to assist these customers by enabling new capabilities to support their business operations, including rapidly equipping merchants who did not previously sell online with a full omni solution, particularly in the restaurant vertical market.
In fact, in North America alone, we have added over 1,800 new restaurants to our online ordering platform since mid-March.
Likewise, we have been facilitating social distancing and no-contact commerce by enabling mobile pay and contactless and mobile wallet acceptance at merchants who had not previously accepted these form factors.
As a worldwide leader in NFC deployment, we rapidly enabled contactless acceptance for our merchant customers, which also positions us well for the future as we expect the secular shift from cash to electronic forms of payments to accelerate post the pandemic.
We have also provided customers and markets worldwide with virtual terminals to allow them to accept orders over the phone.
For healthcare customers at AdvancedMD, we've enabled nearly 1,500 practices with telemedicine capabilities, delivering the technology for more than 80,000 virtual visits in the last two weeks of March alone.
In addition to these efforts, we are providing economic relief in a variety of forms to our customers, including waiving certain fees such as SaaS and POS payments, as well as online ordering fees.
We have also granted free trial or reduced fees for newly enabled services and established a charitable program targeted at our most vulnerable merchant customers that provides preloaded pay cards that can be used to support their staff at no cost.
Further, we are waiving setup fees in the first 90 days of subscription fees for our virtual card add-on solution to brick-and-mortar gift card customers and have extended free trial period of our analytics and customer engagement platform that we are deploying in our Heartland business.
to facilitate payroll protection program loans for customers across our distribution platforms.
To date, our lending partner has placed thousands of PPP loans for our customers.
Our issuer business has also maintained strong operational stability in its call centers as we work to support our issuer clients during a period of very high call volumes.
Additionally, we are working with issuers to enable cardholder and small business relief programs, including supporting the delivery of a range of payment options as consumers and businesses seek predictable ways to manage budgets and expenses during this challenging time.
While we continue to manage through this situation with a difficult relentless focus on execution you have come to expect from Global Payments, we also have an eye on the future and are working to ensure the business is well-positioned for the inevitable recovery.
We are revamping sales and marketing strategies to align with our expectations for market reopenings around the globe and to emphasize those solutions most in demand.
In the U.S., we are also aggressively recruiting and onboarding new sales professionals into our Heartland channel, which we can do in a cost-effective manner given our model.
And while we are reducing expenses where appropriate, we continue to invest in products and capabilities that will further differentiate Global Payments in the future.
There is no question the competitive environment will look different on the other side of this crisis, and we are poised to benefit in the long term due to the distinctiveness of our technology-enabled pure-play payment strategy.
I want to reiterate how pleased we are with the way in which our team members have responded during this crucial time to ensure business continuity, deliver the highest standard of support and execution for our customers and allow for us to achieve strong financial performance.
For the first quarter, total company adjusted net revenue was $1.73 billion, reflecting growth of 108% over 2019 and ahead of our preliminary expectations on April 6.
On a combined basis, our revenue increased slightly from the prior year, including a roughly 50-basis-point headwind from the impact of negative foreign currency exchange rates.
Adjusted operating margins expanded an impressive 300 basis points to 39% for the quarter and well above the 250 basis point annual expansion target we mentioned on our last call.
As a result, we were able to deliver strong adjusted earnings-per-share growth of 18% to $1.58, which also includes a roughly 100-basis-point impact from adverse foreign currency exchange rate movements.
This first-quarter bottom-line performance was better than anticipated when we previewed our first quarter on April 6.
Notably, from the start of the quarter through the first two weeks of March, our performance was exceeding our growth expectations compared to last year, excluding the impact of the virus we were already experiencing in the Asia Pacific region.
Our merchant solutions business drove the outperformance while results for our issuer and business consumer segments were tracking relatively in line with our expectations through that period.
However, in the second half of March, the spread of COVID-19 began to impact our results meaningfully in North America and Europe in addition to Asia Pacific.
As Jeff and Cameron both mentioned, it was a dynamic quarter for all of our businesses, and I want to provide some color on each segment.
First, adjusted net revenue in merchant solutions increased 2% on a combined basis to $1.1 billion for the first quarter, which includes nearly a 100-basis-point headwind from currency while adjusted operating margin improved 180 basis points to 45.4%.
Before the spread of COVID-19, we were experiencing low double-digit adjusted net revenue growth in this segment, excluding the impact of COVID-19 in Asia Pacific, which negatively impacted results consistent with the $15 million drag we had previously disclosed.
This strength was largely attributable to our technology-enabled businesses, including Global Payments Integrated, which was tracking toward mid-teens growth for the lion's share of the quarter.
This business continues to benefit from record new wins, strong same-store sales and low attrition rates driven by our ability to provide a truly integrated ecosystem across more vertical markets and more geographies than our peers.
We also maintained our consistent track record of strong growth in our vertical market software portfolio ahead of the COVID-19 impact.
As Jeff and Cameron indicated, booking trends across the portfolio remained strong with record achievements at several of our businesses during the period.
Our relationship-led businesses were also seeing good momentum outside of Asia Pacific before the spread of COVID-19.
Notably, in North America, adjusted net revenue was tracking up low double digits ahead of our expectations, and our European businesses were delivering high single-digit growth.
For the full quarter, as in-store volumes came under pressure, our e-commerce and omnichannel businesses served as a partial hedge.
As Cameron noted, we delivered strong growth in online sales at Heartland during the quarter while in Europe, we saw high single-digit growth in the U.K. and roughly 20% growth in Spain as more spending moved online.
E-comm omni revenue was also up double digits in APAC during the first quarter.
Moving to issuer solutions, we delivered a record $442 million in adjusted net revenue for the first quarter, representing growth of 150 basis points on a constant-currency basis.
As I mentioned previously, this business was tracking in line with our expectations through early March for roughly 3% growth with underlying trends to that point remaining consistent with our long-term outlook for mid-single-digit growth.
Adjusted segment operating margin expanded a very strong 430 basis points to 39.5% as we continue to drive efficiencies and make the pivot toward the cloud in this business.
We also added over 13 million accounts on file this quarter, producing yet another record.
Transaction growth was in the mid-single digits.
We experienced strong volumes in managed services as cardholders ramped up the frequency of their interactions with trusted financial institutions in the quarter.
Finally, our business and consumer solutions segment delivered adjusted net revenue of $204 million, down nearly 7% from the prior year, primarily due to headwinds from the CFPB prepaid rule and seasonal tax impacts.
Absent that, adjusted net revenue was roughly flat for the quarter, marking a continuation of the underlying trends from the fourth quarter of 2019.
Adjusted operating margin for the quarter for this segment was 25.7% and was again better than our expectation.
We continue to be pleased by the performance of our DDA products with account growth of over 30% from the prior-year period.
As Jeff mentioned, we saw a substantial benefit in early April from the processing of stimulus payments in this segment.
In sum, we delivered solid operating performance across all our segments through outstanding execution, and we also benefited from the early and rapid cost actions we took to position our company given the current environment and for the eventual recovery.
As it relates to cost actions, as Jeff highlighted, we have already implemented expense initiatives that will translate to roughly $100 million per quarter in incremental cost benefits for the balance of 2020.
Our focus has been to streamline discretionary spend that includes cuts to G&E and marketing budgets, reductions in executive pay and other salary initiatives and additional targeted actions across the organization.
We have also been intentional about these measures to allow our strong growth momentum to continue when a more normalized operating environment resumes.
From a cash flow standpoint for the quarter, we generated adjusted free cash flow of approximately $400 million, which was in line with our expectation.
We also exited Q1 with roughly $1.3 billion of available cash, including $640 million in excess of our operating cash needs.
This excess cash increased approximately $300 million from year-end.
We have adjusted our capital spending outlook for the year from the high $500 million to low $600 million range we talked about on our last call and now expect to be in the $400 million to $500 million range or roughly $100 million less for the year.
We invested $105 million of cash in the first quarter that was focused on new products and technologies to ensure we continue to build upon our leading portfolio of pure-play payment solutions, which is consistent with our newly revised estimate.
Earlier in the quarter, we finished the buyback activity started in the fourth quarter, purchasing 2.1 million of our shares for approximately $400 million.
We did, however, suspend repurchases in early March.
We ended the quarter with a leverage position of roughly 2.45 times on a net-debt basis or roughly 2.75 times on a gross basis consistent with year-end.
Our strong investment-grade balance sheet, in combination with our stable free cash flow generation, provides us with ample capital and financial flexibility to navigate through this challenging time.
With $2.9 billion of liquidity, including our available cash and undrawn revolver and no significant required debt repayments until our maturity in April 2021, we are truly in a position of financial strength.
We will continue to monitor and leverage market opportunities to maintain that strong position over the long term.
Although trends are dynamic, we have seen some stabilization and improvement in late April from the lower levels we have seen several weeks ago.
Specifically, volume trends in our merchant business have held fairly steady and begun to recover modestly, led by our technology-enabled businesses.
In addition, markets that have recently reopened, such as China and in Central Europe, have seen similar stabilization and improvement trends in domestic volumes.
Our issuer solutions business remains resilient as bundled pricing and managed services volumes are helping to mitigate the impact of transaction level declines.
Our international issuing business also remains a bright spot with absolute growth in the low single digits despite the macroeconomic environment.
These trends have been offset in part by what we are seeing in our commercial card area due to limited travel spending by corporations and governments.
Similar to our experience in merchants, issuing trends have stabilized and recovered somewhat in selected verticals over the last several weeks.
Finally, business and consumer solutions has benefited from processing substantial stimulus funds, and we do expect to recapture some of the lost revenue from last quarter related to the extended tax deadline over the next several months.
Additionally, April is the first month where we do not have CFPB headwinds for comparison.
And while we are not providing guidance at this time, I think it's worth parsing our business in light of the current environment.
First, we have several businesses that have been relatively more resilient through this period.
This includes both our issuer and business consumer segments, which combined account for roughly 35% of our adjusted net revenue.
Additionally, roughly half of merchant solutions adjusted net revenue has been generally less economically sensitive.
This includes our omnichannel business, Global Payments Integrated and certain vertical market solutions like Xenial, AMD and our university business.
So two-thirds of our businesses have been somewhat insulated from fluctuating consumer spending trends.
With that said, it is difficult to predict when and how the current environment will change.
However, we are confident we will emerge stronger due to the significant cost initiatives being implemented to protect our earnings, cash flows and investment-grade balance sheet.
All in all, we are pleased with how we are positioned given the unprecedented times we are operating in as a company.
Our recent significant wins highlight the wisdom of our partnership with TSYS and the strength of our combined business.
We have already taken and will continue to take actions to best position our company for success as the worldwide economy returns to growth.
In the interim, we are fortunate to be confronting this crisis from a position of strength.
The competitive landscape will no doubt change as a result of this crisis, and we believe that we will capitalize on those changes and continue to gain share organically and through further consolidation.
We believe that the virus will continue to accelerate the ongoing shift toward further digitization of payments and the movement toward online commerce globally.
We are also grateful for our market-leading position in software across multiple vertical markets, highlighting the diversity of our business banks.
We believe that we will continue to be the beneficiary of trends that will be further catalyzed by COVID-19.
While we are not immune to the current economic climate, we are as well-positioned as we have ever been with a balanced portfolio in payments and vertical market software at scale.
We expect our strategy of leading with software owned and partner with an emphasis on premier omnichannel solutions in the most attractive markets will serve us well into the future.
[Operator instructions] Operator, we will now go to questions.
| compname reports q1 adj. earnings per share of $1.58.
q1 adjusted earnings per share $1.58.
implemented cost initiatives that co expects to deliver at least an incremental $400 million of savings over next 12 months.
truist financial has selected global payments to be its provider of issuer processing services for its combined business.
remain on track to achieve at least $125 million in annual run-rate revenue synergies from tsys merger.
remain on track to achieve at least $350 million in annual run-rate expense synergies from tsys merger.
|
In addition, today's call includes discussions of certain non-GAAP financial measures.
Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investors section of the company's website at crowncastle.com.
As you saw from our results yesterday, we remained on track to generate an anticipated 12% growth in AFFO per share this year.
We expect to be at the high end of our long-term growth target in 2022, with 8% AFFO per share growth.
Being driven in large part by our expectation at tower core leasing activity will be approximately 50% higher in 2022 than our trailing 5-year average.
And we increased our annualized common stock dividend by approximately 11% to $5.88 per share, marking the second consecutive year of dividend growth that meaningfully exceeds our long-term target.
Given that our dividend payout ratio has remained largely unchanged since 2014, our dividend remains the best indicator of how we are performing both financially and operationally.
Our significant out-performance in 2021 combined with our forecast for 2022 enabled us to raise our dividend 11%, well above our stated goal for the second year in a row.
In essence, we've achieved three years of targeted dividend growth in just two years.
Since we established our common stock dividend in 2014, we have grown dividends per share at a compounded annual growth rate of 9% with growth ranging from 7% to 11% in each year.
We aim to provide profitable solutions to connect communities and people.
And our carbon-neutral goal builds on our commitments to deploy our strategy sustainably.
Our business model is inherently sustainable, shared solutions limit infrastructure in the communities in which we operate and minimize the use of natural resources.
Further to the point, our core value proposition, since we began operating more than 25 years ago has centered around our ability to provide our customers with access to mission-critical infrastructure at a lower cost, because we can share that infrastructure across multiple operators.
In addition, our solutions help address societal challenges like the digital divide in under-served communities by advancing access to education and technology.
To-date, we have invested nearly $10 billion in towers, small cells and fiber assets located in low-income areas.
As a way of quantifying how our business model minimizes the use of natural resources, our business in it's just one ton of CO2 per $1 billion of enterprise value, which is 90 times more efficient than the average company in the S&P 500 based on industry estimates.
Although we are proud of our limited environmental impact, we are focused on making even more strides by reducing our energy consumption and sourcing renewable energy to help us achieve our goal of carbon neutrality by 2025.
We are excited about this announcement and look forward to continuing to find ways to help our communities and planet while driving significant returns to our shareholders.
Turning back to our 2022 outlook.
We are benefiting from record levels of activity in our tower business with our customers upgrading thousands of existing cell sites as a part of their first phase of 5G build-out.
Adding to the opportunity, we are seeing the highest level of tower co-location activity in our history with DISH building a nationwide 5G network from scratch.
I believe our strategy and unmatched portfolio of more than 40,000 towers and approximately 80,000 route miles of fiber concentrated in the top U.S. market, have positioned Crown Castle to capitalize both on the current environment and to grow our cash flows and dividends per share in the near term and for years to come.
We are focused on generating this growth while delivering the highest risk adjusted returns for our shareholders.
By investing in shared infrastructure assets that lower the implementation and operating costs for our customers while generating solid returns for our shareholders.
To execute on this strategy, we are providing our customers with access to our 40,000 towers and 80,000 route miles of fiber help them build out their 5G wireless networks.
We are investing in new small cell and fiber assets that meet our disciplined and rigorous underwriting standards to expand our long-term addressable market.
And we are identifying where wireless networks are going and investing early to position the company to capitalize on future opportunities, as we have done with small cells, edge computing and CBRS.
One of the core principles underpinning our strategy is to focus on the U.S. market, because we believe that represents the best market in the world for wireless infrastructure ownership, since it has the most attractive growth profile and the lowest risk.
And we believe this dynamic of higher growth and lower risk will continue into the future, which is why we expect our U.S. based strategy will drive significant returns for shareholders.
With that in mind, we have invested nearly $40 billion in towers, small cells and fiber assets in the top market that are all foundational for the development of future 5G network.
We believe our unique strategy, portfolio of the infrastructure assets and proactive identification of future opportunities provide a platform for sustained long-term dividend growth as wireless network architecture evolves and our customers' priorities shift over time.
Today, our customers are primarily focusing their investment on macro sites as towers remain the most cost-effective way to deploy spectrum at scale and established broad network coverage.
With our high quality towers concentrated in the top markets, we are clearly benefiting from this focus with an expected 6% organic growth for our Tower segment in 2021 and an expected 20% increase in tower core leasing activity next year when compared to these 2021 levels.
With history as a guide, we believe the deployment of additional spectrum on existing cell sites will not be enough to keep pace with the persistent 30% plus annual growth in mobile data traffic.
As a result, we expect cell site densification to remain a critical tool for carriers to respond to the continued growth in mobile data demand as it enables our customers to get the most out of their spectrum assets by reusing the spectrum over shorter and shorter distances.
When the current cell site upgrade phase shift to densification phase, we believe the comprehensive offering of towers, small cells and fiber will be critical for our customers and provide us with an opportunity to further extend the runway of growth in our business.
While we expect the densification phase of build out will drive additional leasing on our tower assets for years to come, we believe small cells will play an even greater role as the coverage area of cell sites will continue to shrink due to the density of people and therefore the density of wireless data demand.
With more than 80,000 small cells on air or committed in our backlog, high capacity fiber assets and the vast majority of the top 30 markets in the U.S. and industry-leading capabilities, we believe we are well positioned to deliver value to our customers as their priorities evolve, driving meaningful growth in our small cell business.
Bigger picture, when I consider the durability of the underlying demand trends we see in the U.S., how well we are positioned to consistently deliver growth through all phases of the 5G build out with significant potential upside in our comprehensive asset base as wireless networks continue to evolve.
Our proven ability to proactively identify where wireless network architecture is heading and to be an early investor in solutions to help future networks, the deliberate decisions we have made to reduce risks associated with our strategy and our history of steady execution.
I believe that Crown Castle stands out as a unique investment, that will generate compelling returns over time.
In the near term, as I mentioned before, we expect to deliver outsized AFFO per share growth of 12% in 2021.
We expect to generate 8% growth in AFFO per share in 2022 at the high end of our long-term growth target and supported by an expected 20% increase in tower core leasing activity and we increased our common stock dividend by 11% for the second consecutive year.
Longer term, we believe Crown Castle provides an exciting opportunity for shareholders to invest in the development of 5G in the U.S., which we believe is the best market for communications infrastructure ownership.
Importantly, we provide access to such attractive industry dynamics, while providing a compelling total return opportunity, comprised of a high-quality dividend that currently yields 3.5% with expected growth in that dividend of 7% to 8% annually.
As Jay discussed, we delivered another great quarter of results in the third quarter.
We remained on track to grow AFFO per share by an anticipated 12% this year.
We expect to be at the high end of our growth target in 2022 with 8% AFFO per share growth and we increased our quarterly common stock dividend by 11% for the second consecutive year, meaningfully above our long-term target growth rate while maintaining a consistent payout ratio.
We are excited about the outsized growth we are experiencing in the early stages of 5G.
And we continue to believe our portfolio of towers, small cells and fiber provides unmatched exposure to what we believe will be a decade-long build out by our customers.
Our third quarter results were highlighted by 8% growth in site rental revenues, 11% growth in adjusted EBITDA and 13% growth in AFFO per share when compared to the same period last year.
Record tower activity level supported this strong growth, generating organic tower growth of 6.3% and higher services contribution when compared to the same period in 2020.
Looking at our full-year outlook for 2021 and 2022 on Slide 5.
We are maintaining our 2021 outlook with site rental revenues, adjusted EBITDA and AFFO growing 7%, 11% and 14% respectively.
For full year 2022, we expect continuing investments in 5G to drive another very good year for us, with 5% site rental revenue growth, 6% growth in adjusted EBITDA and 8% AFFO growth.
Turning now to Slide 6.
The full year 2022 outlook includes an expected organic contribution to Site Rental revenues of $245 million to $285 million or 5%, consisting of approximately 5.5% growth from towers, 5% growth from small cells and 3% growth from fiber solutions.
To address feedback we received to provide more detail around our expectations for future leasing -- for the leasing activity, we have introduced a new concept of core leasing activity, which excludes the impact of changes in prepaid rent amortization.
Core leasing activity is more indicative of current period activity, whereas changes in prepaid rent amortization also include activity from prior periods as prepaid rent received in those prior periods eventually amortizes the zero over the life of the associated contract.
Although we have as consistently provided disclosure on prepaid rent amortization by segment in our supplemental earnings materials.
With that definition in mind, we expect 2022 core leasing activity of $340 million at the midpoint or $350 million inclusive of the year-over-year change in prepaid rent amortization.
The 2022 expected core leasing activity includes a $160 million in towers, representing a 20% increase when compared to our 2021 outlook and an approximately 50% increase when compared to our 5-year trailing average.
$30 million in small cells compared to $45 million in $2021 and a $150 million in fiber solutions compared to a $165 million expected this year.
Turning to Slide 7.
You can see, we expect approximately 90% of the Organic Site Rental Revenue growth to flow through the AFFO growth, highlighting the strong operating leverage in our business.
As we discussed in July, we expect to deploy an additional 5,000 small cells in 2022, which is the same number we expect to build in 2021.
We expect a discretionary capex to be approximately $1.1 billion to $1.2 billion in 2022, including approximately $300 million for towers and $800 million to $900 million for fiber, similar to what we expect in 2021.
This translates to $700 million to $800 million of net capex when factoring in $400 million of prepaid rent contribution we expect to receive in 2022.
The full year 2022 outlook for capex represents an expected 30% reduction in discretionary capex for our fiber segment relative to full year 2022 when we deployed approximately 10,000 small cells.
Based on the expected growth in cash flows, for full year 2022 and consistent with our investment grade credit profile, we expect to fund our discretionary capex with free cash flow and incremental debt capacity without the need for new equity for the fourth consecutive year.
In addition, we believe our business and balance sheet are well positioned to support consistent AFFO growth through various economic cycles, including during periods of higher inflation and interest rates.
Our cost structure is largely fixed in nature as you can see, with nearly 90% of the full year 2022 expected Organic Site Rental Revenue growth to flow through to AFFO growth as I referenced earlier.
And we have taken steps to further strengthen our investment grade balance sheet, that now has more than 90% fixed rate debt, a weighted average maturity of more than 9 years and a weighted average interest rate of 3.1%.
In conclusion, we are excited about the outsized growth we are generating as a result of the initial 5G build out by our customers, which is translating into back-to-back years of 11% growth in our quarterly common stock dividend.
This dividend currently equates to an approximate 3.5% yield, which we believe is a compelling valuation given our expectation of growing the dividend 7% to 8% per year, combined with our high quality, predictable and stable cash flows.
Looking further out, we believe our unique ability to offer towers, small cells and fiber solutions, which are all integral components of communications networks provides significant optionality to capitalize on the long-term positive industry trends of network improvements and densification and gives us the best opportunity to consistently deliver growth as wireless network architecture continues to evolve and our customers' priorities shift over time.
With that, April, I'd like to open the call to questions.
| compname reports third quarter 2021 results, provides outlook for full year 2022 and announces 11% increase to common stock dividend.
|
I am Pat Ackerman, Senior Vice President, Investor Relations, Corporate Responsibility and Sustainability and our Treasurer.
Also as a courtesy to others in the question queue, please limit yourself to one question and one follow-up return.
If you have multiple questions, please rejoin the queue.
Our global A.O. Smith team delivered first quarter earnings per share of $0.60 on a 21% increase in sales, demonstrating solid execution, despite pandemic and weather-related challenges in our supply chain and operations, along with rapidly rising material costs.
I greatly appreciate the diligence of our team to keep each other healthy and safe.
Outside of India, where COVID-19 cases have recently surged, I am pleased that we have experienced steady improvement in this area since the beginning of the year.
North America water treatment grew 12%, driven by continued consumer demand for home improvement products, which provides safe drinking water in the home.
The direct-to-consumer channel with our Aquasana brand and the dealer channel contributed to solid growth to start 2021.
Boiler sales grew 12%, as we have seen strong demand, particularly within commercial boilers, as a result of completed projects carried over from 2020, as well as a resilient replacement demand.
Our volumes of US tank residential water heaters declined in the first quarter, due to weather disruptions at our facility, supply chain constraints, which limited production.
If not for limited production based on our surge in customer orders in the quarter, our US residential shipments would have increased compared with 2020.
Strong orders in the quarter were largely due to extended lead times, our second price increase, which was effective April 1, and announced third price increase effective in June.
Due to continued pandemic-related disruptions in restaurant and hospitality new construction and replacement demand, our commercial water heater volumes declined in the first quarter, largely in line with our expectations coming into the year.
In China, sales increased over 100% in local currency, driven by higher consumer demand and the easy comparison compared with the pandemic disrupted first quarter of 2020.
First quarter sales of $769 million increased 21%, compared with 2020, largely due to significantly higher China sales.
As a result of higher sales, first quarter net earnings increased 89% to $98 million or $0.60 per share compared with $52 million or $0.32 per share in 2020.
Sales in the North America segment of $553 million increased 4% compared with the first quarter of 2020.
Higher commercial boiler service parts and tankless water heater sales in the US, improved water heater sales in Canada, a 12% price -- 12% growth in water treatment sales and inflation related price increases on water heaters in the US were partially offset by lower US residential and commercial water heater volumes.
Rest of the World segment sales of $222 million increased over 100% from the first quarter of 2020 driven by stronger consumer demand in each of our major product categories in China.
Pandemic-related lockdowns and weak end market demand in the first quarter of 2020 provided an easy comparison for the first quarter of 2021.
Currency translation of China sales favorably impacted sales by approximately $14 million.
On slide 6, North America segment earnings of $130 million increased 3% compared with the first quarter of 2020.
The impact to earnings from higher sales and inflation-related price increases on water heaters was partially offset by higher material costs and freight costs and lower water heater volumes in the US.
Segment operating margin of 23.6% was slightly lower than the first quarter of 2020.
Rest of the World segment earnings of $12 million increased significantly compared with the first quarter of 2020, which was negatively impacted by the pandemic.
In China, higher volumes and lower selling and administrative costs contributed to higher segment earnings.
As a result, segment operating margin of 5.3% improved significantly from negative 38.3% in the first quarter of 2020.
Our corporate expenses of $15 million were similar to the first quarter of 2020.
Our effective tax rate of 22.5% was 110 basis points lower than the prior year largely due to geographical differences in pre-tax income.
Cash provided by operations of $104 million increase -- or during the first quarter was higher than the first quarter of 2020, primarily as a result of higher earnings in 2020 compared with the prior year.
Our cash balances totaled $660 million at the end of the first quarter and our net cash position was $559 million.
Our leverage ratio was 5% as measured by total debt to total capital at the end of the first quarter.
We completed refinancing our $500 million revolver credit facility on April 1st of this year.
We currently have no borrowings on this facility.
During the first quarter, we repurchased approximately 1.1 million shares of common stock for a total of $67 million.
The midpoint of our range represents an increase of 20% compared with the 2020 adjusted results.
We expect cash flow from operations in 2021 to be between $475 million and $500 million compared with $560 million in 2020.
We expect higher earnings in 2021 will be more than offset by higher investments in working capital than in our prior year.
Our 2021 capital spending plans are between $85 million and $90 million and our depreciation and amortization expense is expected to be approximately $80 million.
Our corporate and other expenses are expected to be approximately $52 million, which is similar to 2020.
Our effective tax rate is assumed to be approximately 23% in 2021.
Average outstanding diluted shares of 160 million assumes $400 million worth of shares are repurchased in 2021.
Our businesses continue to navigate through supply chain and logistic challenges.
The first quarter was particularly challenging for our North America water heater business.
Severe weather impacted our Ashland City and Juarez facilities resulted in a weak production at each plant in the quarter.
Supply chain constraints limited our ability to make up the lost production within the quarter.
As a result of a surge in orders approximately 30% higher than the first quarter last year, our lead-times have further extended.
We are working with customers on managing orders along with our operations and supply chain teams working diligently to meet demand.
However, we expect to be catching up throughout the second quarter and into the third quarter.
Our outlook for 2021 includes the following assumptions.
We have not changed our outlook for full year US residential heater industry volumes and continue to project a full year volume will be down 2% or 200,000 units in 2021, a small retracement from the record volume shipped in 2020.
We expect commercial industry water heater volumes will decline approximately 4% as pandemic impacted business delay or defer new construction and discretionary replacement installation.
We continue to experience inflation across our supply chain, particularly steel and logistics costs.
Steel has increased 25% since we announced our April 1st water heater price increase.
We announced a third price increase in late March on water heaters effective June 1 at a blended rate of 8.5%.
In China, it is encouraging to see sales of our products continue to remain strong through April.
Our strategy continues to expand distribution to Tier 4 through 6 cities is on track.
We see improvement in consumer trends toward trading up for higher priced products across all product categories, driven by differentiated new products launched in the last 12 to 24 months.
We expect year-over-year increase and local currency sales between 18% to 20% in China.
We assume China currency rates will remain at current levels adding approximately $50 million and $3 million to sales and profits over the prior year respectively.
We have nearly doubled our growth projections and our outlook for our North America boiler sales for mid-single-digit growth to approximately 10% growth based on a strong first quarter, strong backlog, and visibility into coating activity.
Our expectations are based on several growth drivers.
We believe pent-up demand from the declines last year will drive growth.
The transition to higher energy efficient boilers will continue particularly as commercial buildings improve their overall carbon footprint.
In 2020, condensing boilers were 39% of the commercial boiler industry.
That represents our addressable market, which provides continued opportunity for our leading market share commercial condensing boilers.
New product launches including improvements to our flagship Crest commercial condensing boiler with a market differentiating oxygen center, which continuously measures and optimizes boiler performance, an introduction of a one million BTU light-duty commercial Knight FTXL.
We continue to project 13% to 14% full year sales growth in our North America water treatment products, similar to that which we have seen in the first quarter.
We believe the mega trends of healthy and safe drinking water, as well as a reduction of single-use plastic bottles will continue to drive consumer demand for our point-of-use and port of entry water treatment systems.
We believe margins in this business could grow by 100 to 200 basis points higher than the nearly 10% margin achieved in 2020.
In India, first quarter 2021 sales were nearly double the prior year.
While India is challenged with recent COVID case resurgence, we project 2021 full year sales to increase over 20%, compared with 2020 to incur a smaller loss of $1 million to $2 million.
We project revenue will increase between 14% to 15% in 2021, as strong North America water treatment, boiler and China sales, enhanced by pricing action, more than offset expected weaker North America water heater volumes.
Our sales growth projections include approximately $50 million of benefit from China currency translation.
We expect North America segment margin to be between 23% and 23.5% and Rest of World segment margins to be between 7% and 8%.
I'm on slide 11.
Our operations faced continued challenges in the first quarter.
And while we expect continued headwinds in supply chain and logistics in the near term, I have confidence in our teams to continue to navigate through this environment.
Along with the strength of our people, I believe A.O. Smith is a compelling investment for numerous reasons.
We have leading share positions in our major product categories.
We estimate replacement demand represents 80% to 85% of US water heater and boiler volumes.
We have a strong brand, premium brand in China, a broad product offering in our key product categories, broad distribution and a reputation for quality and innovation in that region.
Over time, we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We are excited for the opportunity we see in our North America water treatment platform.
We have strong cash flow and balance sheet, supporting the ability to continue to invest for the long term, with investments in automation, innovation and new products, as well as acquisitions and return cash to shareholders.
| compname reports q1 earnings per share $0.60.
q1 earnings per share $0.60.
q1 sales rose 21 percent to $769 million.
sees fy 2021 revenue up 14 to 15 percent.
|
It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations homepage.
Please see the Events section of our Investor Relations homepage for a full list.
Our actual results may differ significantly from the matters discussed today.
When you hear us say on a comparable basis that means excluding the impact of FX, net M&A and other noncomparable items.
When you hear us say adjusted, that means excluding noncomparable items.
When you hear us say organic, that means excluding the impact of FX and net M&A.
We will also refer to our growth compared to our market.
When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus this market.
We encourage you to follow along with these slides during our discussion.
Let's start on slide five.
We're very pleased to share our results for the third quarter and provide an overall company update.
The third quarter operating environment was very challenged, both from an absolute volume perspective and in light of the production volatility we experienced throughout this quarter.
Overall, we're doing a solid job managing the near-term environment while securing our future growth.
With just over $3.4 billion in sales, our third quarter revenue decreased by about 7% organically.
Excluding the year-over-year growth in our aftermarket business, our OEM business declined 9% compared to the 22% decline in our market during the quarter as we benefited from new business and favorable mix.
Our margin and cash flow performance in the quarter was impacted by the volatile production environment, which put pressure on near-term cost containment and drove excess inventory within our plans.
Even with those challenges, we're still on track to delivering a near double-digit operating margin for the full year.
And we still expect full year free cash flow to be among the strongest results in our history.
At the same time, we're very focused on ensuring that we secure our future.
To that end, this past quarter, we won multiple new product awards for electric vehicles, which I will speak about in a few moments.
As a result of these awards, along with wins in prior quarters, we are well on our way to achieving the organic electric vehicle 2025 revenue targets underlying our project CHARGING FORWARD.
In fact, we estimate that more than 90% of that target is already booked.
The market environment continues to be extremely volatile with the risk of future production disruption arising from ongoing supply constraints.
With that in mind, on a full year basis, we now expect our global weighted light vehicle and commercial vehicle markets to be down 2.5% to flat year-over-year.
This is down materially from our previous assumption, reflecting both the third quarter decline and our most recent expectations for the fourth quarter.
As you can see from the line chart showing the different scenario, we do expect light vehicle industry production to improve sequentially Q3 to Q4.
Underlying customer demand remains robust.
However, just like we saw in the third quarter, industry production levels will be dependent on the varying impact of ongoing supply constraints and on the potential impact on our customer mix.
Overall, we expect the challenging environment to continue throughout the remainder of 2021.
And at this point, we think it will carry on well into 2022.
As we manage this challenging environment, we're also continuing to focus on securing our mid- to long-term opportunities in electric vehicle.
And we did just that during this quarter, securing several awards for electric vehicle programs.
I'm very proud of the teams.
Two of those awards are highlighted on slide seven.
First, we secured a major award for a North American inverter with a global OEM expected to launch in 2024.
This high-voltage silicon carbide program is our largest inverter win to date.
This business award also marks the company's first major win in the North American market.
It will also be used in multiple battery electric vehicle platforms, including pass cars and trucks.
Our product performance, scalability, cost competitiveness, size optimization and global manufacturing footprint, all contributed to securing this business win.
Additionally, we announced a new 800-volt silicon carbide inverter award with a German OEM expected to launch in early 2025.
This award expands our existing 400-volt inverter business with this same German customer by now adding 800-volt products.
This new technology offers enhanced power density, proven performance and long-term reliability.
Given these two new and significant inverter awards, I would like to give you an update on our positioning in the inverter market on slide eight.
We've had tremendous success establishing ourselves in this market.
When I think about BorgWarner's competitive advantages in power electronics, it's driven by, first, the breadth of our product portfolio.
This allows us to be faster and more effective at bringing products to market.
Second, our ability to innovate, like with our Viper power module technology.
We can continue our innovations in part due to our vertical integration strategy.
We have in-house capabilities for power modules, integrated circuit development and software, which we feel are an advantage in the marketplace.
And finally, I think the last driver is our ability to leverage the electronic scale that we already have across our company, and especially within our engine control units.
The result is that we've secured significant new business award.
And as you can see by the chart on the slide, we expect the business to grow rapidly from about 500,000 units in 2021 to 2.5 million units by 2025, representing about 50% CAGR.
We expect this volume to drive total inverter sales of $1.7 billion by 2025 -- in 2025, sorry.
And remember, these programs are already booked.
We continue to pursue additional inverter opportunities with production volumes in 2025 and beyond, and would expect to secure more awards in the coming quarters.
And one more thing, with the business we've already won, we believe that we are positioned to be the number one noncaptive inverter producer globally by 2025.
As we look at our year-over-year revenue walk for Q3, we begin with pro forma 2020 revenue of just under $3.6 billion, which includes a little over $1 billion of revenue from Delphi Technologies.
Next, you can see that foreign currencies increased revenue by about 2%.
Then our organic revenue decline year-over-year was approximately 7% or almost 9%, excluding growth in our aftermarket segment.
That compares to a 22% decrease in weighted average market production, which suggests that our outgrowth in the quarter was more than 13%.
Now with that said, the significant volatility in production schedules and the varying levels of supply disruptions among our customers are continuing to make it difficult to draw conclusions from the quarterly outgrowth figures.
Nonetheless, we were pleased that we delivered strong relative revenue performance in all three major markets despite the overall decline in revenue.
Regionally, in Europe, we outperformed, driven by new business in small gasoline turbochargers and fuel injection products.
In China, we also outperformed the market, driven by the resilience in the former Delphi businesses.
And in North America, we outperformed the market, primarily due to new business as well as vehicle and customer mix.
The sum of all these was just over $3.4 billion of revenue in Q3.
Now let's look at our earnings and cash flow performance on slide 10.
Our third quarter adjusted operating income was $311 million compared to pro forma operating income of $396 million last year.
This yielded an adjusted operating margin of 9.1%.
On a comparable basis, excluding the impact of foreign exchange and the impact of AKASOL, adjusted operating income decreased $79 million on $261 million of lower sales.
That translates to a decremental margin of approximately 30%.
This higher than typical decremental margin was primarily driven by $24 million of higher commodity costs, net of customer recoveries.
Excluding these higher commodity costs, our year-over-year decremental margin was approximately 19%, which we view as a sign that we're effectively managing our operating cost performance in spite of the supply chain disruptions.
Moving on to cash flow.
We consumed $10 million of free cash flow during the third quarter.
This was worse than our expectations going into the quarter due to lower-than-expected operating income as well as higher-than-planned inventories.
Fundamentally, when production declines this rapidly and expectedly, it's difficult to get inventory out of the system in the near term.
We expect inventory to improve in the coming quarters once we see less volatility in production orders, which will give us the ability to rightsize our supply chain demands accordingly.
Now let's talk about our full year financial outlook on slide 11.
We now expect our end markets to be down 2.5% to flat for the year.
Next, we expect to drive market outgrowth for the full year of approximately 1,000 basis points.
This contemplates the strong performance to date with a sequential step down in the fourth quarter as we expect to return to more normalized year-over-year outgrowth in Q4.
Based on these assumptions, we expect our 2021 organic revenue to increase approximately 8.5% to 11% relative to 2020 pro forma revenue.
Then adding an expected $425 million benefit from stronger foreign currencies and an expected $70 million related to the acquisition of AKASOL, we're projecting total 2021 revenue to be in the range of $14.4 billion to $14.7 billion.
This wide revenue guidance range reflects the continued production uncertainty we have in the fourth quarter.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 9.6% to 10% compared to a pro forma 2020 margin of 8.3%.
This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi-related cost synergies and purchase price accounting.
From a cost synergy perspective, our margin guidance continues to include $100 million to $105 million of incremental benefit in 2021, the same as our prior guidance.
Based on this revenue and margin outlook, we're now expecting full year adjusted earnings per share of $3.65 to $3.95 per diluted share.
And finally, we expect that we'll deliver free cash flow in the range of $600 million to $700 million for the full year.
The reduction versus our prior guidance is a little larger than our projected decline in operating income as we expect inventory to remain higher than usual through the fourth quarter.
Then once we head into 2022, we expect to start to see reductions in inventory toward more normalized levels.
That's our 2021 outlook.
Given the uncertain outlook for the remainder of 2021, we felt it appropriate to provide you with some of our initial thoughts on some key financial drivers and strategic priorities heading into 2022.
Starting with our top line.
As of right now, we do expect to see supply chain challenges, particularly with respect to semiconductors, continue well into 2022.
Ultimately, where full year 2022 industry production shakes out will depend on the scope and duration of these challenges.
But at this point, we would still expect a modest level of growth in industry production next year.
Next, we expect to deliver outgrowth in 2022.
However, we're currently assessing the extent to which the much stronger-than-expected outgrowth in 2021 will result in any headwind to our outgrowth next year.
From a cost perspective, we expect incremental Delphi-related cost synergies in the $40 million to $45 million range, and we also expect incremental restructuring savings of $40 million to $50 million.
These combined savings are expected to largely offset our estimated increase in R&D spending of approximately $100 million.
We're planning for this significant increase in R&D spending in order to support the new business wins we've achieved to date and to pursue additional EV opportunities consistent with our CHARGING FORWARD organic growth objectives.
And finally, we're building our plans based on the assumption that we'll see sustained levels of commodity inflation continuing into 2022, which means we expect that to create a year-over-year headwind during the first and second quarters.
That's the near term.
But while we're managing the near term, we're also focused on securing our long-term future.
So consistent with our CHARGING FORWARD initiative, we have three key strategic priorities heading into next year.
First, we plan to continue to pursue and secure additional electric vehicle awards for both components and systems.
Second, we intend to execute additional M&A to accelerate our positioning in electric vehicles.
And finally, we expect to complete the disposition of approximately $1 billion in combustion revenue.
Ultimately, it's the pillars of near-term execution, securing future profitable growth and disciplined inorganic investments that will drive the success of our strategy and thus drive value creation for our shareholders.
I'm now really excited to share an update of our progress toward our project CHARGING FORWARD targets on slide 13.
And as evidenced by our program announcements over the past several quarters, including the two wins that I alluded to earlier, we're making significant progress on the organic growth in electric vehicles underlying our CHARGING FORWARD plan.
Or to put it another way, with this booked business, we're more than 90% of the way toward our $2.5 billion organic revenue target we gave you back in March.
The breakdown of these programs is highlighted on the chart to the left.
We're excited about the mix of both components and system awards.
Plus we expect to add to this booked business portfolio over the next quarters by securing additional EV awards with 2025 revenues.
And then we will supplement this organically developed revenue with EV revenues from AKASOL and any future acquisitions.
The takeaway from today is this.
It's a challenging near-term environment.
Once again, BorgWarner is successfully managing the present and delivering solid financial results.
At the same time, we're delivering our future.
We're doing this by establishing product leadership and winning new business in the world of electrification.
And with these wins, we are successfully executing on our long-term strategy, CHARGING FORWARD, which will deliver value to our shareholders long into the future.
| sees fy adjusted earnings per share $3.65 to $3.95 excluding items.
announced an 800v sic inverter award with a german oem, expected to launch in early 2025.
acquisition of akasol is expected to increase year-over-year sales by approximately $70 million.
full year free cash flow is expected to be in range of $600 million to $700 million.
sees full-year 2021 net sales to be in range of $14.4 billion to $14.7 billion.
borgwarner - fy 2021 net sales guidance under assumption that semiconductor supply issues do not worsen.
fy 2021 net sales guidance under assumption that there are no additional production disruptions arising from covid-19.
|
Let me also remind you that CVR Partners completed a 1-for-10 reverse split of its common units on November 23, 2020.
I'd like to begin today's call with a brief discussion of our accomplishments in 2020, then discuss our operating performance for the quarter as well as for the year.
2020 was a challenging year for United States, our industry and our company.
That the pandemic shut down the country and reduced demand for refined products and were forced to adjust our strategy and adapt to the conditions we were presented.
Despite these challenges of the year, we have a number of accomplishments worth highlighting.
We maintained safe, reliable operations and back office functions during the COVID crisis.
We successfully completed $1 billion notes offering in January of 2020, which have provided us with additional cash and liquidity at attractive rates.
We completed a major planned turnaround at our Coffeyville refinery during the beginning of the COVID crisis and deferred turnarounds at Wynnewood, in both fertilizer plants.
We completed an ERP modernization project on time and on budget.
We realigned our business strategy with a focus toward sustainability, with Board approval -- with the Board-approved renewable diesel project at the Wynnewood.
We planned to reduce refining capacity and retool for renewable diesel production, while also transitioning to a lighter gravity-gathered crudes at our refineries.
While we intend to maintain our current capabilities in refining, we are focusing new investments toward growing our renewable diesel business and reducing our carbon footprint.
We achieved significant reductions in SG&A operating costs, capital expenditures companywide, exceeding our goal of $50 million annual reduction in SG&A and operating expenses.
We announced the acquisition of Blueknight Energy's crude oil pipeline assets in Oklahoma, which closed in early February and expands our crude gathering reach at the wellhead.
We evaluated multiple acquisitions in PADD IV, but maintained our capital discipline and refused to overpay for assets when we felt the bid-ask spread was still too wide.
In our trucking business, we began hauling LPGs to our plants to reduce costs.
We appealed the misguided Tenth Circuit Court ruling to the Supreme Court, which has agreed to review the case.
Earlier today, CVR Partners' CEO, Mark Pytosh announced the following accomplishments for our Fertilizer segment in 2020.
Record ammonia production of 852,000 tons between the two plants, posting a combined utilization of 95% for the year.
Certification of CVR Partners' first ever carbon offset credits as a result of nitric oxide abatement efforts and our long-term air separation contract with Messer was renewed with favorable conditions, including the addition of a new oxygen surge tank, which will further improve reliability of our gas fired Coffeyville.
Yesterday, we reported CVR Energy's full year and fourth quarter results for the full year of 2020.
We reported a net loss of $320 million and a loss of $2.54 per share.
For the fourth quarter, we reported a net loss of $78 million and loss per share of $0.67.
EBITDA for the year was a negative $7 million and for the quarter was a positive $1 million.
Weaker crack spreads, as a result of demand destruction from the pandemic and dramatically higher RIN prices weighed heavy on our results for the full year and the quarter.
The market remains volatile and uncertain, particularly in regard to RIN prices, which currently consume a significant portion of the refining margin available in the market.
As a result, the Board of Directors did not approve a dividend for the fourth quarter of 2020.
On the last few earnings calls, I've discussed our focus on preserving our balance sheet and liquidity position in light of the ongoing pandemic as well as potential acquisition opportunities that we were evaluating.
Although we got far down the path on a number of acquisitions that we viewed as attractive, ultimately the bid-ask spread proved to be too wide.
And at this time, there are no active discussions on these potential transactions.
We've also made it clear that we do not currently have any interest in acquiring Delek.
Although as its largest shareholder, we continue to see the stock as undervalued and have some suggested actions Delek should take to improve its business.
We also notified Delek of our intent to nominate three directors for election to Delek's Board in it's upcoming Annual Meeting.
As we get more visibility into the sustained rebound in the refining market, we continue our discussions with the Board around the appropriate level of cash return to shareholders and in what form.
At current trading levels, there could be more value in buying back our own shares.
For the Petroleum segment, the combined total throughput for the fourth quarter of 2020 was approximately 219,000 barrels per day as compared to 213,000 barrels per day for the fourth quarter of 2019.
Both the facilities ran well during the quarter.
Although the total throughput remained constrained by light naphtha processing capabilities, as narrow crude differentials continue to favor running light -- very light crude slate.
Across the board, benchmark cracks and crude differentials deteriorated significantly from the year-ago.
Group 3 2-1-1 crack spreads averaged $8.44 per barrel in the fourth quarter of 2020.
However, RINs consumed 40% of that at approximately $3.50 per barrel.
The Group 3 2-1-1 averaged $16.65 per barrel in the fourth quarter of 2019, when RINs were only a $1.15 per barrel.
The Brent TI differential averaged $2.49 per barrel in the fourth quarter compared to $5.55 in the prior year period.
The Midland Cushing differential was $0.37 over WTI in the quarter compared to $0.94 over WTI in the fourth quarter of 2019.
And the WCS to WTI crude differential was a low $11.44 per barrel compared to $18.89 per barrel in the same period last year.
Light product yield for the quarter was 103% on crude oil processed.
Our distillate yield as a percentage of total crude oil throughputs was 44% in the fourth quarter of 2020 consistent with prior year period.
In total, we gathered approximately 117,000 barrels per day during the fourth quarter of 2020 as compared to 148,000 barrels per day for the same period last year.
Our current gathering volumes are approximately 130,000 barrels per day, including the volumes on the pipelines we have recently acquired from Blueknight.
In the Fertilizer segment, we had a strong ammonia utilization at both of our facilities during the quarter, at 99% at Coffeyville and 103% at East Dubuque.
Although fertilizer prices remained soft in the fourth quarter, year-over-year production and sales volumes were higher for both UAN and ammonia.
With rally the in crop prices over the past few months, farmer economics have improved considerably and this is driven higher demand for crop inputs.
As a result, UAN and ammonia prices have increased significantly since the beginning of the year, and the outlook for spring planting currently looks favorable.
Our consolidated fourth quarter net loss of $78 million and loss per diluted share of $0.67 includes a mark-to-market gain of $54 million related to our Delek investment, and favorable inventory valuation impacts of $15 million.
Excluding these impacts, our fourth quarter 2020 loss per diluted share would have been approximately $1.18.
The effective tax rate for the fourth quarter of 2020 was 23% compared to 40% for the prior year period.
As a result of our net loss for the full year 2020 and in accordance with the NOL carry-back provisions of the CARES Act, we currently anticipate an income tax refund of $35 million to $40 million.
The Petroleum segment's EBITDA for the fourth quarter of 2020 was a negative $66 million compared to a positive $135 million in the same period in 2019.
The year-over-year EBITDA decline was driven by significantly narrower crack spreads and elevated RINs prices.
Excluding inventory valuation impacts of $15 million, our Petroleum Segment EBITDA would have been a negative $81 million.
In the fourth quarter of 2020, our Petroleum segment's refining margin, excluding inventory valuation impact was $0.56 per total throughput barrel compared to $11.86 in the same period in 2019.
The increase in crude oil and refined product prices through the quarter generated a positive inventory valuation impact of $0.76 per barrel during the fourth quarter of 2020.
This compares to a $0.61 per barrel positive impact during the same period last year.
Excluding inventory valuation impact and unrealized derivative losses, the capture rate for the fourth quarter of 2020 was approximately 20% compared to 79% in the prior year period.
The most significant item impacting our capture rate for the quarter was elevated RINs prices, which reduced margin capture by approximately 71%.
Derivative losses for the fourth quarter of 2020 totaled $15 million, including unrealized losses of $23 million associated with Canadian crude oil and crack spread derivative.
In the fourth quarter of 2019, we had derivative losses of $19 million, which included unrealized losses of $24 million.
RINs expense in the fourth quarter of 2020 was $120 million or $5.97 per barrel of total throughput, compared to $13 million for the same period last year.
Our fourth quarter RINs expense was impacted by $64 million from this mark-to-market impact on our accrued RFS obligation, which was mark-to-market at an average RIN price of $0.89 at year end and other market activities.
The full year 2020 RINs expense was $190 million as compared to $43 million in 2019.
For 2021, we forecast a net obligation from refining operations of approximately $280 million RINs adjusted for our expected internal blending volumes.
We also expect to generate approximately $90 million D4 RINS from renewable diesel in the second half of the year, bringing our net RIN obligation for 2021 to approximately $190 million RINs.
RINs expense for 2021 is expected to be comprised of the cost of this anticipated $190 million RIN obligation, as well as any necessary mark-to-market on any remaining accrued RFS obligation.
Subsequent to year end, we have reduced our 2020 RINs obligation by approximately 8%.
The Petroleum segment's direct operating expenses were $3.99 per barrel of total throughput in the fourth quarter of 2020 as compared to $4.63 per barrel in the fourth quarter of 2019.
For the full year 2020, we reduced operating expenses and SG&A costs in the Petroleum segment by approximately $62 million compared to the full year of 2019.
The reduction in full year operating expenses and SG&A costs were a direct result of our cost savings initiative, most of which we believe should be sustainable going forward.
For the fourth quarter of 2020, the Fertilizer segment reported operating loss of $1 million and a net loss of $17 million, or $1.53 per common unit, and EBITDA of $18 million.
This is compared to a fourth quarter 2019 operating loss of $9 million, a net loss of $25 million, or $2.20 per common unit, and EBITDA of $11 million.
The year-over-year EBITDA improvement was primarily due to higher sales volume and lower operating and turnaround expenses offset somewhat by lower prices for UAN and ammonia.
For the full year 2020, we reduced operating expenses and SG&A costs in the Fertilizer segment by over $23 million compared to the full year of 2019.
During the quarter, CVR Partners completed a 1-for-10 reverse split and repurchased nearly 394,000 of its common units for approximately $5 million.
In total, CVR Partners repurchased over 623,000 of its common units for $7 million in 2020, and the Board of Directors of CVR Partners' general partner has approved an additional $10 million unit repurchase authorization.
Total units outstanding at the end of 2020 were 10.7 million, of which CVR Energy owns approximately 36%.
The Partnership did not declare distribution for the fourth quarter of 2020.
The total consolidated capital spending for the full year of 2020 was $121 million, which included $90 million from the Petroleum segment, $16 million from the Fertilizer segment and $12 million for the Renewable Diesel Project at Wynnewood.
Of this total, environmental and maintenance capital spending comprised $92 million, including $77 million in the Petroleum segment and $12 million in the Fertilizer segment.
Actual spending for the year came in at the low end of our expected range as a result of canceling or shifting certain projects into the future.
We estimate the total consolidated capital spending for 2021 to be $215 million to $230 million, of which $115 million to $125 million is expected to be environmental and maintenance capital and $95 million to $100 million is related to the Renewable Diesel Project.
Our consolidated capital spending plan excludes planned turnaround spending, which we estimate will be approximately $11 million for the year in preparation of the planned turnaround at Wynnewood and Coffeyville in 2022.
Cash provided by operations for the fourth quarter of 2020 was $28 million and free cash flow in the quarter was $4 million.
Working capital was a source of approximately $105 million in the quarter due primarily to an increase in our accrued RFS obligation.
For the year, cash from operations was $90 million and free cash flow was a use of $193 million.
In addition, in January 2020, we refinanced and upsized our notes, which generated a net $489 million of cash.
Turning to the balance sheet, we ended the year with approximately $667 million of cash, a slight increase from the prior year.
Our consolidated cash balance includes $31 million in the Fertilizer segment.
As of December 31st, excluding CVR Partners, we had approximately $929 million of liquidity, which was comprised of approximately $637 million of cash, securities available for sale of $173 million, and availability under the ADL of approximately $365 million, less cash included in the borrowing base of $246 million.
Looking ahead to the first quarter of 2021, our Petroleum segment -- for our Petroleum segment, we estimate total throughput to be approximately 185,000 -- excuse me, to 190,000 barrels per day.
Due to the extreme winter weather and natural gas and power curtailments over the past two weeks, our Coffeyville and Wynnewood refineries both ran at reduced rates.
We currently anticipate resuming normal operations at both facilities by the end of the month.
We expect total direct operating expenses for the first quarter to be $95 million to $105 million and total capital spending to range between $65 million and $75 million.
For the Fertilizer segment, despite reducing operating rates that used to be last week due to the extreme weather conditions and natural gas pricing, we estimate our ammonia utilization rate to be greater than 90% for the quarter.
We expect direct operating expenses to be $35 million to $40 million excluding inventory impacts and total capital spending to be between $4 million and $7 million.
In summary, 2020 was a very challenging year, but we were able to navigate through this difficult environment and we believe we are well positioned to capitalize on any eventual upswing in market.
Our mission remains to be a top-tier North American refining and fertilizer company, as measured by safe, reliable operations, superior financial performance and profitable growth.
Looking at 2021, cracks have improved to start the year, although most of the increase is being consumed by out-of-control prices for RINs.
While vaccines are encouraging, so far we've not seen any meaningful increase in demand for refined products.
Domestic inventories are generally balanced, but utilization is still low and starting to increase without a corresponding pickup in demand.
In the near-term, our outlook remains cautiously optimistic based on the market fundamentals that we see.
Starting with crude oil, we've drawn down about 50% of the excess crude oil inventories worldwide.
Shale oil production is still declining, but drilling is starting to increase.
Crude differentials are still narrow, but Brent-TI spread has widened some, and backwardation is firmly in place supported by declines in inventories and the action takes -- taken by the Saudis.
Moving on to refined products, gasoline demand is down approximately 1 million barrels per day and vehicle miles traveled are showing declines.
Jet demand remains low mainly due to little international travel.
Domestic demand is approaching five-year averages.
US inventories are near five-year averages, but still high overall, while inventories and demand in the Magellan system are near normal.
Exports are weak and imports are high.
RINs are ridiculous, approaching $5 per barrel, putting RINs cost above operating costs.
Looking at cracks, cracks have been trending up, but fairly keeping up with RINs.
Diesel cracks are in contango, and the domestic refining utilization is still low at 83%.
We believe cracks will remain relatively weak until demand supports utilization in the 90% plus level.
The question is, what happens to RINs going forward?
Right now, the industry is not generating sufficient free cash flow from refinery operations at these conditions considering sustaining capital requirements and turnaround spending.
Crack spreads and RIN prices are unsustainable at these levels over the long term.
We believe we need to see more rationalization of capacity in order to see sustained moving -- sustained move higher in cracks.
Today, we have seen approximately 5 million barrels per day and announced between permanent shutdowns, temporary idling and potential closures worldwide, with $1.1 million of that in the United States.
While we remain cautiously optimistic on the market in the near- term, we continue on to focus on what we can control to put us in the best position to take advantage of any improved market.
Safe, reliable operations remains a key focus for us as a company.
We'll will continue to work to minimize capital spending on our refining system, other than what we consider critical to safe, reliable operations, and remain compliant with at the book regulations.
We are in the process of integrating our crude oil pipeline assets we acquired from Blueknight and working to maximize our value to our systems by reducing our purchases of Cushing common.
We are executing on our renewable diesel strategy.
Our primary focus now is on getting Phase 1 mechanically complete.
We are currently in construction.
We have everything ordered.
We remain generally on schedule, although it is tight.
As we move through construction, we will focus on completing soybean oil procurement and renewable diesel marketing agreements.
Next, we will begin development of Phase II, which would involve adding pre-treatment.
We are currently evaluating different technologies and considering where we could build the unit and what capacities.
We could potentially have a pre-treatment unit installed by the end of 2022 or sooner if we go through third-party, subject to Board and other approvals.
We also -- we will also begin planning for the potential Phase III at Coffeyville.
We will most likely wait until the first wave of large renewable diesel products are completed to see where the market goes before making a final decision on Phase III.
We continue to believe that renewable diesel become a commodity over time and that there is a clear advantage will be in an early mover.
For the Fertilizer segment, we are more optimistic on the near-term outlook.
Corn prices have rallied over 50% since October, significantly improving farmer economics and driving demand for crop inputs higher.
We believe prices for the nitrogen fertilizers likely bottomed in 2022 and we currently expect demand for UAN and ammonia to be strong in 2021.
The NOLA urea price has continued to increase as LNG and natural gas prices overseas have surged.
As the business has improved in this credit market to strengthen, we intend to focus on potential refinancing of CVR Partners' senior notes at much lower cost.
Looking at the first quarter of 2021, quarter-to-date metrics are as follows: Group 3 2-1 [Phonetic] Group 3 2-1-1 cracks have averaged $12.77 per barrel, with the Brent TI spread of $3.11 per barrel, and the Midland Cushing differential was $1.5 over WTI.
WTL differential has averaged $0.71 per barrel over WTI.
And the WCS differential has averaged $12.60 per barrel under WTI.
Corn and soybean prices have increased significantly and fertilizer prices have responded.
Ammonia prices have increased to over $400 a ton, while UAN prices are $250 dollars per ton.
Renewable diesel margins have averaged $1.31 per gallon, quarter-to-date, based on soybean oil with the carbon intensity of 60, and includes RINs, blenders tax credit, and low carbon fuel standard credit.
As of yesterday, Group 3 2-1-1 cracks were $17.77 per barrel.
Brent TI was $3.67 and WCS was $12.85 under WTI.
Although benchmark cracks have improved, as I mentioned earlier, most of this move was associated with increase in prices.
Quarter-to-date, ethanol RINs have averaged toward $0.94 and biodiesel RINs have averaged $1.5.
In January of 2020, ethanol RINs averaged $0.16 and biodiesel RINs averaged $0.40, a nearly six-fold increase in the price of ethanol RINs in one year should be clear evidence as the RFS program is broken.
EPA's refusal to rule on outstanding small refinery waivers for 2019 and '20, while failing to issue a renewable volume obligation for 2021 despite their legal obligations are significant factors in driving what we've seen over the past year in the RINs market.
We are encouraged that the Supreme Court decided to hear the appeal of the misguided Tenth Circuit ruling, and we do not believe they would have taken the case if they did not have serious questions about the ruling.
The original intent of the RFS regulation was that small refinery waiver could be applied for at any time.
We had an accrued RFS obligation at the end of 2020, which approximates our 2019 and 2020 obligations at Wynnewood, for which waivers have been applied.
Without the mark-to-market effect of this position, our capture rate would have been higher by 38% for the quarter.
| q4 loss per share $0.67.
q4 sales $1.1 billion versus refinitiv ibes estimate of $1.19 billion.
|
We appreciate you joining us today for Gartner's third quarter 2020 earnings call, and hope you're well.
With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.
All growth rates in Gene's comments are FX neutral unless stated otherwise.
Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website.
Finally, all contract values and associated growth rates we discuss are based on 2020 foreign exchange rates unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
Business leaders need help in all times, but during highly uncertain times like today they need help more than ever.
Those that know Gartner, know, we are the best source for how to survive and thrive in these difficult times.
Beginning in Q1, we made significant changes in response to the pandemic and economic downturn.
Our strategy is to ensure our research content addresses the most critical priorities of our clients at any point in time.
When the pandemic hit, the rate of change in the world increased radically.
We responded with agility, we accelerated the creation of new, highly relevant content for our clients across every function.
Topics included adapting to COVID-19, shifting to remote work, accelerating the transition to digital business, strengthening diversity, equity and inclusion across the enterprise and more.
Clients have highly valued this content addressing their mission critical priorities.
Client engagement with our experts rose significantly, during Q3 client interactions increased more than 20% year-over-year to over 120,000 interaction.
Gartner Conferences delivered the same unparalleled insight and advice to those who want an immersive experience.
Seat holders who attend our conferences received great value, which results in higher retention.
Non-seat holders equally received great value and are a great source of highly qualified leads for our research sales force.
Once the pandemic hit, we pivoted to virtual conferences to replace our traditional in-person destination conferences.
So far we've delivered seven virtual conferences through October and the performance of these conferences has exceeded our expectations.
IT Symposium/Xpo is our flagship conference series for senior IT executives.
We recently held our IT Symposium Americas virtually.
It was a resounding success.
More than 15,000 executives attended and that's about double the number that attended Orlando Symposium in-person last year.
Attendees were highly engaged and participated in an average of 11 live sessions.
More than 80% of IT Symposium Americas attendees rated the conference as meeting or exceeding their expectations.
Attendee scores for the keynotes were on par with the in-person conferences from last year.
Exhibitors are also an important element of our conferences.
We've been working with them to create a great experience for both attendees and themselves.
While exhibitor revenues were lower when compared to our in-person conferences from last year, they exceeded our expectations.
Early on, there was great uncertainty as to whether virtual conferences would be viable.
The results of the seven virtual conferences, we've held-to-date demonstrate we can achieve attendance, while delivering high value to both attendees and exhibitors.
We're early in the virtual conference journey and each one we've held has been better than the last.
We are a learning organization, we'll continue to get even better by taking the experience from each conference and improving on the next.
We have eight more virtual conferences planned for 2020 and have -- already have more than 21,000 attendees registered.
So we were extremely agile in serving the needs of our clients, by adapting our content and pivoting to virtual conferences.
We were just as agile in adapting our operations for the new environment.
We went from an in-office to completely remote and we now have achieved the same level of operational effectiveness as we had in the office.
We acted early and decisively at the beginning of the pandemic to optimize our costs and prepare for a wide range of scenarios.
We've achieved strong cost savings by working smarter, not just by getting by with less.
For example, we've established specialized teams to handle some tasks such as background research.
Previously, this was done individually by all our experts rather than specialized teams.
The specialized teams do this research in fewer hours and often with higher quality because of the specialization.
In addition, we have automated some of this work through technologies such as web mining, which further lowers the cost and increases the overall quality.
Though these changes didn't begin during the pandemic, but because of the pandemic we accelerated the pace.
In addition to cost savings and operational efficiencies, we also took several steps to preserve liquidity and maintain financial strength.
We now have a capital structure with less maturity risk and more flexibility.
So we accelerate the creation of new, highly relevant content for our clients across every function.
We successfully pivoted to virtual conferences, which were well attended and delivered high value to our clients.
Our clients are more engaged than ever.
Beyond client engagement we adapted our operations to work remotely just as effectively as we do from our offices, and we combine this with early and decisive actions to optimize our cost structure and our balance sheet.
The combination of these factors has resulted in improvements across most of our operational metrics compared to Q2.
The improvement in our operational metrics in turn has resulted in improvement in our Q3 financial metrics and guidance compared to Q2.
Revenue and EBITDA are performing better than we expected and free cash flow generation is very strong.
I hope everyone remains safe and well.
Third quarter results were ahead of our expectations and we raised our full year guidance to reflect the modestly better demand environment and strong cost management.
We had another successful bond offering during the quarter and amended and extended our credit facility through 2025.
As of September 30th, we have a stronger balance sheet than we did at the start of the year.
We have significant liquidity, which gives us financial flexibility.
We reduced our maturity risk and our annual interest expense will be lower starting in 2021.
As we have gotten more clarity on the economy and gauged our business performance over the past several months, we've resumed targeted spending.
While we continue to manage our cost carefully, we remain focused on positioning ourselves to rebound strongly as the economy recovers.
Third quarter revenue was $995 million, down 1% both as reported and FX neutral.
Excluding conferences, our revenues were up 5% year-over-year FX neutral.
In addition, contribution margin was 67%, up more than 300 basis points versus the prior year.
EBITDA was $168 million, up 20% year-over-year and up 19% FX neutral.
Adjusted earnings per share was $0.91 and free cash flow in the quarter was a very strong $229 million.
Research revenue in the third quarter grew 6% year-over-year on a reported and FX neutral basis.
Third quarter research contribution margin was 72%, benefiting in part from the temporary cost avoidance initiatives we put in place starting in the first quarter.
As we have seen improvements in the macro environment, we have resumed growth spending and started to restore some of the compensation and benefit programs, which we've had put on hold when the pandemic first hit.
Total contract value was $3.4 billion at September 30th, representing FX neutral growth of 5% versus the prior year.
Global Technology Sales contract value at the end of the third quarter was $2.8 billion, up 5% versus the prior year.
The more challenging selling environment that began in March continued through the third quarter and had an impact on most of our reported metrics.
Client retention for GTS was 80%, down about 160 basis points year-over-year, but up modestly from last quarter.
Wallet retention for GTS was 99% for the quarter, down about 600 basis points year-over-year.
GTS new business declined 7% versus last year.
We ended the third quarter with enterprises down about 3% from last year.
The average contract value per enterprise continues to grow.
It now stands at $227,000 per enterprise in GTS, up 9% year-over-year.
Growth in CV per enterprise reflects the combination of up-sell, increased number of subscriptions and price.
In addition, we continue to see higher churn among lower spending client.
At the end of the third quarter, the number of quota-bearing associates in GTS was down about 8% year-over-year.
We expect to end 2020 with more than 3,100 quota-bearing associates, a slight decline from the end of 2019.
We entered this year with a large bench, which we have now fully deployed.
For GTS, the year-over-year net contract value increase, or NCVI, divided by the beginning period quota-bearing headcount was $41,000 per salesperson, down about 60% versus the third quarter of last year.
Despite the challenging macro environment, GTS CV grew in nearly all of our 10 largest countries similar to last quarter was up double digits in Brazil, Japan, France and the Netherlands.
CV grew across all sectors except for transportation and media.
Across our entire GTS sales team, we sold significant amounts of new business in the quarter to both existing and new clients.
New logo has continued to be a significant contributor to our CV growth.
Finally, despite some net churn in clients, we continue to see increased spending by retained clients on average, although not quite enough to offset dollar attrition.
This speaks to the compelling client value proposition we offer in both strong and challenging economic environments.
Overall GTS retention and new business improved in the third quarter as compared to the second quarter.
Global Business Sales contract value of $656 million at the end of the third quarter.
That's about 20% of our total contract value.
CV growth was 6% year-over-year as reported and 5% on an organic basis.
CV growth in the quarter was led by our supply chain and human resources teams.
All practices positively contributed to the 6% CV growth rate for GBS with the exception of marketing.
GBS new business was strong, up 14% over last year.
As we've discussed the last three quarters, in the marketing practice, we are transitioning away from some lower margin products.
This has created short-term headwinds, but is expected to improve profitability in a normal environment.
GxL is now more than 50% of GBS total contract value, an important milestone in the path to long-term sustained double-digit growth in GBS.
Client retention for GBS was 82%, up 117 basis points year-over-year.
Wallet retention for GBS was 99% for the quarter, up 220 basis points year-over-year.
We ended the third quarter with GBS enterprises down about 9% from last year as we continue to see churn of legacy clients.
The average contract value per enterprise continues to grow, it now stands at $140,000 per enterprise in GBS, up 16% year-over-year.
Growth in CV per enterprise reflects upsell, an increased number of subscriptions, penetration of new functional areas and price.
Despite the pandemic, our retain clients are continuing to spend more with us every year, although not quite enough to offset dollar attrition.
At the end of the third quarter, the number of quota-bearing associates in GBS was down 7% year-over-year.
We expect to end 2020 with roughly flat headcount at the end of 2019 in GBS.
For GBS, the year-over-year net contract value increase, or NCVI, divided by the beginning period quota-bearing headcount was $38,000 per salesperson, up from last year.
Overall, GBS had a good third quarter, driven by a strong double-digit year-over-year improvement in new business.
As you know, the Conferences segment has been materially impacted by the global pandemic.
We cancelled all in-person destination conferences for the remainder of 2020.
We pivoted to producing virtual conferences with a focus on maximizing the value we deliver for our clients.
We held two virtual conferences in the third quarter after producing pilots in the second quarter.
We have also held a number of virtual Evanta meetings, shifting these one-day local conferences online due to the pandemic.
Conferences revenue for the quarter was $30 million, a combination of the two virtual conferences and a number of virtual Evanta meetings.
We are still in the early stages of all forms of virtual conferences and will continue to leverage customer feedback as we develop, refine and grow our virtual conference offerings.
The revenue mix of our virtual conferences is different from the mix from in-person conferences.
First, in Q3, our revenues were split between virtual conferences and virtual Evanta meetings with a higher mix from Evanta meetings than last year.
Attendee revenue with virtual conferences is from two sources, tickets that are purchased as a stand-alone item, either online or through our sales teams, or an entitlement associated with a broader research contract.
As we've detailed in the past, a small portion of many research contracts gets attributed to the Conferences segment.
The vast majority of the Q3 and expected Q4 attendee revenue is from subscription contract entitlements.
These are entitlements which would have been applied to in-person conferences in 2020 or in some cases in 2021.
We continue to refine our exhibitor offerings for virtual conferences.
We expect Q4 exhibitor revenue to be a much smaller part of overall conferences revenue than in the past.
We continue to incur costs, both in cost of services and SG&A to support virtual conferences and to be in a position to resume in-person conferences when it is safe and permitted.
Lastly, the timing of receiving conference cancellation insurance claims remains uncertain.
So we will not record any recoveries and expenses incurred until the receipt of the insurance proceeds.
Third quarter consulting revenues decreased by 4% year-over-year to $89 million, on an FX neutral basis revenues declined 6%.
Consulting contribution margin was 32% in the third quarter, up over 300 basis points versus the prior-year quarter.
Margins were up, primarily due to cost reduction actions.
Labor-based revenues were $74 million, down 5% versus Q3 of last year or 6% on an FX neutral basis.
Labor-based billable headcount of 737 was down 9%.
Utilization was 60%, up about 300 basis points year-over-year.
Backlog at September 30th was $96 million, down 12% year-over-year on an FX neutral basis.
Our backlog provides us with about four months of forward revenue coverage.
As we discussed last quarter, we had a small workforce action in the consulting business to align our billable headcount with our revenue outlook for the balance of the year.
Our contract optimization business was down 3% on a reported basis versus the prior year quarter.
This compares to a 74% growth rate in the third quarter last year.
As we have detailed in the past, this part of the Consulting segment is highly variable.
SG&A increased 2% year-over-year in the third quarter and 1% on an FX neutral basis.
SG&A as a percentage of revenue increased in the quarter as we restored certain compensation and benefits costs.
EBITDA for the third quarter was $168 million, up 20% year-over-year on a reported basis and up 19% FX neutral.
As I mentioned earlier, we had stronger than expected top-line performance and continue our disciplined focus on expenses.
We also continue to see a meaningful benefit from significantly lower than normal travel costs.
Depreciation in the quarter was up approximately $2 million from last year, although, flat with the second quarter as a result of additional office space that had gone into service before the pandemic hit.
Amortization was about flat sequentially.
Net interest expense, excluding deferred financing costs in the quarter, was $29 million, up from $22 million in the third quarter of 2019.
Net interest expense is up because our interest rate swaps had higher fixed rates from the warrants, which expired last year.
The Q3 adjusted tax rate which we use for the calculation of adjusted net income was 20% for the quarter.
The tax rate for the items used to adjusted net income was 26.4% in the quarter.
Adjusted earnings per share in Q3 was $0.91.
Operating cash flow for the quarter was $244 million compared to $220 million last year.
The increase in operating cash flow was primarily driven by cost of avoidance initiatives, partially offset by an earlier interest payment due to the refinancing.
Capex for the quarter was $15 million, down 59% year over year.
Lower capex is largely a function of lower real estate expansion needs due to the pandemic.
We define free cash flow as cash provided by operating activities less capital expenditures.
Free cash flow for the quarter was $229 million, which is up 25% versus the prior year.
This includes outflows of about $10 million of acquisition, integration and other non-recurring items.
Free cash flow as a percent of revenue, or free cash flow margin was 15% on a rolling four-quarter basis, continuing the improvement we've been making over the past few years.
Free cash flow as a percent of GAAP net income was about 285%.
Free cash flow benefited from continued strong collections combined with reductions in outflows from our cost avoidance initiatives, lower capital expenditures and lower cash taxes and deferrals of certain tax payments.
While we've seen timing benefits to our free cash flow margin from significantly lower capex and our ability to defer certain tax payments, even excluding these, LTM free cash flow margin is still up about 200 basis points versus the prior year.
During the quarter, we took advantage of historically attractive high yield bond pricing and issued $800 million of new 10-year senior unsecured notes with a 3.75% coupon.
We use the proceeds from this new issuance to extinguish our 2025 bonds, which carry a 0.625% coupon.
We also amended and extended our credit facility to September 2025 with attractive financial terms, increased flexibility and fewer less restrictive covenants.
The overall impact of the financing activities resulted in a 50 basis point reduction to total cost of borrowing.
The combination of the capital market activities in the past six months has extended our debt maturity profile to nearly eight years versus less than three years pre-pandemic.
Our September 30th debt balance was $2 billion.
Our reported gross debt to trailing 12 month EBITDA is about 2.5 times.
Our total modified net debt covenant leverage ratio was 2.3 times at the end of the third quarter, well within the 5 times covenant limit.
At the end of the third quarter, we had $554 million of cash.
After pausing share repurchases at the start of the pandemic, we are in a position to resume our normal capital allocation programs.
Going forward, we will deploy excess cash for share repurchases and strategic tuck-in acquisitions.
At the end of the quarter, we had about $1 billion of revolver capacity and have around $680 million remaining on our share repurchase authorization.
We are updating our full-year outlook to reflect Q3 performance, a modestly better demand environment including the successful launch of virtual conferences and cost restoration plans.
Last quarter, when updating guidance, we were cautious because we had only been through one full quarter of the pandemic and we had two quarters remaining in the year.
With more experience, better performance and more visibility, we have updated our guidance accordingly.
We now forecast research revenue of at least $3.57 billion for the full year.
This is growth of almost 6% versus 2019 and reflects a continuation of third quarter new business and retention trends.
For the Conferences segment, we are generating revenue from our virtual conferences.
We now expect revenue of $110 million for the full year.
This reflects our initial success in launching virtual conferences and virtual Evanta meetings.
The majority of the incremental revenue, we expect in conferences is from entitlements, included in some of our subscription contracts, as we've discussed earlier.
We now forecast consulting revenue of at least $370 million for the full year or a decline of about 6%.
The consulting outlook continues to contemplate a slowdown in labor-based demand.
The timing of revenue in the contract optimization business can be highly variable as you know.
Overall, we expect consolidated revenue of at least $4.05 billion, that's a reported decline of about 5% versus 2019.
Excluding conferences, we expect revenue growth of at least 4.5% versus 2019 on a reported basis.
The cost avoidance programs we put in place in March have allowed us to protect profitability and conserve cash.
We started to resume certain spending late in the second quarter as the operating environment appears to have at least stabilized, we want to ensure we are well-positioned for an economic normalization.
We expect full year adjusted EBITDA of at least $740 million, that's full year margins of about 18.3%, up from the 16.1% margins we had in 2019.
We expect our full year 2020 net interest expense to be $106 million.
We continue to expect an adjusted tax rate of around 22% for 2020.
This does imply a higher fourth quarter rate than we've seen throughout 2020, consistent with our experience in recent years.
We expect 2020 adjusted earnings per share of at least $4.07.
For 2020, we expect free cash flow of at least $625 million.
Our free cash flow guidance reflects both the P&L outlook we just discussed, strong capex management and better than previously forecasted collections.
All the details of our full year guidance are included on our Investor Relations site.
In summary, despite a very uncertain economic environment we delivered better-than-planned financial results in the third quarter, which has allowed us to update our full year outlook favorably.
Most of our key operating metrics improved in the quarter and we were able to successfully launch and monetize virtual conferences and virtual Evanta meetings.
Cash flow was outstanding and we have taken a number of measures to increase our financial flexibility, reduce maturity risk and ensure we have ample liquidity.
We will continue to balance cost avoidance programs with targeted investments and restoration of certain expenses, to ensure we are well positioned to rebound when the economy recovers.
| q3 revenue $995 million versus refinitiv ibes estimate of $928.1 million.
q3 adjusted earnings per share $0.91.
raised guidance for full year as demand is tracking above our prior expectations.
sees fy adjusted earnings per share at least $4.07.
sees fy adjusted fcf at least $625 million.
|
Molly Langenstein, our CEO and president, also joins me today.
Although 2020 and pandemic uncertainty created a sales environment that was challenging as reflected in our results, we successfully navigated this extraordinary landscape while also creating a solid foundation that we believe positions us for our return to growth in 2021 and the years ahead.
We rapidly accelerated our transformation to a digital-first company, fast-tracking numerous innovation and technology investments, which drove higher consumer engagement and year-over-year digital sales increase of nearly 20%, led by Soma's digital sales increase of 72%.
As a brand, Soma generated comparable sales growth for the last seven months in fiscal 2020.
And according to the NPD Group, for the 12 months ended January 2021, Soma's growth exceeded that of the U.S. apparel market and the market leader for nonsport bras and panties and was in the top five brands overall in the sleepwear market.
I am also pleased to report that Soma sales for the back half of fiscal 2020 were the highest in the history of the brand.
We believe this is compelling evidence Soma is well positioned to accelerate recent market share gains.
Our enhanced marketing efforts drove traffic as well as new customers to our brands, and newly acquired customers were retained at a meaningfully higher rate than fiscal 2019.
The average age of our new customers dropped 10 years for Chico's and eight years for Soma.
And the average age for the new White House black market customers complemented the current target customer, reinforcing the runway for all three brands.
Our new apparel selections resonated with customers.
We relaunched Zenergy in Chico's with new fabrication, styling and marketing and also increased our gifting assortment in key item depth, which showed positive results.
At White House black market, we pivoted to casualization and launched Lux Weekend, new runway leggings and a focus on denim that customers love.
We significantly enhanced our liquidity and financial flexibility by amending and extending our credit facility to $300 million and ended the year with a solid cash position.
We obtained landlord commitments of $65 million in rent abatements and reductions and further rationalized our real estate position by permanently closing 40 underperforming locations over the last year.
And we substantially streamlined our organization and permanently reduced our cost structure to more efficiently support our business.
These efforts resulted in approximately $235 million of annual savings in fiscal 2020 or 23% greater than our original plan.
Chico's FAS is a company of three unique brands, and we believe we are poised to take market share in each of these businesses when the pandemic-related consumer pause lifts.
We are optimistic about store traffic rebounding as vaccines become more widely available and have, in fact, seen this correlation prove out.
We believe Soma, in particular, has the opportunity for significant growth.
Today, the intimate apparel and loungewear market is a nearly $7 billion business in the U.S. and is forecasted to reach over $11 billion by 2025.
Soma's compelling position in intimates and a seven month of comparable sales growth, give us confidence that Soma is on track to take a meaningful piece of this market and become one of the largest intimate apparel brands in the country.
At the same time, we believe there is opportunity to optimize and strengthen both Chico's and White House black market.
The disruption in the competitive set has left white space that we can strategically take.
At Chico's, we expect to reinvigorate growth through loyalty, community and design.
At White House black market, we expect to drive consumer enthusiasm for the brand by a focus on fabric, fit and fashion that meets our customer where she is in her lifestyle today.
In order to maximize the opportunities in each of our brands, we are targeting five key focus areas for 2021.
First, continuing our ongoing digital transformation.
Second, further refining product through fit, quality, fabric and innovation.
Third, driving increased customer engagement through marketing.
Number four, maintaining our operating and cost discipline and finally, further enhancing the productivity of our real estate portfolio.
Allow me to elaborate on each of these.
Number one, continuing our ongoing digital transformation.
Over the last year and a half, we prioritized digital as the primary sales channel for all three of our brands, making major strategic investments in talent and technology to pivot up to a digital-first company.
We are enabling her to shop how she chooses in a way that is personalized and simplified across every touch point of her shopping experience.
Innovative launches that we consider meaningful competitive advantage includes Style Connect, our digital styling tool; My Closet, a personal closet feature; and social proofing.
Each of these tools have gained traction and driven engagement and conversion.
In the fourth quarter, Style Connect orders nearly doubled from last year.
We have successfully enrolled 42% of our active customer file in Style Connect, representing almost three million customers.
Our prioritization to digital also incorporates mobile POS, AI search engine optimization and enhanced navigation touch points across all brands.
We have also accelerated the launch of new leading edge digital selling and fulfillment tools to drive greater online customer demand.
We will be rolling out more innovations in 2021, including an optimized mobile-first experience.
We continue to leverage our digital investments, converting single channel customers to the omnichannel customers as the average omnichannel customer spend is nearly three and a half times more than a single channel customer.
Number two, further refining products through fit, quality, fabric and innovation.
At each of our brands, we are laser-focused on our customer, continually elevating our products so we can capture the greatest market share.
At Soma, innovation is at our core, while beautiful solutions that extend to wellness and comfort are synonymous with our brand.
Our products serve our customers' lifestyle and promote health, including a great night sleep and loungewear to live in.
We fuel our bra and panty franchises and are positioned to further expand our market share and drive results.
We have a growing customer base with the most meaningful growth in our under 34 age group, as a result of more inclusive branding and evolved product assortment.
To continue capturing a broader audience, we will integrate our digitally native and younger TellTale brand onto the Soma site, which we successfully tested in the fourth quarter.
At our apparel brand, as the world shifts toward comfort and work from home, we see increased interest in our core franchises of effortless chic pants and tops at Chico's and denim with plenty of stretch, legging and feminine tops at White House black market.
As women emerge from their homes and continue to reinvent their wardrobe, we have developed improved fabrics and integrated new technology and comfort features to adapt to her needs.
Number three, driving increased customer engagement through marketing.
Our goal is to increase brand awareness, drive engagement, generate traffic and acquire new customers through continuous marketing improvement.
We are especially excited about our partnership with Salesforce, which enables us to better leverage the unified view of our millions of customers and act on our robust customer data that has been collected for more than three decades.
We can track every omnichannel customer journey and interaction, connect every commerce channel, create more engaging personalized and targeted marketing and messaging using predictive intelligence and adjust marketing in real-time based on trends or customer actions.
The Salesforce relationship also creates a data foundation to support the rollout of our enhanced loyalty program in the second half of this year.
And our loyalty program already has some of the highest participation rates in retail at over 90%.
We also have some of the most loyal and long-tenured customers in retail.
Our Chico's customers averaged well over 12 years with us.
White House black market customers average nine and Soma customers average over six, demonstrating we have the ability to retain new customers for a very long period of time.
We will continue to elevate our marketing efforts with more digital storytelling, the use of social influencers and to build upon our organic social efforts and wider-by communication.
Number four, maintaining our operating and cost discipline.
We will continue to improve our sourcing, logistics and operational processes to drive efficiencies and speed and lower cost.
We have teams focusing on a wider range of areas from further diversifying the supply chain, lowering dependence on agents, increasing the use of 3D design, and streamlining outbound shipping and ship from store processes, just to name a few.
Over the last year, we have reduced our supplier base by 20%, and agents currently represent 32% of the business, and we expect to lower that to about 18% by 2022.
And finally, number five, further enhancing the productivity of our real estate portfolio.
Stores continue to be an important part of our omnichannel strategy, and digital sales are higher in markets where we have our retail presence.
Soma is certainly a great example of that.
While Soma is now a digital-first business, it is supported by 259 boutiques.
In alignment with driving Soma to be one of the largest intimate apparel brands in the country, we are excited about opening Soma shop-in-shops in a number of Chico's boutiques.
We have opened 10 so far this year, and we will open 40 more by early May.
Our marketing data indicates that Soma and Chico's in-store cross-shop opportunities are abundant.
And we believe the shop-in-shop format will deliver meaningful brand awareness and generate both store and digital sales in markets where we are underpenetrated.
In addition, we plan to convert eight White House black market locations into Soma Boutiques.
We will also continue rationalizing and tightening our real estate portfolio, reflecting our emphasis on digital and our priority or higher profitability standards.
We are currently driving store sales with less inventory and increased productivity.
We've closed 40 underperforming locations since the beginning of fiscal 2020 and ended the fiscal year with 1,302 boutiques.
We will continue to shrink our store base to align with these standards, primarily as leases come due, lease kick-outs are available or buyouts make economic sense.
We have strong lease flexibility with nearly 60% of our leases coming up for renewals or kick-outs available over the next three years.
To further improve store productivity, we anticipate closing 13% to 16% of our remaining store fleet over the next three years, with 40 to 45 of those closures occurring in fiscal 2021.
The vast majority are expected to be mall-based Chico's and White House black market stores.
This means from the beginning of fiscal 2019 through the end of fiscal 2023, we will close up to a total of 330 stores, well ahead of our original multiyear closure target of 250 stores.
Our balance sheet remains solid.
We ended the fiscal year with $109 million of cash and cash equivalents after paying $38 million in fourth-quarter rent settlements.
And we navigated the fourth quarter without increasing debt levels on our newly amended credit facility, which matures in October 2025.
As you recall, last year, we renegotiated over 90% of our store leases, resulting in commitments of $65 million in rent abatements and reductions.
On a cash basis, approximately $44 million of these savings were realized in fiscal 2020, with the majority of the balance expected to be realized in fiscal 2021.
This $65 million represented about 25% of our annual rent expense, which we felt was a reasonable request at the time.
However, with the effect of the pandemic now extending well beyond original expectations this month we are launching Phase 2 of our lease renegotiation process, going back to our landlords for additional reductions.
Phase 2 will focus on the continuing COVID impact on our stores.
We will again work with A&G Real Estate Partners to obtain what we expect will be meaningful rent concessions.
We will provide an update on this initiative during our first-quarter earnings call.
In the fourth quarter, we permanently closed eight stores, bringing our net year-to-date closures to 39.
As of fiscal year-end, we have closed 123 stores since the beginning of fiscal '19.
Turning to fourth-quarter performance.
Net sales totaled $386.2 million compared to $527.1 million last year.
This 26.7% decrease reflects a comparable sales decline of 24.9% as well as the impact of 39 net store closures in the year, partially offset by a double-digit growth in digital sales.
For the fourth quarter, we reported a net loss of $79.1 million or $0.68 per diluted share, which included $35.9 million or $0.32 per diluted share and significant after-tax noncash charges outlined in today's release.
The majority of these charges related to a $32.1 million or $0.28 per share deferred tax asset valuation allowance.
Gross margin in the fourth quarter was 19% of net sales compared to 32.5% last year.
The rate decline primarily reflected lower maintained margin in our apparel brands and deleverage of fixed occupancy cost.
Lower apparel maintained margin rates primarily reflected the impact of declines in average unit retails, with higher sales driving promotional activity and increased markdowns mix versus last year.
Also keep in mind that fourth-quarter occupancy cost, a component of gross margin, does not reflect the meaningful savings from rent reductions as these reductions are being recognized pro rata over remaining lease terms.
I'm pleased with how swiftly our team pivoted at our assortment and managed inventory.
We believe our inventory is current and properly balanced with the influx of new seasonally appropriate receipts.
We ended the year with inventories down over 17% from the prior fiscal year-end.
And weeks of supply are substantially less than last year.
More importantly, our inventory is appropriately targeted.
Our apparel inventories are down over 20%, and some inventories are up 2% year over year.
As we look ahead to the first half of fiscal '21, we are planning year-over-year apparel inventories down more than 30%, and Soma inventories up over 30% as we continue to cannibalize on the momentum in this rapidly growing business.
SG&A expenses for the fourth quarter totaled $136.2 million, an improvement of $40.8 million from last year, reflecting our ongoing expense reduction initiatives to align our cost structure with sales.
The effective fourth-quarter tax rate was a provision of 20.4% compared to a benefit of 21.6% from last year's fourth quarter.
The current year effective tax rate primarily reflects the deferred tax asset valuation allowance charge, partially offset by the favorable rate differential due to the benefits provided under the CARES Act.
The fourth-quarter valuation allowance is a noncash charge as a result of ongoing pandemic-related uncertainty, surrounding future realizability of the related deferred tax assets.
Our financial position liquidity are being bolstered by strong digital performance across all brands.
Retail store sales and a significantly leaner expense structure that better aligns cost with sales.
In addition, our fiscal year-end balance sheet reflects a federal income tax receivable of approximately $35 million that we expect to realize in the second quarter of fiscal '21.
Turning to our outlook.
However, we believe it would be helpful to have a view into our planning for the coming year and are providing color.
At this time, we expect to benefit from the COVID-19 vaccine rollout, particularly given our customer base and are planning for consolidated sales trends to improve in the back half of the year.
As Molly noted, we are seeing traffic trends in proven areas where vaccines are becoming more widely available.
For planning purposes, consolidated sales trends for the first half of the year are expected to be largely in line with our reported fiscal 2020 results.
Looking at each brand, we expect continued strong performance at Soma, with performance at Chico's and White House, consistent with market expectations.
In addition, we expect our ongoing investment in the digital channel to deliver continued sales growth.
We expect cost savings realized in fiscal 2020 to be maintained in fiscal '21.
We are continuing to implement supply chain efficiencies and intend to maintain stringent inventory controls, with fiscal 2021 first half inventories planned down roughly 30% to last year.
These actions are expected to deliver significant improvement in current margin levels.
We believe the actions we have taken, combined with our solid financial position, increased flexibility under our credit facility and our competitively positioned brands, enable us to emerge as a stronger company in 2021 and beyond.
| compname reports q4 loss per share $0.68.
q4 loss per share $0.68.
q4 sales $386.2 million versus $527.1 million.
fiscal year-end total inventories down over 17% and store inventories down 25%.
not providing specific fiscal 2021 first-quarter or full-year financial guidance at this time.
qtrly comparable sales was a decline of 24.9%.
|
First, on a somber note, as we look at the events over the last couple of weeks, our thoughts, Korn Ferry's thoughts, are with the people of Ukraine and everyone who's been impacted by the destruction, the devastation, and the loss of thousands of lives.
Our prayers go out to all of those who were impacted by this unnecessary war and by the human misery that's taking place.
Turning from that, and an entirely different view, I am pleased with our results during the third quarter.
We once again achieved new financial performance size.
We generated about $681 million in fee revenue, that was up 43% year over year.
Our diluted and adjusted diluted earnings per share was $1.54 and $1.59, respectively, and those were also new highs.
Our performance over the recent quarters is a reflection of the relevance of our strategy and solutions, the resilience of our colleagues, and more importantly, the connection with our Korn Ferry brand.
We're replicating and scaling our success and continuing to lead innovation at the intersection of talent and strategy in an increasingly digitally enabled new world of work.
The metrics of our business are very good.
It's hard to believe that it was two years ago, almost to the day that the pandemic was declared.
And those were certainly uncertain times.
And now again, we face ourselves with uncertain times.
But when we think about the power of the firm, the breadth of what we offer, and particularly the sacrifices made by our colleagues over the last couple of years, it affirms what this company is all about.
We've accelerated from that uncertainty.
We're now up 32% compared to the quarter preceding the pandemic, which at that time was an all-time high, and we haven't just talked about it we've walked it.
We've walked it from the vast IP we have.
We developed over 1 million professionals a year.
We walked it by living our purpose, and we continue to innovate, replicate and scale, allowing people and organizations to exceed their potential in this rapidly changing world.
Elements of our strategy include driving a top-down go-to-market approach based on our marquee and regional accounts, which year to date represent about 37% of our portfolio.
This not only facilitates growth and enduring partnerships, but is also key to more scalable and durable revenues.
For example, on a year-to-date basis, about 28% of our revenue is driven by cross referrals within our firm, up several million dollars sequentially which demonstrates the effectiveness of our go-to-market strategy.
We also believe there's substantial market opportunity with our talent acquisition and interim businesses, particularly given the acceleration of the nomadic labor market.
And looking at our digital and consulting businesses, we'll continue to innovate, marrying Korn Ferry's capabilities with tomorrow's opportunities, from organizational transformation, to sales effectiveness and accelerated revenue growth to M&A and ESG.
We're going to continue to further push to monetize our IP and continue to move more of our digital business to a subscription offering.
And we're also going to scale our learning, development, outsourcing capabilities, LDO, leveraging our Korn Ferry Advance platform.
150,000 professionals around the world have used Advance, both as individuals and as part of their professional development journeys with their employers.
And lastly, we're going to maintain a balanced capital allocation strategy.
including a disciplined approach to M&A.
With that, I'm joined by Gregg Kvochak and Bob Rozek.
A couple of weeks ago, I celebrated my 10-year anniversary at Korn Ferry.
Looking back to when I started, I really believed that there were great opportunities ahead for us.
And as I stand here today, after 10 years, looking at the business we built, the data, the assets, the solutions, and most of all, the incredibly talented colleagues we have to serve our clients, it's pretty clear to me that I underestimated our true potential.
The investments we've made in IP, people, data, and processes have enabled us to thrive in today's environment and more importantly, have positioned us for future growth.
Our operational execution continues to drive consistent and superior financial performance.
I've always said the best way to measure performance is by looking at results.
Now you heard Gary say that we continue with strong financial performance in the third quarter, delivering new highs in our fee revenue and adjusted diluted earnings per share.
This is a direct result of the exceptional execution of our strategy and the growing relevance of our solutions.
You also heard Gary talk about our go-to-market success with our marquee and regional accounts and the cross line of business, top-line synergies we're able to generate with our highly complementary portfolio of services and solutions.
I look at the growing relevance of our consulting services and solutions around major issues or what we refer to as mega trends that companies are wrestling with today, whether it's ESG, diversity, equity and inclusion, accelerating revenue growth in a post-pandemic world or developing professionals and leaders to operate in the evolving digital world.
All of this leaves us uniquely positioned.
In fact, the only company able to meet the entire spectrum of human capital needs of companies across the globe, and we are well-positioned to continue to gain market share in the markets that we serve.
Now let me turn to the third quarter.
Fee revenue, as Gary indicated, was $681 million.
That's up $205 million or 43% year over year.
Normally, with the year-end holidays, our third quarter has historically been our seasonal low.
However, in the current year, fee revenue was actually up $41 million or 6% sequentially.
By line of business, fee revenue growth for executive search was up 42% year over year, while RPO and professional search was up 98%.
Year-over-year growth for consulting and digital was also very strong at 20% and 19%, respectively.
Earnings also grew to new highs in the quarter.
Adjusted EBITDA grew $42 million or 43% year over year to $138 million with an adjusted EBITDA margin of 20.3%.
Our earnings and profitability continue to benefit from both higher consultant and execution staff productivity as well as lower G&A spend.
Today, our earnings and profitability have never been higher.
If you go back and you look at the first three quarters of fiscal '20, that's right before the pandemic recession hit, our adjusted EBITDA is up 71% and it's actually grown two and a half times faster than our fee revenue has grown.
Our adjusted fully diluted earnings per share also advanced to a new high in the quarter, improving to $1.59 per share, which was actually up $0.64 year over year.
New business was also very strong in the third quarter, up 30% year over year, reaching a new quarterly high.
If you look at it by month, the consolidated new business, we saw a real sharp rebound in January from a seasonal low in December.
We saw solid new business growth in every line of business.
Of particular note, growth in our RPO new business was very strong at $135 million of new contract awards, and that's the second consecutive quarter they achieved that level.
Our investable cash position remains strong.
At the end of the third quarter, cash and marketable securities totaled about $1.1 billion.
Now if you exclude amounts reserved for deferred compensation arrangements and accrued bonuses, our global investable cash balance was approximately $592 million, which is up $58 million or 11% year over year.
I would note that the investable cash position is net of $91 million that we used to acquire the Lucas Group on November 1 and about $22 million for share repurchases in the quarter.
As Gary mentioned, we continue to take a balanced approach to allocating capital.
In addition to investing in M&A and hiring of additional fee earners and execution staff, we have repurchased approximately $55 million worth of our stock and have paid cash dividends of approximately $20 million so far in fiscal year '22.
I'm going to start with KF Digital.
Global fee revenue for KF Digital was $90.2 million in the third quarter, which was up 19% year over year.
Additionally, the subscription and licensing component of KF Digital fee revenue grew to $29 million in the third quarter, which was up 26% year over year and up 12% sequentially.
Globally, new business for KF Digital in the third quarter grew 8% year over year to $108 million, which was the fifth consecutive quarter over $100 million.
$39 million or 37% of the total digital new business in the third quarter was related to subscription and license sales.
Earnings and profitability remained strong with adjusted EBITDA of $28.1 million and a 31.2% adjusted EBITDA margin.
Now turning to consulting.
In the third quarter, Consulting generated $162.9 million of fee revenue, which was up approximately $27 million or 20% year over year.
Fee revenue growth continued to be broad-based across all solution areas and strong regionally in North America and EMEA, which were up 28% and 16%, respectively.
Consulting new business also reached a new high in the third quarter, growing approximately 10% year over year.
Regionally, new business growth in the third quarter was strongest in North America and EMEA, which were up 10% and 16%, respectively.
Adjusted EBITDA for Consulting in the third quarter was $28.6 million with an adjusted EBITDA margin of 17.5%.
The growth trend for RPO and professional search remained strong in the third quarter, driven by the surge in demand for top skilled professionals.
Globally, fee revenue grew to $188.6 million, which was up 98% year over year and up approximately $38 million or 25% sequentially.
RPO fee revenue grew approximately 68% year over year and 3% sequentially, while professional search revenue was up approximately 150% year over year, and up 67% sequentially.
The integration of the Lucas Group has gone well.
Revenue in the third quarter for the Lucas Group was approximately $33 million, which was up approximately 10% compared to the revenue for the three months preceding the acquisition.
New business wins for both RPO and professional search were also strong in the third quarter, reaching new highs.
Professional search new business was $93 million and RPO was awarded $135 million of new contracts, consisting of $74 million of renewals and extensions and $61 million of new logo work.
Adjusted EBITDA for RPO and professional search continued to scale with revenue improving to $44.1 million with an adjusted EBITDA margin of 23.4%.
Finally, in the third quarter, global fee revenue for executive search reached another new high of $239 million, which was up 42% year over year.
Growth was also broad-based with North America growing 44% year over year and EMEA and APAC growing 32% and 45%, respectively.
Market demand in international regions continued to improve in the third quarter with core sequential growth accelerating in EMEA, APAC and Latin America.
We continue to invest in expanding our team of consultants in the third quarter.
The total number of dedicated executive search consultants worldwide at the end of the third quarter was 581, just up 59 year over year and up 11 sequentially.
Annualized fee revenue production per consultant in the third quarter remained steady at $1.66 million.
And the number of new search assignments opened worldwide in the third quarter was up 37% year over year to 1,787.
In the third quarter, global executive search adjusted EBITDA grew approximately $66 million, which was up 24 -- grew to approximately $66 million, which was up $24 million year over year with an adjusted EBITDA margin of 27.5%.
As previously discussed, our consolidated new business grew to a new high in the third quarter, again, with real strength across all lines of business.
Backlog exiting the third quarter was strong as was February new business.
February generally is the shortest month in the year in terms of working days.
However, this February was actually our eighth best new business month ever excluding RPO.
And if you include RPO, it was actually our best new business month ever.
Now despite the continuing strength in new business trends and backlog coming out of Q3, the very recent situation in Eastern Europe presents a level of risk and uncertainty that is difficult to quantify.
With this in mind and assuming no new major pandemic-related lockdowns or further changes in worldwide geopolitical conditions, economic conditions, financial markets or foreign exchange rates, we expect our consolidated fee revenue in the fourth quarter to range from $670 million to $690 million and our consolidated adjusted diluted earnings per share to range from $1.49 to $1.63 per share and our GAAP diluted earnings per share to range from $1.44 per share to $1.60.
Now let me end as I started.
As I look ahead for all the reasons previously discussed, I'm more optimistic now than I have ever been about our long-term opportunity to continue to build on our financial success.
Our company today has more durable revenue streams, has achieved a new level of business activity and profitability that is sustainable and has positioned us for continued growth.
And we have a core set of integrated solutions that are highly relevant to the mega trends that we're seeing in the world today.
Korn Ferry has never been better positioned to serve all of its constituencies, colleagues, clients, candidates, and shareholders for years to come.
With that, we'll conclude our remarks and be glad to answer any questions you may have.
| q3 earnings per share $1.54.
qtrly adjusted earnings per share $1.59.
q4 fy'22 diluted earnings per share is expected to range between $1.44 to $1.60.
q4 fy'22 fee revenue is expected to be in range of $670 million and $690 million.
q4 fy'22 adjusted diluted earnings per share is expected to be in range from $1.49 to $1.6.
|
I'm joined by John Peyton, CEO; Allison Hall, Interim CFO and Controller; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's.
When we spoke last quarter, I shared my belief that the industry and our brands, in particular, were on the cusp of a restaurant renaissance.
And our headline today is that the renaissance is here.
I love this notion of renaissance because it's all about resurgence and creativity and pushing beyond established boundaries, and that's exactly what we're doing at Dine Brands.
We're changing the way people think and we are turbocharging creativity and experimentation.
A willingness to learn and adapt is flourishing throughout our organization.
I see it every day from our franchisees, to our company staff, to the restaurant teams, our general managers and our servers.
And that's why I'm so proud of our company and our franchisees.
I'm proud of our management team, and I'm especially proud of the thousands of hard-working restaurant team members around the world.
Now as I look back on the first quarter, it's remarkable how we continue to persevere and grow.
Our brands posted meaningful improvements during the first quarter.
So let me share those results through the lens of store sales, total revenue and cash generation because, obviously, each one leads to the next.
Average weekly sales at both IHOP and Applebee's exceeded pre-pandemic levels several different times during the first quarter.
According to Black Box, and this is impressive, Applebee's increase in same-store sales for Q1 outperformed the casual dining segment.
Off-premise, in March, both IHOP and Applebee's off-premise sales reached absolute dollar levels, higher than when the restaurants were 100% off-premise in 2020, indicating the staying power of this largely incremental business.
We achieved revenue of $204.2 million and EBITDA of $58.1 million, reflecting strong underlying performance across our business.
Cash, we generated free cash flow of $30.7 million which, in part, enabled us to repay our $220 million revolver in early March.
And also importantly, our franchisees opened 10 new restaurants during the quarter, indicating that they're beginning to pivot toward growth.
We're very encouraged by our Q1 performance, and we're certainly optimistic that economic tailwinds will sustain us throughout 2021.
Contributing to that view is historically high consumer savings, the Federal spending that we've been enjoying as well as a new potential infrastructure bill.
The unemployment rate is the lowest since the pandemic began.
And with vaccinations rising, the economic growth outlook firming and the strength and resilience of our brands, I'm confident that we'll build on the strong Q1 performance to drive market share gains and deliver profitable growth throughout the year.
Now our fundamental strengths are something many CEOs would love to have.
Number one, we are an asset-light 98% franchise model that is a significant generator of cash.
Second, we've got two iconic world-class brands that are number one in both the casual and family dining categories.
And third, we've got the most talented, most resilient team members in the industry today, along with the next generation of workers still to be hired.
And as tough as the past year has been, the pandemic actually gave us new competitive competencies.
Here's what we have today that no one could have even imagined pre COVID.
We've got significant incremental off-premise business in both brands.
Our teams moved quickly and aggressively to add the tech and operations capability needed to nurture and sustain this new business.
Second, we leaned heavily into ghost kitchens and virtual brands like Cosmic Wings and others on the horizon that offer new sources of revenue per dine in our franchisees, all of that due to the creativity and talent of our people.
And we advanced our digital platform and loyalty programs that will increase our share of wallet.
So with COVID-19 vaccine appointments now more widely available and capacity restrictions being eased across the country, we are seeing increased traffic in our restaurants.
A couple of questions that might be on your mind.
First is about hiring, and that is certainly a challenge in the industry today and all around the country.
So I want you to know that we are aggressively working to help our franchisees recruit adequate staffing to accommodate the increase in demand.
And this is a great example of where dine scale makes a big difference.
We're launching national campaigns for two recruiting days next week.
Applebee's and IHOP are collaborating with their franchisees on the 17th and 19th with the goal of hiring more than 20,000 new team members, and we're making it easy to apply via text, email and in-person, and both brands are leveraging very creative social campaigns to generate interest.
Your second question today might be around procurement, and I want you to know that we're working to secure the continuity of our supply chain.
During the past few months, the surge in guests going out to eat created demand that has outpaced supply.
This is actually not a terrible problem to have, as we see it as just a moment in time.
Nonetheless, our purchasing co-op remains heavily engaged with both brands, and we've adjusted our full year food forecast slightly upward due to generally higher commodity and input costs.
However, we expect prices to fall back to equilibrium as our suppliers adjust to the new demand forecasts over the remainder of the year.
We want the world to know right now that Applebee's and IHOP are open for business.
So our marketing plans encompass national TV, digital media, social media platforms and one-to-one marketing.
Both IHOP and Applebee's have standard operating procedures in place, and our employees have done a terrific job of adhering to best practices like QR code menus upon request, tables that aren't set until the guest is seated, the proper use of masks and enhanced cleaning protocols.
And so with safety in place, we're doubling down on innovation to fuel the renaissance.
And specifically, we've got five growth platforms that build on Dine's competitive advantage.
Number one, we're developing and investing in new smaller restaurant prototypes for both brands.
Flip'd is a good example of our new thinking; number two is off-premise enhancing technology like FlyBuy; number three, virtual brands, think Cosmic Wings; number four is ghost kitchens.
For IHOP, they're up and running in Dubai, Kuwait and Saudi Arabia.
And for Applebee's and Cosmic Wings, we're up and running in L.A., Philadelphia and coming soon in Miami.
And as always, we're focused on new culinary creations like IHOP's Burritos & Bowls.
So I know that you're waiting for our comprehensive long-term growth plan.
And I can tell you that we're currently conducting a top to bottom strategic review of the business.
And as part of that process, we're embracing a bigger and more holistic vision for our future.
But in the near term, I can tell you that we've already decided to lean into three incremental investments that I know will make a difference, and since we spoke last quarter.
First is technology that enhances the guest experience.
We -- we're accelerating the redesign of ihop.com and the IHOP app.
We're accelerating the Flip'd website and its app as well as the platform needed to support our loyalty programs for IHOP and Applebee's.
Second, we're leaning into Flip'd by IHOP.
We'll increase investment to accelerate the launch of this IHOP sister brand.
And on that topic, I can just say, stay tuned for some news coming soon.
And third, we're making investments to improve the guest experience in our portfolio of 69 company-owned Applebee's restaurants in the Carolinas, which by the way, consistently ranked among the top performers in the domestic Applebee's system based on sales.
So these three investments that I just mentioned are largely an investment in capex, and they represent an additional $5 million in capex since we last spoke.
We don't expect them to alter our previously issued G&A guidance.
So I'm confident in our plans and very confident in our management team.
We've identified the building blocks for the restaurant renaissance, and we'll use those as a way for all of you to continue to follow the progress of our story.
An important part of our story is a strong balance sheet because it enables us to create that future, and Allison will now give you an update on that as well as on our financial results.
I'll begin with an update on the business.
Our performance in the first quarter reflects pent-up consumer demand for our brands.
Vaccine is being administered across the country, the distribution of government stimulus checks and the gradual easing of dining room restrictions.
At the end of the first quarter, 99% of our domestic restaurants were open for dining operations, with restrictions in some states.
I'm pleased to reiterate that we repaid the $220 million drawdown from our revolving credit facility in early March 2021 as planned.
We now expect to achieve an annual interest savings of approximately $5 million.
Our cash position remained strong.
We ended the first quarter with total unrestricted cash of $179.6 million.
This compares to unrestricted cash of $163.4 million for the fourth quarter of last year, excluding the $220 million that was drawn against our revolving credit facility, a 10% increase.
Switching gears to our operating results.
I'll start with the income statement.
For the first quarter, adjusted earnings per share was $1.75 compared to $1.45 for the same quarter of 2020.
The year-over-year improvement was primarily due to lower tax expense as well as a higher gross profit, driven by an increase in revenue from Applebee's company-operated restaurants, due to a higher average check and increased traffic.
We believe the distribution of the latest round of government stimulus checks in March favorably impacted both traffic and average checks.
The increase in average check was also partially attributable to favorable product mix and daypart ships.
Gross profit for our Applebee's company-owned restaurants increased 5.9 percentage points to 9% for the first quarter compared to the same quarter in 2020.
Rental segment revenue for the first quarter of 2021 was $26.1 million compared to $29 million for the same period last year.
The variance was primarily due to the decrease in base rent, resulting from restaurant closures and lease buyouts, and a decline in percentage of rental income based on franchisees' retail sales.
Rental segment gross profit was 19.8% for the first quarter of 2021.
This represents sequential improvement of 12 percentage points compared to the fourth quarter of 2020, which was more heavily impacted by charges related to the planned closures of underperforming IHOP restaurants.
Turning to our GAAP effective tax rate for the first quarter.
Our effective tax rate for the first quarter of 2021 was negative 6.6% compared to 23.2% for the same quarter of 2020.
The change in effective tax rate was primarily due to onetime recognition of excess tax benefits on stock-based compensation related to the departure of our previous CEO.
Switching gears to G&A.
G&A for the first quarter of 2021 was $39.9 million compared to $37.6 million for the same quarter of last year.
The increase was primarily due to higher personnel costs associated with equity-based and other incentive compensation, partially offset by lower travel costs.
We continue to view G&A as a significant lever for the organization.
Turning to the cash flow statement.
Cash from operations for the first quarter of 2021 was $30.6 million compared to $29.6 million for the same quarter last year.
The increase was primarily due to the recognition of excess tax benefits on stock-based compensation.
Our highly franchised model continues to generate strong adjusted free cash flow of $30.7 million for the first quarter of 2021 compared to $27.5 million for the same quarter in the prior year.
The variance was primarily due to the increase in cash from operations just discussed and lower capex compared to the first quarter of 2020.
We believe that our strong cash position, cash from operations, disciplined G&A management, and the ongoing improvement in our business will allow us to invest and grow as the recovery from the pandemic continues.
Regarding capital allocation and financial flexibility, our business decisions are driven by the improvements in our restaurant operations and industry conditions.
As a result of our progressive recovery, we chose to repay the $220 million drawn against the revolver in early March.
We'll continue to evaluate our business performance, which will influence our decisions on capital allocation.
Turning to our franchisees assistance programs.
As of March 31, 78% of the $61.9 million in royalty, advertising fees and rent payment deferrals that Dine Brands provided to 223 franchisees across both brands has been repaid.
Dine Brands started the year strong, both Applebee's and IHOP posted meaningful sequential improvement in comp sales.
Average weekly sales in dollars for both brands increased to pre-pandemic levels in certain weeks during the first quarter.
We ended the first quarter with a strong cash position, allowing us to make additional investments in our business.
We're very pleased with our start to 2021, and we remain optimistic about the second half of the year.
Now you will hear more from brand President, John Cywinski, who will tell you about the significant progress we're making at Applebee's, John?
After a year of navigating the pandemic, March and April represented an extraordinarily positive inflection point for the Applebee's brand.
In fact, in more than four years as President of Applebee's, I honestly can't recall the brand being better positioned than it is at this very moment.
We just delivered the two highest monthly sales volumes Applebee's has achieved since the inception of Dine in 2008.
In fact, it's quite likely March and April represent two of our all-time highest volume months in the 40-year history of the brand, but I really can't confirm this as our database only goes back 13 years.
What I can confirm is that March comp sales were positive 6.1% versus 2019, reflecting the confluence of consumer stimulus, compelling marketing and most importantly, operational excellence.
Momentum continued to accelerate in April as Applebee's delivered a plus 11.4% comp sales result versus that same 2019 baseline.
While it's impossible to determine how much of this momentum can be attributed to government stimulus versus organic demand, it's very clear to me that America is dining out again in full force.
So here's the real story.
According to Black Box, 2021 comp sales versus 2019, as John referenced, Applebee's has now significantly outperformed the casual dining category for 12 consecutive weeks.
And get this, an average of 560 basis points.
In many respects, this is reminiscent of Q1 of last year when we posted 10 consecutive weeks of positive comps before the emergence of COVID.
Clearly, Applebee's momentum has returned, and it's returned in a very powerful way.
It's important to remember that this momentum started to emerge in the last week of February, well before stimulus checks, when we introduced our successful Burgers and Wings event.
This message really resonated with Applebee's guests behind the enormously popular Chicken Fried lyrics from our friends at the Zac Brown band.
In the April return of our signature Irresist-A-Bowls currently on air, is the latest example of Applebee's providing big flavor and abundant value.
This advertising was choreographed to the classic AC/DC Rock Anthem Back in Black and it delivered breakthrough results.
This is just more evidence of Applebee's talented marketing team continuing to innovate around what I firmly believe to be the most enduring, memorable and likable ad campaign in the entire industry, and frankly, outside of the industry.
Of course, I'm talking about eating good in the neighborhood, something that's a real point of pride for our franchise partners, the restaurant teams and our entire organization.
We hear about our advertising all the time from our guests, and it always brings a smile to my face.
Equally important to our guests is the innovation our team continues to deliver behind Applebee's $5 Mucho Cocktails, as we begin to see the alcohol business steadily return to pre-COVID normalcy.
The easing of capacity constraints, the opening of bar seating and the reemergence of our late night daypart represent clear incremental growth opportunities as we progress through the year.
And after scaling back media spending in January and February, our national media plan is now substantial, and equally balanced throughout the remainder of the year with favorable Q2, Q3 and Q4 comparisons with each of the same quarters in 2019, which bodes very well for the brand.
Additionally, there are other indicators that our performance isn't short-term in nature.
Applebee's unaided brand awareness and advertising awareness continue to significantly outpace all casual dining competitors.
In key metrics such as affordability, menu variety, guest satisfaction, brand affinity and likelihood to visit consistently outperform the category average.
Now, I'd like to share a few insights regarding our on-premise and off-premise business.
For both March and April, Applebee's restaurant sales averaged an impressive $54,000 per week.
As anticipated, our on-premise business has steadily increased as dining restrictions have eased.
It's worth noting here that our off-premise volume has held steady between $17,000 and $18,000 per week per restaurant reflecting the staying power of this off-premise business.
Without question, Applebee's has significantly broadened its reach and relevance within this important convenience driven segment.
For the month of April, Applebee's sales mix consisted of a 67% dine in, 20% Carside To-Go and 13% delivery.
Included in this delivery segment is our new virtual brand, Cosmic Wings, and after about 10 weeks in market, Cosmic Wings sales have averaged about $330 per restaurant per week with significant geographic variability, reflecting Uber Eats coverage.
For context, individual restaurants range from a low of $100 per week to a high of $2,000 per week.
Now importantly, we add Postmates delivery this week and then expand to include DoorDash later this month, which will significantly enhance Cosmic Wings distribution, visibility and trial.
After this expansion, I should be able to quantify the size of the Cosmic Wings opportunity.
In the meantime, you can use your imagination as to what the addition of DoorDash may mean for the business.
Now, with respect to restaurant operations.
I'm very encouraged with the integration of handheld tablets in about 500 Applebee's restaurants.
With staffing challenges across the country, these tablets provide a meaningful hedge against labor inflation, while enabling our service to be far more efficient in taking care of the guests.
Bottom line of servers love these tablets because it makes their job easier and allows them to make more money.
Additionally, one of the positive outcomes of this past year was the approximate 33% reduction in our core menu and the simplification of our operation.
The resulting food and labor benefits have had a favorable impact on restaurant margins as well as restaurant execution.
I should also reinforce that over the past year, our teams have been quietly focused on building an awesome innovation pipeline of culinary, beverage, marketing and technology initiatives for future deployment.
So in wrapping up, it's quite evident to me that America trusts Applebee's, as we're beginning to see the benefits of the goodwill that our franchise partners worked so hard to create over this past year.
Virtually all of our restaurants are now open, royalty collections remain rock solid.
Our advertising fund is now comparable to what it was in 2019, and it's a big lever for us moving forward.
We have an exceptionally talented team who have been eagerly awaiting this day and franchisees are aligned behind our business plan and confident in our ability to not only perform but to thrive in this environment.
For the first time in a long time, I now believe we control our own destiny, and we're poised to unlock the full potential of this great brand.
While I'm sure there'll be other challenges along the way, there always are, Applebee's has genuine momentum right now, and I couldn't be more optimistic about our future than I am right now.
And with that, I'm going to turn it to my partner, Jay.
John, you must be really proud of those results and what your team and franchisees are accomplishing right now.
I know I'm very proud of it.
So a nice job.
Like Applebee's, we've made great progress this quarter compared to where we were during the pandemic as well.
Our first quarter comp sales improved sequentially by 8.9 percentage points compared to the fourth quarter.
As our business improved, our average weekly sales in dollars has grown significantly and surpassed pre-pandemic levels at times during the quarter as stimulus checks provided our guests with additional buying power.
Average weekly sales were approximately $26,000 for January and sequentially increased to just under $36,000 from March, reaching a high for the quarter of approximately $40,000.
Regarding our domestic restaurants opened for business, 97% of restaurants were opened for dine-in service with restrictions in most states as of March 31.
That compares to only 70% with dine in as of December 31.
With guests eager to return to in restaurant dining, we're pleased that California recently increased indoor restaurant capacity to 50%.
IHOP's presence in California makes up approximately 13% of our domestic business.
So we're optimistic about the potential lift overall there.
To drive sustainable growth, we're continuing to execute against four strategies.
As I discussed with you last quarter, these are focusing on our p.m. dayparts, providing compelling value, maintaining our gains in off-premise sales, and lastly, our development growth.
Our plans have yielded tangible results.
To provide some color on our first two strategies, focusing on that p.m. daypart in value.
We launched IHOPPY Hour in September of last year to offer our guests a broad selection of value options during those nonpeak daypart hours, mainly two to 10 p.m. IHOPPY Hour continues to drive incremental sales even as business improves across all of our dayparts.
Additionally, IHOPPY Hour traffic is two to three times higher than the rest of the day compared to September 2020 when we launched it.
This actually equates to a low to mid-single-digit lift in sales for the entire day.
To further increase the appeal of our IHOPPY Hour's menu, which has been very well received by our guests, we plan to update the menu items over time.
We're continually innovating to maintain IHOP's category-leading position in family dining.
Our latest innovation is IHOP's new steakhouse premium bacon, which is available on our new bacon obsession menu.
This makes IHOP the first national family dining restaurant chain to offer this type of thick cut premium bacon.
The bacon obsession menu continues to solidify our position as the leader in breakfast and highlights our commitment to both innovation and value across all of our dayparts.
During 2020, we played both defense and offense to remain resilient during and also prepare to thrive after the pandemic.
We played defense by making operational changes and moving heavily or completely at times into alternative occasions.
But we also invested heavily in our menu and preparation for the recovery.
We wanted to be ready with a fresh and appealing menu for guests to enjoy when they return to our restaurants, but also accommodate guests, who choose to dine on-premise.
This culminated in the launches of IHOPPY Hour and our signature Burritos & Bowls.
Both have been very well received by our guests.
Burritos & Bowls perfectly filled the gap we had in our menu and continues to capture 8% to 10% of total ticket order incidents since we launched it with really minimal promotion.
Our overarching menu strategy underscores innovation and supports both breakfast and non-breakfast occasions while also being portable for guests on the go.
Now let's switch gears to our third strategy of maintaining our gains in on-premise sales.
Despite capacity restrictions generally being eased across the country in the first quarter, our off-premise sales held steady at 33.3% of total sales.
That's flat compared to the fourth quarter.
However, we've seen a steady increase in net off-premise sales in dollars.
For the first quarter, our sales mix consisted of 66.7% dine-in, 16.8% to go and 16.4% delivery.
We continue to believe that sustaining off-premise sales mix at a much higher rate is feasible in a post pandemic environment, and will strongly complement the anticipated return of our dine-in business.
In fact, our weekly off-premise sales in March reached dollar levels higher than we were 100% off-premise last year, even at the higher than shutdowns.
In the first quarter, as the overall business increased, so has the to-go business.
The pandemic has certainly influenced consumer behavior and change how guests use IHOP.
We adapted to the changes in this behavior through innovation and developing highly affordable items such as Burritos & Bowls.
We believe the convenience of takeout delivery will remain appealing to our guests.
Turning to our forward strategy development.
We have the benefit of being able to now provide our franchisees with four different development platforms.
These includes -- include our traditional formats, nontraditional, our first Flip'd by IHOP locations, which we plan to open in 2021 and a new small prototype that we intend to test this year.
In the first quarter, our franchisees opened eight new restaurants globally, and for the remainder of the year, we expect to resume development that was paused due to the pandemic.
Looking ahead, we have a plan in place for more robust development starting in 2022.
We believe the brand can potentially exceed its historical annual average of approximately 60 new restaurants opened over the last decade.
As we begin to plan our growth for the next three years, we intend to have a blended mix between these four types of development vehicles.
We made great progress over the last 12 months.
We're successfully executing against our four strategies and are seeing tangible results.
IHOP remains in a position of strength and is poised for long-term growth.
Look, I can't say it enough to all of you on the call, but the restaurant renaissance is here, and our Q1 performance is certainly evidence of that.
I've got so much confidence in our future because I really believe that restaurants are an essential part of society and people want a place to gather and celebrate.
And after 13 months of being locked in our houses, we, Americans, are ready to do that.
Our people, our teams, our franchisees and the thousands of restaurant team members across the country are amazingly resilient.
I mentioned last time that I worked in my parents restaurant when I was in high school.
And that's why I think the favorite part of my job is when I get to visit team members in the field.
I've finally gotten to do that in the last couple of weeks, and it's truly energizing and invigorating and what impressed me the most on my recent visits to our restaurants is that even after 13 months of extreme challenge, I was greeted with unbelievable enthusiasm and optimism about the future.
So as we transition to a post pandemic environment, Dine will continue to invest in innovation and the strategic platforms that we know will drive long-term sustainable growth.
| q1 adjusted earnings per share $1.75.
q1 gaap earnings per share $1.51.99% of domestic restaurants open.
currently cannot provide a complete business outlook for fiscal 2021.
qtrly total revenue $204.2 million versus $206.9 million.
|
With me on the call today are Seamus Grady, Chief Executive Officer; and Csaba Sverha, Chief Financial Officer.
We had a strong start to fiscal 2022 with top and bottom line results for the first quarter that exceeded our expectations.
Demand trends remain robust across our business, which contributed to revenue reaching $543.3 million, more than $13 million above the high end of our guidance.
We continue to execute very effectively with revenue upside falling to the bottom line as reflected in our non-GAAP net income of $1.45 per share, which was also above our guidance range.
From a revenue perspective, we had a particularly strong quarter for optical communications, which grew 10% from the fourth quarter and 24% from a year ago.
As Csaba will detail in a moment, strong optical communications demand was evident in both telecom and datacom.
We continued to execute well despite the component supply constraints that we and many others continue to experience.
During our last call, we estimated that we would see a $25 million to $30 million revenue headwind in the first quarter from these constraints.
We are pleased to report that the actual impact was at the lower end of that range.
Our ability to overcome many of these component charges was most evident in our record optical communications results.
Component charges in the automotive markets' extremely lean supply chain resulted in a moderate decline in automotive revenue from the fourth quarter.
As we look to the second quarter, we are optimistic about continued strong demand across our business and are anticipating healthy overall growth despite persisting supply chain headwinds.
Operationally, I'm very happy to announce that our COVID-19 vaccination program for employees in Thailand has been a great success and that, at this point, 99% or virtually all of our employees in Thailand are now fully vaccinated.
I'm also pleased that we were successful in delivering first quarter margins within our target ranges despite these additional COVID-19 related costs in the quarter.
At our Chonburi campus, construction of our second building is progressing well.
This building will add approximately 1 million square feet or 50% to our global footprint, substantially increasing our manufacturing capacity.
We are on-track for construction to be completed around the end of the fiscal year.
This schedule is extremely timely since based on continued customer demand, we now anticipate that our first building in Chonburi will be effectively fully occupied when our second Chonburi building opens for business.
In summary, after a very strong first quarter, we are optimistic that Q2 will represent another strong quarter for revenue and profitability.
Demand trends remain strong, and we are excited that our second building in Chonburi will be coming online just at the right time to enable us to continue meeting anticipated demand and extend our business momentum in the years ahead.
We are off to a great start for the fiscal year with record revenue and non-GAAP profitability in the first quarter.
Revenue of $543.3 million was well above our guidance and represented an increase of 7% from the fourth quarter and 24% from a year ago.
As we continue to execute very efficiently, our top line outperformance fell to the bottom line, with non-GAAP earnings of $1.45 per diluted share, which also exceeded our guidance.
This result includes approximately $0.05 per share in foreign exchange gains, offsetting the expenses related to our vaccination program that we incurred in Q1.
Looking at the quarter in more detail.
Optical communications revenue was $427.3 million, up 10% from the fourth quarter and made up 79% of total revenue.
Within optical communications, telecom revenue increased 9% from the last quarter to $338.6 million, a new record, and datacom revenue of $88.7 million increased 15% from Q4.
By technology, silicon photonics products reached a record $135.1 million or 25% of total revenue and was up 23% from the fourth quarter.
Revenue from products rated at speed of 400 gig or higher was $173.3 million, up 30% from the fourth quarter and 149% from a year ago.
Revenue from 100 gig product increased modestly from Q4 to $135.6 million.
Based on continue strong demand, we are expecting to see strong sequential growth in optical communications in the second quarter.
Nonoptical communications revenue was $116 million or 21% of total revenue, representing a 25% increase from a year ago, but a decrease of 5% from the fourth quarter.
While as Seamus noted, the overall impact of component shortages was at the lower end of our expectations for the quarter, these constraints were more apparent for nonoptical products, especially in automotive.
With the majority of our sensor revenues serving automotive applications, we are now reclassifying automotive revenue and other nonoptical communications revenue to include historical sensor revenue, which has represented less than 1% of quarterly revenue for the past two years.
On this combined basis, automotive revenue was $48.2 million, a decrease of 8% from last quarter.
While we don't intend to break this out in the future, for a more direct comparison purposes, automotive revenue, excluding sensors, declined 8% sequentially.
Industrial laser revenue was $37.5 million, a decline of 9% from Q4, but stable when viewed on a trailing 12-month basis.
Other nonoptical communications revenue was $30.3 million, up 7% from the fourth quarter.
This category now includes a portion of revenue that was previously classified as sensors.
Now turning to the details of our P&L.
Gross margin was 12.1%, down 20 basis points from Q4, consistent with our expectation, considering the expenses related to our vaccination program annual merit increases.
Operating expenses in the quarter were $13.2 million or 2.4% of revenue, resulting in operating income of $52.5 million or 9.7% of revenue.
Effective tax rate was 1.2% in the first quarter, and we continue to anticipate that our tax rate in the fiscal year 2022 will be approximately 3%.
Non-GAAP net income was a record at $54.2 million or $1.45 per diluted share.
On a GAAP basis, net income was $1.20 per diluted share.
Turning to the balance sheet and cash flow statement.
At the end of the first quarter, cash, restricted cash and investments were $528.6 million, compared to $548.1 million at the end of the fourth quarter.
Operating cash flow was $39 million.
With capex of $34.6 million, free cash flow was $4.4 million in the quarter.
We did not repurchase any shares during the first quarter.
We remain committed to return surplus cash to shareholders through a 10b5-1 share repurchase plan, combined with opportunistic open market share buybacks.
Currently, we have $81.2 million in our share repurchase authorization.
Now I would like to turn to our guidance for the second quarter of fiscal year 2022.
After a strong start to the year, we are optimistic that our momentum will continue in the second quarter.
We expect strong top line growth despite similar revenue headwinds from component shortages that we experienced in the first quarter.
We estimate that the ongoing supply cost change will again impact our second quarter revenue by approximately $25 million to $30 million.
With that backdrop, for the second quarter, we anticipate revenue in the range of $540 million to $560 million.
From a profitability perspective, we anticipate non-GAAP net income to be in the range of $1.42 to $1.49 per diluted share.
In summary, we are off to a great start to the year, and we are optimistic that strong demand trends and execution will combine again to produce even stronger results in the second quarter.
| compname says revenue for first quarter of fy22 was $543.3 million, compared to $436.6 million in first quarter of fy21.
revenue for the first quarter of fiscal year 2022 was $543.3 million, compared to $436.6 million in the first quarter of fiscal year 2021.
gaap net income per diluted share for the first quarter of fiscal year 2022 was $1.20.
non-gaap net income per diluted share for the first quarter of fiscal year 2022 was $1.45.
expects second quarter revenue to be in the range of $540 million to $560 million.
non-gaap net income per diluted share is expected to be in the range of $1.42 to $1.49 in q2.
|
Different from the first quarter this year, second quarter ended up being quite unbeatable.
As many of you have asked quite a few times now, will Frontline try and exploit the weakness in this market to grow further?
And I guess, we have answered that now during Q2.
We are in some way a three-legged shipping platform with VLCCs, Suezmax and LR2s.
Our VLCC leg has been a bit shorter than the others.
Now we're amending that somewhat.
Parts of the challenges in the market this quarter has been the continuous flare-ups of COVID infections in various locations around the world.
Vaccination has come far in the Western parts.
But other parts of the globe are not so fortunate.
We remain vigilant toward our seafarers' well-being and are happy to share that our efforts to arrange vaccines for them is going well.
In addition, I'd like to mention we are very grateful certain port states are being extremely generous, offering vaccines to seafarers literally for free.
So let's move on and have a look at the highlights on Slide 3.
Q2 '21 performance reflects the challenges the market faced this quarter.
It is, however, a further proof that our business model, efficient operations, modern fleet, and a very hardworking chartering team manages to outperform the key benchmarks.
To put this in perspective, an average weighted earnings index I checked recently for oil tankers came in just over $6,000 per day in Q2 '21, the lowest print in more than 20 years.
In order to outperform this, the owners, and in particular, the owners' charters, must fight for every cent and know their position well to be able to play their hands best possible.
Regrettably, this is not always the case as far as we can observe.
Anyway, at Frontline, we do the hard work and managed to achieve $15,000 per day on our VLCC fleet; $11,000 per day on our Suezmax fleet; and $10,600 per day on our LR2/Aframax fleet in the second quarter of this year.
So far in Q3, we have booked 70% of our VLCC days at $14,000 per day; 64% of our Suezmax days at $9,800 per day; and 63% of our LR2/Aframax days at $11,800 per day.
All numbers in this table are on a load-to-discharge basis.
Before Inger takes you through the financial highlights, let me quickly comment on the acquisitions in the quarter.
During Q2, we acquired, through resale, six latest-generation ECO-type VLCCs currently under construction at Hyundai in Korea.
In addition, we acquired two modern ECO-type VLCCs built in 2019 at the same shipyard.
We have for a period of time followed the VLCC asset market closely to look for opportunities.
As we didn't expect an imminent recovery in tanker markets, delivery was a key bargaining chip.
The rallying steel prices and high activity around us for non-tanker assets pushing potentially delivery slots way forward added to our conviction in making these investments.
I'll now let Inger take you through the financial highlights.
Following the acquisition of the VLCCs, as Lars mentioned, we have progressed on the loan financing.
And in August this year, we obtained financing commitments, subject to final documentation, for three senior secured term loan facilities.
They are in a total amount of just $247 million.
And they will partially finance the acquisition on the two VLCCs built in 2019 and three of the six VLCC newbuilding contracts.
All facilities will finance 65% of the market value.
They will carry an interest rate of LIBOR plus a margin of 170 basis points.
And they will have an amortization profile of 20 years, starting from delivery date from the yard.
We intend to establish long-term financing for the remaining four resale VLCCs newbuilding contracts closer to delivery of the vessels.
Then I think we should move to Slide 4 and look at the income statement.
Frontline achieved total operating revenues, net of voyage expenses, of $80 million and adjusted EBITDA of $28 million in this quarter.
And we report a net loss of $26.6 million or $0.13 per share and an adjusted net loss of $23.2 million or $0.12 per share.
The adjustments this quarter consist of a $4.7 million loss on derivatives; a $0.8 million gain on marketable securities; and a $1.3 million amortization of acquired time charters; and lastly, a $0.8 million share of losses of associated companies.
The adjusted net loss in the second quarter decreased $32 million compared with the first quarter.
And the decrease was driven by a decrease in our time charter equivalent earnings due to the lower TCE rates, as Lars mentioned; an increase in ship operating expenses of $9.3 million, mainly as a result of higher dry-docking costs; offset by a gain on marketable securities sold in the quarter of $4 million.
Let us then look at balance sheet on Slide 5.
The total balance sheet numbers have increased with $64 million in this quarter.
The balance sheet movements in the quarter are primarily related to taking delivery of the LR2 tanker from Future and the acquisition of 6 VLCC newbuilding contracts in addition to ordinary debt repayments and depreciation.
As of June 30, Frontline has $257 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facilities, marketable securities, and minimum cash requirements.
Then let us take a closer look at cash breakeven rates on Slide 6.
We estimate risk cash cost per daily rate for the remainder of 2021 of approximately $21,800 per day for the VLCCs; $7,500 per day for the Suezmax tankers; and $15,400 per day for the LR2 tankers.
And the fleet average estimate is about $18,000 per day.
These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock, estimated interest expenses, TCE and bareboat hire, installments on loans and G&A expenses.
The highly attractive terms on the updated financing commitments on four of the acquired VLCCs, which I mentioned earlier, decreases the daily cash breakeven rates with approximately $1,400 per vessel per day compared to existing financing terms of similar vessels.
In the quarter, we recorded opex expenses of $7,600 per day for VLCCs; $8,500 per day for Suezmax; and $9,000 per day for LR2.
We dry-docked three Suezmax tankers in this quarter and four LR2 tankers.
And we expect to dry-dock one VLCC and two LR2 tankers in the third quarter and none in the fourth quarter.
The graph on the right-hand side of this slide shows that if we assume $30,000 on top of the daily fleet average cash cost per daily rate of $18,000, Frontline will generate a cash flow per share after the service cost of $3.51 per year.
And the cash generation potential will increase after acquisition of the eight VLCCs.
With this, I leave the word to Lars again.
So let's look at Slide 7 and recap the second quarter tanker market.
So global oil consumption averaged 96.7 million barrels per day in Q2 '21.
That's up 2.1 million barrels per day from Q1 '21.
Production averaged 94.9 million barrels per day.
Hence, the world continued to draw about 1.8 million barrels from inventories.
Just to put that in perspective, when you go from inventories, you're not really using that much transportation.
And as a rule of thumb on tanker utilization, you need about 30 VLCC equivalents in order to transport 1 million barrel of oil per day.
So this kind of draw represents a loss of 30 to 35 VLCC equivalents in demand.
The tanker rate gradually slipped throughout the quarter and volatility faded.
OPEC+ did increase supply by more than 1 million barrels per day during Q2 '21.
The key OPEC producers also went into higher-demand periods, typically in the Middle East, where summer hits and you start to basically burn oil or fuel for electricity generation.
U.S. and Brazil added another 900,000 barrels per day.
Most of the Brazilian additions came out as exports.
Demand rose sharply in North America and Greater Europe while Asia, that led the recovery, saw a far more muted development in the second quarter of the year.
As illustrated in the two charts below, where we basically isolated North America, Europe, and Eurasia, we see that during Q2, demand there rose sharply while the rest of the world, and in particular Asia, and as I mentioned that led the recovery toward 2021, has performed kind of -- performed less first half this year.
So let's move over to Slide 8 and look at the tanker order books.
New ordering has naturally been muted during the second quarter of '21.
We've observed that the delivery window for ordering a significant number of VLCCs or Suezmaxes is now firmly into 2024.
This is obviously due to all the ordering activity for asset classes kind of outside of the tanker space.
The overall tanker order book for VLCCs, Suezmax, and LR2 has shrunk 10% year to date.
The overall order book for tankers above 10,000 deadweight tons stands at 8% of the existing fleet.
And this is, in fact, comparable to levels seen in Q1 1997.
In absolute deadweight terms, we are at a 20 years low.
I'd also like to put this in some perspective.
Twenty years ago, the global oil consumption was around or at 76 million barrels per day.
A normalized market now is closer to 100 million, if not above.
So it means that the oil market is 30% larger now than in early 2000 and the order book is just about the same size.
The VLCC order book is now at 81 units, give or take.
At the same time, 124 VLCCs will be above or past 20 years in the same period.
For Suezmax, we are at 41 units and 123 passing 20 years on the same metrics.
Let's move to Slide 9 and look at oil in transit.
This is a very important indicator to us.
We monitor this basically on a monthly basis to see where we are.
Oil in transit is basically oil being transported, so in essence, excluding whatever is on storage.
And as you can see on -- I've kind of circled in 2020 in a red rectangle here.
And as you can see, 2020 was a very noisy year for oil transportation.
We started off the year with the Saudi-Russian price war, which distorted Q1 and Q2, and we had a massive production increase and transportation increase.
Then the COVID-19 pandemic hit, and we had -- and we saw a demand shock that suddenly kind of took away a lot of production and also then transportation needs.
And Q3 and Q4, the transportation needs diminished almost back to 2017 levels.
Floating storage did save tank utilization at the time.
First half of '21, the tanker markets have -- well, basically, volume has increased and transportation has grown.
But we've been facing increased fleet supply by vessels released from storage and delivery of newbuilds, together with seeing deep inventory draws.
Now -- where we are now, this is obviously, July and August for Q3, we're back to Q4 2019 levels.
OECD commercial inventories are now down to 2019 levels.
And I believe or we believe that's a fair proxy for global inventories.
There is also another thing to note, when inventories are no longer drawn, transported oil will come into play.
As an example of this, EIA are currently estimating us to build 1 million barrels of oil per day for September.
But then come October, we're supposed to draw half a million barrels per day from inventories.
That gives you a delta of 1.5 million barrels, which then needs to be transported.
That's equivalent to the demand for 45 to 48 VLCC equivalents.
And I think this gives you kind of a notion of how quickly this can turn.
Now let's move to Slide 10.
And I call it the VLCC fleet paradox.
This is almost the same for Suezmaxes.
But I decided to point out this for the VLCCs.
We may all speculate in what the older generation of VLCCs are doing.
But it is undisputable that a 20-year-old vessel will struggle as a very limited number of charters accept them.
And this is purely on age.
With the challenging trading environment we've had during first half this year, earnings achieved on non-ECO, high-consuming vessels have been zero or negative.
And mind you, 51 vessels are above 20 years as we speak.
Year to date, eight VLCCs are reported sold for recycling.
The average recycling price in Asia has risen 70% in the same period and is now close to $25.5 million for a VLCC.
Well, one of the typical exits for an older vessel in the tanker world is crude oil storage.
Well, crude oil curves turn into backwardation in Q4 last year and are not at all supporting floating storage.
So far this year, we've seen three VLCC spot fixtures reported on a vessel that's either 20 years or older than that.
And this is out of the 660 VLCC fixtures we recorded.
So again, I want to highlight this because it is important and it's very important looking at the previous slide, where we are in the cycle on oil being transported.
If it is so that the effective tonnage actually hasn't grown over the last couple of years, then we're closer to balance than we might think we are.
So let me sum up on Slide 11.
Demand and supply of oil continues to rise.
But we have to admit the Delta-type infections cloud the outlook, in particular in Asia.
We see asset prices remain firm, steel prices continue to rise.
And the activity is very good on the yards but for non-tanker assets.
At the same time, the tanker fleet continues to age, the overall order book shrinks and the potential delivery window moves further out, should demand for tankers pick up.
OPEC+ plan to add about 400,000 -- no.
400,000 barrels per day each month until the end of the year.
This means in total 2 million barrels per day of increased supply.
And go back to the math for -- we then would need 60 to 65 VLCC equivalents by the end of the year.
Oil in transit continues to rise.
And the big question mark is obviously, when do we reach the inflection points?
I would like to draw your attention to the chart at -- below or at the bottom of the slide.
I showed you this last quarter as well.
And as the orange dot indicates, this is where we were in March this year.
So we're -- basically, we're gradually digging ourselves in from negative year-on-year growth in global oil trade into positive territory.
And since last, Frontline has increased its position significantly.
We have secured attractive financing and are ready to capitalize as we sail on toward the expected recovery.
| frontline q2 net loss of $26.6 million.
q2 net loss -26.6 million usd.
q2 diluted loss per share 0.13 usd.
net loss of $26.6 million, or $0.13 per basic and diluted share for q2 of 2021.
|
In addition, this conference call contains time-sensitive information that reflects management's best judgment only as the date of the live call.
Management's statements may include non-GAAP financial measures.
I will not dwell on the economic devastation that occurred in the second quarter.
You have all heard more than enough about that by now.
For Forum specifically, a primary piece of our business is selling short-cycle products to service companies to sustain, replace and upgrade their drilling and completion operations.
Our customers have sharply reduced their spending in these areas as their equipment utilization evaporated.
Eventually, much of this equipment will go back to work, which will drive demand for our products and services, but the timing is uncertain.
That is why Forum's recently announced debt exchange that extended our debt maturity to October 2025 was so important.
This gives us the extended runway we need to exploit the inevitable upturn in drilling and completion activity.
After buying back $72 million of our bonds at about $0.40 on the dollar in the first half of 2020, under our exchange, $350 million of the $328 million of our debt was due in 2021 was rolled into a new security.
This new debt has a cash coupon of 6.25%, the same as the old debt, plus another 2.75% that is payable at the company's option in cash or in kind additional notes.
In addition, there is a clear path for the company to delever as the new notes are partially convertible into for equity.
$150 million principal amount of the new notes are convertible at a conversion price of $1.35 per share and are automatically and mandatorily convertible once form stock price trades through $1.50 for 20 business days.
The conversion of $150 million of new debt at a conversion price that is more than 2.5 times the current stock price would represent about 50% dilution to current shareholders, while ensuring a strong and sustainable capital structure for the company.
This debt exchange provides a number of benefits, the time necessary for a business recovery, a clear path to delever the balance sheet.
It does not burden the company with a higher required cash cost of financing or restrictive financial maintenance covenants.
And it aligns the interest of our debt holders and our legacy stockholders around the long-term success of Forum.
The second quarter of 2020 was exceptionally difficult, and Lyle will review our results in a minute.
But it did provide the catalysts to resolve Forum's capital structure issues and to significantly restructure our costs for long-term success in a world of lower demand for oilfield equipment.
Compared to the year ago quarter, our second quarter cash costs, excluding our purchased materials costs, are down about $150 million or 39%, with most of that savings happening in the most recent quarter.
So we now have a very competitive cost structure for the current market environment.
As I look ahead, I believe we have seen the bottom in our orders and our EBITDA.
For the third quarter, we expect revenues will be comparable to the second quarter as we rebuild the order book with an increase in domestic completions and international well construction activity.
We are already seeing some positive signs in this regard.
We also expect a modest improvement in EBITDA driven by cost reductions.
Looking further ahead, Forum is positioned for renewed success with our new cost and capital structures, dedicated employees and our portfolio of winning products.
I am pleased to represent the Forum team with Cris and Neal at this exciting inflection point for the company.
The decrease in activity and spending by our customers resulting from the COVID-19 pandemic and the dramatic reduction in drilling and completion activity due to low oil prices had a significant impact on our second quarter financial results.
Our total revenue for the quarter was $113 million, down 38% from the first quarter.
Our book-to-bill ratio was 76% as orders for our consumable products, which are typically booked and shipped in the same period, were most severely impacted.
In response to the forecasted declines in our revenue, we initiated a significant cost reduction plan in March and completed many of our identified cost reduction actions early in the second quarter.
We focused our plans on cash costs included in SG&A and cost of goods sold, except from the purchased materials.
In total, we reduced these costs by $24 million compared to the first quarter, a 30% reduction.
These cost reductions, which have all occurred since March, amount to approximately $100 million in total savings on an annualized basis.
Our cost reduction actions included significant head count reductions, especially at senior levels of the organization; facility closures, including production and distribution facilities located in the U.S.; salary reductions across the company; suspension for our U.S. and Canadian retirement plans; and other reductions in variable costs.
As a direct result of these cost savings, sequential decremental EBITDA margins were limited to 23%, resulting in adjusted EBITDA of negative $11 million for the second quarter.
We are particularly pleased with this result given the weak pricing environment and the COVID-related under absorption of fixed costs that had a direct impact on our gross margins.
For clarity, adjusted EBITDA results exclude roughly $3 million of noncash stock compensation expense for the second quarter.
Our free cash flow after net capital expenditures in the second quarter was negative $3.5 million as the impact of lower earnings was mostly offset by reductions in working capital from strong collections of receivables and inventory management.
Included in this result were approximately $5 million of cash severance and other restructuring costs paid in the quarter.
But for these restructuring costs, Forum was free cash flow positive in the quarter and has generated positive free cash flow for the past seven quarters.
Over this period, Forum generated $109 million of free cash flow.
In the quarter, we decreased our net inventory position by $15 million and expect the monetization of excess inventory to continue in 2020 and beyond.
Net loss for the quarter was $5 million or $0.05 per diluted share.
Excluding a $39 million gain on extinguishment of debt and $9 million of special items, adjusted net loss was $0.29 per diluted share.
Special items for the quarter on a pre-tax basis included $4 million of severance and other restructuring costs, $4 million of inventory and other working capital impairments and $1 million of foreign exchange loss.
I will now summarize our segment results on a sequential basis.
In our Drilling & Downhole segment, orders were $42 million, a 40% decrease from the first quarter, resulting from significant declines in drilling and well construction activity in North America.
This decrease was mitigated by our international exposure in this segment.
To put that in context, despite the low commodity price environment in the second quarter, our drilling product line was awarded a multiyear contract to supply rig handling tools and related equipment for a 24-rig new build program in the Asia market.
Orders for the second quarter include $14 million for this award with additional orders under the award anticipated in the second half of the year.
Segment revenue was $47 million, a $29 million or 38% sequential decrease as book and ship activity across the segment was impacted by lower activity levels and lockdowns due to the COVID-19 pandemic.
Adjusted EBITDA for the segment was negative $3 million in the second quarter, a sequential decrease of $10 million.
In our Completions segment, orders decreased 72% to $14 million.
Segment revenue was $18 million, a sequential decrease of $33 million or 65% due to the virtual standstill and well completion activity in the quarter.
The segment was also impacted by shipping delays from one of our international customers due to the impacts of COVID-19.
Adjusted EBITDA for the segment was negative $6 million, a $10 million sequential decrease.
Despite the significant cost reductions mentioned earlier as well as additional furloughs in several facilities within the segment, the magnitude of the decline in revenue and resulting loss of operating leverage from unabsorbed fixed costs had an outsized impact on our Completions segment EBITDA.
Production segment orders were $29 million, a sequential decrease of 43%, primarily due to a significant decline in customer bookings activity for our valves product line as customer activity ground to a halt due to the pandemic due to pandemic-related lockdowns and significant distributor destocking.
Segment revenue was $49 million, a 13% decrease due to lower sales of valves.
This decrease was partially offset by a slight increase in shipments of surface production equipment for our customers focused on natural gas production in the Northeastern United States.
Adjusted EBITDA for the segment was $2 million, up $2 million sequentially due to lower overhead expenses from cost reductions.
I will now discuss some additional details about our results and financial position at the Forum level.
Our capital expenditures in the second quarter were less than $1 million.
We are a capital-light business, and we expect our total capital expenditures for 2020 to be less than $5 million.
In the second quarter, we reduced net debt by $32 million, primarily due to the repurchase of $72 million principal amount of senior notes at a discount.
We ended June with $110 million of cash on the balance sheet and availability under our revolving credit facility of $84 million, resulting in total liquidity of $194 million.
Our debt at the end of June included $85 million outstanding on our revolving credit facility and $328 million of unsecured notes due 2021.
Following the debt exchange completed earlier this week, we now have $315 million of new secured notes due in 2025 and $13 million remaining on the old unsecured notes.
In connection with the debt exchange, we also amended our revolving credit facility.
The changes include: a reduction in the size of commitments from $300 million to $250 million, an increase in the interest rate margin, a limit on the amount of availability derived from our inventory collateral and certain other administrative changes.
The maturity of the revolving credit facility will be October 2022 with the resolution of the small remaining stub of all notes.
Pro forma for the credit facility amendment, our liquidity at the end of the second quarter would have been $126 million.
Interest expense was $6 million in the second quarter.
While we do expect higher interest expense following our debt exchange, the 6.25% of cash interest on the new convertible notes is consistent with cash interest on the previous notes.
In the second quarter, depreciation and amortization and stock-based compensation were $12 million and $3 million, respectively.
We expect these expenses to remain at similar levels in the third quarter.
Adjusted corporate expenses were $6 million in the second quarter, and we expect them to be similar in the third quarter as well.
We will continue to have some tax expense despite an overall net loss as we are not recognizing tax benefits in loss-making jurisdictions, but we continue to recognize tax expense for some international jurisdictions with income.
Once we turn profitable in the loss-making jurisdictions, we expect to have a relatively low tax rate as we begin to use our net operating losses.
Together, we made sacrifices to dramatically reduce costs and position Forum for the future.
The market will recover, and when it does, our employees will be the key differentiator in our success.
As Cris and Lyle have mentioned, the unprecedented decline in drilling and completions activity due to COVID-19 significantly reduced demand for many of our products.
In response, we have sized our businesses to produce positive EBITDA with only a modest market rebound.
We remain committed to controlling costs while generating cash flow from inventory.
The second quarter presented the most challenging market conditions in a generation.
Our ability to execute will increase as the market improves.
Forum's customers rely on our products to increase their productivity and reduce their cost.
For example, within our Forum Multilift solutions product portfolio, we provide sand management tools and cable plants that extend the life of electric submersible pumps, or ESPs.
These products witnessed an increase in monthly demand after bottoming out in May, and we expect demand for these products to continue as we as more wells are brought back online.
Another example of Forum's winning products was the large multiyear rig handling tool award Lyle referenced earlier.
In an industry where capital is limited and tight, our customer selected the premium product of our handling tools, and we are very excited to play a key role in this rig new build program.
Let me provide one more example.
In the midst of last quarter's meltdown, one service company customer was proud to post a picture of social media with one of their frac fleets working.
Among the key components in that picture, seven were supplied by Forum, 7: our 3,000-horsepower pumps, our JumboTron radiators, our ICBM single-line manifold, our high-pressure flow wire, our AMT wireline pressure control equipment, our Hydraulic Latch Assemblies and our newest product from quality wireline and wireline cables.
In addition, after the frac work was completed, our DURACOIL coiled tubing from Global Tubing was used for drilling out the plugs and our Forum SandGuard with Cannon clamps was used with the artificial lift installation.
This picture reinforced to me that Forum has the products, the people and the desire to be the leading solutions provider in our space.
These are just a few examples, and I can name many more from our valve solutions, production equipment and subsea product lines.
The market rebound may take many months to occur, but when it does, we are positioned to win.
The second quarter presented an extremely challenging market environment, but I am proud of the way our team has navigated through the significant cost reductions.
I am also pleased with the outcome of our debt exchange, which leaves us well positioned for future growth.
We now have the cost structure and the balance sheet to prosper in a lower-for-longer environment.
Forum has excellent earnings power potential with our stable of well-positioned completions products, artificial lift accessories and well construction products, to name a few.
With our new much more efficient cost structure, we can realize this earnings potential at a much lower level of drilling and completions activity than in the past.
Shanteller, let's take the first question.
| compname reports q2 loss per share $0.05.
q2 loss per share $0.05.
q2 revenue $113 million.
q2 adjusted loss per share $0.29 excluding items.
customer spending has been 'exceptionally' weak, impacting demand for many of forum's products.
|
These are indeed volatile times, although maybe not as volatile as we hope for in freight.
Q3 '21 marked the bottom of tankers post COVID-19.
This is seasonally a low point in the markets, but everything seems to have been amplified in these times we currently live in.
Towards the end of the quarter, we actually started to see a recovery in demand for freight as export volumes grew, which has continued into the fourth quarter.
Right now, we are, as of the rest of the world, worried about the implication of this new omicron variant of the COVID-19 virus.
What will OPEC plus do in that respect and will something come out of the ongoing Iranian nuclear talks in Vienna?
Well, let's start with the facts on Frontline's third quarter and look at the highlights on Slide 3.
Q3 '21 performance reflects the challenges the tanker markets faced this quarter.
It is, however, a proof that our business model, our efficient operations, our modern fleet, and very hardworking team managed to outperform most of our peers.
In the third quarter, Frontline achieved $10,500 per day on our VLCC fleet; $7,900 per day on our Suezmax fleet; and $10,700 per day on our LR2/Aframax fleet.
So far in the fourth quarter, we have booked 79% of our VLCC days at $21,600 per day; 72% of our Suezmax days at $17,900 per day; and 64% of our LR2/Aframax days at $16,000 per day.
All numbers in this table are on the load-to-discharge basis.
But I do think they show that the markets have indeed recovered from the third quarter, although we have yet to see rates reaching for these guys.
I'll now let Inger take you through the financial highlights.
Following the acquisition that we did of the eight VLCCs in the first half of the year, we have been busy on the financing side.
And in the third and the fourth quarter, we have entered into term loan facilities and obtained financing commitments for a total amount of up to $507 million to partially financed the acquisition on the two 2019 built VLCCs and also the six new building contracts.
These facilities will finance 65% of market value.
They will carry an interest rate of LIBOR plus a margin of 170 basis points.
And they will have an amortization profile of mostly 20 years but also 18, commencing from the delivery date from yard.
When we factor in 33.4 million available under the term loan facility entered into November 2020 to partially finance the delivery of the last LR2 tanker, we have established bank debt of up to $540.4 million.
The company has also raised gross proceeds of 51.2 million under the equity distribution agreement and also net cash proceeds of approximately 67 million through the sale of four LR2 tankers.
And following this, remaining commitments as per September 30th for Frontline's new building program consisting of one LR2 tanker and the six VLCCs and for the acquisition of the 2019 built VLCCs is fully funded.
Through these new financings, we reduced our borrowing costs, and we also reduced our industry-leading cash breakeven base, providing significant operating leverage and sizable returns during periods of market strength, and help protecting our cash flows during periods of market weakness.
Frontline has also extended the terms of the senior unsecured revolving credit facility of up to $275 million by 12 months to May 2023, leaving Frontline with no loan maturities until 2023.
Frontline achieved total operating revenues net of voyage expenses of $69 million and adjusted EBITDA of $17 million in the third quarter of 2021.
We reported net loss of 33.2 million or $0.17 per share and adjusted net loss of 35.9 million or $0.18 per share in the third quarter.
The adjustments consist of a 1.2 million gain on derivatives and 0.2 million gain on marketable securities, and a 1.3 million amortization of acquired time charters.
The adjusted net loss in the third quarter increased by 12.7 million compared with the second quarter.
And this increase in loss was driven by a decrease in our time charter equivalent earnings due to lower TCE rates and the recognition of a gain on the marketable securities sold in the second quarter of 4 million.
This was partly offset by a decrease in ship operating expenses of 3.2 million, primarily as a result of lower dry-docking costs.
Then let us take a look at the balance sheet on Slide 5.
The total balance sheet numbers have increased with 6 million in the third quarter.
And the balance sheet movements in the quarter are primarily related to taking delivery of the LR2 tanker Front Favour, in addition to ordinary debt repayments and depreciation.
As of September 30th, 2021, Frontline has 190 million in cash and cash equivalents including undrawn amounts under our senior unsecured loan facility, marketable securities, and minimum cash requirements.
Frontline's remaining new building and this acquisition capex of 659.4 million as per September 30th, 2021 is fully funded by a 540.4 million in estimated debt capacity and also the 118.2 million in cash raised with the ATM and the sale of the four LR2 tankers, which I mentioned.
The company has also no debt maturities until 2023, as I also mentioned.
Then let's take a closer look at cash breakeven rates and opex on Slide 6.
We estimate average cash cost breakeven base for the remainder of 2021 of approximately $21,400 per day for the VLCCs, $17,800 per day for the Suezmax tankers, and $14,100 per day for the LR2 tankers.
And the fleet average estimate is about $17,600 per day.
These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock, estimated interest expenses, TC and bareboat hire, installments on loans, and G&A expenses.
We recorded opex expenses in the third quarter of $8,200 per day for the VLCCs, $7,200 per day for the Suezmax tankers, and $8,800 per day for the LR2 tankers.
We dry docked two LR2 tankers in the third quarter and expect to dry dock one VLCC and one Suezmax tanker in the fourth quarter.
Then the graph on the right-hand side of the slide shows free cash flow per share and free cash flow yield basis current fleet and share price of November 26 as alternative TCE rates.
Let's take an example, if we assume historic Clarkson TCE rates for non-ECO vessels in the period 2000 to 2021, November 2021, adjusted them for Frontline fleet scrubber and ECO vessels, Frontline will have a free cash flow yield of 38%.
Free cash flow yield potential increases with higher assumed TC rates and also on a fully delivered basis.
With this, I leave the word to Lars again.
Let's move over to Slide 7 and look at the third quarter tanker market.
So tanker rate bottomed at -- during Q3, and this is seasonally kind of the normal weakest moment of the year.
But I think it's safe to say that this is not a normal year.
We actually haven't had any normal year since 2019.
So global oil consumption averaged 98.6 million barrels per day.
That's up 1.9 million barrels from the second quarter.
Supply averaged 96.8 million, also increasing by close to 2 million barrels per day.
But we continue to grow then kind of very close to 1.8 million barrels per day of inventories.
OPEC plus supply rose an average of 1.4 million barrels per day.
And I think it's important here to note that a lot of the key OPEC suppliers came out of their peak demand period, which is when they burn fuel for electricity generation, and basically for cooling.
And this normally happens in September, so toward the end of the quarter.
We saw strong demand growth in North America and in Europe, while the Asian demand recovery was muted also in the third quarter like we saw in the second quarter.
What was special about the quarter that we went through was that oil and energy prices were extremely volatile.
We saw natural gas prices, coal prices, also other commodities that are affected by energy prices rise rapidly during the quarter.
And all the markets kind of performed strongly as we came to the end of the quarter.
I think it's important to note here, if you look at the graph on the left-hand side at the bottom of the slide, so total world consumption is now actually not that far off from where we started in January '19 -- sorry, in January 2020 before the pandemic hit us.
And in December, we're actually -- some market commentators actually arguing for us to end up in or at 100 million barrels per day.
What we have seen, which is on the slide on -- sorry, the chart on the right at the bottom of the slide, is that oil in transit has developed quite well during the last couple of months.
We saw that during Q3, we remain at this kind of depressed level were kind of oil in transit increased and then decreased again and increase and you have kind of this choppy movement.
But now as we went into November, we started to see that this oil and water, which is basically a picture of demand or utilization in the tanker fleet increased rapidly to where we are now.
So let's move to Slide 8 and have a look at the order books.
So tanker ordering was obviously muted during third quarter.
We saw one Suezmax order and eight LR2/Aframax orders.
No VLCCs were reported ordered as far as we could see in the quarter.
What did happen though was that the delivery window for ordering in any kind of useful number of tankers is now starting to get limited for '24 even.
2023 is destined to show very few VLCC and Suezmax deliveries.
New building prices are indicated at very high levels.
There hasn't been much price discovery in this market, particularly for the VLCCs as no kind of newbuilds has been ordered really during the last four to five months.
But it's obviously governed by a combination of high steel prices and low availability.
And basically, the considerations that shipowners need to make now, if you are to go into the market and order a VLCC, say at 110 or 115 or $120 million depending on who you speak to, you're actually making a bet on steel prices come 2023.
So this is obviously a bet that a lot of people are hesitant to take at this point in the curve.
The VLCC order book is now at 71 units, that's a little bit north of 8% of the existing fleet.
But we still have this situation where 113 VLCCs will be above or past the 20-year mark during that period as the current order book delivers.
For Suezmax, there are 41 units in the order book and 116 will be passing 20 years using the same metrics.
One thing that's kind of changed a little bit during the third quarter is that recycling has started to show some promise.
And let's move to Slide 9.
So with the record high recycled steel prices, activity is finally accelerating.
20 -- as you see on the chart at the top there, so 2017 and 2018 were the last big periods for vessel retirement.
And now in Q3 alone, we saw close to 0.76% of the global tanker fleet sold for recycling.
We are in a situation now where alternative use for tankers is extremely limited.
As most of you may know, that kind of in earlier markets, you've had the opportunity to either convert a ship for storage or even it could be converted into a vessel, so basically an oil-producing unit.
This -- obviously, these markets are closed as it is right now.
And we also see that during the pandemic, it's becoming evident that the capacity for recycling was seriously contracted.
So basically, there has been COVID pandemic in countries like India, Pakistan, and Bangladesh.
So basically, year to date, we've seen 15 VLCCs, 11 Suezmaxes, 18 Aframax, and eight LR2s that are reported sold for demolition.
And broadly speaking, this amounts to actually close to 2% of the existing fleet.
So basically, we believe that this might accelerate going forward as the recycling values are still extremely strong.
Then let's move to Slide 10.
So there's a lot of noise in the market currently.
But I believe we'll need a few weeks to learn more about this variant to even know where we're heading.
What we do know is that in the recent weeks, we've had kind of a message of U.S. releasing oil from their strategic petroleum reserve.
There are obviously other x again factors playing up as well, but let's focus on this one.
have released volumes from their SPR on a few occasions over the last 18 months.
And despite U.S. inventories being below five-year averages, this country is actually not particularly short of crude oil.
And after the recent releases, we have actually observed slightly higher exports with a significant part of the volume going to Asia and particularly so in October and November this year.
And it's obviously not the SPR volume itself that is directly kind of heading into Gulf Coast and being exported.
But it's basically there is an ample kind of supply of oil in U.S. And what an SPR release creates is that you depress the local prices for crude and this basically makes that crude attractive to Chinese or Asian buyers.
effort and release from their SPRs.
But apart from India, none have been very specific on volume.
And we have to remember that these Asian countries are far more sensitive to severe supply disruptions and -- because they have very limited domestic production capacity.
And the Northern Asian region is facing record-high energy prices as they now head into winter.
So whether it be released -- whether it's oil will be released at all from the SPR now after having a $10 drop in oil prices is obviously the question.
But if it should happen, it could actually trigger a ton-mile increase.
So let's move to the summary and let's go through a couple of things that are at play right now.
So demand and supply of oil continues to rise, but the latest virus version is obviously now clouding the outlook.
Tanker markets have recovered since Q3 '21, but it's still challenged by oil supply not fully at pre-pandemic levels.
Tanker recycling, I think this is a very important thing to note that tanker recycling has finally started to make an impact on vessel supply.
And then we have all these exogen factors that we really don't know much of at this point.
SPR release, opex strategy going forward.
They just postponed the meeting for a couple of days in order to find out more on the virus outbreak and the resumed Iranian nuclear talks in Vienna.
So there's a lot of stuff that is going to happen over the next couple of weeks.
Oil in transit continues to rise and energy prices are at record highs as the Northern Hemisphere is heading into winter.
I think the most important part here is that Frontline's financial commitments are now fully funded with reduced overall funding costs, and we are indeed well-positioned as the story of this market unfolds.
Finally, I've used this graph below before, and it just year on year basically various segments and how the trades are performing.
And we do see that for tankers, it's actually showing a growth of 3.8% year on year in October compared to October 2020.
So tankers have been lagging all the other asset classes in shipping for a while, but now we're actually starting to perform with.
| frontline q3 net loss at $33.2 mln.
q3 net loss -33.2 million usd.
q3 diluted loss per share 0.17 usd.
reg-fro - third quarter and nine months 2021 results.
net loss of $33.2 million, or $0.17 per basic and diluted share for q3 of 2021.
reported spot tces for vlccs, suezmax tankers and lr2 tankers in q3 of 2021 were $10,500, $7,900 and $10,700 per day, respectively.
adjusted net loss of $35.9 million, or $0.18 per basic and diluted share for q3 of 2021.
for q4 of 2021, we estimate spot tce on a load-to discharge basis of $21,600 contracted for 79% of vessel days for vlccs.
for q4 estimates $17,900 contracted for 72% of vessel days for suezmax tankers and $16,000 contracted for 64% of vessel days for lr2 tankers.
board of directors has decided not to pay a dividend for q3 2021.
|
Comments will also reference certain non-GAAP or adjusted measures.
Before turning the call to Carlos, I would like to mention that we will be participating in a fireside chat at the Virtual Morgan Stanley Global Consumer Conference on Wednesday, December 1 at 9:55 AM Eastern.
We hope to see you there.
I am very pleased to report another strong performance this quarter, which exceeded our expectations for revenue growth, operating margin expansion and bottom line results.
Revenues increased 13% for the quarter versus last year and adjusted operating profit reached $70 million delivering an adjusted operating margin of almost 11% and adjusted earnings per share of $0.62 versus $0.58 last year and $0.22 in the pre-pandemic third quarter.
This performance was driven by the hard work, vision and dedication of our teams around the world, the business transformation that we have executed on the amazing product and strong momentum of the Guess brand.
We are very proud of all of you.
I strongly believe our Company is positioned better than ever to extend its distribution, gain market share and increase profitability.
We have a strong balance sheet and solid cash generation power to support our business growth and return excess cash to our shareholders.
Our Board's commitment is evident with the previously announced plans to our unused $200 million share repurchase authorization.
And today's approval to double our dividend.
We firmly believe our stock is trading below its intrinsic value and plan to execute share repurchases opportunistically.
Over the last two years, we have successfully executed a full transformation of our business and what better prove that our strategy is working, than our results this fiscal year, when we are guiding to double our operating margin and profit from pre-pandemic levels.
The first piece of this transformation is the innovation of our brand, including launching our first global line innovating the quality and sustainability of our product, upgrading our marketing and visual merchandising, optimizing full price selling, remodeling our store fleet and enriching the customer experience.
Paul has led this critical initiative and together with the product and creative teams, they have been doing an incredible job.
The second piece of the transformation is the reset of our business model.
We have optimized our distribution in both retail and wholesale by removing unproductive stores and accounts, reducing our product offering to result in a single business with more productive SKUs from our global line.
We have also remained laser focused on margin expansion with improvements coming from IMU optimization, longer occupancy and cost reductions, including the consolidation of certain functions in Europe.
As a natural extension of these efforts, during the third quarter, we completed an intra entity transfer of certain intellectual property rights from the US to Switzerland, more closely aligning our IP rights with our business operations.
We are operating in a more capital-efficient way turning inventory faster with less non-productive assets.
This transformation has repositioned this Company's ability to deliver strong growth, significant profitability and superior shareholder returns into the future.
Sustainability remains a key focus for our brand and we are committed to being part of the solution to climate change.
We have aggressive internal targets to reduce corporate greenhouse gas emissions by 50% and supply chain emissions by 30% by 2030 and to achieve net zero by 2050.
In fact, last month, we signed an open letter to G20 leaders calling for policies that align with this goal.
We also supported the United Nations Conference of Youth to ensure the collective youth voice on climate negotiations is heard.
We are actively working on our climate action roadmap that includes store efficiency measures, investment in renewables and changes to the way that we create and produce our product, I couldn't be prouder of our leadership in this very important area.
Let me add some color to our third quarter results.
Our retail and wholesale businesses in North America have remarkable performance in the period with significant increases in operating profit and margin expansion.
Our licensing business also reported strong quarter, all driven by the strong momentum our brand is enjoying in the marketplace.
Our Europe segment performed well positively impacted by a shift in business to LLY due to the timing of inventory receipts, and I am proud to say that we closed the spring-summer order book for our European wholesale business this quarter with orders up 12% to LLY.
And our sales campaigns for the pre-fall-winter season is looking promising for double-digit growth as well.
These results clearly signal that we are continuing to gain market share.
Our Asia segment had a challenging quarter and continues to be impacted by the COVID situation on government restrictions in several countries including China, Japan and Taiwan.
I am really encouraged by the momentum that we saw in the third quarter in our top line which of course starts with our brand and our product.
We had strong performance in dresses, sweaters outerwear and denim as well as our high-end Marciano brand.
North America saw a pop in the mid-tops while Europe remained strong in athleisure.
Our men's business outperformed in North America, and in accessories sales of handbags and watches were solid in both regions.
I believe, the strength that we have been seeing in categories like denim, Marciano, handbags, dresses and outerwear bodes well for the future as these provide us key levers to drive same-store sales growth.
Guess is a true lifestyle brand and is poised to capitalize on current consumer trends.
Casualization is here to stay, which will help fuel our continued growth in categories like denim.
We have a diversified denim offering with silhouette including skinny, straight leg, mom jean and mini flare and see this as key opportunity for future growth.
At the same time, we see consumers returning to social activities and fashion-oriented which is seen in other key areas of our business like dresses and Marciano.
Regarding our store fleet, we opened 55 new stores so far this year, most of which were pop-ups with new gas and factory stores, but also specialty conference like accessories, activewear, Marciano, kids and our Gen Z concept Guess Originals.
We continue to believe that we have substantial whitespace for new stores in many of our markets and stores are a key pillar to represent a lifestyle attributes of our brands, provide a tool for new customer acquisition will complete the omnichannel experience.
In connection with the elevation of our brand, we embarked on our remodeling program that will ultimately touch roughly 630 stores.
Including new stores, this would represent 80% of our entire fleet in Europe and North America by the end of next year.
We continue to invest in technology including upgrades to our store infrastructure to drive efficiencies and enhance the customer experience.
Our e-commerce business continues to grow with sales in North America and Europe in the third quarter, up 15% to last year and 37% to LLY.
This is a source of both revenue and profitability growth for our brand and it represents a material go forward opportunity for us.
And we continue to make progress on our customer centricity initiatives including omnichannel capabilities and advanced data analytics and customer segmentation.
In Europe, we are rolling out omnichannel and ship from store capabilities in all countries and we have launched a new gift card application for the holidays.
Regarding customer analytics, we have nearly 6 million contactable customers in our databases in North America and Europe and have added 1 million new customers this year so far.
Over 85% of this customers provide us with their mobile phone number and over 20% with their home address.
So we can leverage SMS marketing and mailers.
As part of the Customer 360 projects, we recently launched our CRM platform, which gives us a 360 view of our customer and enable us to improve the way we segment and personalize our communication marketing and promotional strategies.
This is fully implemented in Europe and early results are very promising.
The same application will be implemented in North America next year.
We'll continue to drive innovation in this area and fund investments in technology and customer analytics.
Regarding inventory and the supply chain, it will come as no surprise that our product development cycle has been impacted by the unprecedented challenges that the world is facing on the supply and logistics side.
Our team is doing an incredible job mitigating this challenges to the extent possible.
Our work to consolidate our vendors going from over 500 to around 135 as well as the execution of the global line which reduce SKUs by over 40% has enabled us to leverage higher volumes to push through production.
We have ordered product in advance to allow for extended lead times and our inventory levels at the end of Q3 reflect this.
We maintain a globally diversified sourcing strategy which has helped us to limit impacts when areas experienced disruptions.
We are also moving roughly 10% of our apparel sourcing to locations that are closer to the final distribution to get out and tighten costs as well as exploring alternative shipping methods like to change to move product faster between China and Europe and we are certainly investing in air transportation when it makes sense to get our product in time to sell.
This year, we have gone through above at 7% usage of air freight versus a prior average of about 3%.
In addition, as with the rest of the industry, we are experiencing increases in raw material cost like cotton.
We have contracts for certain raw materials that cover us into Q3 next year and simultaneously are looking at alternative options like recycled cotton made of post-consumer waste products.
All of this is obviously resulting in elevated costs which we have built into our outlooks.
Importantly, we have been successful in increasing prices with AURs up 15% to 20% alongside our innovation and product quality to mitigate the impact this cost increases are having on our profitability.
As of the end of Q3, we had over a $100 million of inventory in transit representing almost 25% of our total ownership compared to 12% in pre-pandemic Q3.
A lot of this product will support our post holiday business primarily to service our European wholesale business and our on-hand inventory today is completely aligned with our demand expectations for the upcoming holiday season.
I feel strongly about our plans for the holiday business.
We have a lot of newness coming to stores.
Our assortment and the elevated quality of our product is clearly resonating with our customers as evidenced by our strong start to the fourth quarter.
In North America, traffic is gaining momentum recently and we are experiencing good conversion and strong AURs.
Recent improvement in trends in our tourist location suggests that we are getting a boost from the change in travel restrictions implemented in the US earlier this month.
In Europe, we have also seen positive sequential momentum in sales comps at the start of the quarter driven by material increases in traffic as AUR also remain strong.
As we have done all year, we plan to continue to be less promotional than in the past, especially with store wide level discounts.
We are increasing marketing to fuel the customer acquisition.
We are expanding the use of direct mail and catalog pieces planning to send out 1.2 million pieces during the quarter as well as increasing our investment in digital marketing to drive traffic to our sites.
We have bought key product feature in our marketing campaigns in significant debt.
We have also added video capabilities to show product attributes more effectively.
When you put it altogether, we see top line growing in excess of 20% in the fourth quarter period versus last year and operating profit exceeding $100 million.
This represents an increase in both the top and bottom line to our previous outlook for the year and Katie will give us more color on this in a few minutes.
Looking past this year, we remain confident in our longer-term goals to reach revenue of $2.8 billion and operating margins of 12% in fiscal year 2024.
In closing, let me just say that I could not be prouder of what our team has accomplished in the last 2.5 years since I've been back.
We have highly dedicated people who share an incredible passion to pursue our purpose.
And on this team when we commit to something we deliver.
We committed to elevating our brand we are delivered.
I think Paul and our product teams have done extraordinary work with this and today, we have one line of product for the entire world across all categories and our products are the best they have been in our Company's history, highly elevated, of great quality and very consistent with the DNA of the Guess brand.
We committed to transforming the business we are delivering.
We have reacted to every aspect of our business model including our store portfolio, digital business, sourcing and logistics operations and systems infrastructure.
We also committed to expanding our margins and we are delivering here too.
We now expect to reach an 11% operating margin this year, double our margin of two years ago and well ahead of our initial plans.
While these are all significant accomplishments, I strongly believe that the best is yet to come for us.
We are in an inflection point at Guess, and I'm very confident that our business is well positioned to generate superior returns in the future and our results will be here to prove it.
You have our commitment.
With that, let me pass it to Katie to review our financials in more detail.
I'm excited to tell you more about our financial performance this quarter which truly exceeded our expectations.
We tripled earnings to pre-pandemic levels and are raising both our top and bottom line outlook for the year.
The brand is showing strong momentum going into the holiday season and despite the challenging supply chain we have the products to support that demand.
These results are again a testament of our organization's commitment to win, flexibility to adapt during volatile times and pure grit.
I love being part of this passionate team.
Now, let me take you through the details on the quarter.
Third quarter revenues were $643 million, up 13% to last year and up 4% compared to LLY.
This exceeded our expectations as our Americas Retail, European wholesale and licensing businesses all outperformed.
Overall, the 4% revenue increased to pre-pandemic LLY with the result of growth in our European business driven by wholesale including shift to sales from Q2 to Q3 as well as e-commerce.
This was partially offset by permanently closed stores and negative same-store sales in Europe and Asia.
Excluding sales from the over 170 stores that we have closed since the pandemic, Q3 revenue would have been up 9% to LLY.
And let me just remind you that these stores are accretive to operating profit by about $20 million on a run rate basis.
Let's talk a bit about sales performance by segment.
In Americas Retail, revenues were up 30% versus last year and down 5% versus LLY, better than our expectations.
Again this quarter, the declines for LLY was driven entirely by permanent store closures which are worth roughly 7% of sales.
So we're constantly US and Canada were up 2% in constant currency versus LLY.
Same-store sales in the US remain positive despite continued negative traffic trends with positive conversion and AUR growth over 20%.
I'm happy to report that sales in our over 70 stores in Canada have improved substantially driven by a material increase in traffic in that region as the pandemic there is beginning to wane.
This quarter, we continue to be a lot less promotional lapping also four events on holidays like Labor Day that we didn't do this year, which has an impact on our topline, but of course a benefit to our bottom line.
I can help to point out the increase in profitability that we have brought to this segment that is allowing us to capitalize on our positive sales trends.
Operating margin in Q3 was over 14% versus less than 1% in the prior two years and operating profit is 15 times what it was in pre-pandemic LLY even on lower sales, what an incredible business transformation.
In Europe, revenues were up 3% versus last year and 19% versus LLY.
The increase to LLY is primarily a result of growth in our wholesale business.
As you may recall from last quarter, our shipments for the fall-winter season were a few weeks away due to challenges with the supply chain.
So we had a shift in sales from Q2 into Q3.
But even absent the shift, this business had positive momentum and we are gaining market share here.
While our retail business continues to be pressured by pandemic-related traffic declines, we saw a significant sequential improvement in our sales since last quarter.
Store comps for Europe were down 13% in constant currency versus LLY, a 7% improvement from down 20% last quarter as a result of improved traffic and continued increases in AURs.
In Asia, revenue was down 8% in the last year and 31% to LLY, nearly half of this decline was driven by the permanent store closures.
Our store comps were down 25% in constant currency versus LLY, 5% better than Q2 with negative sales comps in South Korea and China more moderate than other areas in the region.
This region has struggled with the resurgence of COVID-19 as well as the lack of consumer confidence which is deeply impacting our sales.
Our Americas wholesale sales were up 64% to last year and 5% to LLY driven by higher sales in the US and licensing revenue continues to outperform, up 37% to last year and 20% to LLY in Q3 driven by strong performance in shoes, perfumes and watches.
Total company gross margin for the quarter was 45.7% more than 800 basis points higher than two years ago.
Our product margin increased 340 basis points this quarter versus LLY primarily as a result of lower promotions and higher IMU, partially offset by business mix and increased freight, which was worth about 100 basis points this quarter.
Occupancy rates increased 500 basis points driven by business mix, lower rents and permanently closed stores.
Adjusted SG&A for the quarter was $223 million compared to $206 million two years ago.
The increase is the result of variable costs for both the e-commerce and wholesale businesses, mostly in Europe which grew materially into LLY as well as higher performance based compensation.
Adjusted operating profit for the third quarter was $70 million versus $55 million last year and $23 million two years ago.
This is a 27% increase to last year and an over 200% increase to pre-pandemic levels.
Our balance sheet remains strong.
We ended the third quarter with $391 million in cash, $26 million higher than last year's sales at the end of Q3.
Our cash balance was impacted by an $80 million US tax payments made in connection with the IP transfer that Carlos mentioned.
We expect to receive this amount in Switzerland over the next 5 to 10 years.
Inventories were $482 million, up 23% in US dollars and 22% in constant currency versus last year and down 8% in constant currency to LLY.
This increase reflects our strategy to secure good in advance of the holidays and Q1 in light of the global supply chain disruptions and elongated transit times.
Year-to-date capital expenditures were $41 million up from $12 million in the prior year, but below pre-pandemic levels, mainly driven by investments in new stores, remodels and technology.
Free cash flow for the first three quarters of the year was negative $41 million driven down by the $80 million US tax payments that I previously mentioned.
Excluding the tax payments, our free cash flow would have been positive $39 million.
Let me touch on capital allocation.
We are confident in our ability to generate sustainable and profitable growth and ample free cash flow.
As a result, we have the runway not only to fund our growth initiatives, but also return incremental capital to our shareholders.
As you recall, last quarter we expanded our share repurchase program to $200 million.
Today, we announced that our Board of Directors has approved a 100% increase in our quarterly dividend from $0.1125 to $0.225.
As a reminder, our dividend was announced earlier [Phonetic] before we executed the $300 million convertible notes to fund share repurchases in April of 2019.
Now let's talk about our go-forward expectations.
We are raising our outlook for the fourth quarter and the full fiscal year.
For the fourth quarter, we are expecting revenue to be down mid-single digits versus LLY driven by timing in our wholesale business and permanently closed stores partially offset by growth in our e-commerce business.
I wanted to note that in light of the recent developments with the pandemic in Europe, we have built in more prudent assumptions for revenues for a European retail business in the fourth quarter.
In terms of profit, adjusted operating margin for the fourth quarter is expected to be about 100 basis points better than LLY.
Gross margin is expected to expand by around by 500 basis points to LLY driven primarily by business mix, lower occupancy, lower promotions and improved IMU.
And as with the rest of the industry, we are seeing some cost pressures, particularly in freight, which are built into these numbers.
We anticipate that the adjusted SG&A rate will be up around 400 basis points as cost savings are offset by business mix, investments in labor and higher incentive-based compensation.
For the year, we now expect revenue to be down in the low single digits versus LLY and adjusted operating margin to reach just over 11% for the year versus 5.6% in LLY.
This represents a doubling of adjusted operating margin with margin expansion of over 550 basis points to our pre-pandemic business despite a lower revenue base.
To break it down for you, this margin expansion comes from about 250 basis points of lower promotional activity, 200 basis points of IMU improvement, 150 basis points of lower occupancy expense and 200 basis points of channel mix and onetime benefits.
This was partially offset by about 150 basis points of higher inbound freight and 100 basis points of increases in G&A, mostly higher performance-based compensation for this year.
We are very confident in the sustainability of these margin improvements.
We realized that the current environment of significant demand and limitations in product availability have triggered broad increases in margin in our industry.
In our case, most of our margin improvement has come from concrete changes in our business model that Carlos walked you through earlier and are not circumstantial but more permanent in nature.
This margin expansion combined with the potential for future top line growth at Guess is very powerful.
For these reasons, we remain confident in our longer term goals, and we look forward to sharing our outlook for the next fiscal year with you when we report Q4.
| q3 adjusted earnings per share $0.62.
q3 revenue $643 million.
|
I'm Larry Mendelson, Chairman and CEO of HEICO Corporation.
As management looks at the company, we really believe that our success and the ability to keep our head well above water, not to get into any financial binds, not to struggle to sell debt at 8% or 10% and so forth and to be fiscally sound is all attributed to the unbelievable talent and brilliance of the team members.
And I can tell you, senior management hold -- and the Board holds these people in the highest regard.
Before reviewing our operating results in detail, I'd like to take a few minutes to discuss the impact on HEICO's operating results from the COVID pandemic.
Results of operations in the first quarter of fiscal '21 continue to reflect adverse impact from COVID-19.
Most notably, demand for commercial aviation products and services continues to be moderated and impacted negatively by ongoing depressed commercial aerospace markets.
We continue to focus on health and safety measures at our facilities in accordance with the CDC guidelines in order to protect the global team members and mitigate the spread of COVID-19 while serving our customers' needs.
Keep in mind that almost all of our facilities were open continually since the start of the COVID pandemic.
And very, very few members of our teams came down with this miserable disease.
That was because of the safety measures and health measures that we employ throughout the company.
Consolidated net sales for businesses that operate within the commercial aerospace industry decreased by about 43% in the first quarter of fiscal '21 as compared to the first quarter of fiscal '20.
As we mentioned in prior calls, we anticipate that as the pandemic vaccine becomes more widely available, consumer interest in commercial air travel should begin to reemerge.
As such, we cautiously anticipate improved demand for our commercial aerospace products to slowly recover toward the second half of fiscal '21.
Summarizing the highlights of our first quarter of fiscal '21 results.
I would tell you that despite continuing difficult operating environment created by the pandemic, HEICO continues to generate excellent cash flow.
And the cash flow provided by operating activities was very strong, increasing 32% to $107.2 million in the first quarter of fiscal '21, and that was up from $81.1 million in the first quarter of fiscal '20.
We are encouraged by the second consecutive quarter of sequential improvement in net sales and operating income at our Flight Support Group.
Operating income and net sales at flight support increased 20% and 3%, respectively, in the first quarter of fiscal '21 as compared to the fourth quarter of fiscal '20, clearly an improvement that's obvious.
Net sales for ETG, space and electronics products grew organically by a very strong 19% and 14%, respectively, in the first quarter of fiscal '21, while the ongoing pandemic's impact resulted in softer demand for its commercial aerospace products.
In January 21, we paid our regular semiannual cash dividend of $0.08 per share, and this represented our 85th consecutive semiannual cash dividend since 1979.
HEICO's strength in the face of ongoing challenging conditions, coupled with our optimism for HEICO's future, gave our Board the confidence to continue paying a cash dividend through the current health pandemic.
Total debt to shareholders' equity improved to 32.2% as of January 31, '21, and that compares to 36.8% as of October 31, '20.
Our net debt, which is total debt less cash and cash equivalents of $270.3 million as of January 31, '21, to shareholders' equity ratio improved to 13% as of January 31, '21.
And that was down from 16.6% as of October 31, '20.
Our net debt-to-EBITDA ratio improved to 0.62 times as of January 31, '21.
And that was down from 0.71 times on October 31, '20.
We have no significant debt maturities until fiscal '24, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes to accelerate the growth and maximize shareholder return.
Last week, we publicly have proudly extended our congratulations to both NASA and Jet Propulsion Laboratories, or known as JPL, on their successful Mars Perseverance Rover Landing.
Our Apex Microtechnology, Sierra Microwave, 3D PLUS and VPT subsidiaries supplied mission-critical hardware for the mission.
Once again, NASA and JPL demonstrated remarkable talent and capabilities despite a year of great challenges for the world's population, and they remain a beacon of optimism for all people.
And we are extremely proud of HEICO companies and team members who contributed to this effort.
I think we want to focus on the extreme technical ability and unbelievable quality that these -- our subsidiaries built into the electronics that they supply for that Mars Perseverance Rover Landing.
The Flight Support Group's net sales were $199.3 million in the first quarter of fiscal '21 as compared to $301.1 million in the first quarter of fiscal '20.
The net sales decrease is principally organic and reflects lower demand for the majority of our commercial aerospace products and services resulting from the significant decline in global commercial air travel attributable to the pandemic.
The Flight Support Group's operating income was $25.8 million in the first quarter of fiscal '21 as compared to $62 million in the first quarter of fiscal '20.
The operating income decrease principally reflects the previously mentioned decrease in net sales as well as a lower gross profit margin and the impact from lost fixed cost efficiencies stemming from the pandemic.
The lower gross profit margin principally reflects the impact from lower net sales of commercial aerospace products and services across all of its product lines.
The Flight Support Group's operating margin was 13% in the first quarter of fiscal '21 as compared to 20.6% in the first quarter of fiscal '20.
The operating margin decrease principally reflects the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lost fixed cost efficiencies and the effect of higher intangible asset amortization expense.
I would like to point out that the full impact of the pandemic began to affect the FSG operating segment at the beginning of our third quarter of fiscal '20.
Through practical and disciplined cost management, we have delivered sequential quarterly improvements in our FSG operating margin.
The FSG operating margin was just 6.7% in the third quarter of fiscal '20 and has since steadily increased to 11.1% in the fourth quarter of fiscal 2020 and to 13% in the first quarter of fiscal '21.
Our team members and assembled workforce is our most valuable asset.
Our team members engaged primarily in commercial aviation sacrificed greatly during the pandemic through limited layoffs, moderate furloughs and wage reductions for nearly all others not impacted by layoffs or furloughs.
These team members sacrificed a tremendous amount, and we owe our loyalty to them as we held on to a much higher percentage of our workforce than most others.
Thus, we decided to operate with higher overhead, which reduced our gross margins and increased our SG&A.
A lot of companies speak about how their team members are important.
But HEICO demonstrates it through actions, including by maintaining our 401(k) matching contributions and granting our team members their maximum potential 401(k) profit sharing contributions, even though we missed our budgets due to the pandemic.
We could have sacrificed the future in order to have better current period results, but that is not what HEICO is about.
That's the luxury of being part of the HEICO family as we don't feel pressured to make short-term decisions that hurt future performance.
We also treated our customers, suppliers, principles, partners and acquisitions extremely well and truly believe this helps us grow faster than the industry as people prefer dealing with us due to our culture.
We are confident that our motivated and assembled workforce will propel us to new heights as the pandemic passes.
And I would also like to echo my gratitude to all of HEICO's team members, including those at the Electronic Technologies Group, for their remarkable efforts during this difficult time.
About 90% of our people cannot work from home and have to come in.
And our businesses have been operating as essential businesses throughout this pandemic very carefully and very safely and taking care of each other.
And I'm very proud of the job that our people have done throughout this entire difficult period as well as the many years before, and I know that they'll continue to do the excellent work that they've carried out.
As for the Electronic Technologies Group's performance, our net sales increased 7% to $223.6 million in the first quarter of fiscal '21, up from $208.4 million in the first quarter of fiscal '20.
The increase is principally attributable to the favorable impact from our fiscal '20 acquisitions.
The Electronic Technologies Group's operating income increased 5% to $60.1 million in the first quarter of fiscal '21, up from $57.5 million in the first quarter of fiscal '20.
This increase principally reflects the previously mentioned net sales growth.
The Electronic Technologies Group's operating margin was 26.9% in the first quarter of fiscal '21 as compared to 27.6% in the first quarter of fiscal '20.
The lower operating income as a percent of net sales principally reflects a lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from certain efficiencies gained from the previously mentioned net sales growth.
The lower gross profit margin mainly reflects a decrease in net sales with commercial aerospace products and lower net sales and a less favorable product mix of certain defense products, partially offset by an increase in net sales of certain electronics products.
Moving on to earnings per share.
Consolidated net income per diluted share was $0.51 in the first quarter of fiscal '21 and that compared to $0.89 in the first quarter of fiscal '20.
The decrease principally reflects the previously mentioned lower operating income of the Flight Support Group and higher income tax expense, partially offset by less net income attributable to noncontrolling interest as well as lower interest expense.
Depreciation and amortization expense totaled $23 million in the first quarter of '21.
That was up from $21.6 million in the first quarter of fiscal '20.
The increase in the first quarter of fiscal '21 principally reflects the incremental impact of higher intangible asset amortization expense from our fiscal '20 acquisitions.
Significant new product development efforts are continuing at both ETG and flight support.
R&D expense was $16.2 million in the first quarter of fiscal '21 or about 3.9% of sales, and that compared to $17.1 million in the first quarter of fiscal '20 or 3.4% of sales.
Consolidated SG&A expense decreased by 10% to $78.1 million in the first quarter of fiscal '21 as compared to $87.1 million in the first quarter of fiscal '20.
The decrease in consolidated SG&A expense reflects: a decrease in performance-based compensation expense; a reduction in other selling expenses, including outside sales commission, marketing and travel; and the reduction in other G&A expenses.
Consolidated SG&A expense as a percentage of net sales was 18.7% in the first quarter of fiscal '21, and that compared to 17.2% in the first quarter of fiscal '20.
The increase in the consolidated SG&A expense as a percentage of net sales principally reflects higher other G&A expenses as a percentage of net sales and the impact from higher intangible asset amortization expense.
Interest expense decreased to $2.4 million in the first quarter of fiscal '21, and that was down from $4.3 million in the first quarter of fiscal '20.
The decrease was principally due to lower weighted average interest rates, partially offset by a higher weighted average balance of borrowings under our revolving credit facilities.
Other income in the first quarters of fiscal '21 and '20 was really not significant.
HEICO's income tax expense was $2.3 million in the first quarter of fiscal '21, and that compared to an income tax benefit of $22.9 million in the first quarter of fiscal '20.
HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal '21 and '20 of $13.5 million and $47.6 million, respectively.
The tax benefit from stock option exercises in both periods was the result of the strong appreciation in HEICO's stock price during the option lease holding period, and the $34.1 million larger benefit recognized in the first quarter of fiscal '20 was the result of more stock options which were exercised.
Net income attributable to noncontrolling interest was $5.7 million in the first quarter of fiscal '21, and that compared to $7.9 million in the first quarter of fiscal '20.
The decrease principally reflects a decrease in the operating results of certain subsidiaries of flight support, in which noncontrolling interests are held.
For the full FY '21, we now estimate a combined effective tax rate and noncontrolling interest rate of approximately 24% to 26% of pre-tax income.
Moving over to balance sheet and cash flow.
The financial position of HEICO and forecasted cash flow remains very strong.
As we mentioned earlier, cash flow provided by operating activities was very strong and increased 32% to $107.2 million in the first quarter of fiscal '21, up from $81.1 million in the first quarter of fiscal '20.
Our working capital ratio was strong and consistent at 4.9 times as of January 31, '21, and that compared to 4.8 as of October 31, '20.
Days sales outstanding of receivables, DSOs, improved to 45 days as of January 31, '21, and that compared to 46 days as of January 31, '20.
Of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposure.
No one customer accounted for more than 10% of net sales.
Our top five customers represented about 24% and 22% of consolidated net sales in the first quarter of fiscal '21 and '20, respectively.
Our inventory turnover rate increased to 164 days for the period ending January 31, '21.
That compared to a pre pandemic 132 days for the period ended January 31, '20.
The increase in the turnover rate principally reflects lower net sales volume, mainly resulting from the pandemic impact on certain -- on demand for certain of our products and services.
And despite the increased turnover rate, our subsidiaries really have done an excellent job controlling inventory levels in the first quarter of fiscal '21, which we believe are appropriate to support expected future net sales.
And in consideration of HEICO's consolidated backlog, which has increased by $62 million since October 31, '20, the backlog was $906 million as of January 31, '21.
As we look ahead to the remainder of fiscal '21, the pandemic will likely continue to negatively impact commercial aerospace and HEICO.
Given this uncertainty, we cannot provide fiscal '21 net sales and earnings guidance at this time.
However, we believe that our ongoing fiscal conservative policies, healthy balance sheet and increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers.
In addition, our time-tested strategy of maintaining low debt and acquiring and operating high cash-generating businesses across a diverse base of industries beyond commercial aviation, such as defense, space and other high-end markets, including electronics and medical, puts us in a good financial position to weather this uncertain economic period.
Furthermore, we are cautiously optimistic that the vaccine progress may generate increased commercial air travel and will result in gradual recovery in demand for our commercial aerospace parts and services businesses.
And we expect that to commence primarily in the second half of fiscal '21, although we do expect it to increase gradually until we get there.
That strength will manifest from our culture of ownership, our mutual respect for each other and the unwavering pursuit of exceeding customers' expectations.
I also would like to point out that in spite of the pandemic and in spite of decreased sales, HEICO wanted to look and reward our team members.
And again, this year, we continue to make the 5% match to team members' 401(k) investments.
As you know, most team members invest 6%, HEICO matches it with 5% of their salary in HEICO shares.
We would never cut that back because we respect and we want to reward our outstanding team.
| compname reports strong operating cash flows in the first quarter of fiscal 2021; up 32%.
q1 earnings per share $0.51.
cannot provide fiscal 2021 net sales and earnings guidance at this time.
|
I'm here with James Quincey, our chairman and chief executive officer; and John Murphy, our chief financial officer.
Note that we posted schedules under Financial Information in the Investors section of our company website at www.
You can also find schedules in the same section of our website that provide an analysis of our gross and operating margins.
Today, I'd like to reflect on the past year and how we've emerged stronger from the pandemic, including positive performance in the fourth quarter.
I'll also highlight the broader macro environment and how we're executing in the marketplace.
Finally, I'll touch briefly on the accelerators for growth that give us confidence we can achieve the 2022 guidance we've provided today, with more on them to come at CAGNY later this month.
John will then discuss financial results for the quarter and our outlook in more detail.
In 2021, the operating environment remained dynamic as the pandemic continued to evolve and factors like inflation and supply chain disruptions brought additional challenges.
But over the year, our organization and the system continued to manage through these circumstances with focus and flexibility.
We are pleased with the results, which were above 2019 across key metrics, and we remain focused on building a stronger total beverage company.
Now looking more closely at our fourth quarter results.
We saw another quarter of sequential improvement versus 2019, and we ended the year with volume ahead of 2019.
Notably, it was the first quarter in which away-from-home volume was also ahead of 2019 while at-home channels remained strong.
So recapping the quarter 4 performance around the world, starting with Asia Pacific.
China delivered strong performance in the quarter by capturing a growing trend among consumers' zero-calorie offerings, we doubled our Zero Sugar sparkling portfolio in terms of volume compared to the fourth quarter of 2019.
We leveraged RGM strategies and targeting investments to gain share in e-commerce, thus driving growth for the overall business.
In India, initiatives to build omnichannel presence and marketing campaigns around key occasions by leveraging festivals and passion points through occasion-led marketing and integrated execution drove a sequential increase in market share and nearly 30% growth in transactions for the quarter.
Additionally, our local Thums Up brand became $1 billion brand in India, driven by focused marketing and execution plans.
In Japan, while our system was faced with a very challenging year, we gained value share and consumers driven by successful innovation and commercial strategies.
In ASEAN and South Pacific, there were strict restrictions and limited reopenings in many markets for a large part of the year.
In Q4, acceleration of vaccine efforts and strong results from the Fanta Colorful People and Sprite Make it Clear campaigns helped drive our recovery.
In EMEA, volume in Europe in the quarter surpassed 2019 despite mobility restrictions, particularly in Western Europe.
Despite the recovery remaining asynchronous in the region, increased investments behind our brands in the marketplace resulted in our system driving the highest incremental retail value among FMCG players in the region.
In Africa, volume continued to be ahead of 2019 in the fourth quarter, driven by our key markets with strong double-digit growth in Nigeria and Egypt.
Additionally, increased investments behind our affordability and multi-serve packages drove value share for the full year above 2019 in the region.
In Eurasia and Middle East, the top line continued to expand faster than the macro environment, driven by strong revenue growth management, execution, and digital capabilities.
Turkey, one of our key markets, grew 7 points of value share for the year in digital as total digital commerce expanded by close to 90%.
In North America, despite COVID cases leading to business closings and some mobility restrictions, value share growth was strong in the quarter, driven by pricing, revenue growth management, and strong execution in the market.
The new Coca-Cola Zero Sugar continued to deliver strong results, outpacing category growth, while Sprite and smartwater grew drinker base and buy rates.
Innovations also delivered strong performances, led by Coke with Coffee and Simply Almond.
Latin America delivered another quarter of strong performance with mid-single-digit volume growth versus 2019.
This resilience of the system has been driven by years of experience navigating volatile environments through strong and effective execution.
Within Global Ventures, Costa continued to recover through the year but was impacted in Q4 due to COVID-related restrictions.
Costa Express continued its strong performance in the U.K., delivering results ahead of expectations.
In China, the Costa ready-to-drink expansion continued with availability now in more than 300,000 outlets, continuing to drive our share position ahead of our key competitor.
Finally, our Bottling Investment Group continues to focus on productivity and transformation initiatives, delivering strong operating margin expansion for full year 2021.
Due to improved mobility throughout the year, our industry is growing in both volume and value.
Gaining share was a key objective in our Emerging Stronger agenda.
And this year, we gained value share in both at-home and away-from-home channels.
Our NARTD market share is above 2019 levels at a global level and in both at-home and away-from-home channels.
We will continue to identify and address opportunities to further improve our value share, driven by data-backed insights.
As we close the chapter on 2021, we emerge stronger by delivering both top line and earnings per share ahead of 2019, and we gained share in a growing industry.
The actions we took during the pandemic have resulted in an agile, a focused organization that is poised to capture the sizable opportunities that exist.
And we continue to look to the future to build on our momentum and drive growth.
As we turn to 2022, while it is impossible for us to know whether this variant will be the last, what is clear is that our consumers, our customers, and our business are learning and adapting with great resilience.
For example, while we have seen some impacts from the omicron variant through the first few weeks of the year, we are not seeing the same level of disruption as previous waves, and our system is better equipped.
Further recovery in 2022 will be determined by macro factors, including overall consumer sentiment, as well as supply chain challenges; labor shortages; and of course, the inflationary pressures, and interest rates.
We are confident we are well equipped to navigate this environment and deliver on the guidance we provided today.
We're excited about where we are today and the substantial initiatives we have in place for 2022.
The consumer continues to be at the center of our strategy.
And through our total beverage company agenda, we are adapting to the macro and micro trends which are shaping consumer habits.
We advanced our total beverage company agenda last year by streamlining our portfolio, focusing on the core, and investing behind a portfolio of brands that allows us to meet the evolving needs of consumers.
We completed much of this work on brand eliminations while being deliberate with brand transitions.
This optimized portfolio will ensure we follow the consumer and win in emerging and fast-growing categories.
And is complemented by the recent strategic acquisition of BODYARMOR; as well as relationships, like the new agreement with Constellation Brands, which will launch Fresca Mixed; and the extended relationship with Molson Coors, which will launch Simply Spiked Lemonade in the U.S.
Our network marketing model, with global category teams and local operating units, is allowing us to focus on end-to-end consumer experiences that are data-driven and always on.
Our announcement of WPP as our global marketing network partner is a foundational component of our new marketing model.
This new agency approach gives us access to the best creative lines, regardless of source, and is underpinned by leading-edge data and technology capabilities.
The Real Magic campaign is the first campaign which was cocreated internally leveraging this new end-to-end approach.
And the campaign is showing strong results with the consumers.
We have good visibility into the benefits of the new marketing model.
The approach will allow us to deliver best-in-class consumer-centric marketing experiences across our categories and around the world.
We also built more discipline into our innovation process in 2021 with a key focus on scalable bets that can build momentum year over year.
It's still early, but the approach is working.
Revenue per launch and gross profit per launch were up 30% and 25%, respectively, versus prior year.
And we took intelligent local experiments and moved more rapidly to scale them across geographies.
Sustainable packaging like refillables and labelless bottles, along with brands like Coke with Coffee, fairlife, AHA, Costa ready-to-drink, and Lemondo, are all examples of local winners that have been extended to more markets.
For 2022, our innovation process is increasingly supported by data, and our pipeline is robust with built-in agility and consists of big bets along with many shots on goal.
The system has stepped up its RGM and execution capabilities, which is helping us navigate an inflationary environment, driving value growth in a segmented way.
Due to the strength of our bottling partners and the stronger than ever alignment of the system, we are prepared to address opportunities, as well as challenges that may lie ahead.
Our network organizational structure is designed to better connect functions and operating units to help our system scale ideas faster.
As we've emerged stronger, we kept moving forward on integrating sustainability work into our business as it is a key driver of future growth.
During the quarter, we were recognized for our commitment to transparency and action to address environmental risks by earning an A score in CDP's Assessment for Water, an improvement over last year.
We improved or maintained our score in CDP's assessments on other important areas, like climate and forests.
Additionally, to complement our World Without Waste goals, we announced a new global goal to reach 25% reusable packaging by 2030.
Increasing refillable and reusable packaging options responds to consumer affordability and our sustainability aspirations, and it helps create a circular economy as refillable packages have extremely high levels of collection and are low carbon footprint beverage containers.
We expect the recovery will remain asynchronous, but we are encouraged by our growing industry, our unparalleled system strength, and a strategic transformation that enables us to be agile and to adapt.
Our actions drove strong results in 2021, and we have confidence in our ability to deliver another year of strong performance in 2022 and over the long term.
Now John will provide more details on our results and our 2020 guidance.
In the fourth quarter, we closed the year with strong results, despite the impact of the omicron variant across many parts of the world.
Our Q4 organic revenue growth was 9%.
Our price/mix of 10% was driven by a combination of factors, including targeted pricing, revenue growth management initiatives, as well as further improvement in away-from-home channels in many markets.
Unit case growth showed further sequential improvement on a two-year basis, and concentrate sales lagged unit cases by 10 points in the quarter, primarily due to six fewer days in the quarter.
Despite the commodity market inflation and the dynamic supply chain environment, comparable gross margin for the quarter was relatively flat versus prior year.
Pricing initiatives and favorable channel and package mix were offset by the impact of consolidating the fast-growing finished goods BODYARMOR business, along with incremental investments to sustain momentum in the overall business for 2022.
We continued to invest in markets as they recovered and stepped up year-over-year marketing dollars again in Q4, spending in a targeted way to maximize returns.
This increase in marketing investments, along with some top-line pressure from six fewer days in the quarter, resulted in comparable operating margin compression of approximately 500 basis points for the quarter.
For the full year, comparable operating margin was down approximately 100 basis points versus prior year as improved comparable gross margin was offset by the significant step-up in marketing.
Importantly, versus 2019, a key measure we have focused on, comparable operating margin was up approximately 100 basis points.
Putting it all together.
Fourth quarter comparable earnings per share of $0.45 was a decline of 5% year over year, resulting in full year comparable earnings per share of $2.32, an increase of 19% versus the prior year, as the strong resurgence in the business also benefited from a 3-point tailwind from currency and tax.
We delivered strong free cash flow of $11.3 billion in 2021, with free cash flow conversion of approximately 115% and a dividend payout ratio well below our long-term target of 75%.
With these results, we exceeded guidance on every metric for full year 2021.
We have done tremendous work to emerge ahead of 2019 and set the stage to drive our growth agenda for years to come.
We are spinning the strategy flywheels faster and more effectively.
Our organization is focused on execution and enhancing our capabilities to fuel growth.
As James mentioned, the pandemic will be one of the many factors, along with the dynamic macro backdrop that we face in the coming year.
But our local businesses are ready to adapt and execute for growth.
We expect organic revenue growth of approximately 7% to 8%, and we expect comparable currency-neutral earnings-per-share growth of 8% to 10% versus 2021.
Based on current rates and our hedge positions, we anticipate an approximate 3-point currency headwind to comparable revenue and an approximate 3 to 4 points currency headwind to comparable earnings per share for full year 2022.
Additionally, due to a certain change in recent regulations, we estimate an effective tax rate increase from 18.6% in 2021 to 20% for 2022, which is an estimated 2 percentage points headwind to EPS.
Therefore, all in, we expect comparable earnings-per-share growth of 5% to 6% versus 2021, including the combined 5- to 6-point headwind from currency and tax.
We expect to generate approximately $10.5 billion of free cash flow over 2022 through approximately $12 billion in cash from operations, less approximately $1.5 billion in capital investments.
This implies the fourth consecutive year of free cash flow conversion above our long-term range of 90% to 95%.
We continue to raise the performance bar across the organization and are confident in delivering on this 2022 guidance.
In summary, we expect to deliver another year of strong top-line-driven growth, along with maximized returns, driven by the strategic changes we have made in our business.
There are several considerations to keep in mind for 2022.
Overall, inflationary and supply chain pressures continue to impact costs across several fronts in the business, including input costs, transportation, marketing and operating expenses.
With regards to commodity costs.
After benefiting from our hedging strategy in 2021, we remain well hedged in 2022, but at higher levels.
Based on current rates and hedge positions, we continue to expect commodity price inflation to have a mid-single-digit impact on comparable cost of goods sold in 2022.
However, we are taking actions in the marketplace using multiple levers, including RGM in its many forms, along with our productivity initiatives, to help offset much of the impact.
As a reminder for your modeling, the consolidation of the recently acquired fast-growing BODYARMOR finished goods business will have a mechanical effect on margins.
When it comes to capital allocation, our balance sheet remains strong, and our improving cash flow position is allowing us to be even more vigorous in pursuit of priorities that balance financial flexibility with efficient capital structure, first and foremost, to invest in our business; secondly, continuing our track record to grow our dividend; thirdly, to seek opportune M&A, and to repurchase shares with excess cash.
And finally, due to the calendar shift, there will be one less day in the first quarter and one additional day in the fourth quarter.
Despite another year of uncertainty, in 2021, we came together as a system to emerge stronger and position ourselves to drive sustainable growth.
We are encouraged by the momentum in our business and are clear on the direction we're headed.
As we look to 2022, we feel confident in our ability to deliver on the commitments we outlined today.
With that, operator, we are ready to take questions.
| q4 non-gaap earnings per share $0.45.
q4 revenue rose 10 percent to $9.5 billion.
organic revenues (non-gaap) grew 9% for quarter and 16% for full year.
global unit case volume grew 9% for quarter and 8% for full year.
for full year 2022 company expects to deliver organic revenue (non-gaap) growth of 7% to 8%.
company expects commodity price inflation to be a mid single-digit percentage headwind on comparable cost of goods sold in 2022.
coca-cola- for 2022 comparable net revenue (non-gaap), expects a 2% to 3% currency headwind based on current rates, including impact of hedged positions.
for full year 2022 comparable earnings per share percentage growth is expected to include a 3% to 4% currency headwind.
sees q1 comparable earnings per share (non-gaap) percentage growth is expected to include an approximate 5% currency headwind.
for q1 2022, comparable net revenues are expected to include an approximate 3% currency headwind.
for full year 2022, expects to deliver comparable currency neutral earnings per share growth of 8% to 10% and comparable earnings per share growth of 5% to 6%.
|
We appreciate you joining us today for Gartner's second quarter 2021 earnings call and hope you are well.
With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.
All growth rates in Gene's comments are FX-neutral unless stated otherwise.
Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website.
Finally, all contract values and associated growth rates we discuss are based on 2021 foreign exchange rates unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
Gartner's positive momentum continued in the second quarter of 2021.
We again delivered strong results across contract value, revenue, EBITDA and free cash flow.
We significantly increased the pace of our buybacks.
Total company revenues were up 16% with strength in all three business segments and research exceeding our expectations.
We continue to see growth opportunities across industries, geographies, and every size enterprise.
Research is our largest and most profitable segment.
Our research segment serves executives and their teams across all major enterprise functions in every industry around the world.
Our market opportunity is fast across all sectors, sizes and geographies.
Total contract value growth increased to 11% with both GTS and GBS accelerating in the quarter.
This was driven by strength in both retention and new business.
Global Technology Sales or GTS, serves leaders and their teams within IT.
For Q2, GTS contract value growth accelerated to 9% and we have CD growth in all of our top 10 countries.
GTS drove strong growth across virtually all industries, including manufacturing, services, and tech and telecom.
And we expect GTS contract value growth to continue accelerating, returning to double-digit growth in the future.
Global business sales or GPS serves leaders and their teams beyond IT.
This includes HR, supply chain, finance, marketing, sales, legal and more.
GBS again accelerated, delivering outstanding contract value growth of 18%.
Both practices contributed to our growth.
And our HR, finance, sales and supply chain practices each exceeded 20% contract value growth.
So across our entire research business, we're seeing the results of a sustained focus, a consistent execution of proven practices.
We continued to have a vast market opportunity.
And our research business is well-positioned as we continue to deliver long-term sustained double-digit growth.
Turning to conferences; for the second quarter of 2021, conferences revenues were $58 million, again exceeding our expectations.
As many of you know, during 2020 we were unable to hold in-person conferences.
To address this situation we created virtual conferences to deliver extraordinarily valuable insights to our audiences.
We continue to operationally prepare for some in-person conferences in the second half of the year if conditions allow.
Gartner Consulting is an extension of Gartner Research and helps clients execute their most strategic initiatives through deeper extended project based work.
Consulting revenues were up 4% in Q2.
We had strength in our labor-based business.
With labor-based revenue up 20% over this time last year.
Contract optimization revenue was down from a record high last year.
Overall, Consulting continues to be an important complement to our IT research business.
To ensure we keep pace with our accelerating growth rates, we're rapidly growing our recruiting capacity.
Our hiring is accelerating.
Even in today's tough labor market, candidates see Gartner as a great place for a long-term career.
They know we have an incredible impact on our clients, that we're a sales-driven growth company and our growth provides among the best promotion and professional development opportunities for all our associates.
With strong revenues and continued disciplined cost management, EBITDA exceeded expectations.
Strong EBITDA combined with effective cash management resulted in strong free cash flow.
Our priorities for cash flow continue to be strategic, tuck-in acquisitions, like the small one we did this quarter and share repurchases.
Summarizing, Q2 was another strong quarter with strength in all three business segments, and research exceeding our expectations.
We delivered strong results across contract value, revenue, EBITDA and free cash flow.
Looking ahead, we're well-positioned for long-term sustained double-digit growth.
We have a vast addressable market.
We have an attractive recurring revenue business model with strong contribution margins.
We expect to deliver modest EBITDA margin expansion going forward from a normalized 2021.
We generate significant free cash flow in excess of net income, which will continue to deploy through share repurchases and strategic tuck-in acquisitions.
With that, I'll hand the call over to Craig.
Second quarter results were excellent with strength in contract value growth, revenue, EBITDA and free cash flow.
We are increasing our 2021 guidance to reflect our strong Q2 performance.
Second quarter revenue was $1.2 billion, up 20% year-over-year as reported and 16% FX neutral.
In addition, total contribution margin was 70%, up more than 300 basis points versus the prior year.
EBITDA was $355 million, up 85% year-over-year and up 75% FX neutral.
Adjusted earnings per share was $2.24.
Free cash flow on the quarter was $563 million.
Free cash flow includes $150 million from insurance proceeds related to cancelled 2020 conferences.
Research revenue in the second quarter grew 15% year-over-year as reported and 11% on an FX neutral basis.
We saw strong retention and new business in the quarter.
Second quarter research contribution margin was 74%, up about 170 basis points versus 2020.
Contribution margins reflect both improved operational effectiveness, continued avoidance of travel expenses and lower than planned headcount.
However, some of the margin improvement compared to historical levels is temporary and will reverse as we resume normal travel and increased spending to support growth.
Total contract value grew 11% FX neutral year-over-year to $3.8 billion at June 30.
Quarterly net contract value increased or NCVI was $114 million, significantly better than the pandemic lows in the second quarter of last year and a new record high for second quarter NCVI.
Quarterly NCVI is a helpful way to measure contract value performance in the quarter, even though there is notable seasonality in this metric.
Global technology sales contract value at the end of the second quarter was $3 billion, up 9% versus the prior year.
GTS CV increased $75 million from the first quarter.
The selling environment continued to improve in the second quarter.
By industry, CV growth was led by technology, manufacturing and services.
While retention for GTS was 101% for the quarter, up about 110 basis points year-over-year.
While retention isn't yet fully back to normal because it's a rolling four quarter measure.
GTS new business was up 38% versus last year with strength in new logos and continued improvement in upsell with existing clients.
Our regular full set of metrics can be found in our earnings supplement.
Global Business Sales Contract Value was $770 million at the end of the second quarter, up 18% year-over-year, which is above the high-end of our medium term outlook of 12% to 16%.
GBS CV increased $39 million from the first quarter.
Broad-based CV growth was led by the healthcare and technology industries.
All of our practices including marketing delivered year-over-year and sequential CV growth.
HR, finance, sales and supply chain each grew 20% or more year-over-year.
While retention for GBS was 110% for the quarter, up more than 950 basis points year-over-year.
GBS new business was up 76% over last year, led by very strong growth across the full portfolio.
As with GTS our regular full set of GBS metrics can be found in our earnings supplement.
Conferences revenue for the second quarter was $58 million compared to no revenue in the year-ago quarter.
Contribution margin in the quarter was 73% driven by strong top line performance.
We held 13 virtual conferences in the quarter.
We also held a number of virtual Avanta meetings.
Second quarter consulting revenues increased by 9% year-over-year to $106 million.
On an FX neutral basis, revenues were up 4%.
Consulting contribution margin was 40% in the second quarter, up almost 600 basis points versus the prior year quarter.
Labor-based revenues were $86 million, up 25% versus Q2 of last year and up 20% on an FX neutral basis.
Labor-based billable headcount of 740 was down 7%.
Utilization was 70%, up more than 1,100 basis points year-over-year.
Backlog at June 30 was $108 million, up 7% year-over-year on an FX neutral basis after another strong bookings quarter.
Our Contract Optimization business was down 31% on a reported basis versus the prior year quarter and down 33% FX neutral.
The prior year period was the highest ever revenue quarter for Contract Optimization and as we have detailed in the past, this part of the consulting segment is highly variable.
Consolidated cost of service has increased 9% year-over-year and 6% FX neutral in the second quarter.
Cost of services increased due to the reinstatement of annual merit increases and to support growth in the business.
SG&A decreased 1% year-over-year and 4% FX neutral in the second quarter.
Compared with the prior year period, SG&A declined due to lower severance and conference related expenses partially offset by higher personnel costs.
E&E remains close to zero.
Operating expenses were lower than planned in part because net headcount growth was below our targets.
While our rate of hiring continues to ramp up, turnover remains modestly above normal levels due to tighter labor market conditions.
As Gene said, we're rapidly growing our recruiting capacity to keep pace with our accelerating growth rates.
EBITDA for the second quarter was $355 million, up 85% year-over-year on a reported basis and up 75% FX neutral.
Second quarter EBITDA again reflected revenue above the high-end and cost toward the low-end of our expectations.
Depreciation in the quarter was up about $3 million versus 2020, reflecting real estate and software which went into service since the second quarter of last year.
Net interest expense excluding deferred financing costs in the quarter was $26 million, roughly flat versus the second quarter of 2020.
The Q2 adjusted tax rate which we use for the calculation of adjusted net income was 29.9% for the quarter.
The tax rate for the items used to adjust net income was 24.6% in the quarter.
Adjusted earnings per share in Q2 was $2.24.
The weighted average fully diluted share count for the second quarter was 86.6 million shares.
We exited the second quarter with 85.1 million fully diluted shares.
Operating cash flow for the quarter was $575 million, up 68% compared to last year.
Q2 operating cash flow includes $150 million of proceeds from insurance related to 2020 conference cancellations.
Excluding the insurance proceeds, operating cash flow improved by 24% versus the prior year quarter.
Cash flow strength continues to be driven by EBITDA growth and improved collections.
Capex for the quarter was $12 million, down 44% year-over-year.
Lower capex is largely a function of lower real estate investments.
Free cash flow for the quarter was $563 million, which was up about 75% versus the prior year.
Excluding the insurance proceeds, free cash flow improved by 28% versus the prior year quarter.
Free cash flow growth continues to be an important part of our business model with modest capital expenditure needs and upfront client payments.
Free cash flow as a percent of revenue or free cash flow margin was 27% on a rolling four quarter basis.
Excluding the insurance proceeds, free cash flow was 23% of revenue, continuing the improvement we've been making over the past few years.
Free cash flow was well in excess of both GAAP and adjusted net income.
At the end of the second quarter, we had $796 million of cash.
During the quarter, we issued $600 million of new 8-year senior unsecured notes with a 3.625% coupon.
We used the proceeds from this new issuance to repay $100 million of the existing term loan A. The balance is available for general corporate purposes including share repurchases.
Our June 30 debt balance was $2.5 billion.
At the end of the second quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12-month EBITDA was about 2.3x.
Our expected free cash flow generation and excess cash remaining on the balance sheet provide ample liquidity and cash to deliver on our capital allocation strategy of share repurchases and strategic tuck-in M&A.
During the quarter, we made a small acquisition with net cash paid at closing of $23 million.
Year-to-date, we've repurchased more than $1 billion in stock, including $685 million during the second quarter.
In July, the Board increased our share repurchase authorization for the third time this year, adding another $800 million.
As of August 1, we have more than $1 billion available for share repurchases.
We expect the Board will continue to refresh the repurchase authorization as needed.
As we continue to repurchase shares, we expect our capital base will shrink.
This is accretive to earnings per share, and combined with growing profits also delivers increasing returns on invested capital over time.
We are updating our full year guidance to reflect Q2 performance and an improved and increased outlook for the remainder of the year.
For Research, the strong start to the year in CV performance and improvement to non-subscription revenue are contributing to higher than previously expected research revenue.
For Conferences, our guidance is still based on being virtual for the full year.
With the uptick in COVID and shifting government directives, there is much more uncertainty around our ability to run in-person conferences during the balance of the year.
We continue to operationally plan for some in-person conferences.
Our updated guidance reflects some additional cancellation related costs for conferences where we have been planning to run in-person, but may need to cancel.
If we are able to run in-person conferences, we expect incremental upside to both our revenue and profitability for 2021.
For expenses, we have reinstated benefits which were either cancelled or deferred in 2020.
This includes our annual merit increase, which took effect April 1.
We are investing in expanding our recruiting capacity, drive additional hiring across the business.
The additional hiring will continue into 2022 and beyond to support current and future growth.
Our current plan is to increase quota-bearing headcount in the mid-single digits for GTS and low double digits for GBS by the end of 2021.
Additionally, we continue to invest in a number of programs with a focus on improving sales productivity.
As you know, travel expenses were close to zero from April 2020 through June 2021.
Our current plans continue to assume a ramp up in travel related expenses.
Over the course of the rest of this year, we add more to the fourth quarter.
If travel restrictions remain in place for longer than we've assumed, we'd see expense savings.
For our revenue guidance, we now expect research revenue of at least $4 billion, which is growth of 11%.
We still expect Conferences revenue of at least $170 million, which is growth of 41%.
We still expect Consulting revenue of at least $400 million, which is growth of 6%.
The result is an outlook for consolidated revenue of at least $4.57 billion, which is growth of 11%.
Based on current foreign exchange rates and business mix, the consolidated growth includes an FX benefit of about 200 basis points.
The year-over-year FX benefit was more pronounced in the first half of the year.
With the ongoing business momentum, we are seeing we will continue to restore growth spending as we move through the year.
We now expect full year adjusted EBITDA of at least $1.16 billion, which is an increase of about 42% versus 2020 and reflects reported margins of 25.4%.
We expect a reasonable baseline for thinking about the margins going forward is around 18% to 19% consistent with our comments last quarter.
We expect our full year 2021 adjusted net interest expense to be $113 million.
Looking out to 2022, as the balance sheet stands today, we expect interest expense to be around $115 million.
We expect an adjusted tax rate of around 22% for 2021.
We now expect 2021 adjusted earnings per share of at least $7.60.
For 2021, we now expect free cash flow of at least $1.13 billion.
This includes the $150 million of insurance proceeds received in the second quarter this year.
All the details of our full year guidance are included on our Investor Relations site.
Turning to the second half of the year.
For Research, we have more visibility into revenue the farther we get into the year.
This is because NCVI earlier in the year has more of an effect on the full year revenue.
Seasonally, Conferences and Consulting are also both typically later in Q3.
Finally, at the start of 2021, there was a lot of uncertainty in the world and we began with a prudently conservative plan.
More than halfway through the year and with less macro uncertainty, there's a lower likelihood of the kind of upside we've seen in the past few quarters.
As a result, we expect reported numbers to be closer to our guidance than earlier in the year.
Any upside is more likely to come from lower costs than higher revenue.
For Q3, we expect to deliver at least $250 million of EBITDA.
We also expect the tax rate for the quarter in the high 20s.
Looking out over the medium term, our financial model and expectations are unchanged.
With 12% to 16% Research CV growth, we will deliver double-digit revenue growth.
With gross margin expansion, sales cost growing in line with CV growth over time, and G&A leverage, we can modestly expand margins from a normalized 2021 level of around 18% to 19%.
We can grow free cash flow at least as fast as EBITDA because of our modest capex needs and the benefits of our clients paying us up front.
We will repurchase shares over time, which will lower the share count.
With a strong first half, with momentum across the business, we have meaningfully updated our outlook for 2021 to reflect the stronger demand environment and our enhanced visibility.
We are restoring certain expenses and investing to ensure we are well-positioned to continue our momentum.
We repurchased more than $1 billion worth of stock this year, and remain committed to returning excess capital to our shareholders.
| compname posts q2 adjusted earnings per share $2.24.
q2 revenue $1.2 billion versus refinitiv ibes estimate of $1.12 billion.
q2 adjusted earnings per share $2.24.
|
Let's begin on Slide 3.
Order trends remain positive across the majority of our portfolios in September, and we had a strong finish to the year.
Our year-over-year backlog is up 21% as a result of general recovery trends across the portfolio, a meaningful increase in the DFRE segment backlog and some recognition from our customers that raw material costs and supply chain constraints are becoming more challenging into 2021 driving preorders in some markets.
Revenue of 1.8 billion was flat versus the comparable period.
Adjusted segment operating margin at 7.1% was flat despite unfavorable revenue mix during the quarter.
For the full year, revenue was down 6% and adjusted segment margins up to 16.7% as a result of structural cost savings centered around strategic initiatives, tight cost controls, offsetting the impact of fixed cost under-absorption[Phonetic].
As we discussed at length in Q3, we are driving toward a strong cash flow performance in the 4th quarter, and we got it with full year free cash flow increasing 24% over 2019 achieving 14% of revenue.
This is what we would expect to happen as we liquidate working capital in excess of loss profits impact and as a result of efficiency gains from our back office consolidation program.
With that backdrop, we look into 2021 with conservative optimism.
Our order book is solid, albeit with a different mix as compared to last year with DFRE having a material positive impact to the top and bottom line in '21.
With that, we are initiating full year guidance of 5% to 6% organic revenue growth and adjusted earnings per share of $6.25 to $6.45.
I will not spend a lot of time on slide 4, which is a more detailed overview of the results of the 4th quarter, so let's move to slide 5.
Engineered Products revenue declined to lower shipments and CapEx levered markets such as industrial winches, waste handling equipment, and vehicle services.
ESG had a tough Q4 comparable to overcome and VSG was coming off a strong Q3, so the performance was largely expected.
Both have strong backlogs into 2021.
The aerospace and defense business had a strong quarter that ended a record year for the business, and demand in industrial automation has shown robust recovery contributing to our backlog as global auto sequentially ramps production.
In fueling solutions, as we discussed at the end of Q3, the comparable benchmark for Q4 was tough.
Despite the topline pressure, the segment posted another quarter of strong margin performance and lower volume as our, as our productivity actions remain durable.
We are beginning to see the mix benefits from our Helix and Anthem dispenser products which we believe are winning in the marketplace.
We completed the acquisition of Innovation Control Systems in the 4th quarter, which is a great addition to our vehicle launch platform.
ICS is a leading supplier of access, payment, and site management solutions and software, which fits into our strategy of driving long-term value from the large installed base of retail fuel sites which we presented in October.
Sales and imaging and identification declined 3% organically.
The core market in coating business grew on continued healthy demand for consumables and improvement in demand for printing equipment with particularly healthy activity in the United States.
Digital textile printing CapEx remained slow, but it will begin seeing recovery in demand for consumables and small format machines which are likely [Technical Issue] of conditions normalizing in 2021.
Imaging and identifications is our highest gross margin segment.
The marking and coating business has delivered commendable margin performance this year, holding the profit line virtually unchanged; however, decrementals in textile printing on lower volumes weighed on the segment margins in Q4 and during the full year, we expect this to begin reversing progressively into 2021.
Pumps and process solutions returned to top line growth in the 4th quarter on strong growth in biopharma, medical, and hygienic applications.
We also began seeing cyclical recovery in industrial pumps, which posted growth after several soft quarters.
Compression components and aftermarket continued to be slow, but recent trends in natural gas and LNG markets gives us grounds for optimism going forward.
The 4th quarter closed off a solid margin performance in this segment with margins expanding a 150 basis points in Q4 and 220 basis points for the full year.
This was driven by broad based productivity efforts, cost controls, favorable mix, and well-timed capacity expansion in biopharma and medical which we highlighted earlier in the year.
Refrigeration and food equipment posted 13% organic growth with all businesses except food service equipment delivering the increase.
A significant, a significant portion of the growth came from the well advertised strength in can making.
We are also very encouraged by activity in core food retail market, which grew organic top line at high single-digits in the quarter driven by the continued strength in the door case product line where we saw double-digit growth for the full year.
The heat exchanger business grew on robust demand in heat pumps and residential applications as well as refrigerated transport and industrial applications like semiconductors and data centers.
Margin performance expectedly improved supported by volume and actions we took in the middle of 2020.
Absolute earnings increased 71% in the quarter of the comparable period.
This margin performance coupled with the upcoming ramp-up of automated case line in food retail positions us to deliver material margin expansion in 2021.
I'll pass it to Brad here.
Let's go to slide 6.
On the top is the revenue bridge.
Our top line continued its recovery with sequential improvement in organic revenue over Q3.
Several of our businesses including short cycle industrial pumps and heat exchangers returned to positive growth in the quarter.
While biopharma, aerospace, and defense, marketing and coding, food retail, and can making continued their positive growth trajectory from prior quarters.
FX benefited the topline by 2% or 34 million, driven principally by strengthening of the Euro against the Dollar.
Acquisitions, more than offset[Phonetic] dispositions in the quarter by 12 million.
We expect this number to grow in subsequent quarters.
The revenue breakdown by geography reflects sequential improvement in each major geographies except with the exception of Asia.
The US, our largest market, posted a 1% organic decline in the quarter, an improvement over the 4% decline in Q3 and progressively improving order rates and a strong quarter in biopharma, marking and coding, food retail, and can making among others.
Europe declined 3% organically driven by retail fueling and a difficult comparable quarter in vehicle services, though partially offset by continued strength in several of our pumps and process solutions businesses.
All of Asia was down 11% organically driven principally by China, which was down 16% organically.
This result in China was not unexpected, as we continue to face headwinds in retail fueling due to the expiration of the underground equipment replacement mandate.
Moving to the bottom of the page.
Bookings were up 2% organically, reflecting the continued momentum we see across our businesses.
In the quarter, we saw organic growth in four out of our five segments.
The fifth segment fueling solutions faced a difficult comparable quarter in the prior year as previously discussed.
Overall, our backlog is currently up approximately 300 million or 21% higher compared to this time last year, positioning us well as we enter 2021.
Let's go to the earnings bridges on slide 7.
We delivered improved sequential results in the quarter after a significant decline in Q2 and recovery in Q3.
On the top chart, adjusted segment EBIT and margin were both essentially flat year-over-year as continued productivity initiatives offset negative organic growth and diluted impact of FX on margins.
Going to the bottom chart, the adjusted net earnings declined 1 million, as higher taxes in corporate expense offset improved segment EBIT.
The effective tax rate excluding discrete tax benefit was approximately 21.4% for the year compared to 21.5% in the prior year.
Discrete tax benefits were 8 million in the quarter and 22 million for the year or approximately 4 million lower than in 20 -- than in 2019.
As we move into 2021, excluding the impact of discrete taxes, we expect the effective tax rate remain essentially the same as 2020 at about 21.5% rightsizing and other costs were 21 million in the quarter or 17 million after tax relating to several new permanent cost containment initiatives and other items that we executed at the end of 2020.
Now on slide 8.
We are pleased with the cash performance in 2020 with full year free cash flow of 939 million, a 181 million or 24% increase over last year.
Free cash flow conversion stands at 21% of revenue for the 4th quarter, historically our highest cash flow quarter and 14% for the full year, a significant increase over the prior year.
Recall, last quarters -- last quarter's earnings call, we decided to prioritize prudent working capital management over fixed course -- fixed cost absorption to close out the year, and you can see the value delivered in our year-over-year working capital comparison.
We have strong revenue visibility into Q1 and confidence in our team's ability to match industrial production with improved customer demand.
I'm on page 9.
Let me take a few moments to give you an update on our center led initiatives that we outlined in our strategic plan in September of 2019.
While we could have not expected what transpired in 2020, we positive at the time that our portfolio had through cycle durability and that there were opportunities to drive synergies from our diverse portfolio to improve profitability over time.
Despite this, we often hear a notion that Dover is a cost out story likely because we give measurable structural cost saving goals each year, implying a finite nature to such endeavor.
There is a lot more than cost reductions to our improvement journey, and we continue to reinvest a portion of the savings.
So, I will give you a short update on where we are in these strategic initiatives.
Through in 2019, we began with the right sizing of our SG&A base after a significant portfolio change.
This was necessary and required immediate intervention.
Since then, the improvements have been driven by steady productivity and structural cost actions by our operating units and from our investments in four core enterprise capabilities that generate very attractive return on investment and can be leveraged across the portfolio.
The investments are substantial.
By the end of this coming year.
, the head count involved a center led enterprise capabilities will have increased by over 50%.
These are transformational initiatives touching every corner of our global portfolio and delivering real results that you can see in our bottom line, and there is significant runway to drive value.
We are investing in the following four enterprise capabilities, and I'll highlight a few results, but I would encourage you to review the stats in the slides.
First, Dover Digital on slide 10.
This work began in 2017 and accelerated in 2018 with the opening of our Dover Digital Center in Boston.
We have over 100 e-commerce connected product and software experts dedicated to this endeavor.
This team helps our business to lever each commerce at scale and improve the customer journey with ease of doing business as well as back end efficiency for sales and order entry.
For example, this year we target to reach a run rate of $1 billion of revenue processed through digital channels, much of which is service parts and catalog items compared to 100 million in 2019.
This is a multi-year journey, value creation journey, and we are very excited about what lies ahead for our digital team.
Moving to slide 11.
Our operation center of excellence is a central team of domain knowledge experts that delivers health and safety, supply chain management, lean operations, and advanced manufacturing and automation.
This team is instrumental in driving value through rooftop consolidation and automation projects.
As you know, we have a number of these in the works.
We are also excited about the results of the early lean initiatives this spearheading.
This is another multi-year journey that we continue -- will continue to deliver results.
Moving on to slide 12 is our central back office system, which we call Dover Business Services.
We've been at this for several years, and we're still in the early innings of expanding the scale and scope of this capability.
By centralizing and offshoring transactional back office facilities, we multiply efficiency through scale, technology leverage, and unit cost arbitrage.
DBS is and will remain an integral part of our margin enhancement story.
And lastly moving to slide 3, the India Innovation Center is more than 600 person strong team that our operating companies can leverage for product engineering, digital solutions development, data information management, research and development, and intellectual property services.
The scale and expertise of this team allows our operating companies to tap resources that would have been unaffordable to them as stand-alone companies and allows for concurrent engineering on time sensitive projects.
So, let's sum this up on slide 14.
We laid out four pillars of our strategy in 2019 and have been delivering through cycle.
We have maintained our focus on margin improvement and continue to invest despite the economic difficulties of 2020.
Our end market exposure, coupled with the strategic R&D investments, we are delivering attractive growth profile.
We are committed to reinvesting in our businesses as a top priority and capital allocation to maintain competitive competitiveness, fuel growth, and improve productivity.
We are making good strides on the inorganic front.
Finally, we're staying disciplined in our capital allocation by returning excess capital to our shareholders, buying[Phonetic] growing dividends and share repurchases.
Moving to 15, where does this leave this going into 2021.
We believe that our playbook offers us a significant runway to continue delivering attractive through cycle returns through mid single-digit topline growth, steady margin expansion, healthy cash conversion, and disciplined capital allocation and shareholder-friendly capital return posture.
I'll step off the soapbox and let's move on to 16, we expect demand in engineered products to rebound in 2021.
We have seen strong bookings recently in vehicle services and Industrial automation with relevant automotive and vehicle usage statistics trending in the right direction.
Bookings have also improved recently waste handling, and we are nearly fully booked for the first quarter.
Municipal demand remains uncertain, but we see strong trends in the parts and digital business.
As we previewed in November, we expect fueling solutions to have a modest organic growth year, there is known headwind from EMV roll-off in the US, but there are a number of positive [Technical Issue].
We are encouraged by the prospects of our new Anthem user interface solution offering.
We expect robust growth in our systems and software business where we will be launching the industry first cloud platform developed.
We also see good setup for vehicle wash and are excited about having ICS in our portfolio.
We expect imaging and identification to perform well this year.
Marking and coding saw limited downside in 2020, and we've been on a good trajectory in recent quarters, despite the tough comp in Q1 due to COVID-driven consumable stocking.
We expect further improvement in services as travel restrictions subside and activity and serialization software is also firming up.
The biggest factor in the segment is of course the digital textile printing unit.
Our initial read is for the recovery to take place in the second half of the year when printers will be ramping up production for 2020 apparel collections.
Pumps and process solutions expected to have another solid year.
We expect robust growth in biopharma and hygienic applications and a continued recovery trend in industrial pump.
Plastics and polymers is expected to deliver steady performance with a comparable basis to the second half bias to the second half.
Precision components is likely to experience a slower start to the year, and we are still comping versus last year's first quarter.
That's our robust upstream and downstream activity.
And finally, we expect a very strong year in refrigeration and food equipment.
The core food retail business is operating with a strong backlog, and the order trajectory has been healthy in the last few quarters.
We expect retailers that had paused their remodel programs last year amid the pandemic to restart these strategic initiatives, and we are well positioned to participate in that activity.
Additionally, we see a good outlook for natural refrigerant systems, both in Europe and also in the US where California was the first state to recently mandate transition to natural refrigerant systems.
We were the pioneers in this space, and we are very well positioned to capitalize on this sustainability trends in the industry.
Belvac as you know, is working through a record backlog and is booked for the year.
Our heat exchanger business also exited 2020 with a record backlog and a constructive order trajectory across multiple verticals.
This will result in material margin improvement in this segment on the back of the case production automation project, higher volume positive business mix.
We covered most of the items on the earlier slides but summarize, but I summarize them here in the slide for your reference.
The Dover team has delivered strong results in it's difficult conditions, and I commend all of our employees for doing their part and Andre with that, let's move on to Q&A.
| sees fy 2021 adjusted earnings per share $6.25 to $6.45.
|
Today, FCX reported second quarter 2021 net income attributable to common stock of $1.08 billion or $0.73 per share.
Adjusted net income attributable to common stock totaled $1.14 billion or $0.77 per share.
Our adjusted EBITDA for the second quarter of 2021 totaled $2.7 billion.
And you can find a reconciliation of our EBITDA calculations on Page 35 of our slide deck materials.
We had a strong second quarter.
Our copper sales of 929 million pounds and gold sales of 305,000 ounces were significantly above the year ago quarter, but our sales were approximately 5% lower for copper and 8% lower for gold relative to our recent estimates, primarily reflecting the timing of shipments from Indonesia.
Our annual guidance is consistent with our prior estimates.
Our results in the second quarter benefited from strong pricing.
Our second quarter average realized copper price of $4.34 a pound was 70% higher than the year ago quarterly average.
Our net unit cash cost of $1.48 per pound of copper on average in the second quarter was slightly above our estimate going into the quarter of $1.42 per pound, but that primarily related to nonrecurring charges associated with a new four-year labor agreement at Cerro Verde.
Operating cash flow generation was extremely strong, totaling $2.4 billion during the quarter.
That included $0.5 billion of working capital sources.
And our operating cash flow significantly exceeded our capital expenditures of $433 million during the quarter.
Our consolidated debt totaled $9.7 billion at the end of June.
And our consolidated cash and cash equivalents totaled $6.3 billion at the end of June.
Net debt was $3.4 billion at the end of the quarter, and we achieved our targeted net debt level several months ahead of our schedule.
We are really pleased to reporting what's now becoming a string of really strong operating performances for our company.
And with this great positive outlook for our business, we're all really enthusiastic about it.
Hoping all of you are staying healthy through this pandemic.
Vaccinations are giving us an opportunity to protect ourselves and those around us, and we're working hard to encourage our people globally to take full advantage of this opportunity whenever possible.
Our teams are working safely.
We remain diligent with our COVID protocols that have been so effective.
With the recent rise in cases globally, we are refocusing, redoubling our efforts, restoring some protocols that we had loosened to keep our team and communities safe.
Our results in the second quarter demonstrate really strong execution of our plans, really strong and favorable pricing for our products.
Kathleen mentioned the shipping issue.
Logistics is an issue globally.
We've been able to -- we basically met or slightly exceeded our production targets.
We've been able to ship everything we produced.
We would have beat our sales target.
We also, common in the mining industry, had some one-off type issues affecting production.
Without those and with shipping, we would have had a real strong beat on our previous guide.
Really important, our Grasberg underground ramp-up is proceeding on schedule.
This is a remarkable and, I would say, a historic success for both our company and even the mining industry.
Our team in Indonesia is doing remarkable and outstanding work.
And this is building value for our shareholders and long-term, sustainable, low-cost values for the future.
We're making money in the Americas.
Copper prices -- production in the U.S. is increasing.
Our Lone Star project in Eastern Arizona is really exciting.
We have a series of ongoing value-enhancing opportunities in the U.S. in front of us.
And I'm personally really encouraged about future growth in the U.S. The South America teams in Peru and Chile are navigating the pandemic effectively.
We're restoring production that we have curtailed a year ago.
We have achieved these outstanding financial results made possible by the hard work and investments we've been making for many years.
We are now generating significant cash flows, which will be sustainable for years in the future.
This quarter alone, we had $2 billion of cash flow after capital spending.
That's just remarkable considering where we were just a year ago.
Kathleen mentioned, and it's notable that we reached our debt target several months earlier than our forecast earlier this year.
We ended the quarter with $3.4 billion of net debt, and that's within the targeted range we set at $3 billion to $4 billion.
We've reduced our debt by like 60% over the past year.
We're now positioned in accordance with the financial policy that our Board adopted earlier this year and that we disclosed to the market to shift our capital allocation priorities by increasing cash returns to shareholders as we make disciplined investments for future growth of our business.
This policy will allow us to maintain a strong balance sheet with high-grade credit metrics while providing cash for increasing shareholder returns and investing in our company's long-term future.
Slide four talks about how we're devoting significant attention and resources to sustainability initiatives.
And this has always been key to our company and a position of our company.
We are committed to the sustainability principles of ICMM.
We're also moving to certify all of our operations with The Copper Mark, a relatively new industry framework developed by the International Copper Association to ensure responsible production consistent with UN sustainability development goals.
To date, we lead the industry with six of our operations now certified.
In the second quarter, we submitted five additional operating sites for this initiative, and we've committed to validate all of our sites to this robust framework.
Responsible production is critical in building and maintaining trust, which we've earned over the years through long-standing partnerships with communities as we deliver a product, copper, valued by society, produced in safe, environmentally sound, innovative manner.
Slide five talks about electrification, which is key to copper.
Majority of copper goes into generating and transmitting electricity, and copper is critical in every aspect of achieving low carbon goals for the global economy.
This ranges from electric vehicles and supporting infrastructure to clean energy from wind and solar.
Copper is just simply essential to a green economy.
This transition is now just beginning to unfold.
It will add significantly to future demand for copper.
And as the global leading copper producer, Freeport is solidly positioned to benefit from this higher future demand.
In addition, now companies around the world are responding to COVID with aggressive physical and monetary policies.
This alone is creating important near-term copper demand beyond China.
And China's consumption remains strong.
There are some mixed economic signals.
But even with that, demand for copper in China is strong.
And now as higher consumption is being generated from economic recovery in developed countries around the world, and that's even in the face of an important sector of copper demand, automobiles, which is being constrained by this chip problem.
So this increasingly important incremental demand outside China, the long-term growth from global -- from growth in emerging markets just is very positive for our outlook.
Copper demand is also expanding from technology advances in communications, artificial intelligence applications, expanding connectivity through global infrastructure initiatives and efforts to improve health through using copper to fight viruses and other infections.
Slide six talks about this growing demand, the global challenges in maintaining much less growing supply makes the outlook for copper, compelling.
I would say compelling is an understated word.
Really, really positive and enthusiastic about it.
This recent pullback in copper pricing that we've seen has not altered in any way our conviction, but the favorable long-term outlook for copper.
This is a decision we made years ago, which underscores our strategy at Freeport to focus on copper because of its favorable fundamentals, the nature of our assets and our team.
There are always actions that influence sentiment in short-term pricing at any point in time.
So beyond that, indisputable facts support a positive fundamental outlook for copper.
Demand growth is inevitable.
Maintaining supply or growing supply is challenged.
Our prices will be required to support major new investments in copper.
Rising demand, scarcity of supplies point to large impending structural deficit, supporting much higher future copper prices.
Our company has high-quality assets, industry-leading experience, highly motivated team will allow us to benefit from these fundamentals.
Portfolio of assets in the copper business is rare, if not unique, in our industry.
It would be difficult, if not impossible to replicate these assets.
With strong growing production, embedded brownfield, low-risk growth from our large portfolio of undeveloped resources, our assets are extremely valuable in today's world and will become more valuable as these market develops -- market deficits emerge in the future.
Slide seven highlights our growing margins and cash flows.
We've had meaningful volume growth in recent quarters that you've all seen.
This growth will continue.
For the year 2021, copper value -- copper volumes are projected to increase 20%; gold volume, 55% over 2020.
Then looking forward to 2022, we'll see a further growth of 15% to 20% over 2021 levels.
The capital and execution risk to achieve these higher volumes are largely behind us.
Our volumes will -- with low incremental costs, we yield expanding margins at prices ranging from $4 to $5 per pound for copper.
We've generated annual EBITDA for '22 and '23 of $12 billion to $17 billion of copper with capital expenditures in the range of $2.5 billion a year.
Looking back, there was always an overhang for report related to execution risk with this underground development, political risk in Indonesia, debt levels.
If you look back over the past three years, we have met and mitigated all of these major risks that were overhanging our company, and it's been a really exciting and gratifying time for our company.
Slide eight highlights the great progress we're making with the Grasberg underground ramp-up.
I just met with Mark Johnson and his team in Indonesia and really congratulating them on the fabulous work they're doing even in the face of COVID.
In the second quarter, we achieved just under 80% of our target annualized run rate for metal sales.
We're on track to reach full rates of metal production by the end of the year.
And our team in Indonesia has just done a fabulous job in the face of dealing with pandemic and a challenging physical environment.
We executed well-designed operating protocols.
We're dealing with this new upturn in cases in Indonesia in recent weeks.
We're helping to support the government and our local community.
We've implemented travel, other restrictions to mitigate the spread.
We're encouraged by the increasing availability of vaccines at our job site and generally in Indonesia.
A number of our workers -- a significant number have already received vaccines -- have received vaccines.
We have a goal of providing vaccines to all of our workforce in the second half of the year, and we're supporting nearby communities in their efforts to respond to COVID.
We have a real strong support from the government of Indonesia, a real positive partnership with PT-FI state home shareholders on that shareholder mine and they were all working together and are aligned.
I've been working in Freeport for 30 years -- over 30 years.
And I'm personally proud and gratified by our team's accomplishments since we began investing in the underground over 20 years ago, transition from the open pit that began 18 months ago and dealing with COVID, it's just remarkable what we've been able to do.
Planning and investing in this transition began in the 1990s.
Now experiencing this success is special for all of us at Freeport.
We now look forward to continuing long-term success at Grasberg by building value to this world-class historic mining district with low-cost, high-volume and sustainable production.
Slide nine shows the multiple options for brownfield low-risk growth across our global portfolio.
Increasingly encouraged by the opportunities in the U.S. where we have favorable community support across the board with where we operate, favorable tax situation and a long history of working in a responsible way.
We are expanding our mine production at Lone Star, Bagdad, other sites.
And we have exciting new opportunities from technology evolving leach recovery from our historical operations.
The Lone Star mine, our newest operation situated adjacent to our long-standing operations in Southeast Arizona.
There, we have strong community support, and this new mine is performing above design capacity.
We're evaluating expansions of Lone Star's oxide ores.
We're actually making a lot of money in what normally would be stripping operations.
We're conducting long-range planning for the development of a potentially world-class sulfide resource that lies beneath this oxide cover in our historical mining area.
We have an opportunity and a strong likelihood of moving forward with constructing a new concentrator to double production in our Bagdad mine in Northwest Arizona.
We expect to commence this project next year.
Emerging leaching technology, which I am pumped about, provides substantial opportunities for added growth across our portfolio of global resources.
We are evaluating an attractive expansion operation -- expansion opportunity at our El Abra mine in Chile where we're partners with CODELCO.
This project would require significant capital investment and long lead time, but it's attractive and large.
Major future expansion in El Abra is likely, but not now.
We are deferring investment decision on this project until we have more clarity about the mining policy issues currently under consideration by the government in Chile.
We're also evaluating development of an underground deposit of Kucing Liar in the Grasberg district operated by PT-FI.
This copper gold resource involves a large block cave mine using the substantial infrastructure that we already have in place.
We have expertise, long track record.
Mark Johnson and his team has come up with revised development plans that make the project less capital-intensive.
The economic is better.
It's a large operation.
It would be a block cave with about 90,000 tonnes per day.
So that's a real big, six billion tonnes of copper resource, six million ounces of gold, and it fits right in with our plans.
We have additional opportunities to invest in projects to support our copper -- our carbon reduction, our sustainability goals, including investing to develop clean renewable energy for our operations and communities.
We're advancing plans for an exciting ESG-type project to recover metals from the recycle of electronic devices at our Atlantic Copper processing facilities in Spain.
Bottom line, we're going to be disciplined in devoting capital to new investments.
We're going to be focused on value-added projects supported by long life reserves.
We have a long track record of success in developing projects.
We have established license to operate and positive relationship and support from communities where we have the opportunities to invest.
Slide 10 goes back to Lone Star, shows we're meeting, exceeding expectation.
Original plan was 75,000 tonnes a day, 200 million pounds of copper.
We now exceeded this, reaching the targeted rate of 95,000 tonnes a day.
On a sustained basis, we have takeouts capacity to do this to yield 285 million pounds of copper.
Looking at a further increment that would involve a relatively small investment in tank houses, mining equipment to produce 300-or-more pounds of copper, 50% more our than original design.
The project view though is longer term.
We have a major opportunity for Lone Star to become a cornerstone asset for our company.
Potential resource is 10 times more than our current reserve.
As we mine these oxide ores, we're gaining access to this underlying potentially massive sulfide resource.
Long-term cornerstone asset for our company.
Slide 11 talks about this reference I made earlier through reaching technology, gaining additional copper from material that's already mined.
We have lots of opportunities to apply.
It's an exciting potentially high-value opportunity with low incremental cost and low carbon footprint.
We're engaged in multiple studies using a range of different technologies internally and externally to capture this value from existing stockpiles.
Our estimate now is for 38 billion pounds of copper in these stockpiles.
This is material that's already been mined.
And if we can recover just 10% to 20% of this material, it would be like having a major new mine with variable capital and operating costs.
A significant portion of this is in our flagship Morenci mine, the largest mine in North America, where we are now applying artificial intelligence, data analytics to help us understand what's going on with these leaching performance opportunities.
Our team historically was an instrumental in unlocking substantial values years ago with the new SXEW technology.
We are now focused on taking this leaching technology to the next level by using modern approaches to it.
We've established a cross-functional team of technical experts, metallurgists, mine planners, data scientists, geologists, business analysts all working together to take full advantage of this really exciting opportunity.
We have strong operating franchises in the U.S., South America and Indonesia, gained the trust and respect of our partners, our customers, suppliers, financial markets, and more importantly, the workers, communities and host governments where we operate.
We have significant large-scale project development, operating expertise.
Team Freeport has all the capabilities to undertake new projects in a responsible, efficient manner.
I want to close on slide 13 by recognizing the people of Freeport.
All around the world, their commitment, dedication, resilience, positive outlook, cooperative spirit is just gratifying.
Our team is passionate about the role we're going to play in achieving a better and more sustainable future for everyone.
Team Freeport has the capabilities and drive to continue to meet, exceed our own high level of expectations and those of our stakeholders.
We're living in a great -- a time of great challenge and exceptional opportunity for our business.
At our team, we're meeting the challenges, embracing the opportunities.
Our future is bright.
We at Freeport are charging ahead responsibly, reliably and relentlessly.
Richard talked about the great progress we're making at Lone Star.
We're very focused now on sustaining the rates to keep our tankhouse full there, which has a capacity of 285 million pounds per year of copper and looking at potential increments beyond that with relatively small and attractive investments.
Richard also mentioned our plans at Bagdad.
We're advancing studies to double the capacity there and hope to be in a position to qualify a project and commence a project there next year.
At Morenci, we've started to increase our mining rates, which had been curtailed in the last 12 months.
We averaged about 725,000 tonnes per day of mining material in the second quarter and are ramping up to reach 800,000 tonnes per day by the end of this year, going to 900,000 tonnes a day in 2023.
We've also advanced from 2022 the restart of some of Morenci milling capacity.
That was also idled last year to reduce cost.
Now with the improvement in copper prices, these actions result in more profitable production.
We're also very encouraged by the opportunity to add low-cost production at Morenci through our leach technology initiatives.
In South America, the teams are continuing to work to restore production to prepandemic levels.
We continue to target a full restoration at Cerro Verde in 2022.
And we've been running at about 95% of the mill capacity in recent months.
That was in advance of our labor agreement exploration, which is coming up at the end of August of this year.
We're very pleased with the win-win outcome of the agreement and now working to conclude a mutually satisfactory agreement with the balance of employees.
At El Abra in Chile, we're well on our way to restoring production levels that were curtailed last year.
We're increasing the stacking rate of material on the leach pads and moving forward to add a new leach pad to accommodate the higher rates.
This is capital that was always part of our plan, but was deferred last year as part of the capital conservation plans that we rolled out in April of last year.
This allows El Abra to increase production on a sustained basis to about 200 million to 250 million pounds per annum for the next several years as we assess opportunities for a major expansion there.
As Richard talked about at Grasberg, we're continuing to deliver results and generating strong cash flows.
As you recall, we started the second quarter with significantly more concentrate inventory than we normally carry with the strong production volumes and some maintenance downtime at our port, weather issues at quarter end, sales were below our earlier estimates in the quarter.
This is really a short-term timing issue, and we expect to be able to work inventory levels down in the second half of this year.
We successfully commissioned at Grasberg the second crusher at our Grasberg Block Cave during the quarter, and that will provide sufficient capacity for a ramp-up to 130,000 tonnes per day.
You've seen the performance and the records achieved from the Grasberg Block Cave during the quarter.
We're also moving to advance the installation of our third SAG mill there.
That's been part of our plan to support the higher rates of throughput.
We've also identified an opportunity to invest in a new mill circuit that will allow us to increase copper and gold production in Indonesia through the achievement of higher mill recoveries when the initial phases of this project and the economics are highly attractive.
Our global team also remains focused on cost management and efficiency projects to extend equipment lives, improve energy efficiency and maintenance practices with the use of technology.
We have experienced some degree of cost increases this year, principally from energy price increases and, to a lesser extent, the impact on consumables of steel price increases, increased freight costs and sulfuric acid cost.
We've had -- partially offsetting these items, we've had the benefits of a weaker exchange rate in South America versus the U.S. dollar.
The increases in costs have been offset by significant increase in molybdenum prices in recent months, and those have provided a very nice hedge to certain of these cost inflation items.
We talked on slide, you've seen in the release our plans for -- to meet our commitments in Indonesia for the new smelter.
On slide 16, we provide an update on our plans to meet the commitment that we agreed to with the Indonesian government in 2018 to construct two million tonnes per year of in-country processing facility of copper concentrate.
We have been advancing the discussions with our Japanese partners to expand the existing smelter at PT Smelting.
That would fulfill a portion of the obligation.
And there are several financial and operating benefits of expanding this facility, which has been expanded very efficiently in the past.
After considering various alternatives for the balance of the commitment, we've concluded that the best long-term option is to continue with our plans to construct a new greenfield smelter in East Java near the existing facilities at PT Smelting.
We recently entered into an EPC contract with Chiyoda to construct a 1.7 million tonne facility there.
And we're now focused on completing the project as efficiently and as timely as possible.
We show in the graph on slide 16 on the right, the estimated timing of expenditures over roughly a three-year period.
FCX is responsible for 49% of these expenditures.
We recently completed a new $1 billion bank credit facility for PT-FI to advance these projects and are planning additional debt financing, which can be attained at attractive rates to fund these activities.
As indicated, the long-term cost of the financing expected for the smelter would be offset by a phaseout of the 5% export duty.
And we show a graph on the bottom of slide 16 which shows you that the economic impact is not material as the cost of the smelter would be essentially offset in lower duties, which we're currently paying.
Slide 17 provides a three-year outlook for volumes.
These are consistent with our previous guidance.
We're continuing to pursue additional incremental near-term growth opportunities and conducting our longer-range development planning.
Moving to slide 18, we show the significance of cash flow generation using these volumes and cost estimates.
And the price is ranging from $4 to $5 copper and holding gold and molybdenum flat at $1,800 per ounce of gold and $16 per pound of molybdenum.
What you see here on these graphs, we would generate EBITDA in the range of over $12.5 billion per annum for '22 and '23 on average at $4 copper to $17 billion per annum at $5 copper.
And at operating cash flows, net of taxes and interest would be $9 billion to $12 billion using these price assumptions.
As demonstrated in the second quarter, we're generating very significant free cash flow, and this trend is expected to continue with cash flow significantly above our capital spending.
On slide 19, we include our projected capital of $2.2 billion this year and $2.5 billion in 2022.
As you'll note, we shifted about $100 million in expenditures from 2021 to 2022, which was timing related.
And we've advanced some capital from future years into 2022 to reflect the timing of additional leach pad construction at Lone Star and the addition of some highly attractive growth spending in Indonesia related to mill recoveries.
We've entered a period of outstanding free cash flow generation.
We've got growing volumes, strong markets and low capital requirements.
You'll see on slide 20, and this is backward looking, but over the last 12 months, we've reduced our net debt by $5 billion, and that included $2 billion in the second quarter alone.
You'll see our credit metrics are strong and less than 0.5 times EBITDA on a trailing 12-month basis.
And we're projecting our credit metrics to continue to be strong and improving.
As Richard mentioned, we achieved our targeted net debt level several months ahead of our schedule with our long-lived asset base and growing production profile and strong markets.
We'll have the ability to continue to strengthen our balance sheet, provide increasing cash returns to shareholders and build additional values in our asset base.
The slide on 21 just reiterates our financial policy.
We have performance-based payout policy, which was established by our Board earlier this year, providing up to 50% of free cash flow, would be used for shareholder returns with the balance available for growth and further balance sheet improvements.
And with the recent achievement of our net debt target, we expect our Board will consider additional payouts to shareholders with our 2021 results.
We're looking forward to reporting on our continued progress and continuing to build additional values as we go forward.
Kathleen, I want to put an exclamation point on your -- the comments you made about cost management.
Everyone is focused on inflation around the world and the impact on mining companies.
And as Kathleen said, we've had higher energy costs, higher grinding material cost.
But Josh Olmsted and our Americas team have just done a great job in helping offset that.
Mike Kendrick in running our molybdenum business, which is a primary production business and a by-product business and with higher molybdenum prices is offsetting us some of these cost increases.
We've got a high gold price which helps us.
Danny Hughes is leading our supply chain group.
And so a combination of all these things is helping us as a company to really mitigate much of these increases in costs, working with logistics.
So I just wanted to make a note of that because I think it's important giving -- given all of our concerns about where inflation is leading us.
So let's do turn over to questions.
| compname reports q2 earnings per share of $0.73.
qtrly earnings per share $0.73.
freeport-mcmoran - average realized prices in q2 2021 were $4.34 per pound for copper, $1,794 per ounce for gold and $13.11 per pound for molybdenum.
qtrly adjusted net income attributable to common stock totaled $1.14 billion, or $0.77 per share.
consolidated sales totaled 929 million pounds of copper, 305 thousand ounces of gold and 22 million pounds of molybdenum in q2.
ramp-up of grasberg underground mines advancing on schedule.
freeport-mcmoran - sees q3 consolidated sales of 1.035 billion pounds of copper, 360 thousand ounces of gold and 21 million pounds of molybdenum.
|
I'll begin with a high-level review of our 2020 results and highlight the many accomplishments that we were able to deliver during the year.
These accomplishments were achieved despite the tremendous challenges presented by the global pandemic.
I will then provide some closing comments and open the call to questions.
The pandemic brought immense challenges to our industry customers and our employees and their family.
Whether their jobs were performed in our manufacturing facilities, on a rig servicing our customers, or working remotely, all of our employees adjusted their lives for the good of the organization and in service to our customers.
I am grateful for all their contributions.
Although our 2020 results were challenged by the pandemic and associated oil and gas demand destruction, it was not a year without significant progress and accomplishments for Dril-Quip.
The transformation and productivity journey we started in 2019 positioned us well for this challenging environment.
We were able to conclude 2020 with $365 million of revenue and $32 million of adjusted EBITDA.
Although a decrease from our 2019 results, we successfully responded to the challenging environment by mitigating the impact of the pandemic as seen in our operating and financial results and continued delivering products and services to our customers.
We also celebrated many accomplishments in our research and development efforts during 2020.
In May, we were presented with our fifth spotlight on new technology award by the Offshore Technology Conference for our VXTe Subsea Tree System.
The VXTe system is a disruptive technology in the subsea production system space.
VXTe provides significant cost and time savings for our customers, which improves their IRR by reducing capital and time to first oil, with the added benefit of reducing their carbon footprint.
The VXTe offers the operator the ability to drill the well to completion and land the tubing hanger in the wellhead as part of their normal drilling operations without regard to its orientation.
This eliminates the traditional development well scenario, whereby the operator will cease drilling operations, pull the BOP stack and run the horizontal tree or tubing spool and then rerun the BOP stack to drill the well to completion.
We estimate that this, combined with our other e-Series technology products, will save operators approximately $5 million per well and five days of rig time.
We have seen incredibly positive response from our customers about the potential to improve their operations with this technology.
Our R&D and manufacturing teams worked hard through the pandemic to complete all qualification tests and maintain the production schedule of the first VXTe tree.
With the tree now in final assembly, we expect to make delivery in the first quarter and hopefully, installing the first VXTe this year.
While we are aware that consolidation is needed in our sector, we also know the difficulties in quickly executing that strategy.
Accordingly, we embarked on a strategy of consolidation through collaboration.
In 2020, we entered into a strategic collaboration agreement with Proserv for the manufacture and supply of subsea control systems.
This nonexclusive collaboration achieved two main priorities.
First, it allowed us to offer our customers the latest subsea controls technology without having to make the significant research and development investment of $8 million to $10 million per year over the next three years, as well as eliminated the associated operating costs of maintaining that product line.
Second, this win-win scenario allows us to bundle our award-winning subsea trees with Proserv's state-of-the-art control systems and offer our customers significant value.
The collaboration with Proserv was part of a larger strategy to continue down our transformation path to align our business with market activity.
Allowing us to refocus our engineering and manufacturing resources toward solutions that set us apart from our peers and offer the highest return on invested capital.
This strategy led us to the difficult decision to transition and consolidate our subsea tree manufacturing from Aberdeen to Houston as we saw the subsea tree market decline from close to 300 subsea trees to a little over 100 tree awards in 2020.
Aberdeen is a critical location for our operations, and therefore, we still have a significant presence there.
This includes sales, project management, fabrication, final assembly and aftermarket operations serving our customers.
In total, the productivity initiatives executed in 2020 reduced our costs by approximately $20 million on an annualized basis and helps us to continue on maintaining profitability and a strong balance sheet.
As we view the market today, it seems probable that a longer, more gradual post-pandemic recovery is likely.
This means it could take several years to return to 2019 activity levels.
The recovery is also likely to vary by geography and customer profile.
Low-cost areas of offshore development, like the Caribbean, or with the support from subsidies and parts of the North Sea, are expected to see activity levels remain steady.
The same can be said for national oil companies that typically drill for domestic energy consumption.
In contrast, the most recent developments in the U.S. regulatory environment through executive order has created uncertainty around future projects in the U.S. Gulf of Mexico.
Overall, our outlook on the market takes into account multiple factors, including demand recovery, supply control from OPEC, and increased emphasis by government regulators on transitioning toward less consumption of fossil fuels in favor of alternative energy sources.
The energy transition is a process we believe should be guided by market forces and approached rationally with regulatory consistency.
We recognize the transition is under way, but will take time and resources to accomplish.
Furthermore, we believe hydrocarbons will continue to play an important role in this transition, continuing to provide affordable, reliable and often cleaner energy to help lift developing nations out of poverty, while developed nations move more toward alternative energy sources.
Dril-Quip has a role to play in both parts of the transition solution.
As part of our commitment to this transition, we have always prioritized helping our customers efficiently produce hydrocarbons and our latest e-Series suite of products continues that legacy.
Many of our customers have made pledges to reduce emissions or become carbon neutral in the coming years.
A large part of these commitments, in some cases, as high as 70% reduction in carbon emissions, will come from the vendors who supply these companies.
Dril-Quip's innovative line of products are green by design, offering significant reductions in material or equipment that must be installed.
This design methodology, which has always been part of Dril-Quip's DNA, eliminated the carbon associated with manufacturing equipment as well as reducing the offshore installation days.
These products are thoroughly tested to improve reliability, which leads to better well integrity and fewer workovers.
For example, the combination of our e-Series technologies can help reduce roughly 40 tons of steel from traditional operations.
The elimination of this component alone reduces carbon emissions by approximately 70 tons as the process needed to produce the steel is no longer required.
We look forward to continuing to lead in the technologies and products that help our customers achieve their operational objectives.
However, as we make the energy transition together, we do not lose sight of the very important role the industry currently plays today in providing reliable, affordable energy, and we take great pride in being part of that solution as well.
I'm going to walk through Q4 performance and also provide a review for the full year of 2020.
We executed well, given the challenges we saw in the overall market.
Revenue for the fourth quarter fell slightly from the prior quarter to $87 million.
This decline was mainly due to lower manufacturing production hours related to increasing levels of quarantines from rising COVID-19 cases, seen mainly in the U.S. Adjusted EBITDA for the fourth quarter was $9 million, a decrease of $1 million from the prior quarter.
The same factors impacting our revenue fell through to the bottom line.
We also saw regional government subsidies implemented as a result of the pandemic being reduced during the quarter.
For the full year 2020, our revenues were $365 million, a decrease of $50 million versus 2019.
This was driven by the impacts of the pandemic on overall oil and gas demand.
Adjusted EBITDA for the full year 2020 was $32 million, a decrease of $22 million from the previous year.
We were successful in addressing this market decline by swiftly taking steps to reduce costs and optimize our global footprint.
As a result of this execution, we saw our margin profile improve significantly in the second half of 2020 as we realize the benefit of these cost actions.
We met our $20 million cost reduction target in 2020.
These are always difficult decisions, but were necessary in this environment.
We expect these cost reductions to be sustainable going forward.
While most of our regions saw headwinds to product and leasing revenues during the year, our service revenue saw an increase year-over-year.
This was primarily due to an increase in installations from orders booked in previous years, coupled with the growth in our downhole tools business.
Our downhole tools business was able to outpace the market by gaining share in key markets in the Middle East and Latin America as a result of service quality and execution.
I'll now move on to margins.
Gross margins were under pressure.
But given the environment, it held up falling by only 3%.
Our decision to take actions early in the year helped to support margins as the year progressed.
We saw EBITDA margins improve 3% from the first half to the second half 2020 after normalizing for mix and the impact of disruptions related to COVID-19.
Moving to SG&A expenses.
For the fourth quarter of 2020, SG&A was $26 million, an increase of $5 million compared to the third quarter.
This increase was mainly due to short-term legal expenses.
We expect these legal expenses to continue into the first half of 2021, mostly in connection with the trial currently scheduled for April.
For the full year 2020, SG&A expenses decreased by $8 million to $90 million after excluding these short-term legal expenses.
These improvements in SG&A stem from our 2020 cost out initiatives.
On the engineering R&D side, we saw a modest increase in 2020 to $19 million as we work to bring the VXTe to market.
Now looking at bookings for the year.
Product bookings were negatively impacted by the difficult market conditions in 2020.
After approximately $388 million in bookings during 2019, the uncertainty surrounding the pandemic and its impact on commodity prices led to customers holding off or delaying decisions to book orders for their upcoming projects.
We saw smaller orders with less predictable timing.
We now see one or two orders being the difference between a $40 million or a $60 million bookings quarter.
We expect the effects of the pandemic to persist into the first half of 2021, but are cautiously optimistic that things will gradually recover as the year progresses.
We believe there is some upside if operators see increased stability in prices and confidence in the global economic recovery returns with the recent rollout of COVID-19 vaccines.
We expect the road to recovery to be more gradual.
We are taking actions related to our productivity initiatives driven by our LEAN management philosophy and are targeting a $10 million cost improvement on an annualized basis.
These savings will come primarily from changes in our manufacturing and supply chain functions, including an increase in outsourcing for our downhole tools business.
The timing of these productivity actions will take place over the course of the year and is expected to deliver roughly $5 million of realized benefit in 2021.
Moving on to capital expenditure or capex.
In the fourth quarter of 2020, our capex totaled just under $2 million.
And for the full year, it was around $12 million.
This represents a minimum maintenance level of capex that we have seen over the past two years.
We are, however, anticipating an increase in capex to range in between $15 million to $17 million in 2021.
The increase is partly related to growth in our downhole tools business.
We are also investing in manufacturing safety and equipment and our information technology infrastructure.
We will monitor conditions to adjust our capex if necessary, but we believe these investments will support growth and improve our long-term efficiency and profitability.
Now let me turn to the balance sheet.
We continue to maintain a strong balance sheet and remain focused on protecting our cash position with no debt.
At year-end, we had cash on hand of $346 million and a further $40 million of availability in our ABL facility.
This results in approximately $386 million of available liquidity.
Our balance sheet and liquidity position are critical for us.
It gives our customers confidence in our ability to execute on our commitments and provides financial flexibility.
Moving on to free cash flow.
Free cash flow for the fourth quarter was a negative $18 million.
For the full year, it was negative $33 million.
Both the quarter and full year free cash flow was slowed by several headwinds, many of which were related to the pandemic.
Firstly, we saw a number of large customers whole payments that were due at year-end until early in January.
While we are accustomed to disturb our balance sheet management by our customers, this amount was beyond our normal experience.
Secondly, we saw inventory build in 2020, driven by customers requesting delays in shipments and our need to continue to procure materials for upcoming projects.
We also strategically added inventory for our expanding downhole tools business and subsea trees for stocking programs.
Both these factors led to an increase in inventory.
These working capital increases were partially offset by a federal tax refund.
We believe we have laid the foundation for a strong recovery.
We executed in improving billing turnaround and worked to improve our collection efforts and expand payment terms with vendors.
We expect we will see benefits of these efforts more clearly in 2021.
Free cash flow is a primary focus for us as a management team.
We have tied all annual incentives for our entire leadership team to free cash flow.
We are focused on all aspects of working capital.
We have dedicated a cross-functional team working on inventory reduction in a more gradual recovery environment.
Our auditor cash teams are gaining traction on reducing time to bill.
And we are continuing to leverage our supply base by moving to a more vendor-managed inventory program.
In the current environment and given the initiatives I just mentioned, we expect to be able to generate 5% free cash flow yield.
The bottom line is that free cash flow is a key metric for the management team.
Prior to turning the call back over to Blake for closing comments, I will give some color on what we expect to see in 2021.
Based on the current view and the conversations with customers, we expect 2021 bookings to be around $200 million for the year.
At these product booking levels and with the anticipated growth in our downhole tools business, we expect to see revenue to come in flat to slightly down from 2020.
We are forecasting 40% decremental margins for any given decline in revenue as we hold costs critical to address a recovery.
As I mentioned earlier, we are forecasting a free cash flow yield around 5% in 2021.
We are well positioned to achieve this goal and have aligned management objectives and incentives toward meeting this target.
To sum up, while we see near-term headwinds from the hangover of the pandemic, we see a gradual recovery in sight.
We have a proven track record of executing and meet these near-term challenges head on as we prepare for the recovery and focus on our strategic initiatives.
We have a strong financial position and a strong management team to execute in this market environment.
As we enter 2021, we believe there are signs to be optimistic that a recovery, even a more gradual one, is beginning to take form.
We have established several strategic initiatives, which will position Dril-Quip to thrive in the years ahead.
First, we are continuing to progress our consolidation through collaboration strategy through peer-to-peer collaborations that help to expand market access for our technology.
We see these collaborations through several lenses.
With respect to VXTe, we believe via conversations and significant pull from both customers and peers in the market that VXTe monetization remains a midterm opportunity via Dril-Quip providing the IP kit to our peers for delivery to end customers.
With wellheads, as a best-in-class wellhead provider, we believe both our superior technology and qualification lend themselves to partnering with multiple peers in integrated offerings.
Finally, with our connectors, we believe that real opportunity exists to partner with pipe providers around the world to build out better supply chains to improve delivery to our customers.
The common theme of these strategies is to expand share while reducing overall industry capacity.
Second, we have a downhole tool business that we believe has not fulfilled its potential.
We would expect to have a business here that has a market share similar to our wellhead franchises in most markets.
Quite frankly, we've struggled over the last few years with that business.
But we've laid the foundation in 2020 for significant growth in 2021.
We have a new leader.
We've shuttered underperforming bases.
We place smart bets with stock and added business development resources in key regions.
Further, we are only beginning to capitalize on our technology as outlined via our XPak DE technology.
Finally, as I'm sure you followed, we've moved from an organization of transformation to an organization that demands real annual productivity improvements.
These productivity initiatives span our organization and will make us nimble in difficult times while allowing us to scale up when the market returns.
Productivity and LEAN are now the way we do business and will serve us well in good and bad times.
As we look to the market increasingly focused on energy transition, we are continuing to be green by design, delivering lower carbon options for our customers, continuing to drive R&D that reduces the carbon footprint for our customers and following our customers in their transition.
While we are in the early stages of our R&D, rest assured that you can expect us to bring the same level of innovation to energy transition that we have to our customers over the last several decades.
In conclusion, the culmination of all these efforts leads to increasing market share by using technology and execution as a differentiator.
We will be keenly focused on free cash flow generation in a competitive free cash flow yield to attract investment and ultimately benefit our shareholders.
As Raj indicated, we are continuing several key working capital reduction initiatives in 2021.
We take these commitments seriously and have tied our annual performance compensation toward meeting these goals.
I look forward to providing further updates on the progress we are making across all our strategic areas in the coming quarters and sharing the benefits of success with our employees, customers and shareholders.
| anticipate that orders could continue to be lumpy and remain in a $40 to $60 million range per quarter for 2021.
|
With the pandemic conditions to evolve, we remain cautiously optimistic and vigilant as the vaccination efforts continue in the face of uncertainty associated with the emerging variants.
I am proud of our response over the last year and our ability to adapt to what has been a very challenging time for everyone, and I continue to pray each day for everyone affected.
Adjusted earnings per diluted share, excluding foreign currency impact, increased 24.2% for the quarter and 24.5% for the year.
While earnings are off to a very strong start for the first half of the year, it's important to bear in mind that they are largely supported by a low benefit ratio associated with the pandemic conditions as well as a better-than-expected return on alternative investments.
At the same time, sales improved year-over-year for the first time during the pandemic in the second quarter in both the United States and Japan.
As part of our strategy, we strive to be where people want to purchase insurance.
That applies to both Japan and the United States.
Face-to-face sales are still the most effective way for us to convey the financial protection only Aflac products provide.
However, the pandemic has clearly demonstrated the need for virtual means.
In other words, non-face-to-face sales that help us reach potential customers and provide them with the protection that they need.
We have continued to invest in tools from a distribution in both countries and to integrate these investments into our operation.
Recognizing the uncertain nature of recovery from the pandemic, we expect a stronger second half of the year in both countries, especially if the communities and businesses continue to open up, which would allow more face-to-face interactions.
I'm addressing our employees in a way that is similar to how I talk to my family, keeping them informed with the medical community by bringing doctors in but also by encouraging them to get COVID-19 vaccinations as I want people to avoid being sick or even worse, becoming a casualty of the virus or variant.
Looking at our operations in Japan, in the second quarter, Aflac Japan generated solid financial growth results as reflected in its profit margin of 26.5%.
This was above the outlook range provided at the 2020 Financial Analyst Briefing.
Aflac Japan also reported strong premium persistency of 94.7%.
Sales improved year-over-year, generating an increase of 38.4% for the quarter and 15.7% for the first six months.
These results reflect easier comps, improved pandemic conditions and a boost from the first quarter launch of our new medical product.
While sales in the first half of 2021 are at approximately 65% of 2019 levels, we continue to navigate evolving pandemic conditions in Japan.
The states of emergency have been in the targeted areas, especially Tokyo and Okinawa.
However, cases have begun increasing in Tokyo and Osaka metropolitan area, and we expect the Japanese government to make a determination soon to expand the declaration of the state of emergency to three other prefectures surrounding Tokyo and Osaka.
But most importantly, these states of emergencies are less restricted and limited in scope and do not represent lockdowns as experienced in other countries.
Japan, post-resumption of proactive sales starting in April, is contributing toward a gradual improvement in Aflac's cancer insurance sales, and we continue to work to strengthen the strategic alliance to create a sustained cycle of growth for both companies.
In June, for example, Aflac and Japan Post Holding, Japan Post Company and Japan Post Insurance, reached agreements to further the strategic alliance in a matter consistent with Japan Post Group's five-year medium-term management plan, which was announced in May.
While we do not expect this to have an immediate impact on sales recovery, it will further position our company for long-term growth as we respond to customers' needs, provide customer-centric services and create shared value of resolving societal and local community issues.
Turning to Aflac U.S., we saw a strong profit margin of 24.4 -- 25.4% and very strong premium persistency of 80.1%.
As expected, we also saw sequential sales improvement and more opportunities for face-to-face activities.
As a result of softer sales a year earlier and more face-to-face opportunities, sales increased 64.1% for the quarter and are at a 73% of the first half of the 2019 levels.
In the U.S., small businesses are still in a recovery mode, which we expect to continue through 2021.
At the same time, larger businesses remain primarily focused on returning employees to the worksite.
As I stated earlier, we will focus on being able to sell and service customers, whether in-person or virtually.
In addition, we continue to build out the U.S. product portfolio with previously acquired businesses, Aflac Network Dental and Vision and Premier Life and Disability.
While these acquisitions have a modest near-term impact on the top line, they better position Aflac for future long-term success in the U.S. Meanwhile, strong persistency, underwriting profits and investment income continue to drive strong pre-tax margins in the United States as they do in Japan.
As always, we place significant importance on continuing to achieve strong capital ratios in the U.S. and in Japan on behalf of our policyholders and investors.
We remain committed to prudent liquidity and capital management.
We treasure our 38-year track record of dividend growth and remain committed to extending it, supported by the strength of the capital and the cash flows.
At the same time, we will continue to tactically repurchase shares, focus on integrating the growth investments that we've made in our platform.
We are well positioned as we work toward achieving long-term growth, while also ensuring we deliver on our promise to our policyholders.
By doing so, we look to emerge from this period in a continued position of strength and leadership and look forward to sharing more about the strategic and financial priorities at our financial analyst briefing on November 16, 2021.
So now I turn the program over to Fred.
I'm going to focus my comments on activities to restore our production platform and progress on growth strategies.
Beginning with Aflac Japan, we are focused on three areas in building back to pre-pandemic levels of production: product development, online or digital assisted sales and specific sales efforts within the Japan Post platform.
With respect to product development, we continue to see positive reception to our revised medical product, EVER Prime.
Medical product sales for the first half of the year are up roughly 48% over the same period in 2020 and have approached pre-pandemic levels down only 4% from the 2019 period.
We are gaining back market share in this highly competitive medical market.
Earlier this year, we launched our first short-term insurance product under a newly formed subsidiary called SUDACHI.
The product is a small amount, substandard medical product targeting customers who do not qualify for traditional medical coverage.
In the second quarter, we have registered close to 600 agencies with SUDACHI and issued about 230 policies.
We are in the very early stages of this initiative, but over time, we anticipate adding additional short-term health and income support products.
We are in the process of developing a new care product aimed at supplemental elderly care coverage provided by the Government of Japan.
We will provide strategic context and timing around this product in the coming months, but we believe this product line will mature into a meaningful driver of future third sector sales, with an aging population and in anticipation of a continued shift in financial burden from the government to individuals.
Turning to distribution, we have technology in place to allow agents to pivot from face-to-face to virtual sales.
On March 26, we launched a national advertising campaign promoting this capability.
In the second quarter, we have processed over 14,000 online applications as compared to nearly 8,000 in the first quarter.
On Japan Post, proposal activity has increased month-to-month as sales training and promotion permeates the 20,000 branches that sell our insurance.
Through the month of June, Aflac Japan has conducted over 35,000 training sessions with Japan Post sales agents nationwide, along with providing contact information on nearly 700,000 existing cancer policyholders to inform on the latest coverage advantages.
Activities in the third quarter include visits with regional office managers in the JP system and post office visits to reinforce the sales process.
Turning to the U.S., our group voluntary platform continues to respond well with sales exceeding 2019 pre-pandemic levels.
Overall, sales recovery is focused on restoring our agent-driven small business franchise hurt by the pandemic.
Critical areas of investment include recruiting, converting recruits to weekly producers and product development.
In terms of recruiting, we have refocused our efforts in the past year on broker recruiting, with new appointments exceeding pre-pandemic levels.
Appointing small business brokers takes time to convert into production but is critical to expanding our reach and gaining traction in the dental and vision markets.
Individual agent recruiting remains under pressure, and we are running at 70% of weekly producers we enjoyed pre-pandemic.
Agent recruiting is impacted by onboarding and training under COVID restrictions, tight labor markets and employment subsidy programs, all of which we expect to subside later in the year.
Our Network Dental product is approved in 43 states and Vision in 42 states, with more states coming online later in the year.
We are completing national training programs and have about 50% of trained agents who have quoted on our new dental and vision product offerings.
It's early, however, we continue to see our volume building each month, and over 50% of our dental and vision cases include voluntary benefit sales.
We believe this supports our strategic intent to increase access in new accounts and deepen relationships in our existing accounts.
As I said last quarter, our 2021 dental and vision strategy can be summed up as a year of launch, learn and adjust.
Our Premier Life and Disability platform continues to support their key client relationships and are building a pipeline of quoted business.
Our service model remains exceptional.
And since closing, we have not lost any notable accounts and have seen early interest among some of our larger voluntary benefit clients.
This awarded business would not have been possible without our recently acquired group capabilities.
With respect to our e-commerce initiative, Aflac Direct, we offer critical illness, accident and cancer and are now approved in 45 states, including California.
As a reminder, this platform is focused on reaching customers outside the traditional work site.
Like most digital sales platforms, we enjoy higher conversion rates when a digital lead is handed to a licensed call center agent.
Currently, most of our leads are funneled to third-party call center platforms, and we are actively building out an Aflac licensed call center.
Our digital platform overall is experiencing a 16% conversion rate on qualified leads and generally consistent with many digital D2C insurance platforms.
Our consumer market strategy also includes digital distribution and product partnerships, and while early in development, are designed to expand access to protection products and increase traffic to our site.
Through six months in 2021, these three platforms, new platforms, have combined for 5% of sales as they are in the early building and development stages.
We continue to forecast a strong second half based on increased activity and expect these three growth initiatives will contribute upwards of 15% to sales in the second half of 2021.
Aflac Global Investments announced last week, an investment partnership with Denham Capital.
Aflac has made a $2 billion multiyear general account commitment to launch a new debt platform focused on investing in the senior secured debt of sustainable infrastructure projects.
Aflac will hold a 24.9% minority interest in a newly created entity Denham Sustainable Infrastructure.
We are also making a $100 million commitment to Denham Equity Fund, focused on sustainable infrastructure investments.
We are pleased to partner with Denham, a recognized and leading investment firm, in the sustainable infrastructure markets.
Under Eric's leadership, this transaction furthers our strategy of partnering with external managers.
We seek alliances with firms that maintain strong track records in specialized asset classes that play an important role in our portfolio.
We then leverage our capital to take a minority stake to further maximize the potential benefits.
When combined with our recent Sound Point capital investment, we advance our ESG efforts by investing in sustainable infrastructure and distressed communities across the U.S. I'll now pass on to Max to discuss our financial performance in more detail.
Let me begin my comments with a review of our Q2 performance, with a focus on our core capital and earnings drivers have developed.
For the second quarter, adjusted earnings per share increased 24.2% to $1.59.
The slightly weaker yen-dollar exchange rate did not have a significant impact on adjusted earnings per diluted share.
This strong performance for the quarter was largely driven by lower claims utilization due to the pandemic, especially in the U.S. In addition, variable investment income ran $112 million above our long-term return expectations.
Adjusted book value per share, including foreign currency translation gains and losses, grew 20.5%.
And the adjusted ROE, excluding foreign currency impact, was a strong 17%, which is a significant spread to our cost of capital.
Starting with our Japan segment, total earned premium for the quarter declined 3.8%, reflecting the impact of first sector policies reaching paid-up status, while earned premium for our third sector products was down 2.3% due to recent low sales volumes.
Japan's total benefit ratio came in at 66.9% for the quarter, down 290 basis points year-over-year.
And the third sector benefit ratio was 56.5%, down 305 basis points year-over-year.
We experienced a slightly higher-than-normal IBNR release in our third sector block as experience continues to come in favorable relative to initial reserving.
This quarter, the IBNR release was primarily due to pandemic conditions, constraining utilization since second quarter of 2020 and year-to-date.
Although claims activity have begun to rebound, it remains below longer-term normalized levels.
Auto claim reporting lags require up to a year to mature the data.
And now with more than a year's worth of pandemic data, our estimates are more refined, which has led to increased IBNR releases.
Persistency was down 10 basis points, yet remained strong at 94.7%.
Our adjusted expense ratio in Japan was 20.8%, up 80 basis points year-over-year.
We continue our technology-related investments to convert Aflac Japan to a paperless company, which also includes higher system maintenance expenses.
Additional telework expenses also added to the higher expense ratio in the quarter.
Adjusted net investment income increased 27.4% in yen terms, primarily driven by favorable returns on our growing alternatives portfolio and lower hedge costs, partially offset by lower reinvestment yield on our fixed rate portfolio.
The pre-tax margin for Japan in the quarter was 26.5%, up 450 basis points year-over-year, which was a very favorable result for the quarter.
This quarter's strong financial results leads us to expect the full year benefit ratio for Japan to be at the lower end of the 3-year guidance range of 68.5% to 71% given at Fab.
And the pre-tax margin to be at the higher end of the 20.5% to 22.5% range.
Turning to U.S. results, net earned premium was down 3.4% due to weaker sales results.
Persistency improved 180 basis points to 80.1%.
63 basis points of the elevated persistency in both the second quarter of this year and the prior year can be explained by emergency orders.
So there was no net impact for the quarter year-over-year.
80 basis points of improved persistency in the quarter is attributed to lower sales, as first year lapse rates are roughly twice total in-force lapse rates.
Another 30 basis points of improved persistency is due to conservation efforts, and the remainder largely comes from improved experience.
Our total benefit ratio came in lower than expected at 43.5% or 80 basis points lower than Q2 2020, which, itself, was heavily impacted by the initial pandemic.
Lower claims utilization impact our estimates for incurred claims as data matures over the course of the year.
As our data matures, we increased our reliance on raw data, and with a year of pandemic data behind us, we reduced our IBNR to reflect the lower utilization.
This quarter, IBNR releases amounted to 5.6 percentage points impact on the benefit ratio, which leads to an underlying benefit ratio, excluding IBNR releases, of 49.1%.
We expect the benefit ratio to increase gradually throughout the remainder of the year, with the resumption of normal activity in our communities and by our policyholders.
For the full year, we now expect our benefit ratio to be in the range of 45% to 48% versus our original guidance of 48% to 51%.
Our expense ratio in the U.S. was 36.9%, up 160 basis points year-over-year but with a lot of moving parts.
Weaker sales performance negatively impacts revenue, however, the impact to our expense ratio is offset by lower DAC and commission expense.
Higher advertising spend increased the expense ratio by 60 basis points.
Our continued buildout of growth initiatives, group life and disability, network dental and vision and direct to consumer contributed to a 170 basis point increase to the ratio.
These strategic growth investments are largely offset by our efforts to lower core operating expenses as we strive toward being the low-cost producer in the voluntary benefits space.
Net-net, despite a lot of moving parts, Q2 expenses are tracking according to plan.
In the quarter, we also incurred $5.5 million of integration and transition expenses not included in adjusted earnings associated with recent acquisitions.
Adjusted net investment income in the U.S. was up 9.9%, mainly driven by favorable variable investment income in the quarter.
Profitability in the U.S. segment was very strong with a pre-tax margin of 25.4%, with a low benefit ratio as the core driver.
With the first half now in the books, we are increasing our pre-tax margin expectation for the full year.
Initial expectations were for us to be toward the low end of 16% to 19%.
We now expect to end up slightly above the range indicated at fab.
In our Corporate segment, we recorded a pre-tax loss of $76 million, as adjusted net investment income was $45 million lower than last year due to low interest rates at the short end of the yield curve and amortization of certain tax credit investments, which amounted to $30 million this quarter held at the corporate level.
Under U.S. GAAP, we recognized a negative impact to corporate NII, but this is offset by a lower effective tax rate for the enterprise.
This results in a level of reported volatility to our Corporate segment, but the economic returns on these investments are above our cost of equity capital.
To date, these investments are performing well and in line with expectations.
Our capital position remains strong, and we ended the quarter with an SMR above 900% in Japan and an RBC of approximately 600% in Aflac Columbus.
Unencumbered holding company liquidity stood at $4.4 billion, which was $2 billion above our minimum balance, excluding the $400 million proceeds from the sustainability bond that we issued in March that reinforced our ESG initiatives and believe that sustainable investments are also good long-term investments.
Leverage, which includes our sustainability bond, remains at a comfortable 22.8%, in the middle of our leverage corridor of 20% to 25%.
In the quarter, we repurchased $500 million of our own stock and paid dividends of $223 million, offering good relative IRR on these capital deployments.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital to drive the strong risk-adjusted ROE, with a meaningful spread to our cost of capital.
With that, I'll hand it over to David to begin the Q&A.
[Operator Instructions] Andrea, we will take our first question, please.
| q2 adjusted earnings per share $1.59.
q2 revenue $5.6 billion.
aflac- with respect to q2 sales results in u.s. and japan, we continued to see improvement and expect a stronger second half of year in both countries.
|
With the pandemic conditions continuing to evolve, I'm proud of our response over the last year.
I am also grateful to our team of employees and sales representatives who have empowered Aflac to adapt to what has been a very challenging time for everyone.
During the third quarter, we saw a rise and then a decline in COVID cases and hospitalizations in both the United States and in Japan, but to varying degrees.
With that in mind, I continue to address our employees in a way that's similar to how with my own family.
I'm keeping them informed in updates from the medical community and encourage them to get the COVID-19 vaccine because I want people to avoid being sick or even worse being a casualty due to this pandemic.
As we entered the fourth quarter, when the weather gets colder and indoor gatherings increase, the recovery from the pandemic remains uncertain, and we must remain diligent.
For the third quarter, adjusted earnings per diluted share, excluding foreign currency impact increased 10.1% for the quarter and 20.1% for the year.
These results are largely driven by lower-than-expected benefit ratios and higher net investment income, primarily in Japan.
Looking at the operations in Japan in the third quarter, Aflac Japan generated solid overall financial results as reflected in the profit margin of 26.3%, which was above the outlook range provided at our financial analyst briefing for 2020.
As Max will explain in a few moments, Aflac Japan has reported very strong premium persistency of 94.5%.
Aflac Japan sales were essentially flat for the quarter.
Sales for the first nine months of this year were approximately 66% of 2019 level.
We continue to navigate evolving pandemic conditions in Japan, which include widespread state of emergencies that extended to multiple prefectures and persisted through the third quarter.
These states of emergency in Japan are much less restrictive and more limited in scope than lockdowns in other countries, but they have impacted face-to-face sales opportunities.
As we entered the fourth quarter, the ability to meet face-to-face with customers appears to be improving somewhat gradually.
And the degree to which our ability to meet face-to-face continues to improve with a very key driver in the recovery of our sales.
We were encouraged by the September launch of our new nursing care insurance in Japan, which we view as another opportunity to meet the needs of certain consumers.
However, it's still very early in the launch of this new product to determine the potential of the nursing care insurance.
In addition, Aflac Japan continues to work to strengthen the alliance with Japan Post, which resumed proactive sales of the cancer insurance on April 1.
We expect continued collaboration to further position both companies for the long-term growth and a gradual improvement of Japan Post cancer insurance sales in the intermediate term.
Now turning to Aflac U.S.
We saw a strong profit margin of 22.2%.
This result was driven by lower incurred benefits and higher adjusted net investment income, particularly offset by the higher adjusted expenses.
Aflac U.S. also continued to have strong premium persistency of nearly 80%.
Sales increased 35% for the quarter and are at approximately 78% of sales for the first nine months of 2019.
These sales results reflect what we believe are improving pandemic conditions in the United States, allowing us more face-to-face meetings and enrollments than prior periods.
In the U.S., small businesses have gained some incremental ground toward recovery, which we expect to continue gradually.
Within the challenging small business and labor markets, we continue to make investments in developments of traditional independent sales agents that make up about 53% of our sales as of the third quarter of 2021.
At the same time, larger businesses appear to be more resilient, given their traditional reliance on online self-enrollment tools, and we continue to invest in the group platform.
Group business, which is being driven by broker performance is performing very well.
Excluding our acquired platforms, group sales have generated a year-to-date sales increase of 14% over the same period for 2019.
As we enter historically higher enrollment periods in the United States, we remain focused on being able to sell and service customers, whether in person or virtually.
With an eye toward responding to the needs of consumers, businesses and our distribution, we continue to build out the U.S. portfolio with Aflac network Dental and Vision premier life and disability.
These new lines modestly impact the topline in the short term.
These new products in combination with our core products, better position Aflac U.S. for future long-term success.
Pandemic conditions have served to fuel our long-standing strategy of being where people want to purchase insurance in both the United States and in Japan.
And while face-to-face sales remains the most effective way for us to convey the financial protection only Aflac products provide, the pandemic has clearly demonstrated the need for virtual avenues to help us reach potential customers.
We have continued to invest in tools for our distribution in both countries and to integrate these investments into our operations.
As always, we place significant importance on continuing to achieve strong capital ratios in the U.S. and Japan on behalf of our policyholders and investors.
We remain committed to prudent liquidity and capital management.
With the fourth quarter declaration, 2021 will mark the 39th consecutive year of dividend increases.
Our dividend track record is supported by the strength of our capital and cash flows.
At the same time, we will continue to be tactical in our share repurchase and focus on integrating the growth investments we've made in our platform.
We are well positioned as we work toward achieving long-term growth, while also ensuring we deliver on our promise to our policyholders.
By doing so, we look to emerge from this period in continued position of strength and leadership and look forward to sharing more about our strategic and financial priorities at the financial analyst briefing on November 16, 2021.
Now let me turn the program over to Fred.
Recognizing we have our analyst and investor briefing scheduled in the next few weeks.
I'll keep my comments brief before handing off to Max on the quarter's financial results.
Beginning with Aflac Japan, as Dan noted, it was an unusual quarter with the states of emergency declarations across most of the country.
Declarations are triggered in Japan by, among other things, a combination of rates of infection and hospital utilization by prefecture.
The precise impact is difficult to calculate, but the practical implications include reduced face-to-face consultations, limited access to on-site workers and payroll solicitation, reduced foot traffic to the roughly 400 owned and affiliated retail shops that we sell through and restricted travel between prefectures, which further constrains sales professionals.
When looking at claims experience through the third quarter and since inception of the virus, Aflac Japan's COVID impact has totaled approximately 31,000 claimants with incurred claims of JPY5.6 billion.
We expect conditions to improve and remain focused on what we can control, including product development and advancing our business model.
Our medical product EVER Prime continues to do well with medical sales up roughly 14% in the quarter and 36% year-to-date over the same period in 2020.
Our market share has improved, but we're still at roughly 85% of the medical sales enjoyed in 2019, which was also a medical product refresh year.
So pandemic conditions in the quarter are having an impact.
Regarding our nursing care product.
Since our late September launch, we have sold nearly 10,000 policies.
This is a strong start, but within our expectations, given the marketing support put behind the product.
From a risk perspective, this is a supplemental product aligned with coverage provided by the Japanese government and targeting the mass market.
Benefits are, therefore, less rich and capped, both in amount and duration.
The product is designed for protection versus savings with modest interest rate sensitivity.
In summary, the product has a similar risk profile to our existing third sector products.
We continue the development of noninsurance services that wrap our cancer and now nursing care product offerings.
This has become more common among the large domestic insurers and we see these services as important for both defending and building our market share.
Turning to the U.S., pandemic conditions remain at elevated levels with the spread of the Delta strain of the virus.
As of the end of the third quarter, Aflac U.S. COVID claimants since inception of the virus, has totaled approximately 79,000 with incurred claims of $135 million.
Dan covered overall U.S. sales conditions.
I'll focus my comments specifically on our buy-to-build growth platforms.
Our 2021 Dental and Vision strategy can be summed up as a year of launch, learn and adjust.
This quarter, we processed over 1,600 cases, up 30% over the second quarter, as we roll out training and development to agents and launch in additional states.
We are focused on small- and medium-sized businesses with sold cases averaging around 95 employees.
Looking forward into 2022, we continue building out our dental network and readying the platform for increased volumes as we move upmarket and introduce a direct-to-consumer individual product.
Our premier life and disability team successfully renewed 100% of their current accounts, a testimony to their high-quality service model.
We are preparing to launch with Connecticut administering benefits for their statewide paid family and medical leave program in 2022.
This is an administrative-only contract leveraging our acquired leave management platform.
With respect to our e-commerce initiative, Aflac Direct, we currently offer products in 46 states.
We are actively building out a licensed call center and currently have 14 licensed agents.
The call center platform is in the early days of building and augments our digital-only conversion rates as well as reduces operational dependency on call center vendors.
In the third quarter, these three platforms accounted for roughly 13% of sales and are expected to build as a percentage of sales and earned premium in the coming years.
Before handing off to Max, a few comments on operations.
In Japan, we continue to drive volume through our online sales solution.
Year-to-date, we have processed over 38,000 online applications with September being our largest month since launching the capability.
We are pushing forward on technology and digital modernization and are sizing the investment required to streamline our policyholder services platform.
This is the largest operating platform in Japan and a key to driving down our long-term expense ratio.
In the U.S., our premier life and disability platform completed a successful transition this month from Zurich on time, on budget and without client or customer disruption.
We are focused on migrating our voluntary business to a new group administration platform and building out critical data connections with leading benefit administration and HR systems.
The goal is to ensure ease of doing business, smooth onboarding and renewals and quality service and analytics.
When looking at our Japan and U.S. expense ratios going forward, we continue with critical platform development despite a period of weaker revenue.
We expect to stay within previously guided ranges for expense ratios recognizing prolonged pandemic conditions require recalibrating the precise trajectory and timeline for reaching our ultimate targets.
Finally, at Aflac Global Investments, performance remains strong.
We continue to advance our sustainable investing platform and recently refreshed our strategic asset allocation work.
Our team will dive deeper into operations and strategic execution at next month's Analyst and Investor Briefing.
Let me now turn things over to Max to cover financial performance.
For the third quarter, adjusted earnings per share increased 10.1% to $1.53, with a $0.02 negative impact from foreign exchange in the quarter.
This strong performance for the quarter was largely driven by lower claims utilization due to pandemic conditions, especially in Japan.
Variable investment income ran $0.11 above our long-term return expectations.
Adjusted book value per share, including foreign currency translation gains and losses, grew 10.1%.
And the adjusted ROE, excluding the foreign currency impact, was a strong 16.2%, a significant spread to our cost of capital.
Starting with our Japan segment.
Total earned premium for the quarter declined 4%, reflecting first sector policies paid-up impacts, while earned premium for our third sector products was down 2.6% due to recent low sales volumes.
Policy count in-force, which we view as a better measure of our overall business growth declined 1.8%.
Japan's total benefit ratio came in at 66.1% for the quarter, down 520 basis points year-over-year, and the third sector benefit ratio was 55%, down 670 basis points year-over-year.
We experienced a greater-than-normal IBNR release in our third sector block, as experience continues to come in favorable relative to initial reserving.
Utilization continues to be constrained by pandemic conditions, and we now have more than a year's worth of pandemic data.
And with that, our model output is more refined, leading to increased releases.
Adjusting for greater than normal IBNR releases and in-period experience, we estimate that our normalized benefit ratio for the third quarter to be 68.7%.
Persistency remained strong with a rate of 94.5%, down 50 basis points year-over-year.
Consistent with past refreshed product launches, we have experienced a slight uptick in lapse rates on our medical product, as policyholders look to update their coverage.
Our expense ratio in Japan was 21.4%, down 30 basis points year-over-year.
Constrained business activity lowered our expenses in Q3, which we view to be a temporary phenomenon.
We generally expect increased spending on key initiatives to continue and especially in Q4, as we tend to see some seasonality in spending and booking of projects.
Adjusted net investment income increased 19.7% in yen terms, primarily driven by favorable returns on our growing private equity portfolio and lower hedge costs, partially offset by lower reinvestment yield on our fixed rate portfolio.
The pre-tax margin for Japan in the quarter was 26.3%, up 690 basis points year-over-year, a very good result for the quarter.
This quarter's strong financial results lead us to expect the full year benefit ratio for Japan to be below the 3-year guidance range of 68.5% to 71% given at FAB.
And the pre-tax margin to be above the 20.5% to 22.5% range given at -- for the full year 2021.
Turning to U.S. results.
Net earned premium was down 1%, as lower sales results during the pandemic continue to have an impact on our earned premium.
Persistency improved 110 basis points to 79.9%, 70 basis points of which are from lower sales, as first year lapse rates are roughly twice the level of in-force lapse rates.
In addition, there still remains about 40 basis points of positive impact from emergency orders.
Our total benefit ratio in the U.S. came in lower than expected at 45.1% or 320 basis points lower than Q3 2020, which itself was heavily impacted by the initial pandemic.
Lower and deferred claims utilization impacts our IBNR held for incurred claims within a year.
And as we get more data, our long-term models increased reliance on raw data leading to IBNR releases.
This quarter, they amounted to a 3.5 percentage points impact on the benefit ratio, which leads to an underlying benefit ratio, excluding IBNR releases of 48.6%.
We expect the benefit ratio to increase gradually throughout the remainder of the year with the resumption of normal activity in our communities and by our policyholders.
For the full year, we now expect our benefit ratio to be in the range of 43% to 46% versus original guidance of 48% to 51%.
Our expense ratio in the U.S. was 38.9%, up 170 basis points year-over-year, but with a lot of moving parts.
Weaker sales performance negatively impacts revenue, however, the impact to our expense ratio is largely offset by lower DAC expense.
Higher advertising spend increased the expense ratio by 40 basis points.
Our continued build-out of growth initiatives, group life and disability, network dental and vision and direct-to-consumer contributed to a 260 basis points increase to the ratio when isolating these investments.
These important strategic growth investments are somewhat offset by our efforts to lower our core operating expenses, as we strive toward being the low-cost producer in the voluntary benefits space.
Net-net, despite a lot of moving parts, Q3 expenses are tracking according to plan.
In the quarter, we also incurred $7.8 million of integration expenses, not included in adjusted earnings associated with recent acquisitions.
Adjusted net investment income in the U.S. was up 9.1%, mainly driven by favorable variable investment income in the quarter.
Profitability in the U.S. segment remained strong with a pre-tax margin of 22.2%, with a low benefit ratio as the core driver.
With nine months now in the books, we are increasing our pre-tax expectation for the full year.
Initial expectations were for us to be toward the low end of 16% to 19%.
We now expect to end up above the range indicated at FAB 2020.
In our Corporate segment, we recorded a pre-tax loss of $41 million, as adjusted net investment income was down $12 million versus last year due to low interest rates at the short end of the yield curve and change in value of certain tax credit investments.
These tax credit investments run through the corporate net investment income line for U.S. GAAP purposes with an associated credit to the tax line.
The net impact to our bottom line was a positive $5 million in the quarter.
To date, these investments are performing well and in line with expectations.
In the fourth quarter, we do expect a significant tax credit investment to fund, which will bring some volatility to the corporate NII line as well as an offsetting credit to the tax line.
Our capital position remains strong, and we ended the quarter with an SMR in Japan of north of 900% and an RBC north of 600% in Aflac Columbus.
Unencumbered holding company liquidity stood at $4.2 billion, $1.8 billion above our minimum balance.
Leverage, which includes the sustainability bond issued earlier this year, remains at a comfortable 22.6% in the middle of our leverage corridor of 20% to 25%.
In the quarter, we repurchased $525 million of our own stock and paid dividends of $220 million, offering good relative IRR on these capital deployments.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted return on equity with a meaningful spread to our cost of capital.
Finally, I would like to mention that we will begin to expand our disclosures around the adoption of LDTI in our Form 10-Q and at FAB.
At a high level, we do not see this accounting adoption as an economic event with no impact to our regulatory financials or capital base.
There will be no change to how we manage the company, cash flows or capital.
With that, I'll hand it over to David to begin.
| q3 adjusted earnings per share $1.53.
|
Undoubtedly these are unprecedented times.
With safety and well-being of our employees as the highest priority I am extremely proud of our entire team supporting our customers with the central water heating and water treatment products to combat this virus.
As a result of the COVID-19 pandemic and in support of continuing our manufacturing efforts during this time we have undertaken numerous meaningful in some cases extraordinary steps at our manufacturing plants to protect our employees.
These steps include plant accommodations and reconfigurations to maintain social distancing mask availability to all employees deep cleaning quarantining individuals with positive tests or potential exposure to the virus for 14 days and restricting access to facilities among others.
While these steps result in lower manufacturing efficiencies in some cases our focus is on safety first.
The majority of our office personnel have been working from home and have done a great job in maintaining productivity and support of the business.
As offices have reopened in China and will soon in other countries and in the U.S. we have implemented return to office protocols which include bringing back office staff in waves over a two month period making maks available more frequent cleaning of common areas sanitizing stations throughout the office areas and limiting use of conference rooms for small group meetings to maintain social distancing.
Our long-term relationships in many cases decades-long and strength of our partners within various channels including wholesale distributors DIY retail hardware stores plumbing supply and independent reps are particularly important as we provide the essential water heating and water treatment products critical to uninterrupted operations of hospitals clinics grocery stores food service companies and many more including the households that many are now using to conduct business and education.
Our global supply chain management team proactively monitors and manages the ability to operate effectively and identify bottlenecks.
To date we have not seen any meaningful disruption in our supply chain.
We engaged in ongoing communication with our supply chain partners to identify and mitigate risk including multi-sourcing and managing inventory at higher levels.
Our recent implementation of SAP has provided improved management tools and visibility into our supply chain.
Additionally we have improved our manufacturing flexibility as a result of water heater tank standardization projects over the last five years.
Standardization greatly improves our ability to shift manufacturing from one plant to another should the need arise.
The stability afforded by the replacement component in residential and commercial water heater and boiler demand which we estimate at 85% of the U.S. unit volume puts us in a position of strength as we navigate through this pandemic.
We estimate replacement demand is 40% to 50% in China.
While we are in a position of strength similar to 2008 and 2009 time frame we expect to see lower demand for the majority of our products and have been proactive in managing costs.
We have increased our cost-reduction programs in China and we continue to monitor the North American environment and customer demand to potentially take further actions such as furlough programs and other restructuring.
A. O. Smith is in a solid financial position with positive cash flow and a strong balance sheet.
While A. O. Smith has a strong balance sheet and capital position we are proactively managing our discretionary spend and cash position.
To that end we suspended our share repurchase program in mid-March in addition while we continue to focus on strategic investments including new products and production efficiency.
We have reprioritized and reduced our capital spend plans for 2020 by approximately 20%.
Through April we have completed $200 million of dividends out of China and we have repatriated $125 million to the U.S. As of April 30 2020 we had approximately $850 million in liquidity consisting of cash cash equivalents marketable securities and borrowing capacity on our credit facility which remains in place throughout 2020 and 2021 expiring in December 2021.
We continue to focus on rightsizing the cost structure of our China business.
We have achieved a 20% headcount reduction compared with December 2018 and we will continue to assess the need for additional workforce reduction.
We are targeting 1000 net store closures this year in China along with further cuts in advertising and other costs.
Total savings are expected to total $55 million an increase of $10 million from our estimate in January of which $30 million was achieved in 2019.
Our debt maturity schedule is shown on slide five.
The next major maturity date is at the end of next year in December 2021 when our revolving credit facility expires.
We are in compliance with all covenants in our credit facility.
Our leverage ratio is 17.5% gross debt to total capital at the end of March was significantly below the 60% maximum dictated by our credit and various long-term facilities.
I will begin comments about the first quarter on slide six.
First quarter 2020 sales of $637 million declined 15% compared with the first quarter of 2019.
The decline in sales was largely due to a 56% decline in China local currency sales driven by the COVID-19 pandemic.
As a result of lower sales in China first quarter 2020 net earnings of $52 million and earnings per share of $0.32 declined significantly compared to the same period in 2019.
Sales in our North America segment of $533 million increased 2% compared with the first quarter of 2019.
Incremental sales of $16 million from the Water-Right acquisition purchased in April 2019 organic growth of 17% in North America water treatment products and higher water heater volumes drove sales higher.
These factors were partially offset by water heater sales mix composed of more electric models which have a lower selling price and lower contractual formula pricing associated with a portion of water heater sales based on lower steel costs.
Rest of the World segment sales of $110 million declined 53% with the same quarter in 2019.
China sales declined 56% in local currency related to weak consumer demand driven by the pandemic.
China channel inventories declined slightly from the levels at the end of 2019 and remained in the normal range of two to three months.
On slide eight North America segment earnings of $127 million were 10% higher than segment earnings in the same quarter in 2019.
The improvement in earnings were driven by lower steel costs incremental profit from Water-Right and improvement in the profitability of the organic water treatment sales which were partially offset by the mix skew to electric water heaters and lower contractual pricing.
As a result first quarter 2020 segment margin of 23.9% improved from 22.2% achieved in the same period last year.
Rest of the World loss of $42 million declined significantly compared with 2019 first quarter segment earnings of $12 million.
The unfavorable impact to profits from lower China sales and a higher mix of mid-price products which have lower margins more than offset the benefit to profits from lower SG&A expense.
As a result of these factors the segment margin was negative with compared with 5.3% in the same quarter in 2019.
Our corporate expenses of $15 million and interest expense of $2 million were essentially flat as last year.
Our effective tax rate of 23.6% in the first quarter of 2020 was higher than the 20% tax rate in the first quarter of 2019 primarily due to geographical differences in pre-tax income.
Cash provided by operations of $54 million during the first quarter of 2020 was higher than $22 million in the same period of 2019 as a result of lower investment in working capital including timing of certain volume incentive payments which was partially offset by lower earnings compared with the year ago period.
Our liquidity and balance sheet remained strong.
We had cash balances totaling $552 million and our net cash position was $209 million at the end of March.
During the first quarter of 2020 we repurchased approximately 1.4 million shares of common stock for a total of $57 million.
During April we saw differing levels of impact from the pandemic across our major product lines and geographies.
In North America our average daily orders for residential water heaters declined low single digits compared with the first quarter pace.
Commercial average order rates in April were down 30% to 35%.
It is difficult to interpret order rates in April as customers are likely adjusting inventory levels as they manage their inventory investment dollars.
In China the pandemic had a significant impact on our volume in the first quarter.
50% of our sales volume occurred before the Chinese New Year shutdown on January 24.
With manufacturing government offices restaurants and schools now largely reopened and the majority of installers able to access apartments in China we have seen sequential improvement in sellout and orders in April compared with February and March.
Consumers remain cautious and it's too early to determine when consumers will return to normal levels in retail environments.
A portion of the improvement could be pent-up demand.
In North America demand for residential boilers has remained soft following a warm winter.
And we have delayed our early buy incentive program in this environment.
Our commercial condensing boiler backlog has doubled from levels at this time last year but some orders have extended delivery dates.
With construction sites closed in some states timing of delivery is difficult to project.
Safety and security of drinking water is a high priority for consumers during this time.
The North America water treatment end market strength we saw in the first quarter continued in our direct-to-consumer product portfolio which skews to lower price easier-to-install products.
In April we experienced some challenges in parts of the country with installed in-home products.
In India our water treatment products are considered essential.
But our manufacturing plant is closed as worker transportation is difficult in this environment.
We believe the current environment does not allow for the forecast of performance with reasonable precision.
And as a result we continue to suspend our 2020 full year guidance.
As the depth of the disruption and pace of recovery in our end markets become clearer we look to return to our practice of providing a current year outlook.
In Mexico similar to other companies we temporarily suspended operations as governmental agencies continue to sort through the industries designated as essential and allow to continue operate as well as the conditions and safety measures under which businesses deem essential are allowed to operate.
We temporarily shifted manufacturing from Mexico to the U.S. to minimize disruption of our customers.
Each day we move closer to an understanding of when we'll resume production and believe that we will be in a week or two and at a reduced manning and capacity.
These lower rates coupled with the U.S. output are expected to support demand for customers over the coming months.
Our global supply chain team has been proactive from early in the first quarter and continues to monitor and manage availability of components.
Again to date we have experienced minimal disruptions in our global supply chain.
Our largest suppliers in Mexico which are in different states than our boilers plant are now reopened but at reduced capacity.
While the disruption has been minimal we have experienced reduced safety stock levels on certain items and our supply team is in ongoing communication with our suppliers to mitigate operational risk and manage inventory levels.
We believe replacement demand for water heaters and boilers in the U.S. is approximately 85%.
In 2006 through 2009 which captured the Great Recession peak to trough industry shipments of residential water heater volumes declined 18%.
The decline was primarily driven by a $1.5 million decline in new homes constructed.
During that period we were able to flex our operations to maintain margins.
At 1.3 million new homes in 2019 we do not anticipate the new home construction impact will be as great as the Great Recession.
The replacement base of our core U.S. products provides a stabilizing buffer to the economic downturn expected in the remaining three quarters of 2020.
After being closed for several weeks in February in compliance with local orders our three plants in China are open and operating.
Foot traffic in our retail network in China remains low and we are building to order at lower-than-normal operating capacities.
Our suppliers are open and we are now and we are not experiencing disruptions.
Customers continue to prefer products with fewer features continuing the trend we saw last year as you would expect in this environment.
Our mid-price products are positioned for this trend.
Despite reduced headcount retail footprint and advertising costs we continue to invest in R&D in the region.
Product development continues with a focus on taking costs out of our most popular new products to improve contribution margins.
Product development has been one of the pillars to our success in China and we are committed to our investment in engineering resources in China and around the world.
After a hard closure of the economy in the first quarter China is slowly returning to business.
While we have seen April orders and -- incrementally improve from February and March it's too early to predict if the recent improvement is the result of pent-up demand or by consumers slowly returning to the market.
In North America we have previously experienced in weathering through difficult economic conditions most recently in the 2008 recession.
However with the massive and abrupt impact to jobs and end markets like restaurants hotels and hospitals it is difficult to predict this current state of shelter-at-home and state-by-state closures will play out similarly to the 2008 recession.
While we would expect that our replacement business in both water heating and boilers will provide a buffer in the same manner as we have seen before the impact to construction and discretionary spend and closure of certain job site activity is difficult to predict for the remainder of 2020.
In India it is clear that our targets breakeven in 2020 will be pushed out as the country battles COVID-19.
We believe that particularly in these uncertain times A. O. Smith is a compelling investment for a number of reasons.
We have leading market share in our major product categories.
We estimate replacement demand represents approximately 85% of U.S. water heater and boiler volumes.
We have a strong premium brand in China a broad product offering in our key product categories broad distribution and a reputation for quality and innovation in that region.
Over time we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We have strong cash flow and balance sheet supporting the ability to continue to invest for the long term with investments in automation innovation and new products as well as acquisition and return to cash and returning cash to shareholders.
We will continue to proactively manage our business in this uncertain environment as we've seen consumer demand trends emerge in China where we were first impacted by the pandemic and now in North America as the current economy begins to reemerge after the economic shutdown.
We have a strong team which has navigated successfully through prior downturns.
I'm confident in our ability to execute through COVID-19.
| a. o. smith suspends 2020 outlook.
q1 earnings per share $0.32.
sales in quarter ended march 31 were approximately 15 percent lower.
2020 outlook suspended.
company suspended its 2020 full year outlook.
believes it is in a solid financial position with sufficient liquidity to navigate through today's challenging business environment.
|
Certain risk factors inherent in our business are set forth in filings with the SEC including our most recent 10-K and subsequent filings.
We caution you not to place undue reliance on these statements.
Some of the comments made refer to non-GAAP financial measures such as adjusted net revenue, adjusted operating margin, and adjusted earnings per share, which we believe are more reflective of our ongoing performance.
Joining me on the call are Jeff Sloan, CEO; Cameron Bready, President and COO; Paul Todd, Senior Executive Vice President and CFO.
We delivered our best performance since the end of 2019 because of our focus on technology enablement coupled with the excellence in execution.
Our results demonstrated strong sequential momentum from the fourth quarter of 2020 and improved monthly throughout the first quarter of 2021.
We are encouraged by the overall run rates we are seeing in the business.
We exited the first quarter in a better position than we entered it.
We are delighted to haveto return to growth in the first quarter of 2021.
We were able to deliver revenue, margin, and earnings-per-share growth despite facing difficult year-over-year comparisons as the pandemic did not begin to impact our business until mid-March 2000.
We are pleased today to announce two strategic acquisitions for approximately $1 billion in total that further are software-driven technology enabled strategy and deepen our presence in the most attractive markets globally we expect to continue to gain market share and extend our lead.
In combination with the roughly $1 billion in share repurchases we've affected since returning to our capital allocation strategy at the end of last year, we continue to balance appropriately reinvestment in the future growth of our business with efficient return of capital.
First with our agreement to acquire Zego, we enter one of the largest and most attractive vertical markets worldwide.
Real estate is the contestants of the type of market that we seek, sizable, global in scope, fragmented and right for further software digital commerce and payments penetration, and COVID-19 has accelerated the underlying changes that make this $6.5 billion target addressable market so attractive.
Zego is a leading software and payments technology company with significant scale delivering a comprehensive real estate technology platform to 7300 customers representing more than 11 million residential units in the United States.
Zego is digital omni-channel solutions support property managers and residents throughout the real estate life cycle, from leasing and on-boarding, to work orders, utility management, resident communications, renewals, off-boarding and of course, payments.
Through its integrated payments offering, legal processes approximately $30 billion in payments annually in a market with a volume opportunity that exceeds $1 trillion, the company delivers its full value stock through cloud native SaaS platform to enable seamless digital property management and best-in-class resident engagement and omni-channel experiences.
It is a highly scalable and predictable flywheel with compelling recurring revenue, strong retention rates, booking trends and lifetime customer value returns with double-digit organic revenue growth.
Importantly, we have significant opportunities to accelerate Zego's growth.
We intend to leverage Global Payments scale and digital expertise to further payments penetration into Zego's base, generate incremental property and software partner referrals to more than 3500 sales and sales support professionals expanded footprint outside the United States and generate meaningful cross-selling opportunities into its vertical market including innovative products we already deliver into our merchant business like payroll, data and analytics and replication management.
We could not be more excited about further capitalizing on the convergence of software and payments and we look forward to welcoming Zego team members to Global Payments.
Second, we are excited to have reached an agreement to our Erste joint venture to purchase Worldline's PAYONE business in Austria consisting of roughly 8,000 primarily SMB merchant customers in Erste banks home market.
We entered Austria through organic market expansion of our Continental European joint venture roughly 18 months ago.
This pending acquisition enables us to bring our distinctive distribution and marketing technology to add scale to get another attractive market.
In addition to these strategic accomplishments in early 2021, we also produced a solid first quarter results across our existing businesses.
First, in our merchant segment we delivered significant sequential improvement fueled by our technology-enabled focus and the conversion of last year's share and bookings gains into revenue.
And we generated these results while absorbing ongoing lockdowns in Canada and renew restrictions in selected markets in Europe and Asia Pacific.
Some highlights in the first quarter of 2021 include record new sales in our Global Payments Integrated business in March and in our US relationship-led business for the quarter, record revenue growth at GPI for the quarter well in excess of pre-pandemic levels, record bookings at Xenial for a cloud-based restaurant POS software and solutions and continued sequential acceleration in our omni-channel businesses.
It is worth highlighting that volumes accelerated throughout the quarter, a trend that has continued into April.
Key customer wins include subway, CKE Restaurants A&W Foods and [Indecipherable].
It's also notable that several of these businesses that were most impacted by COVID-19 saw substantial sequential growth in revenue and bookings in the first quarter as our home market end of recovery.
For example, active in gaming achieved significant improvement as better macrotrend strong execution and solid bookings over the course of 2020 benefited performance in 2021.
In fact, we continue to see positive booking trends across our software portfolio as the ability to deliver a full value stock is increasingly becoming table stakes in the markets we serve.
We also made considerable progress on the partnership with Google that we announced in February.
We expect for Google as a merchant customer in select Asian markets in the third quarter with North America to follow shortly thereafter.
We have initiated our coastal programs and are beginning to see referrals from Google on a number of their enterprise class clients.
We anticipate launching our Wanting Grow [Phonetic] My Business product that integrates Google solutions with our innovative capabilities in our digital portal environment in the fourth quarter of this year and we have launched our co-innovation efforts to develop new commerce enablement tools for our merchant customers.
Second, our issuer business continues to benefit from strong relationships with market leaders and we are excited to announce today that we have entered into a multi-year renewal with Barclays Consumer Bank in the United States.
Barclays is one of our largest customers globally and we provide a range of processing and support technologies for both Barclays consumer and commercial credit card portfolios.
We look forward to working with Barclays to enable a best-in-class customer experience with unparalleled levels of security and resiliency for its newest partner, the gap and its portfolio of accounts, yet another competitive takeaway.
Partnering with issuers that are gaining share in the marketplace is a key element of our strategy.
We were also pleased to have signed agreements with Mission Lane and UMB Financial with the latter being a competitive takeaway in which with the prior processing relationship had spanned decades.
In collaboration with AWS, UMB will adopt our cloud-based data and analytics platform which we also successfully deployed during the quarter for a multi-country customer in Latin America.
We continue to capitalize on the broad and deep pipeline we have the good fortune to have in our issuer business.
Today, we have 12 letters of intent with financial institutions worldwide, six of which are competitive takeaways.
Turning to AWS, we expect to go live with our first joint takeaway with a multinational financial institution in Asia by the end of the year.
Our Cloud Prime Instant [Phonetic] is now up and running currently in that market in preparation for the launch.
We have another dozen active customers in our pipeline of AWS, up from four at the end of 2020.
Third, our business and consumer segment delivered record revenue growth.
I am very proud that Netspend once again facilitated the rapid distribution of stimulus funds to customers most in need.
Since late December 2020, we have processed more than 2 million deposits accounting for over $3.5 billion in stimulus payments disbursed by the IRS to American consumers, and this was done days in advance of many of our traditional financial institution and financial technology peers.
In combination with the 2020 stimulus payments, we have disbursed more than $5 billion in aid to customers through the first quarter of 2020.
The pandemic accelerated move toward cashless solutions is also benefiting Netspend.
For example, we are seeing rapid adoption of our tips solution and we've reached a new agreement with Flynn Restaurant Group for its Pizza Huts and Wendy's franchise locations, which will drive additional PayCard and potential tips opportunities across our combined footprint in more than 1000 restaurants.
We also launched our cashless stadium card linked to a digital wallet with the Phoenix Suns at the Phoenix Suns Arena.
These achievements serve as proof points of our differentiated strategy that includes product extensions into the P2P, B2B and B2C segments.
I cannot be more pleased with all that we accomplished across our businesses this quarter.
In March, we returned to year-over-year growth in each of our three segments and the underlying trajectories are tracking for the long-term goals just as we predicted it would, despite the impact of ongoing restrictions and lockdowns in some of our markets outside the United States.
We are pleased with our financial performance in the first quarter of 2021 which demonstrated meaningful sequential momentum and reflected our ongoing strong execution across the business.
Specifically, we delivered adjusted net revenue of $1.81 billion representing 5% growth compared to the prior year and marking an 800 basis point improvement relative to the performance we reported in the fourth quarter of 2020.
Adjusted operating margin for the first quarter was 40.6%, a 160 basis point improvement from the prior year that was achieved despite the return of certain cost we temporarily reduced at the onset of the pandemic.
On a comparable basis, underlying margin trends would have improved approximately 300 basis points.
Adjusted earnings per share were $1.82 for the quarter, an increase of 15% compared to the prior year period and was especially impressive in light of the difficult year-on-year comparison due to COVID-19.
The pandemic did not begin to impact our business meaningfully until the second half of March of last year and that as a reminder, we delivered 18% adjusted earnings-per-share growth in the first quarter of 2020.
Taking a closer look at our performance by segment, Merchant Solutions achieved adjusted net revenue of $1.15 billion for the first quarter and 4.4% improvement from the prior year which marked a nearly 900 basis point improvement from the fourth quarter.
We delivered an adjusted operating margin of 463% in this segment, an increase of 90 basis points from the same period in 2020 as we continue to benefit from our improving technology enabled business mix.
Global Payments Integrated produced a stellar quarter generating in excess of 20% adjusted net revenue improvement, which is ahead of the levels of growth this business was delivering pre-pandemic.
Additionally, our worldwide e-commerce and omni-channel businesses excluding T&E delivered roughly 20% growth as our value proposition that seamlessly spans both the physical and virtual worlds continues to resonate with customers.
As for our own software portfolio, we are encouraged to see that several of our businesses most impacted by the pandemic improved meaningfully sequentially as Jeff mentioned, and it is worth highlighting that our gaming business returned to growth this quarter and across our vertical markets portfolio bookings continue to prove resilient in the first quarter, providing us with a positive tailwind for the balance of 2021.
We are also pleased that our US relationship-led business generated high single-digit adjusted net revenue growth for the first quarter, which is consistent with our long-term targeted growth rate for this channel despite a difficult comparison to the first quarter of 2020 and notwithstanding a challenging environment in several of our international markets, our portfolio of businesses across Europe and Asia improved significantly and delivered adjusted net revenue that was essentially flat with last year for the quarter.
Importantly, because our international businesses are largely focused on the best spending in the markets in which we operate, we are seeing improvement in these businesses well in advance of cross-border commerce recovery.
Moving to Issuer Solutions, we delivered $439 million in adjusted net revenue for the first quarter, which was roughly flat versus the prior year period and exceeded our expectations given traditional fourth quarter to first quarter sequential trends.
Excluding the commercial card business, our Issuer segment grew in the low single digits for the quarter and in the month of March, Issuer delivered growth in aggregate despite continued commercial card headwinds as we benefited from the ongoing recovery in transaction volumes across many of our markets.
We also saw non-volume based revenue increased mid-single digit in the first quarter.
Notably, our Issuer business achieved record first quarter adjusted operating income and adjusted segment operating margin expanded 370 basis points from the prior year also reaching a new first quarter record of 43.2% as we continue to benefit from our efforts to drive efficiencies in the business.
Additionally, our Issuer team signed three long-term contract extensions and three new contracts since the start of the year and our strong pipeline bodes well for future performance consistent with our long-term expectations.
Finally, our Business and Consumer Solutions segment delivered record adjusted net revenue of $244 million, representing growth of nearly 20% from the prior year.
Gross dollar volume increased 26% or $2.5 billion as we benefited from the stimulus we disbursed to our customers.
Trends within our DDA products were also very strong helped by the stimulus and we realized an acceleration in active account growth of more than 45% compared to the prior year.
Excluding the impact of stimulus payments and tax, we believe that this business achieved underlying growth in the roughly mid-single digit range in line with our long-term targets.
Adjusted operating margin for this segment improved an impressive 750 basis points to a record 33.2% as the benefits of the stimulus and long-term cost initiatives post-merger took effect.
The solid performance we delivered across our segments highlights the resiliency of our technology enabled portfolio, consistency of our execution and the strong tailwinds in our business coming out of the pandemic.
We are also pleased that our integration continues to progress well and we remain on track to achieve our increased goals from the TSYS merger of annual run rate expense synergy of at least $400 million and annual run rate eevenue synergies of at least $150 million within three years.
From a cash flow standpoint, we generated adjusted first quarter free cash flow of roughly $583 million after reinvesting $86 million in capital expenditures.
We expect adjusted free cash flow of more than $2 billion and capital expenditures to be in the $500 million to $600 million range for the full year.
In mid-February, we successfully issued $1.1 billion in senior unsecured notes maturing in 2026 at an attractive interest rate of 1.2%.
The transaction was credit neutral with the proceeds used to redeem $750 million of notes outstanding with a rate of 3.8% due in April 2021.
The balance of the proceeds were used to reduce our outstanding revolver.
We have no significant maturities until 2023.
Our strong cash generation and healthy balance sheet have enabled us to create significant value through our capital allocation strategy to the benefit of our shareholders.
We are pleased to have repurchased roughly 4 million of our shares for approximately $783 million during the first quarter, which includes the execution of the $500 million accelerated share repurchase program we announced last quarter.
We ended the quarter with roughly $3 billion of liquidity and a leverage position of roughly 2.6 times on a net debt basis, and we are excited to announce that we have reached agreements to make additional investments in our technology enabled strategy and market expansion.
As Jeff highlighted, we executed a definitive agreement to acquire Zego and Worldline's PAYONE business in Austria for an aggregate of approximately $1 billion.
We expect to finance these transactions using cash on hand and our existing credit facility.
We are targeting closing the Zego transaction by the end of the second quarter and the Worldline acquisition in the second half of 2021 both subject to regulatory approvals.
Upon completion of both transactions, given our current cash balance and strong cash generation, we expect our leverage position will be relatively consistent with current levels leaving us with ample continuing firepower.
Based on our current expectations for continued recovery from the COVID-19 pandemic worldwide, we have increased our guidance for adjusted net revenue to now be in a range of $7.55 billion to $7.625 billion reflecting growth of 12% to 13% over 2020.
We expect adjusted operating margin expansion of up to 250 basis points compared to 2020 levels.
This outlook is consistent with an adjusted operating margin expansion of up to 450 basis points on a normalized basis given the operating leverage in our business and expense synergy actions related to the TSYS merger.
However, this is being partially offset by the reinstatement of certain expenses in 2021 that were temporarily reduced at the onset of COVID-19 for most of 2020.
At the segment level, we have increased our expectations for adjusted net revenue growth for our Merchant Solutions segment to be in the high teens, which assumes the current pace of recovery continues worldwide.
We expect underlying trends in our issuing business to be in the mid to high single-digit range and above our mid-single digit growth target.
It is worth noting that our Issuer business generated high single-digit growth on a normalized basis for the month of March as we begin to lap the pandemic impacts.
As we discussed last quarter, Issuer is being impacted by two distinct and relatively equal sized headwinds.
First, we are not anticipating a recovery in our commercial card business as we expect corporate travel to remain depressed throughout 2021.
Second, we are absorbing a portfolio sale by one of our customers, which will impact us for the remainder of the year.
Taking these two items into account, we forecast our Issuer business to deliver adjusted net revenue growth in the low single-digit range for the year.
Lastly, incorporating the benefits of the incremental stimulus, we are now forecasting adjusted net revenue growth for our business and consumer segment to be in the mid to high-single digits for the full year consistent with our long-term expectations for this business.
This guidance takes into account lapping the benefits of the 2020 CARES Act, which will provide for a more difficult comparison in the second quarter of 2021.
Regarding segment margins, we expect the up to 250 basis points of adjusted operating margin improvement for the total company to be driven largely by Merchant Solutions while we expect Issuer and Business and Consumer to deliver normalized margin expansion consistent with the underlying profiles of these businesses.
This follows the 500 and 400 basis points of adjusted operating margin expansion delivered by Issuer and Business and Consumer respectively in 2020.
From a quarterly phasing perspective, having now lapped muted growth characteristics in the first quarter given the start of the pandemic in mid-March 2020, we will experience the opposite effect in the second quarter before returning to more normalized rates of growth in the back half of the year, a highlight that while we expect to achieve our strongest adjusted revenue growth, adjusted margin expansion and adjusted earnings-per-share growth for the total company in the second quarter, our business and consumer segment will be lapping the impact of the CARES Act stimulus last year.
While we anticipate Netspend to deliver modest adjusted net revenue growth for the second quarter, we expect adjusted operating margins to decline for that segment year-on-year as a result.
On an absolute basis, we would expect business and consumer adjusted operating margins for the second quarter to be consistent with the levels achieved in the fourth quarter of 2020 period that also saw more limited benefits from stimulus.
Moving to non-operating items, we continue to expect net interest expense to be slightly lower in 2021 relative to 2020 while we anticipate our adjusted tax rate will be relatively consistent with last year.
Putting it all together, we now have increased our expected adjusted earnings per share for the full year to a range of $7.87 to $8.07 reflecting growth of 23% to 26% over 2020.
Our raised outlook presumed we remain on a path toward recovery worldwide over the balance of the year and it does not include any impact from the Zego and Worldline Austrian business acquisitions we announced today.
We will further update our guidance when these transactions close, but it is worth noting now that we do not expect these transactions to have a discernible impact on adjusted earnings per share for 2021.
Our business is one rating at accelerated levels.
The trends of digitization, commerce enablement, software differentiation and omni-channel prevalence driving our performance will serve to catalyze future growth.
We said over the course of the last year that we would not stand still or wait for a better day to continue to deepen our competitive mode despite one of the most challenging periods any of us have seen.
As a result of our team members terrific efforts, 20 bookings have begun to translate into 2021 outside revenue gains.
The announcement today of our return to strategic investments will provide further avenues for future growth.
And all that is playing out against the backdrop of recovery, further differentiation from technology enablement, deeper penetration into attractive markets, sustained share gains and substantial and efficient returns of capital.
We now look forward to continuing progress for the remainder of 2021, 2022 and beyond.
Before we begin our question-and-answer session, I'd like to ask everyone to limit their questions to one with one follow-up to accommodate everyone in the queue.
Operator, we will now go to questions.
| raises fy adjusted earnings per share view to $7.87 to $8.07.
q1 adjusted earnings per share $1.82.
compname says raising expectations for full year 2021 adjusted net revenue to be in range of $7.55 billion to $7.625 billion.
|
These statements are based upon information that represents the Company's current expectations or beliefs.
The results actually realized may differ materially based on risk factors included in our SEC filings.
As a note, due to the significant impact COVID-19 had on fiscal 2020 financial results, our first quarter fiscal 2021 results are compared to the first quarter of fiscal 2019, which we believe is a more meaningful comparison.
I am extremely pleased with the pace of our business and the outstanding financial performance in the first quarter.
Even as we compare to the pre-pandemic 2019, our results were truly remarkable and validate the strength of our value creation plan.
We exceeded expectations in essentially all areas of the business, giving us a strong start to the year.
We had record first quarter revenue of over $1 billion and the highest first quarter operating income in our history of $133 million, which was up 170% from 2019.
Importantly, we saw strength across both the American Eagle and Aerie brands.
We ran an extremely healthy business as margins hitting the highest levels in many years.
The actions we took in 2020, including our strategic growth pillars, combined with the favorable external environment, are having a very meaningful impact on our business.
Starting with our first pillar, accelerating Aerie to $2 billion, this quarter provided even more evidence that Aerie is the most exciting brand in retail today.
On nearly 90% revenue growth, operating earnings rose well over 700%.
Aerie is truly hitting its stride.
We have increased digital penetration, expanded geographically and pushed new and explosive categories like OFFLINE, leggings and additional apparel items.
As Jen will review, we continued to gain new customers at a fast clip.
We're spending more on our brand.
At this pace, we expect to hit our $2 billion target faster than expected, fueling significant earnings growth.
As I said back in January, American Eagle is a strong and highly profitable brand with significant opportunity for both growth and profit improvements.
The first quarter demonstrated that potential.
We are seeing a favorable response to our product and new marketing.
While the jeans category continues to dominate, across the brand, we hit high margin rates with promotional [Indecipherable].
I'm very proud of the great progress under Jen's leadership.
I know we are only at the beginning of realizing American Eagle store potential.
Next, customer-facing priorities delivered in the first quarter, fueled by our leading omni capabilities.
Digital growth was terrific as momentum continued.
We also saw an improvement in our store business as consumers are starting to get out more.
Our loyalty relaunch was a homerun and producing a stronger customer experience, positive margin contribution and higher ROI.
The supply chain delivered great results, even in the face of logistic headwinds.
Deliveries were on time and we were able to successfully chase into top-performing items.
The multi-year investment we made in these areas continue to pay off.
Our fifth pillar, to strengthen ROI discipline, is clearly evident in our results.
First quarter growth in our profitability is a testament to the incredible collaboration across teams.
We have not taken our eye off the ball and remain focus on ensuring strong financial management as a top priority.
And lastly, ESG initiatives.
I'll highlight our environmental goals, where we continue to make great progress.
We are reducing water, utilizing more sustainable raw materials and reducing energy to ultimately achieve carbon neutrality in our own facilities by 2030.
We know sustainability is important to our customers and [Indecipherable] on our commitment to social responsibility and I&D, this month we awarded our first 15 Real Change scholarships for Social Justice.
We are excited to support educational pursuits of our amazing associates who are actively driving anti-racism, equality and social.
Before I turn to it Jen, clearly 2021 is off to a great start.
I am so proud of the excellent execution across all areas of the Company.
The past several months truly validates my belief that we have more opportunity than at any time in the past.
We have two of the best brands in the industry with significant momentum, and we have the right teams and leadership in place to achieve our goals.
The macro environment is favorable with pent-up demand and new trends that play to our strength.
At this pace, we expect to achieve our 2023 goal of $550 million of operating income way ahead of schedule.
I hope everyone is doing well.
To say the least, we've had an incredible start to the year across both Aerie and American Eagle.
There is clearly strong demand and momentum for our brands.
Our strategies to expand into new categories, strength in product and marketing and fuel our brand platform are having a meaningful impact in our business.
It's truly gratifying to see strong sales and customer growth, and a very high level of profit flow-through.
Let me begin with Aerie.
I am thrilled by the incredible excitement and energy for Aerie and our merchandise collection.
We continue to set records across the brand.
Building on the momentum throughout last year, the first quarter accelerated.
Sales rose an incredible 89% from 2019.
The consistency we are experiencing is truly amazing.
This was the 26th consecutive quarter of double-digit growth.
As aerie.com becomes a go-to destination for our customers, the online business more than doubled, posting a growth of 158%.
Store revenue increased 36% with about one-third from new store opening.
Aerie's active customer file expanded approximately 40% as we entered new markets, and we increased engagement on social channels, including TikTok where we saw tremendous response.
With new customers attracted to our brand and demand for our merchandise accelerating, brand equity scores show growing awareness.
Sales metrics were strong across the board, and notably our AURs were up 50%.
High demand is driving greater pricing power.
A significant reduction in promotions contributed to an over 700% increase in operating profit and a 23.5% operating margin.
Across categories, we saw broad-based strength with all areas rising in the double-digit.
Intimates was terrific as was swimwear, where product innovation and newness are fueling demand.
Aerie signature legging business is exceptional and continues to expand with the success of our new OFFLINE by Aerie activewear brand.
Related categories such as fleece, tanks and sports bras are also tracking very well.
Geographic expansion is a major priority and opportunity for Aerie.
We opened six new stores in the quarter, including a new OFFLINE by Aerie store, bringing our running total of OFFLINE openings to five stores.
We are very pleased with the early results.
As Mike will review, we plan to continue our market expansion strategy.
Shifting gears now to American Eagle.
As I said at our Investor Day in January, AE has a wonderful heritage defined by individuality, purpose and heart.
My goal has been to harness AE's iconic image and update it for today's youth.
Harmonizing the old with the new, we want to leverage our dominance in jeans and focus on more outfitting.
We are also optimizing our inventory for better margin.
I'm so excited with the progress we've made in such a short period of time.
We've achieved the best margins in many years, and customer demand is strengthening across all categories.
This quarter, we saw a 39% increase in operating profit, with operating margins rising 20.8%.
Our focus on inventory optimization and profit improvement drove merchandise margin expansion.
We made better decisions around promotional activity and drove greater full-price selling.
We are also pleased with the improvement in sales, led by a 20% increase in the digital business.
Customer engagement was up 2% with new digital acquisitions up 17%.
Demand across our jeans and bottoms business remains very strong.
We continue to solidify our position as the number one brand within our demo and the number one women's brand across all ages.
With the new denim cycle under way, we are innovating and investing to maintain our leadership position and to offer the absolute best to our customers.
As silhouettes transition, I'm excited for what's in the pipeline.
In the first quarter, I'm pleased to report that we had our best quarter ever in fleece and graphic.
We plan to lean into this momentum in the back half of the year.
As bottoms evolve, we have the opportunity to delight our customers with new styles across tops and greater outfitting.
Just six months into rewriting our strategy, the success we've seen reinforces my excitement for our longer-term opportunity.
The team is energized and I can't wait to share what's in-store for AE in the coming quarters.
Lastly, I can't say enough about the great work our teams continue to deliver.
The dedication and drive of the Aerie team is simply amazing.
They strive for greatness quarter-after-quarter.
It's been terrific to work with the AE as well over the past several months.
We have extraordinary talent, and I look forward to driving our vision together.
I'm really proud of how quickly and enthusiastically our teams embraced our Real Power.
The results out of the gate in 2021 are tremendous, and they affirm that we are positioning our operations in the right way to fuel our next chapter of growth.
At the heart of our operating strategy is a truly customer-centric focus.
The investments we've made in our systems, our data analytics, omni-channel and supply chain are yielding results.
I firmly believe that the strength of these capabilities and our ongoing investments are a unique competitive advantage.
Today, I'm going to talk about three important areas of our business; our selling channels, our customer focus, and our supply chain transformation.
Let me start with digital, which continues to post remarkable result.
Our revenue rose 57% from 2019, producing incremental revenue of $150 million in the first quarter.
Online traffic and transaction -- transactions increased well into the double digit.
We achieved strong AURs and significantly higher margin.
Further fueling an already highly profitable channel, digital penetration increased to 40% of total revenue, up from 30% in 2019.
As customers continue to embrace online shopping, we are delivering an ever-improving experience.
For example, we recently introduced a new tab structure to provide greater ease of shopping across brands while enabling more immersive brand experiences.
We also introduced more personalization and enhanced curbside and in-store pickup features, which yielded great results.
We improved our mobile experience and redesigned our app, resulting in 70% increase in revenue from total mobile.
Stores improved in the first quarter, despite continued COVID-related traffic pressure.
Fleet optimization work is under way and we are pleased with the initial transfer rates from recent store closures, which are running well ahead of our 40% goal.
Proactive customer engagement has been a driving factor in retaining customers, transitioning them to nearby stores or online.
Our customer base is extremely healthy and growing.
Nearly 1 million new customers have been added since 2019.
The average spend per customer is up in the double digits, with a greater number of customers shopping across both brands.
This speaks to the quality of our engagement, our product, our marketing and technology enhancements.
The relaunch of our loyalty program last summer has been highly successful, not only in attracting new customers but fueling more frequent engagement, more purchases and an improvement to margin.
Across the board, our operational teams delivered exceptional results this quarter.
As I've discussed before, we are highly focused on supply chain transformation aimed at improving inventory productivity, delivering efficiency and better and faster customer experience.
This work is yielding result.
For example, we reduced SKU counts across assortments to focus on the most productive styles, which resulted in faster turns and a meaningful increase in product margins in the first quarter.
Our regional fulfillment nodes are resulting in better placed inventory, creating efficiencies and enabling faster service to both stores and to customers.
In the first quarter, we leveraged e-commerce delivery expense, had fewer shipments per order and delivered to customers 1.5 days faster than in the first quarter of 2019.
Our supply chain team anticipated and successfully managed through shipping delays, with very minimal disruption to our business.
We also successfully executed chase strategies to replenish high demand items and supported outperformance of Aerie, OFFLINE, swimwear and a variety of fashion choices.
This really speaks to the strength of our team, our capabilities and our vendor partnerships.
Now, as I look ahead, we are staying in front of ongoing supply chain challenges and we have continued to see favorability in our product cost for the remainder of the year.
In light of our strengthened operations, focus on driving higher margins, inventory optimization, as well as our well-positioned and growing brands, I'm very confident that we're positioning AEO for continued success.
And with that, I'm going to pass the call over to Mike.
I'll start by saying we are obviously extremely pleased with the first quarter during which we had a number of all-time highs and milestone.
Results were well ahead of our expectations across the board.
Our strategies are clearly working and we're making great progress on our Real Power.
This performance reflects a few major factors.
Our brand is strong and our merchandise is in demand, fueling very healthy sales and KPIs.
Our inventory optimization initiatives are working, resulting in lower promotions and significant growth in our merchandise margin.
Both of our selling channels are delivering positive results and our investments in our supply chain capabilities are effectively supporting our growth.
These factors, plus a favorable environment, led to record first quarter performance.
Revenue of over $1 billion and operating income of $133 million marked all-time highs for the Company.
Demand for Aerie continues at a rapid pace, driving significantly higher sales, margins and profitability.
American Eagle saw a slight topline growth and experienced one of the brand's highest merchandise margin rates on record with more runway ahead.
As Judy mentioned, I will review first quarter 2021 against the same period in 2019.
Consolidated first quarter net revenue increased 17%.
Across brands and channels, sales metrics were exceptionally strong with our average unit retail up over 20% fueling a healthy transaction value.
Conversion rates across channels were also favorable.
Digital revenue rose 57%, with Aerie up 158% and AE up 20%.
This strong growth reflects the benefits of our multi-year investments to capitalize on the customer migration to digital and omni-channel e-commerce.
Online sales for the quarter represented approximately 40% of our total mix, increasing significantly from 30% in the first quarter of 2019.
Store revenue was flat, a nice improvement from the fourth quarter.
Additionally, U.S. stores posted positive revenue in the quarter with our stores in Canada affected more by lower traffic and store closures related to COVID-19.
At a brand level, AE revenue increased slightly to $728 million.
Strong demand, lower promotions, along with inventory optimization initiatives, led to a record merchandise margin.
AE's operating profit jumped 39% to $151 million and the operating margin expanded 570 basis points to 20.8%.
These results are a clear proof point of the margin opportunity for AE which we reviewed back in January.
While the quarter showed great progress, the work continues.
Jen reviewed the progress in the product side, and we still have opportunities to maximize inventory productivity.
Aerie had another standout quarter with growth accelerating.
Revenue increased 89% to $297 million.
Operating income hit $70 million, rising over 700%.
The operating margin expanded to 23.5% from 5.3% in 2019.
As I've highlighted quite a few times now, Aerie is at an inflection point in its growth trajectory.
We'll continue to realize significant flow-through of incremental sales to the bottom line.
Total consolidated AEO gross profit dollars were up $111 million or 34% compared to the first quarter of 2019 and gross margin expanded 550 basis points to 42.2%.
Merchandise margin expanded significantly, reflecting continued promotional discipline and benefits from our inventory optimization initiatives.
Our product assortments were well received, which enabled higher full-priced selling.
Rent dollars were lower and leveraged significantly as a result of negotiated savings, store closures and benefits from impairments.
Offsetting this, we saw higher delivery, distribution and warehousing costs, as well as higher incentive compensation.
SG&A leveraged 40 basis points as a rate to sales.
The dollar increase of $34 million from the first quarter 2019 was due to compensation in line with our performance-based incentive program, an increase in corporate salaries and higher variable selling expenses, partly offset by lower travel expense.
Operating income of $133 million increased 170% compared to $49 million in adjusted operating income in the first quarter 2019.
The operating margin of 12.9% expanded 730 basis points, marking a 14-year high for the Company.
Corporate unallocated expense increased 29% to $88 million, primarily due to incentive compensation.
As a result of historically high profit delivered this quarter, incentive accruals are higher than normal and up against the minimal accrual in 2019.
Adjusted earnings per share was $0.48 per share in the quarter, marking a record first quarter outcome for us.
Our diluted share count was 207 million and included 34 million shares of unrealized dilution associated with our convertible notes.
Ending inventory was up 2% compared to the end of the first quarter of fiscal 2019.
American Eagle inventory was down 15% due to continued inventory optimization initiatives and significantly reduced clearance levels.
Aerie's inventory increased approximately 50% versus 2019, supporting the strong sales growth, new stores and product expansion, including OFFLINE by Aerie.
Across brands, inventory is well positioned and below current demand levels.
As Michael said, we're comfortable with our ability to receive goods through our supply chain and have successfully chased into strong items.
I'm very pleased with our liquidity and the health of our balance sheet.
We ended the quarter with $792 million in cash and short-term investments.
Even excluding proceeds from the convertible bond issuance, our liquid, cash balance is up $36 million versus 2019.
Capital expenditures totaled $37 million in the quarter.
For 2021, we continue to expect capital expenditures of $250 million to $275 million, in line with the average annual target we shared at our investor meeting.
We expect this to be back half loaded, given the timing of Aerie and OFFLINE new store openings.
Regarding our store fleet, we are pleased with the transfer rates of recently closed locations and continue to expect incremental closures this year.
We've had productive negotiations with landlords and have continued to secure lower rents and build flexibility into the portfolio.
The vast majority of our 2020 renewals were short term, resulting in almost 450 leases coming to term in 2021.
This year, we plan to open approximately 60 Aerie stores and over 30 OFFLINE by Aerie stores, which will be a mix of stand-alones and Aerie side-by-side locations.
Now as we look ahead, we are encouraged by our continued trend early in the second quarter.
Both brands continue on a healthy pace.
There is still uncertainty ahead, but as we reflect on our 2023 targets provided back in January of $5.5 billion in revenue and $550 million in operating profit, we believe we are on pace to achieve the profit goal this year, obviously well ahead of expectations.
We're excited about this prospect and what it could imply for our future profitability as we continued to implement and execute on our long-term growth strategies.
As a reminder, our reported second quarter 2019 results included a $40 million benefit to revenue and $38 million benefit to operating profit from the termination of our licensing partnership with a third party operator in Japan.
We are extremely pleased with the speed and success with which we are putting our Real Power.
As I said back in January, I believe we're heading into the most exciting period in our history.
Our brand is stronger than ever, our business model is sound and our first quarter results bear testament to the quality of our strategies and strength of our execution.
| digital momentum continued with revenue up 57% including aerie up 158% and ae up 20% in quarter.
for fiscal 2021, company expects capital expenditures to be in range of $250 to $275 million.
due to impact covid-19 had on fiscal 2020 financial results, q1 fiscal 2021 results are compared to q1 of fiscal 2019.
q1 adjusted earnings per share $0.48.
|
This is Mike Yates, vice president and chief accounting officer for IDEX Corporation.
The format for our call today is as follows: we will begin with Eric providing an overview of the state of our business, an update on our M&A activity and an overview of our order performance and outlook for our end markets.
Bill will then discuss our first-quarter 2021 financial results and provide an update on our outlook for the second and -- quarter and full-year 2021.
Finally, Eric will conclude with an update on our sustainability, diversity, equity and inclusion programs.
Before we begin, a brief reminder.
With that, I'll now the call over to our CEO, Eric Ashleman.
Once again, our teams across IDEX should be extremely proud of the results we've achieved together.
I don't think any of us would have imagined being at this point when viewing the state of the world a year ago.
Our diverse array of high-performing businesses continues to serve us well.
We're seeing most of our end markets either largely recovered or steadily improving at this point.
We continue to build on the momentum we experienced in the fourth quarter and expect 2021 to be stronger than our expectations 90 days ago.
Although tremendous progress has been made in our recovery, there are still some areas we're keeping a close eye on.
Our day rates have accelerated, but we have yet to see larger projects in our industrial sector moving forward.
Customers are more confident in their outlook but are now trying to balance the surge in demand with capacity to make larger investments.
As for COVID, the conditions vary widely around the world.
In the U.K. and the United States, the vaccination rate has been remarkable of late.
In China, much of life has been continuing as normal for many months now.
The situation in Europe and India, where lockdowns and virus variants are still a serious issue, reminds us that we are not fully past the societal and economic impact that the pandemic has had in our businesses.
The quarter was not without challenges from safety protocols and lockdowns to sporadic shortages of parts and materials to rapidly changing logistics hurdles in a variety of staffing challenges, this was far from smooth sailing.
I'm proud that our team successfully navigated many tough hurdles to achieve these results.
The operational excellence of our teams continues to pay off.
Pivoting a moment to capital deployment.
With the closure of the ABEL Pumps transaction this quarter and the announcement of the Airtech acquisition last night, covered in more detail in a moment, we have started off 2021 on a strong note.
And we'll build on this momentum as we further invest in M&A capabilities.
We recently allocated some of our most talented resources toward focused strategy and business development roles, and we engaged external expertise to expand our ability to identify, assess, win and successfully integrate new companies into IDEX.
Our deal funnel is expanding as we look for more opportunities to acquire organizations that fit the IDEX style of competition.
We seek to both widen and deepen the moats around our best businesses as well as established positions within new market niches where the capabilities of our teams will drive the most value for customers and shareholders.
We are fortunate to have significant financial resources to deploy toward these efforts.
Moving on to Slide 7.
Yesterday, we announced our intent to acquire Airtech Vacuum Group from EagleTree Capital for $470 million.
Airtech engineers and manufactures high-performance regenerative blowers, pneumatic valves, air compressors and vacuum pumps.
Airtech had revenue of $85 million with EBITDA margin in the mid-30s range in 2020.
It is a 16x trailing deal and a 15x deal including acquired tax benefits.
Within the IDEX family of businesses, they complement and expand upon the solutions provided by Gast Manufacturing, which produces fractional horsepower, air moving products and systems that include air compressors, vacuum pumps, air motors and tank systems.
While there are some overlaps in the solutions they provide, much of Airtech's product lines will be complementary.
They will remain separate businesses within IDEX, but we anticipate collaboration and synergies from each company with shared expertise leading to further innovation.
This deal, which we expect to close in the second quarter, will then create a $200 million pneumatics platform within our Health & Science Technology segment.
Turning to our commercial results on Slide 8.
The positive momentum in order trends continued in the first quarter, both compared to prior year and sequentially, allowing us to build $59 million of backlog in the quarter.
Most of our business units are at or approaching pre-pandemic levels.
I'll go into more details in a minute.
Organic orders in the quarter exceeded the first quarter of 2020 and were an all-time high for us.
Q1 orders were also up 4% organically versus Q1 of 2019.
As we look across our segments, health and science technologies and fire and safety/diversified products delivered strong organic order growth, with fluid and metering technology slightly lagging.
As growth rates in HST and FSDP begin to naturally level off, we expect FMT will drive additional growth due to the return of project-based businesses in the energy and industrial markets in the second half of the year.
These commercial results and the strength of our rebound highlight the resilience of our businesses and the critical importance of the solutions we provide to our customers.
On Slide 9, we provide a deeper outlook for our primary end markets.
To level set, we entered the year cautiously bullish about the state of our underlying markets and the velocity of the pandemic recovery.
Our day rate businesses began to accelerate coming into the year, and we continue to leverage our diversified portfolio to aggressively pursue opportunities to drive organic growth coming out of the pandemic.
We are now measuring our markets against their pre-pandemic levels.
Many of our markets have fully recovered, and the majority of our markets are on track to have fully recovered by the end of the year.
As I mentioned earlier, we're not out of the woods yet, but even with pockets of concern around supply chain disruptions and COVID in certain geographies, we are optimistic about the outlook of our end markets.
In our fluid and metering technologies segment, industrial day rates continued to increase throughout the quarter.
As I've mentioned, we will not be at full recovery until we see large capex projects resume, but the underlying industrial markets are in a state of recovery trending back toward 2019 levels.
Agriculture continues to drive outsized growth as crop prices and customer sentiment remains strong.
Our water business is stable.
We continue to assess any subsequent impact from the pandemic on municipal funding as well as tailwinds that might come out of an infrastructure bill.
Energy markets continue to lag 2019 levels, primarily due to limited capital investment in this sector.
Moving to the health and science technologies segment.
We experienced solid growth across almost all of our markets, semicon and food and pharma continued to outperform, driven by a strong market and winning share with our differentiated technology offerings.
The overall automotive market faces many challenges, but we have won several new platforms driving our performance.
Our AI and life science markets are on the rebound as the impact of the pandemic in the United States has improved.
Day rates are improving, but projects are lacking.
One last item for HST. We do see risk with the COVID opportunities we have been taking -- talking about in this segment, specifically around testing.
The end product application is yet to receive FDA approval which will impact volumes for this year.
We do believe that the strength in the rest of the segment will be able to offset most of that risk.
Finally, in our fire and safety/diversified products segment, dispensing continues its rebound as large retailers free up capital and work through pent-up demand for equipment.
Much like our automotive exposures in HST, the auto recovery in FSD at BAND-IT is driven by new platform wins, coupled with an improved market.
In fire and rescue, we continue to assess municipal budget headwinds, especially in Europe and India as budgets have not been released, delaying tenders.
The U.S. market has been better, and we are optimistic about the impact of our businesses from increased infrastructure spending.
The other ligand category in FSD is primarily BAND-IT's energy and aerospace exposure along with some industrial applications in fire and rescue.
We continue to closely monitor market conditions and are focused on ensuring the stability of our supply chain.
This persistence in global supply chain issues threatened to create choppiness in the back half of the year.
Despite these factors, we are confident enough in our outlook to raise our organic growth expectations for the year.
I'll start with our consolidated financial results on Slide 11.
Q1 orders of $711 million were up 10% overall and up 6% organically as we built $59 million of backlog in the quarter.
Organic orders grew sequentially and year over year in each of our segments, as highlighted by Eric on the prior slide.
First-quarter sales of $652 million were up 10% overall and 6% organically.
We experienced growth across all our segments, with over 75% of our business units increasing year over year.
Strength in semicon, food and pharma and dispensing were the notable highlights in the quarter.
Q1 gross margin contracted 80 basis points to 44.9% but was up 110 basis points sequentially.
The year-over-year decrease was primarily driven by the dilutive impact of acquisitions, inventory step-up associated with ABEL, mix and onetime inventory reserves.
The inventory reserves were associated with our pandemic-related electrostatic sprayer businesses not materializing at the rate we expected.
Excluding acquisitions and the inventory reserves, gross margin would have been flat to prior year.
First-quarter operating margin was 23.9%, up 40 basis points compared to prior year.
Adjusted operating margin was 24.3%, up 80 basis points compared to last year, driven by the increased volume and the impact of cost actions taken last year, offset by the gross margin pressure I just mentioned.
I will discuss the drivers of operating income in more detail on the following slide.
Our Q1 effective tax rate was 22.6%, which was higher than the prior-year ETR of 20% due to a decrease in the excess tax benefits from share-based compensation.
This drove a $0.05 headwind on earnings per share for the quarter.
First-quarter adjusted net income was $115 million, resulting in adjusted earnings per share of $1.51, up $0.18 or 14% over prior year.
Excluding the $0.05 tax headwind, adjusted earnings per share would have been up $0.23 or 17%.
Finally, free cash flow for the quarter was $95 million, up 32% compared to prior year and was 82% of adjusted net income.
The strong performance was driven by higher earnings and the continued impact of our working capital initiatives.
Moving on to Slide 12.
As Eric mentioned, we entered the quarter cautiously optimistic about the pace of growth coming into 2021.
We knew that we were structurally well positioned to take advantage of improving market conditions from the cost actions and discretionary controls we put in place last year.
Adjusted operating income increased $18 million for the quarter compared to prior year.
Our 6% organic growth contributed approximately $13 million flowing through at our prior-year gross margin rate.
The impact of previous discretionary cost controls contributed $5 million, and we were able to net $4 million from price productivity, partially offset by inflation.
After accounting for $2 million of negative mix, our organic flow-through was extremely strong at 58%.
Flow-through was then negatively impacted by the $3 million charge related to the inventory reserve I discussed on the last slide and the dilutive impact of acquisitions and FX, getting to a reported flow-through of 32%.
As we highlighted in prior calls, we expect to reinvest aggressively in the business to drive both organic and inorganic opportunities.
We have already started those investments and expect the associated costs from these initiatives will reduce our organic flow-through in subsequent quarters.
With that, I would like to provide an update on our outlook for the second quarter and full-year 2021.
I'm on Slide 13.
For the second quarter, we are projecting earnings per share to range from $1.60 to $1.63, with organic revenue growth of 18% to 20%, and operating margins of approximately 24.5%.
The second quarter effective tax rate is expected to be about 23%, and we expect a 2% top-line benefit from the impact of FX.
Corporate costs in the second quarter are expected to be around $21 million, with the increase primarily driven by the M&A investments we discussed earlier.
Turning to the full-year outlook.
We are increasing our full-year earnings per share guidance from $5.65 to $5.95, up to $6.05 to $6.20.
We are also increasing our full-year organic revenue growth from 6% to 8%, up to 9% to 10%.
We expect operating margins of approximately 24 and a half percent.
We expect FX to provide a 1% benefit to top-line results.
Our full-year effective tax rate is expected to be around 23%.
Capital expenditures are anticipated to be around $55 million.
Free cash flow is now expected to be 115% to 120% of net income.
And corporate costs are expected to be approximately $74 million for the full year.
Finally, our earnings guidance excludes any costs or earnings associated with future acquisitions or restructuring charges.
ABEL Pump is now included in these estimates, with the deal closed in the first quarter.
Airtech is not included in these estimates.
We will update our guidance accordingly once the deal closes.
With that, I'll throw it back to Eric for some final thoughts.
I'm on the final slide, Slide 14.
We recently published our second corporate social responsibility report.
This report is our first to adopt the sustainable Accounting Standards board's sector standards, also known as SASB.
We have increased our disclosures in key areas, including health and safety, diversity and environmental impact.
Diversity, equity and inclusion continues to be a point of emphasis in our evolving company culture.
Since we last met, an outside facilitator conducted anonymous focus groups with employees from around the world, from which we learned and were able to begin developing more targeted goals for the company.
We are currently planning training sessions for all leaders to help them understand and become comfortable fostering dialogue on these important issues.
We are addressing our talent management processes, including our assessment of existing talent and our consideration of new talent through recruiting to help ensure our processes are free from unconscious bias, and we are assessing our purchasing practice to expand our use of diverse suppliers.
IDEX is a decentralized company with a diverse collection of businesses.
Our superior economic model depends upon problem-solving and decision-making at the point of impact, closest to our customers.
Our collective work within this important area, as outlined in this report, is an essential component of our next phase of business growth.
| compname reports first quarter results; raises full year guidance; q1 orders and sales up 10 percent overall and 6 percent organically; q1 reported earnings per share was $1.48 with adjusted earnings per share of $1.51.
q1 adjusted earnings per share $1.51.
raises q2 adjusted earnings per share view to $1.60 to $1.63.
sees fy adjusted earnings per share $6.05 to $6.20.
qtrly sales of $652.0 million were up 10 percent compared with prior year period.
qtrly orders of $710.7 million were up 10 percent compared with prior year period.
increasing full year organic revenue growth expectations to 9 to 10 percent with 18 to 20 percent growth in q2.
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We're really pleased to have you join us.
Then we'll be happy to take questions.
Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are here also to provide color.
We also use non-GAAP financial measures, so it's important to review our GAAP results on page 3 and use the information about these measures and their reconciliation to GAAP in the appendix.
And with that, I'll hand it over to Bruce.
The second quarter post unprecedented challenges given the impacts from the coronavirus and widespread disruption to people's lives and the economy.
Once again, I am pleased that Citizens is rising to the occasion and delivering well for all stakeholders.
We are taking great care of customers and colleagues while posting strong results that demonstrate the diversification and resilience of our business model.
We also announced further commitments to diversity and inclusion along with initiatives to promote racial equity and social justice.
Our financial performance in the second quarter featured tremendous revenue generation and strong profitability in our Mortgage business.
We made an important investment in acquiring Franklin American Mortgage Company in May 2018 in order to gain scale and diversify origination channels in the business.
In addition, we've made investments in talent, customer experience and in digitizing and streamlining the business, which has positioned us well to capture the market opportunities we've seen since the middle of last year.
These strong results have been a ballast to windward during the low rate environment and disruptions arising from the pandemic.
Overall, our fees were up 28% year-on-year and 19% sequential quarter.
With stable net interest income, total revenue was up 7% year-on-year and 6% sequential quarter.
We did a good job on expenses, which resulted in 5.9% positive operating leverage year-on-year, up 54.9% underlying efficiency ratio and PPNR growth of 15% year-on-year.
[Indecipherable] charge-offs as our credit cost in Q2 we had a record quarterly earnings of $1.14.
As expected, however we again built our credit reserves under CECL given the deterioration in the macroeconomic conditions since the close of the first quarter.
Our ACL to loans ratio is now 2.01% and that's 2.09% excluding PPP loans.
In addition, we are selling a long-duration student loan portfolio, which freed up additional reserves for reallocation.
We feel we had good coverage now with the credit risk in both the Consumer and Commercial portfolios, though uncertainty on the path of economic recovery remains.
The strong PPNR generation and reduction in commercial line draws during the quarter helped improve our CET1 ratio to 9.6%, which is up from 9.4% in the first quarter.
We had a very liquid balance sheet during the quarter with average deposit growth of 12% sequential quarter, 8% spot.
Our spot LDR at quarter-end was 87.5% or 84.5% excluding PPP loans.
So overall, we have a very strong capital, liquidity and funding position that allows us to use our balance sheet in support of our customers.
We continue to track low on all of our key strategic initiatives for 2020 and we've been working on refreshing our strategy to incorporate key trends and learnings from the crisis.
We aim to take advantage of some of the opportunities we see to come out of the crisis well-positioned for future growth.
Now, I hope you and your families are coping with the current challenges and remain healthy and safe.
Let's start with a brief overview of our headlines for the quarter.
As Bruce said, this is an outstanding quarter for Citizens against a difficult operating backdrop.
This allows us to head into the second half of the year with good momentum and excellent balance sheet strength.
The resilience of the franchises is on display as we generated $0.55 of earnings per share on an underlying basis.
This was driven by record revenues in fee income given record mortgage fees, which offset headwinds in several other fee categories.
Net interest income was stable linked quarter given strong loan growth which offset a 22 basis point decline in margin.
This was driven by lower rates and higher cash balances that we did well in cutting deposit costs in half.
We increased our allowance for credit losses to $2.5 billion, which translates to an ACL coverage ratio of 2.09% ex PPP, up from 1.73% last quarter.
We showed excellent balance sheet strength and in the quarter with a stronger CET1 ratio of 9.6%, up 20 basis points linked quarter.
Our liquidity ratio has also improved as we ended the quarter with an LDR of 84% excluding PPP loans and we remain in compliance with the LCR.
Also, our tangible book value per share is over $32 at quarter end, up 4% compared with a year ago.
Now, let me move to the highlights of our underlying results covered on pages 4 and 5.
Even in the midst of THE COVID-19 pandemic and another strong reserve build, our results highlight the resilience of our diversified business model.
Our earnings per share of $0.55 was down $0.41 year-over-year but up $0.46 linked quarter.
PPNR of $790 million was a record, up 15% year-over-year and 17% linked quarter.
And in addition to another exceptional performance in mortgage banking, we also saw strong underlying performance and IRP and improvement in capital markets results.
Average loan growth was 6% in the quarter, reflecting PPP lending and the impact of the commercial line draws we saw last quarter, which benefited NII and helped offset the impact of the more challenging rate environment.
If we adjust for the sales, PPP and line draws, average loans were up 1% linked quarter.
Moving to page 6, I'll cover net interest income, which are quite well despite a lower margin.
Net interest income was stable linked quarter as the benefit of 8% interest earning asset growth and improved funding costs was offset by the impact of lower rates.
Net interest margin decreased 22 basis points linked quarter as the impact of lower rates and higher cash balances was partially offset by lower deposit costs and outsized growth in DDA and other lower cost deposits.
About 6 basis points of the margin decline related to higher cash balances in the quarter given strong deposit flows as consumers and small businesses benefited from government stimulus and corporate clients built liquidity.
We were especially pleased with our progress on deposit cost, which we drove down 37 basis points during the quarter, a more than 50% decline.
Our total interest-bearing deposit cost was 48 basis points at the end of the quarter.
That compares to 34 basis points back in 3Q 2015 at the end of the last [Indecipherable] period.
So clearly we have a near-term opportunity to continue to reduce these costs.
Moving to page 7, I'll discuss fees, which really shows the benefit from the work we've done to build capabilities and diversify our business.
Noninterest income was a record, up 19% on a linked quarter basis and 28% year-over-year.
Record results in mortgage banking were partially offset by continued headwinds related to COVID-19 and other fee categories.
On a sequential basis mortgage banking fees increased by 74% to $276 million reflecting continued strong refi lock volumes and record high gain on sale margins in particular.
Capital market fees of $61 million, increased $18 million from first quarter reflecting strong DCM activity and a $13 million mark-to-market recovery on loan trading assets.
Foreign exchange and interest rate product revenues increased 5% linked quarter before the impact of CVA.
Interest rate product sales led the way as clients repositioned for a lower rate environment.
CVA improvement was $8 million in the quarter.
Trust and investment services fees were lower by $8 million linked quarter given the rate environment and the effect of the equity market decline on managed money revenue.
The service charges and card fee categories were down significantly compared to first quarter reflecting the full quarter impact of the shutdown and impacts from stimulus money to customers.
On a positive note, we see debit card activity roughly back to pre-pandemic level and credit card activity in June only down about 10% compared with last year, a significant improvement from the over 30% declines we saw in early April.
Turning to page 8, underlying non-interest expense declined 2% linked quarter largely driven by seasonal impacts in Q1 on salaries and employee benefits.
Salaries and employee benefits declined $30 million or 6% linked quarter largely reflecting seasonally lower payroll taxes.
Equipment and software expense and outside services were higher linked quarter and reflect increased technology spend and investments in growth initiatives.
Next, let's discuss loan trends on page 9.
Average core loans were up 7% linked quarter primarily driven by the full quarter impact of the commercial line draws at the end of the first quarter and the $4.7 billion of PPP lending to our small business customers.
Before the impact of loan sales, line draws and PPP loans, core commercial loan growth was up approximately 1% linked quarter.
The $7.2 billion of post-COVID commercial line draws in March have been substantially repaid, and were down to $1.8 billion by the end of the second quarter.
Overall utilization is down to approximately 40% from 50% at the end of the first quarter.
Core retail loans on a linked quarter basis were stable with growth in education and other retail offset by lower home equity balances and the transfer of approximately $900 million of education loans held for sale.
We are building an originate-to-distribute model for our consumer assets, which will generate fee revenue and increase our balance sheet flexibility over time.
Moving to page 10, deposit growth was exceptionally strong in the quarter.
We saw robust average deposit growth of 12% linked quarter and 15 % year-over-year, outpacing loan growth and driving our average LDR down to 89% excluding PPP as consumers and small businesses benefited from government stimulus and clients built liquidity.
These strong deposit flows came in lower cost categories with average DDA growth up 25% on a linked quarter basis and 33% year-over-year.
We continue to aggressively execute our deposit playbook to manage down our deposit costs across all channels.
We were able to cut our interest-bearing deposit costs by roughly half this quarter, down 46 basis points to 48 basis points, and down 82 basis points year-over-year.
Let's move to page 11 and cover credit.
We continue to assess the impact of the COVID-19 pandemic and are closely monitoring the portfolio for areas of potential risk.
That said, portfolio performance is progressing largely in line with our expectations but with a somewhat more adverse macro backdrop than we saw at the end of the first quarter.
Net charge-offs were stable at 46 basis points linked quarter as increases in commercial were partially offset by improvement in retail reflecting the impact of forbearance.
Non-performing loans increased 27% linked quarter driven by $192 million increase in commercial, reflecting COVID lockdown impacts and an $18 million increase in retail.
The non-performing loan ratio of 79 basis point increased 18 basis point linked quarter and 17 basis points year-over-year.
However, in spite of this increase the non-accrual coverage ratio remained strong at 255% at June 30.
We increased our CECL credit reserve coverage ratio from 1.73% in 1Q to 2.09% in 2Q excluding the PPP loans.
This 46 basis points increase was primarily driven by a net reserve build of $317 million.
In addition, approximately $100 million of reserves associated with a planned sale of student loans were reallocated to the remaining loan portfolio.
In effect the reserve build was $417 million or 99% of the Q1 build.
On page 12, we provide detail on customer forbearance and the PPP lending program.
We continue to work directly with our customers to assist them through these challenging times and have seen encouraging trends.
The average FICO score of our retail forbearance customers remains high at 725.
And approximately 93% of these loans were current when they entered forbearance.
We also continue to work proactively with our commercial clients, [Indecipherable] needed in the form of covenant modifications will offer PPP applications as well as granting selected temporary release on principal and interest payments.
I'm also pleased to say that through June 30, our customers received $4.7 billion in PPP loans, which has allowed us to help support over 540,000 jobs.
84% of loans made were below $100,000.
Moving to page 13 to discuss our CECL methodology and reserves; we have summarized the key aspects of our macroeconomic scenario, which is a foundational element of the CECL reserve estimate.
At quarter end, we elected to use the May 13th Moody's Baseline as our base scenario.
Similar to last quarter, given the uncertainty of the continued economic outlook, we also considered other Moody's and internal scenarios.
In general, our aggregate economic scenario is more severe than that used in 1Q.
It assumes the steep drop in GDP in 2Q, is followed by a gradual recovery in the second half of the year and into 2021.
If this scenario plays out, provision requirements over the second half of 2020 should be more reflective of net loan growth and incorporate a smaller build.
However, if the pandemic impacts are deeper or it takes longer for the economy to recover, or government programs are less effective than we expect, then we could require further additions to reserve levels.
On page 14, as I mentioned earlier, we feel well positioned to manage through the current environment with strong capital and liquidity positions.
Our CET1 ratio improved to 9.6%, up 20 basis points linked quarter given our strong results and a reduction in risk-weighted assets.
Additionally, during the quarter, we issued 400 million of Q1 qualifying preferred stocks, which in combination with the increase in CET1 drove a 40 basis point increase in Tier 1 capital.
Strong deposit growth outpaced loan growth, which improved our liquidity metrics and drove the spot LDR excluding PPP loans down to 84%.
Turning to page 15, let's look at reserves and capital versus stress losses.
Our ACL of $2.5 billion represents a very strong 52%% of our modeled losses using the Fed scenario and is now 38% of the stress losses in the Fed's 2020 DFAST. In addition, when adding excess capital above our preliminary SCB of $3.4 billion to our ACL, the resulting $5.9 billion is 120% of our estimate and 88% of the Fed loss estimates.
These levels are further fortified by the additional coverage from the PPNR we regenerate.
On average, we've generated approximately 35 basis points of CET1 capacity per quarter over the last six quarters.
On page 16, we show a summary of the Fed's stress test results.
The Fed estimated our PPNR at 2.3% of average assets, which is well below the peer median of 3.3%.
We believe this ignores the steady and significant progress we have made to improve our PPNR since the IPO.
For example, our PPNR to assets for 2019 has improved by approximately 37% since the IPO to 3.7%.
Importantly, this compares to a stable 3.7% in actual PPNR to assets during the first six months realized stress in 2020.
The Fed's estimate of our credit losses at 5.6% was right on top of the peer median and down from 6.1% in 2018.
However, our estimated company run severely adverse credit loss rate of 4.2% is significantly lower.
We believe that the Fed's modeled results and the 3.4% preliminary SCB is elevated above what our business model would imply.
As such and as we indicated in our CCAR release in June, we have submitted a request to the Fed to reconsider our preliminary SCB.
On page 17, I want to highlight some exciting things that are happening across the company.
While we are first and foremost focused on helping our clients, we're looking forward and continue to work toward building a better company.
We continue to execute on the transformational TOP program and are making steady progress toward our target.
Planning is under way to add significant new transformation initiatives, including the end-to-end digitization of customer interactions and operations, as well as other initiatives to adapt to the post-COVID-19 environment.
We are also moving forward with our major strategic revenue initiatives while considering new opportunities arising from the current environment in an effort to drive higher revenue growth coming out of the crisis.
Moving to page 18, we provide some commentary on how key categories are shaping up for full year 2020 compared to the prior year.
We expect net interest income to be broadly stable as loan growth is offset by a meaningful decrease in NIM due to lower rates.
Non-interest income is expected to be meaningfully driven by the exceptionally strong results in mortgage, which more than offset the weakness in other key categories related to COVID-19.
We expect several key fee categories to benefit from a return to more normal activity levels in the second half, which will help cushion in moderation in mortgage.
Non-interest expense is expected to be up modestly particularly given higher compensation tied to stronger mortgage production and impacts from COVID-19, which includes government lending programs and customer relief efforts.
Provision expense has the greatest potential for variability and remains dependent on the path of the recovery.
We expect solid loan growth driven by the impact of higher line draws in commercial during the first half and government programs like PPP as well as increased demand in education and merchant financing.
Our capital position remains robust with our regulatory capital ratios expected to improve further over the remainder of the year driven by net income growth, a moderation in RWA growth during the second half, and the suspension of our buybacks through year-end.
Looking forward, we expect to remain well-capitalized and feel confident we can continue to maintain the dividend at the current model.
Now, let's move to page 19 for some high-level commentary on the third quarter.
We expect NII to be up modestly reflecting PPP benefit on NIM.
Excluding PPP loans, loan growth is projected to be down modestly due to the full quarter impact of a decline in commercial loan line utilization in the second quarter.
Ex-PPP, the NIM is expected to be broadly stable with the benefit of lower deposit costs being offset by ongoing rate headwinds.
Fee income is expected to be down in the mid- to high-single-digit range, reflecting lower mortgage banking fees from record levels, partially offset by recovery in other fee categories.
Non-interest expense is expected to be up in the low-single-digit range, reflecting higher origination-related cost levels in the mortgage business.
We currently expect a small reserve build, but provision expense will be highly dependent on an updated view of the economic recovery and portfolio performance.
Finally, we expect average loans to be down in the low-single digits given the paydown in commercial line draws during the second quarter.
Excluding the impact of line draws, PPP and loan sales, we expect loan growth to be broadly stable.
To sum up, our profitability, capital, and liquidity position remain strong and we are delivering well on our key initiatives for stakeholders.
Operator, let's open it up for Q&A.
| cecl-related reserve build of $317 million, or $0.59 per share, tied to covid-19 impacts.
second quarter 2020 include revenue of $1.7 billion, up 7%.
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Before we get into the results for the quarter, I want to make some high level comments.
They continue to be laser focused on delivering innovative solutions for our customers.
Operating in the current environment is not easy, but our team finds creative ways to serve and support our existing customers engage with new prospects.
I'm very impressed with how our teammates are leveraging the investments we've made in technology over the past few years to enhance our capabilities and customer interactions.
These include everyone from producers, service, marketing, brokers and underwriting teammates.
At this stage, we do not see face-to-face interactions returning to the pre-pandemic levels for quite some time and more than likely the new normal will be different than in the past.
As we navigate our way through the pandemic, I'm confident that we will continue to leverage innovation in our sales and service model to help further our growth and support our customers.
We've talked a lot in the past about how we're built for the long term and think about delivering shareholder value.
On Tuesday of last week, our Board of Directors increased our quarterly dividend by 9%.
With this increase, we are now on our 27th year of consecutive increases, something we're very proud of.
Now let's transition to the results of the quarter.
I'm on slide number three.
We had a great quarter and I'm very pleased with our results.
We delivered $674 million of revenue, growing 8.9% in total and 4.3% organically.
I'll get into more detail in a few minutes about the performance of our segments.
Our EBITDAC margin was 32.8%, which is up 130 basis points from the third quarter of 2019.
Our net income per share for the third quarter was $0.47, increasing 14.6% on an as reported basis.
On an adjusted basis, which excludes the change in acquisition earn-out payables, our net income per share was $0.52, an increase of 33.3% over the prior year.
Our team has done an outstanding job of growing our revenue while managing our expense base in response to the dynamics associated with COVID-19.
During the quarter, we completed another six acquisitions with annual revenues of approximately $31 million.
From a capital perspective, we issued $700 million of 10.5-year bonds in September.
We're very pleased with a coupon of 2.375%, particularly considering that we issued bonds in March of 2019 with a coupon of 4.5%.
Our insurance was very well received by the debt markets, which we believe is a true reflection of Brown & Brown's credit quality.
With this capital and our cash flow generation, we're well positioned to further invest in a disciplined manner in our business and deliver future results.
In summary, we're very pleased with the strong performance for the quarter as the strength of our operating model continues to perform well through these unprecedented economic times.
I'm on slide number four.
As you may remember, in April, we thought our third quarter would be the most challenging due to the expected decrease in exposure units for our customers.
And then we performed slightly better than anticipated in the second quarter and during our second quarter earnings call, we indicated that third quarter would not be as low as originally anticipated.
As a result of good new business, higher retention and rate increases, we had a really good third quarter.
We saw companies doing their best to restart their businesses, which included some rehiring of employees or taking them off furloughed.
We saw employers and we saw individuals who start to lose employee benefits coverage through layoffs or reductions in force, which would also drive a decline in workers compensation coverage.
We saw this in certain industries.
However, there are many industries that have been quite resilient or have even grown over the past six months.
As a result of our diversification across geography, customer size, industry lines of coverage and capabilities, we've continued to grow.
Please don't take my comments out of context.
We have customers that are struggling, and we're doing our best to help them.
We believe that there is going to be challenges over the coming quarters and consequently expect there will be ups and downs in the path to recovery.
During the quarter we saw rate increases similar to the last few quarters and in some cases, they've increased slightly.
For the most part admitted market rates are up 3% to 7% across most lines.
Commercial auto rates were the exception, as they remain up 10%.
There is a lot of talk about workers compensation rate starting to turn positive during the quarter.
We're not seeing this across the board.
Generally workers' compensation rate are not declining as fast as they were in previous quarters.
From an E&S perspective, most rates are up 10% to 20%.
Coastal property, both wind and quake are up 15% to 25%.
Professional liability is generally up 10% to 25%, depending on the coverage in the industry.
For both of these lines there can be outliers.
One area where we're seeing the most pressure right now is personal lines in California, Florida and the Gulf Coast States.
The continued reduction in carrier appetite has been caused by fires and tropical activity, resulting in a reevaluation of all CAT-exposed property.
We believe the reduction in personal lines capacity in CAT areas will continue to decrease in the near term.
In connection with the increasing rates, the placement of coverage for many lines, certain industries where customers with significant losses continues to be challenging.
This would include access or umbrella coverage where a carrier or carriers might want to reduce their limit by half, but keep the premium constant.
Just to give an example.
We do not expect this trend to change for the next few quarters.
We've been active in the M&A space closing six transactions during the quarter with annual revenues of approximately $31 million.
During the first three quarters, we closed 16 transactions with annualized revenues of approximately $117 million.
And in addition, we've already closed a few deals for the fourth quarter.
I'm now on slide number five.
Let's discuss the performance of our four segments.
Our retail segment, organic revenue grew by 4.1% in the third quarter.
It's a really strong performance recognized across substantially all lines of business, driven by a combination of good retention, improving new business wins and continued rate increases.
We're very pleased with how our team is prospecting new account in both the traditional face to face model, as well as virtually.
Our National Programs segment grew 8.4% organically, delivering another impressive quarter.
Our growth was driven by continued strong performance from many of our programs, including our lender place, our commercial and residential earthquake and our wind programs, just to name a few.
Our Wholesale Brokerage segment grew 8.2% organically for the quarter.
We realized improving new business and continued rate increases for most lines of coverage.
Brokerage was the fastest growing, while our binding authority business delivered modest growth as many main street businesses are not back to full operation and we experience continued headwinds in the personal line space.
We expect this rate pressure to continue for at least the next few quarters until carriers reevaluate the risk appetite or allocate more capacity to this challenged area.
The organic revenue for our services segment decreased 13.1% for the quarter.
The main drivers of the decline were lower claims volume for our social security advocacy businesses, a prior year terminated customer contract and lower claims for many of our other businesses related to COVID-19.
We expect organic revenue in the Services segment will be down in the low to mid single-digit range for the fourth quarter.
Like previous quarters, we'll discuss our GAAP results and certain non-GAAP financial highlights, including our adjusted results, excluding the impact of the change in acquisition earn-out payables.
We're over on the slide number six.
For the third quarter, we delivered total revenue growth of $55.3 million or 8.9% and organic revenue growth of 4.3%.
Our EBITDAC increased by 13.2%, growing faster than revenues as we were able to leverage our expense base and further manage our expenses in response to COVID-19.
Both of these factors were able to offset the headwinds associated with certain non-recurring items related to legal cost, the write-off of uncollectible receivables for one of our programs, increased non-cash stock-based compensation and a gain on the disposal of businesses recognized in the prior year.
A quick comment regarding our employee compensation and benefits and other operating expenses as a percentage of revenues.
The employee compensation and benefits ratio increased slightly as compared to the prior year, driven by higher non-cash stock-based compensation cost as we were performing above the targets for our long-term stock incentive plans.
In addition, with the market recovery during the quarter, there was an increase in the value of deferred compensation liabilities.
Please remember, the impact on EBITDAC margin is substantially zero as this increase was offset within other operating expenses.
The ratio of other operating expenses decrease due to the continued management of our variable expenses in response to COVID-19 and to a lesser extent, the benefit of the aforementioned change in deferred compensation cost.
Our income before income taxes increased by 4.3%, growing at a slower pace than EBITDAC.
This was driven primarily by the $21 million year-over-year increase in the change in estimated acquisition earn-out payables.
On the next slide, we will discuss our results, excluding this adjustment.
Our net income increased by $18.4 million or 15.9% and our diluted net income per share increased by 14.6% to $0.47.
Our effective tax rate for the third quarter was 15.5%, compared to 23.9% in the third quarter of 2019.
The lower effective tax rate, which was in line with previous guidance was driven by the tax benefit associated with the vesting of restricted stock awards.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $0.085 or 6.3% compared to the third quarter of 2019.
Moving on to slide number seven.
This slide presents our results after removing the change in estimated acquisition earn-out payables for both years.
During the third quarter of 2020, the change in estimated acquisition earn-out payables was about $15 million, representing an increase of approximately $21 million as compared to the third quarter of 2019.
Remember that we adjusted certain earn-out liabilities down in the first quarter of this year at the onset of the pandemic, based on our estimates at the time.
Since then, certain businesses have rebounded faster than anticipating causing us to increase the estimated earn-out liabilities in the third quarter of this year.
On a year-to-date basis, the net impact of the change in estimated earn-out payables that they charge of about $5 million as compared to a credit of approximately $7 million for the same period last year.
Excluding the change in acquisition earn-out payables in the third quarter of both years, our income before income taxes, grew $27.2 million or 18.6% growing faster than EBITDAC due primarily to lower interest expense.
Our net income on adjusted basis increased by $35.3 million or 31.6% and our adjusted diluted net income per share was $0.52, increasing 33.3%.
These grew faster than income before income taxes due to the lower effective tax rate for the quarter.
Overall, it was a strong quarter.
Moving to slide number eight.
This slide presents the key components of our revenue performance.
For the quarter, our total commissions and fees increased by 8.7% and our contingent commissions and GSCs were substantially flat.
Our organic revenues, which exclude the net impact of M&A activity increased by 4.3% for the third quarter.
Over to slide number nine.
Our Retail segment delivered total revenue growth of 6.5%, driven by acquisition activity over the past 12 months and organic revenue growth of 4.1%, which was driven by growth across most lines of business and slightly lower contingent commissions and GSCs.
For the quarter, retail realized about a 100 basis points of incremental organic revenue growth from the timing of new business and certain renewals we expected to recognize in the fourth quarter of this year.
Our EBITDAC margin for the quarter increased by 250 basis points and EBITDAC grew 16.2% due to higher organic revenue growth and cost savings achieved in response to the pandemic, both of which were partially offset by a prior year gain on disposals, higher non-cash stock compensation cost and higher inter-company IT cost.
Our income before income tax margin increased 50 basis points and grew slower than EBITDAC, due primarily to a change in estimated acquisition earn-outs.
Over to slide number 10.
Our National Programs segment increased total revenues by $25.1 million or 17.6% and organic revenue by 8.4%.
The increase in total revenue was driven by strong organic growth, recent acquisitions and an increase in profit sharing contingent commissions.
EBITDAC growth of 12.7% was slower than total revenue growth due to the write-offs of certain receivables in one of our programs.
Combined with higher inter-company IT charges, these items more than offset margin expansion from strong organic growth, as well as variable cost savings in response to COVID-19.
Income before income taxes increased by $600,000 or 1.3% with the growth primarily impacted by increased acquisition earn-out payables and higher intercompany interest expense.
Over to slide number 11.
Our Wholesale Brokerage segment delivered total revenue growth of 16.2% and organic revenue growth of 8.2%.
Total revenues grew faster than organic revenue due to recent acquisitions.
EBITDAC grew by 21.1% and the margin improved by 160 basis points as compared to the prior year due to strong organic growth and the delivery of reduced variable expenses in response to COVID-19, which more than offset higher inter-company IT charges and higher non-cash stock-based compensation cost.
Our income before income taxes, grew by 21.1%, substantially in line with EBITDAC growth.
Over to slide number 12.
Total revenues and organic revenues for our services segment declined by 13.1%, driven by the items Powell mentioned earlier.
For the quarter, EBITDAC declined by 22.8%, driven by lower organic revenue and higher inter-company IT expenses.
These were partially offset by reducing certain variable expenses in response to the pandemic.
Income before income taxes decreased 59.5% due to a credit of $6.3 million recorded in the third quarter of 2019 for the change in estimated acquisition earn-out payables and there was no adjustment in the third quarter of this year.
Few comments regarding cash conversion and outlook for certain items.
Regarding cash flow from operations, as a percentage of revenues, it decreased as expected for the third quarter due primarily to about $50 million of second quarter taxes that were paid in the third quarter as permitted by the Cares Act.
For the first nine months of 2020.
Our cash flow from operations as a percentage of revenue was approximately 27% as compared to 25% realized at the same period of the prior year.
The increase is driven by our expanded margins, lower cash taxes, and continuing to manage our working capital.
Regarding liquidity and interest expense, Powell mentioned earlier that we issued $700 million of 10.5 year senior notes in late September with spread decreasing materially and the receptivity of the debt markets we thought it was prudent to access the additional capital at long-term rate materially below our prior issuances.
Our incremental debt is $500 million as we repaid $200 million on the revolving line of credit.
With the additional debt, our interest expense will increase by approximately $3 million per quarter.
With this additional capital, our revolving line of credit and strong generation of cash, we are well positioned from a capital perspective to fund in a disciplined manner, additional investments to help further grow our business.
Through 10 months, we've seen 6.4 million acres burn in California, Oregon, Washington and Colorado with 4.3 million of those acres in California alone.
There have been 27 tropical storms and 10 hurricanes with five of these hurricanes hitting the Gulf Coast region and one may hit this week.
Rates are also increasing in most instances and interest rates are at historic lows.
All of this is in addition to COVID-19 and the related choppy economic environment.
We have customers laying off large numbers of employees and others are the busiest they've ever been.
Even under these extraordinary circumstances, our diversified businesses performed very well.
For the first nine months, we grew our business 3.5% organically, delivered improving EBITDAC margins of 32.4%, adjusted earnings per share was up 21.4%.
Overall, we'd say our performance and financial results have been strong.
With rates continuing to rise, you'll see new capital coming to the marketplace opportunistically.
This will be in certain lines of coverage, but not universally across the board.
In addition, very few senior leaders at insurance companies will discuss if rates are exceeding loss costs.
When that happens, they usually point to rates moderating or flattening.
We're not sure if we've reached at this point yet.
The acquisition space continues to be hot.
There's a lot of competition between private equity and long-term strategics.
We don't see this competition slowing down anytime soon.
Our ability to continue investing in our business was further bolstered by our recent bond offering.
Quite honestly, I didn't think our cost of borrowing for 10-year money would ever be 2.375%.
Our pipeline is good, but as you know, we don't count anything till it's signed.
Finally, we continue to drive our technology agenda across the company through digitization, data and automation and prioritize technology investments around the following.
One, continually optimizing and enhancing our data and analytics program.
Two, expanding our digital delivery capabilities around products and services.
And three, engaging an initiatives designed to drive greater efficiency and velocity through our underlying processes.
We are constantly thinking about how we can serve our customers better and faster.
In closing, we thought it was a really good quarter.
| compname announces quarterly revenues of $674.0 million, an increase of 8.9%, and diluted net income per share of $0.47.
q3 earnings per share $0.47.
q3 revenue rose 8.9 percent to $674 million.
|
It is now my pleasure to turn the floor over to your host, Bill Rhodes, Chairman, President and CEO.
Sir, the floor is yours.
autozone.com under the Investor Relations link.
Please click on Quarterly Earnings Conference Calls to see them.
As we begin, we want to continue to stress that our highest priority remains the safety and well being of our customers and AutoZoners.
Everyone across the organization takes this responsibility very, very seriously, and I am very proud of how our team has responded.
Since the start of the pandemic, we have reiterated consistently that we could not deliver the kind of results we have without the exceptional efforts of our entire team, especially our store and supply chain AutoZoners.
As our sales volumes have remained at historic all time highs, our AutoZoners continue to go the extra mile and surprise and delight our customers by providing WOW Customer Service, regardless of the myriad of challenges that are thrown their way.
The Assistance Fund is an independent non-profit whose primary mission is to provide assistance to AutoZoners who find themselves in a very difficult place.
We are very fortunate to be able to help our AutoZoners in this way.
To me it's yet another example of our organization living consistent with our values.
We'll also share how inflation is affecting our cost and retails and how we think they will impact our business for the remainder of the fiscal year.
On to our sales results.
Our domestic same-store sales were an impressive 13.6% this quarter on top of last year's very strong 12.3%.
Our team once again executed at an extraordinarily high level and delivered amazing results.
Congratulations again to AutoZoners everywhere.
Our growth rates for retail and commercial were both strong with domestic commercial growth impressively north of 29%.
Commercial set a first quarter record with $900 million in sales.
And now we've delivered $900 million in sales in one quarter, an incredible accomplishment.
On a trailing four quarter basis, we had over $3.5 billion in annual commercial sales versus $2.8 billion a year ago, up 27%.
We also set a record in average weekly sales per store for any quarter, reaching over $14,400 versus $11,500 just last year.
On a two year basis, our sales accelerated from last quarter, exceeding 40%.
Many people want to understand what is driving our tremendous sales growth in commercial.
In short, it is not one thing, and I want to repeat that.
It is not one thing.
It's a host, a whole host of key initiatives we've been working on for several years.
Those initiatives include improved satellite store availability, massive improvements in hub and mega hub coverage and access, the continuing strength of the Duralast brand, leveraging technology to make us easier to do business with and amplifying our execution strength to improve delivery times, enhancing our sales force effectiveness and engaging our store operations team deeper in the business and ensuring that we live consistent with our pledge by being priced right for the value proposition that we deliver.
We continue to execute very well in commercial, and we are extremely proud of our team and their performance.
We're also very proud of our organization's performance in domestic DIY.
We ran a 9% comp this quarter on top of last year's 12.7%.
While our DIY two year stack comp decelerated slightly from our fourth quarter, it's remarkable to reflect on a more than 20% two year comp in this sector of our business.
From the data we have available to us, we continue to not only retain the enormous 10% share gains we built during the initial stages of the pandemic, but modestly build on those gains.
Our performance, considering the amount of time from the last stimulus and the ending of the enhanced unemployment benefits, has substantially exceeded our expectations and raises our expectations on how sustainable these sales gains may be long-term.
Now let's focus on our sales cadence.
Same-store sales increased sequentially from September through November.
However, this acceleration could be deceiving as last year's comp weakened as the quarter progressed.
Given the dynamics of the past 20 months, we like others who benefited from the pandemic, believe it is more instructive to look at two year stacked comps.
On this basis, the monthly results were almost identical and very, very stable.
For Q1, our two year comp was 25.8% and the four week periods of the quarter increased by 26.3%, 26% and 25.3% respectively.
Regarding weather, we experienced warmer than usual weather in the Northeastern United States, while the remainder of the country experienced normal trends.
Overall, we feel weather did not play a material role in our sales results for the quarter.
As we look forward to the winter months, we are encouraged to see forecast estimating a slightly colder than usual winter.
Historically, extreme weather, be that hot or cold, helps drive parts failure.
Regarding this quarter's traffic versus ticket growth in retail, our traffic was up 1%, while our ticket was up 7.5%.
This low-single-digit transaction count growth continues to be a meaningful acceleration from pre-pandemic levels, although it decelerated versus last year as expected due to the elimination of stimulus, the reduce -- the elimination of enhanced unemployment, stay at home orders and the closure of some big box retail automotive service departments last year.
In our commercial business, we saw most of the sales growth come from transaction growth from new and existing customers.
It was encouraging for us to see sales trends remain strong.
And we continue to be pleased with the momentum we are seeing in both domestic businesses heading into the winter months.
During the quarter, there were some geographic regions that did better than others, as there always are.
While last quarter we saw roughly 400 basis point gap in comp performance between the Northeast and Midwestern markets versus the remainder of the country, we did not see that gap this quarter.
In fact, the Northeastern Midwestern markets slightly outperformed.
The market share data suggests that we continue to gain share in most markets across the country.
Now let's move into more specifics on performance for the quarter.
Our same-store sales were up 13.6% versus last year's first quarter.
Our net income was $555 million.
And our earnings per share was $25.69 a share, increasing an impressive 38.1%.
Regarding our merchandise categories in the retail business, our sales floor and hard parts categories grew at a similar rate this quarter.
As Americans get back to driving more, we've seen maintenance and failure-related categories perform well.
We've been especially pleased with our growth rates in select failure-related businesses, like batteries, that have successfully lapped very strong performance last year.
We believe our hard parts business will continue to strengthen as our customers drive more.
Let me also address what we are seeing from inflation and pricing.
This quarter, we saw our sales impacted positively by about 4% year-over-year from inflation, while our cost of goods was up about 2% on a like-for-like basis.
We believe both numbers will be higher in the second quarter as cost increases in many key merchandise categories continue to work their way through the system.
We could see mid-single-digit inflation in retails as rising raw material pricing, labor and transportation costs are all impacting us and our suppliers.
We have no way to say how long this will last, but our industry has been disciplined about pricing for decades, and we expect that to continue.
While we continue to be encouraged with the current sales environment, it remains difficult to forecast near to mid-term sales.
What I will say is that the past three quarter sales have all been consistent on a two year stack comp basis and both our DIY and commercial businesses have been remarkably resilient.
While it's difficult to predict absolute sales levels, we are excited about our growth initiatives, our execution and the tremendous share gains we have achieved in both sectors and are maintaining and/or continuing to grow those gains.
Currently, the macro environment, while more uncertain than normal, is certainly favorable for our industry.
And if these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long-term.
For FY '22, our sales performance will be led by the continued strength in our commercial business as we continue executing on our differentiating initiatives.
As we progress through the year, we will as always be transparent about what we are seeing and provide color on our markets and outlooks as trends emerge.
As Bill mentioned, we had a strong second quarter.
Our growth initiatives continue to deliver strong results.
And the efforts of our AutoZoners in our stores and distribution centers have enabled us to take advantage of robust market conditions.
For the quarter, total auto part sales, which includes our domestic, Mexico and Brazil stores, were $3.6 billion, up 16.2%.
Let me give a little more color on sales and our growth initiatives.
Starting with our commercial business, for the first quarter, our domestic DIFM sales increased 29.4% to $900 million and were up 41% on a two year stack basis.
Sales to our DIFM customers represented 25% of our total sales.
And our weekly sales per program were $14,400, up 25% as we averaged $75 million in total weekly commercial sales.
Once again, our growth was broad-based as national and local accounts both grew over 25% in the quarter.
Our execution of our commercial acceleration initiatives is delivering exceptional results as we focus on building a faster growing business.
The disciplined investments we are making are helping us grow share.
And we're making tremendous progress in growing our business in this highly fragmented portion of the market.
We now have our commercial program in approximately 86% of our domestic stores, and we're focused on building our business with national, regional and local accounts.
This quarter, we opened 32 net new programs, finishing with 5,211 total programs.
We continue to leverage our DIY infrastructure and increase our share of wallet with existing customers.
As I said on last quarter's call, in fiscal year '22, commercial growth will lead the way, and our first quarter results reflect this dynamics.
Our growth strategies continue to work as we continue to grow share.
We are confident in our strategies and execution and believe we will continue gaining share.
Delivering quality parts, particularly with our Duralast brand, improved assortments, competitive pricing and providing exceptional service has enabled us to drive double-digit sales growth for the past six quarters.
Our core initiatives are accelerating our growth and position us well in the marketplace.
And notably, our mega hub strategy is driving strong performance and position us for an even brighter future in our commercial and retail businesses.
Let me add a little more color on our progress.
As I mentioned last quarter, our mega hub strategy is giving us tremendous momentum, and we're doubling down.
We now have 62 mega hub locations and we expect to open approximately 16 more over the remainder of the fiscal year.
As a reminder, our mega hubs typically carry roughly 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as a fulfillment source for other stores.
The expansion of coverage and parts availability continues to deliver meaningful sales lift to both our commercial and DIY businesses, and we are testing greater density of mega hubs to drive even stronger sales results.
By leveraging sophisticated predictive analytics and machine learning, we are expanding our market reach driving closer proximity to our customers and improving our product availability and delivery times.
These assets continue to outperform our expectation, and we would expect to open significantly more than 110 locations we have previously targeted.
In commercial, we are building a meaningful competitive advantage and we continue to have confidence in our ability to create a faster growing business.
On the retail side of our business, our domestic retail business was up 9% and up 21.4% on a two year stack.
The business has been remarkably resilient as we have gained and maintained over three points of market share since the start of the pandemic.
As Bill mentioned, we saw an increase in traffic versus the prior year as our initiatives are continuing to drive tremendous sales and share growth along with a relentless focus on execution by our AutoZoners in our stores and distribution centers.
These initiatives include improving the customer shopping experience, expanding assortment, leveraging our hub and mega hub network and maintaining competitive pricing.
These dynamics along with favorable macro trends and miles driven, a growing car park and a challenging new and used car sales market for our customers have continue to fuel sales momentum in DIY.
And the execution of our AutoZoners who are taking care of our customers gives us a key competitive advantage.
I'm also very pleased with the competitive position of our DIY business and our outlook going forward.
Our in-stock positions, while still below where we would like for them to be, are continuing to improve as our supply chain and merchandising teams have made great progress in a challenging supply chain environment.
We've been able to navigate supply and logistics constraints and have product available to meet our customers' needs.
DIY has been a strong contributor to the growth of our company.
And while comps are difficult because of our strong past performance, the fundamentals of our business remained strong.
Now I'll say a few words regarding our international business.
We continue to be pleased with the progress we're making in Mexico and Brazil.
During the quarter, we opened two new stores in Mexico to finish with 666 stores and one new store in Brazil to finish with 53.
On a constant currency basis, we saw accelerated sales growth in both countries.
We remain committed to our store opening schedules in both markets and expect both to be significant contributors to sales and earnings growth in the future.
With approximately 10% of our store base now outside the U.S. and our commitment to continue expansion in a disciplined way, international growth will be an attractive and meaningful contributor to AutoZone's future growth.
Now let me spend a few minutes on the P&L and gross margins.
For the quarter, our gross margin was down 65 basis points, driven primarily by the accelerated growth in our commercial business where the shift in mix coupled with the investments in our initiatives drove margin pressure, but increased our gross profit dollars by 14.9%.
I mentioned on last quarter's call that we expected to have our gross margin down in a similar range this quarter as we saw in the fourth quarter of last fiscal year where we were down 82 basis points.
However, the team has been focused on driving margin improvements, primarily through pricing actions that offset inflation to drive a better than expected outcome.
As Bill mentioned earlier in the call, we are continuing to see cost inflation in certain product categories along with rising transportation and distribution center costs.
We continue to take pricing actions to offset inflation, and consistent with prior inflationary cycles, the industry pricing remains rational.
We would expect our margins in the second quarter to be down in a similar range as the first quarter.
All of the actions we are taking have resulted in us growing our DIY and DIFM businesses at a significantly faster rate than the overall market, and we're committed to capturing our fair share while improving our competitive positioning in a disciplined way.
We are laser focused on taking care of our existing customers, driving new customers to AutoZone and over time growing absolute gross profit dollars at a faster than historic rate.
Moving to operating expenses.
Our expenses were up 10.4% versus last year's Q1 as SG&A as a percentage of sales leverage of 171 basis points.
The leverage was driven primarily by our strong sales results.
While our SG&A dollar growth rate has been higher than historical averages, we've been focused on maintaining high levels of customer service during a period of accelerated growth and taking care of our AutoZoners during these extraordinary high sales growth times.
We're also investing in IT to underpin our growth initiatives.
And these investments will pay dividends and user experience, speed and productivity.
We will continue to be disciplined on SG&A growth as we move forward and manage expenses in line with sales growth over time.
Moving to the rest of the P&L.
EBIT for the quarter was $754 million, up 22.6% versus the prior year's quarter, driven by strong top-line growth.
Interest expense for the quarter was $43.3 million, down 6.3% from Q1 a year ago as our debt outstanding at the end of the quarter was just under $5.3 billion versus just over $5.5 billion last year.
We're planning interest in the $45 million range for the second quarter of fiscal 2022 versus $46 million in last year's second quarter.
For the quarter, our tax rate was 21.9% versus 22.2% in last year's first quarter.
This quarter's rate benefited 159 basis points from stock options exercised, while last year it benefited 134 basis points.
For the second quarter of fiscal 2022, we suggest investors model us at approximately 23.6% before any assumption on credits due to stock option exercises.
Moving to net income and EPS.
Net income for the quarter was $555 million, up 25.5% versus last year's first quarter.
Our diluted share count of 21.6 million was lower by 9.1% from last year's first quarter.
The combination of higher earnings and lower share count drove earnings per share for the quarter to $25.69, up 38.1% over the prior year's first quarter.
Now let me talk about our cash flow.
For the first quarter, we generated approximately $800 million of operating cash flow.
Our operating cash flow results continue to benefit from the strong sales and earnings previously discussed.
You should expect us to be an incredibly strong cash flow generator going forward.
And we remain committed to returning meaningful amounts of cash to our shareholders.
Regarding our balance sheet, we now have nearly $1 billion in cash on the balance sheet and our liquidity position remains strong.
We're also managing our inventory well, as our inventory per store was up 10% versus Q1 last year.
Total inventory increased 3% over the same period last year, driven by new stores.
Net inventory, defined as merchandise inventories less accounts payable on a per store basis, was a negative $207,000 versus negative $99,000 last year and negative $203,000 last quarter.
As a result, accounts payable as a percent of gross inventory finished the quarter at 129.4% versus last year's Q1 of 114.1%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program.
We repurchased $900 million of AutoZone's stock in the quarter.
As of the end of the fiscal quarter, we had approximately 20.7 million shares outstanding.
At quarter end, we had just over $1 billion remaining under our share buyback authorization and just under $700 million of excess cash.
The powerful free cash we've generated this quarter allowed us to buy back approximately 2.5% of the shares outstanding at the beginning of the quarter.
We bought back over 90% of the shares outstanding of our stock since our buy back inception in 1998, while investing in our existing assets and growing our business.
We remain committed to this disciplined capital allocation approach.
We expect to maintain our long-term leverage target in the 2.5 times area and generate powerful free cash flows that will enable us to invest in the business and return meaningful amounts of cash to shareholders.
To wrap up, we had another very strong quarter, highlighted by strong comp sales, which drove a 25.5% increase in net income and a 38.1% increase in EPS.
We are driving long-term shareholder value by investing in our growth initiatives, driving robust earnings in cash and returning excess cash to our shareholders.
Our strategy is working.
And I have tremendous confidence in our ability to drive significant and ongoing value for our shareholders.
Fiscal 2022 is off to a stellar start, and we continue to be focused on superior customer service and flawless execution.
That and our culture is what defines us.
From July 4, 1979 when our first store opened in Forest City, Arkansas, customer service has been paramount to our success.
At the end of the day, it is why customers come back to us.
Whether they are a seasoned professional or a new DIYer, they trust us.
They trust us to help them with their needs.
We continue to be bullish on our industry, and in particular, on our own opportunities for the new year.
We believe the macro backdrop is in our favor for the foreseeable future.
Our customers across the Americas want to get out, get out and drive,.
and we'll be there when they need helpful advice.
Our team has worked diligently and collaboratively with our suppliers, and together they have done a very good job dealing with the enormous supply chain challenges that exist for all retailers.
While we are not where we'd like to be on our store in-stock levels, we believe we are better than most retailers, and I think our results support that belief.
For the remainder of fiscal 2022, we are launching some very exciting initiatives.
We are focused on further growing share, but as always, doing so on a very profitable basis.
We will be announcing significant expansions to our supply chain to fuel the growth of our domestic and Mexico businesses.
We are also targeting to open 16 more new domestic mega hubs in the U.S. that will enhance our availability and support growth in our retail and commercial businesses.
We will also be leveraging our hub and mega hub strategy further in Mexico.
For the fiscal year, we will open more than 200 new stores throughout the Americas with notable acceleration in our Brazil business.
These capacity expansion investments reflect our bullishness on our industry and our growth prospects.
We are being disciplined yet aggressive.
Our company, our customers, our leadership team, and in particular, our AutoZoners have greatly benefited from Mark's 19 years of remarkable service.
Mark spent the majority of his years with AutoZone leading our merchandising team and has played a critical role leading our supply chain and marketing teams in recent years.
He leaves our organization much, much better than he founded and leaves us well positioned for accelerated growth.
I also want to reiterate how proud I am of our team across the board for their commitment to servicing our customers, and doing so in a very safe manner.
First and foremost, our focus will be on keeping our AutoZoners and customers safe, while providing our customers with their automotive needs.
And secondly, we must continuously challenge ourselves during these extraordinary times to position our company for even greater future success.
We know that investors will ultimately measure us by what our future cash flows look like three to five years from now.
I continue to be bullish on our industry, and in particular, on AutoZone.
| autozone q1 same store sales increase 13.6%; earnings per share increases to $25.69.
autozone 1st quarter same store sales increase 13.6%; earnings per share increases to $25.69.
q1 earnings per share $25.69.
domestic same store sales, or sales for stores open at least one year, increased 13.6% for quarter.
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During this conference call, we may refer to certain non-GAAP or adjusted financial measures.
These statements reflect management's reasonable judgment with respect to future events.
A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2019, and in subsequent quarterly filings on Form 10-Q.
Earlier today we announced 2020 fourth quarter earnings of $0.37 per share.
The quarter's results were impacted by the COVID-19 pandemic, which reduced demand for Kirby's products and services, particularly in Marine Transportation, where we experienced low volumes and continued poor market dynamics and poor barge utilization.
Across the company, we have tightly managed costs, which has helped maintain overall Marine Transportation margins near 10%, and distribution and service margins near breakeven.
Our fourth quarter earnings also included a tax benefit as a result of the CARES Act, which Bill will discuss in a few minutes.
Looking at our segments, in Marine Transportation, the inland and coastal markets experienced challenging market conditions, with low demand particularly for the transportation of refined products, crude oil, and black oil.
Although the economy showed some modest signs of improvement during the quarter, increasing cases of COVID-19, high product inventories, and impacts from two Gulf Coast hurricanes contributed to a slight sequential decline in quarterly average refinery utilization.
During the quarter, refinery utilization averaged 77%, compared to a previous five-year fourth quarter average of 90%, and it ended the quarter at 80%.
Chemical plant utilization modestly improved 1% sequentially, but remained below 2019 levels.
Overall, for our inland and coastal businesses there were minimal spot requirements, low barge utilization, and additional pricing pressures throughout the quarter.
In Distribution and Services, fourth quarter revenues sequentially improved, benefiting from the continued economic recovery, higher product sales in commercial and industrial, and some pickup in activity in oil and gas distribution.
In the commercial and industrial markets, we experienced increased demand for parts and service in the on-highway and power generation businesses, higher product sales in Thermo King, and increased deliveries of new marine engines.
These gains were partially offset however by normal seasonality, including lower utilization in power generation rental fleet following the hurricane season, as well as reduced major overhauls in marine repair during the harvest in the dry cargo market.
In the oil and gas market activity continued to recover as many E&Ps modestly increased spending during the fourth quarter, and well completion activity improved.
Active frac crews, which bottomed around 50 in the second quarter, improved every month during the fourth quarter, and finished the year in excess of 150.
This activity improvement contributed to higher demand for new transmissions, parts, and service in our distribution businesses.
In manufacturing, remanufacturing activity was steady, and we received additional new order for environmental-friendly fracturing equipment.
In the fourth quarter, Marine Transportation revenues were $299.4 million, with an operating income of $29.2 million and an operating margin of 9.7%.
Compared to the 2020 third quarter, marine revenues declined $21.2 million or 7%, and operating income declined $3.2 million.
The reductions are primarily due to significantly reduced pricing in inland, reductions in inland barge utilization, and increased delay days as a result of seasonal weather.
Aggressive cost reductions helped to limit the impact on operating margin.
During the quarter, the inland business contributed approximately 75% of segment revenue.
Average barge utilization declined modestly into the high 60% range as a result of the second wave of COVID-19, continued weak refinery utilization in an extended hurricane season.
Long-term inland marine transportation contracts are those contracts with a term of one year or longer, contributed approximately 70% of revenue, with 62% from time charters and 38% from contracts of affreightment.
Term contracts that renewed during the fourth quarter were down in the low double digits on average.
Spot market rates declined approximately 10% sequentially, and 25% year-on-year.
During the fourth quarter, the operating margin in the inland business was in the low-to-mid teens.
In coastal, the market continued to be challenged by significantly reduced demand for refined products and black oil.
We experienced weak spot market dynamics, and some chartered equipment was returned as term contracts expired.
During the quarter, coastal barge utilization was in the mid-70% range, unchanged sequentially but down from the mid-80% range in the 2019 fourth quarter.
Average spot market rates were generally stable, but term contracts continued to renew lower in the mid-single digits.
During the fourth quarter, the percentage of coastal revenues under term contracts was approximately 85%, of which approximately 85% were time charters.
Coastal's operating margin in the fourth quarter was in the negative low-to-mid-single digits.
Moving to Distribution and Services; revenues for the 2020 fourth quarter were $190.3 million, with an operating loss of $2.9 million.
Compared to the third quarter, revenues improved $14.4 million or 8%.
The sequential improvement was primarily due to modest economic improvements and increased product sales in the commercial and industrial market.
These gains were offset by lower revenues in the oil and gas market due to the timing of pressure pumping equipment deliveries to manufacturing.
Segment operating income declined slightly during the quarter as a result of product and service sales mix.
In commercial and industrial, mostly sequential improvements resulted in increased demand for parts and service in the on-highway and power generation businesses.
Higher Thermo King product sales and the timing of new marine engine deliveries also contributed to sequential increases in revenue.
These were partially offset by normal seasonality, including lower utilization of the power generation rental fleet, and reduced major overhaul demand in marine repair.
During the fourth quarter, the commercial and industrial businesses represented approximately 78% of segment revenue.
Operating margin was in the low single digits, and was impacted by a higher mix of product and parts revenue during the quarter.
In oil and gas, revenues and operating income sequentially declined primarily due to reduced deliveries in new pressure pumping equipment and manufacturing.
This reduction was partially offset by increased demand for new transmissions, parts, and services in oil and gas distribution as U.S. frac activity continued to improve.
During the fourth quarter, the oil and gas related businesses represented approximately 22% of segment revenue, and had a negative operating margin in the mid-teens.
Turning to the balance sheet; as of December 31, we had $80.3 million of cash, total debt was $1.47 billion, and our debt to cap ratio was 32.2%.
During the quarter, we had strong cash flow from operations, of $85.1 million, and we repaid $109.8 million of debt.
We also used cash flow and cash on hand to fund capital expenditures of $18.8 million.
For the full-year, we generated $296.7 million of free cash flow, defined as cash flow from operations minus capital expenditures.
This amount was slightly below the low end of our previously disclosed guidance range of $300 million.
This guidance range contemplated a significant income tax refund related to the CARES Act of over $100 million, which was not received as expected prior to the end of the year.
We now anticipate this refund will be received during the 2021 first quarter.
At the end of the year, we had total available liquidity of $684 million.
Looking forward capital spending is expected to continue to trend down in 2021.
For the full-year, we expect capital expenditures of approximately $125 million to $145 million, which represents nearly a 10% reduction compared to 2020, and is primarily composed of maintenance requirements for our marine fleet.
As a result, we expect to generate free cash flow of $230 million to $330 million, which includes the tax refund previously discussed.
Before I close, I'd like to address income taxes.
During the fourth quarter, we had an effective tax rate benefit as a result of net operating losses, which were carried back to prior higher tax rates years as allowed by the CARES Act legislation.
In 2021, we expect our income tax rate will be around 25%.
With 2021 in the rearview mirror, it goes without saying we are all hopeful for brighter days in the New Year.
As we look at our businesses thus far in '21, we believe some green shoots are materializing.
In Marine Transportation, refinery utilization has steadily improved into the low 80% range.
Inland spot activity has modestly picked up.
And our barge utilization has bounced off of the bottom into the low to mid 70%.
Demand in Distribution and Services has continued to recover with an improving economy and more favorable commodity prices.
While all of this is encouraging, the reality is that we are still in the midst of a global pandemic.
Demand for our products and services are still near all-time lows and uncertainty around the timing of material economic recovery remains.
All of this makes predicting 2021 very challenging with a wide range of possible outcomes.
In the near-term, we expect tough market conditions to persist into the second quarter particularly in Marine Transportation where industry barge utilization is very low and we are experiencing very competitive pricing dynamics.
As well, the latest wave of COVID-19 cases has resulted in some challenges crewing our vessels particularly in coastal.
In Distribution and Service, the magnitude and timing of the recovery is dependent on economic recovery and stability in the oil & gas markets.
That been said, although we are starting the year with near term pressures and uncertainty, we are very optimistic that the second half of 2021 will be materially better.
In the meantime, we intend to remain very focused on cost control, capital discipline, cash generation, and debt reduction.
Diving into the businesses, in the inland market we expect the current challenging market dynamics to continue in the near term with gradual improvement in the second quarter followed by a more meaningful recovery in the second half of the year as demand improves.
In the first quarter, we anticipate our results will sequentially decline and be the lowest of the year.
Increased delays from normal seasonal winter weather as well as lower pricing on term contract renewals are expected to more than offset very modest improvements in our average barge utilization.
Beyond the first quarter, activity should begin to recover with an improving economy which should lead to more favorable spot market dynamics.
Even with the pandemic, new petrochemical plants are still scheduled to come online.
There has been very limited construction at new barges and significant retirement of barges are occurring across the industry.
All of this should help improve the market and is expected to contribute to a meaningful improvement in barge utilization likely into the high 80 to low 90% range by the end of the year.
With respect to pricing, we expect pressure to persist in the near term as rates typically move with barge utilization.
As a result although market conditions are looking more favorable later in the year, we expect full-year revenues and operating margins to decline compared to 2020 driven by lower average barge utilization and the full-year impact of lower pricing on term contract renewals.
In Coastal, tough market conditions and low barge utilization are expected to have a meaningful impact on 2021 coastal results, and contribute to year-on-year reduction in revenues and operating losses in this business.
During 2020, the majority of the coastal fleet operated under term contracts established a more favorable markets during 2019 and then early 2020.
These contracts helped to minimize the financial impact as demand fell throughout the pandemic.
However, with many of these contracts now starting to expire and low demand for refined products and black oil expected for a while longer.
We now expect lower overall pricing in 2021 for the coastal business.
As well, the retirement of three older large capacity coastal vessels in 2020 due to ballast water treatment requirements, and the retirement of an additional barge scheduled for mid-2021 will contribute to lower revenue and operating margin compared to 2020.
Looking at the first quarter, we expect coastal revenues and operating margin will decline sequentially due to continue weakness in the spot market pricing pressure and recent challenges crewing our vessels.
Similar to inland, we expect coastal market conditions will improve as the year progresses, resulting in higher barge utilization and reduced operating losses in the second half of 2021.
Looking at Distribution and Services, we expect a more robust economy and increased activity in the oil field will result in material year-over-year improvements in demand for much of the segment.
In Commercial and Industrial, we anticipate continued improvement in on-highway with increasing truck fleet miles and an initial recovery in bus repair demand as activity resumes -- and returned to work commences.
We also anticipate some additional growth in on highway parts sales as a result of the recent launch of our new online sales platform.
Elsewhere, demand for new installations, parts and services and power generation is expected to grow as demand for electrification and 24/7 power intensifies.
In oil and gas, we expect current improved oil prices will contribute to increase rig counts and well completion during 2021.
Industry analysts have predicted the average active frac crew count could climb back to near 200, which is a notable improvement from 2020 levels.
As a result, we expect to see higher demand for new engines and transmissions parts and services in distribution as well as increased remanufacturing activities on existing pressure pumping equipment.
With respect to manufacturing of new equipment, the current excess of traditional pressure pumping capacity across the industry will likely restrain significant orders of conventional fleets.
However, a heightened focus on ESG in both energy and industrial sectors is expected to result in increased demand for Kirby's extensive portfolio of environmentally friendly equipment throughout the year.
Overall, in Distribution and Services; we expect 2021 revenues and operating income will materially improve as compared to 2020 with commercial and industrial representing approximately 70% and oil and gas representing 30% of segment revenues for the full-year.
Although the range is dependent on the timing of a material economic recovery, we expect segment operating margins will be in the low to mid-single digits for the full-year with the first quarter being the lowest and the third quarter being the highest.
We expect a normal seasonal reduction during the fourth quarter.
To close out 2020, it was a difficult year with unprecedented challenges.
The efforts of our dedicated employees to ensure business continuity remain focused on safety and to aggressively reduce costs were recommendable.
I'm very proud of our accomplishments admits a very challenging backdrop.
Looking forward, although some near-term challenges and uncertainty remain, we're confident Kirby is in a strong position to meaningfully recover when the pandemic ease is in demand for our products and services improves.
In Marine transportation, it was only one year ago that inland barge utilization wasn't at an all-time high.
Inland operating margins were near 20% and prices were materially increasing in both inland and coastal.
Although demand has significantly declined since that time because of the pandemic industry supplies in check with very limited new barges construction in inland, no incremental capacity planning, coastal and significant retirement across both sectors.
All of this is very positive for our businesses and is expected to contribute to a meaningful tightening in the barge market once demand improves.
When you consider our inland fleet expansion over the last three years, which is approximately 40% higher on barrel capacity basis, as well as our recent efforts to improve the efficiency of our inland and coastal fleets, we believe there is a significant earnings potential in Marine Transportation.
In Distribution and Services, while managing through the pandemic and unprecedented downturn, we were very focused on improving our business during 2020.
Throughout the year, we took aggressive and proactive steps to streamline and right-size the business for the near-term, while strengthening it for the long-term, including consolidating businesses, support functions, and management teams, renewing and expanding OEM relationships and product offerings, completing the implementation of a common ERP system, rolling out a new online parts sales platform, and developing and prototyping new products for the expanding wave of electrification.
Overall, we anticipate improved result as the economy grows and oilfield activity recovers, and our efforts during 2020 will meaningfully contribute to more favorable long-term returns of this segment.
Finally, from a liquidity perspective, we generated strong free cash flow of nearly $300 million in a very difficult year, and we made significant progress in paying down debt.
We expect 2021 will be a strong cash flow year, with expectations of $230 million to $330 million of free cash flow for the full-year.
We intend to use this cash flow to pay down debt and enhance liquidity.
We're now ready to take questions.
| q4 earnings per share $0.37.
believe improved business activity and utilization levels will occur in second half of year.
in q1, expect weak market conditions in marine transportation to continue with further pricing pressure on contract renewals.
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I'm joined today by Bob Patel, our Chief Executive Officer; and Michael McMurray, our Chief Financial Officer.
Pass code for both numbers is 36941.
During today's call, we will focus on first quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives.
Before turning the call over to Bob, I would like to call your attention to the noncash lower of cost or market inventory adjustments or LCM that we have discussed on past calls.
These adjustments are related to our use of last in, first out or LIFO accounting and recent volatility in prices for our raw materials and finished goods inventories.
We appreciate you joining us today as we discuss our first quarter results.
Before we get into the discussion of our results, I would like to take a moment to recognize the tremendous progress that has been made in fighting the COVID-19 pandemic and how much hard work still needs to be done around the world to reduce the effects of this disease.
While financial markets are focused on the economic upside enabled by increased vaccination and the eventual reopening, today, our employees, customers, suppliers and the communities where we operate in India, in particular, as well as Brazil and even parts of Europe, are still suffering from terribly high case rates and fatalities.
We are working closely with governments around the world to do our part to advance immunity for our employees and their communities and to hasten an end to the devastation brought on by this virus.
Our thoughts remain with those most affected by this pandemic.
Now moving into the discussion of our Q1 results.
LyondellBasell is continuing to build upon the momentum seen in the second half of 2020.
During last year's recession, we advanced on our strategic initiatives to grow our asset base and emerge stronger from the downturn to position our company to capture the benefits of a recovering economy in 2021.
Let's begin with slide three and review the highlights.
In the first quarter, earnings more than doubled from the same quarter of last year to $3.18 per share.
LyondellBasell's first quarter net income improved by 25% relative to the fourth quarter as we earned approximately $1.6 billion of EBITDA.
Our businesses benefited from strong demand and tight markets at improved margins across the majority of our segments.
Our Olefins and Polyolefins-Europe, Asia and International segment achieved their highest quarterly EBITDA since 2018, while the O&P-Americas segment reached a quarterly EBITDA level that has not been seen since 2015.
Strong cash generation enabled us to pay down $500 million of debt in January and end the first quarter with nearly $5 billion of cash and available liquidity.
After the quarter closed, we paid down an additional $500 million of debt in April.
We expect that our robust cash generation should continue throughout the year, and our top priority for capital deployment in 2021 is debt reduction, which will enable meaningful progress toward improving our credit metrics to two turns of total debt-to-EBITDA.
As we approach the end of the first month of the second quarter, low inventories and persistently high demand are driving higher margins for most of our products.
The unusually cold weather and associated power outages that occurred during February in Texas resulted in approximately one month of downtime or a significant share of total US capacity located within the state.
Deferred turnarounds from 2020 are resulting in high levels of planned maintenance downtime for many of our competitors during the second quarter.
LyondellBasell has no major planned maintenance for the second quarter at any of the global assets that we operate.
We are focused on running our assets safely, reliably and at maximum rates to supply our customers' needs and capture the opportunities available in these strong markets.
We expect markets will remain tight through at least the end of this year due to very high demand, low inventories and the capacity that will be lost during planned downtime.
With customer demand exceeding production, the full extent of our customers' backlogs, deferred consumption and unmet demand are unknown.
In the days after the Texas freeze, North American PG exports fell by 13% for the month of February, and we expect the March data to reflect further decline in exports.
It will likely require quite some time before North American polyethylene industry can fulfill backlogs, satisfy domestic demand and returned to last year's pace of selling 40% of production into the export market to serve global demand.
And this scenario of replenishing inventory over the course of 2021 does not factor in an additional wave of demand that is likely to arise in the second half of this year from restocking and increased activity in the travel, leisure and hospitality sectors as vaccines provide for increased mobility.
The reopening and considerable pent-up demand will add another leg of growth across our businesses.
Increased mobility and rising demand for transportation fuels should enable our Oxyfuels and Refining businesses to deliver meaningful profit improvements in the second half of '21 and into 2022.
At LyondellBasell, the first topic on the agenda for a meeting of our leadership or any group of employees throughout the company is typically oriented toward improving the health and safety of our teams.
Our consistent emphasis on a culture of safety provides clear and direct benefits toward improving the health and welfare of our employees, contractors and communities.
We also believe the attention to detail embedded in our safety culture cascades indirect benefits toward our work to ensure reliable operations, commercial leadership, and ultimately, differential financial performance.
As such, I'm pleased to report that in the first quarter of 2021, our employees and contractors achieved the best safety performance we have attained in any prior year.
We look forward to continued progress on our journey toward our goal of 0 injuries.
Earlier this month, we launched our Circulen portfolio of polymers, described on slide five, to enable our customers and brand owners to improve the sustainability of their products.
CirculenRecover polymers are already in use, producing consumer products such as the Samsonite Magnum Eco suitcase line depicted on the slide.
We are stepping up volumes of CirculenRenew polymers in Europe and advancing our proprietary catalyzed pyrolysis technology at our MoReTec molecular recycling pilot facility in Italy, with the goal of bringing this potentially game-changing technology for CirculenRevive polymers to a commercial scale.
Over the past 70 years, our polymers have played a central role in advancing modern living by reducing food waste with protective packaging, delivering safe drinking water through plastic pipes and advancing healthcare with sterile and affordable devices and equipment.
With the introduction of our Circulen product line, we are making further progress toward LyondellBasell's goal of producing and marketing two million metric tons of recycle- and renewal-based polymers annually by 2030.
On slide six, we highlight how LyondellBasell's technological advancements can enable our customers to independently improve the sustainability profile of their product formulations.
Our new Hyperzone HDPE process is capable of producing polyethylene with more than five times the crack resistance of standard polyethylene produced with a chromium catalyst in a slurry loop process.
This premium performance of polyethylene from our Hyperzone multi-zone process can be directly leveraged by customers to produce packaging, such as detergent bottles with thinner walls, and less polyethylene that reduces weight without sacrificing durability or performance.
As our customers seek to improve the circularity of their business models, many plastics converters have set aggressive goals to increase their utilization of post-consumer recycled, or PCR, plastics in packaging and other applications.
Hyperzone's outstanding performance can also be leveraged to allow for increased blending of PCR without sacrificing performance.
As you can see in the chart, Hyperzone HDPE blended with 25% PCR can still exceed the crack resistance of standard polyethylene by 70%.
Our customers are leveraging LyondellBasell's advanced technology to improve the crack resistance, top load strength, impact resistance and other critical properties for their products while simultaneously improving the sustainability profile of their business models.
Now let's step back a bit and on slide seven review some of the macroeconomic forces that have been driving LyondellBasell's business performance during the pandemic and the ongoing recovery.
One way to think about the trajectory of the economy is to untangle a few of the societal trends that are fueling demand in markets for nondurable goods, durable goods and transportation.
In the early days of the pandemic in March, April and May of 2020, we saw elevated demand for nondurable goods as households engaged in pantry stocking to protect against supply disruptions and adapt to the transition toward increased working from home, schooling from home and other lifestyle changes associated with quarantines and societal lockdowns.
LyondellBasell's Olefins and Polyolefins businesses benefited from the double-digit improvements in packaging demand as increased utilization of nonbulk packaging and e-commerce deliveries boosted demand for our materials.
In 2021, consumer packaged goods demand remains elevated by single-digit percentages relative to prepandemic levels.
We expect somewhat elevated demand for packaging will persist following the pandemic with some permanent changes in society as a portion of the population continues to work remotely, school remotely and use home delivery for convenience.
The second economic driver for our businesses has been the recovery in consumer-, industrial- and construction-related demand for durable goods that began in the third quarter of 2020.
This trend can be reflected by the dark blue line that tracks the ongoing recovery in vehicle production in North America.
With government stimulus supporting the US economy and limited options for travel, leisure and public dining, consumers remodeled homes and purchased appliances, home entertainment and vehicles that drove recovery for the industrial economy.
This trend has been boosting demand for LyondellBasell's propylene oxide from our Intermediates & Derivatives segment that is used in polyurethane foams for furniture and construction insulation as well as polymers from our O&P segments that are used both directly and in plastic compounds produced by our Advanced Polymer Solutions segment.
The third significant trend is the increased mobility that is developing around the world as vaccination rates improve and activity in the travel, leisure and hospitality sectors returns to some semblance of normalcy.
Increases in vehicle miles traveled are supporting a rebound in crude oil and gasoline prices to bring back margins for our Oxyfuels business in the I&D segment.
While a slower rebound in international air travel is holding back demand for jet fuel, strong demand for diesel and improving demand for gasoline is expected to improve profitability for LyondellBasell's Refining segment during the second half of this year.
Increased mobility will also benefit our polymer businesses as the restaurant, hotel and tourism industries restock and begin to address substantial pent-up demand.
The sum of these trends points to a strong outlook for both the global economy and LyondellBasell during the remainder of 2021 and well into 2022.
On slide eight, these trends can be seen in first quarter global demand growth for our two largest products, polyethylene and polypropylene, relative to prepandemic levels seen two years ago in the first quarter of 2019.
Over this period, we've seen modest improvements in European demand.
In the first quarter of 2021, North American demand was quite strong, but constrained by lack of supply due to the downtime triggered by the cold weather and associated power outages in Texas.
Northeast Asian demand increased by an astounding 23% driven by the postpandemic strength of the Chinese economy.
Since imports account for approximately 40% of China's demand needs for polyethylene, China's growth benefited LyondellBasell's production sites in the United States and the Middle East that export polyethylene to China.
Global demand for polyolefins has grown by 14% over the past two years, far above the long-term trends of 4% and 5% annual demand growth for polyethylene and polypropylene, respectively.
Strong global demand and constrained production have supported polyethylene contract price increases of $950 per metric ton in the US from May 2020 through March of this year, with $420 per ton occurring since November and more than $300 per ton of additional price increases on the table for April and May of 2021.
As demand should get even stronger as we progress through the recovery, we expect tight markets and strong margins for polyolefins to persist into next year.
In January, we talked about concerns that global polyethylene capacity additions, particularly in China, could outpace global demand and depress operating rates and profitability over the coming years.
This quarter, we have updated the chart we discussed during the fourth quarter call to address operating rates for both polyethylene and polypropylene.
Predictions of reduced operating rates due to new capacity are highly reminiscent of forecasts from consulting reports published in 2016.
These are depicted by the dotted blue line, which predicted global operating rates would dip due to capacity additions on the US Gulf Coast from 2017 through 2018.
More importantly than delays in capacity, we believe recent forecasts are underestimating demand growth.
Early in the pandemic, many predicted declines in PE demand for 2020.
By the middle of the year, forecasts improved to flat demand.
Most consultants now believe that global polyolefin demand grew by approximately 4% in 2020, similar to growth rates seen consistently over the past 30 years.
Adjusting these forecasts to 4% demand growth for both '20 and '21 results in a predicted operating rate shown by the dotted gray line.
Last quarter, we suggested that 2021 would likely follow the patterns seen after prior recessions, and this year's demand growth could be higher than the historical trend of 4%.
A 7% growth in demand during 2021 for only one year with reversion to the historical mean in 2022 and beyond would generate the robust operating rate forecast depicted by the dotted orange line.
Today, with global polyolefin demand growing in the first quarter by 14% over the past two years, we are even more confident that the recovering economy is likely to facilitate a more orderly absorption of this new capacity by the global market, which should support robust margins.
Over the last 12 months, LyondellBasell converted almost 80% of our EBITDA into $3.4 billion of cash from operating activities.
In the first quarter of 2021, our businesses delivered over 40% more free operating cash flow relative to the same period last year.
We expect continued improvement of our LTM performance as we progress through each quarter of 2021.
As Bob mentioned, our goal for this year is to accomplish meaningful deleveraging to further strengthen our investment-grade balance sheet.
In the first quarter, while paying dividends of $352 million and investing a similar amount in capital expenditures, we reduced the balance on our term loan by $500 million to close the first quarter with cash and liquid investments of $1.8 billion.
After the quarter closed, we repaid an additional $500 million on the term loan in April.
We expect that robust cash generation should enable continued progress on deleveraging throughout the year.
Before I continue with a more detailed discussion of our segment results, let me provide a brief update on our 2021 modeling guidance.
We continue to be on track to invest approximately $2 billion in capital expenditures during 2021, targeted equally toward profit-generating growth projects and sustaining maintenance.
Due to extremely strong demand for propylene oxide, we have shifted a turnaround at one of our PO/TBA units in Bayport, Texas from the second quarter to the third quarter of this year and reduced the scope and associated downtime for the maintenance.
With this change, we expect no major planned maintenance downtime in the second quarter of 2021.
And based on expected volumes and margins, we estimate that the third quarter EBITDA impact due to lost production associated with planned maintenance across the company will increase by $30 million to $75 million.
In total, the EBITDA impact associated with all of LyondellBasell's 2021 planned maintenance downtime should decrease by $30 million relative to our original guidance to approximately $140 million for the year.
In the first quarter of 2021, LyondellBasell's business portfolio delivered EBITDA of $1.6 billion.
This was an improvement of more than $300 million relative to the fourth quarter, exceeding typical first quarter seasonal trends.
The upward trajectory of LyondellBasell's profitability reflects improving demand and margins for our products driven by the recovering global economy and tight markets.
As Bob mentioned, cold weather and associated power outages resulted in unplanned shutdowns that constrained first quarter production for LyondellBasell and nearly all of our competitors in the state of Texas.
This downtime was exacerbated by strong global demand that tightened markets and elevated margins across most of our businesses.
While it's clear that we lost production during the first quarter due to unplanned downtime, the offsetting effects of higher margins and sales from inventory complicates the effort to quantify the impact on first quarter business results.
In the second quarter, we plan to operate our assets at nearly full rates as profitability improves for oxyfuels and refining businesses.
We expect further EBITDA improvement during the second quarter.
On the left side of the chart, our all-time high quarterly EBITDA, excluding LCM of approximately $2.2 billion reported in the third quarter of 2015, provides useful perspective.
While profitability for transportation fuels was quite strong in 2015, today, our company has more earnings power from a larger asset base.
Over the last six years, we have added ethylene capacity at Corpus Christi, expanded our compounding business through the acquisition of A. Schulman, started a new Hyperzone HDPE plant in Houston and added significant joint venture capacity in Louisiana and China.
In 2021, LyondellBasell is poised to capture opportunities that are emerging in the rebounding global economy with a larger asset base.
Now let's review the first quarter results for each of our segments.
As mentioned, my discussion will describe our underlying business results excluding the noncash impacts of LCM inventory changes.
I will begin with our Olefins and Polyolefins-Americas segment on slide 13.
Third quarter EBITDA was $867 million, $145 million higher than the fourth quarter.
Tight markets and strong demand resulted in improved margins, driving quarterly results higher than we have seen since 2015.
Olefin results increased approximately $155 million compared to the fourth quarter.
Olefins margins increased, with higher ethylene and propylene prices outpacing higher feedstock and utility costs.
Volumes decreased due to downtime driven by Texas weather events, partially offset by a full quarter of volume from our Louisiana joint venture that we formed in December.
The ethylene cracker at the joint venture ran continuously throughout the weather events and exceeded ethylene nameplate operating rates by 9% during March.
Polyolefin results for the segment decreased by about $15 million during the first quarter.
Polyethylene margin decreased, while polypropylene margin improved.
Polyethylene volume increased due to a full quarter of contribution from the Louisiana joint venture, partially offset by lost production during the weather events.
We anticipate both volume and margin improvement for our O&P-Americas segment during the second quarter.
Volumes are expected to rebound in the absence of weather-related downtime.
Tight markets due to high demand, low inventories and customer backlogs are expected to continue to support strong integrated chain margins.
During the first quarter, EBITDA was $412 million, $161 million higher than the fourth quarter.
Strong demand expanded margins, driving quarter results higher than we have seen for the segment since 2018.
Olefins results increased $30 million driven by increased margins and volumes.
Ethylene margin improved due to increased ethylene prices and lower fixed costs despite higher feedstock cost.
Demand was robust during the quarter, and we increased volumes by operating our crackers at a rate of 98%, almost 10% above industry benchmarks for the first quarter.
Combined polyolefin results increased approximately $150 million compared to the prior quarter.
Strong polymer demand drove spread improvements for both polyethylene and polypropylene prices relative to monomer.
Margin improvements at our Middle East and Asia joint ventures were offset by higher LPG feedstock costs, pressuring profitability at our new Bora joint venture in China, resulting in little change in equity income for the segment.
During the second quarter, we expect strong demand in tight markets to drive further margin improvement for our O&P-EAI businesses.
First quarter EBITDA was $182 million, $14 million lower than the prior quarter.
Margins improved with higher product prices, while volumes declined due to the Texas weather events and planned maintenance in our Propylene Oxide & Derivatives business.
First quarter Propylene Oxide & Derivatives results decreased by approximately $35 million due to lower volumes, offsetting stronger margins driven by tight market supply.
Intermediate chemical results decreased about $55 million due to lower volumes as a result of the weather events.
Oxyfuels and related products results increased by approximately $25 million as a result of higher margins benefiting from improved gasoline prices that were partially offset by constrained volumes.
We expect both volumes and margins to improve for our I&D segment in the second quarter.
Strong demand for durable goods, coupled with continued tight market supply, are expected to increase profitability across most of the businesses in this segment.
Now let's move forward and review the results of our Advanced Polymer Solutions segment on slide 16.
First quarter EBITDA was $135 million, $9 million higher than the fourth quarter.
Volumes improved driven by higher demand for our products, partially offset by lower margins.
Compounding & Solutions results were relatively unchanged, with higher volumes driven by improved demand being offset by compressed margins due to rising feedstock cost.
Advanced Polymer results increased by approximately $15 million due to both higher margins and volumes.
In April, North American feedstock costs for our polypropylene compounds rapidly declined to reverse much of the price escalation that occurred during the first quarter.
We expect that falling feedstock prices, combined with continued price improvements for our compounded products, will expand margins during the second quarter.
First quarter EBITDA was negative $110 million, a $36 million decrease versus the fourth quarter of 2020.
Higher cost for renewable fuel credits, or RINs, and lower crude throughput overwhelmed improvements in the Maya 2-1-1 industry crack spread.
In the first quarter, the Maya 2-1-1 crack spread increased by $5.21 per barrel to $15.32 per barrel.
As a result of the Texas weather event, the average crude throughput at the refinery fell to 152,000 barrels per day.
In April, we continue to see improvements in refined product demand, and we are running the refinery at nearly full rates.
Strong demand for diesel and improving demand for gasoline is expected to improve both volumes and margins at our refinery during the second half of this year.
However, we don't expect a full recovery until there is further progress in vaccination rates and a rebound in global demand for jet fuel driven by increased business and international air travel.
First quarter Technology segment EBITDA was $94 million, $49 million higher than the prior quarter.
Catalyst profitability increased with customers rebuilding inventories and increased demand from Asia and the Middle East.
Based on anticipated timing of upcoming licensing milestones and catalyst demand, we expect that second quarter Technology business profitability will be similar to the first quarter.
Let me summarize our view of current conditions and the outlook for our businesses with slide 19.
We began this year with low inventories and increasing demand from a recovering global economy.
During our fourth quarter earnings call in January, we thought that strong February order books, increasing seasonal demand and tight industry supply would support strong margins for at least the first half of 2021.
Since January, our industry lost several weeks of supply due to Texas weather events during February, and deferred maintenance from 2020 is resulting in higher levels of planned downtime across the industry, particularly in the second quarter.
North American inventories were depleted during the downtime, and European inventories have been pressured by unusually strong first quarter demand.
While our company normally maintains over one month of polyolefin sales inventory, our European PE and PP businesses ended March levels well below those targets, most notably, with less than two weeks of low-density polyethylene inventory.
Logistics constraints are exacerbating the situation due to shortages of shipping containers on critical routes and escalating freight rates that are limiting opportunities for regional arbitrage.
China remains structurally short of polyethylene, and US exports to China have vanished as North American suppliers seek to replenish inventories and address order backlogs from domestic customers.
Backlogs for finished goods are rising as the recovering global economy continues to be supported by government stimulus and pent-up demand emerges with increased vaccination rates.
In summary, we believe that tight global markets are likely to persist well into the second half of this year, and continued improvements in mobility and associated economic activity could sustain strong volumes and margins into 2022.
In the years following the 2008 Great Recession, our company nimbly captured the benefits of low-cost feedstocks that arose from the development of North American oil and gas resources.
LyondellBasell typically delivered between $6 billion to $7 billion of EBITDA over the past 10 years.
Our EBITDA after LCM inventory adjustments reached $8.1 billion in 2015 during my first year as CEO of our company.
At the end of 2019, we thought we might simply be coming to the end of a very long business cycle until we learned more about COVID and the extreme tolls it would take on our society, the economy, and ultimately, in human lives.
As we rebound from the pandemic and contemplate how our company could perform through the recovery and the next business cycle, it is worthwhile to consider the factors that should provide additional earnings power relative to our performance last year and in the previous cycle.
Recovery in automotive and other durable goods demand is rebuilding volumes within our new APS segment back toward 2018 levels.
Increased utilization of our capacity should provide greater visibility on the more than $200 million in synergies that we've built into the business since acquiring A. Schulman.
In 2020, we added 500,000 tons of polyethylene capacity utilizing our next-generation Hyperzone technology.
During the depths of the pandemic and recession, our strong balance sheet enabled us to move forward and form accretive joint ventures for integrated crackers in China and Louisiana that provided immediate returns on our investments.
This quarter, we finalized an agreement to form our second propylene oxide joint venture with Sinopec.
Beyond the broad-based margin improvements that are currently under way for many of our products, full recovery in demand for transportation fuels still lies ahead and should drive margin improvement for our sizable Refining & Oxyfuels businesses over the coming quarters.
Our larger asset base is well poised to capture the opportunities of a recovering economy, establish new earnings benchmarks and position LyondellBasell for further growth over the upcoming business cycle.
Let me close with slide 21.
The title of our 2020 annual report is Emerging Stronger, and it is an appropriate description of LyondellBasell's trajectory as the global economy recovers from the pandemic and recession.
Our leading and advantaged business positions are primed to capture the benefits of a recovering economy.
In the second quarter, we have no major planned downtime, and we are operating our highly reliable and low-cost global network of assets at maximum rates to capture rising margins.
We have remained steadfast to our disciplined financial strategy.
Over the coming year, our priority will continue to be deleveraging while supporting shareholder returns with a strong and progressive dividend.
We remain committed to an investment-grade credit rating, and our plan is to bolster our credit metrics through increased earnings and additional debt reduction over the coming quarters.
Our aim is to maximize free cash flow by leveraging our larger asset base, efficiently converting earnings into cash and deploying capital in a prudent manner toward high-return investments.
All of this will help drive our ultimate focus on delivering strong shareholder returns.
The outlook for our business is quite promising, and we look forward to delivering on our commitments over the coming quarters.
| q1 earnings per share $3.18.
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This past year was a time of great challenges, as well as incredible accomplishments at ALLETE.
ALLETE not only weathered the global pandemic through a tremendous amount of hard work by our team.
We also delivered solid financial and operational results, which Steve Morris will describe later in the call.
And we did so while keeping the safety and health of our coworkers, our families, our customers, and our communities, our highest priority.
I'm so grateful to our employees across our family of businesses in many different states, all of whom demonstrated their incredible resilience and steadfast commitment to our customers, our communities, and each other during this most challenging time.
We certainly saw this past year that we truly are stronger together.
As I shared with you last quarter, we know that especially during trying times like these, our commitment to transparency is even more important to all of our stakeholders.
Last quarter, we reiterated our commitment to ALLETE's long-term five-year objective of achieving consolidated average annual earnings-per-share growth of 5% to 7%.
While on that conference call, we were transparent regarding the challenges we were seeing with our October 2020 projections falling slightly below that range.
As Bob will discuss in more detail later in the call, we're very pleased to report that we are now projecting growth within our average annual 5% to 7% earnings per share objective range.
So as we move on from 2020, ALLETE is well-positioned for the future.
We intend to build on our strong foundation of integrity, our extensive track record of success, and our long-standing reputation as a company trusted by our many stakeholders.
Through our sustainability and action strategy, we will continue to deliver value to our customers, our communities, and our investors while providing opportunities for our employees as together, we build a clean energy future.
A significant step forward in this commitment is Minnesota Power's recently announced vision to deliver 100% carbon-free energy to customers by 2050.
We're proud that Minnesota Power is already the first Minnesota utility to provide 50% renewable energy.
But as we said when we reach this exciting milestone in December, we have more work to do.
We're taking concrete actions to address climate change while working to ensure the reliable and affordable energy that our customers and our communities expect.
The IRP was developed through a best-in-class process with strong engagement over the past year from a broad range of stakeholders, from customers to consumer and environmental advocates, to communities, to regulators, to employees, and many others.
In the IRP, we identified plans to increase Minnesota Power's renewable energy supply to 70% by 2030 and to achieve a coal-free energy supply and 80% less carbon by 2035.
These steps include adding an estimated 400 megawatts of additional wind and solar energy; retiring Boswell Energy Center Unit 3 by 2030; transforming Minnesota Power's Boswell Unit 4 to be coal-free by 2035; and investing in a modern, flexible transmission and distribution grid.
These are significant and meaningful changes to Minnesota Power's entire system, and it's critically important to us that this transition truly be sustainable.
Meaning it goes above and beyond addressing climate change to care for our customers, our communities, and our employees throughout this transition.
This plan and our 2050 vision allow time for advances in technology and for our communities and our employees to transition to a secure and carbon-free energy future.
Also making significant progress in ALLETE's sustainability and action strategy is our second largest company in the ALLETE family.
With current operations in seven States, ALLETE Clean Energy is well-positioned to drive additional clean energy sector growth, as Al Rudeck will discuss in a moment.
As highlighted in our third-quarter conference call, ALLETE Clean Energy's growth has exceeded our original expectations from when we founded the company just 10 years ago.
Building on ALLETE Clean Energy's reputation and its strong track record of success, we believe it is the optimal time to expand its focus beyond wind to additional opportunities within the clean energy space.
Obviously, for competitive reasons, we can't share too many details right now, but we're confident that our strategy to expand and diversify the business through new geographic regions, customers, and clean energy technologies will extend and grow our earnings as part of ALLETE's value proposition for investors.
The combination of our regulated businesses, significant initiatives, and those already completed and under way at ALLETE Clean Energy will further advance ALLETE as a leader in sustainability.
We've been an early mover in this transition, and we're well-positioned for the clean energy future.
Today, ALLETE reported 2020 earnings of $3.35 per share, a net income of $174.2 million.
Earnings for 2019 were $3.59 per share on net income of $185.6 million.
Results for the year ended 2020 were negatively impacted by lower sales due to the ongoing COVID-19 pandemic and related disruptions.
Net income in 2020 also included reserves for interim rates of $8.3 million or $0.16 per share due to the resolution of Minnesota Power 2020 General Rate Case.
A few details from our business segments.
ALLETE's regulated operations segment, which includes Minnesota Power, Superior Water, Light and Power, and the company's investment in the American transmission company, recorded net income of $136.3 million, compared to $154.4 million in 2019.
Earnings reflected lower net income at Minnesota Power primarily due to lower megawatt-hour sales to retail customers due to the COVID-19 pandemic; lower revenue resulting from the expiration of certain municipal and power sales contracts; higher depreciation expense; and lower fuel adjustment clause recoveries with the adoption of a new fuel adjustment clause methodology in 2020.
Overall, we estimate that the COVID-19 pandemic negatively affected revenues by approximately $0.25 per share for the year ended 2020 from our expectations.
These decreases were partially offset by eight months of higher retail rates resulting from Minnesota Power's 2020 rate case settlement.
ALLETE Clean Energy recorded 2020 net income of $29.9 million, compared to $12.4 million in 2019.
Net income in 2020 reflected additional production tax credits, increased earnings from Glen Ullin, South Peak, and Diamond Spring wind energy facilities, and higher megawatt-hour sales due to higher wind resources as compared to 2019.
Our corporate and other businesses, which includes BNI Energy, our investment in Nobles 2, and ALLETE properties, recorded net income of $8 million in 2020, compared to net income of $19.9 million in 2019.
Net income in 2020 included earnings from the company's investment in the Nobles 2 wind energy facility, which commenced operations in December of 2020.
Net income in 2019 included the gain on the sale of U.S. Water Services of $13.2 million.
I'll now turn to our 2021 earnings guidance.
Today, we initiated 2021 earnings guidance of $3 to $3.30 per share on net income of $160 million to $175 million.
This guidance range is comprised of our regulated operations within a range of $2.30 to $2.50 per share and ALLETE Clean Energy and corporate and other businesses within a range of $0.70 to $0.80 per share.
A few comments on our regulated operations outlook for 2021.
Our 2021 guidance reflects a full year of the Minnesota Power retail rate increase from last year's rate case settlement compared to eight months in 2020.
Minnesota Power's 2021 Industrial sales are expected to range between 6 million to 6.5 million megawatt hours, which reflects anticipated production from our taconite customers of approximately 35 million tons.
Our estimated industrial sales reflect a partial recovery of the domestic steel industry, which has rebounded from the 2020 impact of various industry shutdowns and idling due to this ongoing COVID-19 pandemic.
However, steel production rates remain nearly 10% below pre-pandemic level.
We are pleased to begin the year with full production nominations through April for all of our large power industrial customers with the exception of Verso Duluth paper mill, which we expect to remain idled all year.
Our 2021 guidance reflects continued impacts from the ongoing COVID-19 pandemic affecting commercial, other industrial, and municipal sales.
Minnesota Power will also realize lower revenue due to a power sales agreement that expired in April of 2020.
We expect slightly higher operating and maintenance expense of approximately 3% as compared to 2020 and higher depreciation and property tax expenses due to additional plant in service.
We expect slightly lower net income at Superior Water, Light, and Power due to additional operating and maintenance expense, as well as slightly lower earnings from our investment in the American Transmission Company, as 2020 earnings included a favorable MISO ROE outcome and related true-ups.
Our guidance for our regulated operations assumes we will achieve reasonable outcomes in regulatory proceedings.
A few highlights from our 2021 guidance regarding ALLETE Clean Energy.
ALLETE Clean Energy expects approximately 3.2 million megawatt hours in total wind generation in 2021, with the expectation of normal wind resources compared to 2.1 million megawatt hours in 2020.
Our guidance includes South Peak and Diamond Spring in service for a full year.
These facilities were in service in April and December of 2020, respectively.
We anticipate the Caddo wind project to be completed by the end of 2021, with no impact to earnings this year.
Our 2021 guidance does not include the impacts, if any, of possible acquisitions of renewable energy facilities, additional construction and sale projects, or additional requalification projects.
At a high level, we view 2021 as a transition year with lingering economic impacts from the ongoing COVID-19 pandemic, having the most notable effect on our regulated operations.
Looking forward to 2022, ALLETE also provided its preliminary 2022 estimated earnings guidance range of $3.70 to $4 per share, which ALLETE anticipates formally initiating in early 2022.
The we expect Minnesota Power will follow a general rate case in November of 2021 based on a 2022 test year, with interim rates expected in the beginning of 2022.
2020 was, without question, a very challenging year, rooted in the impacts of the global pandemic.
Our successful track record and ability in managing severe economic downturns was directly evident again by the strong results that Steve just shared with you, and I'm very proud of our team.
Although we are all not out of the woods yet and will remain diligent in 2021, we are very optimistic about the future and believe ALLETE is very well-positioned to execute and deliver a solid value proposition for our customers and investors alike over the long run.
I am particularly proud of our employees who work hard to ensure our essential services were provided in a reliable and safe manner across our eight-state footprint, something we achieved in space.
At the same time, we did not lose focus or momentum, in advancing our clean energy growth strategy and associated investments.
Indeed, 2020 represented one of the largest capital programs in our history with more than $650 million being invested, including the completion of approximately 500 megawatts of new wind farms in the Great Northern Transmission Line.
Overall, our execution and discipline was outstanding, especially when considering the challenges created by the pandemic.
We entered 2021 with a strong balance sheet, conservative capital structure at approximately 39% total debt and now generate in excess of $300 million in total operating cash flow.
This positions us well as we continue to advance our sustainable clean energy strategy.
A notable achievement on the financing side was our ability to secure approximately $400 million in tax equity financing under very competitive terms.
These key financings were related to the South Peak, Nobles 2, and Diamond Spring wind projects, which came online at the end of the year.
Now, I would like to turn to 2021 and beyond.
ALLETE is highly focused on providing reliable and competitive services to our customers, and we work hard every day to ensure our operations are efficient and safe.
At the same time, we are also keenly aware of the need to provide an attractive value proposition for our investors to ensure the company has continued access to low-cost capital to fund its operations.
Toward that end, several years ago, we established an average annual long-term earnings per share growth objective of 5% to 7%, which, when combined with a competitive dividend, would provide an attractive total return proposition to investors.
I want to be clear upfront that we remain committed to that objective.
Consistent with last year, this growth target is comprised of 4% to 5% from the regulated utility businesses and at least 15% for the nonregulated businesses.
In third quarter of last year, however, I caution that meeting our growth objectives may be challenged in the short term, given the significant impact COVID-19 was having on a regulated utility business, and competitive pressures we were beginning to see in the wind segment of our renewable business.
In full transparency, I indicated that the five-year average annual earnings per share growth outlook for our consolidated operations, using 2019 as a base year, was currently below the 5% to 7% range at approximately 4%, with the regulated utility growth closer to approximately 3% versus the 4% to 5% targeted rate.
At positive note, I also indicated at that time that our nonregulated business segment, which is comprised primarily of ALLETE Clean Energy, was expected to continue to significantly exceed our 15% growth objective.
And that, even despite some potential challenges in the wind segment longer term, we were confident that this highly successful platform would be able to leverage its reputation, scale, and strong capabilities into new, complementary, and higher returning segments of the clean energy market.
And we committed to you, we will be providing investors an update in early 2021 and upon conclusion of our strategy development work.
With this anchoring in mind, I will now provide an update on our financial outlook for each of the major business segments.
Before I dive into the details, however, I'm pleased to report that our consolidated company 5-year outlook using 2019 as a base year, is projecting growth, which is now back within the average annual 5% to 7% targeted range.
Though our regulated operations are still projected to grow approximately 3% on average, our ALLETE Clean and corporate and other businesses are now projecting average annual growth in the 30% to 40% range, well above the 15% target originally established.
The actual growth of our regulated operations will be impacted by three main drivers.
The first of these are the Minnesota Power's energy forward initiatives detailed by Bethany earlier.
Obviously, there are sensitive and confidential details to these plans yet to finalize, but we anticipate sharing what we can regarding size, scope, and timing with these projects and keeping you paced on our progress as the IRP moves forward.
Make no mistake, however, that the transformation of our generation fleet into cleaner forms of energy is truly historic in size and scope for our company.
And will require significant investment, not only on the generation side but in supporting transmission and distribution over the next decade or so.
Secondly, we will seek out other regulated opportunities, particularly in the transmission area as the MISO region continues to be challenged with constraints on the grid as renewable generation continues to expand.
Our planned expansion of our 550-megawatt DC transmission line is a prime example of that type of investment.
Obviously, the ultimate timing of all such investments described will have a material impact on our growth in coming years, and we will continue to navigate this clean energy transition as we have in the past with customer rates and overall competitiveness in mind.
A final major driver of our regulated utility performance is dependent on our ability to achieve acceptable rates of return.
Despite our best efforts to manage our costs and improve efficiencies, COVID-19 has had a material impact on our business and our ability to earn our authorized 9.25% rate of return at Minnesota Power.
With COVID impact and the health of our customers in mind, we decided to act quickly and settle the Minnesota Power 2020 rate case.
This provided an important relief in the form of an interim rate refund of approximately $12 million in 2020.
Given our expectation that COVID impacts will continue to be material to our customers in 2021, we have also decided to delay a much-needed rate filing from March of 2021 to November of 2021.
Though we continue to believe those actions were merited and will be key to helping our customers regain a solid footing, it has had a very material impact on our 2021 earnings outlook with returns well below authorized levels.
As a result, we will be working closely with our state regulators on a fair and reasonable outcome in our next rate filing, which will enable the company to achieve earnings outcomes more in line with authorized return levels.
On our nonregulated businesses, which is predominantly made up of ALLETE Clean Energy, we have made significant progress over the past few quarters, assessing various strategic options for expanding the business and diversifying its clean energy product offerings.
Indeed, we are very excited about the new chapter ahead as we expand into utility-scale solar, storage, optimize our current wind portfolio, and pursue other potential service offerings.
This strategy work, which will be further described by Al Rudeck in a few moments, was supported by outside advisors and was ultimately approved by the ALLETE board in early February.
The strategy is highly actionable, complementary to our existing offerings, and leverages unique capabilities of the business.
Moreover, we are confident it will result in even higher annual rates of growth beyond the 30% projection inherent in our wind-only strategy.
Hence, we are expanding our average annual earnings per share growth outlook to as high as 40% growth over the next five years.
The nature of investments contemplated by the new strategy will provide for attractive rates of return and by virtue of the recurring or contracted nature of the revenues, plus strong cash flows, will support our strong credit ratings.
Our execution of the new strategy is in full swing already as evidenced by yesterday's announcement of an agreement with a subsidiary of Xcel Energy to sell 120-megawatt wind energy facility for approximately $210 million.
This transaction will involve us repowering the 100-megawatt Chanarambie and Viking wind projects, as well as developing an additional 20-megawatt fleet.
The project is expected to be completed in late 2022, subject to regulatory approval by the MPUC and receipt of permits.
Cash received from the transaction will be reallocated to opportunities presented by the new strategy, thereby reducing the potential for future equity needs, another classic example of ALLETE's disciplined approach to capital allocation and action.
In closing, we were pleased in our ability to increase our annual dividend to $2.52 per share from $2.47 per share, even despite the challenges we see in 2021.
All based on strong confidence in our 2022 and beyond outlook.
We are very bullish about ALLETE's strategic positioning and overall growth prospects and are particularly proud of how this growth will continue to advance our sustainability objectives across our company.
I'll now hand it off to Al Rudeck for his update and outlook for ALLETE Clean Energy.
I would refer you to Slide 8, which illustrates how we at ALLETE Clean Energy are driving growth by leveraging our strong platform and capabilities in a growing clean energy market to meet customer demands for more sustainable energy products and services.
I'm excited to share our view of the market, and specifically why we, at ALLETE, believe the company is so well-positioned for future growth and to diversify its position as a leader in the clean energy landscape.
We are now entering the next stage of America's energy transformation as our country continues to be fertile ground for additional clean energy innovation, opportunity, and investment.
ALLETE Clean Energy sizes of strength because we are nimble and able to adapt to the markets and tailor our solutions to give customers what they want.
As importantly, a small percentage of the market share delivers meaningful growth for ALLETE.
The ability to establish and maintain relationships as a hallmark of hall ALLETE Clean Energy succeeds in the market, as seen by our repeat transactions and consistent positive feedback from our community host and landowner partners.
Through these partnerships and our combined capabilities of project development, construction, long-term operation, and asset optimization are differentiators enable us to secure high-quality investments.
As introduced in ALLETE's third-quarter 2020 conference call, we have been crafting a strategy to deliver more comprehensive energy solutions for our customers.
I will refer you to Slide 9, which outlines the core elements of our growth, vision, and strategy.
ALLETE Clean Energy's new strategy will expand our capabilities, our technologies, and our market investments likely to move to solar, storage solutions, and related energy infrastructure investments and services.
We believe that our customers and industry relationships, diverse portfolio of assets located in some of the best wind resources in America, and a creative and adaptable team will provide a strong foundation for growth.
You'll see more from us in the coming quarters as these plans unfold.
ALLETE Clean Energy will continue to optimize its existing wind portfolio and seek development for our remaining safe harbor qualified equipment and explore other renewable energy opportunities to expand our service offerings to provide more solutions that customers demand and frankly deserve.
The northern wind repowering expansion project with Xcel Energy announced yesterday is a prime example of our strategy in action, delivering sustainability on many levels, going beyond the environment to include supporting communities and the people where we do business.
This project meets all of our sustainability goals while also supporting ALLETE's future investments in new clean energy projects.
Businesses and communities with ambitious climate action commitments are raising demand for renewable energy solutions, and leak energy strategy is designed to meet those growing needs, while also continuing to service our traditional utility and cooperative and even federal power customers.
The 300-megawatt Diamond Spring project became operational in the fourth quarter of last year and is already serving three new Fortune 500 customers: Walmart, Starbucks, and Smithfield Fluids.
And represents its largest single renewables project investing in leads history, successfully completed during the global pandemic.
Diamond Spring is projected to generate more than 1 million-megawatt hours of energy annually and provide great diversity to our northern tier projects that is currently operating and expands coast to coast.
We found Oklahoma to be a friendly business environment and welcoming to new investments.
It represents a key part of our strategy to diversify ALLETE into the Southwest Power Pool market and expand operations into the wind-rich Southern Great Plains region.
Similarly, as Steve mentioned, we're pleased with our ongoing progress of the 300-megawatt Caddo wind project located in Caddo County, Oklahoma.
Last week, we announced that Hormel and Oshkosh as our newest customers at Caddo, this project is on track to be online by the end of 2021.
We're excited and see renewable energy growth opportunities across multiple regions of the country and can be selective and strategic in when and where we invest.
Today, ALLETE Clean Energy's portfolio operates in five North American electric markets, and we're looking to either build or add new PTC qualifying projects or repower projects and/or require existing operating assets while expanding products and services in solar, storage, and related clean energy services.
We are confident ALLETE Clean Energy will become a comprehensive national clean energy solutions provider, as our country is clearly on an expedited path to advance cleaner and more efficient energy forms.
I appreciate being here with you today and look forward to sharing more details on our strategy and on our success in the future.
And now, I'll hand it back to Bethany.
We're pleased with all that our team has accomplished in 2020 and look forward to another year of strong execution of our sustainability and action strategy.
As Al and Bob stated, we're especially excited to share more with you as we execute ALLETE Clean Energy's growth strategy beyond wind.
We're confident that ALLETE Clean Energy will play an increasingly important role in ALLETE's success well into the future.
Sustainability in all of its dimensions has long been a foundation of ALLETE's strategy.
We recognize that if not addressed, climate change poses physical and transitional risks.
We've taken and will continue to take concrete actions not only to mitigate these risks but to build a clean energy future through just and meaningful change.
As Society's energy needs and expectations evolve ALLETE's family of businesses is well-positioned for the future.
Consistent with our commitment to transparency, in the coming months, we plan to release a corporate sustainability report that is aligned with the Sustainability Accounting Standards Board, or SASB, and Task Force on Climate-related Financial Disclosures, or TCFD, reporting requirements.
This report will also contain additional information regarding our commitment to diversity, equity, and inclusion in our workforce, our supply chain, and our communities.
It will mark the first of many reports over the years as we work to effectuate what is personally important to us at ALLETE and to meet and exceed expectations for sustainability disclosures and increased transparency.
As I've shared with you in previous quarters, we are committed to providing value to our customers and our investors and as part of that commitment, we have a responsibility to do what we can to make the regions where we operate, even better places to live and to work for everyone.
For all of us at ALLETE that is sustainability in action.
| compname reports 2020 earnings of $3.35 per share; initiates 2021 earnings guidance; anticipates further improvement in 2022.
allete inc - expects continued impacts of covid-19 pandemic in 2021.
|
Joining in the Q&A after Bob and Mike's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group.
You will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
Tachi was much more than a knowledgeable, deeply involved Agilent Board member for nine years.
As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others.
I know that the Agilent team is not alone and recognize that Tachi Yamada will be greatly missed and we extend our deepest sympathies to Tachi's family.
Now, on to the third quarter review and our updated outlook for the year.
In Q3, the very strong broad based momentum in our business continues.
The Agilent team delivered another outstanding quarter, exceeding our expectations.
Q3 revenue of $1.59 billion is up a reported 26% and is up 21% core.
This is against the mass decline of 3% in Q3 of last year, so we are well above fiscal year 2019 pre-pandemic levels.
In addition, as other positive sign of continued momentum, orders outpaced revenue during the quarter.
Our growth is broad based across all business groups, markets and geographies.
The combination of strong top line performance and execution translated into excellent growth and profitability and earnings per share.
Our Q3 operating margin is 26%, this is up 230 basis points from last year.
EPS is $1.10, up 41% year-over-year.
Agilent's success continues to be driven by our build and buy growth strategy and execution prowess.
We are developing market-leading products and services, investing in fast growing businesses while delivering outstanding customer service and continue to drive profitability.
Since the onset of the pandemic, we have taken actions to ensure Agilent emerged even stronger as a company.
While we have yet to leave COVID-19 in the rearview mirror, our Q3 results are another indicator our actions are delivering the intended results.
Bob will provide more details on end markets and geographies, but I want to briefly highlight our performance in our two largest end markets, pharma and chemical energy.
We continue to perform extremely well in pharma, our largest market growing 27% with strength in both small and large molecule segments.
Our large molecule business grew roughly 52% in the quarter and now represents 36% of our overall pharma revenue, up from the mid 20s just a few years ago.
In chemical energy, our business is recovering faster than expected, expanding 23% in the quarter.
This is an acceleration of the momentum we achieved in the first half and our order funnel continues to strengthen.
Looking at our performance by business unit, The Life Sciences and Applied Markets Group generated revenue of $680 million.
LSAG is up 22% on a reported basis, this is up 18% core, off just a 4% decline last year.
LSAG's growth is broad based across all end markets.
Our performance is led by strength in pharma, which is up 22% and chemical energy up 31%.
All businesses delivered strong growth led by Cell Analysis at 38% growth and our LC and LCMS businesses, which grew 22%.
We continue to strengthen our position in the fast growing large molecule market segment.
During the quarter, the LSAG team launched three InfinityLab Bio LC systems at the well attended InfinityLab LC Virtual Conference in June.
These new products further extend our LC leadership position.
In addition, building on our already strong pharma offerings, we launched new compliance ready LC/Q-TOF and LC/TOF solution to our portfolio in the quarter.
The Agilent CrossLab Group posted revenue of $560 million, this is up a reported 21% and up 15% on a core basis.
These results are on top of 1% growth last year.
The business is benefiting from increased activity and customer labs and instrument connect rates.
This is leading to more contracted services, on-demand services and consumables consumption across all end markets.
All end markets grew mid teens or higher with the exception of environmental and forensics, but still grew 9%.
The pandemic has shown ACG to be our most durable business, with ACG grown each quarter since COVID-19 first emerged.
Our customer-focused approach and digital investments continue to pay dividends.
Looking forward, instrument placements and demand bode well with continued strong performance by ACG as we drive attachment rates and increased customer lifetime value.
The Diagnostics and Genomics Group produced revenue of $346 million, up 44% reported and up 37% core, compared to an 8% decline last year.
The growth was broad based across product lines and regions and was led by our NASD GMP oligo business.
The ramp of our facility in Frederick, Colorado continues to go very well.
The quarterly results exceeded our expectations, easily surpassing the $30 million revenue milestone, while one quarter does not make a trend, our team has done a tremendous job increasing the output in a high quality manner.
This gives us increased confidence in our ability to exceed the $200 million annual run rate of revenue with existing capacity.
In addition, the Train B manufacturing line expansion is well underway and on schedule.
Our genomics instrumentation and consumables businesses rebounded strongly in the quarter as did our pathology-related businesses.
For the first time in several quarters, we saw a diagnostic testing above pre-pandemic levels.
While we are watching Delta variant very closely, to date we have not seen a meaningful negative impact on testing volumes.
I also want to highlight our performance in China.
While still less than 10% of DGG revenue, our China business grew 50% in the quarter.
We continue to see tangible progress in building a stronger China market position.
In Q3, we signed our first ever companion diagnostic development services agreement with a China based biopharma company.
Earlier this month, we also announced the initiation of in-country manufacturing for our SureSelect product line.
We are very bullish about long-term growth prospects in China for our DGG product and services offerings.
In addition, the integration of Resolution Bioscience team is going well and we are very pleased to enter and expand our participation in the fast growing NGS based cancer diagnostic market.
It was a busy quarter at Agilent.
So, I have a few other achievements I'd like to share with you.
Last month, we published Agilent's 21st Annual Corporate Social Responsibility Report.
At a time when some are just starting to look at issues like sustainability and societal impact, this has always been a key part of who we are as a company.
We've been addressing these issues since our founding more than two decades ago.
I would encourage you to review our report on the Agilent website.
We're also very pleased to receive recognition of the Great Place to Work in United States by the Great Place to Work Institute.
This result is just one more example of Agilent having a highly engaged and energized team, and as you know, teams with high engagement win in the market.
Looking ahead, building on another excellent quarter and the momentum we're seeing, we expect the business to continue to perform well as we close out what we believe will be an outstanding fiscal year 2021.
As a result, we are once again raising our full-year revenue and earnings guidance.
I will share more details, but we are expecting a continuation of our excellent top line growth and earnings generation.
While the world has yet to fully emerge from a global pandemic, Agilent is well positioned to deliver excellent results again in the fourth quarter.
I remain very proud of the Agilent team's ability to consistently deliver for our customers and shareholders.
I will now hand the call off to Bob.
In my remarks today, I will provide some additional details on Q3 revenue and take you through the income statement and some other key financial metrics.
I'll then finish up with our updated outlook for the fourth quarter and the full year.
As Mike mentioned, we had an excellent result in the third quarter.
Revenue was $1.59 billion, reflecting reported growth of 26%, core revenue growth was 21%.
Currency added 4.5% for the quarter and M&A added 0.5 point.
In addition, COVID-related revenues were in line with the prior year.
All end markets performed well with pharma and chemical and energy as standouts versus our expectations.
Our largest market pharma grew 27% during the quarter, after growing 2% last year.
The performance was led by the continued strength in our Large Molecule business growing 52%, while our Small Molecule business grew mid teens, and all regions in the pharma market grew double-digits.
Our Large Molecule business was driven by our NASD division and demand for LC and Mass Spec instrumentation and solutions, while our Small Molecule business was primarily driven by QA-QC refresh.
Chemical and energy also performed well this quarter with 23% growth.
Even after accounting for the comparison against the 10% decline last year, this was clearly our best quarter since the onset of the pandemic.
This result was driven by increasing momentum in demand for advanced materials and the general global economic growth.
Our view is that the chemical and energy market still has additional room to grow moving forward.
The diagnostics and clinical market grew 28% against the decline of 10% a year ago, our softest quarter last year.
We are very encouraged with the continued recovery in the market as our genomics and pathology businesses saw very good growth.
On a regional basis, all regions grew with China up 41% and Americas delivering 38% growth.
In the academia and government market, we delivered 12% growth as most research labs continue to open globally and expand capacity.
On a regional basis, Europe led the way.
The food market continued its double-digit performance growing 12% on top of growing 1% last year.
Food manufacturers continue to invest in increased testing to ensure quality and authenticity.
A developing cannabis testing market, primarily in the U.S. also contributed to growth in this market and regionally the food market was led by the Americas and Europe.
Rounding out our key markets, environmental and forensics came in with 5% growth.
On a geographic basis, all regions demonstrated solid growth led by the Americas at 32% and Europe at 23%, both exceeding our expectations.
The performance was broad-based across all markets.
And as expected, China was up 8% on top of 11% growth last year.
All three business groups grew in China during the quarter.
Pharma, chemical and energy and diagnostics were the key drivers.
Now turning to the rest of the P&L, third-quarter gross margin was 55.9%, up 80 basis points from a year ago despite roughly 40 basis points of headwind from currency.
Our strong top line, some positive product mix, coupled with the strong execution from our operations team drove the year-on-year improvement.
And our supply team is doing a tremendous job getting our products to customers, despite the increase in demand.
Gross margin improvement -- performance along with continued operating expense leverage resulted in operating margin for the third quarter of 26%, improving 230 basis points over last year.
Putting it all together, we delivered earnings per share of $1.10, up 41% versus last year.
Our tax rate was 14.75% and share count was 306 million shares, as expected.
We delivered $334 million in operating cash flow during the quarter, showing a strong conversion from net income and up more than 15% from last year while crossing the $1 billion mark in nine months.
During the quarter, we returned $172 million to our shareholders, paying out $59 million in dividends and repurchasing roughly 800,000 shares for $113 million.
Year-to-date, we've returned $829 million to shareholders in the forms of dividends and share repurchases.
And we ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 0.8.
Accounting for our Q3 performance and improved outlook in the fourth quarter, we are again raising our full-year projections for both revenue and earnings per share.
We are increasing our full-year revenue projection to a range of $6.29 billion to $6.32 billion, up $125 million at the midpoint from previous guidance and representing reported growth of 17.8% to 18.4% and core growth of 14.5% to 15%.
Included is roughly three points of impact from currency and a small amount from M&A.
In addition, we are on track to deliver roughly $100 million in COVID-related revenue in fiscal 2021, in line with our expectations from the beginning of the year and flat to last year.
We expect to continue our strong operating leverage, and so we are increasing our fiscal 2021 non-GAAP earnings per share to a range of $4.28 to $4.31 per share, up 30% to 31% for the year.
This translates the fourth quarter revenue ranging from $1.63 billion to $1.66 billion.
This represents reported growth of 10% to 12% and core growth of 8.5% to 10% on top of the 6% growth in Q4 of last year when we started to see early signs of recovery from the strict lockdowns.
In addition, while COVID revenue was roughly flat year-on-year for the full year, last year's fiscal fourth quarter represented the high watermark in our COVID related revenue.
And as a result, we expect to see roughly a one point headwind due to COVID revenue in the quarter.
So, our core growth excluding COVID would be comparable to 9.5% to 11%.
We are forecasting higher expenses in the fourth quarter as we invest to maintain our strong momentum, but expect continued operating leverage in excess of 100 basis points.
Non-GAAP earnings per share is expected to be between $1.15 and $1.18 with growth of 17% to 20%.
We believe our strategy is the right ones for Agilent, but we couldn't achieve these results we’ve been producing without the excellent execution by the team.
With that Parmeet, back to you for Q&A.
Paul, if you could please provide instructions for the Q&A now?
| agilent technologies q3 adj earnings per share $1.10.
q3 non-gaap earnings per share $1.10.
sees q4 revenue $1.63 billion to $1.66 billion.
sees fy revenue $6.29 billion to $6.32 billion.
q3 revenue $1.59 billion versus refinitiv ibes estimate of $1.54 billion.
sees fy non-gaap earnings per share $4.28 to $4.31.
sees q4 non-gaap earnings per share $1.15 to $1.18.
|
Joining in the Q&A after Bob and Mike's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group.
You will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
Before I get into the detail -- into the quarterly details, I want to start by recognize our Agilent India team.
Despite the challenging COVID-19 situation, our India team is working closely with our cause of do while we can to help in this time of extreme need.
In addition our Agilent India customer support, finance and IT teams have worked tiredlessly to help us close out the second quarter and keep us moving forward.
I could not be more proud of how the team has worked together in true one Agilent fashion.
Our thoughts go out the entire Agilent India team and their families during this difficult time.
In Q2 the strong momentum in our business continues against the backdrop of a recovering market.
The Agilent team delivered another outstanding quarter exceeding our expectations, both revenue and earnings are up sharply versus a solid Q2 last year when revenue and earnings per share were relatively flat.
Our growth is broad-based across all business groups, markets and geographies.
We are also expanding margins driving faster earnings-per-share growth.
Revenues for the quarter are $1.525 billion.
This is up 23% on a reported basis and up 19% core.
COVID-19 related revenues accounted for roughly 2% of overall revenues as expected and contributes about 1 point to our overall growth.
Our revenue growth is not a one quarter or easy compare story, but one that sustained above market growth.
For example, our Q2 revenues are up more than 17% core from two years ago.
Q2 operating margin of 23.9%.
This is up 150 basis points.
EPS of $0.97 is up 37% year-over-year.
Like our recent acquisitions in Cell Analysis, Resolution Bioscience an example of our build and buy growth strategy in action.
The Agilent story remains the same.
It is a story of one team outpacing the market to deliver strong broad-based growth in an environment of continuing market recovery.
Moving onto our end market highlights, we do strongly in all markets.
Our growth is led by 29% growth in pharma and 22% in food.
We are seeing improving growth in the chemical and energy market with 14% growth.
We also posted low-teens growth in diagnostics and over 20% growth in academia and government.
Lastly, environmental forensics grew 8%.
Bob will provide end market detail later in his comments.
Geographically, the Americas led the way with 27% growth.
Strength in China, Europe and the Rest of Asia continues with all growing in the mid-teens.
The 30% growth in China is on top of 4% growth last year when the business started to recover from the pandemic.
As we look at our performance by business group, the Life Sciences Applied Markets Group generated revenues of $674 million during the quarter.
LSAG is up 28% on reported basis and up 25% core off a 7% decline last year.
LSAG's growth is broad-based across all end markets and geographies.
Our focus in investments in fast growing end markets continues to pay off.
The LSAG Pharma business is very strong, growing 41% with strength in both biopharma and small molecule.
From a product perspective, we saw strength in liquid chromatography and LCMS along with continued growth in Cell Analysis.
During the quarter, Cell Analysis grew 34% with our BioTek business growing close to 40%.
During the quarter the LSAG team also contribute to our long-term companywide focus on sustainability in advance and important ESG initiatives.
LSAG announced several new products that have earned the highly respected accountability, consistency and transparency, ACT label from My Green Lab.
My Green Lab is a non-profit organization dedicated to improve the sustainability of the scientific research.
LSAG products will also receive two Scientist Choice Awards and now for the Select Science Virtual Analytical Summit.
Our Cell Analysis business during the quarter -- in our Cell Analysis business during the quarter, excuse me, we launched our Cytation C10 Confocal Imaging Reader, a multi-functional automated system focused on research labs and core facilities looking for increased productivity.
This product builds on the BioTek cell imaging leadership with the Cytation multimode leader and expands our reach in the strategic business.
While still early, customer feedback has been extremely positive.
We are also very pleased with the progress and trajectory of our Cell Analysis business overall and see a very positive future for this space.
The Agilent Cross Lab Group posted revenues of $536 million.
This is up a reported 19% and up 15% on the core basis versus a 1% increase last year.
ACG's growth is driven by demand for consumables and services across the portfolio as lab actively continues to increase for our customers.
This is leading to more on-demand services and parts consumption.
Revenues from our contract business continues to drive strong growth due to the high level of contract renewals seen in the previous quarter.
Our strong instrument placements and the increase in installed base will benefit the ACG business going forward.
At the same time our digital investments continue to pay off with continued strong customer uptake and consumables and our digitally enabled services offerings.
Our LSAG and ACG businesses come together in the iLab.
This is where we believe we are well positioned to continue driving above market growth as we build on our market leading portfolio, strong service organization and outstanding customer service.
For the Diagnostics Genomics Group revenues were $315 million, up 20% reported and up 16% core versus the 5% increase last year.
Growth is broad-based, led by our NASD oligo and genomics businesses.
Demand for our NASD offerings remains strong and our capacity expansion plans for a high-growth NASD business remain on track.
We're very pleased with the acquisition of Resolution Bioscience during the quarter with our liquid biopsy technology, Resolution Bioscience is the key player in a very exciting area of cancer diagnostics.
We are very glad to have them on the Agilent team.
I'm confident as time goes on.
, You'll be hearing more and more from us on this business and its contributions.
I would now like to recap the second quarter and take a look forward.
The strong momentum in our business continues.
This is being driven by our relentless customer focus, the strength of our portfolio and the execution capabilities of the one Agilent team.
Our build and buy growth strategy is delivering as intended of above market growth.
Over the last year, I've often said, that Agilent's focused on coming out of the pandemic even stronger as a company.
I believe you're seeing the impact of this approach in our current results.
As we look ahead we do so with a sense about optimism and confidence.
We are optimistic, because of the continued market recovery and the strength of our portfolio.
We are confident, because we have the right team, customer focused, operationally excellent and driven to win.
As a result we are once again raising our full-year revenue and earnings guidance.
Bob will share more details, but we expect that a continuation of excellent top line growth.
We also expect to compare this strong top line into excellent earnings growth and cash generation.
During our Investor Event in December, we discussed our shareholder value creation model and our goals for increasing long-term growth and expanding margins.
Six months into fiscal 2021 we are well on our way to achieving those objectives.
Our build and buy growth strategy is delivering.
The one-Agilent team continues to demonstrate its execution prowess and strong drive to win.
We raised the bar on customer service and continue to exceed customer expectations in providing industry-leading products and services.
While we are yet to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence.
I will now hand the call off to Bob.
In my remarks today, I'll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics.
I'll then finish up with our updated outlook for the year and the third quarter.
Revenue for the second quarter was $1.525 billion, reflecting reported growth of 23%.
Core revenue growth was 19%, while currency contributed just under 4 points of growth.
We are very pleased with our second quarter results as we saw strong broad-based growth with all three business groups posting mid-teens growth or higher and all end markets growing strongly.
From an end market perspective, our focus on fast growing markets is paying off.
Pharma, our largest market, again led the way delivering 29% growth.
This is on top of growing 5% last year.
Growth was led by Cell Analysis LC and mass spec.
These tools are delivering critical capabilities to our biopharma customers as they continue to make investments to develop new therapies and vaccines.
Our Biopharma business grew roughly 40% and represented over 35% of our Pharma business in the quarter.
Our Small Molecule segment also has momentum, growing in the mid 20s in the quarter.
Overall, we are well positioned within Pharma and expect the Pharma market to continue to be the strongest end-market as we enter the second half of the year.
The food market continued its strong performance, growing 22%.
We experienced strong growth across all regions and segments as we continue to see global investments across the entire food supply chain.
And we were very pleased to see the non-COVID diagnostics businesses continue to improve throughout the quarter, growing 13% as routine doctor visits return closer to pre-pandemic levels.
We posted a very strong month in the diagnostics and clinical market as we came to anniversary, the weak April we experienced in our large markets at the onset of the pandemic last year.
And we exited the quarter with testing volumes at a run rate slightly higher than pre-pandemic level.
The chemical and energy market continues to recover as we grew 14% of a decline of 10% last year.
Our results were primarily driven by continued strength in the chemicals and materials markets and in a positive sign, our order growth rates were ahead of revenues and finished the quarter strong leading us to believe this trend will continue.
We also saw a nice recovery in the academia and government market as non-COVID related labs resume operations in a strong funding environment.
With the increase in activity, our business grew 21% against the weakest comparison of the year.
We would expect the academia and government market to continue to recover throughout the rest of the year.
And lastly, the environmental and forensics market saw high single-digit growth driven by the Americas, services and consumables at Atomic Spectroscopy.
On a geographic basis, all regions grew led by the Americas at 27%, the pharma and academia and government markets in Americas grew in the low 30% range and all markets grew at least 20%.
Europe experienced 16% growth led by food, academia and government and C&E.
Those three markets all grew more than 20%.
And as Mike noted, China grew 13% after growing 4% last year.
This was driven by pharma growth in the high 30s.
Our growth in orders outpaced revenue growth by mid single-digits during the quarter.
Now turning to the rest of the P&L.
Second quarter gross margin was 55.4% flat year-on-year, despite a headwind of more than 30 basis points from currency.
Our operating margin for the second quarter came in at 23.9%, driven by volume, this is up a solid 150 basis points from last year, even as we saw increased spending as activity ramped and we invest in the future.
Strong top line growth coupled with our operating leverage helped deliver earnings per share of $0.97, up 37% versus last year.
Our tax rate was 14.75% and our share count was 307 million shares.
Now on to cash flow and the balance sheet.
Our performance translated into very strong cash flows.
We delivered $472 million in operating cash flow during the quarter, up more than 50% from last year.
The strong cash flow has continued to help drive our balanced capital deployment strategy.
During the quarter we returned $254 million to our shareholders, paying out $59 million in dividends and repurchasing 1.55 million shares for $195 million.
And as Mike mentioned, we also continue to strategically invest in the business, We spent a net of $547 million to purchase Resolution Bioscience and invested $31 million in capital expenditures.
Year-to-date, we returned $657 million to shareholders in the form of dividends and share repurchases, while reinvesting in the business by spending $619 million on M&A and capital expenditures.
And we ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward.
During the quarter, we raised $850 million in long-term debt at very favorable terms, redeemed $300 million that was maturing next year and reduced our ongoing interest expense.
We ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 1 time.
Now turning to the outlook for the full year and the third quarter.
We see a great opportunity to build on our strong first half results.
Looking forward, while the pandemic is still with us, we continue to see recovery in our end markets and have solid momentum in all of our businesses.
As a result, we are again increasing our full year projections for both revenue and earnings per share.
This reflects our strong Q2 results an increasing expectations for the second half of the year.
We are also incorporating the Resolution Bioscience into our guidance.
For revenue, we are increasing our full-year range to a range of $6.15 billion to $6.21 billion, up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% to 13%.
Included is roughly 3 points of currency and 0.5 point attributable to M&A.
This increased outlook also reflects continued growth in our end markets.
We see sustained momentum in the second half of the year in pharma, food and environmental and forensic markets.
End markets that we expect to continue to recover in the second half include the Diagnostics and Clinical, academia and government and C&E.
As Mike mentioned during our Investor Event in December, we provided a long-range plan of annual margin expansion in the range of 50 to 100 basis points.
Our updated guidance for the year exceeds the top end of that range.
And in addition, we are increasing our fiscal 2021 non-GAAP earnings per share to a range of $4.09 to $4.14 per share.
This is growth of 25% to 26% for the year.
Now for the third fiscal quarter, we're expecting revenue to range from $1.51 billion to $1.54 billion, representing reported growth of 20% to 22% and core growth of 15% to 17.5%.
And we expect third quarter non-GAAP earnings per share to be in the range of $0.97 to $0.99 per share with growth of 24% to 27%.
We believe our strategies and our execution of driving the strong results we've achieved and put us in a great position to continue to drive strong results for the remainder of the year.
With that Ruben back to you for Q&A.
Gabriel, if you could please provide instructions for the Q&A.
| q2 non-gaap earnings per share $0.97.
sees q3 revenue $1.51 billion to $1.54 billion.
sees fy revenue $6.15 billion to $6.21 billion.
q2 revenue $1.525 billion versus refinitiv ibes estimate of $1.4 billion.
agilent technologies - fy 2021 non-gaap earnings guidance has increased to range of $4.09 to $4.14 per share.
|
Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.
Additional information about factors that could lead to material changes in performance is contained in D.R Horton's annual report on Form 10-K and subsequent reports on Form 10-Q, all of which are or will be filed with the Securities and Exchange Commission.
drhorton.com and we plan to file our 10-K toward the end of next week.
All of this can be found at investors.
Today, we also have Paul Romanowski with us.
He was recently promoted to Executive Vice President and Co-Chief Operating Officer.
Paul has been with D.R Horton since 1999, serving as our regional Florida as our Florida South Division President for 15 years and most recently as our Florida region President for seven years.
I'd like to take a brief moment to have Paul introduce himself before we get started.
I'm excited for the opportunity to serve into my new role on the D.R Horton management team and I look forward to getting know our investors and analysts in the coming year.
Given that Paul is new to his role, he will not be an active participant today, but we are glad to have him with us and believe his extensive homebuilding experience will strengthen our executive team.
The D.R Horton team finished the year with a strong fourth quarter, which included a 63% increase in consolidated pre-tax income to $1.7 billion and a 27% increase in revenue to $8.1 billion.
Our pre-tax profit margin for the quarter improved 480 basis points to 21.3% and our earnings per diluted share increased 65% to $3.70.
For the year, consolidated pre-tax income increased 80% to $5.4 billion on a $27.8 billion of revenue.
Our pre-tax profit margin for the year improved 460 basis points to 19.3% and our earnings per diluted share increased 78% to $11.41.
We closed a record 81,965 homes this year, an increase of over 16,500 homes or 25% from last year.
While also achieving a historical low homebuilding SG&A percentage of 7.3%, our homebuilding return on inventory was 37.9% and our return on equity was 31.6%.
These results reflect our experienced teams in their production capabilities, our ability to leverage D.R Horton scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Our homebuilding cash flow from operations for 2021 was $1.2 billion.
Over the past five years, we have generated $5.9 billion of cash flow from homebuilding operations, while growing our consolidated revenues by 128% and our earnings per share by 383%.
During this time, we also more than doubled our book value per share, reduced our homebuilding leverage 220% and increased our homebuilding liquidity by $2.8 billion, all while significantly increasing our returns on inventory and equity.
Housing market conditions remain very robust and we are focused on maximizing returns and increasing our market share further.
However, there are still significant challenges in the supply chain, including shortages in certain building materials and tightness in the labor market.
As a result, we continued restricting our home sales pace during the fourth quarter by selling homes later in the construction cycle to align with our production levels and better ensure certainty of home closing date for our homebuyers.
We expect to work through the supply chain challenges and ultimately increase our production capacity.
After starting construction on 22,400 homes, our homes and inventory increased 26% from a year ago to 47,800 homes at September 30, 2021.
In October, we started more than 8,000 homes, further positioning us to achieve double-digit growth and again in 2022.
We believe our strong balance sheet, liquidity and a low leverage position us very well to operate effectively through changing economic conditions.
We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home pricing sales pace and inventory levels to optimize our returns.
Diluted earnings per share for the fourth quarter of fiscal 2021 increased 65% to $3.70 per share, and for the year diluted earnings per share increased 78% to $11.41.
Net income for the quarter increased 62% to $1.3 billion and for the year, net income increased 76% to $4.2 billion.
Our fourth quarter home sales revenues increased 24% to $7.6 billion on 21,937 homes closed, up from $6.1 billion on 20,248 homes closed in the prior year.
Our average closing price for the quarter was $346,100, up 14% from last year and the average size of our homes closed was down 1%.
Net sales orders in the fourth quarter decreased 33% to 15,949 homes and the value of those orders was $6 billion, down 17% from $7.3 billion in the prior year.
A year ago, our fourth quarter net sales orders were up 81% due to the surge in housing demand during the first year of the pandemic when we had significantly more completed homes available to sell and prior to the supply chain challenges that arose in 2021.
Our average number of active selling communities decreased 5% from the prior year and was down 3% sequentially.
Our average sales price on net sales orders in the fourth quarter was $378,300, up 23% from the prior year.
The cancellation rate for the fourth quarter was 19% flat with the prior year quarter.
As David described, new home demand remains very strong and our local teams are continuing to restrict our sales order pace where necessary on a community-by-community basis based on the number of homes and inventory, construction times, production capacity and lot position.
They also continue to adjust sales prices to market, while staying focused on providing value to our buyers.
We are still restricting the pace of our sales orders during our first fiscal quarter, but to a lesser extent than during our fourth quarter.
As a result, we expect our first quarter net sales orders to be approximately equal to or slightly higher than our 20,418 sales orders in the first quarter last year.
Our October net sales order volume was in line with our plans and we remain confident that we are well positioned to deliver double-digit volume growth in fiscal 2022 with 26,200 homes in backlog, 47,000 homes in inventory, a robust lot supply and strong trade and supplier relationships.
Our gross profit margin on home sales revenue in the fourth quarter was 26.9%, up 100 basis points sequentially from the June quarter.
The increase in our gross margin from June to September reflects the broad strength of the housing market and benefited from the better alignment of our sales order pace to our construction schedules.
The strong demand for a limited supply of homes has allowed us to continue to raise prices or lower the level of sales incentives in most of our communities.
On a per square foot basis, our revenues were up 7% sequentially, while our stick and brick cost per square foot increased 7.5% and our lot cost increased 2%.
We expect both our construction and lot costs will continue to increase.
However, with the strength in today's market conditions, we expect to offset any cost pressures with price increases.
We currently expect our home sales gross margin in the first quarter to be similar to the fourth quarter.
We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand.
In the fourth quarter, homebuilding SG&A expense as a percentage of revenues was 6.9%, down 70 basis points from 7.6% in the prior year quarter.
For the year, homebuilding SG&A expense was 7.3%, down 80 basis points from 8.1% in 2020.
Our homebuilding SG&A expense as a percentage of revenues is at its lowest point for a quarter and for a year in our history and we are focused on continuing to control our SG&A, while ensuring that our infrastructure adequately supports our business.
We have increased our housing inventory in response to the strength of demand and are focused on expanding our production capabilities further.
We started 22, 400, hundred homes during the fourth quarter and 91,500 homes during fiscal 2021, which is an increase of 21% compared to fiscal 2020.
We ended the year with 47,800 homes in inventory, up 26% from a year ago.
21,700, hundred of our total homes et September 30th were unsold, of which 900 were completed.
Although we have not seen significant improvement in the supply chain yet, we expect the current constraints to ultimately moderate at some point in 2022.
At September 30th, our homebuilding lot position consisted of approximately 530,000 lots, of which 24% were owned and 76% were controlled through purchase contracts.
24% of our total owned lots are finished and at least 47% of our controlled lots are or will be finished when we purchase them.
Our growing and capital efficient lot portfolio is key to our strong competitive position and will support our efforts to increase our production volume to meet homebuyer demand.
Our fourth quarter homebuilding investments in lots, land and development totaled $1.8 billion, of which $1 billion was for finished lots, $330 million was for land, and $440 million was for land development.
Forestar, our majority owned subsidiary is a publicly traded, well capitalized residential lot manufacturer operating in 56 markets across 23 states.
Forestar continues to execute extremely well on its high growth plan as they increase their lot sold by 53% to 15,915 lakhs during fiscal 2021 compared to the prior year.
Forestar's pre-tax profit margin for the year improved 400 basis points to 12.4%, excluding an $18.1 million loss on extinguishment of debt.
At September 30th, Forestar's owned and controlled lot position increased 60% from a year ago to 97,000 lots.
61% of Forestar's owned lots are under contract with D.R Horton or subject to a right of first offer under our master supply agreement.
$370 million of D.R Horton's land and lot purchases in the fourth quarter were from Forestar.
Forestar is separately capitalized from D.R Horton and had approximately $500 million of liquidity at year-end with a net debt to capital ratio of 35.2%.
With its current capitalization, strong lot supply and relationship with D.R Horton, Forestar plans to continue profitably growing their business.
Financial services pre-tax income in the fourth quarter was $103 million on $223 million of revenue with a pre-tax profit margin of 46.1%.
For the year, financial services pre-tax income was $365 million on $824 million of revenue, representing a 44.3% pre-tax profit margin.
For the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 66% of our homebuyers.
FHA and VA loans accounted for 45% of the mortgage company's volume.
Mortgage this quarter had an average FICO score of 722 and an average loan to value ratio of 89%.
First-time homebuyers represented 59% of the closings handled by our mortgage company this quarter.
Our multifamily and single-family rental operations generated combined pre-tax income of $742 -- $74.3 [Phonetic] million in the fourth quarter and $86.5 million in fiscal 2021.
our total rental property inventory at September 30th was $841 million compared to $316 million a year ago.
We sold three multifamily properties totaling 960 units during fiscal 2021 for $191.9 million, all of which were sold in the fourth quarter compared to two properties totaling 540 units sold in fiscal 2020.
We sold three single family rental communities totaling 260 homes during fiscal 2021 for $75.9 million, including one sale of 64 homes during the fourth quarter for $21 million in revenue.
In fiscal 2022, we expect our rental operations to generate more than $700 million in revenues from rental property sales.
We also expect to grow the total inventory investment in our rental platforms by more than $1 billion in fiscal 2022 based on our current rental projects in development and our significant pipeline of future single and multifamily rental projects.
We are positioning our rental operations to be a significant contributor to our revenues, profits and returns in future years.
Our balanced capital approach focuses on being disciplined, flexible and opportunistic.
During fiscal 2021, our cash provided by homebuilding operations was $1.2 billion and our cumulative cash generated from homebuilding operations for the past five years was $5.9 billion.
At September 30th, we had $5 billion of homebuilding liquidity consisting of $3 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.
This level of liquidity provides significant flexibility to adjust to changing market conditions.
Our homebuilding leverage was 17.8% at fiscal year-end with $3.1 billion of homebuilding public notes outstanding, of which $350 million matures in the next 12 months.
At September 30th, our stockholders' equity was $14.9 billion and book value per share was $41.81, up 29% from a year ago.
For the year, our return on equity was 31.6%, an improvement of 950 basis points from 22.1% a year ago.
During the quarter, we paid cash dividends of $71.6 million for a total of $289.3 million of dividends paid during the year.
During the quarter, we repurchased 2.3 million shares of common stock for $212.6 million dollars and our stock repurchases during fiscal year 2021 totaled 10.4 million shares for $874 million.
Our outstanding share count is down 2% from a year ago and our remaining share repurchase authorization at September 30th was $546.2 million.
We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.
Based on our financial position and outlook for fiscal 2022, our Board of Directors increased our quarterly cash dividend by 13% to $22.5 per share.
As we look forward to the first quarter of fiscal 2022, we are expecting market conditions to remain similar with strong demand from homebuyers, but continuing supply chain challenges that will delay home construction, completion and closing.
We expect to generate consolidated revenues in our December quarter of $6.5 billion to $6.8 billion and our homes closed by our homebuilding operations to be in a range between 17,500 homes and 18,500 homes.
We expect our home sales gross margin in the first quarter to be 26.8% to 27% and homebuilding SG&A as a percentage of revenues in the first quarter to be approximately 8%.
We anticipate our financial services pre-tax profit margin in the range of 30% to 35% and we expect our income tax rate to be approximately 24% in the first quarter.
Looking further out, we currently expect to generate consolidated revenues for the full fiscal year of 2022 of $32.5 billion to $33.5 billion and to close between 90,000 homes and 92,000 homes.
We forecast an income tax rate for fiscal 2022 of approximately 24%, subject to changes and potential future legislation that could increase the federal corporate tax rate.
We also expect that our share repurchases will reduce our outstanding share count by approximately 2% at the end of fiscal 2022 compared to the end of fiscal 2021.
We expect to generate positive cash flow from our homebuilding operations in fiscal 2022 after our investments in homebuilding inventory to support double-digit growth.
We will then balance our cash flow utilization priorities among increasing the investment in our rental operations, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend and consistently repurchasing shares.
In closing, our results reflect our experienced teams and production capabilities, industry leading market share, broad geographic footprint and diverse product offerings across multiple brands.
Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to capitalize on today's robust market and to effectively operate in changing economic conditions.
We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis.
Your efforts during 2021 were remarkable.
We closed the most homes in a year in our company's history, achieving 10% market share with record profits and returns and we are incredibly well positioned to continue growing and improving our operations in 2022.
We will now host questions.
| q4 earnings per share $3.70.
qtrly consolidated revenues increased 27% to $8.1 billion.
homebuilding revenue for q4 of fiscal 2021 increased 24% to $7.6 billion from $6.2 billion in same quarter of fiscal 2020.
homes closed in quarter increased 8% to 21,937 homes compared to 20,248 homes closed in same quarter of fiscal 2020.
net sales orders for q4 ended september 30, 2021 decreased 33% to 15,949 homes.
sees 2022 consolidated revenues of $32.5 billion to $33.5 billion.
sees 2022 homes closed between 90,000 homes and 92,000 homes.
|
We will be referencing it today on the call as it provides you with additional detail on this quarter's performance.
Actual results and events could differ materially from those discussed today.
In addition, we will be discussing some non-GAAP financial information during the call today.
You can find reconciliations of our non-GAAP measures to the most comparable GAAP measures in the earnings supplement.
We've had a very strong second quarter, and are excited to share with you many of the details.
Our second quarter financial results outpaced expectations with revenue growing 6.8% year-over-year on a same-store basis, and adjusted EBITDA growing 48% as compared to the prior year second quarter.
That marks our third consecutive quarter of adjusted EBITDA growth to the prior year.
Adjusted EBITDA of $116 million in the second quarter brings our LTM adjusted EBITDA to $453 million.
Within the quarter, the company repaid approximately $46 million in debt under our 5-year Term Loan B. This was done with asset sales and with excess cash flow.
This brings our total principal balance under our term Loan B below $1 billion.
We also finished the quarter with $159 million of cash on hand.
Equally as important, we continue to make tremendous progress on our long-term strategy and against our five strategic pillars.
As a result, our digital revenue is now 32.2% or about 1/3 of total revenue.
And importantly, the digital category is growing strongly, up 33% in Q2 over prior year.
We had previously laid out a clear vision and strategy for the company, and we've continued to make progress on that strategy.
Accelerating digital subscription growth is our first pillar and remains our top priority.
We ended the second quarter with approximately 1.4 million digital-only subscribers, adding 160,000 new net subscribers in the quarter.
This subscriber growth for the company outpaced our previous high, which we set during the first quarter of this year, with 120,000 net new adds.
And our TAM for growth in the digital subscription category is quite large.
With the 174 million unique visitors per month in the quarter, as measured by Comscore, Gannett has the sixth largest digital reach across all domestic peers.
We are actively working to further expand our customer base through new product launches that will attract a younger audience and through continued investment in diversifying our high-quality local, regional and national content.
During June, USA TODAY launched a new crossword subscription product.
And in July, we fully launched our USA TODAY news subscription product.
Prior to these rollouts, virtually all of our digital-only subscriber volume stemmed from our initial paid digital strategy for our local properties, which is still very early stage.
With a subscriber model at USA TODAY, a new subscription product, a portfolio of new content subscription products in the pipeline and data, driving our decisions based on what our consumers and customers are engaging with, is leading to steady progress toward our goal of 10 million digital-only subscribers by 2025.
Our digital-only subscription growth is rooted in the highly valued and unique content, our USA TODAY NETWORK produces.
Just to remind you, the USA TODAY NETWORK includes over 250 local media markets as well as our USA TODAY publication.
Combine this with our data-driven growth strategies, ongoing cross-functional efforts to run experiments that drive both subscriber acquisition growth as well as strengthen subscriber engagement and retention on our platform leaves us very optimistic about our opportunities to perform in this category.
The engaging and quality journalism, our national and local markets produce was evidenced by the impressive accolades our team received in the second quarter.
I'd like to congratulate our team at the Indianapolis Star for winning a 2021 pullet surprise for national reporting alongside partners at the Marshall project, AOL.com and the Invisible Institute for a year-long investigation into police dog attacks.
In addition, the Louisville Courier Journal was named a finalist for two politer price categories, breaking news and public service for its coverage and relentless investigation into the fatal shooting of Breonna Taylor and the ensuing 180 days of unrest.
This marks five Pulitzer winners and four finalists awarded two Gannett journalists in the last four years.
Great work by the team.
In addition to the Pulitzer Prize, the Louisville Courier Journal and ABC News 2020 were named the winner of a prestigious Peabody award, which honors excellence in storytelling, reflecting the social issues and emerging voices of our day for outstanding work on the joint investigative documentary titled, Say Her Name: Breonna Taylor.
The Courier Journal collaborated with ABC News on the 2-hour documentary, and brought Gannett's knowledge and expertise together in a compelling and vital display of visual journalism.
USA TODAY NETWORK South region won the grand prize in the Robert F. Tenet Book and Journalism Awards for their series called Confederate Reckoning.
Dozens of journalists across five states worked on the project, which explores the shadow of racism in the American South.
And finally, the USA TODAY NETWORK received several wins from the Society of Professional Journalists, Sigma Delta Chi national awards honoring the staff at USA TODAY and in Milwaukee, Indianapolis and Nashville.
The scope of these accolades reflects the impact our local to national news presence has on the communities we serve.
As we move to our second pillar in our strategy, which is accelerating growth off of our platform for Digital Marketing Solutions, I want to reiterate why we are so bullish about this business.
First, this business has many similarities to a subscription or SaaS model in that it has a very high revenue and client retention from period-to-period.
We have historically retained 96% to 97% of customer revenue month-to-month, akin to a SaaS or subscription product.
There are over 30 million small businesses in the U.S., and those businesses are increasingly dependent on a digital strategy to grow their businesses and more importantly, to generate and manage leads.
We serve these businesses with our digital platform that helps our business partners establish and optimize their digital presence.
We assist them with optimizing their marketing spend across an increasingly complex online digital ecosystem while optimizing their lead management process.
Finally, given our long-standing involvement and knowledge of the communities in which we operate, we believe that we have a true advantage at successfully reaching the small and medium-sized business segment.
Starting this quarter, we are providing you with additional visibility into our DMS business by providing more information about our client counts, ARPU and revenue retention period-to-period.
With that, let me take a moment to discuss some of our DMS highlights from the second quarter.
Our platform for our Digital Marketing Solutions segment generated revenue of $110 million in the second quarter, and that represented double-digit growth up 21.5% compared to the prior year on a same-store basis, and importantly, up 7.6% sequentially to Q1.
Our core platform business, which we view as customers using our proprietary digital marketing services platform, grew 33% over the prior year, accompanied by significant improvement in ARPU, which we also saw, we saw a 12% sequential growth in terms of revenue over the first quarter, and that was in line with customer growth sequentially of 13% from the first quarter.
So strong growth as measured by all metrics in this category generated off of our platform.
The growth of revenue and client count is coupled with strong segment adjusted EBITDA margins as well.
Our margins were 11.4% in the second quarter.
That's up from 9% in the first quarter and represents our strongest quarterly performance to date for this segment.
We are proud of the progress the Digital Marketing Solutions business has made over the past several quarters and are very optimistic about the opportunity for sustained long-term growth in this segment off of our platform.
We have included a deeper dive of Digital Marketing Solutions segment of our Digital Marketing Solutions segment, along with other key metrics in our earnings supplement, which Trisha mentioned, is available now on our Investor Relations website at investors.
Our third strategic pillar is optimizing our traditional business across circulation and advertising.
Within the second quarter, we've added content to Sunday newspapers in 19 markets and will further expand that to more markets in the third quarter.
We've included more local news, regional coverage, sports and puzzles, and the customer feedback and early data is very positive.
Improving retention and stabilizing our home delivery print circulation subscriber base is a strategy that impacts our results over the long term, and we are committed to making the investment in our newsrooms and in content in order to improve the lifetime value of our subscriber base.
Our fourth pillar is prioritizing investments in our growth businesses.
Last week, Gannett announced an exclusive strategic partnership with Typical U.S. in the sports gaming and bedding area.
Typical U.S. is the U.S.-based sports book of Typical Group Ltd., which is the leading sports book provider in Germany.
With this announcement, Typical became the exclusive sports betting and iGaming provider for Gannett in the U.S. The 5-year agreement includes $90 million in media spend by Typical with Gannett, along with incremental incentives payable to Gannett for customer referrals and the ability for Gannett to acquire up to a 4.99% stake -- equity stake in Typical U.S. With a highly engaged audience of more than 46 million sports fans, over 500 dedicated sports journalists and more than 200 sports sites in our portfolio, Gannett is uniquely positioned to reach sports and gaming enthusiasts.
The partnership with Typical also enables Gannett to add additional value for our subscribers and loyal readers as we enhance the great sports content we already provide with Typical's incredible expertise and analysis, betting insights and odds.
We expect this partnership to be a huge value creator for Gannett.
In the quarter, Gannett also launched its inaugural NFT, which was truly a companywide effort with proceeds benefiting the Air Force Space and Missile Museum Foundation and the Gannett Foundation.
The first newspaper delivered to the Moon collection highlighted our unique content and our ability to use technology as we find meaningful ways to bring communities together and engage new audiences.
Given the vast content we've produced through our 100-plus year history, there's a tremendous archive for us to use as we ideate and explore how to bring these archives to life as compelling digital offerings.
It's a creative and innovative space, and we'll continue to experiment as we look to unlock the unrealized large value of our archived content.
Finally, we saw live events begin to accelerate slightly in the quarter, although the ongoing impacts of the pandemic have muted a more robust return.
We held 81 events in the second quarter, with approximately 20% of them held in person.
Our 81 events is up from 13 events in Q1 of this year and up from 75 events in Q2 of 2020.
The slight increase in the number of events from Q2 2020 to this quarter resulted in 4.4% revenue growth versus the prior year in our events category.
While the Delta variant continues to slow the rebound of in-person events, we are hoping for more favorable conditions in the back half of the year.
Also last night, we aired the first ever national USA TODAY High School Sports Awards, co-hosted by Rob Gronkowski and Michael Strahan, which celebrated the best in high school sports across the country.
These awards, the largest high school sports recognition program in the country featured student athletes from the communities we serve, alongside professional talent such as Shaq, Aaron Rodgers, Kevin Garnett, Lindsey Vonn, just to name a few.
This is a prime example of our deep local engagement, combined with our national infrastructure that fuels our confidence in the long-term opportunity in our events business, and our belief that this can be a significant driver of growth for the company in the future.
As we look to the third quarter, we will continue to build on the early foundation set through the first half of this year.
We expect same-store revenue in the third quarter to grow in the low single digits as compared to the prior year.
We expect adjusted EBITDA to grow year-over-year again for the fourth consecutive quarter.
And we expect margins in the third quarter to be in line or slightly better than our first half of the year performance in 2021.
As mentioned, this would represent our fourth consecutive quarter of growth and contribute to significant full year 2021 adjusted EBITDA growth as compared to 2020, which we've mentioned on the last couple of earnings calls.
We are very pleased with the strong execution by our team in the second quarter and the significant progress we have made against each of our key strategic growth initiatives.
For Q2, total operating revenues were $804.3 million, which was an increase of 4.9% as compared to the prior year quarter.
On a same-store basis, operating revenues increased 6.8% as compared to the prior year quarter, which was the quarter most significantly impacted by the COVID-19 pandemic.
Adjusted EBITDA totaled $115.8 million in the quarter, which was up $37.8 million or 48.4% year-over-year.
The adjusted EBITDA margin was 14.4%, up from 10.2% in the prior year quarter and 12.9% in Q1.
This performance reflects the impact of year-over-year revenue growth while holding adjusted EBITDA expenses relatively flat.
These are strong results, particularly considering that the prior year benefited from approximately $150 million of largely temporary cost reductions put in place in response to the pandemic.
On the bottom line, we achieved $15.1 million of net income and $30.1 million of adjusted net income attributable to Gannett in the second quarter.
Moving now to our segments.
The Publishing segment revenue in the second quarter was $724.5 million, up 4.2% as compared to the prior year quarter and up 5.6% year-over-year on a same-store basis.
Current advertising revenue increased 10.7% compared to the prior year on a same-store basis as a result of the pandemic's impact in the prior year.
Digital advertising and marketing services revenues increased 35.9% on a same-store basis, reflecting strong operational execution from our national and local sales teams.
Despite a slightly smaller audience base compared to last year's peak new cycle, which was driven by the pandemic and the political environment, digital media revenue increased 46.9% versus the prior year.
National sales of digital advertising grew 77% as compared to the prior year and over 49% on a 2-year basis.
We saw strong national demand for both our owned and operated and third-party properties.
Digital classified revenues declined 19% on a same-store basis.
While this is a significant improvement as compared to the Q1 results of down 31.3%, digital classified was negatively impacted in the period as a result of lower automotive business, which is reflective of supply constraints impacting the automotive industry.
It is also worth noting that Q2 of 2020 was the last period that benefited from our previous relationship with Cars.com.
Moving now to digital marketing services.
Digital marketing services revenue in the Publishing segment grew 41% year-over-year and 17.2% quarter-over-quarter.
These results reflect the highest digital marketing services revenue from the Publishing segment to date, and it reflects both an increase in the number of clients sequentially over the past quarters as well as an increased ARPU as compared to the prior year.
Moving now to circulation, where revenues decreased 9.2% compared to the prior year on a same-store basis, which compares favorably with Q1 same-store trend of down 12.9%.
Home delivery trends declined slightly due to the prior year impact of seasonal visitors staying longer in certain of our markets as a result of the pandemic.
Also with regard to single copy, it is still significantly impacted by the ongoing pressure of the pandemic as a result of lower business travel, but it continued to show improvement year-over-year and was down 5.1% on a same-store basis as compared to down 31.5% in Q1.
Record digital-only subscriber growth yielded 40% growth in digital-only revenue.
Digital-only subscribers grew 41% year-over-year to approximately 1.4 million subscriptions.
Digital-only ARPU was essentially flat year-over-year as we continue to focus on growing the overall volume of our subscriber base.
Adjusted EBITDA for the Publishing segment totaled $114.2 million, representing a margin of 15.8% in the second quarter.
That represents an expansion of 120 basis points over Q1 and the prior year.
For the Digital Marketing Solutions segment, total revenue in the first quarter was $110 million, an increase of 21.5% on a same-store basis and a substantial improvement in year-over-year trends.
As compared to Q1 2021, revenue grew $7.8 million or 7.6% on growing client counts -- or client accounts.
Those that utilize our proprietary digital marketing services platform increased from 13,600 clients in Q1 to 15,300 clients in Q2, a 12.7% sequential increase.
Comparing to the prior year quarter, the core business, which accounts for 95% of the revenue in the Digital Marketing Solutions segment, increased 32.9% year-over-year.
While the average client count declined year-over-year from 16,100 in Q2 of 2020 to 15,300 in 2021, that decline is attributable to the alignment of the product suite and platforms that took place in late Q3 2020, bringing together the legacy ThriveHive and ReachLocal systems onto a single platform.
Several low dollar and low-margin products were eliminated from the portfolio, which had the impact of reducing overall client count by approximately 2,500 customers.
The more focused combined products will help fuel the year-over-year growth and the increase in ARPU from $1,600 per month in Q2 of 2020 to $2,300 per month in Q2 of 2021.
Adjusted EBITDA for the Digital Marketing Solutions segment totaled $12.5 million, representing a strong margin of 11.4% in the second quarter, above our Q4 2020 and Q1 2021 levels and the strongest margin to date within the segment.
This margin growth is a result of solid execution by the direct and local market sales teams as well as an improved product portfolio.
Our Q2 net income attributable to Gannett was $15.1 million and includes $48.2 million of depreciation and amortization.
The company's effective tax rate for the quarter was primarily driven by valuation allowances on nondeductible interest expense carryforwards as well as the deferred tax impact associated with the increase in the U.K. statutory rate, which will be effective in 2023.
Net income in the quarter benefited positively from a significant reduction in integration and reorganization costs as the vast majority of the reorganization costs tied to the Gannett acquisition are behind us.
Additionally, we are benefiting from our improved capital structure.
In Q2, our interest expense was approximately $35 million, which is down 39% from the prior year.
Let's now turn to the balance sheet.
Our cash balance was $158.6 million at the end of Q2, resulting in net debt of approximately $1.3 billion.
Our ending Q2 cash balance was impacted by an optional $35 million debt repayment we made during the quarter.
Capital expenditures totaled approximately $8.2 million during Q2, reflecting investments related to digital product development, technology and operating infrastructure.
Free cash flow in the second quarter was $23.1 million, which reflects interest payments of approximately $36.4 million.
Free cash flow in the quarter was burdened from a working capital perspective by approximately $42 million as a result of the timing of our employee payroll and seasonality associated with accounts receivable.
We ended the quarter with approximately $1.5 billion of total debt, comprised primarily of $991 million of 5-year term loan and $497 million of the 2027 convertible notes.
During the quarter, we repaid $450 million of debt funded through $11.2 million of real estate sales and excess cash flow.
We continue to optimize our real estate and asset portfolio, and we completed 28 real estate transactions for approximately $11 million in proceeds during the quarter.
Additionally, we expect to generate $80 million to $100 million of incremental asset sales during the second half of this year, of which approximately $20 million has already been completed in July.
We remain confident in our ability to achieve our first lien net leverage goal of below 1 times adjusted EBITDA by the end of 2022.
In summary, we are very pleased with the strong execution and financial results in the second quarter, which, as Mike noted, demonstrates solid progression against each of our strategic priorities.
We look forward to and anticipate continued adjusted EBITDA growth in Q3 and strong performance in the back half of 2021.
| q2 revenue rose 4.9 percent to $804.3 million.
qtrly digital revenues rose 33%.
qtrly same store revenues increased 6.8% compared to q2 of 2020.
|
We'll start by going through some of the highlights of the quarter.
Then Jack will go through the operating results in the segments, our balance sheet and cash flow and guidance for the first quarter.
I will then share some concluding thoughts before we start our Q&A session.
But before we proceed, Jack will now cover the safe harbor language.
These statements are based on management's current expectations or beliefs.
During our earnings call in October, we talked about signs of recovery in the third quarter.
Pleased to say we saw this trend of slow and steady recovery continuing into the fourth quarter.
Despite experiencing a series of new COVID-19-related restrictions around the world, our results reflect a stronger market environment than we had anticipated with revenue growth and new opportunities in select markets.
We're now seeing clear signs of a case shaped to speed recovery.
The bifurcation is evident between industries able to adjust to the uncertain environment than others like travel, hospitality and entertainment industries being significantly impacted by the lockdowns.
This is also reflected in the labor market divide where demand for workers has improved in some industries and in others remain stalled with high unemployment rates.
Organizations investing in digitization and automation are already emerging stronger.
And that is driving an acceleration in the polarization of the workforce between the skilled and the unskilled, creating a risk of continued post-pandemic skills-based polarization of labor markets in many countries.
This is also captured in our recent Skills Revolution thought leadership series, Renew, Reskill and Redeploy, conducted across 26,000 employers in 40-plus countries.
Those companies that plan to speed up the digitization plans as a result of the pandemic are maintaining or increasing their headcount in contrast to others who've put their plans on hold.
Many of the trends we've been predicting have accelerated significantly.
Adversity can often be a force for society to change at an accelerated pace.
Companies have digitized better speed and scale they could never have imagined and we expect these actions will continue into 2021.
With that context, I would now like to turn to our financial results.
In the fourth quarter, revenue was $5.1 billion, down 6% year-over-year in constant currency, a significant improvement from the 14% decline in the third quarter on the same basis.
On a reported basis, we recorded an operating profit for the quarter of $138 million.
Excluding restructuring charges, operating profit was $151 million, down 24% in constant currency.
Reported operating profit margin was 2.7%, down 100 basis points from the prior year.
And after excluding restructuring, operating profit margin was 3%, down 70 basis points from the prior year.
Reported earnings per diluted share of $1.33 reflects the impact of restructuring charges.
Excluding the restructuring charges, our earnings per diluted share was $1.48 for the quarter, representing a decrease of 39% in constant currency.
Turning to the full year results for a moment.
Reported earnings per share for the year was $0.41.
Excluding restructuring charges and special items, earnings per share was $3.67 and represented a constant currency decrease of 53% year-over-year.
Revenues for the year decreased 14% in constant currency to $18 billion and reported operating profit was $188 million.
Excluding restructuring and special items, operating profit was $377 million, which represented a 48% constant currency decline year-over-year.
Although 2020 was one of the most challenging years in recent history, we were able to reduce operational SG&A to significantly offset gross profit declines while remaining committed to our strategic investments for digitization, diversification and innovation.
In our Manpower business, logistics demand was strong in the fourth quarter driven by the shift in how consumers are buying and an extended holiday delivery peak.
While we are seeing increases -- increasing cases of COVID-19 in several places, we're also seeing strong safety protocols, increased testing advanced by technology, allowing companies to avoid full shutdowns, manage plant productivity by segregating production lines, all reducing the infection risks and ensuring a safe work environment.
In Experis, our IT and resourcing and solutions business, we're seeing positive trends in many industries.
And there continues to be good demand for a range of IT skills in a number of markets.
Many organizations that put investments on hold or made cuts in 2020 are beginning to rebuild and reinvest.
Others are seeking the offerings of our Talent Solutions business as they look to optimize their supplier management and delivery solutions and shift more to full-service HR providers with the tools and tech across markets to build just-in-case resilience and flexibility.
Going back to the quarterly results on slide three, revenues in the fourth quarter came in above our constant currency guidance range.
Our gross profit margin came in at the low end of our guidance range.
On a reported basis, our operating profit was $138 million.
Excluding restructuring charges, our operating profit was $151 million, representing a decline of 21% or a decline of 24% on a constant currency basis.
This resulted in an operating profit margin of 3% before restructuring charges, which was above the high end of our guidance.
Breaking our revenue trend down into a bit more detail.
After adjusting for the positive impact of currency of about 4%, our constant currency revenue declined about 6.5%, which rounds to 6% on a single-digit percentage basis.
As acquisition and billing days had no net effects, the organic days adjusted revenue decline was also about 6.5%.
This represented an improvement from the third quarter revenue decline of 15% on a similar basis and two consecutive quarters of significant improvement from the second quarter of 2020.
Turning to the earnings per share bridge on slide five.
On a reported basis, earnings per share was $1.33, which included the restructuring charges of $12 million, which, including related tax impacts, represented a negative $0.15.
Excluding the restructuring charges, earnings per share was $1.48, which exceeded our guidance range.
Included within this result was improved operational performance of $0.38; better-than-expected foreign currency exchange rates, which added $0.03; a lower weighted average share count from share repurchases that added $0.02, offset by higher other expenses that had a negative impact of $0.05.
Looking at our gross profit margin in detail.
Our gross margin came in at 15.8%.
Underlying staffing margin contributed to a 40 basis points reduction.
The anniversary of the incremental fee-owned subsidies in France in October and the mix of higher seasonal year-end enterprise activity within the Manpower brand drove the overall additional year-over-year staffing margin decline from the third quarter result of down 20 basis points year-over-year.
A lower contribution from permanent recruitment also contributed 30 basis points of GP margin reduction.
10 basis points of increased gross profit margin from career transition growth within Right Management was offset by a 10 basis point decline driven by a higher mix of seasonal other nonstaffing activity.
Next, let's review our gross profit by business line.
During the quarter, the Manpower brand comprised 65% of gross profit, our Experis Professional business comprised 20% and Talent Solutions brand comprised 15%.
During the quarter, our Manpower brand reported an organic constant currency gross profit decrease of 11%.
This was an improvement from the 17% decline in the third quarter.
Gross profit in our Experis brand declined 14% year-over-year during the quarter on an organic constant currency basis, which represented an improvement from the 19% decline in the third quarter.
The lower contribution from perm gross profit drove a more significant gross profit decline compared to the revenue decline in Experis.
Talent Solutions includes our global market-leading RPO, MSP and Right Management offerings.
Organic gross profit crossed back over to growth in the quarter at 1% in constant currency year-over-year, which is an improvement from the 2% decline in the third quarter.
This was primarily driven by our MSP business, which had a very strong fourth quarter with double-digit GP growth and increased year-over-year career transition activity within our Right Management business.
Our RPO business experienced a significant improvement in the rate of decline during the fourth quarter from the third quarter, reaching single-digit percentage declines in the fourth quarter.
Our reported SG&A expense in the quarter was $661 million, including the restructuring charges of $12 million.
Excluding the restructuring charges, SG&A of $649 million represented a decrease of $19 million from the prior year.
This underlying decrease was driven by $40 million of operational cost reductions, a decrease of $2 million from net dispositions, partially offset by an increase of $22 million from currency changes.
On an organic constant currency basis, excluding restructuring, SG&A expenses decreased 6% year-over-year, which represented a very strong recovery against the 10% gross profit decline.
SG&A expenses as a percentage of revenue continued to improve sequentially and represented 12.8% in the fourth quarter, excluding restructuring.
The Americas segment comprised 20% of consolidated revenue.
Revenue in the quarter was $1 billion, a decrease of 3% in constant currency.
OUP was $48 million and OUP margin was 4.7%.
The U.S. is the largest country in the Americas segment, comprising 61% of segment revenues.
Revenues in the U.S. was $622 million, representing a decrease of 4% compared to the prior year.
Adjusting for franchise acquisitions, this represented a 5% decrease, which is a significant improvement from the 16% decline in the third quarter.
During the quarter, OUP for our U.S. business decreased 11% to $30 million.
OUP margin was 4.8%.
The U.S. continued to benefit from higher-margin career transition activity within Right Management year-over-year but at a reduced level from the third quarter.
Within the U.S., the Manpower brand comprised 36% of gross profit during the quarter.
Revenue for the Manpower brand in the U.S. was down 2% when adjusted for days and franchise acquisitions, which reflects a material improvement from the 21% decline in the third quarter.
We expect the Manpower business to cross over to growth on a quarterly basis in Q1.
The Experis brand in the U.S. comprised 27% of gross profit in the quarter.
Within Experis in the U.S., IT skills comprised approximately 80% of revenues.
Revenues within our IT vertical within Experis U.S. declined 13% during the quarter and total Experis U.S. revenues declined 14% as the finance and engineering verticals experienced greater decreases.
This trend reflects a slight improvement from the third quarter year-over-year rate of revenue decline.
Talent Solutions in the U.S. contributed 37% of gross profit and experienced revenue growth of 6% in the quarter.
Within Right Management in the U.S., revenues increased 8% year-over-year driven by career transition activity during the quarter.
MSP business continues to perform very well in the current environment and again experienced year-over-year increased revenues during the fourth quarter.
The U.S. RPO business crossed back over to revenue growth during the fourth quarter, moving to a low double-digit revenue increase driven by RPO client wins as well as additional projects during the fourth quarter.
Provided there are no significant business restrictions impacting our clients across the U.S., in the first quarter, we expect ongoing improvement in an overall rate of decline in the very low single digits for the quarter overall.
Our Mexico operation experienced a revenue decline of 6% in constant currency in the quarter, representing an improvement from the 9% decline in the third quarter.
During the fourth quarter, the President of Mexico introduced the labor proposal that would prohibit certain types of temporary staffing outside of specialized services.
If enacted, we expect this could significantly restrict our activity in Mexico.
The bill is still under development in the Mexican legislator and could be finalized in March or April.
We will provide an update during the first quarter earnings call, at which time we expect to have greater clarity on the likelihood of adoption and the specific restrictions as they would apply to us.
Mexico represented between 2.5% and 3% of our global revenues in 2020.
Revenue in Canada declined 10% in constant currency during the quarter.
This represented a slight improvement from the third quarter billing days adjusted revenue decline of 11%.
Revenue in the other countries within Americas crossed back over to growth with a 4% increase in constant currency, reflecting a significant improvement from the 6% decline in the third quarter.
This was driven by significant revenue growth in Argentina, Brazil and Chile.
Southern Europe revenue comprised 46% of consolidated revenue in the quarter.
Revenue in Southern Europe came in at $2.3 billion, a decrease of 7% in constant currency.
This is a significant improvement from the third quarter trend driven by France, Italy and Spain.
OUP, including restructuring costs, equaled $100 million.
Excluding restructuring costs, OUP decreased 25% from the prior year in constant currency and OUP margin was down 100 basis points.
The $4 million in restructuring costs represented France real estate optimization.
France revenue comprised 56% of the Southern Europe segment in the quarter and was down 11% from the prior year in constant currency.
This reflects a steady rate of improvement over the course of the quarter.
OUP, including restructuring costs, was $62 million in the quarter.
Excluding restructuring costs, OUP was $66 million and OUP margin was 5%.
Although improvement was steady in France during the fourth quarter, January has experienced a softening in the revenue trend as COVID-19 concerns have increased and the government has imposed more restrictions.
We are cautiously estimating ongoing sequential improvement in the revenue trend and are estimating a constant currency decline in revenues in the mid-single-digit percentage range in the first quarter overall.
Revenue in Italy equaled $423 million in the quarter as Italy crossed back over to growth.
Revenues increased 3% in constant currency during the quarter, which was a significant improvement from the 12% days-adjusted decline in the third quarter.
This reflects a progressive improvement over the course of the quarter and a particularly strong December driven by large year-end seasonal logistics activity from enterprise clients.
OUP declined 25% year-over-year in constant currency to $24 million and OUP margin decreased 200 basis points to 5.6%.
We estimate that Italy will have low single-digit year-over-year revenue growth in the first quarter.
Revenue in Spain also crossed over to significant revenue growth in the fourth quarter also driven by enterprise seasonal activity.
Revenue increased 18% on a days-adjusted constant currency basis from the prior year in the quarter.
This represented a significant improvement from the 6% decrease in the third quarter.
Considering the drop-off of the year-end seasonal activity, we estimate that Spain will have revenue growth in the mid-single-digit constant currency range in the first quarter.
Revenue in Switzerland decreased 14% on a days-adjusted constant currency basis from the prior year in the quarter.
This represents a slight decline from the 13% decrease in the third quarter as our Switzerland business did not experience the year-end seasonal increases that the other large markets in Southern Europe experienced.
Our Northern Europe segment comprised 22% of consolidated revenue in the quarter.
Revenue declined 11% in constant currency to $1.1 billion, representing a significant improvement from the 22% decline in the third quarter driven by the U.K. and the Netherlands.
OUP, including restructuring costs, represented $9 million.
Excluding restructuring costs, OUP was $18 million and OUP margin was 1.6%.
The $9 million in restructuring cost relates to Germany, where we restructured a majority-owned venture with a third-party partner.
Our largest market in Northern Europe segment is the U.K., which represented 36% of segment revenue in the quarter.
During the quarter, U.K. revenues decreased 7% in constant currency, which represented a significant improvement from the 22% decline in the third quarter.
The improvement was driven by significant year-end public sector activity particularly in December.
We are cautious in our outlook for the U.K. business and estimate a rate of constant currency revenue decline in the high single digits range during the first quarter, representing the nonrecurrence of certain year-end activity.
In Germany, revenues declined 31% in constant currency adjusted for billing days in the fourth quarter, which did not represent a significant change from the 32% decline in the third quarter.
We remain very cautious on our Germany business in the near term and expect improvement in the revenue trend in the first quarter.
In the Nordics, revenues declined 6% on a days-adjusted constant currency basis.
The two primary businesses in Nordics are Norway and Sweden.
On a days-adjusted constant currency basis, Norway experienced a decline of 6% and Sweden declined 4%.
Both countries experienced a significant improvement in the rate of decline from the third quarter trend.
Revenues in the Netherlands decreased 12% on a days-adjusted constant currency basis, which represents a significant improvement from the third quarter decline of 23%.
Belgium experienced a days-adjusted revenue decline of 25% in constant currency during the quarter, which also reflects improvement from the third quarter trend.
Other markets in Northern Europe crossed over to growth in the quarter.
Revenue increased 9% in constant currency, which represents a significant improvement from the third quarter decrease of 5% in constant currency.
This was driven by strong revenue growth in Poland, Russia and Ireland.
The Asia Pacific Middle East segment comprises 12% of total company revenue.
In the quarter, revenue decreased 1% in constant currency to $617 million.
OUP represented $18 million and OUP margin decreased 70 basis points year-over-year.
Revenue growth in Japan was up 5% on a constant currency basis, which represents a slight decrease from the 6% growth rate in the third quarter.
Our Japan business continues to perform very well.
And we expect the constant currency revenue trend of low single-digit growth in the first quarter.
Revenues in Australia declined 2% in constant currency on a days-adjusted basis.
This represents an improvement from the 7% decline in the third quarter.
Revenue in other markets in Asia Pacific Middle East declined 7% in constant currency, also representing an improving trend from the third quarter.
I'll now turn to cash flow and balance sheet.
Free cash flow equaled $886 million for the year.
During the fourth quarter, free cash flow equaled $201 million compared to $302 million in the prior year quarter.
At quarter end, days sales outstanding decreased by about 3.5 days to 54 days.
Our businesses have displayed outstanding collection and cash management practices throughout this crisis.
Capital expenditures represented $51 million during 2020.
During the fourth quarter, we purchased 2.5 million shares of stock for $201 million.
Our purchases for the full year totaled 3.4 million shares for $265 million.
As of December 31, we have 3.4 million shares remaining for repurchase under the six million share program approved in August of 2019.
As previously announced, we also increased the semiannual dividend paid in December 2020 by 7.3%.
Our balance sheet was strong at quarter end with cash of $1.57 billion and total debt of $1.12 billion, resulting in a net cash position of $443 million.
Our debt ratios remain comfortable at quarter end, with total gross debt to trailing 12 months adjusted EBITDA of 2.48 and total debt to total capitalization at 31%.
Our debt and credit facilities have not changed in the quarter and the earliest euro note maturity is not until September of 2022.
In addition, our revolving credit facility for $600 million remained unused.
Next, I'll review our outlook for the first quarter of 2021.
Our guidance continues to assume no material additional lockdowns or business restrictions impacting our clients in any of our largest markets beyond those that exist today.
On that basis, we are cautiously forecasting earnings per share for the first quarter to be in the range of $0.64 to $0.72, which includes a favorable impact from foreign currency of $0.07 per share.
Our constant currency revenue guidance range is between a decline of 4% to a decline of 6%.
The midpoint of our constant currency guidance is a decline of 5%.
On a days-adjusted basis, we note there is about one less billing day in Q1, which would improve the days-adjusted rate of revenue decline.
This is offset slightly by the impact of net dispositions.
At the midpoint, this would yield an organic days-adjusted rate of revenue decline of 3% for the first quarter, representing an ongoing improvement from the 6.5% decline in Q4.
We expect our operating profit margin during the first quarter to be down 50 basis points compared to the prior year, reflecting a third consecutive quarter of sequential improvement in the year-over-year rate of adjusted operating margin decline.
This reflects continued strong underlying cost actions within the businesses and higher corporate expenses year-over-year based on increased technology investment.
Regarding the effective tax rate, the government of France finalized their budget with the expected 50% reduction in the French business tax and a continuation of the corporate income tax reductions.
Combined, this serves to reduce our underlying effective tax rate by about 4%.
However, we will continue to have an elevated tax rate until we are closer to precrisis levels of pre-tax earnings and are estimating a full year 2021 effective tax rate of approximately 35%.
The effective tax rate in the first quarter will be slightly lower at 34% based on the inclusion of certain discrete items.
As usual, our guidance does not incorporate restructuring charges or additional share repurchases.
And we estimate our weighted average shares to be 56.2 million.
We're well positioned to be able to provide the strategic and operational workforce expertise and flexibility our clients and candidates are looking for: sourcing and developing in-demand talent across the globe and delivering new work models across the HR solution spectrum.
We strengthened our brand portfolio during 2020 and launched Talent Solutions as a separate brand to include our RPO, MSP and Right Management offerings.
This accelerates our diversification strategy by focusing on higher-margin, high-growth market segments in all brands.
We also remain laser-focused on delivering our digitization plans with our PowerSuite technology and continued this investment even during the pandemic.
We have already implemented PowerSuite in our front office and in businesses across 17 countries, are in the process of implementation in another wave of businesses across 17 more countries.
Based on this progress, we expect to have the majority of our businesses on our New PowerSuite front office by the end of this year.
Our PowerSuite front office is improving efficiency and productivity enabled by technology by cloud, mobile and analytics.
We also continue to roll out our new web platform for candidates.
Our B2C digital investments build off the success of Mon Manpower, our French associate app, which has had more than 1.3 million downloads, the most downloaded and the most highly rated in the French market.
In France, 1/3 of our applicants are sourced via the app with an average of 150,000 active users a month enjoying a full portfolio of B2C services, including on-demand access to current targeted assignment opportunities, time management and payroll technology and other services, including online carpooling.
The success of this market-leading tool is helping us to scale and expand our B2C technology elsewhere as well.
We continue to invest in and advance our analytics capability, laying strong foundations for the creation of our data lake.
It will be our data science and database decision-making that will continue to create new value, helping clients better predict performance and supporting candidates so they know more about their skills and potential.
These, together with our investments in next-gen infrastructure programs, will continue to be critical enablers for the next step of our process transformation and growth.
And what we knew all along has been confirmed as well.
It is the combination of tech and our people-first approach, the talent, the skills and dedication of our teams with last-mile delivery capability that allows us to confidently manage uncertainty, volatility and collaborate remotely to deliver the solutions and talent organizations need while being more agile than we ever believe possible.
As we execute our strategic priorities, we remain committed to our values and broader purpose that meaningful, sustainable employment has the power to change the world.
As a member of the International Business Council, we have committed to the IBC's new stakeholder capitalism metrics developed by the Big four global accounting firms, focused on people, planet, prosperity and governance.
This important framework will enable our organization and others to be more explicit on our commitments and progress we're making to create long-term value to shareholders and operate a sustainable business model that addresses the long-term imperatives of society.
Our social impact report that we released in December is the demonstration of the critical role we already play in being part of the solution.
Case in point, in 2020, we were recognized as a catalyst for change among 70-plus companies, outpacing our global peers and advancing women, particularly women of color, along with being placed on the Dow Jones Sustainability Index for the 12th year, helping people and companies respond and reset, redeploy and reskill.
And this skills revolution remains the defining challenge of our time.
And it is what our clients, candidates and employees expect us to help them with today and even more so in the future.
Finally, I'm very proud and grateful for the relentless resilience and commitment of our people to support and deliver to each of our stakeholders during these challenging times, our employees, associates, clients, shareholders and the communities in which we operate.
As digitization continues at pace, we're confident that our strategy is even more relevant as structural changes take hold in a post-pandemic world and as we continue to execute our strategy to diversify, digitize and innovate.
It is positioning ManpowerGroup for greater success, improved returns and profitable growth in the future.
I'd now like to open the call for Q&A.
| sees q1 earnings per share $0.64 to $0.72.
q4 earnings per share $1.48 excluding items.
q4 earnings per share $1.33.
q4 revenue $5.1 billion versus refinitiv ibes estimate of $4.76 billion.
ended quarter with $1.6 billion of cash and cash equivalents and $600 million of untapped revolving credit facility.
|
Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope you're doing well.
I'll start today with some perspective on our fourth quarter results, current industry conditions and company-specific opportunities.
Dave will follow with more detail on the quarter's performance and our forward outlook including fiscal 2022 guidance.
And then I will close with some final thoughts.
Overall, we ended our fiscal 2021 with strong fourth quarter performance that exceeded our expectations and highlights our favorable competitive position as the industrial recovery and internal initiatives continue to gain traction.
Our associates' teamwork, dedication and invaluable contributions turned these challenges into opportunities.
This includes being a critical partner across essential industries and now supporting the growth requirements customers face as we enter what could be a prolonged period of favorable industrial demand.
Combined with our strong cost discipline and the resilient nature of our model, we persevered and generated record earnings in fiscal 2021, while remaining fully invested in our long-term strategy.
In a year, unlike any other, we appalled and often exceeded our commitments to customers, suppliers and all stakeholders.
And we now look to build on this momentum going forward.
As it relates to the quarter and our views going forward, I want to reemphasize several key points that continue to drive strong performance across our business.
First, we are seeing sustained demand recovery.
Second, our industry position and strategic initiatives are driving growth opportunities beyond the cycle recovery.
Third, we are benefiting from a leaner cost structure and effective channel execution.
And our final key point, we enter fiscal 2022 in a strong financial position with ample liquidity.
In terms of underlying demand, we saw continued improvement across both our segments as the quarter progressed, driving daily sales above normal seasonal patterns and our expectations.
Combined with the lapping of prior year pandemic related weakness, sales increased nearly 20% on an organic basis over prior year levels and we're positive on a two-year stack basis.
Trends were stronger in the second half of the quarter versus the first half as break fix and maintenance activity continued to ramp.
In addition, we saw the release of larger capital spending during the quarter, including across our Fluid Power and Flow Control segment, where shipments accelerated following strong order activity in recent months with backlog remaining at record levels.
This positive sales momentum has continued into early fiscal 2022 with first quarter organic sales through mid August up by a high teens percent over the prior year across both our Service Center segment and Fluid Power and Flow Control segment.
When looking across our customer end markets on a two-year stack basis, the strongest areas include lumber and wood, food and beverage, aggregates, technology, chemicals, transportation, mining and construction.
We're also seeing improved order momentum across other heavy industries including machinery, as well as stronger demand within our longer cycle specialty flow control market verticals after lagging some in recent quarters.
Importantly, we believe our sales improvement goes beyond the current end market recovery and reflects building momentum across our internal growth initiatives.
In our Service Center segment, we are supplementing our technical scale with more robust analytics, digital solutions and customer development initiatives.
We're also benefiting from past and ongoing talent development initiatives centered on our best team wins culture while our consistent strategy and local presence is strengthening relationships across our customer and supplier base, as they look to execute their growth initiatives with more capable channel partners.
In addition, we're leveraging a growing cross-selling opportunity.
Legacy embedded service center customers are increasingly recognizing our full capabilities across fluid power, flow control, automation and consumable solutions.
We believe this drives greater customer penetration and new business wins as customers adhere to new facility protocols and mitigate supply chain risk.
In our Fluid Power and Flow Control segment, we continue to see strong demand tailwinds across the technology sector, including areas tied to 5G infrastructure, cloud computing and semiconductor manufacturing.
Our exposure across this area has been supplemented in recent years through the ongoing build out of our automation platform, focused on advanced facility automation through machine vision, robotics, motion, and industrial networking technologies.
Related organic sales across this automation offering were up over 30% year-over-year in the fourth quarter with order activity remaining strong in recent months.
Our growing automation offering also aligns with the related trends and solutions we offer across our legacy operations.
This includes areas within fluid power where our capabilities in electronic integration, software coding, pneumatic automation and smart technology applications are driving new growth opportunities as customers increasingly focus on machine technology advancements and data analytics.
Combined with an accelerating demand recovery in longer and later cycle markets such as industrial OE, process flow and construction segment sales were up 8% organically on a two-year stack basis during the fourth quarter with positive trends continuing in recent months.
Overall, the momentum we see building from our industry position and initiatives leaves us optimistic heading into fiscal 2022.
We remain cognizant of ongoing supply chain constraints across the industrial sector, which has been widely conveyed throughout the industry in recent months.
Lead times remain extended across certain product categories driven by component delays and an increase in fulfillment timing.
However, the backdrop does not appear to be getting materially worse and the direct impact to our operations and performance remains relatively modest to date.
Our technical scale, local presence and supplier relationships have been and will continue to be a competitive advantage in managing through current supply chain dynamics and driving share gain opportunities as the cycle continues to unfold.
Our team is also doing a great job of managing broader inflation through price actions, strong channel execution and benefits from productivity gains.
Combined with a leaner cost structure, our EBITDA increased over 46% year-over-year in the quarter.
SD&A expense as a percent of sales was the lowest in 10 years, and EBITDA margins are at record levels.
While we expect ongoing inflationary headwinds going forward, our cost and margin execution provides strong evidence of the company-specific margin expansion opportunity, we continue to see unfolding in coming years.
Lastly, our balance sheet is in a solid position following strong cash generation in fiscal 2021.
We ended the year with net leverage of 1.8 times, the lowest in four years, an ample liquidity heading into fiscal 2022.
Over the past two years, we deployed nearly $340 million on debt reduction, dividends, share buybacks and acquisitions during an uncertain and challenging operating environment, further highlighting the strength of our team and business model.
We also entered fiscal 2022, with an active M&A pipeline across our focused areas of automation, flow control and fluid power that could present additional value creating growth opportunities going forward.
Overall, I'm encouraged by our ongoing execution and position.
These are exciting times at Applied as our differentiated value proposition and growth strategy are engaging our internal team and driving increased recognition across our legacy and emerging industry verticals.
And just another reminder before I begin.
Now, turning to our results for the quarter.
Consolidated sales increased 3.6% over the prior year quarter.
Acquisitions contributed 2.1 percentage points of growth and foreign currency drove a favorable 1.7% increase.
The number of selling days in the quarter were consistent year-over-year.
Netting these factors, sales increased 19.8% on an organic basis.
While partially benefiting from easier comparisons driven by prior year pandemic related headwinds, we note the two-year stack year-over-year organic change was positive in the quarter.
In addition, average daily sales rates increased 6% sequentially on an organic basis in the third quarter, which was approximately 600 basis points above historical third quarter to fourth quarter sequential trends.
As it relates to pricing, we estimate the overall contribution of product pricing and year-over-year sales growth, was around 80 to 100 basis points in the quarter.
The segment's average daily sales rates improved 4% sequentially from the prior quarter, which likewise was above normal seasonal patterns.
Underlying demand improvement was broad based during the quarter, though end markets such as lumber and forestry, food and beverage, chemicals, aggregates, pulp and paper, and mining reflected the strongest growth on a two-year stack basis.
In addition to the strong sales performance across our U.S. service center operations, we saw favorable growth across our C class consumables and the international operations, which contributed to our top line performance in the quarter.
Within our Fluid Power and Flow Control segment, sales increased 26.1% over the prior year quarter with our acquisitions of ACS and Gibson Engineering contributing 6.4 points of growth.
On an organic basis segment sales increased 19.7% year-over-year and 8% on a two-year stack basis.
Underlying demand across the segment strengthened through the quarter, with segment sales benefiting from ongoing favorable demand within technology end markets, as well as with life sciences and chemical end markets.
We are also seeing strong order activity across off-highway mobile and industrial fluid power applications, while process related end markets have picked up following a slower recovery in recent quarters.
Lastly, demand across our expanding automation platform continues to show strong organic growth trends.
As we have previously indicated, we see sustained favorable growth dynamics across the segment given various secular tailwinds and company-specific opportunities tied to our leading technical industry position.
Moving to gross margin performance.
As highlighted on Page 8 of the deck, gross margin of 29.4% improved 63 basis points year-over-year.
During the quarter, we recognized a net LIFO benefit of $3.7 million compared to LIFO expense of $0.8 million in the prior year quarter.
The net LIFO benefit relates to year end LIFO adjustments for inventory layer liquidations and had a favorable 52 basis points year-over-year impact on gross margins during the quarter.
Excluding the LIFO impact in both periods, gross margins still expanded year-over-year, reflecting strong channel execution and effective management to supplier cost inflation with price cost dynamics neutral during the quarter.
Gross margins declined sequentially reflecting some normalization from record third quarter performance, as well as timing of price adjustments.
Turning to our operating costs.
Selling, distribution and administrative expenses increased 13.9% year-over-year compared to adjusted levels in the prior-year period or approximately 9% on an organic constant currency basis.
Year-over-year comparisons exclude $1.5 million of non-routine expense recorded in the prior year quarter.
SD&A expense was 20.3% of sales during the quarter, down from 22% in the prior year quarter.
Strong operating leverage in the quarter reflects the benefits of a leaner cost structure following business rationalization initiatives executed over the past several years.
In addition, we continue to realize benefits from our operational excellence initiatives, shared services model and technology investments while bad debt and amortization expense were also lower year-over-year.
These dynamics and our culture of cost control and accountability, positive balance, incremental growth related investments, higher incentive expense and the lapping of prior year temporary cost actions.
Our strong cost control combined with improving sales and firm gross margins resulted in EBITDA growing approximately 46% year-over-year when excluding non-routine expense in the prior year period or 39% when excluding the impact of LIFO in both periods.
In addition, EBITDA margin was 10.6% up 165 basis points over the prior year, which includes a favorable 52 basis point year-over-year impact from LIFO.
Combined with the reduced interest expense and a lower effective tax rate, reported earnings per share of $1.51 was up 89% from prior year adjusted earnings per share of $0.80.
Similar to recent quarters, the tax rate during our fourth quarter included discrete benefits related to stock option exercises.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the fourth quarter was $38.3 million, while free cash flow totaled $34.6 million.
For the full year, we have generated free cash up $226 million, which represented 121% of adjusted net income.
We had another strong year of cash generation in fiscal 2021 following our record performance in fiscal 2020.
Over the past few years, we have generated over $500 million of free cash flow.
While partially reflecting the countercyclical nature of our model, our free cash generation is up over prior peak levels, reflecting our increased scale and enhanced margin profile, as well as ongoing benefits from our working capital initiatives, including cross-functional inventory planning, enhanced collection standard work and leverage of our shared services model, all supported with recent investments in technology.
Given the cash performance and confidence in our outlook, we deployed excess cash through share buybacks during the quarter, repurchasing 400,000 shares for approximately $40 million.
In addition, we paid down $106 million of debt during fiscal 2021, including $24 million during the fourth quarter.
We ended June with approximately $258 million of cash on hand and net leverage at 1.8 times adjusted EBITDA, below the prior level of 2.3 times and the fiscal 21 third quarter level of 1.9 times.
Our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option combined with incremental capacity on our AR securitization facility and uncommitted private shelf facility, our liquidity remained strong.
Turning now to our outlook.
For fiscal 2022, we're introducing earnings per share guidance in the range of $5 to $5.40 per share based on sales growth of 8% to 10%, including a 7% to 9% organic growth assumption, as well as EBITDA margins of 9.7% to 9.9%.
Our sales outlook assumes a relatively steady industrial demand environment from current trends.
On a segment basis, the sales outlook assumes high single digit organic growth in our Service Center segment and high single to low double-digit organic growth in our Fluid Power and Flow Control segment.
In addition, based on quarter-to-date sales trends through mid August, we currently project fiscal first quarter organic sales to grow by a mid-teens percentage over the prior year quarter.
From a margin and cost perspective, we assume ongoing inflationary headwinds, including greater LIFO expense in fiscal 2022, as well as normalizing personnel expense, including the impact of our annual merit pay increase effective January 1.
We expect higher LIFO expense will result in gross margins declining sequentially in our first fiscal first quarter following the LIFO benefit we recognized during our fourth quarter.
Based on these dynamics, as well as the lapping of prior year temporary cost actions and the impact of ongoing internal growth investment, we currently project incremental margins and operating income in the low double-digit range for fiscal 2022.
We continue to take a balanced approach to managing our operating cost, while our expense and margin execution in recent quarters, provides strong indication of our potential going forward, including our target of mid-to-high teen incremental margins on average over an up cycle.
In addition, while the macro backdrop has improved over the past several quarters, there remains lingering uncertainty related to COVID-19 transmission rates, labor constraints and supply chain headwinds, which could influence the cadence and trajectory of industrial activity as the year progresses.
We have attempted to capture these variables within our initial guidance, which we believe is prudent as we continue to recover from an unprecedented downturn.
Lastly from a cash flow perspective, we expect free cash flow to be lower year-over-year in fiscal '22 compared to fiscal 2021 as AR levels continue to cyclically build and we replenish inventory at a greater pace in support of our growth opportunities and the recovery.
Over the past several years, we've deployed strategic investments and initiatives that have positioned Applied for stronger growth relative to our legacy trends and improved returns on capital in the coming years.
While near term macro trends continue to face a number of variables as we transition away from an unprecedented downturn, I believe we remain early in a potentially prolonged industrial cycle considering the breadth of tailwinds we see developing today.
These include emerging capex spending following multiple years of under investment, as well as greater industrial production across North America, as customers reduce reliance on long distance global supply chains.
In addition, increasing signs of investment in U.S. infrastructure are promising, which could represent a notable tailwind given our participation in industrial machinery, metals, aggregates, chemicals, mining and construction.
We also enter fiscal 2022 with a record backlog and strong order growth across some of our longer cycle businesses, which have expanded in recent years including Fluid Power, Flow Control and now automation that focus on engineered solutions and tied to our customers core growth initiatives and capital investments.
While supply chain tightness across the industry is partially influencing backlog right now, we see ongoing demand creation as Applied's technical position is called upon to address customers' greater operational and supply chain requirements.
This includes improving demand across our higher margin specialty flow control operations, which should benefit further into fiscal 2022 from pent-up maintenance and service activity, as well as a greater focus on higher environmental and safety standards.
We're also expanding our flow control focus across attractive industry verticals such as life sciences and hygienics.
Further, we'll continue to expand into new and emerging areas of growth across the industrial supply chain.
Of note, following the initial investment and build out of our next generation automation offering, we are now a leading distributor and solutions provider across several product focus areas including advanced machine vision, as well as collaborative and mobile robotic technologies.
We're also investing in digital capabilities that complement our local presence and continue to evaluate and develop new commercial solutions that fully leverage our technical capabilities and application expertise as legacy Industrial Infrastructure converges with new emerging technologies.
Lastly, our cross-selling initiative is gaining momentum, with related business wins increasing and broader teams engaged.
Considering our embedded customer base across our core service center network, an addressable market exceeding $70 billion and growing, we believe this initiative represents a significant opportunity that should expand our share across both legacy and emerging market verticals into fiscal 2022 and beyond.
Overall, these growth initiatives combined with value creating M&A potential, a leaner cost structure, operational excellence initiatives and expansion of our shared services model, provide a strong runway to drive above market growth and EBITDA margin expansion in coming years.
In the interim, we're focused on achieving our financial targets of $4.5 billion in sales and 11% EBITDA margins.
While the timing of these goals remains dependent on the industrial cycle trajectory, I believe they're within Applied's reach and provide the framework for significant value creation as we execute our strategy going forward.
| compname reports q4 earnings per share $1.51.
q4 earnings per share $1.51.
sees fy earnings per share $5.00 to $5.40 including items.
sees fy sales up 8 to 10 percent.
|
To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there.
In the second quarter, Capital One earned $3.5 billion or $7.62 per diluted common share.
Included in the results for the quarter was a $55 million legal reserve build.
Net of this adjusting item, earnings per share in the quarter was $7.71.
On a GAAP basis, pre-provision earnings increased slightly in the sequential quarter to $3.4 billion.
We recorded a provision benefit of $1.2 billion in the quarter as $541 million of charge-offs was offset by a $1.7 billion allowance release.
Revenue grew 4% in the linked quarter, largely driven by the impact of strong Domestic Card purchase volume on noninterest income and the absence of the mark on our Snowflake investment a quarter ago.
Period-end loans held for investment grew $6.5 billion or 3%, inclusive of the effect of moving $4.1 billion of loans to held-for-sale during the quarter.
The loans moved to held-for-sale consisted of $2.6 billion of an International Card partnership portfolio and $1.5 billion in commercial loans.
Turning to Slide 4.
I will cover the changes in our allowance in the quarter.
We released $1.7 billion of allowance, primarily driven by observed strong credit performance and an improved economic outlook.
Turning to Slide 5.
We provide the allowance coverage ratios by segment.
You can see allowance coverage declined in the quarter across all segments, largely reflecting the dynamics I just described.
However, coverage ratios remain well above pre-pandemic levels due to continued economic uncertainty as our allowance is built to absorb a wide range of outcomes.
Our Domestic Card coverage is now 8.9%, down from 10.5% last quarter.
Our branded card coverage is 10.1%.
Recall that the difference between branded and domestic coverage is largely driven by the loss sharing agreements in some of our partnership portfolios.
Coverage in our consumer business declined about 60 basis points to 3%.
In addition to continued strong credit performance and improved economic outlook, historically high auto values aided the reduction in coverage.
Coverage in our Commercial Banking business declined about 25 basis points to 1.7%, with the single largest driver being the improvement in our energy portfolio.
Turning to Page 6.
I'll now discuss liquidity.
You can see our preliminary average liquidity coverage ratio during the first -- during the quarter was 141%.
The LCR continues to be well above the 100% regulatory requirement.
Our liquidity reserves from cash, securities and Federal Home Loan Bank capacity ended the quarter at approximately $137 billion.
The $14 billion decline in total liquidity was driven by lower ending cash balances.
Our cash position declined in the quarter as it was redeployed to net loan growth, wholesale funding maturities, a modest increase in our securities portfolio and share repurchases.
Moving to Page 7.
I'll now discuss net interest margin.
You can see that our second quarter net interest margin was 5.89%, 10 basis points lower than the prior quarter.
The linked-quarter decline in NIM was largely driven by lower yield in our card portfolio, where the typical seasonal decrease in revolve rate was exacerbated by higher transactor volume and associated higher payments.
These impacts were partially offset by the favorable impact from one more day in the quarter.
Lastly, turning to Slide 8.
I will cover our capital position.
Our common equity Tier 1 capital ratio was 14.5% at the end of the second quarter, down 10 basis points from the first quarter.
Loan growth and capital actions were largely offset by earnings growth.
During the quarter, the Federal Reserve released the results of their stress test.
Our stress capital buffer requirement, which will be effective on October 1 of this year, is 2.5%, resulting in a total capital requirement by the Fed of 7%.
While we saw a decline in this year's SCB, it's important to note that the Fed's stress testing results can move around meaningfully from year to year and are only one of many factors that we use in our capital planning process.
Based on our internal modeling, we continue to estimate that our CET1 capital need is around 11%.
Turning to share repurchases.
We repurchased $1.7 billion of common stock in the second quarter, the full amount allowed under the Fed's capital preservation measures.
We have approximately $5.3 billion remaining of our current board authorization of $7.5 billion.
Now let me move on to dividends.
In the third quarter of 2020, we reduced our dividend to $0.10 due to the Fed's capital preservation measures.
We chose to continue this reduced level of dividend in the fourth quarter of 2020 out of an abundance of caution.
The difference between our historical $0.40 dividend and the reduced level for those two quarters was $0.60 per common share.
Therefore, we expect to make up for the reduced level of dividends from the second half of 2020 by paying a $0.60 special dividend in the third quarter of 2021.
In addition to the special dividend, we expect to increase our quarterly common stock dividend from $0.40 per share to $0.60 per share in the third quarter.
Both the $0.60 special dividend and the increase of our quarterly common stock dividend to $0.60 will be subject to board approval.
I'll begin on Slide 10 with our Credit Card business.
Strong year-over-year purchase volume growth drove an increase in revenue compared to the second quarter of 2020, more than offsetting a modest year-over-year decline in loan balances.
And provision for credit losses improved significantly.
Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on Slide 11.
Second-quarter results reflect building momentum in our Domestic Card business.
As we emerge from the pandemic, consumers are spending more and continuing to make elevated payments.
Accelerating purchase volume growth partially offset the impact of historically high payment rates, resulting in strong revenue growth and a more modest year-over-year decline in loan balances.
High payment rates are continuing to contribute to strikingly strong credit results.
Domestic Card purchase volume for the second quarter was up 48% from the second quarter of 2020.
Purchase volume was up 25% from the second quarter of 2019, which is an acceleration from the first quarter when we saw growth of 17% versus 2019.
T&E spending continues to catch up to overall spending and accelerated through the second quarter.
In June, T&E purchase volume was up 3% compared to June of 2019.
At the end of the quarter, Domestic Card loan balances were down $4.1 billion or about 4% year over year.
Excluding the impact of a partnership portfolio moved to held-for-sale last year, second quarter ending loans declined about 2% year over year.
Compared to the sequential quarter, ending loans were up about 5%, ahead of typical seasonal growth of 2%.
Credit performance remained strikingly strong.
The Domestic Card charge-off rate for the quarter was 2.28%, a 225-basis-point improvement year over year.
The 30-plus delinquency rate at quarter end was 1.68%, 106 basis points better than the prior year.
Provision for credit losses improved by about $3.5 billion year over year.
We swung from a large allowance build in the second quarter last year to a large allowance release this year.
Let me turn to Domestic Card revenue margin.
Purchase volume growth outpacing loan growth and strong credit were the key drivers of Domestic Card revenue margin, which was up 226 basis points year over year to 17.7%.
Revenue margin increased over 50 basis points quarter over quarter, higher than our typical seasonal pattern.
Total company marketing expense was $620 million in the quarter, up $347 million compared to the second quarter of 2020.
Our choices in card marketing are the biggest driver of total company marketing trends.
As we emerge from the pandemic, we're seeing strong originations and purchase volumes.
Our growth opportunities are enhanced by our technology transformation.
We are leaning further into marketing to drive future growth and continue to build our franchise.
At the same time, we're keeping a watchful eye on the competitive environment, which is intensifying.
Pulling up, our Domestic Card business continues to deliver significant value and build momentum.
Slide 12 summarizes second quarter results for our Consumer Banking business.
Auto growth and exceptional auto credit are the main themes in second quarter Consumer Banking results.
Driven by auto, second quarter ending loans increased 12% year over year in the Consumer Banking business.
Average loans also grew 12%.
Auto originations were up 56% year over year and up 47% from the linked quarter.
Pent-up demand and high auto prices drove a second quarter surge in growth across the auto marketplace.
In the context of increased industry growth, our digital capabilities and deep dealer relationship strategy continued to drive strong growth in our auto business.
Second quarter ending deposits in the consumer bank were up $4.4 billion or 2% year over year.
Average deposits were up 9% year over year.
Consumer Banking revenue increased 27% from the prior-year quarter, driven by growth in auto loans and retail deposits.
Second-quarter provision for credit losses improved by $1.2 billion year over year, driven by an allowance release and lower charge-offs in our auto business.
Credit results in our auto business are strikingly strong.
Year over year, the second quarter charge-off rate improved 120 basis points to negative 0.12%, and the delinquency rate was essentially flat at 3.26%.
In the quarter, elevated used car prices drove an increase in auction proceeds, amplifying the normal seasonal benefit we see from tax refunds around this time of the year.
As used vehicle prices normalize, they will become a headwind to the auto charge-off rate.
we expect the auto charge-off rate to increase from the unusually low second quarter level.
Moving to Slide 13.
I'll discuss our Commercial Banking business.
Second quarter ending loan balances were down 5% year over year.
Average loans were down 7%.
Commercial line utilization continues to be down year over year, and we moved $1.5 billion of commercial real estate loans to held-for-sale.
Quarterly average deposits increased 22% from the second quarter of 2020 and 5% from the linked quarter as middle market and government customers continue to hold elevated levels of liquidity.
Second-quarter revenue was up 3% from the prior-year quarter and down 6% from the linked quarter.
The linked quarter decline is more than entirely driven by a one-time cost associated with moving the commercial real estate loans to held for sale.
This decline was offset by an equivalent one-time gain in the other category and is therefore neutral to the company.
Excluding this effect, Commercial Banking revenue would have increased about 13% year over year and 4% from the linked quarter.
Provision for credit losses improved significantly compared to the second quarter of 2020, driven by a swing from an allowance build to an allowance release and a swing from net charge-offs to net recoveries.
In the second quarter, the Commercial Banking annualized charge-off rate was negative 11 basis points.
The criticized performing loan rate was 7.6%, and the criticized nonperforming loan rate was 1%.
Our Commercial Banking business is delivering solid performance as we continue to build our commercial capabilities.
I'll close tonight with some thoughts on our results and our strategic positioning.
Several key themes are evident in our second quarter results.
Credit remains strikingly strong.
Purchase volume and loans are rebounding.
We're continuing to invest to propel our future results, and we're returning capital to our shareholders.
We are seeing increasing near-term opportunities to build our Domestic Card business as we emerge from the pandemic.
We are leaning further into marketing to seize these opportunities.
We are also increasing our marketing for auto, national banking and our brand.
We are now in the ninth year of a journey to build a modern technology company from the bottom of the tech stack up.
Our progress is accelerating, and the stakes are rising.
Competitor tech investments are increasing as technology is increasingly seen as an existential issue.
The investment flowing into fintechs is nothing short of breathtaking.
And the war for tech talent continues to escalate, including levels of compensation.
We continue to invest in technology and the opportunities that emerge as our transformation gains traction.
Our modern technology is powering our current performance and setting us up to capitalize on the accelerating digital revolution in banking.
We'll now start the Q&A session.
[Operator instructions] If you have follow-up questions after the Q&A session, the Investor Relations team will be available after the call.
Holly, please start the Q&A.
| compname reports second quarter 2021 net income of $3.5 billion, or $7.62 per share.
q2 adjusted earnings per share $7.71 excluding items.
qtrly provision (benefit) for credit losses decreased $337 million to $(1.2) billion versus q1 2021.
qtrly net interest margin of 5.89%, a decrease of 10 basis points versus q1 2021.
qtrly earnings per share $7.62.
common equity tier 1 capital ratio under basel iii standardized approach of 14.5% at june 30, 2021.
|
Joining me on the call today are President and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas.
These statements are based on management's current expectations and are not guarantees of future performance.
As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance.
Also note that both our adjusted results and full-year guidance exclude our build-to-print actuation product line that supported the 737 MAX program, as well as our German valves business, which was classified as held for sale in the fourth quarter.
I'll begin with the key highlights of our second quarter performance and an overview of our full-year 2021 outlook.
Starting with the second quarter highlights.
Overall, we experienced a strong 14% increase in sales.
Our aerospace and defense markets improved 11%, while sales to our commercial markets increased 21% year-over-year.
Diving deeper within our markets, we experienced double-digit sequential improvements in sales within our commercial aerospace, power and process and general industrial markets.
These markets were among the hardest hit by the pandemic last year and we are encouraged by their improving conditions.
Looking at our profitability.
Adjusted operating income improved 24%, while adjusted operating margins increased 120 basis points to 15.6%.
This performance reflects strong margin improvement in both the Aerospace and Industrial and the Naval and Power segments based upon higher sales, as well as the benefits of our operational excellence initiatives.
It's important to note that this strong performance was achieved while we continue to invest strategically with a $5 million incremental investment in research and development as compared to the prior year.
Based on our solid operational performance, adjusted diluted earnings per share was $1.56 in the second quarter, which was slightly above our expectations.
This reflects a strong 22% year-over-year growth rate, despite higher interest expense and a slightly higher tax rate, which were generally offset by the benefits of our consistent share repurchase activity.
Turning to our second quarter orders.
We achieved 11% growth and generated a strong 1.1 times book-to-bill overall, as orders exceeded one-time sales within each of our three segments.
Of note, our results reflect strong commercial market orders, which serves 50% year-over-year and included a record quarter of order activity for our industrial vehicle products covering both on and off-highway markets.
Within our aerospace and defense markets, book-to-bill was 1.15.
Next, to our full-year 2021 adjusted guidance where we raised our sales, operating income, margin and diluted earnings per share.
Our updated guidance reflects an improved outlook in our industrial markets, some additional planned R&D investments to support our top line growth and an increase to the full-year tax rate.
Chris will take you through the detail in the upcoming slides.
But in summary, we are well positioned to deliver strong results in 2021.
I'll begin with the key drivers of our second quarter results, where we again delivered another strong financial performance.
Starting in the Aerospace and Industrial segment.
Sales improved sharply year-over-year and this was led by a strong increase in demand of approximately 40% for industrial vehicle products to both on and off-highway markets.
The segment's sales growth also benefited from solid demand for surface treatment services to our industrial markets, which is driven by steady improvements in global economic activity.
Within the segment Commercial Aerospace market, we experienced improved demand for our Sensors products on narrow-body platforms.
However, as we expected, those gains were mainly offset by continued slowdowns on several wide-body platforms.
Looking ahead to the second half of 2021, we expect an improved performance within this market, led by increased production of narrow-body aircraft, including the 737 and A320.
Longer term, we see narrow-body aircraft returning to prior production levels by the 2023 timeframe, while wide-body aircraft may not fully recover until 2024 or even 2025.
Turning to the segment's profitability.
Adjusted operating income increased 138%, while adjusted operating margin increased 800 basis points to 15.7%, reflecting favorable absorption on higher sales and a dramatic recovery from last year's second quarter.
Also, our results reflect the benefits of our ongoing operational excellence initiatives in year-over-year restructuring savings.
And although we continue to experience minor influences from supply chain constraints in both container shipments and electronic components, this impact was immaterial to our overall results.
In the Defense Electronics segment, revenues increased 17% overall in the second quarter.
This was led by another strong performance from our PacStar acquisition, which is executing quite well and its integration remains on track.
Aside from PacStar, second quarter sales were lower on an organic basis due to timing on various C5 ISR programs in Aerospace Defense.
If you recall, we experienced an acceleration of organic sales into the first quarter for our higher-margin commercial off-the-shelf products as several customers took action to stabilize their supply chains due to concerns for potential shortage in electronic components.
Segment operating performance included $4 million in incremental R&D investments, unfavorable mix and about $2 million in unfavorable FX.
Absent these impacts, second quarter operating margins would have been nearly in line with the prior-year strong performance.
In the Naval and Power segment, we continue to experience solid revenue growth for our naval nuclear propulsion equipment, principally supporting the CVN-80 and 81 aircraft carrier programs.
Elsewhere, in the commercial Power and Process markets, we experienced higher nuclear aftermarket revenues both in the U.S. and Canada, as well as higher valve sales to process markets.
The segment's adjusted operating income increased 13%, while adjusted operating margin increased 30 basis points to 17.2% due to favorable absorption on higher sales and the savings generated by our prior restructuring actions.
To sum up the second-quarter results, overall, adjusted operating income increased 24%, which drove margin expansion of 120 basis points year-over-year.
Turning to our full-year 2021 guidance.
I'll begin with our end-market sales outlook, where we continue to expect total Curtiss-Wright sales growth of 7% to 9%, of which 2% to 4% is organic.
And as you can see, we've made a few changes highlighted in blue on the slide.
Starting in Naval Defense, where our updated guidance ranges from flat to up 2%, driven by expectations for slightly higher CVN-81 aircraft carrier revenues and less of an offset in the timing of Virginia-class submarine revenues.
Our outlook for overall aerospace and defense market sales growth remains at 7% to 9%, which, as a reminder, positions Curtiss-Wright to once again grow our defense revenues faster than the base DoD budget.
In our commercial markets, our overall sales growth is unchanged at 6% to 8%, though we updated the growth rates in each of our end markets.
First, in Power and Process, we continue to see a solid rebound in MRO activity for our industrial valves businesses.
However, we lowered our 2021 end market guidance due to the push out of a large international oil and gas project into 2022.
And as a result, we are now anticipating 1% to 3% growth in this market.
Next, in the general industrial market, based on the year-to-date performance and strong growth in orders for industrial vehicle products, we've raised our growth outlook to a new range of 15% to 17%.
And I would like to point out that at our recent Investor Day, we stated that we expect our industrial vehicle market to return to 2019 levels in 2022 and we have a strong order book to support that path.
Continuing with our full-year outlook.
I'll begin in the Aerospace and Industrial segment, where improved sales and profitability reflect the continued strong recovery in our general industrial markets.
We now expect the segment sales to grow 3% to 5%, and we've increased this segment's operating income guidance by $3 million to reflect the higher sales volumes.
With these changes, we're now projecting segment operating income to grow 17% to 21%, while operating margin is projected to range from 15.1% to 15.3% of 180 to 200 basis points, keeping us on track to exceed 2019 profitability levels this year.
Next, in the Defense Electronics segment.
While we remain on track to achieve our prior guidance, I wanted to highlight a few moving pieces since our last update.
First, based upon technology pursuits in our pipeline, we now expect to make an additional $2 million of strategic investments in R&D for a total of $8 million year-over-year to fuel future organic growth.
Next, in terms of FX, we saw some weakening in the U.S. dollar during the second quarter, and this will create a small operating margin headwind on the full year for the businesses operating in Canada and the UK.
In addition, we've experienced some modest impacts on our supply chain over the past few months, principally related to the availability of small electronics, which we expected to minimally persist into the third quarter.
And while this remains a watch item, particularly the impact on the timing of revenues, we're holding our full-year segment guidance.
Next, in the Naval and Power segment, our guidance remains unchanged and we continue to expect 20 to 30 basis points of margin expansion on solid sales growth.
So, to summarize our full-year outlook, we expect 2021 adjusted operating income to grow 9% to 12% overall on 7% to 9% increase in total sales.
Operating margin is now expected to improve 40 to 50 basis points to 16.7% to 16.8%, reflecting strong profitability, as well as the benefits of our prior-year restructuring and ongoing companywide operational excellence initiatives.
Continuing with our 2021 financial outlook, where we have again increased our full-year adjusted diluted earnings per share guidance, at this time to a new range of $7.15 to $7.35, which reflects growth of 9% to 12%, in line with our growth in operating income.
Note that our guidance also includes the impacts of higher R&D investments, a higher tax rate, which is now projected to be 24% based upon a recent change in UK tax law and a reduction in our share count, driven by ongoing share repurchase activity.
Over the final six months of 2021, we expect our third quarter diluted earnings per share to be in line with last year's third quarter and the fourth quarter to be our strongest quarter of the year.
Turning to our full-year free cash flow outlook, we've generated $31 million year to date.
And as we've seen historically, we typically generate roughly 90% or greater of our free cash flow in the second half of the year and we remain on track to achieve our full-year guidance of $330 million to $360 million.
I'd like to spend the next few minutes discussing some thoughts and observations since our recent May Investor Day.
I'll start with the President's FY '22 defense budget request, which was issued shortly after our Investor Day event.
The release reflected approximately 2% growth over the FY '21 enacted budget and was reasonably consistent with our expectations and plans.
The budget revealed continued strong support for the most critical U.S. naval platforms, including the CVN-80 and 81 aircraft carriers and the Columbia-class and Virginia-class submarines.
We believe the bipartisan support for the Navy's future provides us a strong base, from which we can grow our nuclear and surface ship revenues and has room for potential upside should they add a third Virginia submarine or another DDG destroyer.
We also expect ongoing support for the funding of the DoD's top strategic priorities, including cyber, encryption, unmanned and autonomous vehicles, all of which were highlighted in the budget release.
This bodes well for our defense electronics product offering, which support all of these areas.
Another bright spot was army modernization.
Despite cuts to the overall army budget, funding to upgrade Battlefield network is up 25% in the services FY '22 budget request to a total of $2.7 billion, which represents the single greatest increase among the Army's modernization priorities.
Further, it provides great confidence behind our decision to acquire PacStar, as they are in a prime position to capitalize on the ongoing modernization of ground forces.
Since then, we have also seen increasing signs of optimism as the budget makes its way through the Congressional markup.
The recent vote by the Senate Armed Service Committee to authorize an additional $25 billion to the Pentagon's budget for FY '22 represents a 3% upside to the President's initial request and an overall increase of 5% above the current fiscal year.
Though not final, this again provides confidence in our long-term organic growth assumptions across our defense markets.
Our pivot-to-growth strategy is led by a renewed focus on top line acceleration, which we expect to achieve through both organic and inorganic sales growth and our expectations to grow operating income faster than sales, which implies continued operating margin expansion.
Additionally, we are targeting a minimum of double-digit earnings per share growth over the three-year period ending in 2023 and continued free -- strong free cash flow generation.
Based on our new long-term guidance assumptions, we're minimally expecting low single-digit organic sales growth in each of our end markets.
We have good line of sight on achieving a 5% base sales growth CAGR, including PacStar, by the end of 2023.
In addition to the organic growth embedded within these expectations, we are focused on maximizing our growth potential in our key end markets based on the contribution from our continued incremental investments in R&D, as well as the benefits of our new operational growth platform.
We are reinvesting in our business at the highest level in Curtiss-Wright's recent history.
And as you know, it's an area that I'm very passionate about.
As you saw in our updated guidance, we increased our 2021 R&D investment by another $2 million, reflecting a total of $12 million in incremental year-over-year spending.
These investments are targeted at critical technologies and the highest growth vectors in our end markets such as MOSA in our defense electronics business.
Additionally, the rollout of the new operational growth platform is providing greater management focus, attention and energy to drive all things critical to growth from reinvigorating innovation and collaboration, to providing new opportunities in commercial excellence and strategic pricing.
As a result, we will have continued opportunities for cost reduction, which could free up money to cover short-term acquisition dilution, be distributed to R&D investments or result in margin expansion.
These will be focused and conscious investment decisions.
Further, I believe it's critical to point out that we will continue to drive our strong processes and dedication to operational excellence, with the same level of commitment and bigger that this team has demonstrated since 2013.
Lastly, I wanted to reiterate that our target for a minimum earnings per share CAGR of 10% over the three-year period is likely to incorporate annual share repurchase activity above our current base level of $50 million annually.
We remain committed to effectively allocating capital to drive the greatest long-term returns to our shareholders.
Therefore, the year-to-year allocation to share repurchases will vary, depending on the size and timing of future acquisitions that we bring into Curtiss-Wright.
Finally, with more management attention on M&A and a very full pipeline of opportunities, I feel very optimistic that we will have the opportunity to exceed 5% and approach the 10% sales targets as we find critical strategic acquisitions to bring into Curtiss-Wright.
In summary, we are well positioned to deliver strong results this year.
We expect to generate a high single-digit growth rate in sales and 9% to 12% growth in both operating income and diluted earnings per share this year.
Our 2021 operating margin guidance now stands at 16.7% to 16.8%, including our incremental investments in R&D.
And we remain on track to continue to expand our margins to reach 17% in 2022.
Our adjusted free cash flow remains strong and we continue to maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth, while ensuring that we are investing our capital for the best possible returns to drive long-term shareholder value.
| curtiss-wright raises full-year 2021 financial guidance.
q2 adjusted earnings per share $1.56.
|
Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.
fortive.com under the heading Investors, Quarterly Results.
We completed the divestiture of the Automation and Specialty Business on October 1st, 2018 and accordingly have included the results of the A&S business as discontinued operations for historical periods.
We completed the separation of our prior Industrial Technologies segment through the spin-off of Vontier Corporation on October 9, 2020 and have accordingly included the results of the Industrial Technologies segment as discontinued operations.
All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis.
Today, we are pleased to announce our fourth quarter 2020 results, which reflect a strong finish to the year.
For the quarter, we delivered adjusted diluted net earnings per share of $0.70, an increase of 19% year-over-year as well as total revenue growth of 4.9%, which exceeded the high-end of our guidance and included a return to positive core growth.
The quarter underlie the increased resilience of our portfolio and represented a continuation of the sequential improvement in top-line performance that we have seen since late in Q2.
Despite the continued challenges associated with the COVID-19 pandemic, our disciplined application of the Fortive Business System help drive more than 100 basis points of core operating margin expansion and a 39% increase in free cash flow.
The better topline performance in Q4 reflected a combination of durability across the recurring revenue portions of our portfolio and clear improvement at Fluke and Tektronix.
The strength of our recurring revenue, which now accounts for approximately 39% of our total revenue provided an important source of stability throughout 2020.
In Q4, this is most notable among our SaaS offerings, which generated low-teens growth.
The application of FBS customer success tools also continue to deliver improvements in net revenue retention, which climbed greater than 101% for the full year.
Our SaaS performance helped to offset the challenges the software businesses are having with customer site access for the provision of services as well as extended timelines for contract renewals.
The fourth quarter also saw Fluke and Tektronix return to positive growth.
Both have seen steady improvement since the middle of Q2 driven by better point of sale trends across major geographies and continued successful new product launches.
On January 19th, we disposed-off our remaining 19.9% ownership stake in Vontier through a tax efficient Debt-for-Equity Exchange.
This transaction represents the final step in the Vontier separation.
With the combination of the Vontier spin proceeds, the Debt-for-Equity Exchange and our continued strong free cash flow, we have reduced our net debt by approximately $3 billion since the beginning of Q4 with a net leverage ratio currently at approximately 1.3 times, we have significant capacity to pursue key capital allocation priorities.
With that, let's turn to the details of the quarter on slide four.
Adjusted net earnings were $252.9 million, up 19.3% from the prior year and adjusted diluted net earnings per share was $0.70.
Total sales increased 4.9% to $1.3 billion with core revenue up 0.7%, reflecting continued sequential improvement from the prior quarter.
Acquisitions contributed 260 basis points of growth and favorable foreign exchange rates increased growth by 160 basis points.
We are particularly pleased to deliver adjusted gross margins of 58.5%, representing a new high for Fortive, which highlights the significant portfolio transformation accomplished over the last few years.
Gross margins also benefited from our ongoing investment in innovation, continued application of FBS growth tools and another quarter of strong pricing.
Adjusted operating profit margin was 23.2% for the quarter.
This reflected 130 basis points of core margin, operating margin expansion, including positive core OMX for each of the segments.
This was the second consecutive quarter with greater than 100 basis points of core OMX.
The Q4 margin performance also contributed to 50 basis points of positive core OMX for the full year 2020.
During the fourth quarter, we generated $313 million of free cash flow, representing conversion of 124% of adjusted net earnings and an increase of 39% year-over-year.
Including this fourth quarter contribution, our full-year 2020 free cash flow was $902 million, representing conversion of 120% of adjusted net earnings and an increase of 44% year-over-year.
Our 2020 free cash flow performance in particular showed the resilience of our portfolio and the power of the Fortive Business System to drive consistent, strong increases in free cash flow.
In Asia, core revenue increased by low single digits, highlighted by high single-digit growth in China and mid single-digit growth in India.
Continued strength in China was broad-based, led by mid 20% growth at Sensing, mid-teens growth at Fluke, and high-teens growth at Advanced Sterilization Products.
The strength in China and India was offset by declines in most of the rest of Asia.
Western Europe core revenue increased by high single digits in the fourth quarter with high-teens growth at Fluke Health Solutions, high single-digit growth in Tektronix, and mid-single digit growth in ASP.
North America core revenue was down slightly in the fourth quarter, as low teens growth at Tektronix and high-single digit growth at Censis was primarily offset by declines at ASP and Industrial Scientific.
Fluke improved to flat core growth in North America, driven by strong performance at Fluke Calibration and a return to growth at Fluke Industrial.
Turning to our segments.
Intelligent Operating Solutions posted a total revenue increase of 3.2% despite a 0.3% decline in core revenue.
Acquisitions increased growth by 170 basis points while favorable foreign exchange rates increased growth by 180 basis points.
Core operating margin increased 280 basis points.
This price realization, improved mix and higher volumes of Fluke resulted in segment level adjusted operating margin of 28.7%.
Fluke's core revenue returned to positive growth in the fourth quarter, increasing by low single-digits.
Fluke saw another quarter of strong growth in China, which increased by mid-teens in addition to seeing continued improvements in North America and Western Europe, which were flat and down low-single digits, respectively.
Point of sale showed improvement with North America still negative, but better sequentially, western Europe turning positive and China continuing at positive high single-digit rate.
Fluke saw a strong performance in Fluke Calibration and Fluke Digital as well as solid growth in Fluke Industrial.
Fluke Digital was led by another strong quarter from eMaint, including low double digit SaaS growth.
Fluke continued to see momentum from recent product launches including its ii900 Sonic Imager, which was launched in November.
Industrial Scientific core revenue declined by mid single digits in the fourth quarter.
iNet continued to see good growth, which is more than offset by continued oil and gas related pressure at ISC's instrumentation and rental businesses.
Separately, Intelex continued to perform well with revenues increasing by low double digits.
The fourth quarter also represented a record bookings quarter for Intelex, which has seen strong traction in its expansion into Western Europe.
Intelex is benefiting from the implementation of FBS, which contributed to the successful rollout of enhanced sales funnel management and digital marketing lead generation tools.
In November, Intelex also completed the acquisition of ehsAI, a leading provider of artificial intelligence and machine learning for the automation of permitting and regulatory compliance management.
The addition of ehsAI significantly enhances Intelex ability to deliver applied intelligence and advanced analytics to a broad range of customers.
At Accruent, we also saw significant sequential improvement, driven primarily by strong growth in its SaaS offerings.
While Accruent declined by low single digits for the quarter, its SaaS business increased by mid-teens.
Accruent also continued to apply FBS to drive improvement and churn in the quarter, bringing net retention for the year to greater than 100%.
Despite some continued pressure from customer site access issues, Accruent has seen good bookings for its Meridian Engineering and Information Management offering, as we partner with customers on their digital transformations and highly regulated markets such as life science and pharma.
We also continue to bring new offerings to market to address return to work requirements, including a recent win for Accruent's EMS space management software product for Cushman & Wakefield.
Gordian declined by high single digits due to headwinds associated with budget challenges and uncertainty across state and local government and higher education customers as well as continued site access issues.
Gordian's RSMeans business grew low single digits, driven by mid-teens growth for its SaaS offering, supported by the successful implementation of virtual platforms for training and onboarding.
Gordian also saw signs of improvement in project activity in its job order contracting business toward the end of the quarter.
Turning to our Precision Technologies segment, we posted a total revenue increase of 2.3% with a 0.17% increase in core revenue.
Favorable foreign exchange rates increased growth by 160 basis points.
Core operating margin increased 30 basis points, resulting in segment level adjusted operating margin of 22.2%.
Tektronix delivered mid single-digit core growth in the quarter with low-teens growth in North America and high single-digit growth in Western Europe.
Tektronix continued to benefit from better point of sale trends in both regions with significant improvement from Q3.
China saw a low-single digit decline due primarily to the negative impact of the expansion of trade restrictions, partially offset by good year-over-year point of sale growth and momentum from small and medium enterprise customers.
Looking across the product lines, the improved topline performance in Q4 was driven by low double-digit growth in both Keithley and the mainstream mixed signal oscilloscope platforms.
Growth in mainstream oscilloscopes continues to be led by the 6 Series line of scopes, which has seen strong demand for the new 6 and 8-channel versions since they were introduced in Q3.
Sensing Technologies declined low single digits in the fourth quarter.
Sensing performed well in China with mid 20% growth, driven by gains and critical environment applications etc and increased OEM demand for Hengstler, Dynapar's factory automation offerings.
North America revenue increased slightly while Western Europe declined low single digits with both regions showing clear sequential improvement.
Sensing's improved topline performance was primarily due to continued strength in medical and semiconductor end markets.
Setra has recently launched AIIR Watch Negative Pressure machine for isolation room applications has performed well, generating strong initial orders since its launch early in the quarter with orders from a range of customers across medical offices, long-term care facilities, and schools.
PacSci EMC declined low single digits, as it continued to face COVID-19 related pressures across certain elements of its supply chain.
The company did see sequential -- clear sequential topline improvement versus the third quarter as well as another quarter of strong bookings.
EMC enter 2021 in a strong backlog position, as its leading technology and innovation capability continue to drive strong demand.
Moving to Advanced Healthcare Solutions.
Total revenue increased 12% with a 2.6% increase in core revenue.
Acquisitions added 830 basis points to growth while favorable foreign exchange rates increased growth by 110 basis points.
Core operating margin increased 50 basis points resulting in segment level adjusted operating margin of 24.1%, up significantly versus Q3 and driven by strong margin lift at ASP, as we continue to exit the transition service agreements.
ASP declined mid single digits, as pandemic related pressure on elective procedure volumes remained a headwind.
Elective procedure volumes averaged approximately 93% of pre-COVID levels across the company's major markets, but were lower than anticipated and did not see slowing -- and did see slowing toward the end of the quarter.
ASP continued to perform well in Western Europe with mid single-digit growth in addition to high-teens growth in China.
In the US, ASP declined low single digits, as growth in capital placements from improved sales execution and funnel management partially offset the weakness in consumables revenue.
ASP service business continues to perform well with the ongoing deployment deployment of FBS tools helping to drive service sales and optimize service delivery processes.
With additional day to closings in Q4 in early 2021, approximately 99% of ASP's global revenue is now fully under our control and off of transition service agreements.
Censis grew by high single digits in the quarter.
Site access at hospitals improved early in the quarter, only to then reverse as the quarter progressed.
Censis' topline performance was led by its SaaS-based CensiTrac offering, which grew low double digits, driven by a combination of new customer acquisitions and successful upselling of its existing customers.
This growth was partially offset by high single-digit decline in professional services revenue tied directly to the ongoing challenges with customer site access.
Fluke Health Solutions generated mid single-digits growth in Q4.
FHS grew slightly in North America against a challenging comparison.
This growth was led by strong performance across both Fluke BioMed and the Landauer radiation monitoring business.
FHS continues to see good initial momentum across the two software platforms introduced over the past 12 months.
OneQA, which enhances workflow efficiency and test automation for biomedical customers and Optimize [Phonetic], which provides tracking and optimization of radiation dose management for Radiology Departments.
Both platforms reflect FHS' focus on bringing forward software and AI enabled revenue models to build on its strong and existing recurring revenue base.
Invetech had another strong quarter with greater than 50% growth.
The company saw a significant sales and order momentum throughout the year, including a strong finish in December.
This growth was led by Invetech's design and engineering offering, which more than doubled on a year-over-year basis in Q4.
The company saw a strong growth in the diagnostics market, driven by near-term projects to develop rapid testing capabilities for COVID-19 as well as strong demand from the cell therapy market tied to the production for next generation therapeutics.
On slide 11, we highlighted the progress made in 2020 with respect to our corporate social responsibility efforts, which is one of our key strategic initiatives.
Throughout the year, we enhanced the rigor and integrity of our data collection by transitioning our EHS, sustainability and risk assessment processes to the Intelex platform.
Our enhanced data analytics improve insights to accelerate our sustainability efforts and give greater transparency to key stakeholders.
To support inclusion and diversity, our Employee and Friends Resource Groups focused on improving employee connections across the organization while utilizing FBS to enhance their impact.
We also expanded our commitment to the CEO in Action Pledge by participating in the 2021 Racial Equity Fellowship, aimed at promoting corporate best practices to address systemic racism and social injustice.
We are using FBS tools to develop standard work for greenhouse gas accounting and reporting and scaling energy kaizen efforts more broadly across the portfolio.
This has resulted in making substantial progress toward our greenhouse gas reduction goals, which we expect to achieve ahead of schedule.
Finally, Fortive employees around the world continue to support our local communities through our efforts in our annual Day of Caring with over 35,000 hours of service in 60 worldwide communities.
We are living our values to achieve our CSR goals and we're excited to continue driving progress in the years ahead.
Turning to guidance on slide 12.
We're instituting formal earnings guidance for the full year and the first quarter of 2021.
For the full year, we expect adjusted diluted net earnings per share to be $2.40 to $2.55, representing year-over-year growth of 15% to 22% on a continuing operations basis.
The annual guidance assumes core revenue growth of 4% to 7% and an adjusted operating profit margin of 22% to 23% and an effective tax rate of approximately 14%.
We also expect free cash conversion to be approximately 105% of adjusted net income.
We are also initiating our first quarter adjusted diluted net earnings per share guidance of $0.56 to $0.60, representing year-over-year growth of 22% to 30%.
This includes assumptions of 5% to 8% core revenue growth and adjusted operating profit margin of 21.5% to 22.5% and an effective tax rate of 14%.
We also expect free cash conversion to be approximately 75% of adjusted net income.
I'm tremendously proud of how our teams rose to meet the many challenges posed by the COVID-19 pandemic, with a focus on keeping our employees safe, helping frontline workers combat the virus and continuing to provide our customers with our essential technologies.
Despite these challenges, we made substantial progress across a range of strategic imperatives over the course of the year.
The focus and dedication of our team around the world enabled us to significantly transform the portfolio while transitioning to a work-from-home environment and ensuring continued execution across the portfolio to deliver strong margin performance and consistent free cash flow growth.
As a result of that hard work and a significant progress it enabled, we're in a strong position as we turn our focus to 2021, while navigating some of the continued challenges in the near term.
With a portfolio comprised of leading businesses that are well positioned in attractive markets, considerable opportunity to accelerate our growth through continued investments in organic innovation and acquisitions and the support of a strong culture rooted in the Fortive Business System, we're very excited about the road ahead.
That concludes our formal comments.
| q4 revenue $1.3 billion versus refinitiv ibes estimate of $1.29 billion.
sees fy 2021 adjusted earnings per share $2.40 to $2.55 from continuing operations.
sees q1 adjusted earnings per share $0.56 to $0.60 from continuing operations.
qtrly adjusted diluted net earnings per share from continuing operations were $0.70.
|
Total revenues for the fourth quarter of fiscal 2021 increased 20% to $153.6 million, compared to $128.4 million in the same quarter last year.
Net earnings for the quarter were $5.8 million or $0.53 per diluted share, compared to net earnings of $14.7 million or $1.35 per diluted share in the prior year.
Net earnings for the quarter were reduced by an after-tax LIFO impact of approximately $4.5 million or $0.41 per diluted share.
Total revenues for the full fiscal year 2021 increased 20% to $567.6 million compared to $474.7 million in the prior year.
Net earnings for fiscal 2021 were $42.6 million or $3.88 per share compared to net earnings of $38.6 million or $3.56 per diluted share in the prior year.
Irrigation segment revenues for the fourth quarter increased 63% to $125.3 million, compared to $77 million in the same quarter last year.
North America irrigation revenues of $53.5 million increased 30% compared to last year's fourth quarter.
The increase in North America irrigation revenues resulted from a combination of higher irrigation equipment unit sales volume and higher average selling prices.
In the international irrigation markets, revenues of $71.7 million increased 100% compared to last year's fourth quarter.
The increase in international irrigation revenues resulted primarily from higher unit sales volumes along with higher selling prices and a favorable foreign currency translation impact of $2.8 million.
The largest sales volume increases were in the Brazil and Middle East markets.
Total irrigation segment operating income for the fourth quarter was $10.6 million, an increase of 78% compared to the prior year fourth quarter.
And operating margin was 8.4% of sales compared to 7.8% of sales in the prior year fourth quarter.
The impact of higher irrigation system unit volume was partially offset by the impact of higher raw material and other costs.
We continue to face some margin headwind as the realization of pricing actions lags the impact of cost increases.
Fourth quarter operating results were also reduced by approximately $5 million resulting from the impact of the LIFO method of accounting for inventory, under which higher raw material costs are recognized in cost of goods sold rather than in ending inventory values.
During the quarter, we added additional inventory as a buffer against supply chain uncertainty, expected cost increases and as part of a build ahead plan in connection with the temporary shutdown at the Lindsay, Nebraska facility to install productivity upgrades.
We expect to realize some benefit of this fourth quarter LIFO impact in future periods as inventory quantities decline.
For the full fiscal year, total irrigation segment revenues increased 35% to $471.4 million compared to $349.3 million in the prior year.
North America irrigation revenues of $273.9 million increased 22% compared to the prior year and international irrigation revenues of $197.5 million increased 59% compared to the prior year.
Irrigation segment operating income for the full fiscal year was $63.2 million, an increase of 53% compared to the prior year and operating margin was 13.4% of sales, compared to 11.8% of sales in the prior fiscal year.
Infrastructure segment revenues for the fourth quarter decreased 45% to $28.4 million compared to $51.4 million in the same quarter last year.
The decrease resulted primarily from lower Road Zipper system sales compared to the prior year.
Revenues in the prior year included a large project in the United Kingdom that did not repeat in the current year.
And in the current year we've continued to see the timing of certain projects impacted by coronavirus-related delays.
Infrastructure segment operating income for the fourth quarter was $5.8 million compared to $19.9 million in the same quarter last year.
And Infrastructure operating margin for the quarter was 20.5% of sales, compared to 38.8% of sales in the prior year.
Current year results reflect lower revenues and the less favorable margin mix of revenues compared to the prior year fourth quarter and were also reduced by approximately $1 million resulting from the impact of LIFO.
For the full fiscal year, infrastructure segment revenues decreased 23% to $96.3 million compared to $125.3 million in the prior year.
Infrastructure operating income for the full fiscal year was $20.2 million, compared to $42.7 million in the prior year.
And operating margin for the year was 21% of sales compared to 34.1% of sales in the prior year.
Turning to the balance sheet and liquidity.
Our total available liquidity at the end of the fiscal year was $196.7 million with $146.7 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility.
Our total debt was $115.7 million almost all of which matures in 2030.
At the end of the fiscal year we were well within our financial covenants of our borrowing facilities, including a gross funded debt-to-EBITDA leverage ratio of 1.4 compared to a covenant limit of 3.0.
We are well positioned going forward to invest in growth opportunities that create value for our shareholders.
| compname posts q4 earnings per share $0.53.
q4 earnings per share $0.53.
q4 revenue rose 20 percent to $153.6 million.
expect a slower start to fiscal 2022 due to specific project delays.
|
Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.
In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA.
Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Nick Westfall President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary.
Sherri is retiring at the end of the year, and this is her last introduction to our quarterly conference call.
I will begin with highlights for the quarter.
And David and Nick will follow up with additional operating detail.
Our third quarter 2021 operating results released last night, reflect very solid performance for both VITAS and Roto-Rooter.
On a go-forward basis, I would like to share with you some of the macro issues we are dealing with as we approach the end of the second year of the pandemic.
For VITAS, the most important issue, we are managing labor.
Staffing of license professionals has been exceptionally challenging to ensure adequate mix of license healthcare workers on a market by market basis.
This is particularly challenging during the pandemic, as we deal with dynamic fluctuations in patient census in every market.
Turnover within our license staff remains above our pre-pandemic rates, but we are seeing indications of normalization, as we continue to expand our hiring and retention initiatives in many markets.
Beyond managing our staffing levels, we are observing increasing pressure on salaries and wages.
To date, we've managed these pressures with increased paid time off or PTO, we view it as inevitable that healthcare wages will increase if we continue to have a nationwide systemic imbalance in supply and demand for license healthcare professionals.
Fortunately, for VITAS and the hospice industry, there is a natural hedge against the inflationary pressures on costs, specifically labor.
The annual increase in the Medicare and Medicaid hospice reimbursement rates is based primarily on inflation in the hospital wage index basket, as measured by the federal government's Bureau of Labor Statistics.
Typically, the annual inflation measured as of March 31 is used to determine the following October 1 reimbursement increase.
This should give the hospice industry reasonable stability in operating margins in an inflationary environment, albeit with a six month lag from the inflation measurement to the actual reimbursement increase.
The second critical challenge for VITAS is the continued disruption to senior housing occupancy and the latest hospice referrals.
A recent admission data suggests senior housing is in the process of recovery pre-pandemic nursing home base patients represented 18% of our total average daily census or ADC.
The nursing of ADC ratio hit a low of 14.3% in the first quarter of 2021.
In the second quarter of 2021 nursing home base patients increased 60 basis points to 14.9%.
And then, the third quarter of 2021, our nursing home patients represented 15.6% of our total ABC.
Our updated 2021 guidance anticipates sequential improvement in senior housing base patients in the fourth quarter of 2021 with acceleration in senior housing admissions anticipated in 2022.
For Roto Rooter, our must significant challenge has been to increase manpower.
We've expanded technician manpower by 8% in 2021.
However, based on our current demand levels, we continue to remain understaffed in many of our markets.
Technician compensation plays a role in recruiting new employees as well as retention of our existing employee base.
Our average 2021 technician and field sales force compensation is over $81,000 per year.
Most of our technicians are paid out on a commission basis of revenue generated.
As a result, pricing for our services is a critical component in increasing technician wages.
We're anticipating passing to inflationary price increases in all our markets in the fourth quarter of this year.
Demand for plumbing, drain cleaning, excavation, and water restoration services remain at record levels.
I want to give additional color on the depth and breadth of this increase in demand.
Let's compare Q3 2021 revenue to Q3 2019.
Excluding the HSW acquisition, which was completed in September 2019, under this unit for unit comparison, residential services have experienced incredible growth.
In aggregate, residential branch revenue increased 46.2% over this two-year period.
On a service segment basis, residential plumbing revenue increased 37.1%; drain cleaning expanded 36%; excavation increased 65.6%; and water restoration increased 48.1%.
Commercial demand has been more challenging, however, commercial revenue has experienced a significant recovery since the 40% decline in commercial demand noted in April 2020.
Overall, commercial revenue declined 3.1% over this 2-year period.
On an individual service segment basis, commercial plumbing service declined 4.9%, drain cleaning expanded 1.8% excavation declined 10.2%, and water restoration increased 7%.
We anticipate continued strengthening in commercial demand in the fourth quarter of 2021, as well as throughout 2022.
Over the past 20 years, the country has faced 9/11, the Great Recession, and now a global pandemic.
In each of these crises, Roto-Rooter remained operating and materially increased market share revenue and operating margin.
Just as important, post-crisis, Roto-Rooter held on to these increases in revenue market share and margins.
Roto-Rooter is well positioned postpaid pandemic, and we anticipate continued expansion of market share, by pressing our core competitive advantages in terms of brand awareness, customer response time, 24-7 call centers and Internet presence.
With that, I would like to turn the teleconference over to David.
VITAS's net revenue was $317 million in the third quarter of 2021, which is a decline of 5.8% when compared to the prior year period.
This revenue decline is comprised primarily of a 5.3% decline in days of care, partially offset by a geographically weighted average Medicare reimbursement rate increase, including the suspension of sequestration of approximately 1.2%.
Our acuity mix shift had a net impact of reducing revenue approximately $3 million or nine-tenths of 1% in the quarter, when compared to the prior-year revenue and level of care mix.
The combination of Medicare Cap and other contra-revenue changes, negatively impacted revenue growth, an additional 80 basis points.
VITAS accrued $100,000 in Medicare Cap billing limitations in the quarter.
This compares to $4.1 million reversal of Medicare Cap billing limitations in the third quarter of 2020.
Of our 30 Medicare provider numbers, 27 of these provider numbers currently have a Medicare Cap cushion of 10% or greater.
One provider number has a cap cushion between 0% and 5%.
And two of our provider numbers have a fiscal 2021 Medicare Cap billing limitation liability.
Roto-Rooter, generated quarterly revenue of $221 million in the third quarter of 2021, which is an increase of $30.1 million or 15.7% when compared to the prior year quarter.
Roto-Rooter's branch residential revenue in the quarter totaled $151 million, which is an increase of $22.2 million or 17.2% over our prior year period.
This aggregate residential revenue growth consisted of drain cleaning, increasing 11.7%, plumbing expanding 17.4%, excavation increasing 14.1%, and water restoration increasing 28%.
Roto-Rooter branch commercial revenue in the quarter totaled $52.3 million, which is an increase of $4.7 million or 10% over the prior year.
The aggregate commercial revenue growth consisted of drain cleaning increasing 17.6%, plumbing increasing 9.3%, and commercial excavation declining 1.3%.
Water restoration also increased 9.4%.
Now, let's turn to Chemed on a consolidated basis.
During the quarter, we repurchased 350,000 shares of Chemed stock for $164 million, which equates to a cost per share of $467.80.
As of September 30 of 2021, there is approximately $148 million of remaining share repurchase authorization under this plan.
Chemed restarted its share repurchase program in 2007.
Since that time, Chemed has repurchased approximately 15.2 million shares, aggregating approximately $1.7 billion, at an average share cost of $113.04.
Including dividends over the same period, Chemed has returned approximately $1.9 billion to shareholders.
We have updated our full-year 2021 guidance as follows: VITAS was 2021 revenue, prior to Medicare Cap, is estimated to decline approximately 5% when compared to the prior year period.
Average daily census in 2021, is estimated to decline 5.5%.
In our full-year adjusted EBITDA margin, prior to Medicare Cap, is estimated to be 18.8%.
We're currently estimating $6.6 million for Medicare Cap billing limitations release calendar year 2021.
Roto-Rooter is forecasted to achieve full-year 2021 revenue growth of 17.3%.
Roto-Rooter's adjusted EBITDA margin for 2021 is estimated to be between 28.5% and 29%.
Based on the above full-year 2021 adjusted earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock option exercises, cost related to litigation and other discrete items, is estimated to be in the range of $19 to $19.20.
This compares to our initial 2021 adjusted earnings guidance per diluted share of $17 in $17.50.
This revised 2021 guidance assumes an effective corporate tax rate on adjusted earnings of 25.1%.
This compares to Chemed's 2020 reported adjusted earnings per diluted share of $18.8.
In the third quarter, our average daily census was 18,034 patients, a decline of 5% over the prior year and 0.2% increase when compared to the second quarter of 2021.
This year-over-year decline in average daily census is a direct result of pandemic related disruptions across the entire healthcare system since March of 2020.
Our hospital generated emissions have largely normalized to pre-pandemic levels.
Referrals from senior housing, specifically nursing homes and assisted-living facilities, continue to be disrupted.
During the third quarter, we've seen admission stabilization and pockets of improvement in senior housing admissions.
However, it remains too early to accurately project the pace and time line for senior housing admissions to fully return to pre-pandemic levels.
In the third quarter of 2021, total VITAS admissions were 17, 598.
This is a 1.9% decline when compared to the third quarter of 2020 admissions and a 4.5% sequential increase when compared to the second quarter of 2021.
In the third quarter, on a year-over-year basis, our hospital directed admissions declined 0.8%.
Total home-based pre-admit admissions decreased 8.3%, nursing home admits declined 0.2%, and assisted living facility admissions declined 8.6%.
When you compare our third quarter 2021 admissions to the second quarter of 2021, we generated solid sequential improvement with hospital directed admissions improving 2%, total home based pre-admit admissions increasing 16.3%, nursing home admits expanding 8.9%, and assisted living facility admissions increasing 5% sequentially.
Our average length of stay in the quarter was 96 days.
This compares to 97.1 days in the third quarter of 2020 and 94.5 days in the second quarter of 2021.
Our median length of stay was 13 days in the quarter and compares to 14 days in the third quarter of 2020, and is equal to the second quarter of 2021.
I will now open this teleconference to questions.
| sees fy adjusted earnings per share $19.00 to $19.20 excluding items.
|
Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.
In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA.
I will begin with highlights for the quarter, and Dave and Nick will follow up with additional operating detail.
I will then open up the call to questions.
Operating two distinct business units during our global pandemic has been exceptionally challenging.
Fortunately, we have begun to return to normalcy.
The pandemic had created unique problems, logistical hurdles and forced our operations to make significant changes in field and home office procedures.
Many of these changes have been institutionalized and will become part of our normal operating procedures post-pandemic.
I could not be prouder of our management team.
Both VITAS and Roto-Rooter met these pandemic challenges head-on, produced excellent operating results that are well positioned for growth in the coming years.
In April 2020, the first full month of the pandemic, Roto-Rooter experienced an immediate and severe drop in demand for all plumbing and drain cleaning services.
This drop was short-lived.
Starting in May 2020, Roto-Rooter saw a spike in residential plumbing and drain cleaning demand.
This increase in demand was sustained throughout 2020 and has continued unabated in the first six months of 2021.
Commercial demand has also improved up pandemic lows and have now normalized close to pre-pandemic levels.
For the remainder of 2021, I anticipate Roto-Rooter's residential demand to remain at the current run rate, coupled with increased commercial demand as the country returns to normalized pre-pandemic consumer behavior.
The Great Recession, and now a global pandemic.
In each of these crises, Roto-Rooter remained operating and materially increased market share, revenue and operating margin.
Just as important, Roto-Rooter has held on to the increases in revenue market share and margins in past crisis.
Roto-Rooter is well positioned post-pandemic, and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness, customer response time and 24/7 call centers and Internet presence.
For VITAS, the most significant issue remaining from the pandemic is the disruption to senior housing occupancy and the related hospital referrals.
Recent admissions' data suggest senior housing has entered into the early stages of recovery, and our updated guidance anticipates steady improvement in the senior housing referred hospice admissions in the second half of 2021, with a further acceleration in senior housing admissions anticipated in the fourth quarter.
With that, I would like to turn this teleconference over to David.
Let's turn to VITAS.
VITAS' net revenue was $312 million in the second quarter of 2021, which is a decline of 4.7% when compared to the prior year period.
This revenue decline is comprised primarily of a 6.3% reduction in our days of care, offset by a geographically weighted Medicare reimbursement rate increase of approximately 1.8%.
Acuity mix shift did have a net impact of reducing revenues approximately $3.8 million in the quarter or 1.2%.
The combination of a lower Medicare Cap billing limitation and other contra-revenue charges offset a portion of the revenue decline by roughly 90 basis points.
VITAS did accrue $2 million in Medicare Cap billing limitations in the second quarter of 2021, and this compares to a $5.7 million Medicare Cap billing limitation in the second quarter of 2020.
Of our 30 Medicare provider numbers, right now 27 of these provider numbers have a Medicare Cap cushion of 10% or greater.
One of our provider numbers has a cap cushion between 0% and 5%, and two of our provider numbers currently have a fiscal 2021 Medicare Cap billing limitation liability.
Let's take a look at Roto-Rooter.
Roto-Rooter generated revenue of $220 million in the second quarter of 2021, which is an increase of $45.6 million or 26.1% over the prior year quarter.
Total Roto-Rooter branch commercial revenue totaled $50.3 million in the quarter, an increase of 31.8% over the prior year.
The aggregate commercial revenue growth consisted of our drain cleaning revenue increasing 39.8%, plumbing increased 32.4% and excavation expanding 25.8%.
Water restoration also increased 8.3% on the commercial side.
On the residential side, total residential revenue in the quarter totaled $149 million, an increase of 23.7% over the prior year period.
The aggregate residential growth consisted of drain cleaning increasing 20.6%, plumbing expanding 30.7% and excavation increasing 22.4%.
Water restoration also increased 23.1%.
Basically increases across the board, all segments, both commercially and residential.
Now let's look at Chemed on a consolidated basis.
During the quarter, Chemed repurchased 250,000 shares of stock for roughly $122 million, which equates to a cost per share of $487.53.
As of June 30, 2021, there was approximately $312 million of remaining share repurchase authorization under this plan.
We've also updated our 2021 earnings guidance as follows: VITAS' full year 2021 revenue prior to Medicare Cap is estimated to decline approximately 4.5% when compared to 2020.
Our average daily census in 2021 is estimated to decline approximately 5%.
This guidance anticipates senior housing occupancy will begin to normalize to pre-pandemic occupancy, starting in the second half of calendar year 2021.
VITAS' full year adjusted EBITDA margin prior to Medicare Cap is forecasted to be 18.3%, and we are currently estimating $7.5 million for Medicare Cap billing limitations in calendar year 2021.
That's an improvement from the initial $10 million of Medicare Cap we estimated at the start of this year.
Roto-Rooter is forecast to achieve full year 2021 revenue growth of 15% to 15.5%.
Roto-Rooter's adjusted EBITDA margin for 2021 is estimated to be between 28% and 29%.
So based upon this discussion, our full year 2021 adjusted earnings per diluted share, excluding noncash expense or stock options, any tax benefits we receive from stock option exercises as well as costs related to litigation and other discrete items, is estimated to be in the range of $18.20 to $18.50.
The revised guidance compares to our initial 2021 guidance of adjusted earnings per diluted share of $17 to $17.50.
In the second quarter, our average daily census was 17,995 patients, a decline of 6.3% over the prior year.
This decline in average daily census is a direct result of pandemic-related disruptions across the entire healthcare system.
This negatively impacted traditional hospice admission patterns, starting in March of 2020.
Our hospital generated admissions have largely normalized to pre-pandemic levels.
Referrals from senior housing, specifically nursing home and assisted living facilities continue to be disrupted.
During the second quarter, we have seen admission stabilization and pockets of improvements in senior housing admissions.
However, it remains too early to accurately project the pace and timeline for senior housing admissions to fully return to pre-pandemic levels.
In the second quarter of 2021, total VITAS admissions were 16,840.
This is a slight improvement when compared to the second quarter of 2020 admissions.
More importantly, admissions in the second quarter of 2021 exceeded discharges by 315 patients.
This is the first quarter since the pandemic began that our patient admissions have exceeded patient discharges.
This is the strongest indication to date that we are now beginning the process of rebuilding census to pre-pandemic levels.
In the second quarter, our hospital directed admissions expanded 7.8% and emergency room admits decreased 9%.
Total home-based preadmit admissions decreased 9.3%, nursing home admits declined 9.9%, assisted living facility admissions declined 17.5% when compared to the prior year quarter.
Our average length of stay in the quarter was 94.5 days.
This compares to 90.9 days in the second quarter of 2020 and 94.4 days in the first quarter on 2021.
Our median length of stay was 14 days in the quarter, which is equal to the second quarter of 2020 and is a 2-day improvement when compared sequentially to the first quarter of 2021.
It's now time for us to consider any questions that come before the teleconference.
| sees fy adjusted earnings per share $18.20 to $18.50 excluding items.
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We'll begin with a brief strategic overview from Randy; Mike will review the Title business; Chris will review F&G and Tony will finish with a review of the financial highlights.
There is significant uncertainty about the duration and extent of the impact of this pandemic.
Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.
It will also be available through phone replay beginning at 3:00 PM Eastern Time today through May 14.
Our team continued to perform at a high level despite the challenging environment that we have all endured as they kept our operations running smoothly, while maintaining a steadfast focus on our customers.
In our Title segment, we achieved record first quarter results, generating adjusted pre-tax title earnings of $512 million compared to $279 million in the year-ago quarter and a 19.9% adjusted pre-tax title margin compared with 14.4% in the first quarter of 2020.
We also continue to invest in technology as we roll out new applications which enhance the user experience, efficiency and safety of the title and closing process, while leveraging our unmatched national scale.
Mike will go into more detail on this in a minute.
We continue to execute on our growth strategy with strong top-line growth and bottom-line profitability during the quarter.
Fixed indexed annuity sales for the quarter were at record levels and growth was further fueled by our momentum in the bank and broker-dealer channel where we are gaining significant traction within the first year of launch.
As a result of our asset growth and disciplined approach to managing net investment spread, we delivered strong earnings during the first quarter, which Chris will discuss further in a few minutes.
The credit rating upgrades as a result of the acquisition have enabled us to actively pursue expansion into institutional products such as the pension risk transfer market, which will be a significant or strategic focus this year.
With the strong growth opportunities that we see, additional capital will be necessary to realize F&G's full potential.
However, our current plan includes utilizing a third-party reinsurance strategy to provide that necessary growth capital.
The plan also includes an expected return of capital of $150 million annually from F&G to FNF or roughly 6% of our original investment beginning in 2022.
We believe this is a meaningful return on capital and is sustainable long-term.
Looking forward, we remain committed to long-term value creation for our shareholders through our thoughtful capital allocation program, while also focusing on supporting the future growth of our business.
Yesterday, we announced a quarterly cash dividend of $0.36 per share and at the end of 2020, we announced a share buyback program of $500 million.
During the first quarter, we repurchased 2.8 million shares for $112 million at an average price of $39.95 per share.
And since announcing the buyback plan, we have purchased 6.9 million shares for $264 million at an average price of $38.28 per share.
Randy touched upon our record first quarter results as we continue to benefit from low interest rates, driving strong origination demand and the continued rebound in commercial real estate activity.
For the first quarter, we generated adjusted pre-tax title earnings of $512 million, an 84% increase over the first quarter of 2020.
Our adjusted pre-tax title margin was 19.9%, a 550 basis point increase over the prior year quarter with a 58% increase in direct orders closed, driven by a 103% increase in daily refinance orders closed; a 21% increase in daily purchase orders closed; and a 12% increase in total commercial orders closed.
Total commercial revenue was $257 million compared with the year-ago quarter of $245 million due to the 12% increase in closed orders, while total commercial fee per file was down slightly compared to the year-ago quarter.
For the first quarter, total orders opened averaged 12,600 per day with January at 13,500; February at 13,300; and March at 11,400.
For April, total orders opened were over 10,700 per day as we continue to see strong demand in purchase activity, while we have begun to see some decline in the refinance market compared to last year's robust levels.
Daily purchase orders opened were up 18% in the quarter versus the prior year.
For April, daily purchase orders opened were up 90% versus the prior year.
Refinance orders opened increased by 15% on a daily basis versus the first quarter of 2020.
For April, daily refinance orders opened were down 23% versus the prior year.
Lastly, total commercial orders opened per day increased by 12% over the first quarter of 2020.
Commercial opened orders per day remained strong compared to the fourth quarter and to the year-ago first quarter.
For April, total commercial orders opened per day were up 72% over April of 2020.
We remain optimistic that the order volumes we have seen over the last several quarters will drive strong commercial performance in 2021.
We are also pleased with the ongoing rollout of our strategic technology initiatives that improve the production and delivery of our core products and services and better the overall transaction experience of home buyers and sellers, borrowers and real estate professionals.
Our proprietary title automation technology and the engines that search, collect and process data remain at the core of our operations.
Our digital inHere Experience Platform continues to be deployed and has been well received by our expert local escrow and settlement employees, consumers and clients.
The first quarter kicked off a great start to 2021 with record sales levels.
Our fixed indexed annuity or FIA sales in the first quarter were $1 billion, up 11% from the sequential quarter.
Total annuity sales of $1.6 billion in the first quarter were up 16% from the sequential quarter.
We continue to see significant growth ahead, driven by strong momentum in our primary independent agent channel and traction in new channels.
We're now three quarters into our financial institutions channel launch and continue to be thrilled with the results.
The first quarter, total annuity results include $410 million from our newest channel and we expect to comfortably exceed our $1 billion goal for 2021.
With these strong sales results, we grew average assets under management or AAUM to $29 billion, driven by approximately $1.1 billion of net new business flows in the first quarter.
Our spread results continue to track in line with historical trends, demonstrating our continued pricing discipline and active in-force management to achieve targeted spread.
Total product net investment spread was 255 basis points in the quarter and FIA net investment spread was 298 basis points.
Adjusted net earnings for the first quarter were $78 million.
Strong earnings were driven by steady spread results and AAUM growth.
Net favorable items in the period were $12 million, primarily as a result of favorable mortality and investment income on CLO redemptions held at a discount to par.
Adjusted net earnings, excluding notable items, were $66 million, up from $60 million in the fourth quarter, which included $4 million of higher strategic spend for faster than expected launch into new channels.
Turning briefly to the investment portfolio.
As of quarter end, the portfolio's net unrealized gain position remains strong at $1.1 billion and there were no credit-related impairments in the quarter.
In summary, we continue to execute on our plan coming out of the FNF acquisition and we remain confident in our future prospects.
We generated $3.1 billion in total revenue in the first quarter with the Title segment producing $2.5 billion; F&G producing $539million; and the Corporate segment generating $42 million.
First quarter net earnings were $605 million, which includes net recognized gains of $43 million versus net recognized losses of $320 million in the first quarter of 2020.
The net recognized gains and losses in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter or continue to be held in our investment portfolio.
Excluding net recognized gains and losses, our total revenue was $3.1 billion as compared with $1.9 billion in the first quarter of 2020.
Adjusted net earnings from continuing operations were $455 million or $1.56 per diluted share.
The Title segment contributed $395 million; F&G contributed $78 million; and the Corporate and Other segment had an adjusted net loss of $18 million.
Excluding net recognized losses of $59 million, our Title segment generated $2.6 billion in total revenue for the first quarter compared with $1.9 billion in the first quarter of 2020.
Direct premiums increased by 37% versus the first quarter of 2020.
Agency revenue grew by 45% and escrow title-related and other fees increased by 22% versus the prior year.
Personnel costs increased by 18% and other operating expenses increased by 7%.
All in, the Title business generated a 19.9% adjusted pre-tax title margin, representing a 550 basis point increase versus the first quarter of 2020.
Interest income in the Title and Corporate segments of $29 million declined to $24 million as compared with the prior year quarter due to reduction of short-term interest rates on our corporate cash balances and our 1031 Exchange business.
FNF debt outstanding was $2.7 billion on March 31 for a debt-to-total capital ratio of 24.6%.
Our title claims paid of $46 million were $35 million lower than our provision of $81 million for the quarter.
The carried reserve for title claim losses is currently $87 million or 5.7% above the actuary central estimate.
We continue to provide for title claims at 4.5% of total title premiums.
Finally, our Title and Corporate investment portfolio totaled $5.9 billion at March 31.
Included in the $5.9 billion are fixed maturity and preferred securities of $2.3 billion with an average duration of 2.9 years and an average rating of A2; equity securities of $1.3 billion; short-term and other investments of $300 million; and cash of $2 billion.
We ended the quarter with just over $1.1 billion in cash and short-term liquid investments at the holding company level.
| compname reports first quarter 2021 diluted earnings per share from continuing operations of $2.06 and adjusted diluted earnings per share from continuing operations of $1.56.
compname reports first quarter 2021 pre-tax title margin of 17.4% and adjusted pre-tax title margin of 19.9%.
q1 adjusted earnings per share $1.56 from continuing operations.
q1 revenue $3.1 billion versus $1.6 billion.
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Kurt will begin and close the call and Melinda will speak to the financials midway through.
We will 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 will turn over the call to Kurt Darrow, La-Z-Boy's Chairman, President and Chief Executive Officer.
Following yesterday's close of market, we reported strong operating results for our fiscal 2021 second quarter, reflecting record demand trends and strong execution across all of our businesses.
I cannot be prouder of the team and every member has my respect and admiration.
Now on to the results.
During the quarter, we experienced strong written orders as consumers continue to allocate more discretionary dollars to their homes rather than on travel and other leisure related activities.
The company delivered increases in sales and operating income with a double-digit consolidated operating margin reflecting excellent performance across all companies.
Also contributing this quarter was Joybird, which turned profitable for the first time since acquisition fueling an increase in earnings per share.
Additionally, we generated $196 million in cash from operations for the year-to-date period, increased our company-owned store footprint with an acquisition, paid dividend, and ended the quarter with no borrowings outstanding on our credit line.
All-in-all for the quarter, these are outstanding results, particularly as our supply chain had to turn on a dime last spring to restart production after the COVID-19 related shutdown and continues to ramp-up capacity to satisfy unprecedented demand levels.
While we are increasing production weekly, demand acceleration continues to outpace capacity acceleration creating a record backlog and extended lead times.
Across the La-Z-Boy Furniture Galleries network, written same-store sales increased 34%, demonstrating the strength of our band and its appeal to consumers during uncertain times as well as the ability of our store teams across the network to provide a safe shopping experience for consumers.
As I turn to a discussion of our segments, my remarks will detail our non-GAAP GAAP numbers, which we believe reflects underlying operating trends and Melinda will cover the non-GAAP adjustments.
I'll start with our wholesale segment, which as a reminder now includes both upholstery and case goods companies as well as our international businesses.
For the quarter, our backlog grew to record levels, but delivered sales declined 2% to $343 million.
This was primarily the result of lower delivery unit volume as our ongoing efforts to significantly increase our production capacity to meet demand were offset by a temporary supply shortage of foam, which reduced sales by more than 2%.
However, even with a decline in sales non-GAAP operating margin increased to 12.2%, reflecting tight cost controls with ongoing cost savings projects roughly offsetting investments in our start-up capacity ramping.
Operating margin in the period also benefited as we pulled back on our marketing spend, given the strong demand environment and had lower expenses such as travel, cost due to COVID related restrictions and lower salary and wages due to the business realignment plan and reduction enforced announced last quarter.
With the surge in product demand, our challenge has been to ramp up capacity at all plants and expand our overall production capacity.
Our current backlog for the La-Z-Boy branded business is 5 times what it was at the end of Q2 last year and we are quoting lead times of 16 weeks to 26 weeks depending on product category, which also include an estimate of the delivery time to the ultimate customer.
Our supply team has done an excellent job to increase weekly production while identifying new opportunities, for both short and long term.
We have added production sales at our three US-based upholstery manufacturing facilities as well as additional weekend shifts.
Secondly, we have temporarily reactivated a portion of our Newton, Mississippi assembly plant to service select geographics.
We have also added manufacturing cells in available floor space at our Cut-and-Sew Center in Mexico, allowing us to tap into a new labor pool.
And finally, we signed a lease on a 200,000 square-foot facility in Mexico just south of Yuma, Arizona, in San Luis Rio Colorado.
Production is expected to start in December with full ramp up extending over the first half of the new calendar year.
As part of our longer-term strategic plan, we were looking to expand our manufacturing footprint to more efficiently service the western portion of North America and we are excited to take this first step with the new facility in Mexico, which we will be calling SLRC.
Once all of these operations are producing at expected capacity likely later in our fiscal year, these moves will significantly increase our capabilities and capacity to support long-term growth.
However during our second quarter, the industry experience temporary supply shortages of foam due to disruption in TDI production, a key component of this product.
As a result we were limited in our ability to fully utilize our existing capacity for almost two weeks during the quarter.
We have recently learned of new issues with form supply in November, which will again temporarily limit our ability to maximize output in the third quarter.
While these disruptions -- while we believe these disruptions are temporary in nature, they effect the entire industry and other industries that use form and they highlight the volatility of the global supply chain in these unusual times.
Now let me pivot to the commercial side of the La-Z-Boy branded business.
During the pandemic related shutdown, as you would imagine, we saw a significant increase in our online business.
While it peaked during that time, today our [Indecipherable] e-comm business remains up some 300% versus pre-pandemic levels, concurrent with an increase in store traffic and sales.
I would note that our e-commerce business is still a very small percentage of our overall business, we recognize it's critical to have a robust online presence in today's environment.
While the core La-Z-Boy customer continues to demonstrate a preference to shop-in-store, she typically starts by spending time on our site to research product and our goal is to facilitate a seamless cross channel experience.
For example, if the consumer wants to come into the store for a higher level of service, wants to touch and feel the product and possibly work with a designer, but prefers to make the final purchase from the comfort of her own home, we are working to make that entire process to seamless as possible.
We are also making a series of ongoing enhancements to the omnichannel experience from internal process improvements to enable scale to customer facing enhancement that simplify and broaden the online experience.
As an example, we are working to simplify the ability to customize online, ensure all products sold in store are available on our website, enhance consumer visibility to available inventory and order progress, and drive better pricing consistency between online and in store.
This will be a journey and we are excited about growing with the changes in consumer behaviors in the omnichannel space.
On the marketing side, we continue to be very pleased with the Kristen -- with Kristen Bell as our brand ambassador.
One of our objectives is to increase consideration among a new generation of consumers, 35 year old to 44 year old, which we view as our opportunity customers.
At the same time we want to ensure our marketing campaign continues to resonate with our core 45 year old to 65 year old customers, who have more disposable income and tend to purchase furniture at higher price points.
Kristen is equally appealing to both consumer groups.
In particular, young -- younger consumers view her as having a great sense of style and being relatable to them.
This makes our marketing dollars work harder and be more efficient.
Now turning to the product side, last month was the high point furniture market.
While we did have some customers visit our showrooms both during pre-market and regular market, our merchandising and marketing teams did a fantastic job of putting together an interactive virtual market for our customers to see and learn about products and marketing initiatives, while maintaining personal safety during the pandemic.
Sectionals and power motion continue in popularity and we introduced a comprehensive new stationary leather program that allows for customization and quicker delivery times of the imported product, which was very well received.
We also introduced a antimicrobial fabric collection as part of our expensive iClean line.
Now let me turn to the retail segment.
For the quarter, delivered sales increased 9% to $162 million and written same-store sales for the company-owned La-Z-Boy Furniture Galleries stores increased 36%, reflecting strong traffic trends and demand as well as stellar execution at store level, including an increase in conversion and average ticket driven by increased units and more design sales.
For the period, delivered same-store sales for the core base of 150 stores increased 6.3%.
Non-GAAP operating margin for the segment improved to 9.4% from 5.8% in last year's comparable quarter resulting from fixed-cost leverage on a higher delivered sales volume, lower spending on marketing due to the already strong demand environment and reduced expenses including travel related spending due to COVID.
Also during the quarter, in September, we completed the acquisition of six Seattle-based La-Z-Boy Furniture Galleries stores, which had approximately $30 million in annual retail sales in calendar '19 and one distribution center.
As the company is already recording a portion of the Seattle-based store volume in its Wholesale segment, the acquisition of these six stores is expected to contribute approximately $15 million of additional sales annually to the company on a consolidated basis, based on their calendar year 2019 sales.
For the current second quarter, they added $3.5 million of sales to our retail volume segment.
The Seattle stores have historically performed above the network average and we believe they are great prospects for the company in this dynamic market.
Over time, we plan to make investments in the operation with store remodels and potential new stores so that the business can continue to grow and expand its potential.
I now want to spend a few minutes on Joybird, which delivered its first profitable quarter.
Since purchasing Joybird, we have been on a journey to build and strengthen the Joybird business and integrate systems to take advantage of the synergies between Joybird and La-Z-Boy.
On the front end, Joybird gives us a new customer and channel and on the back end our supply chain has delivered value through our regional distribution centers, manufacturing Joybird product at our Dayton facility and combined purchase power.
While these synergies took longer than anticipated, they now have come to fruition and were very evident in the results for the period.
Sales for the second quarter, which are reported in corporate and other, increased 42% to $29 million.
For the period Joybird improved its gross margin significantly and lowered SG&A costs, driven primarily by a lower marketing spend and other expense reductions.
Written sales increased 25% in the quarter, reflecting the ongoing strong demand trends that we are seeing across all of our businesses.
We are encouraged by Joybird's performance for the quarter and optimistic about its trajectory for accelerated growth as we move through the year.
We believe Joybird is on a run rate to be a $90 million to $100 million business this fiscal year and expect it will be profitable for the full year.
Moving forward, we will continue to balance investments in top line growth, while watching bottom line performance.
As always, let me remind you that we present our results in both the GAAP and non-GAAP basis.
Last year's second quarter non-GAAP results exclude a pre-tax charge of $2.8 million, or $0.04 per diluted share related to the company's supply chain optimization initiative, which included the closure of our Redlands, California facility and relocation of our Newton, Mississippi leather cut-and-sew operation, a pre-tax purchase accounting charge of $1.6 million, or $0.03 per diluted share primarily related to Joybird and pre-tax income of $1.9 million, or $0.03 per diluted share related to the 2019 termination of the company's defined benefit pension plan.
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 second quarter sales increased 2.7% to $459 million, reflecting record demand across all businesses.
Consolidated non-GAAP operating income increased to $51 million versus $34 million in last year's quarter and consolidated non-GAAP operating margin increased to 11.1% versus 7.5%.
Non-GAAP earnings per share was $0.82 per diluted share in the current year quarter versus $0.52 in last year's second quarter.
Consolidated gross margin for the second quarter increased 240 basis points.
Changes in our consolidated sales mix due to growth in our retail segment and contribution from Joybird, both of 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 supply chain synergies and improved plant performance.
SG&A as a percent of sales decreased 120 basis points, reflecting ongoing expense management, a decrease in advertising spend given strong order rates, reduced spending including travel and limited furniture market events due to COVID-19 related restrictions and a decline in salaries and wages related to our business realignment plan, including the 10% reduction in force announced in June.
This was partially offset by changes in our consolidated mix due to the growth in our retail segment in Joybird, both of which carry higher SG&A costs than our wholesale business, as well as an increase in selling expenses on strong written order trends.
On a GAAP basis, our effective tax rate for fiscal '21 second quarter was 26% versus 26.6% in last year's second quarter.
Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes.
For the full fiscal 2021, absent discrete items, we continue to estimate our effective tax rate on a GAAP basis, will be in the range of 25% to 26%.
Turning to cash, year-to-date we generated $196 million in cash from operating activities, reflecting strong operating performance and $100 million increase in customer deposits from written orders for the company's retail segment and Joybird.
We ended the period with $353 million in cash, nearly triple the $120 million in cash at the end of last year's second quarter.
In addition, we held $27 million in investments to enhance returns on cash, compared with $33 million last year.
During the quarter, we repaid the $50 million remaining balance on our credit line drawn back in March in conjunction with our COVID-19 action plan.
We ended the quarter with no borrowings outstanding.
Year-to-date, we have invested $15 million in capital, primarily related to machinery and equipment, upgrades to our Dayton manufacturing facility, which have now been completed, and investments in our retail stores.
We expect capital expenditures to be in the range of $40 million to $45 million for fiscal 2021, although spending will be largely dependent on economic conditions, continued business recovery, and liquidity trends.
Our spending for the year will include upgrades to upholstery manufacturing facilities and costs for the new production capacity in Mexico, technology upgrades and improvements to several retail stores.
Also during the quarter, given solid business trends and our strong cash position, we reinstated our 401(k) match for employees, as well as full salaries for remaining senior management, thereby reinstating all ongoing cash uses for operations that were temporarily suspended as part of our COVID-19 action plan.
Regarding cash return to shareholders.
Yesterday, our Board declared a quarterly dividend of $0.14 per share, restoring the dividend to the full amount that was in place prior to the pandemic.
Recall, as part of our COVID-19 action plan to preserve cash and provide for financial flexibility, we eliminated our expected June dividend and temporarily suspended opportunistic share repurchases.
In August, our Board of Directors elected to reinstate a regular quarterly dividend to shareholders of $0.07 per share, 50% of the quarterly dividend amount paid prior to the pandemic, paying $3.2 million to shareholders in the second quarter.
We are pleased to now reinstate the full dividend of $0.14 per share, which will be paid in December.
And finally, going forward we will continue to monitor and assess business conditions to determine when it may be appropriate to resume share repurchases.
There are 4.5 million shares of purchase availability under our authorized program.
Before turning the call back to Kurt, let me highlight several important items for the remainder of fiscal 2021.
First, a reminder that our expected non-GAAP adjustments will continue to include purchase accounting adjustments for acquisitions to date, which are estimated to be in the range of $0.09 to $0.11 per share for the full year.
This excludes any further adjustments to the Joybird contingent consideration liability, dependent on Joybird's ongoing business trajectory.
On our non-GAAP results, let me provide a bit more perspective on what we anticipate for the back half of fiscal '21.
We are optimistic about our business trajectory and confident we will deliver a strong second half based on the factors we can control.
However, there is still extreme uncertainty with respect to COVID-19, including the risk of related shutdowns impacting our facilities and impacts of global supply chain volatility such as the recent industry wide foam issues.
What we do know is we have a significant backlog and we are working hard to ramp our production, shortening delivery times as we work to service our customers with high quality products and quick delivery.
With the initiatives undertaken to expand output, we will continue to significantly increase production capacity throughout the back half of the fiscal year.
Further to cover raw material cost increases that we are experiencing now, we have announced pricing on new La-Z-Boy written orders beginning in October, which will be realized on orders delivered beginning in the fourth quarter given our significant backlog.
Considering all of these factors, accounting for our best current understanding of new foam availability issues and provided there are no significant shutdowns [Indecipherable] facilities related to the pandemic, we expect to deliver consolidated sales growth in the third quarter of flat to 4% above last year's record high third quarter.
For the fourth quarter of fiscal '21, accounting for continued growth in production capacity, announced pricing, and the effects of last year's April pandemic related shutdown in the prior year's fourth quarter base period, we anticipate fiscal '21 fourth quarter sales growth of 40% to 45% versus last year's fourth quarter.
On profit, we expect to continue to deliver historically high consolidated operating margins of approximately 9% to 11% for the balance of the year, providing the strong delivered sales volume is achieved.
Included in these margin expectations, is the anticipation that Joybird will sustain profitable operations even as we test investment effectiveness to optimize top line growth.
We do expect some volatility in margins quarter-to-quarter as we manage multiple factors, including input cost increases that we are experiencing now without the benefits of pricing until late in the year.
Beyond the current fiscal year, we have even more unknowns and a continued pandemic effects, demand trends, and supply challenges, but our business is strong and we are optimistic for the future.
However, I would note that there will eventually come a time when we will have to once again invest more in marketing to drive demand, similarly to pre-pandemic times.
We've been a benefactor of the sector rotation that has taken place over the last several months, which play well for us.
Although this has allowed us to keep our marketing spend at reduced levels, in time it will be necessary to increase it.
There will be other costs that will resume over time as the pandemic is brought under control as well including those for travel, furniture market and spending for other discretionary projects that were canceled or postponed due to COVID-19.
That said, we do anticipate being able to deliver strong margin performance over the long term as incremental investments related to bringing on new capacity are completed and we return to more stable operating pattern.
As you can see we are very pleased with the agility our entire organization has demonstrated as it responds to the new operating environment.
Our supply team is pulling out all stops to drive production, our merchandising and marketing teams have pivoted to find new ways to showcase product, highlight the La-Z-Boy brand and its attributes, and target consumers in a manner that will drive growth for the long term.
And our retail team is performing at a very high level, providing a great store experience for customers while keeping them safe.
And all of our other operating companies including Joybird, England, Casegoods, and our international business are also adapting to the landscape and performing very well.
We believe the strength of the La-Z-Boy brand carries great weight in this environment as consumers tend to gravitate to brands, they know and trust during uncertain time.
With our vast distribution including the vibrant La-Z-Boy Furniture Galleries stores and thousands of other distribution points, our world class supply chain, successful marketing platform, focused on expanding omni channel offering, and our strong balance sheet, we believe we are extremely well positioned to continue to navigate and thrive in this environment, capture market share, and return long-term value to our shareholders.
We will begin the question-and-answer period now.
Jim, can you please review the instructions for getting into the queue to ask questions.
| q2 non-gaap earnings per share $0.82.
qtrly written same-store sales for entire la-z-boy furniture galleries network increased 34%.
company anticipates fiscal 2021 fourth-quarter sales growth of 40% to 45% versus prior-year quarter.
board declared a quarterly cash dividend on co's common stock of $0.14 per share.
expects consolidated sales growth in q3 of flat to 4%.
optimistic company will deliver strong results in second half of fiscal 2021.
|
Yesterday, following the close of the market, we issued our news release and investor supplement and posted related materials to our website at allstateinvestors.com.
Our management team is here to provide perspective on these results.
Let's start on slide two.
So this is Allstate's strategy on the left-hand side, which we've talked about before.
We have two components: increase personal property-liability market share and expand the protection solution.
Those are the two ovals you see on the left with the intersection between them.
The key third quarter results are highlighted on the right-hand panel.
Property-Liability policies in force increased by 12.5%.
Allstate Protection Plans continue to grow rapidly by both broadening its product offering and expanding the network of retail providers.
As a result, we now have almost 192 million policies in force across the enterprise.
Financially, the results were more mixed.
Revenues were up substantially, but net income and adjusted net income declined from the prior year quarter.
Underwriting income declined primarily due to higher loss costs in settling auto insurance claims.
We've implemented price increases to proactively respond to the sharp rise in loss cost, and Transformative Growth continues to position us for long-term success, both of which we'll talk about in a couple of minutes.
This was partially offset by the benefits from our long-term risk and return programs that include significant reinsurance recoverables.
They were primarily related to Hurricane Ida, and a substantial increase in performance-based investment income.
Capital deployment results were excellent, with $1.5 billion of cash returned to shareholders in the quarter.
We also completed the divestitures of our two largest life and annuity businesses, one in October and then one just earlier this week.
So let's go to slide three.
Revenues of $12.5 billion in the quarter increased 16.9% compared to the prior year quarter, and that reflects both the higher earned -- National General acquisition, Allstate brand, homeowners premium growth and higher net investment income.
Property-Liability premiums and policies in force increased 13.5% and 12.5%, respectively.
Net investment income was $764 million, and that's up almost about $300 million compared to the prior year quarter, reflecting strong results from the performance-based portfolio.
Net income was $508 million in the quarter, and that's compared to $1 billion in the prior quarter as lower underwriting income was partially offset by the higher investment income.
Adjusted net income was $217 million or $0.73 per diluted share, and it's decreased $683 million compared to the prior year quarter, reflecting the lower underwriting due to the higher auto and homeowners insurance loss costs.
Net income for the first nine months of 2021 was below the prior year, and that's largely due to the loss on the sale of the life annuity business, which we reported earlier in the year.
Adjusted net income was $10.70 per share for the first nine months, and that was above the prior year as higher investment income and lower expenses [Technical Issues] more than offset higher loss costs.
What I would do is put the pandemic in a longitudinal perspective because this created volatility for our results, and it obviously requires us to adapt quickly, which we do.
But before we go through the impact on the third quarter results of the supply chain disruption, let's talk about the initial and subsequent impact of the pandemic.
So in 2020, the economic lockdown resulted in fewer miles being driven and promoted -- and prompted an aggressive economic support response from, really, governments around the world.
The impact on auto insurance was a dramatic drop in the number of accidents.
And of course, due to this unprecedented driver in frequency, we proactively provided our customers with some money back, which increased customer retention.
Since then, since there was less road congestion and fewer accidents that occurred during commuting hours, the average speed and severity of auto claims increased, offsetting some of the frequency benefit.
Nevertheless, underwriting margins improved dramatically, so we introduced a temporary Shelter-in-Place payback rather than take a permanent rate reduction and took some modest overall reductions in rate levels.
This year, as you can see from the right-hand column, the story has been just the opposite as it relates to frequency with large percentage increases.
And while the overall level of accident frequency for the Allstate brand is still below prepandemic levels, the national and general nonstandard business is back to the levels before the pandemic.
Auto severity this year, however, has been dramatically impacted by the supply chain disruption, and price increases on used cars and original equipment parts, and Mario will take you through that in a couple of slides.
From a pricing perspective, this results in moving from modest rate reductions to significant increases in auto insurance prices.
From a growth standpoint, at the onset of the pandemic, we began to see a material increase in the consumer acceptance telematics, and we've really leaned into that with our Milewise product, which is really the only national product out there to pay for the mile, and that's led to substantial increase in our telematics product.
Now the pandemic has also had a significant impact on the investment portfolio, and this is the tale of the beginning and the end as well.
So early in the crisis, equity valuations were down, and this had a negative impact on investment results.
Then, of course, on -- and we have a broad-based long-term spread out over a decade really investing in these kinds of funds.
And so we do it on a long-term basis, whether that's three, five or 10 years.
But -- so what's happened this year, of course, is we've had the opposite happen, which is with the economic stimulus, we've had equity valuations going up, and our returns have come back strongly.
In the market-based portfolio, lower interest rates at the onset of this pandemic did lead to an increase in the unrealized gains in the portfolio.
But of course, what that does is reduce future interest rate income, which you see slight decline in this quarter.
And many of our other businesses have been impacted some positively, some negatively, but it's our ability to adapt and seize the opportunities that are presented that create shareholder value.
So Mario will now go through the third quarter results in more detail and how Transformative Growth positions of Allstate for continued success.
Let's move to slide five to review Property-Liability margin results in the third quarter.
The recorded combined ratio of 105.3 increased 13.7 points compared to the prior year quarter.
This was primarily driven by increased underlying losses as well as higher catastrophe losses and non catastrophe prior year reserve reestimates.
The chart at the bottom of the slide quantifies the impact of each component in the third quarter compared to the prior year quarter.
As you can see, the personal auto underlying loss ratio drove most of the increase due to higher auto accident frequency and the inflationary impacts on auto severity.
Higher catastrophe losses shown in the middle of the chart had a negative 1.4 point impact on the combined ratio as favorable reserve reestimates recorded in 2020 from wildfire subrogation settlements positively impacted the prior year quarter.
Gross catastrophe losses were higher but were reduced by nearly $1 billion of net reinsurance recoveries following Hurricane Ida, demonstrating the benefits of our long-term approach to risk and return management of the homeowners insurance business and our comprehensive reinsurance program.
Noncatastrophe prior year reserve strengthening of $162 million in the quarter drove an adverse impact of 0.8 points primarily from increases in auto and commercial lines.
This also included $111 million of strengthening in the quarter related to asbestos, environmental and other reserves in the runoff Property-Liability segment following our annual comprehensive reserve review.
This was partially offset by a lower expense ratio when excluding the impact of amortization of purchased intangibles primarily due to lower restructuring and related charges compared to the prior year quarter.
Moving to slide six.
Let's go a bit deeper on auto insurance profitability.
Allstate brand auto insurance underlying combined ratio finished at 97.5 for the quarter and 89.7 over the first nine months of 2021.
The increase to the prior year quarter reflects higher loss cost due to higher accident frequency, increased severity and competitive pricing enhancements implemented in late 2020 and earlier this year.
While claim frequency increased relative to prior year, we continue to experience favorable trends relative to prepandemic levels.
Allstate brand auto property damage frequency increased 16.6% compared to 2020 but decreased 16.8% relative to 2019.
The chart on the lower left compares the underlying combined ratio for the third quarter of 2019 to this quarter to remove some of the short-term pandemic volatility.
The underlying combined ratio was 93.1 in 2019, which generates an attractive return on capital.
Favorable auto frequency in the third quarter of 2021 lowered the combined ratio by 6.4 points compared to 2019.
Increased auto claim severity, however, increased the combined ratio by 12 points versus two years ago, as you can see from the red bar.
The cost reductions implemented as part of Transformative Growth reduced expenses by 1.3 points, which favorably impacted 2021 results.
As Tom mentioned, early in the pandemic, the severity increases were driven by higher average losses due to a reduction in low severity claims.
This year, the increase reflects the impact of supply chain disruptions in the auto markets, which has increased used car prices and enabled original equipment manufacturers to significantly increase part prices.
The chart on the lower right shows used car values began increasing above the CPI in late 2020, which accelerated in 2021, resulting in an increase of 44% since the beginning of 2019.
Similarly, OEM parts have also increased in 2021, roughly twice as much as core CPI.
This has resulted in higher severities for both total loss vehicles and repairable vehicles.
Since these increases were accelerating throughout the second and third quarters of the year, we increased expected loss costs for the first two quarters of 2021, and this prior quarter strengthening shows up in the combined ratio for the third quarter.
Increases in report year severities for auto insurance claims during the first two quarters of 2021 increased the third quarter combined ratio by 2.6 points, as you can see by the green bar on the lower left.
So let's flip to slide seven, which lays out the steps we're taking to improve auto profitability.
As you can see from the chart on the top, Allstate has maintained industry-leading auto insurance margins over a long period of time, with a combined ratio operating range in the mid-90s, exhibiting strong execution and operational expertise.
To maintain industry-leading results, we are increasing rates, improving claims effectiveness and continuing the lower costs.
After lowering prices in early 2021 to reflect in part Allstate's lower expense ratio, we have proactively been responding with increases in the third quarter, with actions continuing into the fourth quarter and into 2022.
The chart on the right provides selected rate increases already implemented in the third and fourth quarter as well as publicly filed rates that have yet to be implemented in the fourth quarter.
Those states denoted with the caret are top 10 states in terms of written premium as of year-end 2020.
In the third quarter, we've received rate approvals for increases in 12 states, primarily in September.
We adapted quickly to higher severities in the fourth quarter, with plans to file rates in an additional 20 states.
We have already implemented rate increases in eight states during the fourth quarter, with an average increase of 6.7% as of November 1.
Looking ahead, we expect to pursue price increases in an additional 12 locations by year-end.
We are working closely with state regulators to provide detailed support and decrease the lag time between filing, implementation and premium generation.
As we move into next year, it is likely auto insurance prices will continue to be increased to reflect higher severities.
We also continue to leverage advanced claims capabilities and process efficiencies.
Cost reductions as part of Transformative Growth will also continue to be implemented.
As you can see by the chart on the bottom of the slide, we've defined a new non-GAAP measure this quarter referred to as the adjusted expense ratio.
This starts with our underwriting expense ratio, excluding restructuring, coronavirus-related expenses, amortization and impairment of purchased intangibles and investments in advertising.
It then also adds in our claim expense ratio, excluding costs associated with settling catastrophe claims, which tend to be more variable.
We believe this measure provides the best insight into the underlying expense trends within our Property-Liability business.
Through innovation and strong execution, we achieved 2.6 points of improvement when comparing 2020 to 2018, with further improvement occurring through the first nine months of 2021.
Over time, we expect to drive an additional three points of improvement from current levels, achieving an adjusted expense ratio of approximately 23 by year-end 2024.
This represents about a 6-point reduction relative to 2018 or an average of one point per year over six years, enabling an improved price position relative to our competitors while maintaining attractive returns.
Future cost reductions center around continued digital enhancements to automate processes, enabling the retirement of legacy technology, operating efficiency gains from combining organization -- combining organizations and transforming the distribution model to higher growth and lower costs.
Transitioning to slide nine, let's go up a level to show how Transformative Growth positions us for long-term success and how the components of Transformative Growth work together to create a flywheel of profitable growth.
As you know, Transformative Growth is a multiyear initiative to increase personal Property-Liability market share by building a low-cost digital insurer with broad distribution.
This will be accomplished by improving customer value, expanding customer access, increasing sophistication and investment in customer acquisition and deploying a new technology ecosystem.
We've made significant progress to date across each component.
Starting at the top of the flywheel visual, our commitment to further lower our costs, improves customer value and enables a more competitive price position while maintaining attractive returns.
Enhancing and expanding distribution puts us in a position to take advantage of more affordable pricing.
Increasing the analytical sophistication of new customer acquisitions lets consumers know about this better value proposition.
New technology platforms, lower costs and enable us to further broaden the solutions offered to property liability customers.
This flywheel will enable us to increase market share and create additional shareholder value.
Turning to slide 10.
Let's look at the changes to the distribution system, which are also underway.
As you can see in the chart on the left side of the slide, Property-Liability policies in force grew by 12.5% compared to the prior year quarter.
National General, which includes Encompass, contributed growth of four million policies, and Allstate brand Property-Liability policies increased by 231,000 driven by growth across personal lines.
Allstate brand auto policies in force increased slightly compared to the prior year quarter and sequentially for the third consecutive quarter, including growth of 142,000 policies compared to prior year-end, as you can see by the table on the lower left.
The chart on the right shows a breakdown of personal auto new issued applications compared to the prior year.
[Technical Issues] 38% increase in the direct channel more than offset a slight decline from existing agents and volume that would have normally been generated by newly appointed agents.
As you know, we've significantly reduced the number of new Allstate agents being appointed beginning in early 2020 since we are developing a new agent model to drive higher growth at lower cost.
The addition of National General also added 502,000 new auto applications in the quarter.
Moving to slide 11.
Protection Services continues to grow revenue and profit.
Revenues, excluding the impact of realized gains and losses, increased 23.3% to $597 million in the third quarter.
Protection Plans and net written premium increased by $139 million due to the launch of the Home Depot relationship focusing on appliances.
Our quarterly net written premium is now 5.5 times the level of when the company was acquired in 2017.
Arity expanded revenues due to the integration of LeadCloud and Transparent.
ly, which were acquired as part of the National General acquisition as well as increased device sales driven by growth in the Milewise products.
Policies in force increased 12.5% to 150 million driven by growth in Allstate Protection Plans and Allstate Identity Protection.
Adjusted net income was $45 million in the third quarter, representing an increase of $5 million compared to the prior year quarter driven by higher profitability at Allstate Identity Protection and Arity.
This was partially offset by higher operating costs and expenses related to investments in growth.
Now let's shift to slide 12, which highlights our investment performance.
Net investment income totaled $764 million in the quarter, which was $300 million above the prior year quarter, driven by higher performance-based income, as shown in the chart on the left.
Performance-based income totaled $437 million in the quarter, as shown in gray, reflecting increases in private equity investments.
As in prior quarters, several large idiosyncratic contributors had a meaningful impact on our results.
These results represent a long-term and broad approach to growth investing, with nearly 90% of year-to-date performance-based income coming from assets with inception years of 2018 and prior.
Market-based income, shown in blue, was $6 million below the prior year quarter.
The impact of reinvestment rates below the average interest-bearing portfolio yield was somewhat mitigated in the quarter by higher average assets under management and prepayment fee income.
Our total portfolio return was 1% in the third quarter and 3.3% year-to-date, reflecting income and changes in equity valuations, partially offset by higher interest rates.
We take an active approach to optimizing our returns per unit risk for appropriate investment horizons.
Our investment activities are integrated into our overall enterprise risk and return process and play an important role in generating shareholder value.
While the performance-based investment results continue to be strong in the third quarter, we manage the portfolio with a longer-term view on returns.
On the right, we have provided our annualized portfolio return in total and by strategy over various time horizons.
Consistent with broader public and private equity markets, our portfolio has experienced returns above our historical trend over the last several quarters.
While prospective returns will depend on future economic and market conditions, we do expect our performance-based returns to moderate in line with our longer-term results.
Now let's move to slide 13, which highlights Allstate's strong capital position.
Allstate's balance sheet strength and excellent cash flow generation provides strong cash returns to shareholders while investing in growth.
Significant cash returns to shareholders, including $1.5 billion through a combination of share repurchases and common stock dividends, occurred during the third quarter.
Common shares outstanding have been reduced by 5% over the last 12 months.
Already in the fourth quarter, we successfully completed the acquisition of SafeAuto on October one for $262 million to leverage National General's integration capabilities and further increased personal lines market share.
We also recently closed on the divestitures of Allstate Life Insurance Company and Allstate Life Insurance Company in New York.
These divestitures free up approximately $1.7 billion of deployable capital, which was factored into the $5 billion share repurchase program currently being executed.
Turning to slide 14.
Let's finish with a longer-term view of Allstate's focus on execution, innovation and sustainable value creation.
Allstate has an excellent track record of serving customers, earning attractive returns on risks and delivering for shareholders, as you can see by the industry-leading statistics on the upper right.
F Innovation is also critical to the execution, and our proactive implementation of Transformative Growth has positioned us well to address the macroeconomic challenges facing our business today and in the future.
Sustainable value creation also requires excellent capital management and governance.
As an example, Allstate is in the top 15% of S&P 500 companies and cash returns to shareholders by providing an attractive dividend and repurchasing 25% and 50% of outstanding shares over the last five and 10 years, respectively.
Execution, innovation and long-term value creation will continue to drive increased shareholder value.
| qtrly adjusted earnings per share $0.73.
total revenues of $12.5 billion in the third quarter of 2021 increased 16.9% compared to the prior year quarter.
compname reports q3 revenue of $12.5 billion.
q3 adjusted earnings per share $0.73.
q3 revenue $12.5 billion.
auto insurance had underwriting loss in quarter as supply chain disruptions drove rapid price increases for used cars and original equipment part.
|
Kurt will open and close the call and Melinda will speak to the financials midway through.
We'll then open the call to questions.
Although we believe these statements to be reasonable, our actual results could differ materially.
The most significant risk factors that could affect our future results are described in our Annual Report on Form 10-K.
We encourage you to review those risk factors, as well as other key information detailed in our SEC filings.
I'm very excited about the new La-Z-Boy leadership team and what they will accomplish in the future.
But first let's review the quarter and then I'll circle back to discussions on the transition of roles.
For the quarter, we experienced strong written trends across the entire La-Z-Boy enterprise as consumers continue to allocate more discretionary dollars to their homes in an environment with travel and other leisure related restrictions.
This continues to translate to a build in our record level backlog even as we add more capacity.
Despite the strong written business delivered sales declined slightly versus the prior year quarter, due to greater than anticipated impacts from COVID-19, which I'll detail more in a minute.
And we delivered strong consolidated non-GAAP operating margin of 9.5%, including another profitable quarter for Joybird.
All of this on a base of last year's third quarter, which was the strongest quarter in the company's recent history for both the sales and consolidated operating margin.
In addition, our strong cash generation enabled us to return more than $7 million to shareholders through dividends and share repurchases and we declared an increase in the dividend to 15% -- to $0.15 per share.
Now I'll take them out to explain the specific COVID-19 impact to the business.
With strict safety protocols in place, including contact tracing, we experienced a higher than anticipated level of absenteeism in our manufacturing facilities as in volumes -- as employees quarantine, which limited our ability to increase production to plant levels.
The impact on sales was further exacerbated by COVID-19 absenteeism disproportionately affecting our most mature US plants were our most complicated and higher price furniture is billed.
So for the quarter with lower-than-expected units made particularly at our mature US facilities, there was a mix shift in production with fewer sectionals and other high-priced items manufactured, even though we have the orders for the.
And because our La-Z-Boy Furniture Galleries stores tend to sell a higher proportion of custom product, sofas and sectionals with higher selling prices, our retail segment was particularly impacted by the shift in mix.
Additionally, we were affected by demand and COVID issues impacting shipping routes around the globe and -- an experienced delays and overseas shipments of finished product to our international and case goods business.
And of component parts to our manufacturing operations during the period, which impacted all of our business.
As an example, we were short of supply of electronic components for our highest margin power units and this two contributed to the shift in mix.
Our supply chain challenges affected our quarter and we'll continue to drive uncertainty in the near-term.
They will be remediated over time.
Our backlog remains strong and we are scaling production as quickly as possible and working with our partners in Asia and domestically to address disruptions in supply, so that we can improve service to our customers and deliver strong financial results as we focus on the health and safety of our employees.
Now in the midst of all these challenges written sales momentum remains very strong.
Across the La-Z-Boy Furniture Galleries network written same-store sales increased 6.3% in the quarter of the strongest momentum in January.
This is on top of last year's third quarter written same-store sales increasing 10.5%.
And for some additional context, stripping out the Canadian stores that were closed at various points during the third quarter due to COVID restrictions, written same-store sales would have increased to 8.2% for the network.
Written same-store sales for fiscal '21 year-to-date increased 18%.
And for calendar year 2020 written same-store sales with the La-Z-Boy Furniture Galleries network increased 6% and the average revenue per store increased to $4.4 million from $4.1 million in calendar '19.
Even with some of the stores being closed for the better part of two months last year, due to the pandemic.
These results continue to demonstrate the strength of our brand and its appeal to consumers during these uncertain times, as well as the ability for store teams across the network to provide a safe shopping experience for the consumer.
As I turn to a discussion of our segments my remarks will detail our non-GAAP numbers, which we believe better reflect underlying operating trends and Melinda will cover the non-GAAP adjustments.
I'll start with our wholesale segment and as a reminder it now includes both our upholstery and our case good companies, as well as our international business.
During the quarter, our wholesale backlog grew to over $600 million, 4.5 times what it was at the end of Q3 last year, and up another 25% since the second quarter.
However, delivered sales declined 4% to $351 million, reflecting the COVID-19 production and delivery challenges and a change in mix, as I detailed a moment ago.
Non-GAAP operating margin for the wholesale segment was 10.2%, reflecting the temporary COVID impacts to our supply chain and increased cost to expand manufacturer capacity, as well as for raw materials.
These factors were partially offset by lower promotional activity, due to the strong demand environment.
With the surgeon product demand, our challenge has been to ramp up capacity at all of our plants and expand overall production capabilities, and we have put many pieces in place.
Recall, we have added manufacturing cells and weekend in third production shift at all of our US plants.
We have temporarily restarted a portion of our Newton, Mississippi assembly plant to service select geographic.
And we have also added sales and available floor space at our cut and sew center in Mexico.
And finally, we opened a new manufacturing facility in Mexico just south of Yuma, Arizona and San Luis Rio Colorado, where production started in December with full ramp-up extending over the first half of the calendar year allowing us to tap into a new labor pool.
And we are already in the process of increasing the number of cells in both Mexican-based locations.
Our supply chain team is ramping production capacity as quickly as possible to shorten lead times, which today stands at an unprecedented five to nine months depending on the product category.
Now let me turn to the retail segment.
For the quarter delivered sales decreased 1% to $166 million, reflecting the COVID-related product delays.
However, written same-store sales for the company-owned stores increased 9% with the strongest momentum in January, reflecting positive trends across all sales metrics, including traffic, conversion and average ticket by increased in both three units and design sales.
For the period delivered same-store sales decreased 6.3%.
Non-GAAP operating margin for the segment was 8.9% slightly down from 9.8% in last year's comparable quarter, primarily related to lower delivered sales relative to fixed cost and higher selling expenses driven by commissions paid on increased written sales, partially offset by decreased spending for the market -- for marketing given the strong demand environment and some lower travel-related spending due to COVID restrictions.
We continue to see our Furniture Galleries as an integral part of our omni-channel offering and are investing in robust plans for new stores, remodels, relocations and technology upgrades.
For fiscal '21 and 2022 each year will include more than 20 projects and they will be completed across the network with more than half of them in our company-owned retail.
So the broad array of styles and accessories, as well as free design services, the stores provide the consumer with our most comprehensive offering in a welcoming safe and inspiring shopping experience.
So it is critical that we keep the store systems up-to-date and engaging.
Finally, I'd like to spend a few moments on Joybird, which turned in another solid and profitable quarter.
Sales for the second quarter, which are reported in corporate and other increased 30% to $29 million.
Written sales increased 79% in the quarter versus the prior year, reflecting ongoing strong demand trends and the strength of the brand in the online marketplace.
Joybird again delivered profitable growth improving the gross margin and investing in marketing to drive customer acquisition.
And one last note before turning over the call to Melinda, last week we announced the expansion of our Board of Directors to 10 members with the addition of Jim Hackett, he currently serves as a Special Advisor to Ford Motor Company and was President and CEO of Ford from 2017 to 2020.
Jim spent most of his career at Steelcase serving as a CEO for 20-years.
A true visionary, Jim will undoubtedly make a significant contribution to La-Z-Boy, and we look forward to his guidance and perspective as we move into the next phase of growth.
Melinda now over to you.
As always, let me remind you that we present our results on both a GAAP and non-GAAP basis.
Last year's third quarter non-GAAP results exclude purchase accounting charges of $1.4 million pre-tax or $0.02 per diluted share.
A charge of $6 million pre-tax or $0.10 per diluted share related to an impairment for one investment and a privately held start-up company and income of $8.7 million pre-tax or $0.14 per diluted share related to the Company's supply chain optimization initiative, which included the closure of our Redlands, California facility and relocation of our Newton, Mississippi leather cut-and-sew operation.
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 third quarter sales decreased 1.2% to $470 million, primarily due to temporary supply chain impacts from COVID-19.
Consolidated non-GAAP operating income was essentially flat at $45 million versus last year's quarter and consolidated non-GAAP operating margin improved to 9.5% versus 9.4%, mainly driven by strong performance by Joybird.
Non-GAAP earnings per share was $0.74 per diluted share in the current quarter versus $0.72 in last year's third quarter.
Consolidated gross margin for the third quarter increased 60 basis points, changes in our consolidated sales mix, primarily driven by the growth of Joybird, which carries 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 taken, an increase in average ticket and favorable product mix.
Partially offsetting these increases were higher costs related to expanding our manufacturing capacity across the company.
SG&A as a percent of sales increased 50 basis points, primarily reflecting the changes in our consolidated sales mix, due to growth in Joybird, which carries higher SG&A costs than our wholesale businesses.
And non-operating income in the quarter was primarily due to unrealized gains on investments and contributed $0.02 per diluted share to earnings per share in the third quarter on both a GAAP and a non-GAAP basis.
Our effective tax rate on a GAAP basis for fiscal '21 third quarter was 27.7% versus 26% in last year's third quarter.
The increase is due mainly to the increase in the Joybird contingent consideration liability, which is not tax deductible.
Our effective tax rate varies from the 21% federal statutory rate, primarily due to state taxes.
For the full fiscal '21 year, absent discrete items, we estimate our effective tax rate on a GAAP basis to be between 26% and 27%, and on a non-GAAP basis we estimate it will be in the range of 24% to 25% after adjusting out the effects of the non-deductible Joybird contingent consideration.
Turning to cash, year-to-date we generated $250 million in cash from operating activities, reflecting strong operating performance and a $122 million increase in customer deposits and orders for the Company's retail segment and Joybird.
We ended the period with $393 million in cash, more than doubled our $168 million in cash at the end of last year's third quarter.
In addition, we held $31 million in investments to enhance returns on cash, compared with $30 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.
Year-to-date, we have invested $27 million in capital, primarily related to investments in our retail stores, new production capacity in Mexico, machinery and equipment and upgrades to our Dayton, Tennessee manufacturing facility, which have now been completed.
As we make investments in the business to strengthen the company for the future, we expect capital expenditures in the range of $35 million to $40 million for the full fiscal year, which will include investments in new manufacturing capacity in Mexico, technology upgrades, improvements to retail store facilities and technology and upgrades to our Neosho, Missouri manufacturing facility.
Regarding cash return to shareholders fiscal year-to-date, we paid $9.7 million in dividends to shareholders and spent approximately $1 million purchasing 22,000 shares of stock in the open market, since reinstating our program in December under our existing authorized share repurchase program, leaving 4.5 million shares of purchase availability in the program.
And yesterday, our Board of Directors increased the quarterly dividend to $0.15 per share, demonstrating its confidence in the strength of our business.
Before turning the call back to Kurt, let me highlight several important items for the upcoming fourth quarter.
First, I remind you that our effective non-GAAP adjustments for the fourth quarter will include purchase accounting and related tax adjustments for acquisitions to-date, which are expected to be a $0.02 per share benefit in the fourth quarter.
This excludes any further adjustments to the Joybird contingent consideration liability, which is dependent on estimates of Joybird's ongoing business trajectory.
Second, I remind you that last year's fourth quarter included a one-time $16 million benefit in cost of sales for the rebate of previously paid tariffs, which was included in both our GAAP and non-GAAP results and which was mostly offset by a bad debt expense of $13.5 million, due to the Art Van Furniture bankruptcy and a provision for potential credit losses in the COVID-19 environment also included in both our GAAP and non-GAAP results.
Our non-GAAP results for last year's fourth quarter excluded a non-cash, non-tax deductible Joybird goodwill impairment charge of $27 million, mostly related to the future financial projections at the beginning of the pandemic, and a $6 million pre-tax benefit from purchase accounting, primarily related to the reversal of the Joybird contingent consideration liability by its full carrying value also based on financial projections at that time.
And now looking at our ongoing business.
Let me update the perspective previously provided for the fiscal '21 fourth quarter.
But we think it important to offer it in the near-term given the unusual business trends, driven by the pandemic.
We have a significant order backlog that will have a long tail in terms of production and deliveries.
We are expanding output, and we will continue to increase production capacity.
We are optimistic about our business trajectory and confident we will deliver strong results in the fourth quarter and beyond.
With respect to raw materials, we took pricing on written orders beginning in October to cover cost increases given slower progress to work through our backlog in Q3, we will experience less of that benefit in Q4 than originally expected.
Meanwhile with cost for raw materials continuing to escalate, as well as those for freight, we continue to evaluate the need for further pricing actions.
Also, as we saw in Q3, we are still experiencing extreme uncertainty with respect to COVID-19, including related shutdowns and absenteeism affecting our plants, hiring challenges, impacts of global supply chain volatility impacting availability and timing of component parts and finished good shipments and most recently weather challenges.
Considering all of these factors, we now expect fiscal '21 fourth quarter consolidated sales growth of 34% to 39% versus the prior year fourth quarter, which included the month long pandemic shutdown.
We expect non-GAAP consolidated operating margin at the lower end of the 9% to 11% range.
Included in these margin expectations is the anticipation that Joybird will sustain profitable operations, even as we test investment effect in this to optimize topline growth.
And looking to next fiscal year.
With our existing backlog of written orders and the capacity increases we have under way, we will not experience our usual seasonality in Q1 and Q2.
And instead, we expect to continue to make moderate sequential improvement in wholesale capacity from Q4 throughout the first half of next fiscal.
Further as we increase efficiencies, we will focus on reinvesting a portion of returns back into our business to strengthen our capabilities for longer-term results beyond the pandemic.
And of course, we expect the impacts of COVID and the global supply chain disruptions to continue to cause uncertainty and some temporary volatility as we move forward.
And now back to Kurt.
We feel very positive about our business for the long-term.
We have always had one of the strongest brands in the industry and we believe we have further strengthened this over the past year allowing us to build market share and a more solid foundation from which to grow.
At the same time we have build a sizable cash position, which provides us the mean and flexibility to invest in opportunities that will drive long-term growth and return for all of our stakeholders.
I have made the decision to step down as President and CEO of La-Z-Boy after 42-years associated with this great company and I will remain Chairman of the Board.
This decision was not taken lightly and has been in the works for some time.
I believe a thoughtful and dedicated leader should be responsible along with the Board of Directors for a well planned and comprehensive leadership transition.
so the company may continue to move forward with this view of bumps in the road as possible.
I believe we have accomplished that.
These types of things have a timeline of their own and for La-Z-Boy, the timing is right.
We are rounding the corner on the pandemic, all the company's business units are growing and very profitable, we have a fortress balance sheet, our backlog is at an all-time high and our stock price is just about at an all time high as well.
For some perspective in March of 2009, our market cap was around $30 million and now is approaching $2 billion.
But most importantly, we have the right leader and Melinda Whittington, who has earned the respect of our entire organization and a seasoned leadership team that has been battle tested and a successfully dealt with everything that has been thrown out them.
And now it is my distinct pleasure to introduce the new President and CEO of La-Z-Boy, Melinda Whittington.
I am honored to have the opportunity to lead this amazing company through the next phase of our journey.
As Kurt said, we have a great team and a bright future ahead, as we leverage our strong foundation and build our next chapter.
I'm also thrilled today to introduce our new CFO Bob Lucian, who is joining us for today's call.
And while we still have several months of transition ahead of us and I know I can count on.
I wish him the very best in his retirement.
We'll begin the question-and-answer period now.
Holly, please review the instructions for getting into the queue to ask questions.
| compname reports q3 non-gaap earnings per share $0.74.
q3 non-gaap earnings per share $0.74.
sees q4 sales up 34 to 39 percent.
la-z-boy - for entire la-z-boy furniture galleries network, written same-store sales increased 6.3% for fiscal 2021 q3 compared with fiscal 2020 q3.
|
I'm also thrilled that Lynne Katzmann, Founder and CEO of Juniper Communities is joining us as a special guest.
We are including on our call an informative session with Lynne designed to provide insights and an operator's perspective on the challenges caused by the pandemic and the lessons learned while meeting these challenges.
With me, they share a strong strategic vision of LTC's future.
Please join me in congratulating them for these well-deserved promotions.
They have aggressively dealt with unprecedented challenge over the last several months while also solving problems creatively and compassionately.
Speaking of creativity, I would like to share this story from one of our memory care communities that recently made national news.
After being separated for more than 100 days from her husband, Steve, who is suffering from early onset Alzheimer's, Mary Daniel was focused on finding a way to reunite with him.
Our operator, ALG Senior, headquartered in Hickory, North Carolina thought outside of the box and offered Mary a part-time job as a dishwasher.
Both Mary and the community are taking this job seriously.
She received substantial training on assisted living care and has been tested weekly for COVID-19.
Now, after each shift, Mary visits Steve in his room where they watch TV and lay in bed together holding hands.
She uses her paycheck to buy gift cards for the staff in recognition of the very hard work they are doing to care for her husband and others loved ones.
There are similar stories from many of our operators around the country.
In fact, I hope Lynne will share some of her own.
We commend them for working tirelessly to provide care where it is needed the most and have confidence they will continue to meet this new normal with diligent strength and grace.
Although most states were able to successfully flatten the curve earlier on in the pandemic, COVID-19 cases have spiked around the country, potentially over-taxing our healthcare system.
In our industry specifically, uncertainties remain around PPE, sanitizing supplies, testing and staffing.
Demand for testing has increased resulting in growing lag times between test and results while some testing results have been found to be unreliable.
The recent decision by CMS to provide point of care COVID-19 test supplies to skilled nursing facilities should help, but to our knowledge, there is no similar program for private pay communities.
It is quite impressive to see how our industry has come together during this time.
In addition to the work being done by operators, several industry organizations have launched initiatives including intensive lobbying of Congress for additional relief funding, limited liability protection, and the prioritization of testing, PPE, and access to a vaccine, when available.
They have also engaged PR firms and launched media campaigns in an effort to enhance the perception of our industry and refute recent trends of negative press.
LTC is honored to be an active participant in several of these programs.
Moving more specifically to LTC's second quarter results.
Most directly due to COVID costs and other COVID impacts, we have placed our Senior Lifestyle portfolio on a cash basis as of July 1st due to a shortfall in May and June rent payments.
Senior Lifestyle's total orderly rental obligation to LTC is approximately $4.6 million.
For the quarter ended June 30th, 2020, we received a total of approximately $1.8 million.
In July, we received approximately $1.1 million.
While recent rent payments have been trending up, at June 30th, Senior Lifestyle owed us $2.8 million for the second quarter of 2020, which is reflected in our receivable balance as of that date and is covered by an undrawn letter of credit that we hold.
In cooperation with Senior Lifestyle, we are evaluating our options for the portfolio, which may include seeking new operators for the 23 properties and/or pursuing sales of some of the 23.
A split of the portfolio among several different regional operators, some of whom could be new to LTC Properties, provides an opportunity to reduce portfolio concentration while building relationships with operators new to LTC with whom we can grow.
We have proactively managed operator concentration in our portfolio.
Our current Senior Lifestyle is one of only two operators where income and asset concentration exceeds 10%.
Not surprisingly, the quarter has been quiet with respect to new investments.
However, we are continuing to court [Phonetic] potential operating partners and evaluate structured finance opportunities which typically has shorter investment duration and we believe offer better risk-adjusted returns in today's market.
While the market still remains uncertain with respect to 2020, the foundation we have built will serve us well when restrictions loosen and we can again actively engage with potential acquisition candidates.
Being well capitalized allows us to more quickly step into situations than some other financing sources.
Although I believe that it is unlikely we will close any major transactions in 2020, I also believe that LTC will continue to play a strategic and important role in seniors housing and care financing over the long-term.
As we discussed last quarter, we are not giving 2020 FFO guidance due to COVID-related uncertainties.
As Wendy discussed, we have placed Senior Lifestyle on a cash basis as of July 1.
Additionally, we wrote-off our straight line rent and lease incentive balances related to Senior Lifestyle as of June 30.
Primarily due to this write-off, total revenues decreased $17.8 million from last year's second quarter.
Decreased rent from Preferred Care was also a contributing factor.
These declines were partially offset by acquisitions and completed development projects, increased rent from 2019 lease transitions and higher rent from Anthem.
Interest income increased $469,000 in the 2020 second quarter due to the funding of additional loan proceeds and expansion and renovation projects.
Income from unconsolidated joint ventures decreased $128,000 in 2Q 2020 due to mezzanine loan payoffs and reduced income from our preferred equity investment in a joint venture with an affiliate of Senior Lifestyle.
During the fourth quarter of last year, we recognized a $5.5 million impairment charge related to our $25 million investment in the joint venture.
In the second quarter of 2020, the four properties comprising the JV were sold as discussed on our last call.
Accordingly, we received partial liquidation proceeds of $17.5 million and recognized a loss on liquidation of unconsolidated joint ventures of $620,000.
We have a receivable balance of $1 million related to additional proceeds that we anticipate receiving throughout the second half of 2020.
Interest expense decreased $164,000 due to lower outstanding balances and lower interest rates under our line of credit in 2Q 2020 partially offset by the sale of $100 million of senior unsecured notes in the fourth quarter of 2019.
G&A expense was comparable year-over-year.
Net income available to common shareholders decreased $18.6 million due primarily to the write-off of Senior Lifestyle straight line rent receivable and lease incentive balances as well as the loss on the liquidation of our unconsolidated JV.
NAREIT FFO was $0.31 per diluted share for the second quarter of 2020 and $0.75 per diluted share for the same period last year.
Excluding the non-recurring items already discussed in the current period, FFO per share was $0.76 this quarter compared with $0.75 in last year's second quarter.
During the 2020 second quarter, we received $17.5 million from the sale of the properties in the JV with an affiliate of Senior Lifestyle as previously discussed and $2.1 million related to the partial paydown of an outstanding mezzanine loan.
We funded $2 million of additional proceeds under an existing mortgage loan with an affiliate of Prestige Healthcare, which is secured by four skilled nursing centers with a total of 501 beds.
The additional proceeds bear interest at 8.89% increasing 2.25% annually thereafter.
We also funded $7.4 million in development and capital improvement projects on properties we own, $200,000 under mortgage loans and paid $22.4 million in common dividends.
At June 30, we own one property under development with remaining commitments of $7.4 million.
We also have remaining commitments under mortgage loans of $2.7 million related to expansions and renovations on four properties in Michigan.
At June 30, we had $50.4 million in cash and cash equivalents.
We currently have over $510 million available under our line of credit and $200 million under our ATM program providing LTC with total liquidity of approximately $760 million.
Our long-term debt-to-maturity profile remains well matched to our projected free cash flow helping moderate future refinancing risk.
We have no significant long-term debt maturities over the next five years.
At the end of the 2020 second quarter, our credit metrics compared favorably to 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 4.9 times and a debt to enterprise value of 32%.
The effect of the economic fallout from COVID-19 on the real estate capital markets has resulted in our debt to enterprise leverage metric being higher than our long-term target of 30%.
However at 4.3 times, we are still comfortably below our net debt to annualized adjusted EBITDA for real estate target of below 5 times.
I'd like to quickly discuss rent deferrals before turning the call over to Clint.
For the second quarter, rent deferrals were less than $1 million or approximately 2% of second quarter rent.
Approximately $277,000 of this deferred rent has been repaid.
Accordingly, at June 30, there were $653,000 in rent deferrals outstanding or about 1.5% of rent.
In July, we received two deferral requests from operators and granted one in the amount of $80,000 for July and the other totaling $280,000 for August and October rent.
I will cover several items today starting with our Brookdale renewal.
Our Brookdale leases, which cover 35 properties in eight states are the only significant lease renewals through 2022.
Given the uncertainties caused by COVID-19, we agreed to extend the maturity date by one year to December 31st, 2021.
In consideration for the one-year extension, Brookdale agreed to consolidate the four leases we have with them into a single master lease whereby all properties must be renewed together.
Brookdale now has three renewal periods, consisting of one four-year renewal option, one five-year renewal option and one 10-year renewal option.
Brookdale's notice period to exercise its first renewal option will open January 1, 2021 and close on April 30th, 2021.
The economic terms of rent remain the same as the consolidated rent terms under the previous four separate lease agreements.
We have extended a $4 million capital commitment to Brookdale, which is available through December 31st, 2021 at a 7% yield.
Moving to our development projects, as I mentioned last quarter, construction was completed on our assisted living memory care real estate joint venture project with Fields Senior Living in Medford, Oregon.
Fields has received its license to operate, is conducting tours and plans to open in the fall.
Our development project with Ignite remains on track to be completed in the fall.
Next, I'll discuss our portfolio numbers.
Q1 trailing 12-month EBITDARM and EBITDAR coverage using a 5% management fee was 1.39 times and 1.17 times respectively for our assisted living portfolio and 1.76 times and 1.31 times respectively for our skilled nursing portfolio.
Excluding Senior Lifestyle from our assisted living portfolio, EBITDARM and EBITDAR coverages increased to 1.49 times and 1.26 times.
I'd now like to provide some occupancy trends in our portfolio.
This data is as of July 17th.
For our private pay portfolio, occupancy is as of that date specifically and for our skilled portfolio, occupancy is the average for the month-to-date and because our partners have provided July data to us on a voluntary and expedited basis before the month has closed, the information we are providing encompasses approximately 72% of our total private pay units and approximately 93% of our skilled nursing beds.
For additional context, we are also sharing comparative information about occupancy as of March 31, 2020 and June 30, 2020 for the same population used for the July data.
Private pay occupancy at March 31 was 83% and 77% at June 30 and July 17th.
For skilled nursing, average monthly occupancy for the same dates respectively was 80%, 72% and 71%.
I'll finish my remarks today with some brief comments on deal flow.
While the market remains constrained and there are still complexities to be worked through, we are seeing some interesting opportunities and our business development team is continuing to actively source new deals.
By analyzing where we believe the market is headed, we are positioning LTC to be ready to strategically deploy capital as soon as practical and beneficial for us and for our shareholders.
We believe that our strong and flexible balance sheet is a competitive advantage.
Right now we see better opportunities in structured finance products such as preferred equity investments, mezzanine loans, bridge loans, and unit ranche loans for their shorter duration and what we believe to be better risk-adjusted returns in today's market.
Over the longer-term, we are continuing to build and enhance operator relationships so that when the time is right we can return to more standard acquisition and development investments that meet our underwriting criteria and create or enhance growth oriented partnerships with strong regional operating companies.
At this time however, we cannot accurately pinpoint when these type of transactions will resume.
As I reflect back on the quarter, it was encouraging to see some signs of progress as our operators and the seniors housing and care industry aggressively addressed pandemic-related challenges.
LTC is continuing to provide support as needed as our operators now have to deal with the repercussions of the recent spike in COVID cases.
I continue to believe that more and more opportunities will be available to LTC and that we stand prepared to act on them when the time is right.
Now it's my pleasure to introduce Lynne Katzmann, Founder and CEO of Juniper Communities.
Lynne started Juniper in 1988 and has grown the company to one of the premier regional senior living companies in the United States.
Today, Juniper operates 21 communities in three states, Colorado, New Jersey, and Pennsylvania.
Of these 21, Juniper leases two in Colorado and three in New Jersey from LTC.
These include all care levels from independent living to memory care to skilled rehabilitation centers.
Juniper's mission of nurturing the spirit of life is visible in their physical environments and experience through their signature care programs.
Are we live, now?
Lynne, you are live.
Yes, Lynne, please begin.
Operator, we can't hear Lynne.
Can you hear me now?
Yes, we can hear now, Lynne.
Today, I'm going to be talking about COVID-19, the impact of COVID-19 from an operator's perspective and as Wendy said, Juniper's properties span the continuum.
However, today, I'm going to be focusing primarily on the AL and memory care experience during COVID.
To summarize my comments briefly, I want to let you know that I want to share with you an understanding of COVID-19 and its impact on senior housing through a chronology of events.
I want to talk with you about Juniper's COVID-19 journey, our strategy, as well as a three-phase approach to the pandemic.
And lastly, I'd like to share with you some of the lessons I believe we've learned.
First, I want to talk about the COVID-19 reality.
The CDC issued its first public alert to the U.S. on January 8th of this year.
The first death in the U.S. occurred at Evergreen Health Care Center in Kirkland, Washington on February 29th.
On March 11th, they were 1,100 confirmed cases in the U.S. and it was on that day that the WHO declared COVID-19 to be a global pandemic.
On the next day, on March 12th, the Health and Human Services placed their first order for N95 masks.
At the time, they expected delivery around the end of April.
By the end of March, there were 164,000 confirmed cases with over 3,100 deaths.
Four months later, as you all know, we stand at 150,000 Americans dead with just 1,200 -- with an additional 1,200 being added yesterday.
So the extent of this pandemic is huge and the time frame in which this has happened is incredibly short, which has made it that much more difficult for all of us, but especially operators who care for chronically ill older adults to take action.
Juniper's COVID-19 journey as I said has three phases.
One, we call the crisis phase which started in March -- late March and went through May.
Phase two is what we are calling our path forward or the beginning of recovery, and Phase three, which we have not yet experienced is what we're dubbing the new normal.
I want to now tell you a little bit about our 30,000 foot view of our strategy.
Our goal has been to keep our residents and our associates healthy and safe.
And our approach has been one which we consider to be proactive and has involved primarily a testing and infection control policy.
Part of our strategy has evolved because of our understanding of what successful countries have done -- other successful countries had done in combating COVID and looking at the infection prevention strategy, which have led them more success.
Among those are Germany and South Korea.
Our crisis management strategy included four key points.
The first was testing, contact tracing and isolation where we defined the problem, identified the risk and implemented protective actions that related to what we had identified.
Our second piece of our crisis management process related to stepped up infection control practices, which included everything from hand washing and social distancing to cleaning and disinfecting, and most importantly, the proper use and availability of personal protective equipment or PPE.
The third part of our strategy involved associate training and support particularly to assure widespread adoption of appropriate practices.
And last, but certainly not least, was a new system to ensure enhanced accountability and to document results.
As I said before, our testing strategy was patterned after South Korea, which used a test early and universal strategy regardless of someone's symptoms.
We initiated testing in late March.
We used a private lab and our decision was to test all residents and associates, not just those with significant symptoms, substantially different than what was happening at the time.
We started by testing in hots pots in two communities, both of which were LTC Properties, one in Colorado and one in New Jersey.
Roughly 50% of the people tested were positive, but most notably, of these, 70% to 94% were asymptomatic.
72% of residents to be specific and 94% of our associates.
This is hugely important because it told us that this disease was transmitted without someone having symptoms and that despite what we were being told by the CDC, we needed to do more.
Juniper used that information to put together what we considered our battle plan, which we believe has been fairly successful.
I want to also note that the majority of our communities tested 100% negative and in those communities, what we did is essentially sheltered everyone, including our staff in place.
A fun example of this was something we call Camp Wellspring, which took place in memory care and as many of you may know, memory care residents are harder to isolate.
They naturally like to come out of their rooms and often times and so isolating them individually in their suites is often more difficult.
By creating a safe environment, by sheltering in place, by creating small cohorts, we were able to keep people safe and healthy.
More importantly or equally importantly, I should say is that we created a fun environment, one which had tremendous positive impact on our residents and our team members as well as their families.
We created an RV camp in our parking lot and each of the cohorts -- cohorts are like neighborhoods and so we assigned staff to each of those.
Neighborhoods -- they were not allowed to go to other parts of the building.
So similarly, they had to shelter outside of the building in their time off in a distinct location and we created those.
At the end of the day, many of our residents felt that they were on vacation.
They thought it was great fun and we've now dubbed it Camp Wellspring.
So that's a fun story about that.
I will also just note as I'm telling stories that in the communities that sheltered in place, we now have three new babies of women who sheltered in place and gave birth shortly thereafter.
I want to let you know that in terms of testing right now, we are doing viral testing weekly, but the key to this strategy working is rapid, accurate, affordable, and regular testing.
Testing affords us the data to keep people who are likely communicable and who can transmit the disease out of the community.
That enables us to create a safer environment which keeps everybody healthy and we've been quite successful in doing that.
As of the time we reported to LTC, we have no cases of COVID anywhere in our system among residents and staff.
Moving along, I want to talk a little bit now about some of our other infection control practices and then briefly about staff issues.
Infection control practices, including stopping non-essential visitors from coming in, screening at the door, taking temperatures of all people, but some of the other things we did included stratifying our residents in terms of risk, understanding their chronic conditions, and monitoring those who were more susceptible to the disease more often.
As I mentioned before, we cohorted residents and staff which was probably one of the more effective measures we took.
PPE, we had an adequate supply.
We spent a lot of money on it.
One of the more important things we learned is that we had to train people in the use of PPE and as we all know, wearing a mask is new to many of us, it was to our residents and to our teams and training people in how to use them, how to put them on, how long to keep them on, how not to touch them and then doing compliance audits are all extremely important in proper infection prevention.
In terms of disinfecting, we went green, which is something that Juniper has done repeatedly over our 30 years.
We used a non-toxic disinfectant which was EPA and FDA approved and utilized foggers to make sure that we disinfected the whole building.
The other thing we did that I think was really important, which you may not consider a direct infection control practice, but we considered an infection prevention practice is communication.
We communicated early, often, and I believe transparently.
As of July 17th, we had communicated 1,980 different times with all of our residents families and their powers of attorney as appropriate.
So communication for us has been critical in getting the support of our teams, of our residents, and our families.
I want to talk briefly about staff issues.
One of the things that really impacts all of us as senior living providers is staffing.
If someone is sick, obviously, they need to be out of the building.
If someone is exposed to someone who is sick, they too need to leave.
And as such, it meant that in several cases all of a sudden, within a very short period of time, the staffing you needed was -- or regular staff were no longer available in the same numbers they were before.
If you add to that fear, staffing has become difficult particularly in hot spots.
The cost of that staffing has gone up as we've provided appreciation pay, otherwise known as hero pay and some people call it hazard pay as well.
In addition, personal protective equipment needs to be accessible, which we were able to do and used properly.
Now what is the solution to these staffing issues?
Well, for us, it was to train all of our available associates to be universal workers, to extend pay when people were sick or exposed to protect them and their families, to provide appreciation pay, particularly in areas where we had COVID positive residents, to provide additional incentives for people to shelter in place to essentially create a bubble around our communities, and lastly, we used our salespeople as recruiters and found this to be extremely effective in helping our fill empty positions while people were sick.
I want to talk to you now about the second phase, which we call the pathway forward for us.
The goal of this phase is to restore profitability while keeping residents and associates healthy, safe and engaged.
Our approach has been to jump start move-ins and implement what we call the five pillars, which in notable Juniper fashion alliterate so they are prevention, people, program, place, and packaging.
Prevention has to do with our testing strategy and infection prevention, including cleaning, disinfecting, and again cohorting.
People has to do with the schedules for our associates, their assignments, again, relating to cohorting and different pay programs.
Programming in the pathway forward is about reopening dining, restoring activities and perhaps most importantly, establishing safe visitation for families.
In terms of place we had been working on making sure there are visible signs that we are beginning to return to normal while maintaining successful infection prevention and control strategies and lastly under packaging, which you might consider marketing and sales, we focused on message and the delivery of that message.
In terms of driving sales moving forward, I want to tell you a little bit about what we've done and the results to date.
In terms of our efforts, we utilize a golden triangle approach, which includes the Executive Director, the Director of Wellness and the Director of Sales and Marketing.
Those three people come together to focus their effort on outreach and in working together to close sales.
We've resituated our sales offices, we've changed our tour protocols and moved our model suites to areas, which they can be easily accessed without going through other parts of the building.
We've created new messaging, we've trained for that and then we've also demonstrated competency among the appropriate people.
We've added additional sales support for targeted communities who had significant reductions in census over the period.
We put together tool kits for rapid movements and we've instituted new rewards.
What have we achieved?
Well, in terms of digital leads, which is major source of leads at this point in time, our July 2020 digital leads are up 33% over April of 2020 and our July 2020 digital leads are up 48% over July 2019.
So we are seeing substantial growth in leads.
We have put in place some special campaigns and they are working.
We started doing virtual tours, they are catching on.
Our communities are now able to do backstage tours as well as virtual tours and I'm proud to say that our July 2020 results while not where they were pre-COVID, we are seeing net census gains and we're very happy about that.
Some of our operator pandemic imperatives that I think you need to know about is that we continue to screen for social isolation issues among our residents.
We have expanded telehealth for mental healthcare as well and we've continued to increase access to the Internet and smart devices and just so you know, we have done over 12,000 virtual visits with family since the start of the pandemic.
We've added a variety of different ways for people to meet with their healthcare providers online and have done over 1,400 window visits.
What are the lessons learned?
Well, in terms of leadership, vision, and the ability to use data to set a proactive course has been extremely important.
I think a second lesson learned is that technology is extremely useful and really critical in generating the data and communicating appropriately in times of crisis.
Some of the technology that has been increased in its use is of course telehealth.
We've used a variety of ways to communicate with residents and families and we've used technology to support activities both social and fitness related.
Some of you may have seen the joint effort between LTC and Juniper to develop an industry accessible virtual connections program, which provides a whole host of opportunities for people in our communities at varying levels of care and service need as well as in the community.
It may not involve massive restructuring of what exists, but it does involve an emphasis on safety, on dedicated staff, on looking at buildings in terms of small neighborhoods, and increasing social engagement through a variety of ways of integrating what we do with the community at large.
In terms of phase three, our new normal.
It's a work in progress.
We're not there yet.
It will involve a variety of different things, including continued use of data, of technology that is, for data, communication, provider access, digital marketing, and resident engagement.
We will continue to integrate health services with other providers outside of our communities.
Our neighborhood designs are very important particularly for cohorting and keeping people safe and giving families and prospective residents an understanding -- a visible understanding of how we manage during this type of pandemic.
There will be gated entry where we take temperatures and we screen very tightly over who enters the building and of course, cleaning and disinfecting has changed and needs to be visible.
So all of those things will be part of our new normal.
And Lynne will be available during our Q&A session.
So you can ask her questions about Juniper and about the industry in general.
So, we'll now open it up to the Q&A.
| compname reports q2 ffo per share $0.31.
q2 ffo per share $0.31.
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What we will say today is based on the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
We are happy to report a fantastic third quarter.
We earned $1.27 per share on revenue of $834 million.
Same-store revenue grew by 9% compared to the third quarter of 2020, as work and bookings are returning as COVID challenges decrease.
Our backlog was over $1.9 billion this quarter, which is a $270 million same-store increase over this time last year.
Our free cash flow continues to be strong, and yesterday we increased our dividend by 8%.
Our essential workforce continues to perform at an outstanding level, and we are grateful for their strength and perseverance during these challenging times.
During the third quarter, we closed our acquisition of Amteck, which focuses on electrical projects and service in Kentucky, Tennessee and the Carolinas.
Amteck brings an exceptional set of capabilities and relationships and a strong reputation in industrial markets, such as food processing.
We are thrilled to have them as part of Comfort Systems USA.
I'll turn this over to Bill to review our financial performance.
This will be pretty brief.
Revenue for the third quarter of 2021 was $834 million, an increase of $120 million or 17% compared to last year; same-store revenue increased by a strong 9%, with the remaining increase resulting from our acquisitions of TEC and Amteck.
Gross profit this quarter was $159 million, a $12 million improvement compared to a year ago while gross profit percentage was 19.1% this quarter compared to 20.6% for the third quarter of 2020.
Our gross profit percentage related to our Mechanical segment was strong at 20.1% and margins in the Electrical segment have increased significantly compared to last year.
SG&A expense for the quarter was $95 million or 11.4% of revenue compared to $91 million or 12.7% of revenue for the third quarter in 2020.
On a same-store basis, SG&A was down approximately $2 million, primarily due to tax consulting fees that we incurred in the prior year.
Our year-to-date 2021 tax rate was in the expected range at 24.1%.
Net income for the third quarter of 2021 was $46 million or $1.27 per share.
This compares to net income for the third quarter of 2020 of $50 million or $1.36 per share, as last year included a $0.17 benefit that resulted when we settled tax audits from past years.
Excluding that discrete item from last year, our earnings per share increased by 7% compared to the record level of a year ago.
For our third quarter, EBITDA was up significantly to $82 million, an increase of 15% over the prior year.
And through nine months, our EBITDA is $188 million.
Free cash flow in the first nine months was $139 million, as compared to $199 million in 2020.
The COVID-induced work slowdown and some temporary tax benefit created unprecedented cash flow last year.
Our cash flow this year is robust through nine months and we expect continued good cash flow, although we are likely to continue to deploying some net working capital to start new projects in many places.
In addition, we will be paying the federal government an extra $16 million of payroll taxes next quarter that were deferred under the CARES Act in 2020.
Ongoing strong cash flow has allowed us to reduce our debt faster than expected, while still actively repurchasing our stock.
Since the beginning of the year, we have repurchased 346,000 shares which is almost 1% of our outstanding shares at an average price of $73.69.
Since we began our repurchase program in 2007, we have bought back over 9.6 million shares at an average price of less than $22.
Brian mentioned that we closed the acquisition of Amteck.
Amteck is reported in our Electrical segment and it is expected to contribute annualized revenues of approximately $175 million to $200 million and earnings before interest taxes, depreciation and amortization of $14 million to $17 million.
However, because of the amortization expense related to intangibles, the acquisition is not expected to contribute to earnings per share for the next few quarters.
That's all I have on financial Brian.
I am going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for the remainder of 2021 and full year 2022.
Backlog at the end of the third quarter of 2021 was $1.94 billion.
Our sequential same-store backlog was up slightly, which is great by the end of the third quarter due to the heavy backlog burn this time of the year.
Year-over-year our backlog is up by over $500 million or 36%.
Same-store backlog increased by 19%, a broad base increase.
We believe that the impact on activity levels related to COVID-19 have now stabilized and we expect to continue seeing good trends in work availability in the coming quarters.
Industrial customers were 43% of total revenue in the first nine months of 2021.
We think this sector which includes technology, life sciences and food processing will remain strong for us, as Industrial is heavily represented in new backlog as well as in our recent acquisitions.
Institutional markets, which include education healthcare and government are strong and represented 33% of our revenue.
The commercial sector is also doing well but without changing mix it is now a smaller part of our business at about 24% of revenue.
Year-to-date, construction was 77% of our revenue with 46% from construction projects for new buildings and 31% from construction projects in existing buildings.
Service was very strong this quarter and our increasing service revenue was 23% of our year-to-date revenue with service projects providing 9% of revenue and pure service including hourly work providing 14% of revenue.
Year-to-date service revenue was up by 11%.
And with our continuing strong margins our service earnings were up by a similar amount.
Service has rebounded as buildings are open and profitable small project activity is back.
Overall, service continues to be a great source of profit for us.
Our backlog is at record levels.
Project development and planning activities with our customers are continuing.
We are paying more for materials but so far our teams have coped successfully with challenges in material availability and cost.
We are closely monitoring material shortages and costs and are taking steps to add additional protections on new work.
Vaccine mandates by certain customers have post challenges in our ability to pursue certain work.
All the staff are maintained scheduling on work that is subject to such mandates.
So far we have been able to meet our customers' requirements.
However, the Occupational Safety and Health Administration, OSHA is drafting an emergency regulation on vaccinations and it is impossible to predict the scope, timing and impact of the new regulation on us, or our industry or on the US economy.
The underlying trends in customer demand and opportunities are very positive.
And so despite challenges, we continue to anticipate solid earnings and cash flow for the remainder of 2021 and we feel that we have good prospects for 2022.
Over the last few years, we completed a series of transformative acquisitions that have built upon our unbroken history of profitability and cash flow to increase our scale, deepen our exposure to complex markets, including industrial, technology and pharma and expand our recurring service revenue.
Each investment has strengthened and expanded our unmatched nationwide community of skilled workers.
We are also experiencing increasing benefits from our substantial and ongoing investments in training, productivity and technology.
These acquisitions and other investments have laid the foundation for the current strong results and gives us confidence as we move forward.
Above all, we are mindful of the ongoing challenges that our employees across the United States continue to confront and we are deeply grateful for their perseverance.
We are committed to providing our workers and thus our customers with unmatched resources, opportunities and support.
| compname reports q3 earnings per share $1.27.
q3 earnings per share $1.27.
backlog as of september 30, 2021 was $1.94 billion.
|
We hope you and your families are continuing to stay safe and well.
Now a few reminders before we go into the results.
These statements are based on management's current expectations, but may differ from actual results or outcomes.
In addition, we may refer to certain non-GAAP financial measures.
I'll start by covering our top line commentary, with highlights from each of our segments.
Kevin will then address our total company results as well as our FY '21 outlook.
Finally, Linda will offer her perspective, and we'll close with Q&A.
For the total company, Q2 sales increased 27%, with growth in every reportable segment.
It reflects about one point of net benefit from the July acquisition that gives us a majority share in our Saudi Arabia joint venture and unfavorable foreign currency exchange rates.
On an organic basis, Q2 sales grew 26%.
I will now go through our results by segment.
In our Health and Wellness segment, Q2 sales were up 42%, reflecting double digits increases in two of three businesses.
Our Cleaning business had double-digit sales growth behind strong ongoing demand across our portfolio.
Consumption remains high and, importantly, we're continuing to see increases in household penetration and repeat rates among existing and new users, driven by new routines developed from the prolonged pandemic as well as strategic brand investments.
While we expect tough comparisons as we lap these very high growth rates, we'll continue to work to retain the larger base of loyal consumers we've built for our cleaning and disinfecting products even after a critical mass of the population has been vaccinated.
We're continuing to make progress on our supply expansion, including a new line of wipes plant coming online this quarter.
We're also continuing to identify new sources of supply for other products experiencing constraints, including our disinfecting spray products.
As we're able to better meet consumer demand for our base products, we're looking forward to bringing back our Clorox compostable wipes, along with a stream of exciting innovation in the coming months.
Our Professional Products business had another quarter of double-digit sales growth behind continued high demand for our cleaning and disinfecting products.
It's worth noting, though, that while demand from businesses such as healthcare facilities has remained high, we've seen softer demand from businesses negatively impacted by ongoing mobility restrictions, like commercial cleaning and foodservice institutions.
That's why we're leaning into other out-of-home spaces through strategic alliances, and are encouraged by our progress.
While not yet a meaningful contributor in Q2, our out-of-home partnerships are expanding.
We're excited to announce a new multi-year deal with the NBA, an existing partner.
Lastly, within this segment, our sales in Vitamins, Minerals and Supplements business decreased in Q2.
This is a business where results have not been consistent, and we clearly have more work to do.
As you remember, we relaunched RenewLife last fall.
While we've seen improvements in all outlet consumption, it is not yet delivering the consistent results we want.
With more than half American consumers saying they intend to continue taking vitamins and supplements, we continue to believe in the attractiveness of this category.
Now turning to Household segment.
Quarterly sales were up 20%, with growth in all three businesses for a third consecutive quarter.
Grilling sales were up double digits, driven by continued strong consumption, which reflects the dramatic rise in in-home meal occasion as people continue to spend more time at home.
Behind our strategic collaboration with retailers, we've been able to grow household penetration for a third consecutive quarter, including among millennials and low-income consumers.
As we begin planning for the next growing season, we're building on our innovation through expanded distribution of our new Kingsford pellets and bringing new flavors to our Kingsford product lineup.
With consumer spending more on their backyard and growth, we feel optimistic about the future of this business.
Cat Litter sales were up by double digits in Q2, supported by innovation and continued strong performance online.
Our Fresh Step with Gain Original Scented Litter with the power of Febreze as well as our Fresh Step Clean Paws litter continued to perform very well, and we're supporting them through a new advertising campaign.
A record number of people have become pet parents since the onset of the pandemic in 2020, making this yet another example of how our diverse portfolio is particularly suited to the times.
Glad sales increased in Q2 behind strong demands across our portfolio of trash bags, wraps and food bags as people continue to spend more time at home.
Our latest innovation, Glad ForceFlex with Clorox trash bags, launched in September and is building distribution quickly, earning positive reviews.
In our Lifestyle segment, Q2 sales were up 9%, with double-digit growth in two of three businesses.
Brita sales were up by double digits for a fourth consecutive quarter behind continued strong shipments of pitchers as well as filters.
Just as with wipes and sprays, we're continuing to work through supply chain constraints in our Brita business, which has been impacting our shares.
We feel good about the long-term prospects of this business, especially since once people buy a Brita pitcher, they tend to stay in our franchise with continued purchases of filters.
Importantly, as household penetration for Brita keeps growing, we're building brand loyalty among these consumers.
The Food business had double-digit sales increase for a third straight quarter behind ongoing strong consumption of our Hidden Valley Ranch products, particularly dry seasonings and bottled dressings.
With more and more people eating at home during the pandemic, household penetration has grown to an all-time high, including above-average growth among millennials.
We're building on this momentum with a stream of innovation, including Hidden Valley Secret Sauces and, most recently, Hidden Valley plant-based ranch dressing, which is being supported by strong advertising investments.
Burt's Bees sales decreased by double digits as the business continued to be impacted by mobility restrictions as well as changes to consumer shopping and usage habits as a result of the pandemic.
This quarter, unseasonably warm weather also impacted lip balm sales.
Despite these challenges, we're making progress in the fast-growing online channel, where the brand had double-digit growth in Q2, and we remain confident in the long-term trajectory of this business.
Q2 sales grew 23%, driven by double-digit shipment growth in all major regions.
The growth reflects about nine points of benefit from the Saudi acquisition and about four points of unfavorable foreign currency headwinds.
Organic sales grew 18%.
The recent investment we made to create a dedicated international supply chain for Clorox disinfecting wipes is starting to pay off, giving us the ability to not only meet ongoing elevated demand in existing markets, but also to expand to new countries.
This is a strategic growth platform for the company, and we're supporting it through additional advertising investments.
We hope you and your families are well.
Our sales growth for the second quarter was broad-based, resulting in double-digit growth in each reporting segment for the first half of our fiscal year.
Additionally, this led to profitable growth for the first half, which enables us to capitalize on our momentum and continue investing behind our global portfolio to strengthen our competitive advantage.
Turning to our second quarter results.
Second quarter sales were up 27%, driven by 23 points of organic volume growth, three points of favorable price/mix and one point of net benefit from acquiring majority control of our Saudi joint venture, partially offset by FX headwinds.
On an organic basis, sales grew 26%.
Gross margin for the quarter increased 130 basis points to 45.4% compared to 44.1% in the year ago quarter.
Second quarter gross margin included the benefit of strong volume growth as well as 160 basis points of cost savings and 140 basis points of favorable price/mix.
These factors were partially offset by 420 basis points of higher manufacturing and logistics costs, which, similar to last quarter, included temporary COVID-19 spending.
Second quarter gross margin results also reflect about 50 basis points of negative impact from higher commodity costs, primarily from resin.
Selling and administrative expenses as a percentage of sales came in at 14.6% compared to 14.5% in the year ago quarter.
Advertising and sales promotion investment levels as a percentage of sales came in at about 10%, where spending for our U.S. retail business coming in at about 11% of sales.
This reflects higher investments across our portfolio, strengthening our value proposition to support higher levels of household penetration and lasting brand loyalty among new and existing consumers.
Our second quarter effective tax rate was 21%, which was equal to the year ago quarter.
Net of these factors, we delivered diluted net earnings per share of $2.03 versus $1.46 in the year ago quarter, an increase of 39%.
Turning to our updated fiscal year outlook.
We now anticipate fiscal year sales to grow between 10% to 13%, reflecting the strength of our first half results and higher expectations for the back half.
With our overall demand for our products remaining quite strong, we now expect back half sales to be about flat, on top of 19% growth in the year ago period.
We also anticipate about one point of contribution from our Saudi joint venture, offset by one point of foreign exchange headwinds.
On an organic sales basis, our outlook assumes 10% to 13% growth.
We now expect fiscal year gross margin to be down slightly, reflecting higher commodity and manufacturing and logistics costs as well as temporary costs related to COVID-19.
These factors are expected to be partially offset by higher sales.
As a reminder, we expect gross margin contraction over the balance of the fiscal year, primarily from two factors: first, we are lapping very strong operating leverage from robust shipment growth during the initial phase of the pandemic; and second, we're facing commodity headwinds this year versus last year's commodity tailwinds.
As a reminder, our gross margin expanded 250 basis points in the back half of fiscal year '20.
We continue to expect fiscal year selling and administrative expenses to be about 14% of sales, reflecting ongoing aggressive investments and long-term profitable growth initiatives and incentive compensation costs, consistent with our pay-for-performance philosophy.
Additionally, we continue to anticipate fiscal year advertising spending to be about 11% of sales.
We spent about 10% in the front half of the year and continue to anticipate about 12% in the back half in support of our robust innovation program.
We continue to expect our fiscal year tax rate to be between 21% to 22%.
Net of these factors, we now expect fiscal year '21 diluted earnings per share to increase between $8.05 and $8.25 or 9% to 12% growth, reflecting strong top line performance, partially offset by a rising cost environment.
We now anticipate fiscal year diluted earnings per share outlook to include a contribution of $0.45 to $0.50 from our increased stake in our Saudi Arabia joint venture, primarily driven by a onetime noncash gain.
I'm pleased we've raised our fiscal year '21 outlook.
Of course, it's important to note, we continue to operate in a highly dynamic environment and are monitoring headwinds that could result in impacts moving forward.
In closing, I'm also pleased with our broad-based strong results in the first half, which enables us to continue investing in our brands, capabilities and new growth opportunities, all in support of our ambition to accelerate long-term profitable growth for our shareholders.
I hope you and your families are well.
It's great to be here today showing Clorox's results for the first half of our fiscal year.
My messages this quarter largely reinforce what we discussed in Q1, with the most important point being that our global portfolio of leading brands continues to play a critical role in people's everyday lives.
My first message is that our first half results are rooted in purpose-driven growth.
Our purpose as a company is to champion people to be well and thrive every single day.
And our portfolio of leading brands is the bedrock of our ability to deliver on that promise.
Our first half results reinforce the important role our brands play in addressing people's everyday needs.
We continue to see broad-based strength in our portfolio, with double-digit sales growth for most of our businesses.
Clorox disinfecting products continue to be in high demand among consumers, businesses and healthcare settings.
And as people spend more time at home, we're continuing to see strong performance in other parts of our portfolio.
Kingsford is a great example.
As Lisah mentioned, our Grilling business delivered double-digit sales growth in the quarter.
And with a recharge strategy emphasizing innovation, I'm optimistic about the long-term prospects of this business.
They understand that, more than ever, people and communities need us.
I'm so grateful for their passion and commitment.
My second message is that Clorox will stay in the driver seat, continuing our posture of 100% offense to make the most of the opportunities in front of us while navigating an ongoing dynamic environment.
There's no question, Clorox has built significant momentum over the last year, and we have every intention of extending that longer term.
Our brand portfolio is especially relevant for this environment and for the consumer trends I mentioned last quarter, which we expect to persist beyond the pandemic, prioritizing hygiene and health and wellness, caring for pets and accelerating digital behaviors related to practically every aspect of their lives.
More than ever, as home is where the heart is, it's also where consumers are directing their investments with spending across many categories to support quality of in-home experiences.
This certainly bodes well for our portfolio.
We continue to see strong levels of household penetration.
Importantly, what we mentioned last quarter about repeat rates across our portfolio is playing out.
We're accelerating purchase frequency.
And repeat users are the source of most of our sales growth across our portfolio.
In addition, our strategic investments are creating a virtuous cycle around engaging and retaining new and existing users, resulting in a consumer retention rate of nearly 90%.
As I mentioned, 100% offense will help us extend this momentum, which, as a reminder, includes: investing more across our portfolio to retain the millions of people buying our brands; expanding our public health support to more out-of-home spaces; increasing capital spending for immediate and future production capacity, including wipes expansion in international; and partnering with our retailers to grow our categories.
Given the dynamic environment we continue to face, 100% offense also means actively planning for challenges and disruptions in the near and long term, including an inflationary cost environment, elevated competition in light of category tailwinds and accelerating advancements in digital technology that we expect to impact all areas of our business.
What's important is we'll continue to make strategic choices that position us to achieve our ambition to accelerate long-term profitable growth.
And finally, my third message is this.
As we continue to address immediate priorities related to unprecedented demand, we're also accelerating our progress against our strategy to deliver long-term shareholder value.
Our IGNITE Strategy continues to put people at the center of everything we do and helps us make the most of our strategic advantage in the near and long term.
Addressing unprecedented consumer demand for much of our portfolio continues to be an immediate priority.
We continue to make progress on a number of businesses.
We're bringing in more third-party supply sources and launching our new wipes line in our Atlanta facility in the third quarter.
Importantly, simplification is our mantra, and we're seeing the benefit of focusing on fewer SKUs, which we expect to continue beyond the pandemic.
As I mentioned earlier, we're growing Clorox Disinfecting Wipes international, supported by a dedicated supply chain.
Our expansion plans are going very well, and we expect to double the number of countries where Clorox wipes are sold.
Another immediate priority is to continue supporting people's safety when they're outside their homes through strategic alliances to support public health.
We're expanding our programs with Uber Technologies and Enterprise Holdings.
We recently established a multi-year deal with the NBA and look forward to pursuing similar opportunities with other organizations.
And as the pandemic continues to take a toll in the economy, we know that far too many people feel financial pressure from unemployment and less discretionary spending.
We're mindful of the role we can play to support those who are particularly value-sensitive, and we'll continue to deliver superior value through meaningful innovation.
Importantly, we're also making progress in laying the foundation for long-term growth.
We will continue to invest strongly in our global portfolio of leading brands, particularly behind robust innovation that differentiates our products and deliver superior value.
We will continue to reimagine how we work to ensure a strong culture, with a highly engaged team that works simpler and faster on strategic priorities.
I'm proud of how we've been operating during the pandemic, including accelerating our speed to market.
And finally, as we've said before, we view ESG as a contributor to competitive advantage, which is why it's embedded in our business.
Achievements this quarter include: being included in the 2021 Bloomberg Gender-Equality Index; achieving 100% renewable electricity in the U.S. and Canada four years early; signing on to the Energy Buyer Federal Clean Energy Policy statement, which calls for a 100% clean energy power sector; and donating $1 million to Cleveland Clinic to establish the Clorox public health research grant in support of science-based public health research.
We are grateful to play a role in supporting people and communities as we continue to navigate the global pandemic.
It only strengthens our resolve in pursuing purpose-driven growth, ensuring a strategic link between our impact on the world and long-term value creation for our shareholders.
| compname posts q2 earnings per share $2.03.
q2 earnings per share $2.03.
fiscal year 2021 sales are now expected to grow between 10% and 13%.
now anticipates fiscal year 2021 diluted earnings per share to increase between 9% and 12%, or $8.05 to $8.25.
fy 2021 diluted earnings per share outlook now estimates contribution of 45 to 50 cents from co's increased stake in its saudi joint venture.
|
What we will say today is based upon the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
We are happy to report an excellent second quarter.
We earned $0.90 per share despite some revenue headwinds arising from pandemic-related delays in some areas and projects.
Our sequential backlog increased by $180 million this quarter on a same-store basis, and our year-over-year same-store backlog also increased by $200 million.
And this is the first time since the pandemic decline that we have seen a same-store increase in our backlog from the prior year.
These increases support our belief that direct pandemic effects are abating.
Our free cash flow continues to be strong and yesterday we increased our dividend.
Our essential workforce proved its mettle during the recent challenges and they continue to excel as circumstances improve.
We are grateful for their strength and perseverance.
We are optimistic about our prospects for the next several quarters.
We recently announced that Amteck will be joining Comfort Systems USA and that acquisition is expected to close in the third quarter.
Amteck provides electrical contracting solutions and services, including core electric and low voltage systems as well as services for plans of maintenance, retrofit and emergency work.
Amteck is headquartered in Kentucky and focuses on the Southeastern United States, including Kentucky, Tennessee and the Carolinas.
Amteck brings experienced professionals and a fantastic reputation for electrical contracting and services in industrial markets such as food processing.
Amteck will add world-class capabilities in complex projects, deep customer relationships, design build confidence and opportunities for synergy.
Before I review second quarter details, I want to discuss the impact of COVID and how that has affected the composition and timing of earnings and revenues so far this year and in the comparable period last year.
Our first quarter results in 2020 were lowered by COVID.
As we closed that quarter last year in the midst of governmental orders in building and job shutdowns, we were very concerned about how the pandemic and work precautions would affect our productivity.
Accordingly, the judgments we made to close the first quarter last year led us to expect higher cost on jobs and reduced margins and we also reserve certain receivables.
Three months later, by the time we were closing our second quarter, it had become clear that our activities were deemed essential and that we could work at good productivity levels, or would be paid for lost productivity in most cases.
As a result, we reassess some cautious estimates and partially as a result of those judgments the second quarter of 2020 was particularly robust.
We continue to benefit from those factors in last year's order as well and the third quarter of 2020 also benefited from a very discrete gain relating to the settlement of open issues with the IRS for our 2014 and 2015 tax years.
As a result, although underlying trends are strengthening, we continue to face tough comparables in the third quarter.
Now during the first half of this year and a year later, we have good execution and productivity.
However, we have had some revenue softness due to delays in work preparation and pre-construction due to the pandemic.
We are also toward the end of closing out some work that was performed under the worst conditions of the pandemic and so the margins we achieved this quarter reflect a little of that headwind.
Fortunately, those effects are subsiding, and our research and backlog and active pipeline is a sign of good demand and prospects.
And so with that background and context, let me review the numbers in more detail.
Revenue for the 2021 second quarter was $714 million, a decrease of $30 million compared to last year and our same-store revenue declined by $46 million.
Gross profit this quarter was $126 million, lower by $19 million.
And gross profit as a percentage of revenue declined to 17.7% this quarter compared to 19.6% for the second quarter of 2020.
Our gross profit this quarter reflected the headwinds that we are experiencing in construction, particularly in our Mechanical segment.
If you compare the six months period this year to the same period in 2020, gross profit was 18.1% for the first six months of 2021, which is roughly equivalent to 18.2% for the first half of 2020.
SG&A expense for the quarter was $88 million, or 12.3% of revenue compared to $85 million, or 11.4% of revenue for the same quarter in 2020.
On a same-store basis, SG&A was similar to last year with a same-store increase of $1 million.
Our 2021 tax rate was 23.8% compared to 27.6% in 2020.
Our quarterly tax rate benefited from permanent differences related to stock-based compensation, and we expect a more normal rates in the second half of the year.
Net income for the second quarter of 2021 was $33 million, or $0.90 per share.
And that resulted -- that result included $0.10 of income related to the revaluation of our contingent earn-out obligations.
We have four large earn-outs active in 2021 and so we expect more variability than usual in earn-out valuation this year.
Our net income for the second quarter of 2020 was $39 million, or $1.08 per share.
For our second quarter, EBITDA was $55 million and year-to-date we have $106 million of EBITDA.
Free cash flow in the first six months was $101 million as compared to $151 million for the first half of 2020.
The slowdown and some temporary tax benefits created unprecedented cash flow last year.
Our cash flow is very strong through six months.
But as activity levels improve, we are likely to continue deploying some working capital to start new projects in many of our geographies.
Ongoing strong cash flow has allowed us to reduce our debt faster than expected, and also to remain active in repurchasing our stock, and we have reduced our outstanding share count for five consecutive years.
Brian mentioned that we recently entered into an agreement to acquire Amteck, and that transaction is expected to close shortly and during the third quarter.
We have not yet closed Amteck, so no revenue or backlog is yet included.
Amteck will be included in our Electrical segment, and it is expected to contribute annualized revenues of approximately $175 million to $200 million and EBITDA of $14 million to $17 million.
In light of the required amortization expense related to intangibles and other costs associated with that transaction, the acquisition is expected to make a neutral to slightly accretive contribution to earnings per share for the first 12 months to 18 months.
So that's all I have on financials, Brian.
I'm going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for the remainder of 2021.
New bookings significantly exceeded backlog performed during the second quarter.
Backlog at the end of the second quarter of 2021 was $1.84 billion.
We believe that the business impacts relating to COVID-19 have now stabilized, and as a result same-store backlog increased sequentially by 11% or $180 million.
That is a strong increase, particularly for the second quarter.
The increase is broad based with strength across our markets, most notably, in industrial projects.
Although delays might modestly impact activity levels for the third quarter, we see strong underlying trends in the coming quarters, and we are comfortable with the backlog we have across our operating locations.
Our industrial activities were 42% of total revenue in the first half of 2021.
We think this sector will continue growing as the majority of the revenues at our new companies of TAS and TEC are industrial, and because industrial is heavily represented in new backlog.
Institutional markets, which include education, healthcare and the government, are strong and with 33% of our revenue.
The commercial sector is also solid.
But with our changing mix it is now about 25% of our revenue.
For the first six months of 2021, construction was 77% of our revenue with 46% from construction projects for new buildings, and 31% from construction projects in existing buildings.
Service was a great story this quarter, and service revenue was 23% of year-to-date revenue with service projects providing 9% of revenue, and pure service, including hourly work, providing 14% of revenue.
Year-to-date service revenue is up approximately 12% with improved profitability.
Service is now rebounded to full activity levels.
Profitable small project activity is back and we continue to help customers with their indoor air quality.
Overall, Service was a major source of profit for us this quarter and really help to offset the temporary air pockets in construction.
Our Mechanical segment continues to perform well, despite being most impacted by the pandemic-related air pockets.
Our Electrical gross margins improved from 6.5% in the first six months of 2020 to 14.3% this year.
Our backlog grew this quarter and strength is returning.
Project development and planning activities continue to be strong with our customers.
We are confident in recent acquisitions and are excited about the pending addition of Amteck.
We also continue to invest in our workforce and businesses in order to grow earnings and cash flow.
For the balance of 2021 the pandemic recovery will continue to affect revenue timing and work, and we also faced a tough third quarter comparison as Bill mentioned.
As work picks up, we will be impacted by timing, and we will invest some working capital in order to ramp up.
For the next few quarters, we will have relatively fewer closeouts also.
We are paying more for materials, but so far material availability and increases have been manageable.
We are closely monitoring material shortages and costs, and are taking steps to add additional protections on new work.
All of these considerations make it hard to predict exactly how the next quarter or two will unfold, but the underlying trends and opportunities are very positive.
Despite some moving pieces in carryover effects in the near term, we look forward to continued profitability and our increased backlog and strong pipeline indicate that we can expect stronger activity levels later this year and into 2022.
We are optimistic about finishing 2021 on a strong note, and we are even more optimistic about 2022.
| q2 earnings per share $0.90.
|
I'm Patrick Burke, the company's head of investor relations.
Finally, earlier today, we experienced a power outage, but we've been assured by the local power company that there will be no further outages.
But we do have a backup plan to restart the call just in case we get interrupted.
It's great to be with you today to discuss our 2020 full year and Q4 results, as well as to provide some color on the business going forward.
Looking back on 2020, I have to start with a simple wow, what an interesting and eventful year.
We started with business as usual.
Survived an unforeseen global shutdown working our way through in a manner that is sure we came through in a position of strength.
Then as the world opened back up, we emerged to find Golf experiencing record demand and participation levels.
Finally, we finish the year announcing a transformational merger with Topgolf, signing Jon Rahm, and delivering on some key strategic initiatives.
And now looking forward all things considered we could not feel more fortunate or be happier about where our business is and our future prospects.
With that said, we're also mindful that many people have been significantly, negatively impacted by COVID-19, and our thoughts and prayers go out to them and their families.
Looking at Q4 in isolation.
The operating results in our golf equipment segment continued the strong momentum shown in Q3, while the apparel business returned to growth and showed great signs for the future.
On the Topgolf side, we continue to make progress on the merger front with our shareholder vote scheduled for March 3, and hopefully closing shortly thereafter.
All the while, setting us up for transformational change and growth.
Like me, I'm sure our team realizes that we have a lot more opportunity in front of us and remains highly motivated.
Let's not turn to Page 6 and jump into our Q4 results.
We were pleased with our results in virtually all markets and business segments.
Our golf equipment segment continued to experience unprecedented demand globally as interest in the sport and participation have surged.
According to Golf Datatech, U.S. retail sales of golf equipment specifically hard goods were up 59% during Q4, the highest Q4 ever on record.
Results that followed the highest Q3 on record as well.
rounds were up 41% in Q4.
And despite the shutdowns earlier in the year delivered 14% growth for the full year.
We continue to 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 location remains very strong at present, while inventory at golf retail remains at all-time lows, it is likely these low inventory levels will continue at least through Q1.
Callaway's global hardwoods market shares remain strong during the quarter.
We estimate our U.S. market share across all channels grew slightly during both Q4 and for the full-year 2020.
Our share in Japan was also up slightly for the full-year allowing us to finish 2020 as the No.
1 hardwoods brand in that market.
This is the first time that a non -Japanese brand has ever finished No.
1 for the full year in total hardwoods.
Our full-year share in Europe was down slightly, but we still finished as the No.
1 hardwoods brand in this market as well.
On a global basis, I believe we remain the leading club company in terms of both market share and total revenues, and the No.
2 ball company in the U.S., third-party research showed our brand to be the No.
1 club brand in overall brand rating as well as the leader in innovation and technology.
Over the last several years, we have shown resilience with these important brand positions.
We had a good year on tour in 2020 finishing the year with the No.
1 putter and the No.
1 driver on global tours.
However, we didn't have as many wins or total brand exposure as we would have liked, as a result, we strengthened our tour position significantly during 2020 with the signing of Jon Rahm to a full equipment headwear and apparel deal.
The addition of Jon, along with Xander and Phil, and our ongoing strong complement of players across global men's and women's tours leaves us well-positioned in this important area of our business.
We've also started 2021 nicely with two wins already on the PGA Tour and a lot of exposure at all events.
On the product front, we're thrilled with our new 2021 lineup allowing us to focus on -- our focuses on our most premium brands those being our Epic drivers and Apex Irons.
For 2021, both brands are being supercharged with new technology, including a new speed frame version of our proprietary jailbreak technology in the woods, and a new version of the Apex line called DCB, which should broaden the appeal of this already highly popular line of Irons.
Reaction to the lineup has been outstanding both on tour and in the marketplace.
Turning to our soft goods and apparel segment, this portion of our business along with the apparel industry generally was of course more impacted by the pandemic during Q4.
However, the speed magnitude of the recovery also continued to exceed our expectations.
Looking at individual businesses in this segment starting with the Callaway apparel business in Asia.
In Japan, we had a good quarter and finish the year as the No.
1 golf apparel brand in that market based on market share.
In Korea, we plan to take back the Callaway Golf apparel brand that has been licensed to a third party for several years and launch our own apparel business in Korea during the second half of 2021.
We are investing in staffing and I.T. systems for this.
The team there is energized by this opportunity as this is something that they have been considering for several years now.
Turning TravisMatthew, this brand and business continue to impress.
Their brand momentum is extremely strong both in direct to consumer channels and at wholesale.
Given their success, we are increasingly confident this can be a large and highly profitable brand presenting us with an even bigger opportunity than we originally anticipated.
To enable this, we have been investing in their systems and supply chain infrastructure.
This investment phase will continue through 2021 and then taper off.
We are also investing in direct-to-consumer efforts both through the addition of new stores selectively taking advantage of some great opportunities and of course e-commerce.
We could not be more excited about this business overall.
Jack Wolfskin also had a strong quarter delivering year-over-year revenue growth.
The price even more importantly we cleared some key strategic and operational hurdles during the quarter.
In Europe, our new CEO, Global Jack Wolfskin, Richard Collier joined the team in December.
Richard joined us from Helley Hansen where he held the title Global Product Officer and served in that capacity as well as de facto Chief Operating Officer.
We're excited to have Richard on the team.
The reaction to Richard and the new CFO, André who joined us a few months earlier from my move.
We enter 2021 with a very strong leadership team fully in place.
Equally importantly, prior to the full Europe retail shut down in mid-December, the sell-through of our fall winter lineup was excellent in both Europe and in China.
This speaks to the strength of the brand in these key markets, improved channel management, and the strength of the product lineup.
Noting that in China, Q4 was the first quarter to showcase the local product design by a new team that was recruited in 2019.
The success of this new China for China product was a key strategic initiative for us.
Across the globe, but especially in their key markets of China and Europe, we believe the combination of strong leadership and sell through momentum bodes well for this brand as markets open up and recover.
Taking a step back and looking at the larger apparel and soft goods segment, for the last nine months the hero has certainly been e-com.
This is a channel that was significantly strengthened by investments we made prior to the pandemic as well as those continuing to this day.
These investments enabled our apparel business e-com to deliver 64% year-over-year growth in Q4.
E-com is now a significant portion of the channel mix of this segment and we are confident our expanding capabilities and strength here will bolster this business growth prospects and profitability going forward.
Post-COVID, we continue to expect our apparel soft goods segment to grow faster than our golf equipment business, and with that growth to deliver operating leverage enhanced profitability.
And although the pandemic delayed our efforts, we still believe we'll be able to deliver 15 million synergies in the segment over the coming years.
Like our company overall, this segment with its concentration in golf and outdoor appears to be well-positioned for both the months and years ahead both during the pandemic and after.
Our comments here will be limited given we have not closed the transaction yet.
But during late Q4 due to COVID restrictions, three of the U.S. venues were forced to shut as well as three of the U.K. venues.
However, despite these headwinds, Topgolf's overall results exceeded expectations in Q4.
This was driven primarily by strong walking sales.
venue in Portland, Oregon are closed, and COVID restrictions appear to be gradually even.
Despite 2021 starting out with more COVID restrictions than we expected, strong walk-in traffic is allowing this business to continue to perform at a level consistent with achieving our total venue full-year same venue sales target of 80% to 85% of 2019 levels.
Turning to new venue development.
Topgolf has opened two new domestic venues already this year; Lake Mary, Florida; and Albuquerque, New Mexico, and is on track to hit their new venue plan of eight new owned venues for this year.
On the international front, our third franchise location opened earlier this year in Dubai.
The sales have been getting strong reviews despite ongoing COVID complications in this market, and we expect this to be a flagship site for us internationally.
Looking forward, given the uncertainties of the COVID situation globally, we're not currently providing 2021 guidance.
We can however provide the following color.
The golf equipment sector is likely to be slightly impacted by COVID in Q1 with the majority of European markets in portions of Asia, Tokyo for instance, in some sort of locked down or retail constraint, and with some supply constraints based on both capacity limitations and logistics.
We are also experiencing higher operating costs associated with COVID.
Our container shipping costs alone are estimated to be up approximately 13 million for the full year as these processes have surged, but we do not see this as a long-term issue, just a short-term anomaly associated with the pandemic.
The demand situation is strong enough that we expect a very strong year in golf equipment despite these issues.
A little constrained in Q1 based on capacity and logistics with increasing opportunity catch up with demand in Q2.
Our soft goods and apparel segment continues to be more impacted by COVID.
The Europe shutdown is especially impactful for a business there certainly for Q1.
However, the key points of operating strategic progress we mentioned earlier along with the attractive long-term prospects of both golf and outdoor lifestyle apparel make me increasingly confident for this business post the COVID closures and their short-term impact.
Topgolf is performing consistent with the plan, new venue openings are on track and we are increasingly confident for this business overall.
We hope to close in early March, if this happens, we'll have a lot more say on this business starting on our next call.
We continue to see this as a transformational opportunity.
On the operating expense side and comparison 2019, which is the only meaningful comparison you're going to see some further investments in 2021.
These include investments in our growth infrastructure such as the Korea apparel business, increased tour presence, and direct to consumer resources.
We have a track record for making this kind of internal investments, and we're confident these will deliver high returns for shareholders.
Lastly, we remain confident in the 2022 guidance we provide as part of the topped up merger process as well as the future potential of what is going to be a unique and powerful business.
Brian, over to you.
As Chip mentioned, 2020 was quite a year.
We were pleasantly surprised with how quickly our golf business and the golf industry began recovering from COVID-19 once the governmental restrictions began to abate during the second quarter.
We were also pleased with the recovery of both our TravisMatthew and Jack Wolfskin businesses, while the recovery in those businesses will not be as quick as the golf equipment business through the long supply chain lead times and seasonality.
The recovery of our apparel businesses is pacing ahead of our expectations and that of comparable businesses.
The stronger than expected recovery has contributed to our significantly improved liquidity position.
Our available liquidity, which includes cash on hand plus availability under our credit facilities increased to $632 million on December 31, 2020, compared to $303 million on December 31, 2019.
In addition to the core business recovery, we may also -- we also remain very excited about our prospective merger with Topgolf, which clearly will be transformational for Callaway.
The Topgolf shareholders have already approved the transaction, we are holding a special Callaway shareholder meeting on March 3, 2021, to approve the merger.
We would expect to close the merger shortly thereafter.
We evaluate -- evaluating our results for the fourth quarter and full year, you should keep in mind some specific factors that affect the year-over-year comparisons; First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred non-recurring transaction and transition-related expenses in 2019; Second, as a result of the OGIO TravisMatthew and Jack Wolfskin acquisitions, we incurred non-cash amortization in purchase accounting adjustments in 2020 and 2019, including the Jack Wolfskin inventory step up in the first quarter of 2019; Third, we also incurred other non-recurring charges including costs related to the transition to our North American distribution center in Texas.
Implementation costs related to the new Jack Wolfskin IP system, severance costs related to our COVID-19 cost reduction initiatives, and costs related to the proposed Topgolf merger; Fourth, the $174 million non-cash impairment charge in the second quarter of 2020 is non-recurring and did not affect 2019 results.
Thus, we incurred and will continue to incur non-cash amortization of the debt discount in the notes issued during the second quarter of 2020.
With those factors in mind, we'll now provide some specific financial results.
Turning now to Slide 11.
Today, we were reporting record consolidated fourth quarter 2020 net sales of $375 million, compared to $312 million for the same period in 2019, an increase of $63 million or 20.1%.
This increase was driven by a 40% increase in the golf equipment segment resulting from the high demand for golf products late into the year as well as the strength of the company's product offerings across all skill levels.
The company soft goods segment continued its faster than expected recovery with fourth-quarter 2020 sales increasing 1% versus the same period 2019.
Changes in foreign currency rates had a $9 million favorable impact on fourth-quarter 2020 net sales.
The gross margin was 37.1% in the fourth quarter of 2020, compared to 41.7% in the fourth quarter of 2021, a decrease of 460-basis-points.
On a non-GAAP basis, the gross margin was 37.2% in the fourth quarter, compared to 42.4% in the fourth quarter of 2019, a decrease of 520-basis-points.
The decrease is primarily attributable to the company's proactive inventory reduction initiatives in the soft goods segment, increased operational cost due to COVID-19, increased freight costs -- freight costs associated with higher rates, and a higher mix of air shipments in order to meet demand.
These decreases were partially offset by favorable changes in foreign currency exchange rates and a favorable mix created by an increase in the company's e-commerce sales.
Operating expenses were $171 million in the fourth quarter of 2020, which is an $18 million increase, compared to $153 million in the fourth quarter of 2019.
Non-GAAP operating expenses for the fourth quarter were $152 million, a $14 million increase compared to the fourth quarter of 2019.
This increase was driven by the company's decision to pay back to employees other than executive officers to reduce our salary levels for a portion of the year, variable expenses related to the higher revenues in the quarter, continued investments in our new businesses, and an unfavorable change in foreign currency exchange rates.
Other expenses were $15 million in the fourth quarter of 2020, compared to other expense of $9 million in the same period the prior year.
On a non-GAAP basis, other expenses with $13 million in the fourth quarter of 2020, compared to $9 million for the comparable period in 2019.
The $4 million increase in other expenses primarily related to a net decrease in foreign currency-related gains as well as interest expense related to our convertible notes.
Pre-tax loss was $48 million in the fourth quarter of 2020, compared to a pre-tax loss of $32 million for the same period in 2019.
Non-GAAP pre-tax loss was $35 million in the fourth quarter of 2020, compared to a non-GAAP pre-tax loss of $25 million in the same period of 2019.
Loss per share was $0.43, or 94.2 million shares in the fourth quarter of 2020, compared to a loss per share of $0.31 on 94.2 million shares in the fourth quarter of 2019.
Non-GAAP loss per share was $0.33 in the fourth quarter of 2020, compared to a loss per share of $0.26 for the fourth quarter of 2019.
Adjusted EBITDA was negative 12 million in the fourth quarter of 2020, compared to negative 6 million in the fourth quarter of 2019.
Turning now to Slide 12.
Net sales for full-year 2020 were $1.589 billion, compared to $1.701 billion in 2019, a decrease of $112 million or 6.6%.
All things considered, we were very pleased with the sales level given the global pandemic.
The decrease in net sales reflects a decrease in our soft good segment, which decreased 15.9%t and our golf equipment segment increased slightly year over year.
Changes in foreign currency rates positively impacted 2020 net sales by $11 million versus 2019.
The gross margin for full-year 2020 was 41.4%, compared to 45.1% in 2019, a decrease of 370-basis-points.
Gross margins in 2020 were negatively impacted by the North American warehouse consolidation, and in 2019 were negatively impacted by a non-recurring purchase price inventory step-up associated Jack Wolfskin acquisition.
on a non-GAAP basis, which is good and they were not referring item, gross margin was 41.8% in 2020, compared to 45.8% in 2019, a decrease of 400-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 all facilities during the governor -- government mandated shutdown, the company's inventory reduction initiatives, and increased freight expense in the back half of the year.
The decrease in gross margin was partially offset by favorable changes in currency exchange rates and an increase in the company's e-commerce business.
Operating expense with $763 million in 2020, which is a $129 million increase compared to $634 million in 2019.
This increase is due to the $174 million of the non-cash impairment charge, related to the Jack Wolfskin goodwill and trading, excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for 2020 were $570 million, a $47 million decrease, compared to $670 million in 2019.
This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses, lower variable expenses due to the lower sales, and reduced spending in marketing tour golf events around the world was canceled.
The decrease was partially offset by continued investment in our new businesses and unfavorable impacts of foreign exchange rates.
Another expense was approximately $22 million in 2020, compared to other expense of $37 million in 2019.
On a non-GAAP basis, other expenses $15 million for 2020, compared to $33 million for 2019.
Those $18 million improvements are primarily related to a $19 million increase in foreign currency-related gains period over a period, including the $11 million gain related to the settlement of the cross-currency swap arrangement.
Pre-tax loss of $127 million in 2020, compared to pre-tax income of $96 million in 2019.
Excluding the impairment charge in the other non-GAAP items previously mentioned, non-GAAP pre-tax income was $79 million in 2020, compared to non-GAAP pre-tax income of $130 million in 2019.
Loss per share was $1.35, or 94.2 million shares in 2020, compared to fully diluted earnings per share of $0.82, or 96.3 million shares in 2019.
Excluding the impairment charge in the other non-GAAP item previously mentioned, non-GAAP full-year earnings per share were $0.67 in 2020, compared to fairly good earnings per share of $1.10 for 2019.
Adjusted EBITDA was $165 million in 2020, compared to $210 million in 2019.
Turning now to Slide 13.
I will now cover certain key balance sheet and cash flow items.
As of December 31, 2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand, was $632 million, compared to $303 million at the end of the fourth quarter of 2019.
This additional liquidity reflects improved liquidity from working capital management, cost reductions, and proceeds from the convertible notes we issued during the second quarter.
We had total net debt of $406 million, including $442 million of principal outstanding under our term loan B facility that was used to purchase Jack Wolfskin.
Our consolidated net accounts receivable was $138 million, a decrease of 1.4% compared to $140 million at the end of the fourth quarter of 2019.
Days sales outstanding decreased to 45 days on December 31, 2020, compared to 53 days on December 31, 2019.
We continue to remain very comfortable with the overall quality of our accounts receivable at this time.
Also displayed on Slide 12, our inventory balance decreased by 22.8% to $353 million at the end of the fourth quarter of 2020.
This decrease was primarily due to the high demand we are experiencing in the golf equipment business as well as inventory reduction efforts in our soft goods businesses.
The teams continue to be highly focused on inventory on hand as well as inventory in the field, both of which remain relatively very low at this time.
Capital expenditures for 2020 were $39 million, which is right in line with the range provided during our Q3 update.
This amount is down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions.
In 2021, we expect our capital expenditures to be approximately $50 million for the current Callaway business.
Depreciation and amortization expense was $214 million in 2020.
D&A expense excluding the $174 million impairment charge was $40 million in 2020, compared to $35 million in 2019.
In 2021, we expect non-GAAP depreciation and amortization expense to be approximately $45 million for the current Callaway business.
I am now on Slide 14.
We're not providing revenue and earnings guidance for 2021 at this time due to the continued uncertainty surrounding the duration and impact of COVID-19.
However, we would like to highlight certain factors that are expected to affect 2021 financial results compared to 2020.
On a premerger basis, which includes only Callaway golf business and does not take into account Topgolf's business following the proposed merger, consolidated net sales for the first quarter of 2021 will exceed 2020 net sales but will continue to be negatively impacted by COVID-19.
The company's soft goods business will continue to be impacted by the regulatory shutdown orders in Europe and Asia, which should then strengthen during the balance of the year as the regulatory restrictions subside.
The company's golf equipment business is expected to be impacted by temporary supply constraints caused by COVID-19 during the first quarter, which could affect the company's ability to fulfill all of the robust demand in its golf equipment business.
The company believes that there are opportunities for supply to catch up beginning in the second quarter.
On a premerger basis, the full-year 2021 non-GAAP gross margin will also be negatively impacted by increased operational costs due to COVID-19, including higher labor costs, logistical challenges as well as increased freight expense resulting from a shortage of ocean freight containers.
The freight container shortage alone is estimated to have a negative $13 million impact on freight costs in 2021, with the substantial majority of the impact occurring during the first half.
The company believes that its full-year 2020 gross margin will be approximately the same as in 2019 despite these gross margin headwinds, which should be offset by increased direct-to-consumer sales and foreign currency exchange rates.
On a premerger basis, full-year 2021 non-GAAP operating expenses are estimated to be approximately $70 million to $80 million higher compared to full-year 2019 non-GAAP operating expenses.
In addition to the negative impact of changes in foreign currency rates estimated to be approximately $20 million and inflationary pressures, the increased operating expenses generally reflect continued investment in the company's current business.
These investments include investment needed to assume the Korea apparel business, investment in the pro tour, and continued investment in the soft goods business, including the TravisMathew business related to opening new retail doors, investment in infrastructure and systems, and investments related to new market expansions for Jack Wolfskin in North America and Japan.
The company believes that these investments will continue to drive growth in sales and profit but expect to incur the expenses for these investments prior to receiving the associated benefit.
In 2020, the company realized gains from certain foreign currency hedges in the aggregate amount of approximately $25 million.
This gain is not expected to repeat in 2021.
In sum, the COVID-19 pandemic had a significant impact on our business beginning in the first quarter of 2021.
After we absorb the initial -- after we absorb the initial shock of the impact of the pandemic, including the various governmental shutdown orders and restrictions, Chip challenged us to protect our business, avail ourselves of opportunities that arise during the pandemic, and take actions so that we not only survive the pandemic but also emerge in a position of relative strength.
Given the recovery in our core business, our prospective merger with Topgolf, and our increased liquidity, I believe we have done that.
We are cautiously optimistic as we enter 2021.
All of our business segments as well as the Topgolf business support an active, outdoor, healthy way of life.
It is compatible with the world of social distancing, and we believe this will continue to mitigate the impact of COVID-19.
We continue to believe that 2021 will be a stepping stone to more normal conditions in 2022, and the resulting transformational growth we have projected for 2022.
As Chip mentioned in his remarks, the primary focus of the Q&A should be with regard to the Callaway business as we are still pending shareholder approval on the merger.
Operator, over to you.
| q4 non-gaap loss per share $0.33.
q4 loss per share $0.43.
q4 2020 consolidated net sales of $375 million.
anticipate covid-19 will continue to negatively impact business in 2021.
|
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.
The U.S. economy continues to exhibit strong growth as we emerge from the COVID pandemic.
U.S. GDP grew 6.7% in the second quarter but is expected to slow in the third quarter due to the surge in infections caused by the Delta variant.
However, daily COVID infection levels have dropped over 50% from highs in September, which bodes well for strong economic growth in future quarters.
The relatively low unemployment rate at 4.8% is being driven by both new job creation, which recently has been tepid and workers withdrawing from the workforce.
There are over 10 million job openings across the U.S. and virtually every employer, including BXP, is experiencing a highly competitive labor market.
Annual inflation remains high at 5.4% in September, driven largely by energy prices, which are up 25% versus one year ago.
Supply chain challenges are a primary topic this earnings season for many companies, and Doug will cover BXP's experiences in his remarks.
Lastly, the 10-year U.S. treasury rate has increased approximately 40 basis points to 1.6% since our last earnings call.
Given the prospect of further interest rate increases, we've been very active refinancing our corporate and specific asset level debt.
Interest rates remain extremely low relative to office cap rates and the yields we are achieving on our developments, creating the potential for lower cap rates and higher value creation in the quarters ahead.
DXP's financial results for the third quarter continue to reflect the impact of this recovery and an increasingly favorable economic environment.
Our FFO per share this quarter was $0.03 above market consensus and $0.04 above the midpoint of our guidance, which Mike will detail shortly.
We completed over 1.4 million square feet of leasing, significantly more than double the volume achieved in the first quarter, well above the leasing achieved in the second quarter and just under our long-term third quarter average.
Our clients continue to make even longer-term commitments as the leases signed in the third quarter had a weighted average term of 9.3 years versus 7.5 years in the second quarter.
Year-to-date, we have completed 3.3 million square feet of leasing with an average lease term of 8.3 years.
This success can be attributed to not only our execution but also the enhanced velocity and economics achieved in the current marketplace for premium quality, well-amenitized assets, which are the hallmark of BXP's strategy and portfolio.
In addition to our leasing activity, which included a 524,000 square foot long-term renewal with Wellington at Atlantic Wharf, Google purchased a 1.3 million square foot building in New York for its use.
In the Silicon Valley alone, Apple completed a 720,000 square foot new requirement.
Facebook is looking for 700,000 additional square feet.
And ByteDance is searching for approximately 250,000 to 300,000 square feet.
In the Seattle region, Facebook is pursuing a 0.5 million square foot requirement in South Lake Union and Amazon has executed on enormous growth in Bellevue.
I could go on.
These examples support our repeatedly stated position that tenants are committed to the office as their location of choice to collaborate, innovate and train, all critical for their long-term success.
Measurable census in our portfolio also continues to improve.
Our leading region is New York City, which hit 52% occupied last week.
Our lagging region is San Francisco, which is increasing, but currently at 18%, and the remaining regions are in between.
From watching on television, stadiums packed with unmasked people, to trying to park at busy shopping centers to experiencing difficulties in making restaurant reservations in our core markets, it appears to us, people are undoubtedly more comfortable with in-person activities.
Liquidity fueled strong business performance, and a tight labor market are clearly factoring into remote work decisions by businesses.
However, as time progresses and the shortcomings of remote work become more apparent, we increasingly hear concerns from business leaders about the decaying cultures of their companies, inadequate training and difficulties in onboarding new professionals as well as the potential for deterioration in innovation and competitiveness.
We believe it's only a matter of time before employers more strongly encourage their teams to return to in-person work.
Record levels of commercial real estate sold in the third quarter, and private capital market activity for office assets is also recovering rapidly.
$26 billion of significant office assets were sold in the third quarter, up 38% from last quarter and up 165% from the third quarter a year ago.
Cap rates are arguably declining for assets with limited lease rollover in anything life science related given low interest rates, and activity is increasing for assets facing near-term lease expirations.
Of note, this past quarter in all of our markets, One Canal Park, an empty 112,000 square foot office building in Cambridge sold to a REIT for $131 million or $11.70 a square foot.
As mentioned, Google exercised its option to purchase St. John's Terminal in New York City, which is a 1.3 million square foot office building that fully occupies and the price was $2.1 billion or $1,620 a foot.
Coleman Highline, which is a 660,000 square foot office complex under construction in North San Jose and fully leased to Verizon, sold for $775 million, which is $1,180 a square foot and a 4.2% initial cap rate to a non-U.S. buyer.
153 Townsend Street, which is 179,000 square foot office building in San Francisco sold for $231 million or $1,290 a square foot to a local operator and fund manager.
This asset is fully leased to a single user, which has put the entire building on the sublease market.
West 8th is a 540,000 square foot office building in the Denny Triangle, Seattle, sold for $490 million or $910 a square foot to a REIT.
The building is fully leased, but faces significant rollover through 2023.
49% interest in 655 New York Avenue in Washington, D.C. sold for a gross price of $805 million or $1,060 a square foot and a 4.7% cap rate.
The building comprises over 760,000 square feet, is 93% leased and sold to a non-U.S. investor with a domestic advisor.
And lastly, The Post, which is 100,000 square foot fully leased office building in Beverly Hills, sold for $153 million, which is $1,530 a square foot and a 4.8% initial cap rate to a domestic fund manager.
Now moving to BXP's capital market activity.
We closed on the acquisition of Safeco Plaza and entered the Seattle market.
BXP will own a one third interest in the asset along with two partners in our strategic capital program.
We also closed the Shady Grove Bio+Tech Campus acquisition and entered the Montgomery County, Maryland life science market.
We're also on track to close the 360 Park Avenue South acquisition with Strategic Capital Program Partners on December 1, thereby entering the Midtown South market in New York City.
I described the economics for all these acquisitions last quarter.
Regarding dispositions, we completed the sale of our Spring Street Office Park in Lexington Mass this week, bringing our share of gross sale proceeds from dispositions year-to-date to $225 million.
We're also marketing for sale two additional buildings, which, if completed, are projected to yield approximately $200 million in gross proceeds.
On development activities, this quarter, we delivered 0.5 million square feet of Verizon and other tenant space at 100 Causeway and 285,000 square feet of Fannie Mae space at Reston Next.
In the aggregate, we have 4.3 million square feet of development underway that is 72% pre-leased.
These future deliveries plus the stabilization of recently delivered projects are projected to add approximately $190 million to our NOI and 3.8% to our annual NOI growth over the next few years.
So in summary, we had another active and successful quarter with strong leasing and financial results and entered several new geographic markets.
We believe BXP is about to experience a strong growth ramp, which we project to be approximately 13% in FFO per share in 2022, driven by improving economic conditions and leasing activity, recovery of variable revenue streams, delivery of a well-leased development pipeline, completion of four new acquisitions, a strong balance sheet combined with capital allocated from large-scale private equity partners to pursue additional new investment opportunities as the pandemic recedes, a rapidly expanding life science portfolio in the nation's hottest life science markets and low interest rates and decreasing capital costs.
Hilary joined BXP right after Labor Day and will become our Regional Head in New York when John Powers retires in January.
Let me turn our remarks over to Doug.
So the impacts of the supply chain are both in time and money.
Schedule is one of the criteria we use when we bid our jobs.
And to-date, we've been able to award bids while maintaining the schedules necessary to get our tenants in their spaces as required.
The supply chain challenges have made the process much harder, but we are still able to deliver the current development pipeline on time and within budget.
And as you all know, we have contingencies that are in our budget and at some point, we are using those contingencies.
However, in the near term, as we look at new jobs, there are fewer material choices, and we are working closely with our consultants and our contractors to make sure that they are not specifying critical path items that could impact schedules.
Our construction teams are working a lot harder at figuring out exactly how the key and the parts are put together.
We are intentionally minimizing oversea items and we're releasing our material packages as early as possible.
Trucking issues are real.
And at times, we are being forced to air freight as well as stockpile materials offsite, hence the use of some of our contingencies.
There's no single answer to how much more is it going to cost.
But when we're budgeting jobs that will start eight to 12 months from now, we're using a 5% to 6% escalation in our total construction costs.
We are in the process of rebidding our Platform 16 base building project, which was previously budgeted in late 2019 with an eye toward our 2022 restart.
And we will have a real-time perspective in mid-November.
But as today, we just don't know what that's going to be.
Supply shortages are also impacting our operating budgets.
Energy is a material input into our operating expenses.
While our largest utility cost is electricity, we are mostly hedged for 2022, and we have been successfully increasing our procurement from Green Power.
We are still exposed to the marginal cost of electrical generation in the Boston region where we expect double-digit increases from last year.
Cost for security, cleaning and engineering, labor continues to increase due to labor shortages across all those trades.
However, our lease contracts take two forms.
We have net leases, under which 100% of the operating expense and real estate taxes are paid by the tenant, and we have gross leases with a base year that is set upon the lease commencement with increases in expenses over that base year added to the rental obligation of the tenant.
In other words, our exposure is on our vacant space and for new or renewal leases, where we are setting a base.
This is a pretty small percentage of the total, so it really doesn't have a material impact on our actual operating results as we look at 2022.
As you saw in our supplemental, our second-generation leasing statistics were weak this quarter, and they need some finer explanation.
The universe of square footage that is encompassed in the statistics is about 500,000 square feet and it includes 105,000 square feet of short-term transactions, 18 to 24 months, that we signed in the heart of the pandemic with tenants that were not in a position to make a long-term commitment but they were prepared to extend for a negotiated discounted as-is deal.
One of those tenants has since agreed to lease space for 13 years, where the interim rent was $60 a square foot and they'll be paying $103 a square foot, and this is in a New York asset.
If you eliminate that 105,000 square feet, the statistics that we would have shown you changed dramatically, going from down 14% to effectively flat.
You should also note that our transaction costs were also significantly below our run rate since there were no TIs involved in any of these short-term deals.
Our life science and office portfolio make up 91% of our revenues.
As we look toward 2022, we currently have more than 800,000 square feet of signed leases that have not commenced.
In 2022, lease expirations for the whole portfolio, not just our share, totaled about 2.9 million square feet, and we already have renewal conversations underway on over 25% of that space.
Historically, we have leased well over 1 million square feet a quarter each and every year.
The question will be when those new expected leases will commence?
Occupancy should slowly edge up in 2022.
The changes in the quarter occupancy this quarter are due to the addition of the Shady Grove and Seattle acquisitions, not a degradation in our occupancy in our existing portfolio.
Now let me give you a sense of what's going on in our portfolio today.
New York is a good place to start.
Tour activity, proposals and ultimately, leases continue to be very consistent with the commentary we've been providing during the last few quarters.
The high-end buildings are seeing good activity.
Brokers that advise the small and midsized financial firms and professional services firms are very busy and their clients are taking action.
Many of those users are incrementally increasing their space requirements as they continue to acquire people and AUM.
Sublease space continues to gradually melt from the statistics.
You may remember that we were asked about a 200,000 square foot sublet at 399 Park Avenue during various conference calls in 2020.
That space has been taken off the market as the user reoccupies.
Now there still is significant supply of direct and sublease space in New York City and our view is that net effective rents remain down 10% to 15% from pre-pandemic levels.
During the quarter, we completed eight deals totaling 113,000 square feet in the CBD portfolio.
Many of these spaces were vacant, but the two largest had a roll up of 8% in one case and a roll down of 4% in another.
About 70,000 square feet of leases are in the category of leases that will not have a revenue commencement until sometime in mid '22.
Last week, we signed a lease at Dock 72 for 42,000 square feet.
We don't anticipate this tenant completing their buildout until the latter half of '22.
We have an additional 340,000 square feet of leases under negotiation in New York right now, including almost 200,000 square feet at Dock 72.
We don't anticipate revenue commencement on 65% of that space until 2023.
One of the themes for next year is going to be a pickup and sign leases with contribution to occupancy or revenue flow-through occurring when tenants complete their installations in late '22 or '23, and we don't necessarily control those times.
At Carnegie Center, down in Princeton, we did eight leases for 38,000 square feet and have another 106,000 square feet in active lease documentation.
One final note on New York before I turn to the other markets.
Our culinary collective, The Hugh, has opened at our 53rd Street campus in 601 Lex.
This is as good an example of placemaking as we can point to in our portfolio.
As users who want to encourage their employees to come back to work, this type of experience will dramatically enhance their physical space offering.
It's why we do what we do.
In Northern Virginia, our leasing team is seeing a consistent flow of inquiries, tours, lease proposals and -- ultimately -- completed transactions.
During the quarter, we completed seven leases totaling 70,000 square feet in Reston, and we're in lease negotiation on another seven deals totaling 125,000 square feet.
The tech tenants that have identified the DC metro market as a fertile area for workforce expansion are continuing to grow, and their growth is going to be in Northern Virginia.
In addition, the contractors that service the Defense and the Homeland Security are also expanding.
There are significant vacancy in northern Virginia.
But the urban market core Reston is under 10% vacant, and it continues to dramatically outperform with starting rents in the high 40s to low 50s gross.
And with our Reston Next project opening up this week, the rents are starting to hit the low 60s.
The Reston Next development is welcoming Fannie Mae into the building this month, and we are actively marketing and leasing the remaining 160,000 square feet of available space.
Our Reston Town Center retail placemaking is also very active.
During the quarter, we completed a lease with a new theater operator for 50,000 square feet.
Last week, we signed a 20,000 square foot lease with a local restaurant distillery and yesterday, a new 20,000 square foot fitness operator.
We have three more restaurants totaling 22,000 square feet that are close to execution.
This 115,000 square feet of leased retail is not expected to have any revenue contribution until 2023.
In the District of Columbia, we continue to chip away at our current availability at Net Square 901 New York Avenue and Market Square North.
We completed seven leases for 49,000 square feet during the third quarter and have signed another 32,000 square feet during October.
Just as an aside, we completed a major repositioning of Net Square this year.
And year-to-date, we've signed 162,000 square feet over eight transactions.
When we do our work, our buildings lease.
The urban downtown recovery in San Francisco continues to lag our other markets.
Very few businesses have commenced their return to work, downtown streets remain quiet, much of the ground plane remains closed, and the city has had a very restrictive mass mandate.
As Owen pointed out, daily consensus continues to be significantly below all our other urban markets.
There's been a reduction of sublease space in the market stemming from active lease commitments and reoccupancy plans, but overall availability continues to be elevated.
This description while accurate overlooked important subtleties in the market.
Pre-pandemic, there was very little available space in high-quality, multi-tenanted buildings, particularly those with views.
Broadly speaking, those conditions still exist for that segment of the market.
The bulk of the demand in the last 18 months has come from traditional financial asset management and professional services firms that have focused on the best space in the best buildings.
This has resulted in very little change to leasing economics in the best buildings, particularly in spaces we've used.
We've discussed this on recent calls, and it continues today.
This quarter, we've completed over 100,000 square feet of leases, including full floor transactions in Embarcadero.
The average starting rent was just over $100 a square foot on those full floor deals, a 21% increase over expiring rents.
We are negotiating leases on another 106,000 square feet right now.
And from what we've seen, these experiences are being repeated in a competitive set north of market.
In contrast, sublet transactions are being closed at significant concessions to pre-pandemic economics, but with no capital.
Life science activity at our Gateway development continues to be healthy.
The BXP ARE joint venture has signed an LOI with a full building user for 751 Gateway, 230,000 square feet and we're actively responding to proposals for our anticipated redevelopment of 651 Gateway, about 300,000 square feet, which won't commence until the third quarter of next year.
Further down the Peninsula and Mountain View, activity has picked up in the last 30 days.
This quarter, we completed two full building deals totaling 58,000 square feet.
We're seeing less information gathering exercises and a lot more active tours with RFPs and the need for immediate occupancy or early 2022 occupancy.
There are, as Owen said, large tech requirements active in the Silicon Valley.
For those of you who saw that the Tesla announcement that they're moving their headquarters to Texas, you may have missed that they leased 325,000 square feet in Palo Alto contemporaneously with that announcement.
High-quality new construction availability is very limited in the valley, and we're actively considering when we should restart the construction of Platform 16 next to Diridon Station and the future of Google development in San Jose.
Finally, let's touch on Boston.
In the high-end market in the Boston CBD, particularly in the Back Bay, there is currently limited availability, particularly with used space.
Rents have remained at pre-pandemic levels and concessions are only marginally higher.
As we move closer to 2023, there will be additional new construction supply entering the market in the CBD, but not the Back Bay.
As Owen mentioned, the big lease for the quarter was the early renewal with Wellington.
They agreed to expand by 70,000 square feet at Atlantic Wharf, and we're going to terminate 156,000 square feet at 100 Federal Street in 2023.
The space we're getting back is leased at a rate that's below market, so we're optimistic that we can create additional value through this relet.
We completed an additional 73,000 square feet of leases in our Back Bay portfolio, and we have about 50,000 square feet of leases under negotiation today in that same group of properties.
The Boston retail portfolio is also very active.
We have signed an LOI for the 118,000 square feet formerly occupied by Lord & Taylor, as well as 40,000 square feet of in-line space that's currently vacant or in default.
This 158,000 square feet will likely commence paying rent in early '23.
As we move to the suburbs, life science is dominating our activities.
Last week, we signed our first lease at 880 Winter Street, our lab conversion that we started four months ago, 37,000 square foot deal, which we'll deliver in the middle of next year, and we are in the final stages of negotiation on another 128,000 square feet, which will bring that 224,000 square foot building to 74% leased, and we have active dialogue on the rest of the space.
And during the quarter, we signed over 105,000 square feet of leases with life science tenants at 1,000 Winner, 1,100 Winner and Reservoir Place traditional office buildings.
As we move into '22, we're developing plans to convert additional available office space in Waltham into lab space.
So to summarize, we've seen a recovery in employment, as Owen discussed.
Employers are aggressively looking to hire, capital raising in the venture world is breaking through levels never seen and IBO takeouts are at a historically high levels.
Conditions are right for recovery in office absorption.
Employers are going to want to use their physical space to encourage their teams to be together.
Our mantra has been to create great places and spaces to allow our customers to use space as a way to attract and retain their talent.
If you believe that employees may be spending less time in their offices, it's even more important to have the right space in place when they're present.
And I'll stop there and give it over to Mike.
Before I jump into the details of our third quarter earnings as well as our 2021 and 2022 guidance, I want to touch on our recent financing activities.
This quarter, we took advantage of the low interest rate environment and very attractive credit spreads to issue $850 million of 12-year unsecured green bonds when the underlying 10-year treasury rate was 1.3%.
We achieved a coupon of 2.45%, the lowest in the company's history.
We utilized the proceeds to redeem $1 billion of 3.85% unsecured notes on October 15.
Those notes were scheduled to expire in early 2023 and represented our largest debt maturity through 2025.
The early prepayment will result in a redemption charge of $0.25 per share in the fourth quarter of 2021.
We will benefit from the 140-basis point drop in the relative debt cost, and we are thrilled to issue such attractive long-term financing.
The only other significant debt maturity we have in the next 18 months is our $620 million mortgage on 601 Lexington Avenue in New York City that expires in April of next year.
Similar to the bond we redeemed, this loan also carries an above-market interest rate of 4.75%.
Given the increase in the cash flows from the building, owing partially to the redevelopment we completed earlier this year, we anticipate that we will be able to increase the size of the financing and reduce the interest rate substantially.
We're working on this now, and our assumptions include closing before the end of 2021.
The impact of these financing activities will be accretive to our 2022 earnings through a meaningful drop in our interest expense from 2021 that I will touch on in a minute.
First, I'd like to describe our third quarter 2021 results.
For the third quarter, we announced FFO of $1.73 per share, that's $0.04 per share higher than the midpoint of our guidance and $0.03 ahead of consensus estimates.
Our outperformance came from better portfolio NOI with $0.02 of higher rental and parking revenue and approximately $0.02 of lower-than-projected operating expenses.
Looking at our parking revenues, they've started to accelerate sequentially as clients and visitors increase driving days into our properties.
As Owen described, we're seeing building census grow and the results are evident in our parking.
Our share of this quarter's parking revenue totaled $22 million.
This compares to a comparable pre-COVID quarterly result from the third quarter 2019 of $28 million.
At the bottom, in the second quarter of 2020, our share of parking revenue was $14 million, so we are over 50% of the way back.
On an annualized basis, using the third quarter run rate, we have about $25 million of revenue or $0.14 per share to recover before we are back to pre-COVID annual parking levels of $113 million.
Our Kendall Square hotel was profitable for the first time in six quarters contributing about $1 million of positive NOI.
Given the hotel's location in the heart of Cambridge and adjacent to MIT, we expect that it will ultimately restabilize at or above the $15 million annual NOI generated in 2019, though certainly not in 2022.
The third leg of our ancillary income is our retail income.
Other than in San Francisco, nearly all of our retailers have returned to paying previous contract rents.
This quarter, our share of retail rental revenue was $43.6 million.
On an annualized basis, this is $16 million less than our share of 2019 retail revenue, which totaled $190 million.
And as Doug mentioned, we have some vacancy in our retail due to the pandemic, but we're negotiating leases now on significant portions of that space.
If you combine and annualize our third quarter hotel NOI and our share of parking and retail revenues, we have the opportunity to gain approximately $52 million or $0.30 per share to return to 2019 full-year levels.
We believe that all three of these income streams will fully recover and ultimately exceed prior peaks over time.
Looking at the rest of this year, we released fourth quarter 2021 guidance of $1.50 to $1.52 per share and full-year 2021 guidance of $6.50 to $6.52 per share.
Our fourth quarter guidance includes the $0.25 share redemption charge related to our bond refinancing.
Excluding the charge, our fourth quarter guidance would be sequentially higher than third quarter results by $0.03 per share at the midpoint.
The improvement is primarily from Verizon taking occupancy of its 440,000 square foot lease at the Hub on Causeway office development this quarter and lower interest expense after our refinancing.
And while we expect our same property portfolio NOI will also grow sequentially, the growth is partially offset by the FFO dilution from the sale of our Spring Street office campus in suburban Boston that closed for $192 million this week.
Turning to our assumptions for 2022.
Last night, we released our 2022 FFO guidance.
We have three major drivers that are all headed in the right direction, that provide for very strong FFO growth of 13% at the midpoint over 2021.
The drivers include delivering a significant volume of leased new developments and acquisitions, growth in our same property portfolio, and our refinancing activities that lower our interest expense.
The first growth driver is developments and acquisitions.
We're delivering five of our development properties over the next four quarters totaling $1.6 billion of investment.
These projects totaled 3 million square feet of additions to our portfolio and are 92% leased.
They include the Hub on Causeway in Boston that is leased to Verizon, 325 Main Street in Cambridge that is leased to Google, the 200 West Street Life Science development in Waltham that is leased to Translate Bio; Marriott's new headquarters facility in Bethesda, Maryland; and Reston Next that is leased to Fannie Mae and Volkswagen in Reston.
It is also possible that our Life Science conversion at 880 Winter Street in Waltham will begin to contribute in late 2022.
In total, we expect our development deliveries to contribute an incremental $65 million to $70 million to our FFO in 2022.
Additionally, we've layered in several acquisitions that we completed this year, most notably Safeco Plaza in Seattle and our Life Science project we acquired in Waltham.
We expect these acquisitions will add $7 million to $10 million to our share of NOI next year.
The second growth driver for 2022 is the projected growth in our same property portfolio NOI.
Our guidance assumes that our share of same-property NOI will grow between 2% and 3.5% next year.
The growth is expected to come from higher parking revenues, improvement in occupancy and pricing in our residential portfolio, higher NOI from our hotel and increased occupancy in our office portfolio.
Our leasing velocity has picked up in the last two quarters where we've leased 2.7 million square feet of signed leases.
Given the length of the typical leasing cycle, many of these leases we've signed or are negotiating will take occupancy either in late '22 or '23.
We expect the improvement in our headline office occupancy to be gradual.
As Doug described, we have several larger leases in the works for vacant space where we anticipate occupancy will occur in 2023.
On a cash basis, we expect our share of 2022 same-property NOI growth to be much stronger at between 5.5% and 6.5% over 2021.
This equates to between $90 million and $100 million of incremental cash NOI to 2022.
Much of our cash NOI growth is coming from approximately $50 million of free rent that is burning off in contractual leases.
Our third FFO growth driver is coming from lower interest expense.
As I mentioned earlier, we will incur a debt redemption charge of $0.25 per share in the fourth quarter of '21.
We do not expect that this will recur.
Also, we are aggressively refinancing loans that were placed five to 10 years ago in a higher interest rate environment with low-cost current market financing.
Partially offsetting this, we do expect to see higher interest expense in our joint venture portfolio.
This is because we will cease capitalization of interest on the Marriott and Hub on Causeway projects when they are delivered into service.
In aggregate, we expect that 2022 interest expense will be $52 million to $60 million less than in 2021.
That equates to $0.30 to $0.34 of incremental positive impact on our 2022 FFO.
So to summarize, our guidance for 2022 FFO was $7.25 to $7.45 per share.
The midpoint of our range is $7.35, which is 13% or $0.84 a share higher than the midpoint of our 2021 guidance.
At the midpoint, the incremental growth is coming from $0.43 from development and acquisitions, $0.25 from our same property portfolio and $0.32 from lower interest expense.
This will be offset by $0.06 of dilution from our 2021 disposition activity, $0.06 of lower termination income and $0.04 of higher G&A.
The past 18 months have brought challenges and uncertainty to so many, including our team at BXP.
These past few months, it's been heartening to see our cities reopen, our colleagues and our clients starting to return to their offices and office leasing volumes picking up.
As I spelled out, we anticipate very strong FFO growth in 2022 and beyond 2022, we have more developments underway that will deliver additional FFO.
Plus, we have the highest quality portfolio of office buildings that we believe will generate higher occupancy rates and earnings in the future.
Operator, that completes our remarks.
| compname reports earnings per share of $0.69 and ffo per share of $1.73.
q3 ffo per share $1.73.
sees fy ffo per share $6.50 to $6.52.
full year 2021 projected earnings per share and ffo includes an expected charge of $0.25 in q4 of 2021.
revenue grew more than 5% to $730.1 million for quarter ended september 30, 2021.
|
Let me start by providing some key takeaways.
First, we continue taking share in the global contact lens market, with CooperVision being flat for calendar Q3 against the market being down 3%.
We're having success with our strong daily silicone hydrogel portfolio, with unique products like Biofinity Energys, and with several product launches.
Second, CooperSurgical outperformed with fertility, PARAGARD, and medical devices all exceeding expectations.
In particular, we're taking share in the fertility market, where we're seeing strong momentum.
Third, our myopia management portfolio comprised of MiSight and Ortho K lenses performed extremely well, including MiSight being up 73%.
So we're taking share, launching products, and investing intelligently, including helping expand the pediatric optometry marketplace.
Our teams are executing at a very high level, and we expect that to continue.
Moving to the numbers and reporting all percentages on a constant-currency basis, we posted consolidated revenues of $682 million in Q4, with CooperVision revenues of $506 million, down 3%; and CooperSurgical revenues of $175 million, down 4%.
Non-GAAP earnings per share were $3.16.
For CooperVision, the Americas were up 3%, led by strength in MyDay and Biofinity and some rebound in channel inventory of roughly $10 million.
EMEA was down 6%, which included quarter-end purchasing delays from several large accounts as the region returned to more restrictive COVID-related lockdowns in October.
Asia Pac was down 8% with COVID-related softness lingering longer into the quarter than we were expecting.
To add a little more color on Asia Pac, we're well-positioned in that region and taking share, but the market has been sluggish.
We are becoming more optimistic, though, as we saw a pickup in October and November, driven by strong MyDay sales.
Overall, for the full quarter, revenues came in roughly where we expected with COVID continuing to present challenges, but we're managing through it and taking share by executing on product launches and expanding our key account relationships.
Moving to some additional quarterly numbers.
Our silicone hydrogel dailies were up 1% in Q4, led by strength in torics and a strong rebound in MyDay sphere sales.
We're seeing daily silicones as the clear winner right now as health and wellness trends continue to drive adoption, and this bodes well for us given our strong portfolio.
Additionally, we're now fully unconstrained on MyDay, so we're able to aggressively launch the product around the world, especially the toric, which is still relatively early in its launch stage.
Biofinity and Avaira combined to be flat for the quarter, with strength noted in Biofinity toric and Energys.
Energys continues to be a strong performer, growing double digits.
It was launched a few years ago, probably a little ahead of its time.
But its innovative lens design that uses digital zone optics to help alleviate eye fatigue from excessive screen time is certainly catching on now as it's addressing an important need in today's digital world.
Moving to our product launches.
We remain incredibly busy with MyDay sphere and toric being launched or relaunched in many markets around the world.
Biofinity toric multifocal and clariti's extended daily toric range continuing their successful launches and the launch of MiSight.
One point to highlight is how incredibly active we are in the daily silicone hydrogel space right now, probably busier launching products than anyone, and we expect this to continue throughout 2021.
Given there still exists roughly $2.4 billion in traditional daily hydrogel sales worldwide, there's a significant multiyear trade-up opportunity for us and our industry.
The only FDA-approved myopia management contact lens clinically proven to slow the progression of myopia in children.
Things are going incredibly well.
We now have roughly 25,000 kids around the world wearing MiSight, including over 1,000 in the U.S., and the momentum when new fits is strong.
But we already have 2,100 optometrists certified to fit the lens and 1,400 more in the process of being certified.
We've also recently launched in Taiwan and Russia, and the early feedback is very positive.
launch, including the average age for a new MiSight wearer is 11 years old.
Getting fits in this age range is fantastic as the average age for fitting a new wearer in regular contact lenses is 17, which means we're getting an extra six years' worth of revenue.
Furthermore, 70% of kids being fit in MiSight are 12 and under.
So we're changing the overall perception of what age kids can be fit in contact lenses.
Regarding sales, even with continuing COVID challenges, our myopia management portfolio, including MiSight and Ortho K lenses, grew 39% to $13 million.
Within these results, MiSight grew 73% to $2.5 million and Ortho K grew 33%, which included $1.3 million of revenue from last quarter's acquisition of GP Specialties.
For this coming year, even with COVID impacting the market, we're continuing to target $25 million in global MiSight sales, which is growth of roughly 250%.
We're also targeting strong growth in our Ortho K franchise, driven by positive developments such as the recent receipt of European CE mark approval for our Paragon lenses.
When looking at the global myopia management market, we're at the forefront of an extremely exciting pediatric optometry category.
Myopia management is in its infancy.
But as we discussed last quarter, there's a clear path to a market that we expect will ultimately be well over $5 billion annually for manufacturers.
We still have a lot of work to do, and we're investing in sales and marketing programs, new launches, regulatory approvals, and R&D activities to really help drive the market forward.
This approach is clearly working, and it's great to keep hearing optometrists talk about MiSight as standard of care for their pediatric patients.
As trained professionals, optometrists know that reducing the progression of myopia brings many benefits, including reducing the risk of serious eye disease later in life, such as retinal detachment, cataracts, and glaucoma.
To conclude our vision, let me touch on the global contact lens market.
We're seeing optometry offices mostly open around the world, and we're frequently hearing that they're fully booked with appointments running through January.
Having said that, patient throughput remains below pre-COVID levels as offices work to get more efficient with COVID safety protocols and managing staffing challenges.
From a consumption perspective, wearers are returning to their normal wearing and ordering habits.
But new fits are running roughly 90% of pre-COVID levels on a global basis, and that's the challenge.
and in markets like China, and it's improving everywhere, but eye care professionals are still struggling to meet demand.
We're not seeing any signs that demand is disappearing, though, so we believe it's only a matter of time before new fit activity returns to pre-COVID levels and the pent-up demand is addressed.
On a longer-term basis, the underlying growth drivers for our industry remains strong and may actually be improving with the macro trend of people spending more time on electronic devices.
With roughly one-third of the world myopic, and this is expected to increase to 50% by 2050, combined with a continuing shift to daily silicone hydrogel lenses, geographic expansion, and strong growth in torics and multifocals, our industry has a very bright future.
And for CooperVision, our strong product portfolio, momentum within the myopia management space, and strong new fit data puts us in a great position for long-term sustainable growth.
Revenues rebounded faster than expected to $175 million for the quarter.
Although down 4%, we exceeded expectations in a challenging market environment and expect solid performance moving forward.
Starting with our fertility business.
Revenues rebounded nicely and were only down 2% year over year.
We're taking market share, and we're well-positioned for future gains with a strong product portfolio and improved traction with key accounts.
Within products, our consumable portfolio grew this quarter, led by our RI Witness system.
This is an RFID lab-based management system that helps fertility clinics automate their processes by identifying, tracking, and recording patient samples throughout the IVF process.
Labs are starting to use it as a cornerstone solution to improve safety, reduce errors, improve workflow management, and enhanced compliance of standard operating procedures.
The product almost doubled in revenue to $2.5 million and with a growing focus on safety and compliance within fertility clinics, we expect this product to continue growing nicely.
Our genomics business also returned to growth this quarter as testing volume picked up, and our media products also grew.
The only softness we saw was in capital equipment, which declined against a very tough comp from last year.
From a fertility market perspective, we're still seeing COVID negatively impact patient flow and some important countries like India still have clinics shut down or are operating with minimal patient volume.
But the good news is we're seeing patient flow improving, and we believe we'll see IVF cycles return to normal soon.
With this happening, we'll continue expanding our business through in-person and virtual sales and marketing activity, adding sales personnel, and expanding our product offerings.
The fertility market has extremely positive long-term macro growth trends.
And as the global leader in the space, we're intent on helping the industry return to its strong historical growth rates.
Within our office and surgical unit, we were down 5%, slightly better than forecasted.
PARAGARD continued to rebound, down 6% to $50 million against a tough comp from last year due to buy-in activity before price increase.
PARAGARD is another product that is benefiting from the positive wellness trends we're seeing in the U.S. as the only 100% hormone-free IUD on the U.S. market, it offers a fantastic long-lasting birth control option that addresses the needs and interests of women looking for a healthy alternative.
Sales of the product continued trending in the right direction through November, so we're optimistic we'll see PARAGARD grow year over year in Q1.
Elsewhere, like many medical device companies, we've seen deferred elective procedures steadily rescheduled, and our medical device sales have improved.
We're entering this year in a really nice position with some of our focus products such as INSORB, our patented surgical skin closure device, and EndoSee Advance, our direct visualization system for evaluation of the endometrium positioned to grow nicely as markets rebound.
In conclusion, let me say I'm optimistic about the future.
Our businesses are performing well, and we're taking share.
We're very active with new product launches, and we have fantastic dedicated people driving our businesses forward.
Our fourth-quarter consolidated revenues decreased 1% as reported or 3% in constant currency to $682 million.
Consolidated gross margin increased 70 basis points year over year to 67.7%.
This was driven primarily by currency at CooperVision and efficiency improvements at CooperSurgical, from our successful global manufacturing integration and consolidation efforts.
This quarter was an extremely busy one for our manufacturing teams as we work diligently to finish most of our manufacturing restructuring activity.
This now allows us to minimize costs while optimizing production to more efficiently manage inventory levels and improve margins and cash flow.
We're in a significantly better position with our manufacturing operations rightsized for the current environment, while also being well-positioned to ramp up quickly.
We still have some absorption-related inefficiencies, but we expect these to go away quickly as growth returns.
OPEX was up 4.3% year over year, largely due to planned MiSight investment activity, including sales and marketing, regulatory, and R&D costs.
This resulted in consolidated operating margins of 26.8%, down from 28.5% last year.
This performance slightly exceeded expectations as we continued to effectively managing expenses, balancing costs against investment opportunities.
Interest expense for the quarter was $6.7 million, driven by lower interest rates and lower average debt and the effective tax rate was 11.1%.
Non-GAAP earnings per share was $3.16 with roughly 49.6 million average shares outstanding.
The year-over-year FX impact for the quarter to revenue and earnings per share was a positive $10.6 million and a positive $0.15.
Free cash flow was strong at $111 million, comprised of $218 million of operating cash flow offset by $107 million of CAPEX.
Net debt decreased by $76 million to $1.68 billion, and our adjusted leverage ratio decreased to 2.15 times.
Before moving to guidance, I want to mention an item you'll see disclosed in the tax footnote in our upcoming 10-K.
In November, as part of an internal restructuring to simplify our supply chain, CooperVision's intellectual property and related assets were transferred from Barbados to the U.K. Although this will impact our GAAP financials, including a significant onetime P&L benefit in Q1, along with offsetting adjustments over the next 10-plus years, we will exclude these entries from our non-GAAP results to ensure transparency.
We do not expect this having a material impact on our non-GAAP tax rate over this period.
We were hoping to give full-year guidance but the surging COVID cases in Europe and in the U.S., make that extremely difficult.
So we're providing only Q1 guidance at this time.
This includes consolidated revenues of $642 million to $670 million, down 1% to up 4% or down 3% to up 2% in constant currency.
CooperVision revenue of $482 million to $502 million, down 1% to up 4% or down 3% to up 1% in constant currency.
And CooperSurgical revenue of $160 million to $168 million, down 1% to up 4%, both as reported and in constant currency.
Non-GAAP earnings per share is expected to be in the range of $2.66 to $2.86.
As compared to last year, we expect the midpoint of our non-GAAP earnings per share guidance to be up $0.07 due to a positive $0.21 currency impact, offset by MiSight investment activity and slightly lower gross margins tied to unfavorable manufacturing absorption.
Below the line, we expect lower interest expense to be roughly offset by a higher effective tax rate.
Lastly, on cash flow.
We made significant progress completing our multiyear capacity expansion program and expect solid improvement in free cash flow moving forward as operating cash flow improves and CAPEX reduces.
In conclusion, even with COVID, we expect to start the year off well.
We have strong product lines, solid manufacturing, and distribution capabilities, growing key account relationships, plenty of MyDay capacity, and a dynamic myopia management business.
We plan to continue taking market share, and we look forward to COVID vaccines and better treatments returning markets to normal.
| compname reports q4 non-gaap earnings per share $3.16.
q4 non-gaap earnings per share $3.16.
sees q1 non-gaap earnings per share $2.66 to $2.86 including items.
sees fiscal q1 2021 total revenue $642 million - $670 million.
|
Before I hand it over to Gary to discuss the second-quarter financials, I'll make a few comments on the current state of the company as well as our outlook for the future in light of the COVID-19 crisis.
Given how much the world has changed since our last earnings call three months ago, I think it's important to share with you the details of how we're managing the business through this unprecedented time.
As the pandemic spread across the globe during February and March, and as economic impacts started being felt in some of our businesses, we did what we do best: we took decisive action.
The actions we've taken have a clear and precise focus, which is protect our strong financial condition, to secure the financial well-being of the company and to support business continuity.
These measures will allow us to weather the storm while continuing to support our long-term strategy for profitable growth.
In the past, we've shown our operational excellence and our ability to effectively manage costs to meet challenging market demands.
This challenging time will be no different as we're actively addressing today's business pressures by using all the tools at our disposal.
The beauty of these current cost reduction initiatives is they're being done and implemented with minimal cost to achieve, thereby maintaining our flexibility to ramp up quickly should demand increase as customers, communities, and countries reopen their economies.
Bottom line is we're controlling what is within our control and focusing on the near term without losing our vision for the future.
I hope our comments today will leave investors with three clear messages about ESCO going forward: our diverse portfolio of strong, global businesses serving a wide range of nondiscretionary end markets provides us with the strength and resilience to continue to support our long-term growth outlook.
Number two, our strong balance sheet and significant financial liquidity will allow us to effectively manage through this crisis and maintain the company's financial health and well-being.
And finally, our deep and experienced leadership team has managed through and overcome many challenges in our 30-year history.
And I'm confident that we will emerge from this extraordinary time as an even stronger company.
Today, we have a very clearly defined priorities.
First and foremost is the health and safety of our employees and our families, followed by a commitment to meet the needs of our customers and suppliers.
Both of these will help support the business today and secure our future during this uncertain time.
ESCO will benefit from the fact that we have developed leading positions in various niche markets with a set of unique and highly technical products and solutions specifically designed to meet our customers' needs, which makes it difficult to be replaced by alternative sources.
Our continued investment in new products across all three segments and our staff of highly skilled engineering talent will continue to create new opportunities to provide value to our customers, which will drive our long-term growth.
I firmly believe that our future will rise as our customers' communities recover and spending returns to more normal levels.
To close out my comments before I hand it over to Gary, as we face the immediate and ensuing economic fallout of COVID-19, I believe we're well-positioned to navigate the short-term challenges in front of us.
I'm confident that our fundamental approach to operating our business and our solid liquidity will be the cornerstone of our continued long-term success.
Our employees are our most important asset.
And Vic will close out today's call with his current view related to our future and our end markets.
As Vic noted in his comments, our liquidity position is of the utmost importance to us during this challenging time.
I'm extremely pleased with where we stand today by having nearly $700 million of dry powder at our disposal between cash on hand and available credit capacity, while carrying a modest leverage ratio of 0.92.
I wish I could tell you that we saw this economic prices coming late in 2019 when we extended our five-year credit facility out to the year 2024 and we increased our debt capacity by an additional $50 million at lower rates, or when we sold the Technical Packaging business and generated over $190 million of gross proceeds to significantly improve our cash and debt positions, but we didn't see it coming.
We did not anticipate a pandemic as we executed both of these liquidity enhancements as these were part of our normal financial strategy.
But I'm sure glad we did these things as they have bolstered our current financial position.
I'll touch on a few Q2 highlights from the release.
Sales increased 5%, led by our Aerospace & Defense segment growing $16 million or 20% driven by the addition of Globe's submarine businesses, coupled with strong aerospace sales at PTI and Crissair, and higher space sales at VACCO.
Q2 A&D sales came in approximately $3 million ahead of plan.
Test sales were relatively flat as a result of a three-week shutdown of our Chinese manufacturing facility in February, coupled with the timing delays as several installation sites where personnel access was restricted due to COVID.
Domestic chamber sales were relatively strong and on-plan during the quarter, which nearly offset the installation site issues.
USG sales were down due to the timing of various project deliverables as several large utility customers, both domestic and international, realigned their short-term maintenance and spending protocols to focus on uninterrupted power delivery during the global crisis.
Entered orders clearly were a bright spot in both Q2 and year-to-date, where we booked $466 million of new business and ended March with a record backlog of $565 million, which is up 25% from the start of the year.
Our DoD business, led by our participation on the Block V contract for additional Virginia Class submarines, was the clear winner.
During Q2, we generated $34 million of cash from continuing operations with free cash flow of $23 million, which is 127% free cash flow conversion to net earnings during the quarter.
Q2 and year-to-date adjusted EBITDA improved from prior year, with Q2 reflecting a 17.4% margin despite the lower contribution from USG, which is our highest margin segment.
And finally, Q2 adjusted earnings per share was $0.68 a share, down slightly from the $0.71 a share delivered in Q2 of 2019, which resulted from the noted COVID impact.
To set the table for the balance of 2020, the COVID-19 global pandemic has introduced considerable uncertainty around the extent and duration of today's economic circumstances, which makes it difficult to predict how our future operations will be affected using our normal forecasting methodologies.
And as a result of this uncertainty, we're withdrawing our previously issued full-year guidance and will not provide guidance for Q3 at this time.
To add some color to Vic's comments on our cost savings actions, we are clearly focused on the right things, and we are pulling on all reasonable cost levers to maintain and optimize our cash flow and liquidity.
Our focus is to prudently cut our deferred costs in the short term and focus on those costs which do not have a negative outcome, impacting our ability to meet increasing demand or growth in the future.
I will offer some qualitative comments about our end markets, but I will emphasize that today's situation is very fluid, and there are many unknowns so my comments today may change materially in the future.
We recently completed a thorough review of our individual businesses as part of our April planning meetings to better frame our expectations of the impact of COVID-19 across and within our various operating units.
Starting with the Aerospace & Defense segment, we expect to see a slowdown in commercial aerospace deliveries over the balance of the year.
And it's too early in the cycle to determine the sales and EBIT impact from the current industry downturn as it relates to future build rates and airline passenger miles.
We are working with all of our aerospace customers to get a better picture of their demand and requirements over the coming quarters, but the situation continues to evolve daily.
Our defense contract within Aerospace & Defense, both military aerospace and navy products, is expected to remain strong given its current backlog and the urgency of expected platform deliveries.
Our aerospace supply chain partners continue to deliver necessary parts and services to us.
And in some cases where we see some weakness, we are working on bringing some of these products and services back in-house, such as machining and other capabilities we can replicate as a safety net.
We also did see this weakness in the aerospace market as an opportunity for ESCO.
So we find suppliers or competitors experiencing financial or operational stress during this crisis, we may be able to provide assistance about your partnering or through an acquisition at a reasonable price.
Our Test business is expected to remain relatively solid over the balance of the year given the strength of its backlog and the strength of its served markets, including medical shielding and 5G and its related communications technologies.
We expect USG's customer spending softness to continue through the next few months as they come out of their summer testing protocols and return to their more normal buying patterns.
Once some of the social distancing guidelines get sorted out and utility service personnel can return to their normal site visit routines, we expect our service business to return to normal as it has been essentially on hold for the past few months.
Utilities have money spend, and I'm certain that spending will return in the near future as maintenance spending cannot be delayed indefinitely without creating significant risk to grid safety, efficiency, or regulatory compliance.
The critical need to maintain, repair and improve the utilities' aging infrastructure is not reduced by this pandemic crisis.
On a positive note, I'm really pleased with USG's pipeline of new products and solutions, especially related to the software security and the related asset hardening solutions.
We introduced several new solutions at the Doble conference in March.
And from customer feedback, both there and after the show, these products are being enthusiastically received.
Moving on to M&A.
Prior to COVID, we had a couple of actionable opportunities well down a path to completion, and we'll continue to evaluate several other -- and we're continuing to evaluate several other actionable deals in the pipeline.
When the time is right, we will take action on these opportunities to grow our businesses than we have in the past.
Our Board is supportive of our M&A strategy and our current balance sheet provides us with plenty of liquidity to allow us to add to our existing portfolio.
In summary, we delivered a strong first half of the year.
And for the balance of the year, our plan is to hunker down while dust settles, work hard to control our costs while maintaining our critical workforce, develop contingency plans for multiple scenarios, and look for opportunities to leverage our infrastructure.
We will survive and prosper.
I'll now be glad to answer any questions you have.
| esco suspends previously issued fiscal year 2020 guidance.
q2 adjusted earnings per share $0.68.
from a liquidity perspective, we are in a really solid position.
not changing its dividend payment plan.
suspending its previously issued fiscal year 2020 guidance.
|
We undertake no obligation to publicly update or revise these statements.
Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our first quarter results.
It has been a little over a year since the pandemic started.
Over that time, we acted swiftly to address the challenges we face, so we could quickly turn our focus to best positioning ourselves toward recovery and beyond.
I'm really proud of how we've set up the company for the future.
And most importantly, I'm grateful to our team members who have continued to lead with hospitality and to all of our stakeholders for their ongoing support.
In the first quarter, systemwide RevPAR decreased 38% year-over-year and 53% versus 2019.
Rising COVID cases and tightening travel restrictions, particularly across Europe and Asia Pacific, weighed on demand through January and most of February.
However, March marked a turning point.
As we lapped the start of the U.S. lockdowns, RevPAR turned positive up more than 23% year-over-year.
Systemwide occupancy reached 55% by the end of the month driven by strong leisure demand.
As expected, recovery in group and corporate transient continued to lag, but both segments showed sequential improvement versus the fourth quarter.
Overall, this positive momentum has continued into the second quarter.
While recovery varies by region and country, we can see the light at the end of the tunnel.
In the U.S., more than 50% of adults have received at least one dose of a COVID-19 vaccine.
As a result, we're seeing a significant lift in forward bookings and occupancy, which is now around 60% as well as lengthening booking windows.
This mirrors trends in other countries around the world.
For instance, China is running in the low 70s occupancy.
We do expect this momentum to continue.
Vaccine distribution, coupled with relaxed travel restrictions and increasing consumer confidence should drive further RevPAR improvements in the coming months and quarters.
In fact, we are on pace to see record leisure demand in the U.S. over the summer months with April bookings for the summer exceeding 2019 peak levels by nearly 10%.
We also expect continued corporate office reopenings to drive a meaningful pickup in business transient demand toward the back half of the year.
Based on what we've seen in China and pockets of the U.S., once restrictions are lifted and offices reopen, business travel returns.
In the first quarter, business transient revenue was roughly 75% of 2019 levels in states that were further along in their reopening process.
Additionally, recent forecast for nonresidential fixed investment are up more than three percentage points from prior projections to 7.8%, indicating even greater optimism around business spending.
On the group side, forward booking activity continues to improve month-over-month.
Group bookings made in the first quarter for the back half of the year were roughly flat with 2019 booking activity, suggesting customers are increasingly optimistic about safety measures and loosening pandemic restrictions.
Near-term group bookings continue to be driven largely by social events and smaller group meetings, but we are seeing a slow shift back to a more normal mix of business with corporate group leads up more than 70% for future periods.
Associations and trade shows have also started opening up housing and registration sites for events later this year, further signs of moving forward with in-person group meetings.
As we look out to next year, our group position is roughly 85% of peak 2019 levels with rate increases versus 2019.
Group bookings were up in the mid-teens for 2023 versus 2019.
In fact, last week, I was in Mexico to chair the World Travel and Tourism Council's Global Summit where more than 800 participants from all over the world attended in person and thousands more attended virtually.
The conference demonstrated that it is possible to meet in a safe way and that hybrid events can be incredibly effective at expanding participation and enhancing collaboration.
It was great to be in the same room with other hospitality and government leaders talking about the bright future that lies ahead for our industry.
The event made me even more optimistic for our recovery and confident that we are beginning to see a new era of travel emerge.
During the quarter, we added 105 hotels totaling more than 16,500 rooms to our system and achieved net unit growth of 5.8%.
We celebrated the openings of our 100th Curio and our 50th Tapestry hotel demonstrating the strength of our conversion-friendly brands.
Overall conversions accounted for approximately 24% of additions in the quarter.
We also continued to enhance our resort footprint during the quarter with the openings of the 1,500-room Virgin Hotel Las Vegas, the Hilton Abu Dhabi Yas Island, the all-inclusive Yucatan Resort Playa del Carmen and six spectacular properties along the California Coast.
Customers have even more opportunities to stay with us as travel resumes.
Building on our already impressive portfolio in the world's most desirable locations, during the quarter, we signed agreements to bring our Waldorf Astoria and Canopy brands to the Seychelles.
The properties are scheduled to open in 2023, joining the Mango House Seychelles, LXR Hotel and Resorts set to open later this summer.
In the quarter, we signed nearly 22,000 rooms modestly ahead of our expectations.
This included our first Signia hotel.
Additionally, through our strategic partnership with Country Garden to introduce the Home2 Suites brand to China, we added more than 5,000 rooms to our pipeline.
We're excited for the opportunities this partnership provides with one of our fastest-growing brands.
Home2 recently celebrated its tenth anniversary, marking the milestone with nearly 1,000 rooms, hotels open and in the pipeline.
On Entrepreneur Magazine's Annual Franchise 500 List, which featured 11 of our 18 brands, Home2 was the number two hotel brand ranking only behind Hampton.
Overall, we are very happy with our development progress and excited for additional growth opportunities with more than half of our 399,000-room pipeline under construction, We're confident in our ability to grow net units in the mid-single-digit range for the next several years and continue to expect growth in the 4.5% to 5% range in 2021.
And in an environment where safety and cleanliness are top priorities for travelers, we continue to create more opportunities for our guests to enjoy a contactless experience from pre-arrival to post-checkout.
Our digital key feature, which enables guests to bypass the front desk and go straight to the rooms is now available in the vast majority of our hotels worldwide.
Additionally, we've joined forces with Lyft to mobilize Honors members to contribute to the Lyft Vaccine Access Initiative, which funds rides for those in need of reliable transportation to their vaccine appointment.
We're excited to continue the momentum of our partnership with Lyft by supporting this important cause.
During the quarter, we also launched two new co-branded credit cards in Japan, building on our 25-year partnership with American Express and marking the first time our co-branded cards have been made available to customers outside the United States.
These cards are designed with both frequent and occasional travelers in mind and offer customers the opportunity to earn Hilton Honors bonus points on everyday spending as well as at our properties worldwide.
As a result of our strong partnerships, industry-leading brands, and unmatched value proposition, our loyalty program continues attracting new members.
We ended the first quarter with more than 115 million Honors members, up roughly 8% year-over-year with membership increasing across every major region despite lower demand due to the pandemic.
As I reflect on the quarter and the past year, I'm very proud of the determination, creativity and hospitality that our Hilton team members have demonstrated.
This earned us recognition by Fortune and Great Place to Work as the number one Best Big Company to Work For and number three Best Company to Work For in the United States.
Overall, I'm pleased with our first quarter results and feel very good about the momentum for the remainder of the year.
I'm optimistic for the future of travel and for Hilton as we emerge stronger and better positioned continuing to drive value for our guests, our owners, our communities and, of course, our shareholders.
During the quarter, systemwide RevPAR declined 38.4% versus the prior year on a comparable and currency-neutral basis as rising COVID cases and reinstated travel restrictions and lockdowns disrupted the demand environment, especially across Europe and Asia Pacific.
However, occupancy improved sequentially throughout the quarter, increasing more than 20 points.
Adjusted EBITDA was $198 million in the first quarter, down 45% year-over-year.
Results reflected the continued impact of the pandemic on global travel demand, including temporary suspensions at some of our hotels during the quarter.
Management and franchise fees decreased 34%, less than RevPAR decrease as franchise fee declines were somewhat mitigated by better-than-expected license fees and development fees.
Additionally, results were helped by continued cost control at both the corporate and property levels.
Our ownership portfolio posted a loss for the quarter due to the challenged demand environment.
Reinstated lockdowns and travel restrictions in Europe and Japan, coupled with temporary hotel closures and fixed operating costs, including fixed rent payments at some of our leased properties, weighed on our performance.
Continued cost control mitigated segment losses.
For the quarter, diluted earnings per share adjusted for special items was $0.02.
Turning to our regional performance.
First quarter comparable U.S. RevPAR declined nearly 37% year-over-year and 50% versus 2019.
Demand improved sequentially throughout the quarter with March occupancy 62% higher than January and ending at 55%, the highest level since the pandemic began.
Leisure travel continued to lead the recovery, particularly on weekends with warm weather destinations benefiting the most.
In the Americas outside the U.S., first quarter RevPAR declined 55% year-over-year and 63% versus 2019.
Performance recovered in March, but lagged the broader system due to the region's greater dependence on international travel, which remain constrained by tightened travel restrictions.
In Europe, RevPAR fell 76% year-over-year and 82% versus 2019.
Declines were driven by increasing COVID cases and reinstated lockdowns across both the United Kingdom and Continental Europe.
Delays in vaccination distribution also disrupted recovery.
In the Middle East and Africa region, RevPAR was down 32% year-over-year and 46% versus 2019.
Performance in the region benefited from strong domestic demand and easing restrictions.
In the Asia Pacific region, first quarter RevPAR fell 7% year-over-year and 49% versus 2019 as rising infections, lockdowns and border closures weighed on performance early in the quarter.
RevPAR in China increased 64% year-over-year with occupancy levels increasing from roughly 35% to roughly 65% during the quarter.
Both leisure and business transient demand rebounded quickly as restrictions eased with March occupancy in China exceeding 2019 levels.
As Chris mentioned, in the first quarter, we grew net units 5.8% driven primarily by the Americas and Asia Pacific.
Tightening restrictions and lockdowns across Europe delayed openings in the region.
However, we expect an uptick in development activity as countries continue to reopen.
For the full year, we continue to expect net unit growth of 4.5% to 5%.
Signings in the quarter decreased year-over-year due to pre-pandemic comparisons, but exceeded our expectations due to greater-than-expected signings in China, particularly for our Home2 Suites brand.
For the year, we expect signings to increase mid-single digits versus 2020.
Turning to the balance sheet.
During the quarter, we took steps to further enhance our liquidity position and preserve financial flexibility.
We repaid $500 million of the outstanding balance under our $1.75 billion revolving credit facility and opportunistically executed a favorable debt refinancing transaction to extend our maturities at lower rates.
As we look ahead, we remain confident in our balance sheet and liquidity positions as we continue to focus on recovery.
We would now like to open the line for any questions you may have.
Chad, can we have our first question?
| compname reports q1 adjusted earnings per share $0.02.
q1 adjusted earnings per share $0.02.
system-wide comparable revpar decreased 38.4 percent on a currency neutral basis for q1 from same period in 2020.
|
A summary of these risks, can be found on the second 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 our key messages and then provide an overview of our performance against our strategic objectives across Governance, Capital Markets and Wealth & Investment Management, then I'll close with some thoughts about our future before Edmund reviews the financials.
I have four headlines.
First, Broadridge delivered a strong fiscal year '21.
Recurring revenues rose 10%; adjusted earnings per share rose 13% and our sales teams delivered a 10th consecutive year of record sales.
Our results demonstrate how well positioned Broadridge is to take advantage of increasing investor participation and the growing need to digitize and neutralize Financial Services.
Second, we're executing against the strategic growth plan we laid out at our Investor Day in December.
We're building the next generation of Governance products, growing the scope of our Capital Markets business across the trade lifecycle, and building our Wealth Management franchise.
Third, we remain committed to balanced capital allocation.
In fiscal '21, we increased our level of investment on our internal platforms, completed the largest acquisition in our history, and returned nearly $250 million in capital to shareholders.
Yesterday, our Board approved an 11% increase in our annual dividend per share.
Broadridge has now increased its annual dividend every year since becoming a public company with double-digit increases in eight of the last nine years.
Fourth and last, we expect another strong year in fiscal '22.
Our guidance calls for 12% to 15% recurring revenue growth, further margin expansion, 11% to 15% adjusted earnings per share growth, and another year of record sales.
A combination of strong fiscal year '21 results and our guidance for fiscal '22 leaves Broadridge extremely well positioned to achieve the higher end of our three-year growth objectives.
As we close out the first year of our current three-year cycle, I want to give you an update on our progress against our strategic growth plans for each of our three franchise businesses, starting with Governance or ICS, on Slide 4.
ICS recurring revenue rose 11% in fiscal '21 to $2.1 billion, driven by both new sales and internal growth.
Strength of our Governance franchise comes from its position at the heart of a network linking broker dealers, corporate issuers, asset managers, and tens of millions of individual and institutional investors.
Our fiscal '21 results highlight how our strategy of innovating at the core while providing incremental value to all network participants drives incremental and sustainable growth for Broadridge.
I'll start with our core regulatory business.
The big story here is the very strong position growth we're seeing across equities.
Equity stock record growth, which is our measure of the number of positions held by shareholders grew 26% in fiscal '21 including 33% in the seasonally strongest fourth quarter.
We continues to be struck by the broad based nature of this growth.
We're seeing growth across large and small issuers not simply a handful of mega-cap tech or main stocks.
Looking at industry sectors; tech and consumer cyclical stocks are leading the growth with 42% and 37% growth respectively.
We're also seeing double-digit growth across virtually other sector including 33% growth in healthcare needs and 20% plus in basic materials and industrials.
This broad based participation is a key reason why we believe that fiscal year '21's strong growth is an extension of the long-term trend that's been driving higher equity and fund position growth over the past decade and why we're forecasting continued growth in fiscal '22.
At Broadridge, we're able to meet this increased demand because we've invested in scaling our capacity.
After the initial COVID surge last spring, we invested in new distribution capacity to build incremental flexibility across our network, enabling us to seamlessly ensure that holders of more than 500 million positions got the communications they needed to participate in corporate governance.
We've also invested in new digital capabilities, including QR codes that make voting on your mobile device easier than ever.
Our Governance franchise is also increasingly global with gains from our Shareholder Rights Directive II solution and the continued expansion of our European Fund Communications business.
We're also expanding the suite of data driven solutions we provide for our fund clients, driven in part by another year of double-digit growth across our data and intelligence products.
We're growing our relationships with corporate issuers.
We conducted almost 2,400 virtual shareholder meetings in fiscal '21, up from 1,500 a year ago.
We become the clear choice for America's leading companies with more than 75% of S&P 100 companies using Broadridge to host their annual meetings in 2021.
In turn, increased demand for our VSM capabilities has enabled us to deepen our client relationships, leading to strong growth in our suite of other annual meeting services and Disclosure Solutions products.
Finally in customer communications, our strategy is focused on using our print capability as a door opener for growing our digital business.
So, it was encouraging to see strong double-digit growth in digital revenues which offset lower print revenues and helped to drive higher earnings.
All in all, it is a very strong year for our Governance franchise.
Now let's turn to Capital Markets on Slide 5.
In Capital Markets we're driving trading innovation across the front office, enabling our clients to simplify and improve their global post-trade technology, providing strong enterprise and data component solutions, and building new network enabled solutions using AI, digital ledger and other innovative technologies.
Capital Markets revenue grew 8% to $701 million, driven by new client additions and the acquisition of Itiviti, which has given us a new capability to drive innovation across the trade lifecycle.
While the Itiviti integration is only just beginning, I'm excited by the progress we've made.
Itiviti recently closed its largest-ever sale and we're on track to leverage Broadridge's relationships to drive more meaningful sales in the quarters ahead.
Client feedback has continue to be positive and the sales pipeline, especially in EMEA and APAC, is strong.
A key driver of our revenue growth is our continued success at bringing clients under our global platforms, enabling them to simplify their global technology.
We're also enhancing those platform capabilities.
A great example is the exchange-traded derivatives platform onto which were on-boarding R.J. O'Brien.
I'm also tremendously excited by the continued progress in developing new capabilities based on next-gen AI and DLT technology.
Our LTX fixed income platform continues to progress well.
We have more than 70 buy and sell side users in the platform and we're adding more every week.
And the average initiated trade is north of $3.5 million, indicating demand for increased liquidity in fixed income markets.
We also recently launched our Digital Ledger Repo platform and are averaging $35 billion worth of transactions daily, a number which will grow as more clients, including UBS, come onto the platform.
While both of these products are small today, each is bringing an innovative and differentiated solution to a multi-billion dollar market.
Now let's turn to Wealth & Investment Management franchise on Slide 6.
In Wealth, we're extending our services around our core back office capabilities, growing our suite of component solutions and building a modular platform that will link our individual capabilities across a modern technology architecture.
The biggest driver behind our 6% growth in Wealth & Investment Management revenues was revenue from new sales.
During the year, we added new clients to both our core back office platform and saw strong demand for our digital solution suite.
Our work with UBS on the digital transformation of the Wealth Management industry remains one of our most exciting initiatives.
Broadridge -- the Broadridge Wealth Management platform is an important part of UBS' own multi-year transformation plan for its North American Wealth business.
As we line around UBS' goals around sequencing, we're already rolled out Select Components and we expect to rollout the additional platform components over the next 18 to 24 months.
Based on the terms of our contract, we'll begin recognizing revenue when we complete the delivery of the full suite.
Meanwhile, this platform continues to draw attention from other clients.
We are pleased to announce last month that RBC Wealth Management will become our second client on the Broadridge Wealth Platform.
RBC is pursuing its own digital transformation journey and our platform will accelerate their ability to enhance the client experience, optimize advisor productivity and digitizes back office.
We're excited to be a key technology partner in that journey.
Beyond our work in the Wealth platform, we continue to make progress in expanding our digital solutions with the AdvisorStream tuck-in acquisition and by extending our partner network.
Lastly, I was pleased to see strong growth in our Investment Management technology revenues, which grew by 12%; strong revenue from sales of existing solutions; continued platform development; and new product additions.
We're making solid progress on our Wealth & Investment Management growth strategy.
As I wrap up my strategy update, I want to highlight the common denominator behind our execution across Governance, Capital Markets and Wealth & Investment Management.
Broadridge is investing in driving near, medium and long-term growth.
We've investing to process higher position counts, more virtual shareholder meetings and handle surges in trading volumes which are critical in fiscal '21 and will remain important in fiscal '22 and '23.
At the same time, we're investing in initiatives that will carry our growth momentum forward, including our data intelligence products, the emergence of a European governance hub, Itiviti, and our Wealth platform.
And finally, I see tangible signs of products that have the potential to extend our growth runway well into the next decade like digital communications, Digital Ledger Repo and fixed income AI.
These are solutions that our clients value, as evidenced by the traction that we're gaining in the market for each of them.
This mix of near, medium and long-term growth businesses across the company are exciting.
What does that mean for Broadridge?
As we enter fiscal '22, I've never been more optimistic about Broadridge's long-term growth prospects.
When I look across our Company, I see a leadership team that's stronger than ever, focused on how we engage our associates, better serve our clients and create value for our shareholders.
That team is executing against our growth plans across Governance, Capital Markets and Wealth & Investment Management.
We're finding ways to help our clients accelerate digitization, drive mutualization benefits and enable the increasing democratization of investing.
Even more tangibly, we are on track to deliver another strong year.
Our strong backlog gives us visibility into new revenue over the next 12 to 24 months and we see continued position growth as new investors enter the market and current investors continue to diversify their portfolios.
In short, we see another year ahead of low teens revenue and adjusted earnings per share growth.
The net result of strong fiscal year '21 results, continued execution against our growth strategy and an outlook for continued growth in '22 means that Broadridge is well positioned to deliver at the higher end of our three-year growth objectives including, 7% to 9% recurring revenue growth and 8% to 12% adjusted earnings per share growth.
Little in the past 12 months has been easy, but they have found the way to adapt to the new virtual environment.
They stayed focused on our clients and they are helping drive the transformation of the financial services industry that is enabling better financial lives for millions.
As you can see from the financial summary on Slide 8, Broadridge delivered strong fiscal '21 results, capped off by a strong fourth quarter and demonstrating significant progress toward our three-year objectives.
Fiscal '21 recurring revenues increased 10% to $3.3 billion, driven by strong growth in both ICS and GTO.
That strong growth enabled us to make the near, medium and long-term investments in our technology platforms and our digital products while driving 60 basis points of AOI margin expansion for the year.
Higher revenues and higher margins drove 13% adjusted earnings per share growth to $5.66.
In the fourth quarter, revenues rose 15% year-over-year to $1.1 billion, driven by growth in ICS and the acquisition of Itiviti.
Adjusted operating income rose 4% as we continued our ongoing investments and adjusted earnings per share grew 2% to $2.19.
Our results came in at the high end of our latest full-year guidance range and above our three-year recurring revenue and adjusted earnings per share growth objectives.
And as Tim has highlighted, our sales team closed the year on a high note and pushed us modestly above our closed sales guidance range.
So let's get into the details of those results starting with recurring revenue on Slide 9.
The momentum in our business driven by the trends in increased investor participation in digital solutions continued into the fourth quarter and helped Broadridge post another year of 10% recurring revenue growth.
Our recurring revenue growth was powered by 8% organic growth, which came in well above our 5% to 7% three-year growth objectives.
The combination of organic growth coupled with 2 points of growth from our acquisition of FundsLibrary and Fi360 in fiscal year '20, and then Itiviti in May, pushed our fiscal year '21 recurring revenue growth above our 7% to 9% objective as well.
So a strong start to our three-year recurring revenue growth objectives.
Now let's look at this quarter's recurring revenue growth by business beginning with ICS on Slide 10.
ICS revenues grew by 17% to $719 million in the fourth quarter.
All of that growth, organic.
The biggest driver of that growth was in our regulatory business, which grew 27% to $381 million.
Fourth quarter stock record growth was 33% and mutual fund record growth was 11%, both key drivers of growth in regulatory.
We also benefited from strong growth in international and our investment in the Shareholder Rights Directive II solution is paying back and contributing to recurring revenue growth.
For the full year, regulatory revenues rose 20%.
Issuer revenue also contributed to growth, rising 20% in the fourth quarter to $106 million and 21% growth for the full year.
As Tim noted, our continued success in providing virtual shareholder meeting services has helped drive revenue growth of our other annual meeting services and document disclosure products.
Fund solutions lapped the drag from lower interest income and recurring revenue grew 7% in the fourth quarter.
Full year revenues rose 5% driven by the fiscal year '20 acquisitions mentioned earlier and revenue from net new business.
Customer communication revenues was down 1% in the quarter as declines in the low margin print revenue offset digital growth.
For the full year, customer communications revenue growth was slightly positive, but more importantly, higher margin digital revenues within customer communications grew by 15%.
Turning to GTO on Slide 11; GTO recurring revenues rose 10% to $346 million in the quarter driven by 18% growth in our Capital Markets business and 1% growth in Wealth & Investment Management.
Across both Capital Markets and Wealth, solid revenue growth from new business was offset by $7 million of lower license revenue, which declined as expected, and modestly lower trading volume.
Our acquisition of Itiviti closed in mid-May and contributed $29 million to revenue growth in the Capital Markets franchise.
For the full year, GTO revenues rose 7% to $1.3 billion, driven by 4 points of organic growth and 3 points from acquisitions.
Organic growth was driven by new sales and internal growth was essentially flat as the benefit of higher full year trading volumes was offset by lower license revenue, which declined relative to an unusually high fiscal year '20 level.
We expect modest growth in license revenues in fiscal year '22.
So Broadridge's recurring revenue growth benefited from strong volume growth both in ICS and our GTO business segments.
Equity stock record growth rose to a record 26% in fiscal '21, well above the 6% to 8% trend in the past decade.
Fourth quarter proxy volumes which accounted for 55% of full year distributions benefited from 33% stock record growth.
We also saw strength in mutual fund and ETF regulatory communications, driven by strong fund inflows as we lap last spring's COVID driven withdrawals.
Looking ahead to fiscal '22, we continue to model stock record growth growing at a healthy low-teens pace, though the seasonally light first half before reverting to more trend line mid-to-high single digit growth in the much more meaningful seasonal second half.
We're also expecting mid-to-high single-digit fund record growth.
Turning to trading volumes in the bottom of the slide, fourth quarter volumes slipped 1% driven by a combination of tough year-over-year comps and lower overall market volatility.
Fourth quarter volumes also declined on a sequential basis as elevated levels in Q3, '21 driven by market volatility subsided.
Trading volumes rose 12% for the full year.
As we look ahead to fiscal '22, we expect trading volumes to be essentially flat for the year with modestly higher volumes in the first half of the year offset by lower volumes in the third quarter.
Shifting to a view of growth drivers of recurring revenue on Slide 13, organic growth rose to 11% in the fourth quarter, driven by a combination of new sales and the seasonal impact of higher proxy volumes.
New sales contributed 6 points to growth with balanced contribution from both ICS and GTO.
Internal growth of 7 points was primarily driven by proxy volumes as is typically the case in our fourth quarter.
Acquisitions contributed 3 points, almost all of that came from Itiviti with only a modest contribution from our mid-June acquisition of AdvisorStream.
Client losses subtracted 2 points of growth in both the fourth quarter and for the full year, marking another year of 98% client revenue retention rates.
High retention rates reflect the value of the services we offer, our commitment to client services and/or a tangible outcome of our service profit chain culture.
I'll round out our revenue drivers discussion on Slide 14 with a look at total revenue.
Total revenues rose a healthy 12% in the fourth quarter.
Recurring revenue was the primary contributor to that growth and Broadridge received a further boost from an uptick in event driven revenues as well as 2 points of growth from higher distribution revenue.
While higher distribution revenues contributed to our overall growth, their share of the full-year total revenues declined to 31%, down from 32% in fiscal year '20 and 38% five years ago.
We expect that the share of low to no margin distribution revenues will continue to decline as we remain focused on growing recurring revenues, FX was a modest positive, reflecting the weakening of the U.S. dollar.
Looking down the slide, event driven revenues rose $5 million year-over-year in the fourth quarter to $73 million, driven by higher proxy contest activity.
For the full year, event driven revenues rebounded from a cyclical low to a healthy $237 million.
That rebound was broad based across the full range of event driven activities.
Higher mutual fund communications contributed roughly a quarter of the growth as did higher revenues from proxy contest as well as higher revenues from capital markets activity and other communications.
Going forward, we're not forecasting that the major fund complex goes to proxy.
And while there might be some quarterly cyclicality, we expect full year fiscal '22 event driven revenues to be approximately $220 million, in line with the fiscal year '15 through fiscal year '21 long-term average.
Turning to Slide 15, for the full year, adjusted operating income margin expanded 60 basis points to 18.1%, slightly ahead of our latest guidance and multi-year objectives.
AOI margin declined 180 basis points to 22.8% in the fourth quarter on the back of our planned fiscal year '21 investment spend.
We have a strong track record and high confidence in our ability to make growth accretive investments while still expanding margins and delivering near term profit growth in line with our adjusted earnings per share three-year growth objective.
Before I move to our uses of cash and our balance sheet, let me touch on closed sales in our revenue backlog on Slide 16.
I was especially pleased to see strong growth in our smaller sales, those under $2 million in annualized values which rose 11%.
These small sales represent the bread and butter of our long-term growth and reflect the broad demand we are seeing across our businesses.
Our sales performance pushed our overall backlog, a measure of past sales that have not yet been recognized into revenue, to $400 million, up from $355 million last year and steady at 12% of recurring revenue.
As a CFO, I appreciate the added visibility into our future revenues that our backlog gives me.
Moving to capital allocation on the next slide.
Broadridge remains committed to a capital allocation policy that balances internal investment, M&A and capital return to shareholders.
In fiscal year '21, we generated $557 million of free cash flow, up $58 million from fiscal year '20.
Given the size of the market opportunity we see in front of us, we're continuing to prioritize making investments in our business, both internal and external.
The biggest use of our cash was the $2.6 billion acquisition of Itiviti, which was completed in the fourth quarter.
Late in the fourth quarter, we also completed the additional tuck-in acquisition of AdvisorStream.
Since the close of the quarter, we've made two more very small tuck-in acquisitions for the assets of Jordan & Jordan and the remaining share of Alpha Omega.
We invested almost $300 million in continued platform build-outs, as we add to our capabilities across Wealth Management and Capital Markets, and another $100 million in capex and software development.
Total capital returned to shareholders was $248 million.
The 11% increase in our annual dividend approved by our Board was in line with our long-term 45% pay-out ratio policy and will increase capital returns in fiscal year '22.
As a result of the Itiviti acquisition, our total debt rose to $3.9 billion, up from $1.8 billion at the end of fiscal year '20.
Our leverage ratio at year end was 3.5 times.
We remain focused on an investment grade credit rating and target a 2.5 times leverage ratio by the end of fiscal '23.
Our guidance for fiscal '22 calls for low teen recurring revenue growth, healthy margin expansion and another year of strong adjusted earnings per share growth.
Let's take each point in turn starting with recurring revenues.
We expect to grow recurring revenues by 12% to 15% in fiscal year '22.
That includes organic revenue growth of 5% to 7% with growth balanced across both ICS and GTO.
We're not modeling in any revenue contribution from the UBS contract in fiscal '22.
As Tim noted, we expect to complete the rollout of the full Wealth Management platform suite over the next 18 to 24 months and will begin to recognize revenues at that time.
We expect the contribution from acquisitions to add an additional 7 points to 8 points, with most of that coming from Itiviti.
Our more recent acquisitions of AdvisorStream, J&J and Alpha Omega should contribute less than $10 million combined to fiscal '22 recurring revenues.
As always, we do not forecast the impact of any future tuck-in acquisitions that we might make.
In addition to recurring revenue, we expect mid-single digit distribution revenue growth, driven in part by a postal rate increase.
Event driven revenues should, as I indicated earlier, be more in line with our fiscal '15 to '21 seven-year average level of approximately $220 million.
For modeling purposes, between recurring revenue, distribution and event-driven revenues, total revenue growth should be in the range of 9% to 13%.
We are expecting our adjusted operating income margin of approximately 19%, up from 18.1% in fiscal year '21, driven by a combination of incremental scale, digital, and efficiency gains as well as the addition of the higher margin Itiviti business.
Finally, we expect adjusted earnings per share growth to be in the range of 11% to 15%.
Included in our earnings per share outlook is an expectation that our tax rate will essentially be flat at approximately 21% and that we'll see a modest increase in our overall share count.
On our last guidance point, we expect another year of record closed sales.
Our outlook calls for closed sales in the range of $240 million to $280 million.
This guidance emphasize the strength of our financial model and our ability to drive sustainable revenue growth, expand our margins while maintaining a balanced capital allocation policy in delivering steady and consistent adjusted earnings per share growth.
That concludes my remarks on our fiscal year '22 guidance.
I have one more final administrative note.
Beginning with our first quarter results, we'll be updating how we report foreign exchange.
As you know, we've historically used a fixed exchange rate for our segment revenues and for recurring revenue.
The difference between the fixed internal rate and the actual rate are recorded in our FX revenue line, which was negative $132 million in fiscal year '21.
With the continued growth in our international revenues, especially after the acquisition of Itiviti, the time is right to adjust our reporting.
Going forward, we will be changing our internal rate to one that is much closer to the actual rate.
This will have the impact of shrinking our reported negative FX revenue to a much smaller number and lowering our segment and recurring revenue numbers by the same amount.
These changes will have no significant impact on our reported recurring revenue growth rate nor will they have any impact on our reported total revenue or profitability metrics.
We intend to publish our historical revenue results at a restated rate ahead of our first quarter earnings so that you have a chance to adjust your models.
Again, this is a change that will begin with our first quarter earnings report.
It will lower our reported recurring revenue with little if any change to growth rates and will have no impact on total revenue, operating profit or adjusted EPS.
| quarterly adjusted earnings per share $2.19.
sees fy 2022 recurring revenue growth 12%-15%.
sees fy 2022 adjusted earnings per share growth - non-gaap 11% - 15%.
|
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 fourth quarter of 2020 were $0.85 per diluted share, compared to $0.76 for the fourth quarter of 2019.
For the full year, consolidated earnings were $1.90 per diluted share for 2020 compared to $2.97 last year.
Now, I'll turn the discussion over to Dennis.
As we begin 2021 continuing to work through the COVID pandemic, we hope you're staying safe and healthy.
Looking back on the last year, I'm just so proud of our employees for navigating the challenges presented by the pandemic, continuing to provide energy like they always do to our customers and progressing our business plans forward.
We continue to help those who are struggling and most in need in our communities.
In 2020, Avista and the Avista Foundation provided more than $4 million in charitable giving to support the increased need for services that community agencies are still experiencing throughout the areas we serve.
Financially, our earnings for 2020 were better than expectations, and Mark will provide further details here in just a few minutes.
Operationally, we finished installing nearly all of our smart meters, electric smart meters and natural gas modules across Washington in one of the largest projects in our history.
The deployment of this infrastructure will provide customers with more real-time data, so they can better manage their energy use.
The technology enables us to proactively push high energy alerts to notify customers, if they could exceed their preset energy budgets, which of course, helps eliminate surprises when their bill arrives at the end of the month.
Beyond generating bills, we're using the data from smart meters to run a more reliable and efficient power grid and to deliver a higher level of service for our customers.
For example, we now have more visibility into our system, which allows us to detect and restore power outages more quickly.
We also made strides to meeting our clean energy goals, as the Rattlesnake Flat Wind Farm went online last December.
During its construction the project created clean energy jobs for our local communities and now that it's completed the project's 20 -- project's 57 wind turbines excuse me will provide 50 average megawatts of clean renewable energy for our customers at an affordable price.
That's enough energy to power 38,000 homes for years to come.
As wildfires continue to have an impact on our region we implemented a new comprehensive 10-year wildfire resiliency plan that aims to improve defense strategies and operating practices for a more resilient system.
We expect to invest about $330 million implementing the components of this plan over the life of the plan, which as I said was 10 years.
We were proud to announce yesterday that Avista has been recognized again as one of the 2021 World's Most Ethical Companies by Ethisphere, a global leader in defining and advancing the standards of ethical business practices.
This marks the second year in a row that Avista has achieved this distinction.
We are only one of nine honorees recognized in the energy and utilities industry based on their assessment.
In 2021, 135 honorees in total were recognized spanning 22 countries and 47 industries.
In January, we published Avista's 2021 Corporate Responsibility Report on our avistacorp.com website and I urge you to check it out when you have some time.
This content provides a broad look at our operations and how we're fulfilling our commitments to our people, our customers, our communities and our shareholders.
The website also provides links to Avista's reporting on a series of industry and financial ESG disclosures.
The updated content supports Avista's long-standing commitment to corporate responsibility and sharing this information with our stakeholders.
Switching gears with respect to regulatory filings, in January we filed two-year general rate cases in Idaho.
And as you know in 2020 we filed general rate cases in Washington.
And we continue to work through the regulatory processes in both of these jurisdictions.
We take our responsibility to provide safe, reliable energy at an affordable price very seriously.
And we work hard to make prudent financial investments in our infrastructure, manage our costs and identify ways to best serve our customers that contribute to keeping energy prices low.
For example, our proposed tax customer credit would completely offset an immediate increase in electric and natural gas bills for our Washington customers.
In Oregon new rates went into effect on January 16 of this year and we expect to file another rate case in the second half of 2021 in Oregon.
Looking ahead, we remain focused on running a great utility and continue to invest prudent capital to maintain and update our infrastructure and provide reliable energy service to our customers.
We are initiating our 2021, 2022 and 2023 earnings guidance with consolidated ranges of a $1.96 to $2.16 per diluted share for 2021, $2.18 to $2.38 in 2022 and $2.42 to $2.62 per diluted share for 2023.
This puts us on track to earning our allowed return by 2023.
Lastly, earlier this month the board increased our dividend by 4.3% to an annual dividend of $1.69 per share and a dividend increase approved by the board marks the 19 consecutive year the board has raised the dividend for our shareholders, and I believe it demonstrates the board's commitment to maximizing shareholder value.
We had low expectations coming into this year.
No, not the company, the Blackhawks and the Blackhawks have really started off pretty good after a slow first four games.
We've had five rookies score their first goals ever in the NHL, so pretty exciting times for all you hockey fans out there.
For the company in the fourth quarter, Avista Utilities contributed $0.81 per diluted share compared to $0.67 last year.
Our earnings increased primarily due to higher utility margin and customer growth.
Also in the fourth quarter, the Oregon and Washington Commissions joined the Idaho Commission to allow for the deferral of certain COVID-19 related expenses for future -- possible future recovery.
Additionally, Avista Utilities earnings were better than expectations due to higher utility margin and lower income taxes, which were partially offset by higher operating expenses.
With respect to COVID-19, as I mentioned earlier, we have now received accounting orders in each of our jurisdictions to defer the costs and benefits associated with COVID-19.
And those will be addressed in future proceedings with each of those commissions.
We expect a gradual economic recovery that will still have some depressed load and customer growth in '21.
We expect that to start improving in the second half of '21, our economy.
We do have decoupling and other regulatory mechanisms, which mitigate the impacts of changes in load for our residential and certain commercial customers.
Over 90% of our revenue, as you recall, is covered by regulatory mechanisms.
As Dennis mentioned, we continue to be committed to investing the necessary capital in our utility infrastructure.
We expect our capital expenditures in 2021 to be about $415 million and at AEL&P we expect about $7 million and about $15 million in our other businesses.
With respect to our liquidity, as of December 31, we have $270 million of available liquidity under our committed credit line at Avista Utilities and in 2020 we issued about $72 million in stock in 2020.
In '21 we expect to issue about $75 million of equity or stock and up to $120 million of long-term debt.
As Dennis mentioned, we are initiating guidance not only for 2021 but also for 2022 and 2023.
And as we mentioned those ranges, this is to get us back to earning our allowed return by 2023 and our guidance does assume timely and appropriate rate relief in each of our jurisdictions relative to the capital expenses that we have going forward.
We experienced regulatory lag during '20 and expect this to continue through the end of '22 due to our continued investment in infrastructure and our delayed filings.
We again delayed last year as we talked about with the pandemic in Washington and Idaho.
Dennis mentioned those earlier.
We expect our cases in Washington and Idaho along with new rates to provide some relief in 2021 and begin reducing that regulatory lag.
Going forward we'll strive to continue to reduce debt and closely align our returns to those authorized by '23.
After '23 we expect to grow at 4% to 6% our earnings.
Our '21 guidance reflects unrecovered structural cost estimated to reduce the return on equity by approximately 70 basis points and in addition our timing lag, which is what we're trying to reduce with rate cases has reduced it by about 100 basis points.
This results in expected return on equity for Avista Utilities of approximately 7.7% in 2021.
We are forecasting operating cost growth of about 3% and customer growth of about 1% annually, which has slightly improved from prior numbers on the customer growth side.
For 2021 we expect Avista Utilities to contribute in the range of a $1.93 to $2.07 per diluted share and the midpoint of our guidance does not include any expense or benefit under the ERM.
Our current expectation for the ERM is in the benefit position within the 75% customer, 25% company sharing band which is expected to add $0.05 per diluted share.
For 2021 we expect AEL&P to contribute in the range of $0.08 to $0.11 per diluted share and our outlook for both Avista Utilities and AEL&P assumes among other variables, normal precipitation and hydroelectric generation for the year.
We expect a loss between $0.05 and $0.02 per diluted share for our other businesses as we continue to develop opportunities for the future.
We'll spend a little bit of money in the next couple of years to continue to get those earnings up over the course of the next five years and we look forward to those opportunities.
They're both in our service territory and in funds.
Our guidance generally includes only normal operating conditions and does not include any unusual or non-recurring items until the effects are known and certain.
| q4 earnings per share $0.85.
earnings guidance of $1.96 to $2.16 per diluted share in 2021.
earnings guidance of $2.18 to $2.38 per diluted share in 2022.
earnings guidance of $2.42 to $2.62 per diluted share in 2023.
expect to experience increased costs in 2021 associated with exploring strategic business opportunities.
|
A copy of which is available on our Investor Relations 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.
Lastly, there are two items that have been posted to the Investor Relations section of our website for your reference.
To ensure our disclosures are consistent, these slides provide the same details as they have historically, and as I have said, are available on the Investor Relations section of our website.
With these formalities out of the way, I'm joined by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
Mollie, can you hear me OK?
Let me start with a couple of preliminary remarks before we get into it.
So I apologize for the inconvenience and want to express our appreciation for you all, juggling your calendars to be here.
Second, my second point was going to be, I thought a positive point.
I was going to, maybe for the first time ever, begin to talk a little positively on the COVID situation.
And I was going to express my hope that we are finally, in many places around the world and I hope where you are, starting to see some movement toward the normality.
I still hope that, but I think the events in the Ukraine in the last little while, remind us that the hope to normality, unfortunately, is not just limited to COVID.
So I wish many good wishes to you and any colleagues, family, friends who are affected by that situation.
Let me turn to what I think is a much more positive set of messages.
As I'm sure many of you have by now have already seen, 2021 was another terrific year in the face of the global pandemic, and as we'll talk about, the worst restructuring market in probably the last 15 years, we delivered another record year.
And let me stress that word another.
We've now had 7 years in a row of adjusted earnings per share growth.
7 years in a row in the face of COVID, fluctuating restructuring markets, turning around core strategies, expanding geographies, entering new adjacencies, lumpiness from big jobs coming or going, heightened competition, and attracting talent among lots of other challenges.
7 years in a row of growth in adjusted EPS, which is the easiest thing to measure, but also, to me, far more important in the underlying drivers of those financial results.
The talent level of our organization, the ambition of it, the energy, the commitment of our people, the leadership, the number of great assignments we are working on, the client relationships we forged, and the enhancement of our reputation that all those factors have driven.
We don't have a single business that has guaranteed automatic growth every quarter.
In fact, if you look back over these several years, many of our teams in sub businesses during this period were down multiple quarters in a row, as they face difficult markets or made big investments, or had big jobs end.
What I believe our results have shown is that over any extended period of time, those short-term factors don't matter.
Rather over any extended period of time when our teams do the right things, they control our destiny.
We create our own future.
Over time, we have shown ourselves able to attract great talent to support the growth of that talent in our organization, to double down and reinforce core positions in core markets, to expand into new adjacencies, and as a consequence of all that, make ourselves ever better able to serve our clients, to build our businesses, to build our brand.
It is that commitment, those efforts by our leaders and our teams that have allowed us to grow seven years in a row.
And over those last four years -- in the last four years of that, in the face of good markets and bad markets, to average double-digit organic top-line growth.
To me, that demonstrates something important.
It demonstrates that FTI is not the cork on the restructuring wave that some described us as when I joined.
Rather, I think our teams have shown that when we do the right things, we have multiple, multiple businesses that are each powerful growth engines, engines that, of course, can get buffeted by markets or other short-term factors over any extended period of time, engines that could plow through markets, plow through them and find their way toward success in attracting and developing talent, success in brand building assignments and success in financial results.
Over the past several years, I believe we've seen examples of that in every business.
This year, in the resilience of CF, the comeback of FLC in some parts of Econ business, in the last several years, the extraordinary performance of our tech business following the strategic changes they made five years ago or the performance of our stratcom business over now seven years.
And I think the story is similar, if you think about it instead of by segment but by geography.
Just think about the challenges our teams had of taking on difficult positions in, say, Australia or LATAM.
They were not small, nor is the challenge of conquering new markets in Europe.
But that's why I think our teams very much deserve the sense of excitement and pride that they have when they turned those platforms positions into platforms for growth.
For the second point, let me pick up on that word platform.
What I'd like to underscore is that to me, the successes we have been having are not the end, but rather the beginning.
The success we've had has left us with powerful platforms that we can leverage going forward to extend that growth, to build upon it.
The success we've had in stability now to bet boldly in Germany and France, in The Netherlands, in China, in the Middle East, and in other places in a way that we could never have done a few years ago.
It gives us the ability to invest behind that successful tech business and that successful Stratcom business to drive our investigations business, to grow all those non-restructuring services in CorpFin, and in the face of a slow restructuring market to commit to continue to grow that business, to extend that global leadership, confident that it will eventually pay off in a big way and brand assignments in leadership positions in attracting great talent.
To me, to my knowledge, this company has never had such a rich set of opportunities before it as we do today.
And that brings me to the third point to preview something Ajay will discuss, which is there's always near-term risk in these sorts of investments.
Let me spend a minute on that.
As you know, our investments are typically in hiring.
If one instead buys a company, the investment shows up in its capital.
If on the other hand, you hire a lot of people, it shows up in EBITDA.
This year, our ambition is to have the highest organic growth rate during my tenure and I guess is during the company's entire history, the highest organic growth rate.
There is no way to make those sorts of bold bets without facing some short-term financial risk.
And if you want to underscore some of the negatives, we're making those bets at a time when our most profitable business, our restructuring business, is facing market demand that is lower than it's been in 15 years according to one measure and 20 years according to another measure.
And we no longer have the rollover of the large restructuring jobs from the early parts of the 2020.
And we're facing compensation pressure due to wage inflation in a tight talent market.
And at the same time, we're expecting rising SG&A expenses due to a rebound in travel expenses post COVID, as well as investments in infrastructure, to support the growth.
So one can get worried about the number of bets we're making.
One could wonder in the face of that, could we cut back on our bets.
Of course, we could.
But let me underscore something else.
I don't believe that's how one makes a company like this soar.
It's not how we've built this company over the last seven years.
It's not how we've achieved the growth we have.
My experience is when you have great people and great bets to make, you commit to those people, you commit to those opportunities and you make those bets.
And you live with any potential short-term dislocations in the P&L.
Because if you do, even if there are short-term dislocations in the P&L in a couple of quarters or a year in the medium term, the company soars, it delivers for your clients.
It delivers for the people whose energy and sweat makes that success happen.
And ultimately, thereby it delivers for the shareholders, as you have seen now over the last seven years.
So we are making those bets this year.
And there is some risk in the near-term P&L.
But I will say those bets, those opportunities have left me never more excited about where we can take this company over the next while.
I so look forward to sharing that journey with each of you.
I will begin with some highlights from our full year 2021 performance.
Revenues of $2.78 billion increased $314.9 million from $2.46 billion in 2020.
GAAP earnings per share of $6.65 increased $0.98 from $5.67 in 2020.
Adjusted earnings per share of $6.76 increased $0.77 from $5.99 in 2020 and adjusted EBITDA of $354 million was up $21.7 million from $332.3 million in 2020.
Our record performance this year is primarily because of 12.8% revenue growth, once again demonstrating how beneficial it is to have the breadth of our service offerings.
In 2021, demand continued to decline for restructuring, often our highest margin service offering as access to capital remained abundant and many pandemic-related moratoriums and insolvency proceedings were extended.
Conversely, the continued high level of liquidity in the market spurred record levels of M&A activity, which drove strong demand for our economic consulting and technology segments, as well as our transactions practice within our corporate finance and restructuring segment.
Our forensic and litigation consulting, or FLC segment, which was heavily impacted by pandemic-related travel restrictions and core closures in 2020, saw activity levels rebound across almost all practice areas in 2021.
So FLC has not yet reached pre-COVID-19 levels of business activity across the entire segment.
Lastly, our strategic communications segment recovered well from COVID-related impacts in 2020 and delivered a record year.
We also continue to invest in people.
Our total headcount increased 7.3% year over year on top of the 13.5% increase in total headcount in 2020.
Revenue growth more than offset the increase in direct costs, primarily from headcount growth and higher variable compensation, and an increase in SG&A expenses.
Now I will turn to fourth quarter results.
For the quarter, revenue of $676.2 million increased $49.7 million or 7.9%, with revenues increasing across all business segments compared to the fourth quarter of 2020.
GAAP earnings per share of $1.07, compared to $1.57 in the prior-year quarter.
Adjusted earnings per share of $1.13, which excludes $0.06 of noncash interest expense related to our 2023 convertible notes, compared to adjusted earnings per share of $1.61 in the prior-year quarter.
Of note, the fourth quarter of 2020 included a significant tax benefit resulting from the use of foreign tax credits in the U.S. and a deferred tax benefit arising from an intellectual property license agreement between our U.S. and U.K. subsidiaries, which boosted both fourth quarter of 2020 GAAP and adjusted earnings per share by $0.32.
Net income of $38.2 million, compared to $55.6 million in the fourth quarter of 2020.
Adjusted EBITDA of $62 million, compared to $82.3 million in the prior-year quarter.
Now turning to our performance at the segment level for the fourth quarter.
In corporate finance and restructuring, revenues of $231.5 million increased 5.3% compared to Q4 of 2020.
The increase was due to higher demand for business transformation and transaction services, as well as an increase in pass-through revenues and success fees, which was partially offset by lower demand for restructuring services compared to the prior-year quarter.
Business transformation and transactions represented 62%, while restructuring represented 38% of segment revenues this quarter.
This compares to business transformation and transactions representing 44% and restructuring representing 56% of segment revenues in the prior-year quarter.
As business transformation and transactions grew 50%, while restructuring revenues declined 27%.
Adjusted segment EBITDA of $22.2 million or 9.6% of segment revenues, compared to $35.4 million or 16.1% of segment revenues in the prior-year quarter.
This decrease was primarily due to higher compensation, which was largely related to an increase in variable compensation and higher SG&A expenses.
In FLC, revenues of $138 million increased 8.5% compared to the prior-year quarter.
The increase was primarily due to higher demand for health solutions and investigation services.
Adjusted segment EBITDA of $8.5 million or 6.2% of segment revenues, compared to $7.6 million or 6% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, which was partially offset by an increase in SG&A expenses and compensation.
Economic consulting's revenues of $172.3 million increased 7.4% compared to Q4 of 2020.
The increase in revenues was primarily due to higher demand for non-M&A-related antitrust and financial economic services, which was partially offset by lower demand for M&A-related antitrust services compared to the prior-year quarter.
Non-M&A-related antitrust services represented 33% and M&A-related antitrust services represented 20% of total segment revenues for the fourth quarter.
Adjusted segment EBITDA of $30 million or 17.4% of segment revenues, compared to $31.3 million or 19.5% of segment revenues in the prior year quarter.
This decrease was primarily due to higher compensation.
In technology, revenues of $64.6 million increased 10.2% compared to Q4 of 2020.
The increase in revenues was primarily due to higher demand for investigations and litigation services.
Adjusted segment EBITDA of $7.8 million or 12.1% of segment revenues, compared to $10.2 million or 17.3% of segment revenues in the prior-year quarter.
This decrease was primarily due to higher compensation, which includes an increase in variable compensation and the impact of a 14.7% increase in billable headcount, as well as higher SG&A expenses.
Lastly, in strategic communications, revenues of $69.9 million increased 15.5% compared to Q4 of 2020.
The increase in revenues was primarily due to higher demand for corporate reputation and public affairs services.
Adjusted segment EBITDA of $14.9 million or 21.4% of segment revenues, compared to $11.7 million or 19.4% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, which was partially offset by an increase in compensation and SG&A expenses.
I will now discuss certain cash flow and balance sheet items.
Net cash provided by operating activities of $355.5 million, compared to $327.1 million in the prior year.
Free cash flow of $286.9 million in 2021, compared to $292.2 million in 2020, primarily due to an increase in net cash used for purchases of property and equipment, which includes capital expenditures related to our new office in New York City.
There were no share repurchases in Q4 of 2021.
For the full year 2021, we repurchased 422,000 shares at an average price of $109.37, for a total cost of $46.1 million.
Cash and cash equivalents at the end of the year were $494 million -- $494.5 million.
Total debt net of cash of negative $178.2 million on December 31, 2021, decreased $199.5 million compared to December 31, 2020.
Turning to our 2022 guidance.
We are, as usual, providing guidance for revenues and EPS.
We estimate that revenues for 2022 will be between $2.92 billion and $3.045 billion.
We expect our earnings per share to range between $6.40 and $7.20.
Of note, due to our adoption of a new accounting standard change that went into effect on January 1, 2022, we will not record noncash interest expense related to our 2023 convertible notes.
As such, assuming no other future special charges or adjustments, we currently expect earnings per share and adjusted earnings per share to be the same in 2022.
Additionally, pursuant to the first supplemental indenture for our 2023 convertible notes that was effective on January 1, 2022, the company is now required to settle the principal amount of our 2023 convertible notes that is due upon conversion in cash only versus at our option in cash or stock or a combination.
We retained the option of settling the premium, if any, due upon conversion of our 2023 convertible notes in cash or stock or a combination.
Importantly, none of these changes affect the calculation of adjusted earnings per share in the prior periods.
Turning to our guidance.
Our 2022 guidance range incorporates several assumptions.
First, as we have the wherewithal, intent, and opportunity to invest for growth, our plans include aggressive hiring globally.
Though there is no certainty that we will be successful in such hiring, aggressive headcount additions typically result in reduced profitability in the short term.
Coupled with investment in headcount, there is also increasing pressure on wages, and not all of this expense may be recoverable in price increases.
Second, though we believe we are the leader in restructuring globally, and we intend to maintain that position, we currently expect restructuring activity to improve only moderately over the course of 2022.
Additionally, many of the large restructuring engagements we supported in 2020 and 2021 has now concluded.
Moody's trailing 12-month global default rate for speculative-grade corporate issuers was 1.7% as of the end of 2021, down from 6.9% in December of 2020.
Moody's is currently forecasting that this rate will fall to a bottom of 1.5% in Q2 of 2022 and will gradually rise to 2.4% by the end of 2022.
Some analysts don't expect a rebound in restructuring activity until 2023.
Third, global M&A activity, which drives demand in our economic consulting and technology segments, as well as our transactions business and corporate finance and restructuring was at record levels in 2021.
Though we currently expect that this elevated level of activity will continue, regulatory scrutiny, crystal policy, and other events globally may dampen such demand.
Fourth, demand in our FLC segment improved significantly in 2021 compared to pandemic-related lows in performance in 2020.
However, over the course of 2021, demand for these services weakened.
Our current expectation is for a rebound in such demand in 2022.
Fifth, certain aspects of SG&A such as travel and entertainment, have remained depressed due to the pandemic.
Our expectation is that in 2022, SG&A may revert back closer to the per-person levels we saw in 2019.
Sixth, we expect a higher effective tax rate in 2022.
We currently expect our full year 2022 tax rate to range between 22% and 25%, which compares to 21.1% in 2021.
Overall, based on our expectation for a gradual improvement in demand for restructuring and FLC services, our guidance assumes that the second half of 2022 will be stronger than the first half.
I must point out that our assumptions define a midpoint and a range of guidance around such midpoint, which I characterize as our current best judgment.
Often, we find actual results are beyond such range, because ours is largely a fixed cost business in the short term and small variations in revenue may have an outsized impact on income.
And now, I will close my remarks today by emphasizing a few key themes.
First, we believe FTI is unique in having such a diverse mix of services and that helps us thrive regardless of business cycle.
Second, our investment to build expertise in areas like information governments, privacy and cybersecurity, public affairs, and in industry verticals like energy, power and renewables and financial services and in geographies, including Continental Europe, the Middle East, and Australia are paying off, and we intend to double down on these and other investments.
Non-U.S. revenues have more than doubled in the last five years, while U.S. revenues have grown by a third over that time frame.
Third, our leadership remains focused on growth with strong staff utilization and realization.
And finally, our business generates excellent free cash flow, and our balance sheet is exceptionally strong.
We have the capacity to continue to boost shareholder value through organic growth, share buybacks, and acquisitions when we see the right ones.
| sees fy earnings per share $6.40 to $7.20.
q4 adjusted earnings per share $1.13.
q4 earnings per share $1.07.
q4 revenue rose 8 percent to $676.2 million.
sees fy 2022 revenue $2.92 billion to $3.045 billion.
|
I am pleased to report the results for the second quarter of 2021.
Our properties experienced unprecedented demand in the quarter.
Our MH revenue, RV revenue, home sales and subscription revenue exceeded our expectations.
We continued our record of strong core operations and FFO growth with a 30% growth in normalized FFO per share in the quarter.
While this great -- growth rate is significantly impacted by the negative comps from 2020, it represents 28% growth from the second quarter 2019.
New customer growth in both MH and RV contributed to the positive results in the quarter.
Year-to-date, new home sales grew by 122% contributing to the high quality of occupancy at our MH communities.
Homeowners grew by 179 in the quarter, driven by a record number of new home sales.
Our residents recognize the high quality and value of homes in our communities and are especially motivated to buy given trends in the broader real estate market.
We continue to focus on digital marketing and our website experience as a catalyst for growing our home sales pipeline.
The unique traffic to our website has grown over 35% compared to the same time prior to the pandemic.
Within our RV platform, we saw increased demand during holidays and weekends, as well as strength in weekday activity.
We saw an increase in customers committing to us on an annual basis.
The resort LifeStyle appeals to our customers as they choose an ELS property for their second home.
We are attracting a larger number of new guests than in previous years and new customers look a lot like our pre-pandemic guests, indicating stability in our growing customer base.
The number of new customers added to our database during the first half of 2021 is up 25% compared to 2019.
These, first time our viewers are drawn to campaign because of an increased desire to spend time outside and the feeling that campaign is a safe activity.
We see our new customers choosing to increase engagement with us.
Our subscription-based Thousand Trails Camping Pass showed significant growth in the quarter.
Over 8,000 new members purchase a campus, which was an increase of 40% over the second quarter of 2020.
We reached a new high with almost 50% of all camp passes being sold online.
With increased RV sales, we saw our RV dealer past activations increased 39%.
In our customer surveys, our new customers are indicating that they intend to camp more even after returning to other vacation travel including plane travel and hotel stays.
In 2020 to help support the safety of our guests and team members, we launched a new online check-in option for our RV guests.
Since launch, over 250,000 reservations were completed through the online check-in process allowing them to get to their site more quickly and with less direct interaction.
The 2021 TripAdvisor Traveler's Choice Awards have been announced and we are pleased that 54 of our properties won this year, 26 of those properties are Hall of Fame winners as they have maintained a Travelers' Choice Award for 5 years.
Our guests reported high satisfaction levels based on the experience provided by our teams at our properties.
Based on the second quarter survey results, guests responded to customer experience questions with a rating of 4.46 out of 5.
In May, we released our Annual Sustainability Report, highlighting our commitments to American Forest and Marine Life as well as our ongoing project centered around energy efficiency at our properties.
We have increased our efforts to bolster diversity through our CEO action pledge, expanded learning curriculum and recruitment efforts.
The report highlights all the ways that we unite people, places and purpose within our communities.
We are halfway through our primary camping season and the feedback we've received is a testament to the hard work of our teams in the field and in the home and regional offices.
I will review our second quarter results, highlight our guidance assumptions for the third quarter and full year 2021 and discuss our balance sheet and debt market conditions.
For the second quarter, we reported $0.61 normalized FFO per share, $0.07 ahead of the midpoint of our guidance range.
The main drivers of outperformance compared to our guidance were core RV rent revenues and membership revenues including upgrade sales.
Our core MH rent growth of 4, 7% consists of approximately 4.1% rate growth and 60 basis points related to occupancy gains.
We have increased occupancy 153 sites since December with an increase in owners of 283, while renters decreased by 130.
While our occupied sites increased during the second quarter, our reported occupancy percentage reflects the impact of expansion sites we've added to our portfolio.
Core RV resort base rental income from annuals, increased 7.5% for the second quarter and 5.6% year-to-date compared to the same periods last year.
Annual RV rate increases, continue to be in line with our expectations.
Increased occupancy from annual RV residents in our Northern properties was higher than expected during the quarter.
The average annual rates in these locations are lower than our Southern and Western Resorts, so the increased occupancy slightly reduced our core portfolio average rate.
For the quarter, RV rent from seasonal, increased 31% and rent from transients increased 180% compared to 2020.
The comparison to prior year is impacted significantly by COVID-related property closures and shelter in place orders that were in effect during the second quarter 2020.
Strong demand in the quarter is evidenced by seasonal and transient growth rates of 19% and 50% respectively over 2019.
Membership dues revenue increased 10.1% and 7.2% for the quarter and year-to-date respectively compared to the prior year.
Year-to-date, we've sold approximately 13,000 to 500,000 Trails Camping Pass memberships, this represents a 50% increase over the same period in 2020 and an increase of 32% over the same period in 2019.
The net contribution from membership upgrade sales year-to-date is $5 million higher than 2020.
During the quarter, members purchase more than 1,200 upgrades at an average price of approximately $7,400.
Core utility and other income was higher than expected during the quarter as a result of the receipt of insurance proceeds related to Hurricane Hanna in 2020.
We recognized approximately $2.3 million of income in the quarter related to that storm event.
Core property operating, maintenance and real estate tax expenses were generally in line with our expectations for the quarter, higher than expected utility expenses for offset by lower payroll expense as we faced challenges filling open positions across the portfolio.
The comparison to second quarter 2020, shows an elevated expense growth rate as a result of the COVID-related limited operations conducted across our portfolio during the second quarter last year.
In summary, second quarter core property operating revenues increased 14.9% and Core property operating expenses increased 13.9%, resulting in an increase in core NOI before property management of 15.6%.
For reference, the second quarter core NOI growth CAGR from 2019 is 8%.
Income from property operations generated by our non-core portfolio was $5.2 million in the quarter.
This result was higher than our expectations in part because of the NOI contributed by Pine Haven, the RV resorts we acquired during the quarter.
Revenues from annual customers at the marinas and other properties in the non-core portfolio generated more than 90% of total non-core revenues in the quarter and year-to-date periods.
Property management and corporate G&A expenses were $26.8 million for the second quarter of 2021 and $52.7 million for the year-to-date period.
Other income and expenses generated a net contribution of $5.7 million for the quarter.
New home sales profits along with the recovery in our ancillary retail and restaurant operations contributed to an increase of $4 million in sales and ancillary NOI compared to the second quarter 2020.
Interest and related loan cost amortization expense was $27.1 million for the quarter and $53.4 million for the year-to-date period.
As I provide some context for the information we've provided, keep in mind my remarks are intended to provide our current estimate of future results.
A significant factor in our guidance assumptions for the remainder of 2021 is the level of demand for transient stays in our RV communities.
We have developed guidance based on our current customer reservation trends.
Our full year 2021 normalized FFO is $2.47 per share, at the midpoint of our range of $2.42 to $2.52 per share.
Normalized FFO per share at the midpoint represents an estimated 13.4% growth rate compared to 2020.
Core NOI is projected to increase 7.9% at the midpoint of our range of 7.4% to 8.4%.
The core NOI growth rate increased from our prior guidance is mainly the result of our second quarter outperformance.
Our expectation for the third and fourth quarters has been updated to include MH occupancy gains in the second quarter, current RV reservation trends and expense adjustments based on year-to-date activity.
As a reminder, we make no assumptions for storm events or other uninsured property losses we may incur.
Our guidance for the full year and third quarter includes the impact of the acquisition activity we've closed in the first and second quarters with no assumptions for additional acquisitions during the year.
We've also included the impact of the financing activity we've disclosed including the recast of our unsecured credit facility.
We expect third quarter normalized FFO at the midpoint of our range of approximately $119.5 million with a per share range of $0.59 to $0.65.
We expect the third quarter to contribute 25% of full year normalized FFO.
We project a core NOI growth rate range of 8.7% to 9.3%.
MH and RV annual growth -- rate growth assumptions for the third quarter and full year remained consistent with our prior guidance.
We've built our transient RV revenue assumptions for the third and fourth quarters using factors including current reservation pace compared to both 2020 and 2019.
Our guidance for the third quarter assumes a growth rate of approximately 23% compared to 2019, this represents a core transient RV revenue increase of approximately $3.5 million compared to 2020.
Our fourth quarter assumptions include a reopening of the Canadian border and return of those customers for the upcoming winter season.
Now, some comments on debt markets and our balance sheet.
Current secured debt terms available for MH and RV assets range from 50% to 75% LTV with rates from 2.5% to 3.5% for 10-year maturities.
High quality age-qualified MH will command best financing terms.
RV assets with a high percentage of annual occupancy have access to financing from certain life companies as well as CMBS lenders.
Life companies continue to quote competitively on longer term maturities.
We continue to place high importance on balance sheet flexibility and we believe, we have multiple sources of capital available to us.
Our debt-to-EBITDAre is 5.4 times and our interest coverage is 5.4 times.
The weighted average maturity of our outstanding secured debt is approximately 12.5 years.
| q2 adjusted ffo per share $0.61.
|
A copy of the release can be found on our IR website at ir.
These statements contain elements of uncertainty, which we have laid out on Slide 2 under the cautionary statement.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please also note that we'll be using combined historical results for the first quarter as defined as three months of legacy IFF results, and two months, February and March, of N&B results, in both the 2020 and 2021 period, to allow for comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig; and our Executive Vice President and CFO, Rustom Jilla.
I will begin today's call by providing an overview of our first quarter results, including a review of our performance by region and segment.
I would also like to share with you an update regarding our efforts to integrate DuPont, N&B business, which continues to progress well, following the completion of our transaction in February.
Rustom will then provide a more detailed financial review of the business, highlighting segment level business dynamics and performance and cover cash flow and leverage as well.
IFF is off to a strong start in 2021, and I'm confident that the momentum we have built will continue for the remainder of the year and beyond.
Now beginning with Slide 6, I would like to review our performance and notable developments in the first quarter.
We achieved 3% in combined sales growth, or 1% in currency-neutral basis, compared to the first quarter of 2020.
Also because of our change to a fiscal calendar rather than a traditional 4-4-5 calendar, we have had less -- two days less in first quarter.
If we were to normalize for that, our combined currency-neutral growth in the first quarter would also have been approximately 3%.
And on a two-year average basis, to factor in our strong 7% year-ago comparison, growth would be strong at approximately 5%.
Our adjusted operating EBITDA margin improved by 30 basis points, reflecting our team's diligent execution of our cost management strategy.
IFF also continues to generate strong free cash flows, and we remain on track to meet our deleveraging target.
For the first quarter, our leverage ratio was 4.3 times.
I'm also pleased to say we have reached an agreement to divest our fruit preparation business to Frulact, who specializes in fruit preparations for the food & beverage industry.
The divestiture is expected to close in the third quarter 2021, pending customary closing conditions, including regulatory approvals.
The fruit preparation business contributed approximately $70 million to IFF's Nourish segment pro forma sales in 2020.
This is our first step in terms of our portfolio optimization strategy.
So, I expect more news as we progress through 2021.
As you can see, we have established a solid foundation to carry us forward.
As we have said before, the opportunities in front of us and our mission is to execute on our plan to deliver industry-leading returns for our shareholders.
As we move into the second quarter, we remain squarely focused, leveraging our new capabilities to reach our business objectives, and further establish ourselves as an innovation leader in a global value chain for consumer goods and commercial products.
Now on Slide 7, I would like to briefly discuss the regional sales dynamics that have influenced our first quarter financial results.
As you all know, there are notably significant differences in how different countries are managing the continued impacts of the pandemic.
So we want to talk to the dynamics we are seeing in our business across the world.
We are pleased to report that most of our operating regions saw sales growth in Q1.
In North America, we achieved solid performance across our portfolio with growth in nearly all of our segments.
This performance in North America reflects the impressive results in our Scent segment.
We continued to see healthy performance across our Asian markets, achieving a 6% increase in combined currency-neutral sales, primarily driven by double-digit growth in China and India.
While we are pleased to see growth across many of these key markets, we must recognize that our growth in India could be challenged in the near term as the country is grappling with hardship related to the pandemic.
We wish everyone in India, our Indian colleagues and their loved ones the very best, and hope to see rapid improvement in conditions.
In Latin America, we saw an 11% increase in overall sales for the region with growth primarily driven by local currency sales.
Two highlights, that I would like to call out, in Brazil and South Cone, where both grew double-digits in Q1.
COVID-19 and related ongoing restrictions continue to heavily impact Western and Central Europe, which has resulted in challenges across the entire EMEA region and a 5% decline in overall sales.
That said, we remain optimistic about the region's recovery as global vaccination rates increase and related restrictions ease.
As we press ahead, we will continue to work diligently with our regional teams and communities, particularly those that remain on the most pandemic-related pressure to adapt our [Phonetic] supply chain ensure that our customers continue to receive the leading solutions they have come to expect.
Let's move to Slide 8.
I would now like to review our first quarter sales performance across IFF's key business segments, so you can get a more granular view.
We are pleased to report solid growth across our Nourish, Pharma Solutions and Scent divisions.
Our largest group, Nourish, achieved combined currency-neutral sales growth of 1%, led by robust performance in Flavors.
We continue to see pandemic-driven headwinds in Food Design, which is driven primarily by continued declines in Food Service.
This channel, while improved from the fourth quarter trends, was down mid-single digits in the first quarter.
Scent continued its strong performance, achieving combined currency-neutral sales growth of 5%, the largest growth driver across our four divisions, led by continued strengths in Consumer Fragrances, double-digit growth in Cosmetic Actives, and a strong rebound in Fine Fragrance.
For our Pharma Solutions division, we achieved combined currency-neutral sales growth of 3%, with continued strong performance across the entire division and all sub-categories.
For Health & Bioscience division, combined currency-neutral sales decreased 3% against a strong double-digit year-ago comparison.
Increases in both health and home and personal care were offset by pressures in Microbial Control and Grain Processing.
Together, we have an in demand and diversified portfolio that is meeting that needs of our core end markets.
I feel, we are very well-positioned to continue executing our ambitious growth initiatives and the complexity of the global marketplace.
Now turning to Slide 9, I want to show a summary that highlights our business performance, particularly with regard to the segment-level adjusted operating EBITDA margin.
As you know, we are focused on driving overall group operating efficiencies as we execute on our integration plans.
Rustom will cover our first quarter segment performance in much more detail, but I wanted to present this slide as it will be included in our standard earnings package going forward, specifically focusing on year-to-year performance.
Some highlights for Q1, that are worth mentioning; within our largest division, Nourish, I'm very pleased to see early progress on margin expansion.
We achieved strong results in our Scent division.
The team did a great job, driving higher volumes, benefiting from the rebound in Fine Fragrance, which drove favorable mix and continued, therefore, to capture productivity savings.
In H&B and Pharma Solutions, adjusted operating EBITDA margins were pressured by increased raw materials and logistics costs, which overshadowed the strong cost discipline the team has accomplished.
Now on Slide 10, I would like to provide you with an update on our integration progress with N&B.
Since completing our combination in February, we have achieved several financial organizational integration milestones, which reflect the incredible efforts of our global team.
From an organizational perspective, we have established a comprehensive operating and leadership structure for our combined company, having identified and announced roles all the way from CEO, down to third level leaders.
These leaders are working closely with the integration management office to ensure that all employees are provided for the tools and resources they need to succeed.
They've also completed all IT migration from DuPont to IFF, and are on schedule regarding exiting many of our transition service agreements with DuPont.
On the revenue synergies front, we have a robust pipeline of projects, including both cross-selling and integrated solutions, that we expect will accelerate our ability to meet our $20 million synergy target this year.
This quarter, we achieved a significant cross-selling win within our Health & Bioscience divisions by detergents, and we've invoiced our first sales in April.
We are pleased with our project pipeline and with the efforts so far, and continued expressions of demand from customers.
We are confident in our ability to meet our three-year run rate synergy target of $400 million.
From a cost synergy perspective, we are under way and already seeing modest P&L benefits, given we are in early days.
We expect these cost savings to increase over the course of the year, putting us well on track to meet our $45 million cost synergy target in the full year 2021, and our year three run rate cost synergy target of $300 million.
I would now like to pass the call over to Rustom, who will provide a more detailed review of our financial performance in the first quarter.
First, let me go a bit deeper into our consolidated financial results.
In the first quarter, IFF generated $2.5 billion in sales, a 3% combined year-over-year increase, including foreign exchange benefits, or up 1% on a currency-neutral basis, primarily led by strong performances in our Scent and Pharma Solutions divisions.
As you may recollect, from 2021 onwards we are applying prior-year average FX rate to our current year non-US dollar revenues to derive currency-neutral growth rates.
This is the more common practice and makes us more comparable to our competitors.
Our gross margin was impacted in Q1 at Nourish, H&B and Pharma by higher raw material and logistics costs headwinds arising from input cost inflation and higher freight rates, tight inventories and weather-related plant disruptions.
Meanwhile, our aggressive cost management program led by headcounts and other expense reductions, enabled us to improve RSA to sales by 120 basis points and deliver year-on-year adjusted operating EBITDA growth of 4%.
As an aside, Q1 2020 was our most difficult comp with 7% combined currency-neutral sales growth and strong adjusted operating EBITDA growth.
IFF also delivered adjusted earnings per share, excluding amortization of $1.60 for the first quarter.
Now on Slide 12.
I'd like to discuss the first quarter performance of Nourish, which now includes the enhanced capabilities of N&B's pharma, food and beverages business.
Nourish sales totaled $1.3 billion for the quarter, representing 1% growth on a combined currency-neutral basis.
Adjusted operating EBITDA grew 6%, with a 60 basis point margin expansion led by strong cost management.
Looking at Nourish's performance by business, Flavors drove growth in nearly all our regions.
Within ingredients, which was flat year-over-year, Protein Solutions grew double-digits, but this was offset by softness in emulsifiers and sweeteners.
Continued pandemic-related challenges impacted Food Design, particularly Food Service, which declined mid-single-digits year-over-year.
As the effects of the COVID-19 pandemic lessen, and retail and away-from-home channels continue to recover, returning to growth in this area, while maintaining our strong performance in Nourish's other segments will remain a top priority for the remainder of 2021.
Moving to Health & Biosciences on Slide 13.
As Andreas noted, H&B had a combined currency-neutral sales decline of 3%, but this was against a robust 11% positive year-over-year comparison.
It should be noted that on the two-year average basis, currency neutral growth was solid at 4%.
Adjusted operating EBITDA was also pressured and operating margin declined by 70 basis points, primarily driven by lower segment volumes and higher raw material and logistics costs.
Our Home & Personal Care business grew strong double-digits this quarter, supported by evolving consumer buying trends related to the pandemic that has persisted through Q1.
But declines in Animal Nutrition this year, when compared to mid-teen growth in the prior-year period, offset that performance and impacted overall year-over-year growth.
Microbial Control & Grain Processing were also impacted by continued pre-COVID cycling, which impacted H&B's overall growth by approximately 5 percentage points.
We are pleased to say that over the course of the first quarter, these businesses showed improvement and were positive in April as we cycle the comparable.
We are encouraged by the tremendous performance of Home & Personal Care, which is a testament to evolving consumer trends that prioritize individual health more than ever before.
Turning now to Slide 14 to discuss the results of our Scent division.
Overall, we are very pleased with Scent's strong performance, which has been a significant contributor to our Companywide growth.
Our Scent division generated $569 million in total sales, representing 5% combined currency-neutral growth against a strong 7% growth in the year-ago period as well.
On a two-year basis, growth is exceptional at approximately 6%.
Adjusted operating EBITDA improved 8% with a 70 basis point margin expansion predominantly driven by volume growth across the entire segment, as well as favorable mix from Fine Fragrance recovery and continued productivity.
As we began to see last quarter, our Fine Fragrance business experienced a solid recovery as away-from-home restrictions continued to lift and consumer behavior returned to more traditional levels.
Coupled with this rebound, continued strength in Consumer Fragrances and mid-teens growth in Cosmetic Actives, resulted in another quarter of strong performance for the entire division, driven by volume recovery and new business wins across the segment.
Our new core wins also providing strong contributions with all three customers growing double-digits in the first quarter.
Now on Slide 15, I would like to discuss the results of Pharma Solutions, our fourth division.
As previously mentioned, Pharma Solutions had an impressive quarter of broad-based growth and made a solid contribution to IFF's overall higher Q1 sales.
Pharma Solutions delivered $162 million in net sales, representing 3% in combined currency-neutral growth while adjusted operating EBITDA grew 2%.
Taken in the context of the 11% growth in the prior-year period, growth is impressive on a two-year basis -- average basis at approximately 7%.
Looking at Pharma Solutions performance by business, Core Pharma and Industrial Pharma led the division with volume growth for METHOCEL, seaweeds and coatings, providing -- proving instrumental to Core Pharma.
And Global Specialty Solutions and Nitrocellulose supporting the success of Industrial Pharma.
While we are very pleased with Pharma Solutions' sales performance in the first quarter, we saw adjusted EBITDA margin declined due to higher cost of goods related factors.
More specifically, gross margin was hurt by higher raw material and logistics costs related to supply chain challenges and force majeures due to the bad weather in the Midwest earlier this year.
We had two plants shutdown temporarily, which impacted raw material availability and caused higher distribution costs.
Now turning to Slide 16, I'd like to review our cash flow dynamics and capital allocation, which remain a top priority.
As you will see, our operating cash flow was very strong at $358 million.
We are quite pleased with Q1 cash generation.
For legacy IFF, Q1 is usually the lowest cash flow quarter of the year.
We typically have net working capital headwinds, as we reset off Q4's loss and we make annual bonus payments in March.
And this year, we also had large deal-related costs such as, cost to achieve investment banking fees, consulting expenses, etc.
A large part of our Q1 success came from core working capital, where we generated $193 million, a great job by our global team and a great outcome.
But we don't expect this quarter after quarter, as we like to build inventory up in some of our legacy N&B business areas to support future growth.
In the first quarter, capex was approximately $93 million or 3.5% of sales, up from last Q1's combined comparative $76 million or 2.6% of sales.
Free cash flow generation was, therefore, strong $265 million, and we distributed $82 million in dividends to our shareholders.
Our leverage, which is net debt divided by credit adjusted EBITDA ended at 4.3 times, as Andreas noted back on Slide 6.
This is ahead of our expectation of 4.5 times first quarter post-merger leverage.
Now to provide some full year context.
Legacy IFF generated $520 million of free cash flow in 2020 and combined, we expect to generate $1 billion in 2021.
In 2021, we will invest more in legacy N&B production capacity to meet expected strong future demand, but will only be slightly above our original full-year capex projection of approximately 4.5% of sales.
The dividend payment this year will be -- this quarter will be $197 million reflecting our higher post-merger share count.
And we remain on track to meet our long-term deleveraging target of 3 times net debt to credit adjusted EBITDA in 24 months to 36 months from deal close.
Turning to Slide 17, I'd like to provide an update on our full-year 2021 consolidated financial outlook.
But before doing so, I want to remind everyone that in mid-April, we provided sales and adjusted EBITDA metrics for each of IFF's four segments on a 2020 pro forma and combined basis, and additional detail on a segment level via our Learning Labs series.
On a combined basis, IFF generated $10.6 billion of revenue for the full year 2020, with currency neutral growth of approximately 2%.
And our combined adjusted operating EBITDA margin for 2020 was approximately 22%.
Please remember that combined includes 11 months of N&B and 12 months of IFF in 2020 and 2021.
In our fourth quarter conference call in February, we gave initial pro forma guidance, which assume the full 12 months of IFF and N&B, in order to be directly comparable to our previously provided S-4.
Moving forward, to be more aligned with actual results and reporting, we are transitioning to guiding on 11 months of N&B, which excludes January and 12 months of IFF in the 2021 year, in light of the merger completing on Feb.
Also, please note that in January 2021, N&B's actual sales were approximately $507 million and adjusted operating EBITDA was $107 million.
Given our first quarter results, our April preliminary sales, our rest of year FX expectations incremental pricing to recover costs and the fact that Q1 was our toughest comparative period quarter, we are forecasting stronger sales growth through the rest of 2021.
We have, therefore, increased our sales expectation for 2021 to be approximately $11.25 billion in combined revenues, or plus 6% growth with an approximately 23% adjusted operating EBITDA margin.
Since the beginning of the year, we have seen a rise in the cost of goods, driven by input cost, including raw materials and logistics.
In terms of raw material costs, we are seeing a large increase in selected commodities, soy, locust bean kernels, vegetable oil, turpentine and propylene glycol.
In addition, freight costs are higher as a result of greatly increased rates.
For example, the global freight index is up three times due to non-availability of containers at contracted rate.
And we're also seeing an uplift in air freight volumes due to strong demand and supply chain challenges like force majeure earlier this year.
This has required us to go back to have additional pricing discussions to cover our exposure.
While we are confident that over time we can fully pass along the increase, there is a time lag before pricing is fully realized, which can pressure gross margin in the short-term.
Ultimately, by the end of the year, we are confident that through pricing and our ongoing focus on cost reduction, we can achieve our full year adjusted operating EBITDA goal on a combined basis.
With regard to Q2, we are pleased that we've started the quarter strong, a nice growth acceleration versus where we ended the first quarter.
We are optimistic that for the full second quarter, revenue growth including currency benefit should be in the high-single-digits range, with an adjusted EBITDA margin also around 23%.
To assist with understanding and modeling the new IFF, we are also sharing our expectations with regard to depreciation, amortization, interest expenses, capex, our adjusted effective tax rate, excluding amortization and our weighted average share count on a combined basis.
While, most of these metrics probably don't need to be elaborated upon, it's worth noting that we expect moderately higher capex in 2021, as we invest for growth and work to exit some of our IT-related transition services agreements with DuPont more quickly than planned.
We're also providing a 2021 adjusted effective tax rate, excluding amortization for the first time.
And the 21.5% is broadly in line with our early expectations.
This is still preliminary and will change as we finalize purchase accounting and intangibles by jurisdiction.
The equivalent for heritage IFF on a similar basis for the full-year 2020 was approximately 18.5%.
Collectively, these metrics and decisions reflect our confidence in IFF's ability to deliver solid results even in this volatile global environment.
It has truly been a busy quarter, and we all have much to be proud of, especially as this all was accomplished during a global pandemic.
Looking beyond our solid Q1 financial results, I want to reemphasize the important first step that we took in tightening our business and optimizing our portfolio strategy, by agreeing to divest our fruit preparation business.
By divesting this non-core business, IFF will be more efficient organization with a greater capacity to focus on growth and innovation across our key businesses, ultimately generating greater value for our shareholders.
As we enter Q2 together, we are confident that we have the right team and the right structures in place to ensure that our newly combined company will meet our financial and operational goals.
As I mentioned, we are targeting strong year-over-year financial improvements with accelerated sales growth over the coming quarters, backed by our commitment to delivering industry-leading innovative products and services to our customers around the world.
And as Rustom stated, we are pleased that we have started Q2 strong, and optimistic that our full second quarter sales growth should be in a high-single-digit range.
I'm tremendously proud of all we have accomplished, and I firmly believe that the best is yet to come.
We're taking each and every learning from the N&B integration process to create a stronger, more agile and diversified company, that defines the future of our industry and showcase of what it means to be a leading ingredients and solutions partner.
| q1 adjusted earnings per share $1.60.
sees combined fy 2021 (excluding.
n&b jan) sales about $11.25 billion.
qtrly adjusted earnings per share excluding amortization $1.60.
|
Going right into our results.
Our first-quarter adjusted EBITDA of $513 million represented a 79% increase over last quarter, reflecting our first full quarter of results from the former AM USA assets, as well as stronger steel pricing, offset by reduced third-party pellet sales due to the annual maintenance of the Great Lake flocks.
In the Steelmaking segment, we sold 4.1 million net tons of steel products, which included 28% hot rolled, 18% cold-rolled, and 33% coated, with the remaining 21% consisting of stainless, electrical, plate, slab, and rail.
This mix is generally in line with what we expect to see going forward.
Our aggregate average selling price of $900 per ton in Q1 is certainly the low point for the year in our forecast, and is lower than our Q4 2020 average, solely because of the different mix associated with the former AM USA plants.
On the cost side, our performance came in as expected.
Relative to last year, we are seeing decreases in costs for coke and coal, as well as benefits from decreasing scrap use and higher productivity from using our HBI products in-house.
This has been offset by higher prices for scrap, alloys, and natural gas.
We also saw higher labor costs due to increased profit sharing.
DD&A was $217 million for the quarter, and we expect about $840 million on a full-year basis now that purchase price accounting has been further refined.
An important moving piece this year in our cost structure will be iron ore costs.
We certainly benefit on the former AM USA side from transferring pellets at cost.
But during the first and second quarters, we are working through the pellet inventory previously purchased from legacy Cleveland-Cliffs.
These pellets were purchased at a margin prior to the acquisition.
And therefore, the higher cost runs through our income statement in 2021, and the resulting impact is not included in the add-back for inventory step-up.
This short-term anomaly had a negative impact on our first quarter of approximately $50 million and will be a $40 million headwind in Q2.
After that, the impact will be negligible, creating nearly a $100 million EBITDA tailwind going forward in comparison to the first half of 2021.
We experienced the same anomaly in 2020 as a result of the AK acquisition.
As for synergies, we have already identified and set in motion $100 million in cost synergies from the AM USA acquisition, some of which will take effect later this year.
We are well-positioned to reach our target of $150 million of annual run-rate savings by the end of this year for a total of $310 million from the two combined acquisitions.
As far as cash flow, Q1 contains several previously discussed one-time items that will not recur going forward.
As was contemplated in the acquisition of AM USA, we had a significant investment in working capital of nearly $650 million during the quarter, due, first, to the completion of the unwind of the ArcelorMittal AR factoring agreement, as well as other acquisition-related cash impacts.
We are now completely done with this, and receivables have been rebuilt.
Second, we saw a working capital build related to receivables, corresponding to the rising steel price environment.
Also, we made our deferred pension contribution related to the CARES Act of $118 million in January.
With the passage of the most recent stimulus bill and the extended amortization feature, future cash pension contributions will be reduced by an average of $40 million per year over the next seven years.
For the remaining three quarters of this year, we will be generating record levels of free cash flow.
In future years, we expect certain cash outflow items to be lower than in 2021.
Sustaining capex will be approximately $525 million annually.
Interest expense will be lower due to reduced debt.
And pension contributions will also be lower without deferral payments and with the new stimulus benefit.
In addition, working capital impacts will likely revert to neutral over time, unlike the large build we project this year.
Upon releasing our Q4 earnings, we guided to a substantial EBITDA improvement from Q1 to Q2.
And by the end of March, we had enough pricing visibility to disclose a $1.2 billion adjusted EBITDA guide for Q2.
The increase from the first quarter is driven primarily by pricing, offset by higher incentive compensation and profit-sharing and higher raw material pricing for scrap and alloys.
On the liquidity side, we currently have $200 million in cash and $1.6 billion of availability under our current credit facility.
Our ABL debt balance is currently $1.6 billion, and we expect to have this paid off by the end of the year.
Our pay down of this instrument will come penalty-free, and every dollar that has reduced in ABL debt will be added to our liquidity.
In closing, we find ourselves well-positioned to take advantage of a healthy steel market and also take care of a significant portion of our debt balance in very short order.
Based on what we are seeing in the market, we believe our estimates supporting $4 billion of adjusted EBITDA for the year are conservative relative to today's forward curve.
And it was an immensely successful quarter for our integration, culture change, and clearly, our profitability.
Our attitude toward commercial and steel pricing is the main reason behind the massive numbers we are showing for the quarter and guiding for the balance of the year, including $513 million of EBITDA in Q1, $1.2 billion EBITDA next quarter, and $4 billion EBITDA for 2021.
The steel industry is capital-intensive and return on invested capital is necessary.
If we lose track of that, we would not be able to address issues like equipment reliability, workplace safety, or the environment.
We are not greedy.
That's why steel prices are where they are and that will continue going forward.
Right now, the America consumers are consuming, and they are consuming a lot.
The stimulus money provided to the majority of the population is being redirected right back into the economy, and that's great for flat-rolled steel producers like Cleveland-Cliffs.
This money is being spent on consumer goods like HVAC and appliance and cars, evidenced by the skyrocketing AUTOSAR in March.
The so-called experts that long predict the demise of the domestic steel industry have been proven completely wrong.
When Cleveland-Cliffs bought AK Steel and AM USA or when the COVID recovery began, they had an easier window of opportunity to fix their failed thesis.
Unfortunately, their addiction to negativity is apparently the only thing that they care about.
These folks just don't want to see our industry thrive, and they clearly don't care about the well-paying middle-class jobs we generate and sustain in the United States.
For the record, from our proximate years, the median yearly pay of our 25,000 Cleveland-Cliffs employees is $102,000.
And we are hiring because we're growing.
Make no mistake, we are adding jobs.
Since December 9, 2020, we have already added 710 new employees to our workforce.
As we always do at Cleveland-Cliffs, we are putting our money where our mouth is, and bringing back the America that we love, with a vibrant manufacturing sector, a thriving middle class, and with opportunities for all people that believe in education and hard work.
The main factor supporting this new way of doing the steel business are the following.
Prior to our acquisitions of AK Steel and AM USA, they were both buying iron ore pellets from Cleveland-Cliffs under take-or-pay type of contracts.
As a result, their top concern was filling up their steel order book so they could satisfy their purchase requirements with us.
And in many cases, that involved being aggressive on pricing their end product so they could move material.
We and the business we acquired are no longer burdened by this, which leads me to number two, a more disciplined supply approach.
As I have stated in the past, we can be flexible with our production and can walk away from bad deals, automotive, contract, spot, or otherwise, much more easily.
This industry has been plagued in the past by volume for volume's sake.
But with our transformative acquisitions, we have all started to see rationality in the marketplace.
And don't forget, the U.S. dominates the world in environmental performance.
Of all the world CO2 emissions from the steel industry, the U.S. comprises just 2%, while China is responsible for 64%.
We have also the lowest CO2 emissions per ton of steel produced among the nine largest steelmaking nations, due to both the prevalence of EAF production and the massive use of pellets in blast furnaces.
This leads me to my final factor, the one that will drive mid-cycle, hot-rolled coil pricing higher for the long term, the scarcity of prime scrap.
EAFs make up more than 70% of steel production in our country.
This U.S. reality is unique among all major steel-making countries.
EAFs have long taking advantage of the large pool of scrap here in our country.
However, with all the new capacity coming from the EAF side of the business, their scrap feedstock has become stretched, although thin.
In order to make flat-rolled products in EAFs, you need prime scrap and metallics, both of which actually originate from the integrated rock.
On top of that, manufacturers have become more efficient at processing high-grade steel, generating less prime scrap to be sold back to the system.
The United States is a net exporter of scrap, but it is also a net importer of prime scrap.
Combine that with China's growing needs for imported scrap, which will outpace their own generation in the near term, and the U.S. EAFs have a big problem.
Obsolete and lower grades of scrap will likely be OK, as higher prices incentivize collection.
But that's not the case for prime scrap.
Lower-grade scrap is good for rebar, but it's not good or not enough for the production of more sophisticated flat-roll steel products.
This scarcity points to significantly higher prices for scrap.
Meanwhile, we at Cleveland-Cliffs, will continue to enjoy the steady cost structure of our iron feedstock, our own 100% internally sourced pellets, with decades of iron ore reserves ahead, and our in-house production of HBI, fed by our online and pellet plant.
We formulated this view in 2016, and that has been the driving force behind our strategy for the past five years, including the construction of our HBI plant and our two transformational acquisitions executed last year.
It is actually interesting to see other companies get into the same conclusion five years later.
At the time, Cleveland-Cliffs has already started to enjoy the benefits of our investments of the past years.
Our direct reduction plan has had a remarkable past few months since the start-up in December of 2020 and has already exceeded our expectations thus far on HBI production and shipments.
We produced 120,000 tons of recast in the month of March and expect to reach our annual run rate of 1.9 million tons this quarter.
While we have already shipped some HBI tonnage to select outside clients and at a very good prices, we have thus far used most of the product internally at our own EAFs, blast furnaces, and BOFs, as planned.
Operational results have been above our own expectations in all times of internal usage of our HBI.
Particularly at our EAFs, HBI currently makes up between 20% and 30% of their melt.
More importantly, our HBI has effectively eliminated our needs to buy prime scrap.
We only need to buy lower grades at this point, substantially lowering our cost structure.
It has also lowered our greenhouse gas emissions and improved our iron and chrome yields.
The original intention for the Toledo direct reduction plant when Cleveland-Cliffs was just an iron company was to exclusively sell HBI to third parties.
But that dynamic has changed with our two acquisitions of last year.
Given our expectations for the scrap market, our HBI is an incredibly important Cleveland-Cliffs internal resource and differentiating factor, both now and going forward.
This is why I'm happy we did not sign long-term contracts to supply HBI to third parties.
I did not need them to build the plant.
I don't have them now, and I don't want long-term supply contracts going forward.
For the record, the consistent performance we get out of our HBI in all of our plants, both in quality and environmental, is one of the most positive factors differentiating Cleveland-Cliffs from the rest of our competitors, both integrated and mini-mills.
On the steel operations side, things have been progressing nicely.
Our Middletown outage was a success.
We completed the blast furnace repair in less than 14 days.
And the BOF vessel maintenance was finished ahead of schedule, and we do not have any major outages scheduled in Q2.
We are focused on getting steel out of the door.
Despite all we hear about supply shortage of electronic parts and other components in automotive, we really have not seen a huge impact on volumes to this end market.
We have been running our coating lines at full capacity in response to outstanding demand and are restarting our Columbus Coatings galvanizing line.
That will increase our output of galvanized products starting in this second quarter and will help our clients take care of their own high demand.
For the small amount of automotive tonnage that has been deferred, we have been able to divert that substrate to higher-margin customers linked to the spot market.
We completed all of our April 1 automotive contract renewals with nice price increases and plan to continue to see significant improvement in these margins going forward.
All of our actions support immense cash flow generation for this year and beyond.
And that cash will be used to pay down debt.
Under our latest forecast, we expect to generate a record level of free cash flow in the last nine months of 2021, which will put us at a figure of less than 1 times EBITDA leverage by the end of the year.
| compname reports first-quarter 2021 results and increases guidance for full-year 2021 adjusted ebitda to $4 billion.
|
We certainly appreciate your joining us today to discuss Graham's first quarter fiscal 2022 financial results.
If you do not have the releases or the slides, you can find them on the Company's website at www.
He's on the call today with us and will be making some formal remarks.
Also joining us are Jeff Glajch, our Chief Financial Officer; and Dan Thoren, our President and Chief Operating Officer, who has been named effective with Jim's retirement, our new Chief Executive Officer.
Jim will start with his overview and then cover the brief results of the quarter.
Jeff will then review details of the financial results and then we'll have Dan close out with his remarks.
These risks and uncertainties and other factors are provided in the release and in the slide, as well as with other documents filed by the Company with the Securities and Exchange Commission.
These documents can be found on our website or at sec.gov.
I'd like to point out that during today's call, we may also discuss some non-GAAP financial measures which we believe are useful in evaluating our performance.
We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables accompanying today's release.
I will begin my remarks at Slide 3 and provide a brief review of the financial results, before discussing my planned retirement.
Revenue in the quarter was $20.2 million, $16.7 million was organic and $3.5 million was due to the acquisition of Barber-Nichols that closed June 1.
Defense revenue was 35% of total revenue in the quarter.
We do expect that defense revenue will approach 50% of total quarterly revenue with Barber-Nichols fully in future quarters.
This acquisition and the shift in revenue mix is a major transformation for Graham and measurably advanced our diversification strategy.
On an organic basis, revenue was similar year-over-year.
However, it was for different reasons.
You might recall that our first quarter last year operated at nominally 50% capacity due to COVID-19, thus impacting revenue and profitability due to under-absorption.
In the most recent quarter, our workforce utilization was at capacity.
However, mix was very different.
Orders from our crude oil refining and chemical/petrochemical markets were very low during the third and fourth quarters last fiscal year where non-Navy orders totaled $17.5 million for both quarters.
Consequently, greater production resources were pulled into Navy backlog, which are lower margin due to first article work and also due to contract structure for a large order in backlog.
Those headwinds work out of backlog across the next few quarters and largely behind us as we exit this current fiscal year.
Organic revenue and profitability are expected to improve across the fiscal year.
Orders in the first quarter were $20.9 million and were principally organic.
Barber-Nichols orders were $200,000 for the month of June.
Somewhat encouragingly, there were strong orders from our crude oil refining market in the quarter that totaled $11.5 million.
We did have a significant win in the quarter for a domestic refinery revamping their facility to improve crude oil feedstock processing flexibility.
That particular win was gratifying for me.
I still remember losing the original order to a domestic competitor in the mid-1990s.
And now, 25 years later, we won back the installation and replaced the original supplier with our own vacuum systems.
Consolidated backlog at June 30 was $236 million, of which 80% is for defense.
Importantly, as we work through the more challenging margin backlog, that impacts the current fiscal year.
Margin potential for our defense backlog improves measurably.
Barber-Nichols acquisition provides additional market diversity to our profile as it also adds backlog for new markets including space and advanced energy industries.
While we put considerable cash toward acquiring Barber-Nichols to strengthen and diversify revenue along with earnings, our balance sheet remains strong and our opportunity to drive our return on assets improves.
As announced earlier today and as Debbie had mentioned, I'm very pleased to confirm that I will retire effective August 31 at the end of this month and Dan Thoren will succeed me as President and CEO of the corporation.
He also will join our Board of Directors at that time.
It has been a tremendous honor and great privilege for me to serve Graham shareholders and the corporation as its Principal Executive Officer since 2006.
I believe I am departing on a high note as this is an incredibly exciting time for the Company, considering first the strength of our organic defense strategy having advanced to preferred supplier status for many of the products the Company provides to the US Navy, and in some cases, we are now bidding on a sole-source basis.
The credit goes to Alan Smith and his team for executing well our defense strategy.
Secondly, the progress we have had innovating execution to become successful in price-focused international crude oil refining and petrochemical markets.
The sales team has proven we can take market share, and also the operations team has shown we're able to realize or beat target margins.
Thirdly, the investments we've made in IT tools, systems and resources to leverage our installed base and the expected benefit that will provide.
I believe crude oil refining and chemical/petrochemical customers will invest in existing facilities, with greater throughput before investing in new capacity.
I feel we are ahead of competitors regarding commitment to the installed base.
Lastly, the transformational acquisition of Barber-Nichols creates a new strong growth platform for both organic and M&A expansion.
I've had the opportunity to work with Dan through the acquisition process for over nearly three years and most recently, the last two months as he onboarded with the Graham team.
I believe that Dan is well equipped to lead Graham and has a terrific and broad vision for the next phase of growth for the Company.
I'm thrilled this acquisition has proved to be as transforming as we had envisioned.
And part of that transformation is building out the bench strength of our leadership team.
Ultimately, over the last couple of months, it became more clear to me that this has provided for my succession plan as well.
I'm thrilled that the Board saw the same potential in Dan that I had seen.
As a Graham shareholder, I'm looking forward to benefiting from the value of Dan's strategic direction.
You have my full support, not only through this transition, but well into the future.
I have enjoyed our many conversations all these years and have very much appreciated your ongoing support.
If you can move to Slide 4.
As Jim mentioned, we had a very rough first quarter.
As I discuss that first quarter, I would like you to keep in mind that our full year guidance is unchanged.
Therefore, we expect to see improvements as the year goes on and we expect sequential quarterly improvement across each quarter for the rest of fiscal 2022.
Sales in the quarter improved by $3.5 million, which was due to the one month that we owned Barber-Nichols.
The comparable quarter last year was early on during the COVID pandemic.
And as Jim mentioned, we ran the Company at half capacity during that quarter.
However, in that quarter, we did have a $5 million project which was recognized on a completed contract basis and because of COVID had shifted from fiscal 2020 into Q1 of 2021.
Gross profit and earnings per share were dramatically affected by a very poor mix of projects and some timing and some cost items.
Namely, we had some liquidated damages due to COVID in the quarter and some timing of expenses which were pulled into Q1.
We also had a small amount of acquisition expenses, about $169,000 pre-tax, and the first month of purchase price accounting related costs for Barber-Nichols.
To clarify the latter, the purchase accounting amortization costs were $225,000 before taxes in June.
Before we move on, I want to mention that we expect approximately $2.7 million pre-tax and $2.15 million after-tax related to acquisition purchase accounting.
90% of this is amortization costs, with the rest being a step-up in depreciation and inventory.
We will be filing an 8-K later this week with much more detail on the purchase accounting and pro forma income statements.
We expect the amount of amortization will be similar in fiscal 2023 as fiscal 2022 since we will have 12 rather than 10 months of amortization in fiscal 2023.
It will decrease in future years and level off at approximately $1.1 million pre-tax.
On to slide 5.
With the acquisition of Barber-Nichols, we have moved from a very inefficient to a much more efficient balance sheet.
We have added $20 million of low-cost term debt as part of the acquisition and we have access to a much larger revolving line of credit.
This term loan and the line of credit will provide ongoing flexibility.
We expect the acquisition of Barber-Nichols to be accretive in fiscal 2022, even with the $2.15 million or approximately $0.20 a share in added amortization costs.
We will continue to look for both organic and M&A-related growth opportunities and believe we have the financial strength to invest in both areas.
With the addition of Barber-Nichols, we believe there are some excellent opportunities in both arenas.
On to slide 6.
Orders in the commercial markets picked up in Q1 off a very low base in the previous two quarters.
With a $236 million backlog, we are well positioned for long-term growth.
80% of that backlog is in the defense market, which provides an excellent baseline for our business, not just this year, but in upcoming years as well.
Before I pass it over to Dan, I would be remiss if I didn't recognize Jim for his 37 years of service at Graham, the last 15 years being as leader.
He has transitioned Graham from a company which has -- which was capacity limited and had minimal growth engines to a much broader organization with strong footprints in defense and the Asian energy markets to couple with our long history in the United States and Middle East.
Look nearly anywhere in the world and you will see Graham equipment in many world-class refining and petrochemical facilities.
You will also see Graham equipment playing a key role on US Navy vessels which support our country's national defense.
I've known Dan for the past three years, including negotiating the acquisition with or perhaps against him during part of that time.
Dan is a very high character leader with a great history at Barber-Nichols and I expect him to do the same at Graham.
Over the past many months when the Board members have asked for my view as Dan as a potential CEO, I was and continue to be unequivocal in my belief that Dan is the right CEO to take Graham forward.
Now that I've set the bar high, Dan, I'll pass the call over to you.
Very kind words, very kind introduction.
I've spent two and a half years getting to know Graham, their leadership and at a high level their business.
Indirectly, I've learned a little about their culture, their people, their customers and their Board.
Over the last two months, I've met with the executive team, managers, employees, customers and the Board to understand the Company in more depth.
These interactions have helped me understand the proud engineering and manufacturing heritage at Graham, the importance of the Company in the community of Batavia, New York and how they have become a trusted partner to their customers across the world in the critical process industries that they serve.
As I go through my slides, I'll give you an idea of how we are developing our strategy to build upon our strong legacies while leveraging our opportunities in the defense and space industries.
Specifically, we'll be working to generate sustainable earnings growth, reduce that earnings volatility, improve operating performance, generate strong cash flows to reinvest in our business and provide a dividend to stockholders.
The ultimate goals are to provide an acceptable return to our stockholders and provide benefit to all of our stakeholders.
Now let's focus on slide 7.
With Graham Corporation acquired Barber-Nichols, we recognize that the two businesses have individual strengths, serving their respective markets that we do not want to disrupt.
Our strategy is to leverage the strengths of each as platforms that provide potential for both organic and inorganic growth.
As such, Graham operations and BN operations both operate under the Graham Corporation umbrella.
As we consider future capital investments, our plan is to add new companies and technologies with related engineered product that can stand alone yet collaborate to win bigger business.
Leverage best practices between subject matter experts in the companies, share services across the organizations and provide career paths for key employees.
When we do these things, each member company can remain focused and agile while accomplishing more than they could alone.
As you look at slide 7, this depicts our two platforms for expansion.
Barber-Nichols is currently in space and defense predominantly.
Graham manufacturing is currently in Defense, Energy and Petrochemical.
For the space industry, we believe there are acquisition opportunities in this expanding market as it gains more interest in private investment.
We will be looking for small acquisitions that we can tuck in as well as medium acquisitions that can stand on their own and are complementary to our current businesses.
We are also focused on internal investments to develop new products and technologies in that space industry.
Both Graham and Barber-Nichols are well engaged in the defense industries.
We'll be looking for new areas to provide value as well as internal investments and acquisitions that can help us grow into new and more sophisticated product.
Graham has been a world leader in vacuum and heat transfer products for energy and chemical/petrochemical applications.
As Jim and Jeff had discussed over many years, the domestic market is flat and the international markets have room for growth.
We intend to focus on our domestic installed base and provide customers the support they need to keep those plants running at an optimized level.
We'll continue to invest in international markets and grow our presence around the world through our successful shared margin strategy.
More recently, both companies are seeing opportunities to engage in the alternative and clean energy markets through turbomachinery and heat transfer products.
Clean energy is actually an area where synergy between companies is possible.
Strategically, we plan to both service and grow our legacy business while having the engineering and new product capability to participate in these new alternative and clean energy markets.
Now each one of these markets that have gone over have their own risk and reward profiles.
Having teams focused in each area is paramount and we are well along with the organizational changes needed to successfully execute our strategies in each of the markets.
Let's move to slide 8.
As Jim and Jeff discussed earlier, we look at fiscal '22 as a transition year, with a tough start, getting better sequentially by quarter.
Meanwhile, we are seeing a stronger pipeline with more inquiries and new orders in the second quarter.
Graham manufacturing second quarter orders are $9.5 million to date, while Barber-Nichols has booked $9.1 million.
Based on the timing of customers' projects, we are holding our revenue guidance at $130 million to $140 million of which Barber-Nichols is expected to contribute between $45 million and $48 million.
Combined, the Defense segment is expected to account for almost half of the revenue and EBITDA is expected to be in the $7 million to $9 million range.
Capital expenditures are planned to be in the $3.5 million to $4 million range, including the Barber-Nichols capital expenditure.
Let's go to slide 9.
As alluded to in my initial remarks, we are transforming Graham Corporation.
Barber-Nichols was the initial transformational acquisition.
We will be looking to solidify the Barber-Nichols investment through further investment on its platform to enable growth in the defense and space industries as well as other industries as opportunities arise.
Coincident with the acquisition, we believe we are at or near the bottom of the energy and petrochem cycle.
We have been preparing for an up-cycle expansion that we believe will start in FY 2023.
Our welder training program has been very successful in refilling our pipeline of future employees.
We are qualifying additions to our supply base to enable additional capacity with the expectation of a potential up cycle.
Our plans include expanding our international offices with sales, quality and project management personnel.
Both Barber-Nichols and Graham have leading market positions and strong brand recognition.
We believe that strong engineering, working hand-in-hand with customers on challenging applications and delivering high-quality products on time will enable us to maintain those brand strength and market leadership positions.
As we advance our transformation, we will be improving our market presence with linked and updated websites and social media.
We believe that this will expand our exposure to a broader audience that doesn't yet recognize our growth and earnings potential.
Personally, I have a strong interest in being a great corporate citizen and working with all of our stakeholders to build a better stronger business for us all.
With the BN acquisition, Graham puts its large cash reserves to work and created a more efficient balance sheet.
As we continue to improve our business and further our strong cash-generating capabilities, we'll intend to make smart choices to allocate that capital for further growth with a keen focus on returns.
We are very optimistic about this new combination and the future it presents for all of us.
When you have a talented team of people that can see problems for your customers, work with them to design and build solutions to those problems and then shift when the markets change, you will be successful.
At Graham Corporation, we have that ability and we will be looking to add more.
| q1 revenue $20.2 million versus refinitiv ibes estimate of $23.8 million.
fiscal 2022 guidance remains unchanged.
expects about 35% to 40% of backlog will convert to revenue in last nine months of fiscal 2022.
about $25 million to $27 million of backlog related to defense industry is expected to convert to sales in fiscal 2022.
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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 my pleasure to now hand the call over to our CEO, David Hult.
In the fourth quarter, we closed on the transformative acquisitions of Larry H. Miller and Total Care Auto, powered by Landcar, Kahlo Chrysler Jeep Dodge, Arapahoe Hyundai-Genesis and the Stevinson Automotive Group, representing approximately $6.6 billion in annualized revenue.
These acquisitions represent the right brands in high-growth markets and are aligned with Asbury's culture.
We look forward to deploying our joint capabilities and growing together, and I'm excited to have our new team members as part of the Asbury family.
2021 was an all-time record year for Asbury.
For the full year, we grew adjusted EBITDA by 94% and adjusted earnings per share by 112%.
We delivered an operating margin adjusted at 8.1%.
We succeeded in adding great stores in targeted high-growth markets and we completed the rollout of our online transactional tool, Clicklane to all the legacy Asbury stores.
In a challenging new vehicle environment, we delivered record profitability by improving our new vehicle margin, increasing our used vehicle sales and growing our parts and service business, all while maintaining our improved employee productivity levels and using our strong cash flow for acquisitions.
Our multiple business lines allow us to adapt and continue to deliver strong earnings in any business environment.
We will also deploy Total Care Auto into our legacy stores and roll out Clicklane into our recent acquisitions, allowing us to further grow our earnings.
Due to our record performance and strong cash flow, our balance sheet remains solid.
Our adjusted operating cash flow for 2021 was $632 million, an increase of $189 million over 2020.
Our net leverage ended this quarter at 2.7 times.
We will continue to use our free cash flow to manage our leverage and maximize shareholder return through share buybacks and acquisitions.
Now, I'd like to give you a quick update on our five-year plan.
Our same-store adjusted revenue grew almost 12% last year, exceeding expectations.
Clicklane continues to deliver impressive metrics, generating over $570 million in additional revenue for three quarters in 2021.
Despite lower new vehicle levels, inventory levels, Clicklane contributed an incremental 7% to our same-store growth.
As previously noted, we had a very successful year regarding acquisitions.
With these results, we maintain full confidence in the execution of our growth strategy.
Based upon our results in 2021, we will update our five-year plan during our Q1 2022 earnings call.
I will now hand the call over to Dan to discuss our operating performance.
We delivered strong results, enabling us to deliver an impressive gross margin of 20.4%, an all-time record and an expansion of 370 basis points versus the fourth quarter last year.
Our teams continue to maximize productivity per employee, resulting in adjusted SG&A as a percentage of gross profit of 54.3%, a 710 basis point improvement versus prior year.
Our total revenue for the quarter was up 19% year over year and total gross profit was up 46%.
We improved our adjusted operating margins for the quarter from 6% in 2020 to 8.9% in 2021, and we'll continue to optimize our portfolio in the future.
Now, I will turn to our same-store performance compared to the fourth quarter of 2020, unless stated otherwise.
Starting with new vehicles.
Based on current market conditions, we continue to be focused on being opportunistic with our inventory and improving grosses to maximize profit.
Our new average gross profit per vehicle was $6,335, up $3,441 or 119% from the prior-year period.
All segment margins were up significantly from the prior-year period.
At the end of December, our total new vehicle inventory was $207 million and our day supply was at eight days, down 32 days from the prior year.
We expect the days supply to remain low as we progress into 2022, trending up moderately toward the end of the year.
Turning to used vehicles.
Our used retail volume increased 15%, while gross margin was 8.2%, representing an average gross profit per vehicle of $2,623.
As a result of our performance, our retail gross profit was up 64%.
Our total used vehicle inventory ended the quarter at $402 million, which represents a 34-day supply, up three days from the prior year.
Our used to new ratio for the quarter was 109%.
Our strong, consistent and sustainable growth in F&I delivered an increase of $213 to $1,961 per vehicle retailed from the prior-year quarter.
In the fourth quarter, our front-end yield per vehicle increased $2,169 per vehicle to an all-time record of $6,362.
And now to parts and service.
Our parts and service revenue increased 13% in the quarter.
The warranty revenue dropped 19%.
Our customer pay revenue continues its healthy recovery, posting a 17% growth.
We achieved over 149,000 online service appointments, an all-time record and a 16% increase over the prior-year quarter.
Some of the benefits of increasing online service appointments include enhancement to the customer experience, higher customer retention, higher conversion rates, higher margins and higher returns to our shareholders.
With three full quarters of Clicklane at all legacy stores under our belt, we would like to share some performance metrics.
We sold over 5,000 vehicles through Clicklane in Q4, of which 47% of them were new vehicles and 53% used.
91% 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 variable front-end yield of $4,298 and F&I front-end yield of $1,846.
Average credit score is higher than the average credit score at our stores.
80% of consumers seeking financing received instant approval, while an additional 10% require some off-line assistance.
90% of those that applied were approved for financing.
43% of Clicklane sales had trade-ins with 78% of such trades reconditioned in retail to consumers with a total front-end yield of $4,490.
And 92% of our Clicklane deliveries are within a 50-mile radius of our stores, thus allowing us the opportunity to retain our new customers in our parts and service departments.
As expected, Clicklane customers are converting at greater rates than traditional Internet leads.
During our first few months after launching Clicklane, approximately 60% of our sales were new vehicles.
Until inventory levels somewhat normalized, we will not be able to fully assess the full potential of Clicklane.
We remain quite excited about the continued growth of Clicklane.
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.
I will now hand the call over to Michael to discuss our financial performance.
I would like to provide some financial highlights, which marked yet another record quarter for our company.
Overall, compared to the fourth quarter of last year, our actions to manage gross profit and control expenses resulted in a fourth quarter adjusted operating margin of 8.9%, an increase of 290 basis points above the same period last year and an all-time record.
Adjusted net income increased 89% to $163 million, and adjusted earnings per share increased 68% to $7.46.
Net income for the fourth quarter of 2021 was adjusted for acquisition expenses and acquisition-related financing expenses of $289 million or $1.02 per diluted share.
Net income for the fourth quarter of 2020 was adjusted for a gain on dealership divestiture of $3.9 million or $0.15 per diluted share.
In addition to the net income adjustments mentioned above, our fourth quarter 2021 earnings per share was negatively impacted by the interest and additional shares issued as part of the acquisition financing that was completed prior to the acquisition closing.
If the financing had closed simultaneously with the Larry H. Miller acquisition, our adjusted earnings per share for the fourth quarter would have been positively impacted by $0.87 as a result of lower interest expense and fewer outstanding shares.
Now for the full year 2021 results compared to 2020.
Adjusted operating margin was 8.1%, an increase of 240 basis points at an all-time record.
Adjusted net income increased 120% to $549 million and adjusted earnings per share increased 112% to $27.29.
Our effective tax rate was 23.7% for 2021 compared to 24.8% in 2020.
This quarter, we acquired $6.6 billion in annualized revenue.
In order to finance the acquisitions, we completed debt and equity offerings totaling approximately $2.1 billion, a syndicated mortgage facility of approximately $700 million and borrowed under our upsized syndicated credit facility.
In addition, we spent approximately $34 million of capital expenditures in the quarter.
We generated $632 million of adjusted operating cash flow for the year.
Our balance sheet remains healthy as we ended the quarter with approximately $437 million of liquidity, comprised of cash, excluding cash to Total Care Auto, floorplan 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 2.7 times, below our targeted net leverage of three times.
As David stated earlier, today, we announced that our board has approved an increase to our share repurchase authorization by $100 million to $200 million.
For 2022, we are planning for a tax rate of approximately 25% to 26% and capex of approximately $150 million.
This amount excludes real estate purchases and potential lease buyout opportunities that we consider to be financing transactions.
Our key objectives are: Continue our smooth transition with all of our new value team members; execute superior allocation of capital to maximize shareholder return; continue the innovation and growth of Clicklane, rolling out this fully transactional tool coast to coast into our recent acquisitions; integrate our insurance and F&I product provider, Total Care Auto, across the entire Asbury platform of dealerships, which will allow us to expand our F&I PVR; execute our companywide training initiative to continue the development and growth of our teammates; and maintain our best-in-class operating margins and SG&A.
I would also like to make a few comments regarding our expectations for this year.
We are excited about 2022.
We see good opportunities for automotive retail, and we expect that demand will continue to exceed supply for most of the year.
We do anticipate a gradual recovery in inventory levels in the second half of '22 as OEM production improves.
As a result, we are planning our business for a SAAR of 15.5 million to 16 million units and vehicle margins consistent with 2021.
We will remain nimble and vigilant to adapt as conditions evolve.
SG&A as a percentage of gross profit should continue to benefit from active expense management and improved employee productivity.
We look forward to continuing to deliver strong results for our shareholders, be outstanding partners with our OEMs to steward their great brands and offer an environment where our team members can thrive while providing the most guest-centric experience in automotive retail.
Finally, I'd 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.
People make the difference in any organization and you are making us a better place to work, and you are creating an environment where people want to do business.
| increase in company's share repurchase authorization by $100 million, to $200 million.
qtrly used vehicle retail unit volume increased 27%; used vehicle retail revenue increased 53%.
q4 adjusted earnings per share of $7.46 per diluted share.
qtrly revenue of $2.7 billion, an increase of 19%.
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A replay for today's call will be available on our website for a seven day period beginning this evening.
Today's call may also contain non-GAAP financial measures.
Since we last reported in July, we have seen a fundamental shift in the natural gas market.
Current world events demonstrate the critical importance that natural gas will play in our energy future.
Natural gas futures for 2022 through 2026 have rallied approximately $0.75, which has translated to a meaningful increase to our near-term free cash flow projections.
World events have underscored the important role that natural gas plays in the world's energy ecosystem, not only in reliability and costs, but in meeting our global climate goals.
What we are witnessing in Europe and Asia is a crisis borne out of an undersupplied traditional energy sources, one that highlights the dislocation between the perceived good intentions of addressing climate change through policies of elimination and how these policies play out in the real world.
We are unfortunately seeing the predictable outcomes of an underinvestment in traditional energy resources with both continents having to ration energy in hopes of maintaining sufficient supply to make it through the winter.
While defenders of these policies may claim that these events are isolated in transitory, we believe they are chronic symptoms due to a structural underinvestment in traditional energy resources.
And unfortunately, but yet predictably, we are seeing the adverse environmental ramifications of this, as just a couple of weeks ago, China has announced that it's rethinking the pace of its energy transition and ramping up coal production.
This is not the way to address climate change.
As one of the largest exporters of natural gas, the United States needs to recognize the role it plays, not only in the solution, but also the problem.
The solution is American shale.
We are fortunate to be one of the few countries in the world that has an abundance of energy resources and more so in abundance of the lowest cost, lowest emissions energy resources that is exportable, namely Appalachian natural gas.
During the shale boom, technological breakthroughs, investor support and the innovation and efforts of American natural gas workers translated American shale into low-cost, reliable, clean power, replacing high emissions coal and laying the foundation for solar and wind to play a supporting role with the results being the U.S. leading industrialized countries in emissions reductions.
This model is replicable on a global stage, but only if the United States takes on a leadership role.
For example, if we were to replace only China's new build coal power plants with natural gas, we would eliminate approximately 370 million tons of CO2 equivalent per year.
That number is roughly equivalent to the emissions reduction impact of the entire U.S. renewable sector, which leads to the problem.
The problem is that the United States and advocates for policies of elimination have failed to understand the key role that American shale plays in the global energy ecosystem.
The United States represents about 1/4 of global natural gas supply.
Appalachia alone represents almost 10%.
What that means is that global demand has looked all around the world and, instead, we need almost 1/10 of our natural gas coming from Appalachia.
Regrettably, we've canceled multiple pipelines in the last several years, LNG facilities have stalled, capital has been pulled out of the system, all the while demand has grown, and now we're seeing the results.
U.S. natural gas and more specifically, Appalachian natural gas has the opportunity to provide affordable, reliable, clean energy to the world.
But to do that, we need support in building more infrastructure.
A failure to support pipeline and export infrastructure would effectively advocate the leadership role that the United States is poised to play in addressing global climate change to countries that likely do not have the resources or political desire to do so.
Now to talk more about the gas macro specifically and how it is impacting our business.
There are a number of bullish trends for the global natural gas market that we believe underpin a long-term structural change of the curve.
First, severe underinvestment in supply across all hydrocarbons and associated infrastructure over the past few years has contributed to a global scarcity of accessible traditional energy sources.
Second, Solar and wind have reached enough scale in global power markets that their intermittency is driving structural volatility, driving demand for reliable energy sources like natural gas to stabilize the grid.
Third, environmental pressures and governmental regulations on infrastructure have limited the ability for energy to go where it is needed most, creating market inefficiencies and restricting investments across the space, limiting the ability of producers to react to supply demand imbalances.
And fourth, a continued focus on low-cost, reliable and clean energy sources has increased the prominence of the role of coal-to-gas switching as one of the most impactful, actionable and speedy opportunities for significant progress in reducing global emissions.
These are the main reasons that global natural gas prices rose over $20 per dekatherm during the quarter, with the back end of the futures curve having also revved nearly $1 in the past six months.
They are also why we see structural change in the curve sticking.
While we have been vocal about our bullish view of natural gas prices for some time, the speed of the current price escalation came sooner than we anticipated.
Our reasons for hedging 2022 production at the levels we did while continuing to keep 2023 exposure open is simple: We believe that regaining our investment-grade rating and reducing absolute debt levels best positions EQT shareholders to fully capture these thematic, long-term tailwinds in the commodity.
As you look across the energy sector, it's clear that traditional energy companies are being valued at a steep discount.
We believe this is principally a result of views on a long-term sustainability of traditional energy sources impacting terminal value.
We believe that markets have overshot in this regard, especially so as it pertains to natural gas.
And that events like the current global energy crisis, in particular, as to how they are contributing to a step backwards in our efforts to address climate change, we will make this readily apparent to policymakers and investors alike.
And we believe that at that time, there will be a rerating within the sector, principally concentrated on companies like ours that are differentiated in their sustainability, both financially and on an ESG basis.
Now I'd like to give an update on our free cash flow projections.
The structural shift in the commodity curve, along with some hedge repositioning in 2021 and 2022, have had a positive and material impact on our free cash flow projections.
In 2021, we are now expecting to deliver approximately $950 million in free cash flow generation.
In 2022, our preliminary estimates are $1.9 billion, with 65% of our gas hedged.
As our hedges roll off in 2023, we see free cash flow generation potential growing even further to approximately $2.6 billion, equating to an approximate 30% free cash flow yield for a company that expects to be investment grade, highlighting how robust the free cash flow generation is from our business.
In addition to the shipping commodity market, we have several other factors driving improved free cash flow generation, including our contracted gathering rate declines, more efficient land capital spending, shallowing base declines and FTE optimization, which we have just announced.
As such, we are updating our 2021 through 2026 cumulative free cash flow projection to over $10 billion, a 40% increase since our July estimate and materially above our current market cap.
This extensive free cash flow generation provides us with the ability to return a substantial capital to shareholders while simultaneously enhancing our balance sheet.
And as previously mentioned, we think there is still running room.
Further, this structural gas price improvement has solidified our execution of shareholder-friendly actions in 2022, which we intend to formally announce before the end of 2021.
While we are acutely aware of the investor appetite for return of capital, one of the key considerations as we finalize our plans is leverage management.
However, we want to be clear that attaining investment grade or a certain leverage target is not a precondition to initiating shareholder returns.
With our hedge position and strong free cash flow, we can accomplish both debt reduction and shareholder returns as we create our debt retirement glide path.
This business is capable of returning tremendous amount of capital to shareholders while maintaining optimal leverage.
Bottom line is we are projected to have approximately $5.6 billion in available cash through 2023.
And if 100% of that cash was allocated to shareholder returns, we would still be left with leverage of sub 1.5 times.
Those are some very compelling stats, and we look forward to executing on this robust capital allocation strategy in the very near term.
I'll briefly cover our third quarter results before moving on to some strategic and financial updates.
Sales volumes for the second quarter were 495 Bcfe, at the high end of our guidance range.
Our adjusted operating revenues for the quarter were $1.16 billion.
And our total per unit operating costs were $1.25 per Mcfe.
During the third quarter of 2021, we incurred several onetime items totaling approximately $116 million, which impacted our financial results and free cash flow generation.
First, we purchased approximately $57 million of winter calls and swaptions to reposition our hedge book to provide upside exposure to rising fourth quarter '21 and all of 2022 prices, which I'll discuss in more detail in a moment.
Second, we incurred transaction-related costs, mostly from Alta of approximately $39 million.
And finally, we incurred approximately $20 million to purchase seismic data covering the area associated with the Alta assets, which hit exploration expense.
Our third quarter capital expenditures were $297 million, in line with guidance.
Adjusted operating cash flow was $396 million.
And free cash flow was $99 million.
Rising commodity prices and actions taken to unwind fourth quarter hedge ceilings have resulted in an increase to our fourth quarter free cash flow expectations of approximately $200 million.
But at the midpoint, we expect fourth quarter sales volumes to be 525 Bcfe, total operating cost of $1.25 per Mcfe, capital expenditures of $325 million and free cash flow generation of $435 million.
Turning to some more strategic items, I'd like to discuss the actions taken during the third quarter to optimize our firm transportation portfolio.
First, we successfully sold down 525 million a day of MVP capacity, which when combined with 125 million a day previously sold down, amounts to approximately 50% of our original capacity.
The terms are governed by an Asset Management Agreement, pursuant to which EQT will deliver and sell certified, responsibly sourced gas to an investment-grade entity for a six year period.
EQT will manage the capacity and retain access to the premium Southeast markets, while the third-party entity will be responsible for all financial obligations related to the capacity.
This transaction meaningfully reduces our firm transportation costs.
Going forward, we believe that retaining our remaining $640 million a day of MVP capacity provides appropriate diversity to our transportation portfolio.
And we do not intend to sell down any additional capacity at this time.
During the quarter, we were also successful in securing 205 million a day of Rockies Express capacity, with access to the premium Midwest and Rockies markets.
As part of the agreement, the parties agreed to significantly discount the reservation rates during the first 3.5 years of the contract, which results in a material uplift to price realization and margins during that period.
In the aggregate, we expect these arrangements to lower our go-forward firm transportation costs by approximately $0.05 per Mcfe, while simultaneously improving realized pricing.
Additionally, we are currently working on several smaller firm transportation optimization deals, which, if executed, are expected to further enhance margins and price realizations.
Furthermore, our RSG program is ramping up.
The six year, 525-million-a-day contract, we believe represents the largest RSG transaction done in the marketplace and highlights the accelerating end market demand for low methane intensive natural gas.
I'll now move on to some hedging activity initiated during the quarter, which effectively unlocked upside exposure to rising prices.
Since the end of the second quarter, we have seen the Henry Hub contract price appreciate, backed by modestly tightening U.S. fundamentals and rising volatility.
Couple that with energy shortages occurring around the world, we believe the U.S. could see extreme price events this winter.
By early August, we have revised our hedge positioning to one that participates in more upside while still locking in the necessary cash flows for progressing back to investment grade.
In essence, we removed approximately 28% and 13% of tax for ceilings for the balance of 2021 and all of 2022 and lowered our floor percentages by 11% and 9%, respectively.
We were able to do this by purchasing a significant number of winter call options at very attractive prices and strike levels that are currently in the money.
These call options maintain our downside protection, capitalize on rising volatility and open our portfolio to increase realizations.
In addition to our winter call options, we also purchased swaps in 2022 by taking advantage of the backwardation in the market to purchase swaps at points on the curve we felt to be undervalued.
This is expected to allow us to capture stronger pricing in 2022 well after we are through the winter.
These actions resulted in a onetime cost of approximately $57 million in the third quarter and approximately $18 million in the fourth quarter, with the current market value sitting at well over three times the execution cost.
For our 2023 hedge book, which sits at under 15%, we expect to hedge with a more balanced and opportunistic approach as we have reduced debt and achieved our investment-grade metrics in 2022.
At a high level, we envision a lower hedge percentage, utilizing structures that enable upside participation to capture our anticipated long-term appreciation of natural gas prices and increased volatility.
Last, we remain relatively unhedged on our liquids volumes for 2022 and 2023 at less than 15%, which represents about 5% of our volumes and 7% of our revenues.
Moving on to a quick update of leverage and liquidity.
Pro forma the full year impact of Alta and the removal of margin postings, our year-end 2021 leverage sits at 1.8 times and is expected to decline to 0.9 times by year-end 2022 and 0 leverage by year-end 2023 without the impact of shareholder returns.
If you add all our free cash flow through 2023, plus the $700 million in current cash margin posting, we are looking at $5.6 billion in cash available for shareholder returns and leverage management.
So we have the ability to retire substantial debt, achieve optimal leverage and provide robust returns to our shareholders.
Stay tune for a more formal framework before year-end.
As of September 30, our liquidity was $1.2 billion, which included approximately $0.7 billion in credit facility borrowings largely related to margin balances tied to our hedge portfolio.
As of October 22, our margin balance sits at approximately $0.4 billion and our liquidity will end October at around $1.5 billion.
With respect to margin postings, we've been able to manage these nicely by working with our hedge counterparties, many of which are also [Indecipherable] revolver.
We continue to make progress on lowering our letters of credit postings under the credit facility, which dropped approximately $0.1 billion during the third quarter to $0.6 billion, and it declined another $0.1 billion through October 22.
From mid-2020, we have effectively cut our letters of credit in half from approximately $0.8 billion to an anticipated $0.4 billion by year-end 2021.
And as a final reminder on liquidity, virtually all margin postings and letters of credit go away when we achieve investment-grade rating.
We are one notch away from IG with all three agencies.
And when combined with the structural gas macro tailwinds and EQT's robust free cash flow profile, we believe it's only a matter of time until we regain our investment-grade rating.
These include: one, the compelling and structural positive momentum driving the gas macro backdrop, setting up robust and sustained free cash flow generation; two, the announcement of a shareholder return framework that is right around the corner; three, an investment-grade rating that is on the horizon, further driving increased free cash flow generation and improved liquidity; and lastly, our modern approach and ESG leadership will continue to drive sustained, long-term value creation for all of our stakeholders in the sustainable shale era.
| qtrly sales volumes of 495 bcfe, at high end of guidance.
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Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
Then Julie will provide a review of our financial results and details of our updated outlook for 2021.
Barnes Group delivered a very good third quarter of financial performance with 20% organic sales growth, a 180 basis points increase in adjusted operating margin, and an 80-plus percent increase in earnings per share year-over-year.
Sequentially, each of those metrics improved as well.
Clearly, last year was highly impacted by the global pandemic.
Nonetheless, the demand environment overall improved across the portfolio, as each of our SBUs generated double-digit organic sales growth.
Similarly, orders were seasonally good as we generated a book-to-bill of 0.9 times for both industrial and aerospace.
Industrial book-to-bill in the third quarter is typically impacted by the summer holiday season, particularly in Europe.
That said, the ongoing impact of auto semiconductors lingered, and I'll address that in more detail shortly.
In Aerospace, orders were healthy for a fourth straight quarter.
Moving to our segment discussion beginning with Industrial.
Organic sales growth was 17% while organic orders growth was 3%.
As we exited the third quarter, manufacturing PMIs in the U.S. and Eurozone remain well in expansionary territory.
So, not as is robust as they were entering the quarter.
China continues to hover around the neutral 50 mark.
The continuing semiconductor issue affecting automotive builds has worsened prompting IHS to make a significant downward adjustment to their global automotive production forecast in September.
Relative to their prior view, 2021 production was reduced by 5 million units or 6%, and 2022 was reduced by 8.5 million units or 9%.
The decrease corresponds for customers expanding shutdowns, and pushing out demand for our products.
For 2022, IHS expects global auto production to grow 11% over this year, so still a rebound.
Supply chain disruptions including expanded raw material lead times, inflation and freight costs have also persisted throughout the quarter.
And we expect them to continue through the remainder of the year, and into the first half of 2022.
In spite of the headwinds, the industrial team has done a great job to improve margins both year-over-year and sequentially.
Operating margin was 13%, up 60 basis points from a year ago and 130 basis points sequentially.
Inflationary pressures have been mitigated to the extent possible through pricing actions and raw material pass-through arrangements.
Our Barnes Enterprise System has been employed to create various cost savings.
While our July outlook contemplated $2 million of second half inflation pressure, we saw approximately $2.5 million in the third quarter.
And we now forecast a similar amount in the fourth quarter.
Within Molding Solutions, organic orders were up low-single digits with medical rebounding of year-over-year and sequentially.
Automotive orders were solid up mid-teens, driven by a strong quarter in Asia.
Packaging and personal care orders were soft compared to a year ago.
With respect to organic sales, we generated a 15% increase over the prior year quarter.
Personal care and medical saw good sales growth, while automotive was particularly strong.
However, with anticipated supply chain factors in mind, our organic sales growth outlook has been trimmed to the low-teens for the full year, a bit softer than our prior view.
At Force & Motion Control, organic orders were up 27% with organic sales up 24%.
On a sequential basis, sales and orders were approximately flat.
Our largest end market with this business sheet metal forming saw a robust orders and sales growth year-over-year.
And the same is true for our industrial end markets within FMC.
Supply chain disruptions including freight delays are expected to influence near term customer orders.
Nonetheless, our full-year 2021 organic sales growth is up slightly from our prior view with a revised expectation of up high teens.
Engineered Components once again generated solid organic sales growth on a year-over-year basis, up 15%, primarily driven by industrial end markets.
Our automotive production end market sales were up modestly.
Though the third quarter saw semiconductor and supply chain issues intensify, impacting both orders and sequential sales growth.
The automotive semiconductor issue impacts this business the most.
And we saw a third quarter pushout of approximately $6 million in revenue, which was doubled what we anticipated.
We now forecast our fourth quarter impact of a similar $6 million.
General Industrial markets remained very healthy and are helping to mitigate some of the semiconductor impact.
For Engineered Components, our full-year organic sales growth is now estimated to be up in the mid-teens, a bit lower than our prior year.
As noted earlier, with seasonal effects year-over-year organic orders were flat.
However, we continue to expect 2021 to deliver organic growth of approximately 20% on par with our July expectation.
To close my industrial discussion, the business delivered really good third quarter performance.
As we look forward, the near-term challenges of the current operating environment appear likely to persist.
That said, the team is working diligently to lessen the various headwinds space in the business.
For the segment we forecast 2021 organic growth in the mid-teens consistent with our prior view.
We now anticipate operating margins of 11.5% to 12%, a bit softer than our prior expectation with the decline primarily driven by the current economic environment.
Moving to Aerospace, sales improved 30% over last year and 8% sequentially from the second quarter.
Our Original Equipment manufacturing and aftermarket businesses each generated excellent results.
Adjusted operating margin improved 490 basis points from a year ago and 130 basis points sequentially.
The Aerospace environment continues to show recovery progress.
Global passenger traffic and flight activity are expected to increase further as the international markets reopened.
Aerospace freight markets continue to be strong.
All of that contributes to a strengthening aftermarket.
Correspondingly, our sequential sales growth has been good and we expect that trend to continue.
Solid order activity continued in the third quarter with total orders of approximately 70% versus a year ago.
OEM orders were up approximately 80% with the aftermarket being up approximately 50%.
Within the aftermarket, MRO was up 40% plus and spare parts up 70%.
Our 2021 outlook for Aerospace is for total sales to be up low-single digits.
Within the segment, OEM sales are forecast to be up mid-single-digits, MRO down low single-digits and spare parts down in the low to mid-teens.
The latter a bit better than our July view.
Segment operating margin is anticipated to be approximately 14%, slightly higher than our prior outlook benefiting from the better spare parts mix.
In closing, a solid third quarter financial performance in the face of some accumulating pressures as we look ahead, we're taking the necessary steps to limit the risks noted with our primary focus on pricing initiatives and other actions directed to cost management.
Overall, we are positive in the ongoing demand we are seeing from our customers, and the underlying strength of our end markets.
Moving forward, our growth investments in strategic marketing and our sales force, digitalization and innovation should enhance our ability to power up the recovery curve and allow us to deliver further stakeholder value.
Now, let me pass the call over to Julie for details of our quarterly performance.
Let me begin with highlights of our third quarter results on Slide 5 of our supplement.
Third quarter sales were $325 million, up 21% from the prior year period with organic sales increasing 20%.
Adjusted operating income was $43.9 million, up 39% from $31.5 million last year.
While adjusted operating margin was 13.5% up 180 basis points from a year ago.
Our adjusted results include a small amount of restructuring in both the current and prior year quarters.
Interest expense was $4 million, an increase of $300,000 over last year as a result of a higher average interest rate, offset in part by lower average borrowings.
As we foreshadowed a quarter ago, we saw sequentially lower interest expense as our debt-to-EBITDA ratio has continued to improve, driven by the recovery in our business and active cash management.
Sequentially, our interest expense was lower by $448,000.
For the quarter, our effective tax rate of 27.6% compared with 44.1% in the third quarter of 2020 and 37.6% for full year 2020.
As compared to the full year 2020 rates, our third quarter rate is benefiting from the absence of tax expense related to the sale of the Seeger business in 2020, a benefit relating to the tax basis of goodwill at Automation, the positive resolution of a foreign tax matter in the current year quarter and a favorable mix in earnings based on tax jurisdictions.
These items were partially offset by a charge relating to U.K. legislative changes.
Net income was $27.9 million or $0.55 per diluted share compared to $15.4 million or $0.30 per diluted share a year ago.
Now I'll turn to our segment performance beginning with Industrial.
Third quarter Industrial sales were $232 million, up 18% from a year ago, while organic sales increased 17%.
Like last quarter the solid growth reflects volume increases across all our SBUs.
Favorable foreign exchange increased sales by approximately 1%.
Sequentially sales decreased slightly as they were further impacted by the semiconductor and supply chain issues that Patrick mentioned.
Industrial operating profit was $30.1 million, up 23% from $24.4 million last year.
Operating profit benefited from the contribution of higher sales volumes, offset in part by higher personnel costs, which include incentive compensation higher sourcing costs, inclusive of freight and ongoing costs incurred in support of segment growth initiatives.
Operating margin was 13%, up 60 basis points from a year ago and 130 basis points sequentially.
Moving now to Aerospace, sales were $94 million, up 30% driven by a 23% increase in our OEM business and a 46% increase in our aftermarket business.
Operating profit was $13.6 million doubling the $6.8 million in last year's third quarter.
Excluding a small amount of restructuring in the current and prior year period, adjusted operating profit was up 95% from a year ago.
Adjusted operating profit benefited from the contribution of higher sales volumes and favorable productivity offset in part by higher personnel costs including incentive compensation.
Adjusted operating margin was 14.8%, up 490 basis points from last year and 130 basis points sequentially.
Aerospace OEM backlog ended September at $665 million, down 4% from June 2021 and we expect to convert approximately 40% of this backlog to revenue over the next year.
Before moving to our cash flow discussion, I'd like to make you aware of an adjustment to our reported backlog.
During the quarter, we noted that our June backlog included a portion of unshipped orders that had already been recognized in revenue under percentage of completion.
Accordingly, a downward adjustment of $46 million at Industrial and $19 million at Aerospace was made during the third quarter.
This adjustment is reflected in our September ending backlog and no further adjustments are anticipated.
Earlier reported sales, orders and book-to-bill were not impacted.
Moving to cash flow performance, year-to-date cash provided by operating activities was $128 million versus $164 million last year with free cash flow of $101 million, down from $134 million last year.
Capital expenditures were $27 million, down approximately $3 million from a year ago.
As a reminder, year-to-date operating cash flow in 2020 saw an approximate $60 million benefit from working capital as cash management was a significant focus during the pandemic.
Regarding the balance sheet, our debt to EBITDA ratio, as defined by our credit agreement was 2.6 times at quarter end, down from 2.9 times at the end of last quarter.
Our third quarter average diluted shares outstanding were 51.1 million during the third quarter, we did not repurchase shares and approximately 3.6 million shares remain available under the Board's 2019 stock repurchase authorization.
Turning to Slide 6 of our supplement, let me provide you with our updated financial outlook for 2021.
Organic sales are forecast to be up 11% to 12% for the year consistent with our prior view.
Foreign exchange is expected to have about a 2% favorable impact on sales, while divested Seeger revenues will have a small negative impact.
Adjusted operating margin is forecast to be approximately 12.5%, down slightly from 13% in our July outlook.
We expect a small amount of residual restructuring charges in the fourth quarter which we will take as an adjustment to 2021 net income.
Adjusted earnings per share is expected to be in the range of $1.83 to $1.93 per share, up 12% to 18% from our 2020 adjusted earnings per share of $1.64.
This expectation reflects the decrease at the top end of our previous range of $1.83 to $1.98 related to Q4 headwinds.
A few other outlook items, our interest expense forecast remains approximately $16 million while other expense is anticipated to be $6 million, slightly less than our July outlook.
We expect the full year tax rate of approximately 29% excluding adjusted items, a point lower than our previous estimate.
Estimated Capex of $40 million is down from our prior view of $50 million, average diluted shares of $51 million is consistent with our prior view.
And cash conversion is now anticipated to be approximately 120%, an increase over our prior expectation of greater than 110%.
To close, financially, we delivered a good third quarter.
Looking forward, as Patrick mentioned, there are some near-term economic pressures to overcome as we close out the year.
Leveraging the Barnes Enterprise System, our team is focused on executing comprehensive mitigation plan.
In the meantime, our cash generation remains solid and our balance sheet supports ongoing growth investments expected to further improve financial performance and long-term shareholder value.
| compname reports q3 adjusted earnings per share $0.55.
q3 adjusted earnings per share $0.55.
q3 gaap earnings per share $0.55.
q3 sales rose 21 percent to $325 million.
2021 adjusted earnings per share outlook of $1.83 to $1.93.2021 organic sales growth expectation of up 11% to 12%.
industrial end markets, are experiencing some headwinds as supply chain issues remain a near-term challenge.
foreign exchange is anticipated to have an approximate 2% favorable impact on 2021 sales.
fy operating margin is now forecasted to be approximately 12.5%.
|
Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to our investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
Continuing with a clear focus on our business recovery, Barnes Group produced another solid quarter of year-over-year and sequential improvement in orders, organic sales, operating margins and earnings.
With total backlog at its highest point since the end of 2019, expanding revenue outlook, strengthening industrial end markets and the progressing aerospace environment, we feel confident about the prospects for the second half of the year.
More importantly, our improving financial results continue to be supported by significant investments in growth initiatives, that position us to sustain performance over the long-term.
In the second quarter, organic sales were up 31% with sizable gains in both our operating segments.
Industrial was particularly strong, while Aerospace continues to build momentum after the significant effects of the pandemic on that industry.
Similarly, orders were very good as we generated a book-to-bill of 1.3 times, with Aerospace driving that result.
Our total backlog stands at $984 million at quarter-end, reflecting a 12% increase from the end of the first quarter.
Adjusted operating income and margins were up 41% and 40 bps respectively.
Adjusted earnings per share were $0.45, up 67% from last year.
Again, really great results by the team.
Moving now to a discussion of end-market dynamics, beginning with Industrial.
Our Industrial segment generated another strong quarter with each of our businesses generating excellent year-over-year organic orders and revenue growth.
For the segment, orders were up 37% organically with a book-to-bill of approximately 1 times.
Industrial sales grew 42% with organic sales growth of 35%.
Of note, second quarter total industrial sales were ahead of pre-COVID second quarter of 2019.
As a macro level backdrop like last quarter manufacturing PMIs in the U.S. and Euro zone remains strong, with China in the expansion territory, though not as robust as the other regions.
Now with expanding the ongoing semiconductor issue that's dampening automotive bills, IHS predicts -- still predicts 2021 global production to be up 10% over the last year and up an additional 11% in 2022.
With respect to new platform launches and major refresh programs of light vehicles, 2021, 2022 and 2023 are forecast to be sustained at a healthy level.
Within our Molding Solutions business, we saw a good orders quarter up 17% organically.
Automotive, Packaging and Personal Care, each saw double-digit orders growth, with Automotive being particularly strong.
Medical mold orders took a dip in the quarter, not an unusual dynamic as these large ticket products can be somewhat lumpy.
Organic sales were up 22% year-over-year, while sequential sales were up 13%.
On many occasions, you've heard me talk about investments in growth that we're making across the businesses to drive our sales and marketing efforts, innovation, and new product development.
Recently I discussed the launch of our new vacuum gripper technology in our Automation business.
At Molding Solutions, we are also working hard to expand our leading technology-based solutions across multiple end markets.
A prime example relative to the public health crisis we've all experienced over the last year or so, is our mold technology serving the global medical market and our investment and development of a new product offering known as Pipette Tips.
Pipette tips are a high volume critical item used in the world of laboratory diagnostics for collecting a precise amount of liquid and transferring it to a test apparatus.
This market has expanded recently in order to meet the enormous demand brought on by the pandemic.
Our customers require a technology-based solution that consistently delivers high output rates with extremely tight tolerances.
The pipette tip's geometry must be precise to ensure the test results are both accurate and reliable.
Our Molding Solutions business has developed a mold concept, specifically for production of pipette tips, which not only meets strict technical requirements, but also focuses on superior reliability, and ease of maintenance.
To maximize up time in an operation that runs 24 hours a day, seven days a week, the configuration of the mold allows for required maintenance of worn parts to occur right on the machine to replaceable modular units or clusters allowing for minimum disruption and production to come quickly back online.
Delivering leading technology-based solutions such as the pipette tip mold system, and focusing on customer success allows our Molding Solutions business to demonstrate extraordinary value.
To close my Molding Solutions comments, our sales outlook has improved once again, as we now forecast organic sales growth in the mid-teens, a bit better than our prior view.
At Force and Motion control organic orders were up over 50% with organic sales up double digits.
FMC's two major end markets, sheet metal forming and general industrial, both saw robust orders and sales growth.
On a sequential basis, sales increased 6%.
We continue to see full-year 2021 organic sales growth to be up mid-teens.
Engineered Components once again generated high double-digit organic orders and revenue growth on a year-over-year basis.
Sequentially, we saw a modest step in orders and sales as automotive semiconductor issues weigh on automotive end markets.
As a result of this issue, we saw our second quarter revenue impact of approximately $5 million, very much aligned with the exposure we disclosed in April.
We expect the third quarter semiconductor revenue impact of $3 million and another $1 million in the fourth quarter.
Our general industrial markets remained very healthy and are helping to mitigate some of the impact.
Our outlook for organic sales growth is now forecast to be up in high-teens, a step up from our prior view of mid-teens growth.
At Automation, as economies rebound, the migration toward industrial robotics, a more complex end-of-arm tooling solutions continues to be favorable.
On a year-over-year basis, organic orders and sales growth were well into the double digits.
Sequential growth in orders and sales also continues along a healthy trend.
We now expect 2021 to deliver organic growth of approximately 20%, better than our April expectation of mid-teens growth.
To wrap up on Industrial, clearly our year-over-year growth rates across the segment compared favorably to last year's second quarter, which was the trough quarter relative to the impact of the pandemic.
Comparables gets more difficult over the next few quarters, though we expect to perform well.
At Industrial, we see 2021 organic growth in the mid-teens with operating margins of 12% to 13%.
Our margin expectation is down slightly as we continue to make strategic investments in our people, products and systems.
However, we view these investments as critical to setting us up for long-term growth and profitability.
Additionally, in the near-term, we are managing supply chain challenges, which Julie will address in a moment.
It's fair to say that the environment continues to improve.
Airbus and Boeing narrow-body production levels are anticipated to increase meaningfully, although wide-body recovery is still a way off.
Global traffic and capacity trends are improving and that all bodes well for a strengthening aftermarket.
At the segment level we've been seeing good sequential sales growth and expect that trend to continue.
And beginning this quarter, we'll see favorable year-over-year comparisons as we move through the year.
Aerospace sales improved 23% over last year and 6% sequentially from the first quarter.
OEM led the growth while aftermarket was down modestly, which we believe is simply timing.
A highlight of the quarter was our strong OEM orders which generated a book-to-bill of 2.5 times.
That's three quarters in a row with a strong order to book.
This reflects our customer's confidence in a narrow body ramp, as most of the order volume relates to the LEAP engine platform.
Our 2021 outlook for Aerospace is unchanged from our prior view.
Total Aerospace sales are expected to be up low-single digits.
Within the segment, OEM sales are forecast to be up mid-single digits, MRO down low-single digits, and spare parts down in the mid-teens.
Segment operating margin is anticipated to be 13% to 14%, slightly higher than our April outlook.
In closing, the second quarter finished with excellent results, positive momentum and a healthy outlook for the remainder of the year.
Several growth initiatives are been driven across the organization to help advance our recovery, and position us to execute on our profitable growth strategy.
While supply chain and inflation risks are present, our teams are doing a good job mitigating the impacts, and implementing pricing actions as appropriate.
We remain confident in the strength of our end markets and our team's ability to convert that into new business opportunities.
Now, let me pass the call over to Julie Streich, our new Senior Vice President and Chief Financial Officer, for details on our quarterly performance.
Julie brings to us a highly qualified business background and proven leadership in corporate finance.
We're very happy to have you as part of our team.
I'm happy to be here and look forward to working with you and the leadership team as we accelerate the ongoing transformation of our portfolio.
It's an exciting time for Barnes and its likewise exciting to be part of cresting the go-forward story.
Let me begin with highlights of our second quarter results on Slide 6 of our supplement.
Second quarter sales were $321 million, up 36% from the prior year period, with organic sales increasing 31% and foreign exchange generating a positive impact of 5%.
As the impacts of the pandemic lessen, our well-positioned businesses are seeing recovery in almost all our end markets.
Operating income was $38.5 million versus $10.1 million a year ago.
On an adjusted basis, which excludes restructuring charges of $700,000 this year and $17.7 million last year, operating income of $39.2 million was up 41% and adjusted operating margin of 12.2% was up 40 basis points from a year ago.
Interest expense was $4.5 million, an increase of $600,000 as a result of a higher average interest rate, offset in part by lower average borrowings.
We'll see a sequentially lower average interest rate beginning in the third quarter as our debt-to-EBITDA ratio has improved, driven by the recovery in our business and active cash management.
For the quarter, our effective tax rate was 25.3%, compared with 89% in the second quarter of 2020, and 37.6% for full year 2020.
As compared to the full year 2020 rate, our second quarter tax rate is benefiting from the absence of tax expense related to the sale of the Seeger business in 2020, a net benefit related to certain foreign tax matters in the current year quarter, and a favorable mix in earnings based on tax jurisdictions.
Net income was $24.5 million or $0.48 per diluted share compared to $600,000 or $0.01 per diluted share a year ago.
On an adjusted basis, net income per share of $0.45 was up 67% from $0.27 a year ago.
Adjusted net income per share in the current quarter excludes $0.01 of restructuring charges and a net foreign tax benefit of $0.04, while the prior-year period excludes $0.26 of restructuring charges.
Now I'll turn to our segment performance, beginning with Industrial.
Second quarter Industrial sales were $235 million, up 42% from a year ago, while organic sales increased 35%.
As Patrick noted, the strong growth reflects volume increases across all our SBUs.
Favorable foreign exchange increased sales by $12.4 million or 7%.
As has been the case since June of last year, we have delivered another sequential quarter of sales improvement with second quarter sales up 7% from the first quarter of 2021.
Industrial's operating profit was $27.3 million versus an operating loss of $300,000 last year.
Excluding restructuring costs of $200,000 this year and $15.8 million last year, adjusted operating profit was $27.5 million versus $15.5 million a year ago.
Adjusted operating profit benefited from the contribution of higher organic sales volumes and the continuing impact of cost actions taken last year.
Partially offsetting these items were higher personnel costs, primarily incentive compensation, and costs incurred in support of segment growth initiatives.
Adjusted operating margin was 11.7%, up 230 basis points from a year ago.
Supply chain concerns including raw material availability, inflation, and increased freight costs continue to be a watch item.
We do have raw material escalation clauses in certain long-term contracts, and are able to price newly quoted business to account for increasing costs.
We continue to work these issues and are taking steps to mitigate our risk exposures.
In the second quarter, we experienced approximately $1.5 million of combined freight and material inflation in the Industrial segment.
For the second half of 2021, our Industrial outlook includes $2 million of inflation impacts.
Moving now to Aerospace.
Sales were $86 million, up 23% from a year ago, driven by a 37% increase in our OEM business.
Our aftermarket business which continues to be impacted by lingering effects of the global pandemic, experienced a 2% sales decrease, with MRO down 8% and spare parts up 14%.
We expect the aftermarket to sequentially improve as we move through the second half of the year.
On a sequential basis, total Aerospace sales increased 6% from the first quarter of 2021.
Operating profit was $11.3 million, an increase of 8%.
Excluding $400,000 of restructuring cost this year and $1.9 million last year, adjusted operating profit was $11.7 million, down 5%, driven by higher incentive compensation and unfavorable mix.
Adjusted operating margin was 13.5%, down 400 basis points from a year ago.
Aerospace OEM backlog ended June at $694 million, up 16% from March 2021, and we expect to ship approximately 40% of this backlog over the next year.
Moving to cash flow performance.
Year-to-date cash provided by operating activities was $86 million versus $123 million last year, with free cash flow of $68 million, down from $103 million last year.
Capital expenditures were $18 million, down $2 million from a year ago.
Year-to-date operating cash flow in 2020 saw a $48 million benefit from working capital, as cash management with a significant focus during the pandemic.
While we have seen a modest working capital improvement in the first half, we won't see the same benefit in 2021 as we did last year as business rebounds.
Regarding the balance sheet, our debt-to-EBITDA ratio as defined by our credit agreement was 2.9 times at quarter end, down from 3.1 times at the end of last quarter.
Our second quarter average diluted shares outstanding were $51.1 million.
During the second quarter under a pre-existing 10b5-1 plan, we repurchased 100,000 shares at an average price of $52.29, leaving approximately 3.6 million shares remaining available for repurchase under the Board's 2019 stock repurchase authorization.
Turning to Slide 7 of our supplement, let's discuss our updated financial outlook for 2021.
We now expect organic sales to be up 11% to 12% for the year, an increase from our prior view of up 10% to 12%, driven by strong Industrial growth.
FX is expected to have about a 2% favorable impact on sales, while divested Seeger revenues will have a small negative impact.
Adjusting op-- Adjusted operating margin is forecasted to be approximately 13%, consistent with our prior year.
We currently expect a small amount of residual restructuring charges to come through, which we will take as an adjustment to 2021 net income.
Adjusted earnings per share is expected to be in the range of $1.83 to $1.98 per share, up 12% to 21% from 2020's adjusted earnings of $1.64 per share.
Our current expectation reflects an increase at the lower end of our previous range of $1.78 to $1.98 and we expect second-half earnings per share to be weighted to the fourth quarter.
Rounding out a few other items.
Our interest expense forecast remains $16 million, while our other expense is forecast at $6.5 million, slightly less than our April outlook.
Estimated capex of $50 million, average diluted shares of $51 million and a full year tax rate of 30% are all consistent with our prior outlook.
Cash conversion is now anticipated to be greater than 110%, an increase over our prior expectation of 100%.
In closing, we continue to drive solid revenue gains across the organization and expect further improvement.
With many of our end markets demonstrating sustained recovery, our businesses are positioned to seize upon the opportunities presented by a stronger economy.
Improving financial performance, good cash generation, and a supportive balance sheet sets us up for a good second half of the year.
With a clear focus on executing our profitable growth plan, we'll continue to fund our strategic initiatives and pursue accretive acquisitions that will help us deliver superior performance over the long-term.
| barnes group q2 adjusted earnings per share $0.45.
q2 adjusted earnings per share $0.45.
q2 gaap earnings per share $0.48.
q2 sales $321 million versus refinitiv ibes estimate of $304.2 million.
2021 adjusted earnings per share outlook of $1.83 to $1.98.2021 sales growth expectation increased to 13% to 14% with organic sales growth of 11% to 12%.
|
Actual results could vary materially from such statements.
Earnings for the quarter were $1.57 per share compared to $0.65 in the prior year quarter.
Adjusted earnings per share increased to $1.83 in the quarter compared to $1.13 in 2020.
Net sales in the quarter were up 12% from the prior year, primarily due to increased volumes across all segments, favorable foreign currency translation and the pass through of higher material costs.
Segment income improved to $433 million in the quarter compared to $298 million in the prior year, primarily due to higher sales unit volumes, favorable price cost mix and the non-recurrence of charges for tinplate carryover costs that we saw in 2020.
As outlined in the release, we currently estimate second quarter 2021 adjusted earnings of between $1.70 and $1.80 per share.
This estimate includes the results of the European tinplate business, which will be reported as discontinued operations beginning with the second quarter results.
We are maintaining our full year adjusted earnings guidance of $6.60 to $6.80 per share.
Assuming the sale of the European tinplate business closures at the beginning of the third quarter, we expect that the earnings dilution impact over the balance of the year of about $0.50 per share will be offset by improved results in the remaining operations as compared to our original guidance.
Our expected tax rate for the year remains at 24% to 25%.
Demand was strong across all major businesses and despite the ongoing challenges posed by the pandemic and severe winter weather in the United States the company continue to convert strong volume growth into record earnings.
This performance could not have been possible without great people and our global associates continue to perform extraordinarily in the face of the pandemic, ensuring that our customers receive high quality products and services in a safe and timely manner.
And while it feels that we're turning the corner with widespread vaccinations now available.
New streams and increased positivity rates in some jurisdictions remind us that we must remain vigilant in our adherence to recommended behaviors.
Global demand continues to be very strong for the beverage can and we are committed to deploying necessary capital to meet customer needs.
As detailed in last night's release, we expect to commercialize 6 billion units a beverage can capacity in 2021 with further investments being made to bring on at least that much more in 2022.
Before reviewing the operating segments we thought it would be well to remind you that delivered aluminum in North America sit around $1.28 a pound versus $0.75 a pound last year at this time, so an increase of 70%.
And as we contractually pass through the LME and the delivery premium, reported revenues will reflect both volume increases and the higher aluminum cost this year.
In Americas Beverage, demand remained strong across all of the markets we serve with overall segment volumes up 9% in the first quarter.
We expect that demand will continue to outweigh supply for the foreseeable future.
And as described to you in February, we have eight production lines in various stages of construction to bring more supply to these markets during 2021 and 2022.
While the CMI no longer publishes industry volumes, we can tell you that our North American volumes increased 12% in the first quarter compared to the same prior year period.
Unit volumes in European Beverage increased 6% in the first quarter as growth across Northwest Europe and the Mediterranean offset softness in Saudi Arabia.
Segment income reflects contribution from the volume growth and the two aluminum lines in Seville, Spain, which were down for conversion in last year's first quarter.
Sales unit volumes in European Food increased 6% in the first quarter as the business continues to benefit from strong consumer demand for packaged food.
Segment income which almost doubled the prior-year amount reflects the above noted volume growth.
$5 million of favorable foreign exchange and the negative impact of tinplate carryover included in the prior year first quarter.
As reported on April 8, 2021, the company entered into an agreement to sell its European tinplate businesses, which includes European Food.
And as Tom said, we expect the sale to be completed in the third quarter and beginning with the second quarter, results will be reflected in discontinued operations.
Asia-Pacific reported 8% volume growth in the first quarter as both Southeast Asia up 5% and China up more than 30%, continue to show recovery from the pandemic related shutdowns.
As described in February, activity levels are returning.
However, we expect there will be virus-related shutdowns and movement control orders from time to time across the region throughout 2021.
Excluding foreign exchange, results for Transit Packaging were in line with the prior year with industrial demand surging, activity remains extremely strong in Transit and we expect this segment will post full year segment income growth of approximately 25% in 2021 over 2020.
There will be a large outperformance in the second quarter against an easy comp with further gains through the end of the year.
Other operations also reported strong results in the first quarter led by North American Food and our beverage can making equipment businesses.
In summary, a great start to 2021.
With numerous projects completed last year and several more under way currently, we remain well positioned to continue to capture our share of global beverage can growth.
Importantly, we continue to convert growth into expanded earnings and cash flow.
As Tom discussed, our full year guidance remains unchanged, despite expected dilution from the sale of the European tinplate businesses.
Better than expected first quarter performance combined with continued strong demand across beverage and transit will allow us to earn through sale-related dilution and a rising commodity cost environment.
And just before we open the call to questions, we ask you that you limit yourselves to two questions initially so that everyone will have a chance to ask their question.
But always as -- feel free to jump back into the queue.
And with that, Dale, we're now ready to open the call to questions.
| compname reports q1 adjusted earnings per share $1.83.
q1 adjusted earnings per share $1.83.
q1 earnings per share $1.57.
sees q2 adjusted earnings per share $1.70 to $1.80.
sees fy adjusted earnings per share $6.60 to $6.80.
qtrly global beverage can volumes grew 8%.
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